Gijima took a knock of a year-and-a-half's net profit after its settlement agreement with the Department of Home Affairs, as it could not afford the damage that would be caused if it sued its biggest client.
The listed outsourcing company on Monday said a spat between it and the Department of Home Affairs had been resolved after almost a year of negotiations. Last April, the department canned the 'Who Am I Online' contract, arguing that the deal was invalid.
Gijima was awarded the contract to overhaul the department's systems and improve security in 2007, and the contract was signed the following year. The project aims to replace outdated and obsolete legacy systems, as well as improve security.
CFO Carlos Ferreira says the large amount of business the company receives from government was one of the deciding factors in settling with the department. “We don't think it's healthy to be in litigation with any client, big or small, and especially not with government.”
Government contracts accounted for almost half of Gijima's revenue at the end of last year. However, this percentage has dropped to 36% as the company did not earn any revenue from the deal during the first half of the year.
Gijima usually earns R500 million from 'Who Am I' in a full-year period. So far, the company has earned R1.23 billion from the deal, but the debt write off takes this down to under R1 billion.
The canned deal led revenue 15.6% lower in the six months to December, as it dropped to R1.2 billion. Last year's R85 million net profit was wiped out as the company reported a R270 million loss.
Makes sense
CEO Jonas Bogoshi defended the company's decision to settle the argument. He says while it led to a short-term knock, it will benefit Gijima in the longer term. He says the decision was taken despite the fact that Gijima felt it had a strong legal case because it was “pragmatic”.
Bogoshi says the dispute has not affected Gijima's ability to win contracts, as it continued to secure tenders. Gijima has a pipeline of deals worth R600 million from both the public and private sectors.
However, Bogoshi admits the dispute has damaged Gijima's reputation. “It's a perception, and we have to manage that.” He says management is taking steps to mitigate this, and future government contracts will be tightly worded to prevent a repeat incident.
Settling with the department has hit the company's profitability. It incurred R375 million in costs, of which R263 million related to home affairs debt that was written off. In addition, the company has written off another R80 million in future discounts it has promised the department, and another R30 million in expenses related to the settlement.
Ferreira explains this amounts to about a year-and-a-half of net profit. Gijima took the entire cost hit in the six months to December, which resulted in a net loss of R271.8 million compared with a R85.8 million profit a year ago.
Gijima expects to complete the project in the next year-and-a-half once a new contract has been signed. Ferreira says the company will make a profit, but not at the level it would have without the additional costs.
Related story:
Home affairs deal hammers Gijima
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