Restructure knocks Square One

Johannesburg, 26 Sept 2007

JSE-listed Square One Solutions Group has seen revenue and earnings decline in the six-month period to 30 June.

However, analyst firm Frost & Sullivan says this is not a cause for concern as the company is displaying innovative ways of overcoming some of the challenges associated with operating in the South African IT market.

Earlier this year, Square One CEO Craig Alexander said the group aimed to double revenue by 2009. However, yesterday the company revealed its revenue had declined 18% year-on-year, to R79.6 million, off R96.9 million.

In a statement to shareholders, the company said it had been focusing on diversifying the business into a services- and annuity-based business. Although this resulted in a lower turnover, the strategy typically attracts high growth margins, it explained.

"This has been a focus in both the services and rentals business units, with a growth in annuity-based business from approximately 10% of turnover in the prior comparable period to around 25% for the period under review. Contracts being signed with customers vary from one to five years service and/or rental contracts," it revealed.

Frost & Sullivan ICT industry analyst Lindsey Mc Donald adds: "Square One Solutions has initialised a process that will result in a change of business focus to an annuity-based business. While this has led to some expenditure and slightly lower earnings, it is a key investment for the company`s future."

BEE pain

The black economic empowerment (BEE) deal entered into with Utho Investment Holdings was another area to hit its income statement.

"The issue of shares for cash to a BEE partner had a dilutive effect on earnings and headline earnings per share to 8.2c and 7.1c per share, respectively. However, this relationship, together with the existing Proudafrique BEE shareholding, is already providing benefit, as the group is now well positioned with its client base with respect to BEE matters," said Square One.

Comparatively, Square One delivered earnings and headline earnings per share of 9.8c in the six months to end June 2006.

Hope remains

On a higher note, Square One says its acquisition of NETIntellect has now been fully integrated and is expected to contribute to growing profitability going forward.

This integration will show benefits quickly, not only in earnings but also in broadening Square One`s offering, says Mc Donald.

As for its future prospects, the company says the groundwork has been firmly established to enable Square One to unlock greater profitability and tie in sustainable annuity income. Profitability is expected to further improve over the next six months, in line with budgets.

Frost & Sullivan adds the company is appropriately geared to serve the lucrative small and medium-sized business market.

"The clever positioning of the company towards the mid-capitalised market sector means it is perfectly suited to offer services to medium and large companies, as well as catering for the burgeoning SME sector. With this sector set to continue growing at unprecedented rates in SA, Square One`s ability to offer scalable solutions in this market will be a key area of growth," Mc Donald says.