Advanced Computer Software has healthy first half

(By Tola Sargeant, Monday 9th Nov. 2009, 09:30) Advanced Computer Software (ACS), an AIM-listed provider of software and IT services to the UK primary care sector, has revealed strong growth in the six months to 31 Aug ‘09. Its interim results show revenue in the period was £11.0m. EBITDA came in at £2.6m and pre-tax profit was £1.9m, a 17.6% margin.

There are no comparable figures for the previous period since ACS was formed by a reverse takeover of Out of Hours software specialists Adastra in July 2008. However, according to ACS, Adastra reported a turnover of £7.2m in H109, which is 21% up on the same period prior to acquisition. That’s pretty impressive in a market which is characterised by low single digit growth - it is being driven by Adastra’s expansion into Urgent Care and Equitable Access Centres.

ACS’ recent acquisitions are also beginning to pull their weight. Hosting and managed services business BSG contributed £3.6m of revenue over 11 weeks in the period and Staffplan, a provider of roster software for community nurses, contributed £0.2m in the seven weeks from acquisition to 31 Aug ’09. The Group’s most recent acquisition, offshore development capability Oak Labs India, fell outside the period (see also ACS tries and Indian take-away).

But it would be wrong to think that ACS is only about inorganic growth. Organic growth through product innovation remains important to ACS and Adastra has launched three new products for nursing and community care in recent months. Cross-selling between the acquisitions will also be key to the Group’s future success. Indeed, this strategy is already paying dividends, as with the use of BSG’s hosting skills to offer Adastra’s new products on a software-as-a-service (SaaS) basis.

That said, ACS is keen to play a major role in consolidating the fragmented UK primary care software and services market and we don’t see CEO Vin Murria resting on her laurels. She told me this morning she sees two businesses a week at the moment but most have unrealistic price expectations – perhaps a tougher market in 2010 will encourage some more sensible pricing. When ACS does expand it's likely to be into areas like billing, accounting software or business intelligence that will come into their own in a market focused on ROI, KPIs and efficiency (as well as the odd bolt-on acquisition in the clinical space).

Although ACS is relatively well positioned to withstand tougher market conditions, with 65% recurring revenue, Vin is not expecting an easy ride next year. She is predicting a ‘big squeeze’ in the market. We couldn’t agree more, but it’s reassuring to see businesses like ACS planning accordingly rather than living in denial.

Capgemini on the acquisition trail again?

(By Richard Holway 6.00pm Saturday 7th Nov 09) Further to our report on Friday of Capgemini’s Q3 IMS , Paul Hermelin (CEO) told the analyst briefing that he now planned acquisitions, particularly in the US. He wanted Capgemini to be in the “Top Five alongside competitors like IBM and Accenture” but they were “currently #19 in the US IT services market”. By the way, Hermelin also told the FT that he thought the price Dell paid for Perot was ‘crazy’. Well, at least we agree on something!

I well remember Capgemini’s last US ‘adventure’ – or should I say ‘misadventure’ – when they bought the consulting business of Ernst & Young at the very height of dot.com valuations back in December 1999. Now if there was ever a price that was really ‘crazy’, then the $11.5b they paid would certainly qualify. Looking back at my reports of the acquisition at the time, the raison d’etre then was to put the combined group into the Top Five IT Services Groups worldwide. But the acquisition was pretty much a disaster – mainly because the ‘culture’ of E&Y’s prima donna consultants was just a world apart from the ‘body shop’ T&M consultants that Capgemini had at the time in France and the ‘industrial’ type data centres that Capgemini ran in the UK. It took Capgemini many years to work this through – not helped by the biggest slowdown in IT spend on record post dot.com and Y2K.

But Hermelin seems to acknowledge that a big bang approach is unlikely to work this time around either. He talks of a ‘series of acquisitions’ – which is commendable.

One other point of note is that Capgemini will employ more people in India (21,000) than in France (20,000) when their new Bangalore centre opens shortly. Of course, that position was greatly helped by, indeed was built upon, the $1.2b acquisition of Kanbay in Oct 2006. Another acquisition made when the world looked rosy just before a crash. Again, it is interesting to reread Capgemini’s analyst briefing at the time on the announcement of that acquisition when they projected “35,000 staff in India by 2010”. Yet another ambition which is most unlikely to come to pass.

But if Hermelin sticks to the Kanbay size of strategic acquisition in the US, his ambitions of becoming a Top Five player would stand a much better chance of succeeding this time around.

Lenovo back in the black but little cause for celebration

(By Philip Carnelley, 6 Nov 09, 09:30) This morning’s media report that Lenovo is back in the black. George O’Connor at Panmure Gordon also pointed out this morning that Steve Ballmer claims that Windows 7 sales are “fantastic,” and that NPD Group says that “unit sales of boxed copies of Windows 7 in U.S. stores were 234% higher during the software's first few days than they were for Windows Vista.” Return to the good old days?

Sadly not. The secular trends we have noted are still in place. Lenovo’s recovery is the result of cost cutting and growth in the still developing China market. While net income for the quarter rose 130% – after three quarters of losses – sales fell 5.2% year on year. Lenovo has been overtaken by Acer principally because it was late to move to lower cost models. As we have commented many times, Acer has benefited hugely from the rise in Netbooks. Its President said in London last month that it expected to pass Dell “very soon.” Meantime Lenovo says conditions remain challenging.

Earlier this year, I looked to replace my trusty 7-year old IBM Thinkpad with its up-to-date equivalent, as i really liked it, but the prices were just silly. An Apple MacBook was actually better value for money. Lenovo was over-reliant on the corporate market. But it doesn’t expect corporate replacements to kick in until the second half of next year. The turnaround in sales is due to its introduction of lower-end models: While sales were down 5%, shipments were up 28%. But that shift in sales mix means gross margins have fallen from 13% to 10%. To bring about the return to profit, the cost cuts must have been severe.

Indian BPOs – a tale of two continents

(By Philip Carnelley, 6 Nov 09, 08:00) BPO trends are very different either side of the "Pond". Major India-based BPO firm and GE spin-off Genpact has reported third-quarter revenues up 5% year on year, to $284m, and adjusted operating income up 9%: adjusted margins are now 19%. Revenues from its #1 client, GE, declined from 46% to 39% of revenues, principally due to disposals by GE, though adjusted for this they still fell 4% as GE continues to drive down costs. Revenue from other clients was up 17% to more than compensate. Genpact, which is seeing “encouraging signs in the market,” predicts growth of 6–9% this year.

Meanwhile its close rival, WNS, reported Q2 revenues up 2% to $153m. But after deducting auto-repair pass-through payments, (its auto-insurance BPO business pays repair bills, then reclaims from its clients) its net revenues were down 8% to $100m.

With its UK heritage, WNS is much more exposed to the British market (57% of total revenue) which is undoubtedly weaker than the US. Its UK business suffered from the falling pound and lower second-year fees from its landmark deal with Aviva Global Services (WNS wins mega 8 year $1b BPO contract with Aviva) which were not compensated for by other business wins. Consequently, UK revenues fell 13% in dollar terms, to $57m. Its European business (just 6% of revenue) also fell, by 19%.

That said, adjusted operating margin remained a healthy 19% as it cut costs. The company is now expecting to beat its earlier profit and revenue estimates for FY10 – it forecast a flat year – saying that bookings and pipelines in the US are “strong.” The UK (& Europe) “could strengthen” in the next two quarters. We discussed back in September whether there would be a bid for Warburg Pincus’s controlling stake in the company (WNS – in play or not?); but WNS commented in its report that it has received no fresh expressions of interest since that time.

Fujitsu workers to strike

(By Richard Holway 7.00pm Thurs 5th Nov 09) Some Fujitsu personnel in the UK are to to strike for three days later this month in protest at staff cuts, pay cuts and the freezing of their final salary pension scheme. It is understood that the strike will involve only about 720 or about 5% of Fujitsu's 12,500 UK personnel.

I got called by the media for my reactions to this. (Eg see Paul Kunert's article in Microscope) Bluntly, although it is always sad to see job losses, my real criticism of Fujitsu UK is that they didn't take this cost cutting action a year back when most of their UK competitors did. That means that their competitors are now through the pain. Indeed, as you read countless times in HotViews, profits are holding up (indeed increasing) despite revenue declines. This is all due to previous cost cutting. But Fujitsu has still to go through that pain.

I've had to make cuts several times in my career. It is never easy - particularly as I've personally known the people involved. But I've learnt that 1) Delaying the inevitable always makes matters worse 2) Cutting too little just means you have to repeat the pain 3) Cutting TOO much is something I have never seen. 4) Often you need different skills coming out of recession than you needed at the start.

Breakfast with Holway and BDO

(By Richard Holway 6.00pm Thurs 5th Nov 09)

On 3rd December at 8.15am - 10.15am I am giving a presentation for BDO LLP at a Breakfast briefing at their HeadQuarters at 55 Baker Street, London, W1U 7EU. It's entitled Economic Outlook for 2010 and Beyond for the Technology and Telecomms Sectors. In essence it is a repeat of my "State of the ICT Nation" speech that I gave for the Prince's Trust in September.

BDO have kindly offered places to TechMarketView subscribers. I should point out that only senior executives - CEOs, FDs and the like - are eligible. If you fall into those catagories and would like to attend (for free) please contact Mary Elizabeth Hallahan on Email: maryelizabeth.hallahan@bdo.co.uk Tel: 020 7893 3808 Fax: 020 7487 3686 or for more details Click Here.

Charteris revenues slump

(By Richard Holway 9.00am Thurs 5th Nov 09) One of the ‘redeeming factors’ in the Logica and Capgemini results that we have brought you in the last 24 hours has been outsourcing. Unfortunately, Charteris does not have such a benefit as its business is solely ‘business and IT consultancy’. So its not surprising that they have reported a 14% reduction in revenues (to £20.3m) in the full year to 31st July 09 (Yes – you read that right. As everyone else is reporting to 30th Sept, Charteris is bringing us results of three months back). EPS halved and profits fell from £1.4m to £438K.

The reasons are well rehearsed. “Challenging trading conditions”, “Recession in the UK”, “Spending delays and uncertainties”. You won’t get much optimism from the outlook either. “No improvement in the short term”. “Business will continue to perform at a similar level to that achieved in H2”.

So now we have a trio of results all indicating depressed corporate IT spend and no immediate up-tick in prospect.