Phoenix IT sales up but op profit down

The highs and low of moving to the cloud

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Rising demand for outsourced services boosted Phoenix IT Group's top line growth in fiscal 2011 but the cost of funding the firm's continued shift to the cloud saw operating profits dip.

According to prelims, revenues climbed 10.5 per cent to £271.6m, operating profit fell by £500,000 or 1.6 per cent to £29.6m and pre-tax profit climbed 8.7% to £32m for the year to 31 March.

Net debt reduced by £5m to £62.4m but cap-ex ramped from £5.2m in the previous year to £16.7m, with another £3.7m deferred to financial year 2012.

Nick Robinson, chief executive at Phoenix IT Group, noted in a statement: "Some confidence returning to the IT services market in the UK with businesses now proceeding with IT projects which had been deferred and many organisations, in both the public and private sectors, continuing to see outsourcing as a key method of reducing their own cost bases."

He went on to say that the firm had continued to invest in cloud computing goodness - particularly around managed hosting annuity contract business - with market developments fuelled by "virtualisation, web-based architecture and improvements in network capacity".

The shift to the cloud and efforts to cuts costs elsewhere in the group had "mitigated" sales decline in areas of intense price competition or where Phoenix is reducing importance, the firm said.

"However, this planned transition has had the effect of constraining short-term profitability, particularly within the Servo (Mid-market Services) Division," revealed Robinson.

The ICM business continuity unit pushed up revenues 4.4 per cent to £55.5m and operating profit grew 8.5 per cent to £124.4m, driven by customers demanding off-premise alternatives to traditional disaster recovery projects. The order book grew 9.1 per cent to £113.7m.

Sales at the mid-market services operation, Servo, bounced 11 per cent to £98.2m due to the acquisition of support contracts from KCOM Group and rising managed hosting and professional services activity, as operating profit grew 2.6 per cent to £8.3m. The divisional order book ramped 35 per cent to £73.6m.

The partner services business Phoenix IT Services grew sales 13.1 per cent to £117.9m, but operating profit went up jut 2.2 per cent to £16.7m. The order book tumbled in value by 27.6 per cent to £140.7m, and the annual contract value dropped 5.9 per cent to £95.3m.

Robinson said the declining pipeline was due to a "scarcity of large contract opportunities to be won".

"This reduction has in part been driven by a structural move in our market to shorter contracts. While this provides the customer with more flexibility, we typically see these shorter contracts renewed."

The group's substantial rise in cap-ex was related to investments in business continuity, IT facilities, a five-year lease on a co-location facility to expand hosting services and data centre upgrades.

On the outlook for fiscal 2012, Robinson said: "Whilst we have seen some encouraging activity during the year and have a strong pipeline of future prospects, we anticipate that future new business wins are likely to be offset by pressure on margins." ®


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