UCS hit by soft global economy

By Staff Writer for UCS Group
Johannesburg, 19 May 2009

The soft global economy has impacted UCS Group`s international and local non-food retail operations, with several overseas projects having being cancelled, says CEO John Bright.

The software, solutions and services group today posted its results for the six months ended 31 March, showing revenue had climbed 27%, to R725 million. Of this, 11% was due to organic growth and the remainder attributed to the maiden contribution of Computer Software Consultants.

Normalised earnings before interest, taxes, depreciation and amortisation (EBITDA) were up 6.5%, with margins at 13.1%. Diluted headline earnings per share were down 60.2%, to 5.1c (2008: 12.8c).

The results are marginally better than the trading statement issued by the group earlier this month; however, it continues to find conditions difficult.

Bright says: "Trading conditions for the six months to 31 March 2009 continued to be difficult for UCS Group. Certain international projects were cancelled or postponed."

The non-food retail sector, which is a focus of the group, remained under intense pressure, due to weak consumer spending locally and internationally. UCS Group`s domestic software business performed well, with its customer base continuing to rely on its core transaction processing platforms.

"Cash generation remained strong with cash generated from operating activities up 69%, to R94 million. As in the past, we expect the second half of the financial year to be considerably stronger than the first half, as most retail system implementations and enhancements are scheduled during the middle months of the year," Bright says.

He says the strong and growing annuity revenue base positions the group well to navigate the volatile market conditions and maintain its growth momentum.

Varied results

Analysis of the UCS Group`s divisions shows a mixed performance impacted by negative international and domestic factors. This is particularly true of the retail solutions division.

Services revenue was strong and in line with expectations, while project revenue was impacted by adverse market conditions.

The international units are not currently profitable as a result of the severe market conditions. Aquitec has seen the impact of the global recession, particularly the negative impact on its client base, with the likes of Woolworths UK closing down and many distribution centres being rationalised by its international customers.

US-based UCS Solutions is still building its pipeline and some of the early successes of securing signed orders have not progressed as expected in the project phase. This is due to hesitations from certain customers with regards to undertaking such projects in current market conditions.

The division recorded revenue growth of 14.4%, of which 10.1% is organic. Excluding the effects of these acquisitions and excluding foreign exchange and translation effects, EBITDA grew by 5.1%, to R41.2 million, where the comparative period has been adjusted for the once-off profit realised on loan account translations related to Aquitec.

Govt spending

Although the infrastructure division is purely focused on the local market, the good results achieved in retail services were counterbalanced by a weaker than expected level of government business.

New contracts within the public sector are at advanced stages of transitioning, with significant investment being made in overhead capacity ahead of the new business growth. Despite revenue growth of 17.4%, EBITDA for the division decreased by 7.5%, to R26.3 million, indicative of severe margin pressure, particularly in the government space where expenditure lagged ahead of the general elections in April.

With the exception of the CSC acquisition, slower than expected traction was gained in respect of the group`s value-added services components. Lifeworld and 4life, in particular, were not awarded a material contract that was visible in the pipeline at the beginning of the financial year.

CSC has contributed positively over the period, essentially offsetting the negative results realised by the UCS Software Manufacturing unit. The CSC business appears to be on track to exceed its profit warranty for the period ending 30 April.

UCS Software Manufacturing`s progress on the international sales front was disappointing, due to generally depressed international market and the Satyam situation, which forced it to review its international partner strategy.

All other units in this division performed in line with expectations on the top line, despite challenging domestic market conditions. The division recorded revenue growth of 91.7%, to R176 million (4.6% excluding CSC), while EBITDA grew by 19.6%, including the positive contribution from CSC.