Wallace makes the best out of a terrible hand

Logica and 3G; Flying saucers
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The Independent Online

There follows a transcript of yesterday's global conference call with Graham Wallace, chief executive of Cable & Wireless.

"Good morning everyone. You may have noticed that our share price has sunk to a new 11-year low today, but I trust you won't think this reflects badly on me. It is, however, bad news again, I'm afraid. There's another profits warning, revenues in our main business, Global, are 10 per cent below last year and we have absolutely no idea when things are going to improve.

"You may think it impossible to put a positive gloss on such a negative set of statements, but it falls to me at least to try. First, much of the decline is due to falling sales of network capacity as nobody's building any networks any more. But this kind of business was always one-off, lumpy and unpredictable. Having less of it actually gives us greater visibility of earnings going forward. Post the Enron collapse, the market doesn't like that kind of thing anyway, so it is best to be rid of it.

"Second, we are getting rid of the customers we don't want as well. Small business customers are an aggravating lot. They demand as good a service as the big boys but they won't pay for it and it is hardly worth the candle. Who needs these people? We don't, that's for sure. So what we've done is to rebase at a lower level, and we are keeping our fingers crossed we don't have to do it again.

"So when are things going to improve? I cannot answer that question but I do know this. The question is when, not if. All companies will eventually need the kind of added-value telecoms service we provide to stay with the pack on productivity gain. So demand should start to catch up with supply sooner or later. It's not as if we're Marconi or anything. If only the market would recognise it.

"Some of you may ask why I don't use some of my £2.2bn remaining cash pile to buy Energis, Colt or one of the other better alternative network operators that nowadays go for a song. The answer is that even at these depressed levels, we cannot make the numbers work, and if you are wondering where that leaves the numbers for Cable & Wireless Global, you'd be on the right track. Over and out."

Logica and 3G

Logica is another of those technology companies which has been promising more than it can deliver, and Martin Read, Logica's chief executive, is being punished for it. After yesterday's sickening 17 per cent plunge in the price, the shares are back to where they were four years ago before all the fuss about Logica's soaraway text messaging software business began. This year, the company's mobile phones business as a whole will account for 40 to 50 per cent of total profits, and yet as far as the stock market is concerned, it is almost as if no value is being attributed to it whatsoever.

All this is water off a duck's back to Mr Read. The stock market will do what the stock market will do, is his view. In the meantime, he's got a business to run. It's profitable, it's growing and it's got no debt. How many other technology companies can say that? Well, it's a point of view, and Mr Read certainly cannot be blamed for the exaggerated expectations that built up around companies like Logica at the height of the technology bubble. What he can be blamed for, however, is consistently overestimating demand for his software since.

As recently as last November, he was still predicting 40 per cent revenue growth this year for the group's mobile phones interests. The following month that came down to 30 per cent. Figures published yesterday record a 28 per cent increase at the interim stage, but, the group adds ominously, at best modest growth is now expected for the second half. Average it out, and the group will be lucky to sustain 15 per cent growth for the year as a whole.

None of this would come as a surprise to close watchers of the mobile phones industry, and the real mystery is that it did to Mr Read. The bottom has fallen out of the pre-paid market, which was a substantial part of Logica's business, while once fast-growing markets for text-messaging software in Japan and the Far East have been poleaxed by the region's deep recession. In Europe and the Americas growth is still strong, but for how much longer?

Preparations for 3G are already well under way in most developed countries and the big question mark over Logica is whether it, too, can make the leap. As things stand, Logica and CMG pretty much have the territory to themselves, but that's not going to be true of the next generation of multi-media messaging, where the handset manufacturers, mobile operators and others are all trying to muscle in on the action.

Mr Read is nonetheless confident he can maintain a very substantial share of this market, and at decent margins too, though perhaps wisely after all that's happened, he's not prepared to put a number on it. Despite relatively low research and development expenditure, he claims to know his market and have the right products under development to service it.

Mr Read's view is backed by a recent Morgan Stanley/EMC survey of 41 wireless operators, 39 per cent of which listed Logica as their supplier of choice for next-generation messaging, quite a bit higher than anyone else including CMG. It'll be a while before we know whether these intentions translate into real orders but, if Mr Read is right, then Logica, an essentially well managed company whose substantial business outside mobile telephony seems to go almost wholly unnoticed, is severely undervalued. And if he's wrong...

Flying saucers

The U theory is pretty much discredited, as is the V. Lots of people still believe in the L or the W, but Sir Martin Sorrell, chief executive of WPP, having toyed with the bath-shaped recovery is now fully committed to the saucer. This is not as bad as an L, which presumably envisages no recovery at all but, if Sir Martin is right, it is going to feel quite bad enough. At least with a bath there's a steep climb back to economic health at the end of it. With a saucer, there's a long flat period, with a few bumps in the middle, followed by an anaemic little recovery which scarcely feels like a recovery at all.

It's a pretty gloomy prognosis for the world economy, and if you are wondering why the stock market has so far failed to respond to all those forecasts of a big bounce back in the second half, it is because investors still on the whole believe Sir Martin's analysis over the more optimistic ones. That said, the view from the poop deck of the global media business right now is a particularly dire one. In Britain and the US, advertising is suffering its worst downturn since anyone can remember, and there is as yet virtually no sign of a recovery. Every now and again things seem to be getting better, but then they plunge back down once more.

So how come WPP managed to limit its own downturn in revenues last year on a like-for-like basis to just 3 per cent? Brilliant management, Sir Martin would insist. The revenue mix was changed, and WPP seems genuinely to be benefiting from its global reach in grabbing a greater share of a shrinking cake. Whether he can, as promised, eventually drive the margins to 20 per cent remains to be seen, but if the market remains as depressed as he fears, this is about the only way he's going to achieve bottom line growth this year.