Sunday, 25 October 2009

Xchanging steady despite Cambridge IT slowdown

(By Anthony Miller – Sunday 25th October 2009 10:45am). UK-based international BPO player, Xchanging, is holding a steady course (see here) despite weakness in the IT services business of its Indian delivery arm, Cambridge Solutions. Last quarter, Cambridge reported revenues of some $59m, just under flat yoy. However, its IT services revenues – now 21% of the total – declined 28%. The core mainly US-focused BPO business grew 10%. Xchanging CEO David Andrews commented that customers were still deferring ‘discretionary’ IT services spend, but expected Cambridge’s BPO activities to take up the slack.

I have been supportive in principle of Xchanging’s acquisition of Cambridge (they hold 76% of the stock) though I raised concerns about Cambridge's performance at Xchanging’s interims in August (see Xchanging needs steady hand on its US course). Indeed, Cambridge’s net losses deepened substantially to $5m last quarter due to a near-$6m restructuring charge in its BPO business, though ‘adjusted’ margins, at 4.4%, were near double yoy. However, ytd 'adjusted' margins (1.7%) were under half those of the same period the prior year. More significantly, Cambridge’s IT services business was loss-making in Q3 09, reversing the situation in Q3 08, when IT services was profitable (14%!) and BPO registered a small loss.

It seems to me that the volatility in Cambridge’s performance will drain a lot of management time to rectify. The risk is that this will pose an unwanted distraction to Andrews and his team at a time when all eyes need to be on the bigger ‘ball’. Nonetheless, Xchanging CFO Richard Houghton is still forecasting 5% organic growth this year which, against 4% growth in H1, suggests management are not unduly concerned.

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