Logica defies tech crash with 60% profit surge

Software supplier claims focused approach is behind its ability to buck the trend in a depressed market
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The Independent Online

In a tech market that has seen once high-flyers either list badly or collapse outright, Logica yesterday pulled off a stunning 60 per cent rise in annual per-tax profit to £155.6m.

That beat the forecasts of City analysts, among whom the most bullish had pencilled in £150m. For the mobile phone software and IT services supplier, it marked an eighth consecutive year of 40 per cent profits growth – a performance rarely equalled by listed UK tech companies.

Dr Martin Read, the chief executive, said: "Clearly they are very pleasing. But it is important to stress that it's just another year in an eight-year period."

During that time, Logica has gone from a small-cap bit player to the FTSE 100 index. Perhaps more noteworthy, given the savage bear market ravaging IT, software and alternative telecoms stocks, Logica may be the only one to survive next week's quarterly revision.

Dr Read has a simple explanation for Logica's continued growth and a staying power that has surpassed rivals. "It's been the result of a very focused approach," he said, explaining that Logica's strategy is to provide systems to customers that are critical to profitability and survival.

Whether it is back-office clearing and settlement products for banks, consultancy services or billing software for mobile phone networks and utilities, Logica targets high value-added applications. "These are operations critical to our customers," Dr Read said. "Their purchases are based on an evaluation of who can deliver the service reliably – it isn't based on price."

Having grown to encompass 12,000 employees operating in 30 countries, Logica does business with some of Britain's biggest companies. Among its client list is Vodafone, which accounted for sales of £140m or 11 per cent of Logica's year-to-June turnover of £1.31bn. Other top customers include Reuters, the financial information and trading systems giant, British Telecom, Royal Dutch/Shell and Royal Bank of Scotland.

"It's a total solutions capability we've been building," Dr Read said. "That is a consistent pattern that we've followed on the back of our strategy of delivering mission critical systems."

The group's raciest division, unsurprisingly, is mobile phone text-messaging software, though it also provides more basic telecoms network integration software and consulting services. As the growth of SMS messaging has exploded, Logica, as the leading licensor of the software, has prospered mightily. It has also won new customers with software to activate and meter pre-pay handsets, which during the past year, have delivered the bulk of new mobile users.

Growth in the telecoms division saw turnover advance 42 per cent to £485m. Virtually all the gain was organic growth, as distinct from acquisitions, while the mobile messaging and pre-pay products – separated from the slower-growing network business – expanded sales by nearly 70 per cent.

Dr Read, while cautioning that group profits won't grow 60 per cent in the current year, remains bullish about message and mobile-billing software. The company can add more customers with new applications designed to route message volumes more efficiently, something which will help operators get greater volumes – and revenue – out of existing networks.

On the future of third generation [3G], high-bandwidth mobile services, for which operators committed over £50bn in licence payments, Dr Read is sanguine. "[Operators] want to charge customers more, but to do that they have to deliver more value. We have just worked on putting in the world's first 3G platform in Japan. That's one reason why we are cautiously optimistic."

Another reason could be Logica's solid financial footing. Although it made 15 acquisitions in the past half-decade, the company's balance sheet has net cash of £120m.

Essentially, that is the proceeds, minus about £340m for acquisitions, from a £458m rights issue last year when the shares were over 2200p. Despite the strong results, Logica's stock closed down 19p at 738.5p – a far cry from the high of 2724p touched in early 2000. Despite that correction, Logica is still valued at about 30 times prospect fiscal 2002 earnings, which amounts to near-50 per cent premium to the market.

Asked to comment on the stock's year-long decline, Dr Read observed that yesterday's earnings were better than the company forecast at the time of the rights issue. He added: "I'm surprised the share price has gone so low," noting that it is at the same level of two years ago when earnings were only one-third of the 2001 tally.

"I have never been a huge believer in the New Economy," Dr Read said. "Life isn't about great discontinuities, but about trends. Clearly euphoria set in two years ago. Now that the tide has gone out you see who has clothes and who doesn't."

One of the few blemishes on Logica's record is its lacklustre record in the US. Even Dr Read admits "disappointment" with past management, but believes that lagging North American mobile penetration and messaging offers opportunities.

Logica's sales there actually fell 4 per cent to £54.6m, but constitute just 4.3 per cent of total turnover.

Analysts fear that slowing IT services growth, matched with delays in the configuration of next generation mobile networks could bite into current-year business.

For now, Logica sees like the last man standing in the UK tech sector.