Spescom focused on limiting costs

Johannesburg - ICT company Spescom [JSE:SPS] on Thursday reported diluted headline earnings per share from continuing operations of 5.5c for the six months ended March 2010 from 3.7c a year ago.

Total revenue declined to R163.0m from R168.7m as the tight economy constricted new project opportunities and led to a 15% revenue decline in both the Enterprise and broadcast application solutions and the Telecommunications segments. However, the increased contribution from higher margin services supported a 6% rise in gross profit to R83.9m. The company reported a 44% increase in attributable profit to R3.8m.

The company described the results as a "strong performance", despite ongoing pressure on ICT spending among its corporate clients. It is reaping the benefits of its strategy to focus on higher margin services, it said.

All of the company's four operating divisions successfully delivered on this commitment which enabled it to report continual improvements in gross profit margins despite pressure on revenue imposed by the extended economic downturn. During this time, service related turnover has grown to 35% of turnover from 26% in the comparable period.

Spescom showed growth in revenue related to services and annuity revenue contracts, which grew by 27% to R55.4m.

The company said it remained focused on stringent cost management, limiting the operating expense increase to 3% against the backdrop of increased wage costs to retain key skills as well as retrenchment costs of R1.8m.

Operating profit before interest grew 55% to R5.2m underpinned by the services segment which reported a 114% increase in operating profit to R2.6m. The Telecommunications segment achieved an operating margin before interest of 0.7% compared to a negative margin of (4.8%) in the comparable period. The Enterprise and broadcast application solutions segment defended its operating margin of 2.7% despite the tight business environment.

Cash generated by operations amounted to R13.3m, slightly lower than 2009's R14m.

Spescom DataVoice's sales volumes continued to be impacted by slower deal flow, both locally and internationally, due to the economic downturn. However, its gross margin improved as a result of initiatives to streamline costs. A steady increase in its annuity revenue base from the renewal of maintenance contracts also paid off. 

Although Spescom DataFusion is seeing evidence of a slow recovery, the market is characterised by smaller projects. The division delivered a 19% increase in annuity revenue, supported by its growing installed base, which facilitated an improved gross margin. Its opportunity pipeline indicates that market activity is set to continue improving.

Spescom Media IT showed a small decline in revenue, due largely to delays in the delivery of equipment to fulfil customer orders. It concluded long-term maintenance contracts following the supply of turnkey integrated broadcast solutions to the national broadcasters in Mauritius and Namibia which will contribute to its results going forward. The division also has a solid pipeline of opportunities and is pursuing additional growth prospects beyond South Africa.

Spescom Telecommunications benefited from its specialised maintenance contract with Neotel which commenced in April 2009. Infrastructure spending remained under pressure as customers continued to minimise capital expenditure. Despite the tight operating environment, the division contributed positively to the Group's operating profit and remains focused on expanding its service-related activities to support performance in the second half of the financial year.

A new operating division, NewTelcoSA was established during the period to participate in the liberalisation of the domestic telecommunications sector. 

Spescom has established a strong base of annuity revenues and is positioned to benefit from the economic recovery as evidenced by the increase in the number of projects under consideration by customers. Enterprise investment decisions are driven by the requirement for new business practices to enhance efficiencies. Growth opportunities include growth in Africa as well as the public sector domestically, it said.

While there are promising signs that the opportunity pipeline is gradually recovering, business activity could be temporarily affected during the Soccer World Cup. However, Spescom remains confident that margins are sustainable at current levels, underpinned by the groupwide initiative to further increase service related customer engagements.

The company also advised shareholders that caution is no longer required when dealing in its securities. Having evaluated opportunities to accelerate growth, increase critical mass and unlock value, Spescom's board and management team concluded that the terms of the specific opportunities which were under consideration were not optimally aligned with its objectives. It will continue to pursue initiatives to deliver on its growth strategy and create value for its shareholders.

Having delivered a further improvement in profitability in spite of unprecedented tight trading conditions, the group is well positioned, it said.

 - I-Net Bridge