Phoenix IT Group CEO: Turnarounds don't happen overnight

Turnover slips ... but hey, revenue is vanity. Profit's up

The turnaround at Phoenix IT Group initiated by CEO Steve Vaughan was never going to happen overnight and the latest set of declining half-year numbers for the period ended September are testament to that point.

The LSE-listed tech services biz this morning reported revenues of £107.4m, down 8.1 per cent on the corresponding six months in fiscal ’14, as all the divisions went backwards in terms of turnover.

Talking to The Channel, Vaughan said turnover was in line with the management’s expectations, caused by certain contracts that “naturally” reached end of life and by the loss of the Cisco franchise.

He added Phoenix also exited some contracts that were loss-making, “we are running the business on profitable lines," he said, "revenue is vanity".

Business Continuity fared the best of all divisions with revenues dipping by £400k year-on-year to £25m, though annual contract values fell £3m to £48.9m. The order book was up £2m to £79.8m.

The BC wing, which provides design, implementation and hosting of IT disaster recovery and data back-up, reported a £300k slip in underlying profit from operations to £5.9m as the underlying operating profit margin dropped to 23.5 from 24.5 per cent.

“It would be nice if we were selling to more new customers, we had a bit of a quiet first half, one deal slipped that has since been renewed,” the CEO told us.

The Managed Services arm saw sales dip £1.9m or 5.5 per cent to £32.6m, the order book was down nearly £10m to £51.5m, and the annual contract value fell £1.3m to £35.1m. The underlying operating profit was down £400k to just £100k.

This is where the “past year events” come into play: Phoenix said it lost a large, labour-only, low margin professional services gig and a supplier contract termination. In terms of the latter, Cisco last autumn removed the Gold partner badge from the company for flouting its Ts&Cs.

Vaughan, of course, looked to talk up the positives, citing Phoenix’s inclusion in Microsoft’s cloud solutions provider programme - one of only ten, and closer collaboration between the divisions.

“The plan that we need to make work is to sell managed services into the 1,200 customer that buy Business Continuity, sell them a service where we are running all their systems all the time”.

Cross-selling is not easy, otherwise Phoenix would have done it years ago the CEO quipped, “the sales force are under no illusions that this needs to happen. We are having conversations with customers, the pipeline is developing but it’s early days”.

The largest business unit at the company, Partner Services, posted revenues of £49.8m, a drop of 12 per cent. This area was also haunted by the loss of the Cisco franchise where it provides maintenance for integrators/ resellers that don’t have capacity or desire to do it themselves.

Underlying profit from operations actually grew by £700k to £3.1m, oiled by a one-off contract to “transition services and transfer intellectual property” to a punter that was insourcing their services at the end of a previous contract.

The order book was down by a whopping £28.3m to £143.4m, again that Cisco-induced slip, and the annual contract value went down £11.5m to £89.1m.

Phoenix tried to plug the Cisco gap by gaining top tier accreditations from HP and Huawei to service their network kit for trade customers, but subsequent contracts wins could not mask the overall decline.

As we previously revealed, the company is overhauling the way it approaches the market, shifting toward service level agreements rather than having engineers sat on customers' sites permanently. This is designed to improve the margins - and drag Phoenix into the 21st century.

Vaughan reckons some customers are all for the change too, claiming it has moved to this model of working with Tata Consultancy Services, and implementing this with IBM and Atos in the UK too - the three make up half of the revenues of the Partner Services biz.

“It absolutely suits them [customers], not all but most of the big ones want to take service level commitments to their end customers and back-off some of the requirements to us”.

The company is looking at making investments in a service desk to take ownership of calls so that engineers can decide if a problem can be fixed remotely or if it requires on-site support.

Eights months into a three-year turnaround plan, Vaughan claimed to have brought some stability to the business, which was beset with woes: an accounting investigation and continued redundancies.

He uses the huge drop in exceptional costs to £500k versus tens of millions a year ago as evidence of this, “there were no demolition charges or machine gun approaches… this is what I mean by stability”.

Group profit from operations was £7.4m versus £3.8m a year ago, and after HMRC took a slice, net profit for the period was £4m compared to £900k.

Year two, as he told us in July, is about better account management with customers based on profit and a standard set of services, and year three is “about wonderfulness”. Assuming his plans work of course.

There is no change to the strategy, he said, scotching talk in the industry that Phoenix may be involved in a three-way tie-up with Daisy Group and Six Degrees, as has been muted in some corners.

“If you are a public company you are always for sale,” said Vaughan, “but we are not in talks with anyone about anything [related to a sale]”.

Ian Spence, founder and CEO at Megabuyte, described the first half year for Phoenix as “soggy”, highlighting the lack of cash generation at net level.

He noted this morning that “investors will be looking for improved orders in the second half of this year to underpin fiscal 2016 expectations”. ®

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