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By | Drew Cullen 20th January 2005 12:22

Morse: UK sales under pressure

Takes Diagonal path in services push

Trading in the UK remains "challenging and competitive", Morse says. Shares fell 10 per cent yesterday on a Q2 sales update, in which the mid-range reseller revealed that hardware revenues and margins were under fire.

However, smaller country operations in Spain and France, continue to perfom well. And Germany and France have stabilised, with the latter expected to reduce losses significantly in the half year to 31 December, 2004.

For Q2 - also ended 31 December - group sales were £124m (2003: £114m), resulting in half-year sales up 16 per cent to £217m (H103: £187m). The half year includes an £18m revenue contribution from Diagonal, the British SAP consultancy acquired for £50m, last August. Group operating profits of £4m for H1 are expected (H103: £3m) - but this is before exceptionals and goodwill amortisation.

Morse has completed the first stage of integrating Diagonal, but notes "only one disappointment arising in the form of a loss making pre-acquisition contract around which discussions are continuing with the client".

The group says it is proceeding well in its transition from reseller to full-blown "services technology integrator", with 40 per cent of turnover and 50 per cent of gross profits coming from services in H1. Of course, the services / hardware mix is helped by falling hardware sales, as well as improving, Diagonal-assisted services revenues.

Like Computacenter, which last week noted a tough reselling environment, Morse has no plans to retire from reselling hardware. After all, product sales are the basis of much of its services revenues. Duncan McIntyre, Morse CEO, told the FT yesterday that he is aiming for an 80:20 services / products mix - courtesy of services growth, rather than collapsing product sales, we presume.

Morse closed the second quarter with net cash of £39m, up £1m on Q1 end. ®

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