Preliminary Results Announcement

Computacenter plc, the European IT infrastructure services provider, today announces preliminary results for the twelve months ended 31 December 2005.

Financial Highlights*:

• Group revenues of £2.29 billion (2004: £2.41 billion)
• Profit before tax of £34.0 million (2004: £67.9 million)
• £27.0 million of the profit decline attributable to lower vendor rebates in the UK
• Second half profit of £25.8 million (H1 2005 £8.2 million)
• Earnings per share of 10.9p (2004: 25.9p)
• Proposed final dividend of 5.0p per share, total dividend of 7.5p (2004: 7.5p)
• Strong operating cash flow and balance sheet with net funds of £100.4 million at year-end (2004: £41.0 million after the adoption of IAS 32 and 39)
• Proposed return of £75 million to shareholders in Q2 2006

* continuing operations

Operational Highlights:

• Major strategic repositioning programme underway in the UK business
• UK annual services contract base growth of 4.6%
• Encouraging growth in German services activities
• Improved French performance in the second half, although significant challenges remain

 

Ron Sandler, Chairman of Computacenter plc, commented:

“There is no denying that 2005 was a difficult year for Computacenter, and that the financial performance of the Group was disappointing. But the year was not without its positive features. Significant steps were taken in the UK to create an organisation that is considerably better equipped to respond to the challenges posed by the continuing commoditisation of IT. The long-running dispute in Germany with GE was brought to a satisfactory resolution. And across the Group, trading improved as the year progressed, and was particularly strong at the year-end.

“Trading activity in the first two months of 2006 has been below the comparable period in 2005. However, in recent years, our sales have become increasingly weighted towards the end of each quarter, such that trading in the early weeks of the quarter now provides a less reliable indicator of performance for the period as a whole.

“Whilst much remains to be done to improve Computacenter’s profitability, there is a sense of optimism within the company that we are getting back on the right track.”

For further information, please contact:

Computacenter plc.
Mike Norris, Chief Executive 01707 631 601
Tessa Freeman, Investor Relations 01707 631 514
www.computacenter.com

Tulchan Communications 020 7353 4200
Tim Lynch
www.tulchangroup.com
High resolution images are available for the media to view and download free of charge from www.vismedia.co.uk

 

Chairman’s Statement

In 2005, Computacenter’s revenues declined to £2.29 billion (2004: £2.41 billion) and profit before tax fell 49.9% to £34.0 million (2004: £67.9 million). Most of the profit decline is attributable to reduced vendor rebates. Some encouragement can be taken from the fact that following a particularly difficult first half, the Group’s performance improved considerably as the year progressed. Profit before tax increased in the second half to £25.8 million from £8.2 million in the first half, on revenues that were broadly unchanged.

The balance sheet remained strong. Even with an increased requirement for working capital due to an upsurge in trading at the year-end, the Group ended the year with net funds of £100.4 million (2004: £41.0 million after the adoption of IAS 32 and 39). The Group’s cash resources exceed its requirements and the Board has decided to return £75 million to shareholders in the second quarter of 2006, on the assumption that various tax matters can be satisfactorily resolved within this timeframe. The Board intends to return further cash to shareholders in the years ahead, subject to retaining sufficient resources in the company to take advantage of opportunities to advance the strategic repositioning of Computacenter through acquisition.

The Board is pleased to recommend a final dividend of 5p per share, bringing the total dividend for 2005 to 7.5p (2004: 7.5p). It is the Board's intention to maintain this dividend until earnings have risen sufficiently to bring the level of cover to within the new target range of 2-2.5x, which is now considered appropriate by the Board. The final dividend will be paid on 30 May 2006 to shareholders on the register as at 5 May 2006.

Most of the profit decline is attributable to the Group’s UK business, where operating profit fell to £32.1 million, from £63.8 million in the previous year. Reduced vendor rebates accounted for £27.0 million of this fall, and product margins were under pressure throughout the year. Gross profit from the Product Division fell by £35.2 million compared to 2004. The performance of the Services Division was more encouraging; although gross profit was broadly unchanged, revenues grew modestly and the contract base increased 4.6% to £177.1 million.

Computacenter’s product business faces considerable challenges, including falling prices, reducing margins and the impact of vendors selling commodity products direct to end users, particularly in the large corporate market. In response, some major steps have been taken to address Computacenter’s UK strategic positioning. In my statement accompanying the Interim Results, I drew attention to these:

• Re-engineering our product business to deliver lower cost account management and sales;
• Building a sizeable presence in the medium-sized business segment;
• Creating a specialist software business unit to increase our share of this market;
• Broadening the depth and range of our technical services activities;
• Capturing greater value from the superior scale of our engineering and maintenance activities, by sharing more resource across our customer base;
• Seeking to accelerate the growth of our Managed Services business.

Collectively, these strategic initiatives are intended to reposition Computacenter in its core markets and restore long-term earnings growth. Their implementation has required significant changes to our UK business model and organisational structure, and management deserves considerable credit for its handling of a complex and far-reaching reorganisation during the course of the year.

Much remains to be done to realise the benefits of the new strategy; in particular, some key IT systems necessary to support the new organisation will only be introduced through the course of 2006. Whilst it is too soon to comment on the impact of these initiatives, management is optimistic that the changes will deliver the anticipated benefits, and the stronger second-half trading in 2005 may be an early indicator of this. The challenges, however, should not be underestimated.

Difficult market conditions persisted in Germany, putting both product and service margins under pressure throughout the year. Against a 5.7% decline in revenues to £618.2 million (2004: £655.5 million), the operating profit in Computacenter Germany fell to £5.0 million (2004: £9.0 million). But, as in the UK, trading improved considerably as the year progressed; the operating profit of £6.5 million in the second half was a substantial improvement on the first-half loss of £1.5 million, and similar to the comparable period in the previous year (2004: £6.5 million). This second-half improvement is attributable to both the usual seasonal factors in the market and the German management becoming more familiar with the new organisation structure introduced at the start of the year. It also reflects some operational improvements to a particularly problematical services contract.

The long-standing problems at Computacenter France continued during 2005, with losses deepening to £9.3 million (2004: £6.7 million) on revenues of £295.8 million (2004: £300.4 million). Performance was particularly poor in the first half of the year, when purchases from a major customer were temporarily curtailed. A new management team has been in place for over a year and Computacenter France is now being run on a much more disciplined basis; in particular, the quality of financial control in the business has been considerably enhanced. Efforts to align better the cost base of the business with its revenue potential will continue in the future.

In November 2005, it was announced that an independent committee of the Board had been formed to consider a potential offer for the Company from a group led by Peter Ogden, a major shareholder and Non Executive Director. No formal offer was made to the committee and, following the stronger trading performance in December, the approach was withdrawn. The members of this group intend to participate equally with other shareholders in the return of cash planned for later this year.

Trading activity in the first two months of 2006 has been below the comparable period in 2005. However, in recent years, our sales have become increasingly weighted towards the end of each quarter, such that trading in the early weeks of the quarter now provides a less reliable indicator of performance for the period as a whole.

There is no denying that 2005 was a difficult year for Computacenter, and that the financial performance of the Group was disappointing. But the year was not without its positive features. Significant steps were taken in the UK to create an organisation that is considerably better equipped to respond to the challenges posed by the continuing commoditisation of IT. The long-running dispute in Germany with GE was brought to a satisfactory resolution, and management is now free of this particular distraction. And across the Group, trading improved as the year progressed, and was particularly strong at the year-end.

Whilst much remains to be done to improve Computacenter’s profitability, there is a sense of optimism within the company that we are getting back on the right track. My appreciation and thanks go to the employees of Computacenter for their outstanding commitment, energy and hard work.

 

Review of Operations

UK

In the face of continuing challenges, particularly in our product business, we completed a fundamental review and realignment of our UK strategy in the first half of 2005. This, in turn, led to a major reorganisation involving the creation of separate Product and Services Divisions.

This strategic programme required considerable management time and attention during 2005. However, by the year-end, the benefits arising from these changes were already beginning to become apparent. In particular, the separation of our product and services activities has given both areas sharper focus and added new impetus to our efforts to restore top-line growth, whilst delivering operational improvements and cost reduction.

At the heart of the organisational change has been the transformation of our UK operations into seven discrete and highly empowered business units, which operate largely with a shared sales force. This new structure provides two principal benefits: a more focused and bottom-line driven management of Computacenter’s core activities, and a sales force that is now freed of its previous responsibilities for the operational management of services delivery and therefore better able to concentrate on expanding the new business pipeline.

Cost control remains a priority, with overall headcount in the UK falling 3.5% from 4,754 to 4,589 over the course of the year. Of these reductions, 146 were in indirect SG&A (sales, general and administration) expense categories.

Services Division
A key focus of our services business during 2005 has been standardisation in order to reduce operational costs and improve customer service. This has allowed us to reduce the provision of dedicated on-site resources in favour of a centrally provided, shared-resource approach for the delivery of our engineering, help desk and systems management offerings.

In particular, we created a single engineering resource from over 2,000 staff previously dedicated to different functions and contracts. This makes it easier to assign the most appropriate specialist resource where it is needed, as well as helping to achieve higher levels of utilisation. Our success in lowering operating costs and building a more streamlined service delivery model has helped improve the competitiveness of our offerings.

The total services revenue in 2005 was £267.2 million and our annual contracted base increased 4.6% to £177.1 million.

The Services Division comprises three business units: Managed Services, Support Services and Technology Solutions.

Managed Services
Our Managed Services business unit is contractually responsible for the management of our customers’ IT infrastructures, with the goals of reducing their costs and improving their user service levels.

To accelerate the growth in our Managed Services business a number of initiatives were begun in 2005 aimed at targeting our offerings more effectively, reducing operational costs and delivering a more efficient service. Central to these initiatives is the leverage of common processes and central resources, shared across the whole Services Division.

Considerable work has been done to define more clearly our core Managed Services propositions and match our offerings more closely to customers’ requirements. In particular, we now have offerings specifically designed to meet a growing demand for cost-effective managed support of datacentres, and for ensuring 24x7 IT systems availability.

Significant new Managed Services business in 2005 included the award of a five-year global contract with a major investment bank, a major contract with British American Tobacco, and the renewal of our contract with AEGON UK for a further five years. A major focus in 2006 will be the negotiation of the renewal of our flagship Managed Services contract with BT which, unless the renewal is accelerated, comes to the end of its term in March 2007.

Support Services
Our Support Services business unit includes services such as installations and maintenance of desktops, datacentres and networks, user help-desk support, and disaster recovery. Support Services activities differ from Managed Services in that they involve more day-to-day customer instruction, as opposed to a contractually defined service level agreement.

We saw 5.1% growth in engineering and maintenance revenues compared to 2004. Support Services operating costs fell as a result of a 10% reduction in logistics costs, record levels of engineer utilisation, better supply chain management of spare engineering parts, and leverage of our European scale in purchasing.

Technology Solutions
The Technology Solutions business unit is responsible for professional services, including integration and project management services, and the provision of expert advice across a range of platforms and technologies.

Overall Technology Solutions revenues were broadly unchanged. However revenues from cabling projects grew strongly and we saw a 14% increase by volume in enterprise hardware related projects. We are now seeing a healthy pipeline of Technology Solutions projects for 2006.

In 2005 we sought to broaden and deepen our Technology Solutions portfolio, redeploying our consulting skills in new growth areas and particularly targeting the more business-critical areas of IT infrastructure. This has led to the establishment of six solutions units, providing consulting services in the areas of datacentre, storage, communications, Microsoft technologies, security and cabling. Considerable work has been done in each of these areas to define more clearly a portfolio of propositions aimed at delivering demonstrably attractive returns on investment.

A number of significant Technology Solutions projects were undertaken in 2005, including the design, testing and deployment of an upgraded IT infrastructure for the Prescription Pricing Authority (PPA), which is required to help reduce the cost of prescription processing in England. Computacenter has also been contracted to provide ongoing support of the PPA infrastructure under a five-year Managed Services agreement.

Product Division
In 2005, Computacenter experienced a 7.3% decline in UK product revenues, reflecting continuing intense price competition and the efforts of certain major vendors to sell direct. The adverse financial impact of this revenue decline was compounded by substantially inferior vendor terms. The gross profit from our product sales over the full year fell by £35.2 million, of which £27.0 million was attributable to lower vendor rebates.

The new Product Division comprises four business units: Corporate Hardware, Software, Computacenter Direct and CCD.

Corporate Hardware
In Corporate Hardware, we saw a significant shift in demand away from commodity PC and notebook products towards enterprise-class technologies, including high-end servers and networking products. In particular, we saw high growth in sales of enterprise products from IBM, Sun, Veritas, Cisco, EMC, Oracle and BMC. The substantial increase in product revenue in the last weeks of 2005 was primarily related to sales of these kinds of products, which generally attract higher levels of margin.

To help us streamline our sales processes and make them more cost-effective, we have undertaken a number of initiatives intended to introduce a ‘lighter-touch’ sales model in the UK. A significant development in this area has been the retraining and realignment of our Sales Support function. This is designed to provide a more proactive product advice service and grow revenues with existing customers, as well as allowing us to monitor the commercial terms of relationships more closely.

We have also deployed a new internal sales administration system, which simplifies the order process and improves our ability to identify opportunities for alternative or supplementary sales. More of our business was conducted online in 2005, with 11% of orders now placed via our webshop, Computacenter Connect, a major revision of which is due in April 2006.

We introduced or are developing a number of innovative procurement services designed to make our offerings more competitive. This includes the ‘Computacenter Recommends’ portfolio of products, launched in H2 2005, which is a range benchmarked for its high value and low cost, and offers customers highly compatible and readily available technology.

Nonetheless, the Corporate Hardware business unit continues to experience challenging market conditions and reducing margins. The trading terms and conditions with HP, our major vendor partner, deteriorated still further following our annual renegotiation in November 2005. However, the decline was modest and we do not expect this to have a material effect on profitability in 2006.

Software
Our new Software business unit provides software procurement consulting, sourcing and asset management services.

Our software business grew 4.6% in 2005 to revenues of over £134 million following the establishment of this specialist business unit and the ensuing renewed focus on this area.

Considerable work was done in extending our licence management capability to include a wider range of vendor offerings and adding new personnel and skills to the business unit. Twelve new customer propositions were defined and matched against market requirements, with the overall aim of helping customers avoid unnecessary software spend and gain greater control over their software assets.

To accelerate growth in this area of business we have also invested in new systems that allow us to track customers’ software procurement cycles and so identify licence renewal or extension opportunities at an early stage.

Computacenter Direct
Through our new venture Computacenter Direct, we are targeting the growing market for IT product and services in the medium-sized business sector, where the scale benefits of our logistics infrastructure offer real competitive advantage.

Revenues from this business unit increased steadily through 2005 to approximately £4 million per month, and product margins were above those achieved from our traditional large corporate accounts. We continue to invest for Computacenter Direct growth; the unit now comprises over 50 employees, with 35 new salespeople recruited during the year.

CCD
CCD, our trade distribution division, had a disappointing year. The operation saw a significant decline in profitability due to margin pressures in a fairly stagnant market. This is the area of our business where the adverse changes in vendor terms have had most impact. In addition, the prospect of channel consolidation has led to increasingly aggressive price competition between distributors.

In the face of these challenges, CCD embarked upon a major operating cost reduction programme in 2005, reducing headcount by 15% and relocating to lower cost premises.

RDC
Our technology recycling and remarketing operation, RDC, had a difficult 2005, only managing to break even over the full year. H1 was particularly poor, due to a low level of new desktop and laptop implementations by some large customers, reducing the need for RDC’s recycling services, coupled with the delayed introduction of the WEEE waste management legislation in the UK.

To answer customers’ changing requirements more effectively in the light of the legislation, cost reductions achieved over the year were channelled into the launch during Q4 of a Computacenter Asset Recovery Service (CARS) for the management of end-of-life computer technology.

We are confident that the launch of CARS, together with successes already achieved in a number of major accounts this year will take RDC back into profit in 2006.

 

Germany

After an operating loss of £1.5 million in the first half of 2005, Germany returned to profit in H2, recording a full year profit of £5.0 million (2004: £9.0 million) on full year revenue decline of 5.7% to £618.2 million (2004: £655.5 million).

2005 was a difficult year for Computacenter Germany with further decline in the traditional desktop and laptop product resale business, reflecting the weak economic climate and the impact of vendors selling direct to end-users. However as our customers began to release more capital for IT projects in H2, we saw a recovery in networking and datacentre technology revenues, fuelled by server consolidation and storage projects. We also saw strong growth in software licensing sales as customers continued to standardise their applications suites.

Overall, our services business performed satisfactorily considering the market conditions, with revenues growing by 5.8% over 2004. Service margins recovered strongly after a disappointing H1, in part due to a successful renegotiation of a particularly problematical contract.

Professional Services resource utilisation was high across projects, consultancy and customer engineering and we have a strong pipeline for these activities for 2006.

Our Managed Services business enjoyed growth above the market in 2005. Significant successes included the securing of a contract to provide maintenance services to the telecommunications company Telefónica, which will transfer its Field Engineering division to Computacenter in an outsourcing agreement.

In our interim report we said that our reorganisation at the beginning of the year had four key objectives: to improve our focus on the medium-sized business market; to sell a broader range of products and services to existing customers; to sharpen our focus on the growth areas of Government and Financial Services; and to improve relationships with our key vendor partners.

We began to see progress on all these objectives during 2005. However, the full impact of our improvement plan is unlikely to be evident until 2006.

 

France

Following a very poor first half, performance improved substantially towards the end of the year, resulting in revenues that were broadly unchanged on 2004. Nevertheless, the Computacenter France operating loss deepened to £9.3 million (2004: £6.7 million), partly due to the cost of restructuring the business.

The partial recovery in H2 was achieved despite continuing intense price competition and was partly due to seasonal factors, with the French market for IT products typically more buoyant in the second half of the year.

In addition, our largest French account, Le Ministère de la Défense, resumed expenditure in H2, having renewed its contract with Computacenter for a further four years. Expenditure had been suspended for nine months whilst the contract renewal was put out to competitive tender. This had a material impact on overall Computacenter France revenues, negatively in H1 and, as spending recovered to well above normal levels, positively in H2.

The effects of our major transformation project also began to be realised in the second half of the year. A substantial effort was made to rectify the inconsistent revenue stream and consequent low utilisation levels in Professional Services. We also achieved a material improvement in our indirect cost base, with a total of 56 staff entering the formal redundancy process, which will lead to savings in 2006.

In addition, we saw a material improvement in the profit performance of our maintenance operation following the major re-engineering project begun in 2004. This has also given us a growing pipeline of new maintenance contracts.

Whilst the costs of the transformation project have adversely affected profit performance in 2005, we believe we have made significant progress towards Computacenter’s eventual return to profit in France. As we continue to focus on delivering revenue growth and reducing operating costs, our aim is to reduce loss in 2006 and break even in 2007.

Significant wins included a major Managed Services contract with Air Liquide, including international help desk services provided by our multilingual support facility in Barcelona.

Belgium, Netherlands and Luxembourg

In Q1 2005 we extended our business to the Netherlands, establishing a small office in Amsterdam. Overall, our Benelux business showed a slight loss of £0.1 million (2004: profit of £0.0 million) with a 5.4% decrease in revenues to £19.9 million (2004: £21.0 million).

The most significant achievement in Benelux was the award in December 2005 of a three-year renewal, with extended scope, of our global desktop Managed Service with SWIFT. We also saw the renewal of our desktop services management agreement with Clearstream in Luxembourg, contracted through our relationship with Group Deutsche Börse in Germany.