Shareholders lose patience after fresh LogicaCMG profit warning

Investors warn that the troublesome networks division must start to deliver soon
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Martin Read, the chief executive of the information technology group LogicaCMG, has done it again. Yesterday he issued a fourth profits warning and now faces the wrath of leading shareholders who are extremely unhappy as a result of the latest setback.

Martin Read, the chief executive of the information technology group LogicaCMG, has done it again. Yesterday he issued a fourth profits warning and now faces the wrath of leading shareholders who are extremely unhappy as a result of the latest setback.

Although Mr Read was his usual upbeat self before he faced investors at yesterday's annual meeting, institutions made it clear they did not share his cheery disposition. The clock is now ticking for LogicaCMG's long-serving chief executive.

The problems at the former FTSE 100 technology company stem from its Wireless Networks division which accounts for no more than 15 per cent of revenues but which the City sees as its key driver of growth. Its other division offers technology solutions and consulting services for various business sectors.

The Wireless Networks division supplies software to the mobile phone industry that allows the likes of Orange and T-Mobile to run their lucrative text messaging services. LogicaCMG also creates the software that mobile companies use for their billing purposes ­ another growth area. Even more exciting, as far as the LogicaCMG spin goes, is the growth market for voice and picture messaging, called MMS, which the much-vaunted third-generation mobile services will introduce.

These are seen as increasingly important as revenues from traditional text messaging begin to wane.

However, the Wireless Networks division has proved a blessing and a curse for Mr Read ever since December 2001, when he was forced to issue the first of a string of profits warnings about the unit's financial performance.

Yesterday he issued the latest, and the market was deeply unimpressed. Mr Read said that although new contracts were coming in to the division, the specifications on these orders were more complicated than at first anticipated.

The company is therefore facing longer delivery schedules and a delay in payments as a consequence. The resultant lower revenues will mean the division will be loss-making in the first half of the current financial year.

The company's shares have tumbled more than 40 per cent since November, falling a further 7p yesterday to finish at 183p. The shares were trading at 317p six months ago, although even that level is a long way from the £27.24 that the shares hit at the height of the technology boom.

Leading shareholders are now articulating their frustration and it is clear that Mr Read is on his last chance as far as leading shareholders are concerned.

Speaking on the condition of anonymity, one said: "We are obviously disappointed by the statement today, particularly on Wireless Networks. Any differences in [investors'] valuations of this company are attributable to this division, and people's patience is beginning to wear thin. We still believe the company will be in a position to benefit from MMS from a medium-term view but we are getting increasingly frustrated with the recurring profits warnings, however.

"I think they have got to deliver. I really think they have 12 to 18 months to deliver. I think if we are having this same conversation in a year's time then there really will have to be changes. We have bought into the company's story about a gradual recovery in IT services and I think Wireless Networks is worth something but we need to see some evidence of it coming through."

Another of the company's institutional investors said: "The market is deeply suspicious of the company's forecasts. We are not keen on the management. We think Martin has been wildly optimistic on the messaging business and continues to cling to that."

This will make extremely grim reading for the 53-year-old chief executive who has been at the helm of Logica, and latterly at LogicaCMG following the 2002 merger with its main rival, for 11 years.

Few investors have forgotten the Logica annual report for 2000. This revealed spectacular prescience on the part of Mr Read who exercised share options during the year worth £17.9m. He exercised 768,590 shares at 173.7p and then sold them at£25.06. Pay and bonuses of £702,000 plus the proceeds of an £8.7m long-term bonus plan meant that 2000 was a bumper £27m year for Mr Read.

However, as the timeline in the graphic shows, 2000 marks the beginning of Mr Read's problems that have centred largely on the performance of LogicaCMG's Wireless Networks division.

His troubles have not simply issued from that division's operations but also from the way he has kept the market updated and the extent to which pending profits warnings have managed to leak into the market.

Mr Read insists that no leaks have ever emanated from his company. But exactly two years ago, when he issued a third profits warning, the rumours were so strong in the market that the company's shares plunged 12 per cent immediately before the offending statement was published. The situation was serious enough to be brought to the attention of the Financial Services Authority.

Again this year there were rumours swirling in April that not all was well and that another profits warning was on its way. Yesterday the company duly warned that revenues would be delayed and the Wireless Networks division would make a loss in the first six months of the year.

In February 2002 a profits warning ­ again caused by disappointing sales figures at the Wireless Networks division ­ were preceded two months beforehand by guidance from the company that sales growth would be a healthy 30 per cent. Before that analysts had pencilled in 40-50 per cent growth compared with the 80 per cent growth seen in the previous year.

For a company in the messaging business, LogicaCMG certainly seems to struggle to get its own views across.

Mr Read saw yesterday's profit warning as extremely frustrating. LogicaCMG is a victim of its own success, it seems.

"Perversely the problems are actually in some ways the positives," he said. "As we have gone into the second quarter of the year the orders are coming in as expected but a higher proportion are in the new technology areas of 3G, which is good news. But under the revenue recognition rules we have to extend the period over which we can book the revenues. That is frustrating. We can't book the revenues as fast as we would like. That is the short-term profit story."

Mr Read said he accepted that shareholders were going to want to know more about what was going on inside the Wireless Networks division and that the company would be talking to institutions.

"The big picture here is that we have been through a massive downturn in the sector and on top of that there have been big technological changes as well. Trying to give accurate predictions on that level of technological change is very hard to do. It is hard to know what the take-up of 3G will be. But if we have got orders in the order book then they will appear as revenue, given time."

Mr Read admits that he has, in the past, thought about selling the Wireless Networks division but in the end decided it was worth keeping in anticipation of 3G technology.

Those hopes are going to have to become a reality soon, however, if Mr Read stands any chance of extending his 11-year run at the helm of LogicaCMG by any meaningful amount.