Shares in JBA plunged 625p to 632.5p after the company warned that its profit for the year to 31 December 1997 was likely to be about pounds 5m. Analysts had previously forecast that the company would make profits of about pounds 15m.
The warning sent shock waves through the rest of the information technology (IT) sector. Shares in leading IT companies including CMG, FI, Logica, Misys and Sema all tumbled on the news.
Investors were particularly rattled by JBA's comment that the cost of hiring extra contract staff had contributed to the shortfall. In the past year strong demand for programmers, fuelled by the need to rid computers of the millennium bug, has forced up salaries across the IT sector, prompting fears that profits would be squeezed.
However, analysts said JBA's profit warning was largely related to problems within the company, and that the share price falls were the result of a panic reaction by investors. "There's no reason why other share prices should fall," said industry expert Richard Holway. "It's just a knee-jerk response by the City."
However, he said a blip had always been on the cards after shares in IT companies soared away following the creation of the new index. Since the beginning of December, shares in the five largest companies in the sector have risen by an average of over 40 per cent. "I believe the upturn in the sector has been totally overdone," said Mr Holway.
JBA said the profit shortfall was largely down to a sharp rise in product development costs, from pounds 23m in 1996 to pounds 36m last year. Only last year, the company, which specialises in software which helps companies plan their business processes, abandoned its practice of capitalising R&D costs to bring its accounting policies into line with US standards.
JBA also said it had lost several large product tenders to overseas competitors. "Four or five big deals didn't happen in areas where we can't differentiate our products from the competition," said chief executive Allan Vickery. "We made an error of judgement in a fast-moving world."
However, Mr Vickery also said the cost of hiring extra staff had made an impact. "The cost of IT contractors is completely out of control," he said, adding that JBA would be laying off 80 per cent of its contract staff in an attempt to cut costs.
The warning shocked many of JBA's followers in the City. The company has been one of the most consistent performers in the UK IT sector, with a steady record of rising profits.Reuse content