2009 'toughest' in past six years

This year will go down in the history books as being the toughest for IT companies in the past six years.

Irnest Kaplan, MD of Kaplan Equity Analysts, says 2009 has been the most difficult year for the industry since it started recovering in 2003 from the dot-com bomb that peaked in 2000.

The dot-com crash saw companies lose millions in market capitalisation, and some were unable to survive the fall from grace after investors threw norms out the window and speculated on stocks that did not go back up, losing millions in the process.

Although not directly comparable, the global downturn has hit IT companies hard, and 2009 has been characterised as the year that firms cut back on IT spend to trim costs. Kaplan says 2009 has “definitely been the toughest year for IT companies in the past six years”.

Dimension Data chairman Jeremy Ord summed up the effects of the global slowdown last week when he said: “Some of our larger clients are no longer our larger clients, and are no longer in existence.”

Kaplan explains that the recession impacted companies differently, depending on whether they were exposed to sectors that shut the door on spending, or sectors that were still growing. “The effects on various companies were mixed; some saw drop off in revenue and some didn't.”

Restructuring reared its ugly head during the year, with staff losing jobs as companies cut back on costs. MTN recently confirmed it will retrench just over 400 people, after saying in August that 86 former iTalk employees had been retrenched.

Business Connexion (BCX) has also cut staff, although only about a 100 people lost jobs, as others were transferred to outsource partners.

Two months ago, computerised management services company Auto-Mate said it could cut up to 16 jobs out of a total of 86, as one of its divisions has not performed well. Auto-Mate is 93%-owned by Britehouse and 7%-owned by management.

In January, security solutions vendor Symantec said it had been retrenching local staff to offset the effects of the global economic crisis. The company did not disclose exact numbers, but said it needed to achieve 4.5% cost savings in its workforce budget “in the form of job reductions”.

Other companies, such as Music for Pleasure, which used to distribute Microsoft's Xbox gaming console, folded. Choice Technologies also ceased to exist, after its liquidator could not find a company to bail it out.

Masana Technologies failed, blaming the City of Johannesburg for not paying it on time.

Companies that made unwise, or overpriced, purchases in the good years between 2003 and 2008 were hard hit during the year. Kaplan explains that the more difficult times revealed bad deals that would otherwise have been hidden behind glowing numbers.

One casualty of growing too fast is Faritec, which reported a slide in revenue from R1 billion, to R727 million, and operational losses led to a loss per share of 48.1c, compared with a gain of 11.3c in 2008 in the year to June.

Faritec has now shifted its focus back to basics, after making too many acquisitions to offer too many services in the past few years. Among these was the R23 million deal to buy Ubusha Technologies, which was canned in February.

The company also battled to integrate Enterprise Connection and Lechabile Storage Solutions, which affected its bottom line in 2007.

Kaplan says not many companies were as hard hit as Faritec, which was probably the worst casualty of the slowdown.

However, companies with an exposure to the public sector, such as GijimaAst, benefited from increased spend by government, says Kaplan.

GijimaAst delivered a solid set of results for the year to June, bucking the general trend in the sector. Revenue at the listed outsourcing company grew 20%, to R3 billion. Earnings per share were down slightly, from 11.63c, to 11.39c. But, adding back the foreign exchange loss of R51 million, normalised earnings per share grew 88%, to 15.14c.

BCX, which has grown its exposure to government business from 17% to a fifth since last May, produced better-than-expected numbers for the 15 months to August. Revenue was up 25%, to R5.5 billion, and headline earnings per share were down 20%, to 37.5c, an improvement on its results to May, when headline earnings per share for the 12 months lost 40%.

Kaplan says public sector spend was starting to come through at a “fortuitous” time, as it had acted as a partial buffer against the economic slowdown in 2009.

But Datacentrix, which also relies on government spend, did not fair as well. In the six months to August, the company said its performance was knocked by unrealised government deals. It reported revenue down to R687 million from R699 million and headline earnings per share went from 26.8c to 26.5c.

Despite the economic turmoil, some companies proved to be resilient and delivered decent numbers.

Dimension Data released figures last week that were better than expected. Kaplan says the company did well, despite its exposure to developed markets that were hard hit, such as the US and Europe.

Dimension Data met its 5% operating target a year early, despite revenue being almost flat in rand terms in the year to September, and down in dollar terms to $3.97 billion, from $4.5 billion a year ago. The company's operating profit grew 25.4% in rand terms, to $194 million, and earnings per share were up in dollar terms to 7.6c from 7.4c a year ago.

Kaplan says Dimension Data's results bucked the expected trend. While product sales were vastly down, this did not impact the company as much as expected, as it benefited from increased service offerings.

Despite the economic collapse, Altech proved to be a solid performer, and did well off the back of its investment in East Africa, says Kaplan.

Altech was the star performer in Altron's results, reporting revenue 4% higher, to R4.7 billion during the six months to August, with adjusted headline earnings per share 13% better, at 304c.

EOH passed the R1 billion revenue mark ”with ease” in its year to July. The company said earlier this year it was “satisfied” with its performance.

Revenue was up 32%, to R1.255 billion, while profit before tax improved 27.3%, to R116.5 million. Earnings per share were up 25.5%, to 120.7c, and headline earnings per share improved 25.9%, to 121.9c. As a result, the company increased its dividend payout by 20%, to 30c.

At the time, in September, EOH said “the local economic environment is showing signs of improvement with customers undertaking IT initiatives beyond the maintenance and support of their existing IT investment”.

Lucas says IT companies should now have cleared the worst of the slump, and spend in some sectors, such as banking, is starting to return and will benefit IT companies.

He adds that even the hard-hit mining sector is starting to spend again. “IT companies should have an okay year ahead.”