Is CMG failing to pick up the message?

Two British groups are well placed to benefit from the texting boom, but one is sending out mixed signals

The mobile text message market is booming. Girls are being invited out on dates, boyfriends dumped and even proposals of marriage are being made via short SMS messages on mobile phones.

The culture of communication among the young has changed so much that billions of messages are being sent every year. But the message from CMG, the Anglo-Dutch company which produces text messaging software for phone companies, is still gloomy. In its interim results posted last week, CMG revealed that growth in Wireless Data Solutions (WDS), its division that specialises in software for text messages, had ground to a halt. This compares to strong growth at CMG's arch rival Logica, which is still riding on the success of text messaging.

WDS, which accounts for 13 per cent of CMG's revenues, posted a £22.6m loss for the six months to the end of June, compared to a £18.6m profit for the same period last year. Overall, CMG revealed a £10.2m pre-tax loss, after goodwill, compared to £45.1m profit last year.

The results were reported as good news. Shares in the firm jumped more than 20 per cent and investors could have been forgiven for thinking CMG was the shining star in the troubled IT services sector. But the positive reception was principally because in April CMG had downplayed already low expectations with a profits warning. The company had warned that its WDS unit would be pushed into the red by £30m as mobile phone companies found themselves squeezed on spending, victims of the downturn in the sector. A limited loss of £22.6m therefore was seen as a real achievement.

"The results are pretty good, considering the state of the market," says Robert De Souza, an IT services analyst at Gartner, the research group.

Another sector watcher, who asked not to be named, is more pessimistic. "It's a strange world where under-performance of that level is deemed to be good."

Tom Rusting, CMG's chief executive is aware that the company – and in particular its wireless division – has a lot to do. "WDS has been making a profit since May, so that is encouraging," he says. "We will need to make large investments in [the WDS] business because we want to be ready for the next generation of products and the cashflow will improve."

The IT services sector has taken a battering, but there are signs that CMG's woes may be self-inflicted. It is impossible not to compare CMG to Logica, which, with no sign of a profits warning, is the toast of the City. Most analysts are confident that Logica can meet market expectations of a pre-tax profit of £150.4m on revenues of £1.1bn when it posts its results this week.

Why, then, has CMG struggled so much? How much is due to the turbulent sector and how much is due to management mistakes? "It is hard to know why Logica's customers are still buying but CMG's aren't," says one bearish analyst.

Richard Holway, director of Ovum Holway, an IT research company, says: "CMG's core business, which is IT services, has done well in the market circumstances, but it is the high-fashion areas such as wireless that have suffered a decline."

One of the main reasons for CMG's relative failure in SMS compared to Logica's success is geography. "CMG is relatively Euro-centric compared to Logica, that is much more geographically diversified," says Charles Newington- Bridges, an analyst at JP Morgan Chase.

Logica is established in, for instance, Japan, where there is still huge demand for SMS, as well as the US and Europe. Simply, when the text messaging craze dies down in one market, Logica can still ride high as SMS takes off in another country.

"In terms of market leadership we believe that at the end of 2001 Logica will be the undisputed leader in terms of SMS," says one analyst, who asked not to be named. CMG's main market is in Europe, principally the Benelux countries, which is a relatively mature market in which demand has started to slow and it is more difficult to make new sales.

Logica is, naturally, keen to trumpet its success. "Logica has always adopted a global approach to its business and we concentrate on getting ourselves at the heart of what our client is doing, what they need to do," says a spokesman. The company has also been relatively quick to identify new growth markets in IT services and software. In particular, it has made a play for contracts with the Government and utilities, helping to diversify its focus from the sometimes flaky telecoms sector.

But CMG says it is starting to diversify its revenue base and increase its geographical reach. The company's chairman, Cor Stutterheim, points out that its computer group has been "very effective at growing organically". He adds: "We are expanding our market presence particularly in the US and the Pacific." But he concedes that there is "a need to build our global presence as markets are emerging".

The CMG chairman says the company's strategy has been to first build its customer base in Europe, then in the rest of the world. Mr Stutterheim says the group has been taking market share from rivals in its key markets – the UK and the Benelux countries – and service contracts in its core areas such as banking, healthcare and government are growing. He believes the improvement will come for CMG and its wireless division, but this will hinge on a recovery in the sector. "The only way to improve the wireless division is to sell more of what we've got," he says. "We are well-positioned for the future."

The City would naturally like to see evidence of more rapid growth in CMG's core business, combined with the speedy expansion of the WDS division into emerging markets such as China.

But although the City sees the risks, it still has a soft spot for the group. It is still not clear whether CMG will meet its full-year targets because customers are continuing to postpone big purchases until the full extent of the economic slowdown is known.

"On a medium- to long-term view, CMG is structurally sound, it is nicely positioned and it has a strong management team at the helm," says Mr Newington-Bridges. "But there are significant near- term risks." The City clearly thinks that CMG is getting the message. When Logica posts its results this week, it will find out if it is too late.