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By | Paul Kunert 11th June 2014 01:24

Phoenix IT Group CEO hatches three year turnaround plan

Services biz watches profits burn AGAIN, requires corrective surgery

The latest CEO tasked with taking "overly complicated" profit bleeding Phoenix IT Group out of intensive care says a return to rude health will take multiple years but should not involve major amputations.

Industry vet Steve Vaughan came on board in the spring, filling the top job that lay vacant for 17 months, and embarked on a review of the group which he outlined today along with fiscal '14 prelims.

Group revenues fell 6.7 per cent to £233.4m in the 12 months ended 31 March, as underlying profit after tax fell 13.2 per cent to £9.6m.

But a series of one time charges - including goodwill write downs, re-org costs and a provision for contracts - totalling £39.9m paved the way for a net loss of £30.3m versus £59.6m a year earlier.

Net debt at year-end fell to £56.1m helped in part by a share placement in March that raised £8.3m, as net cash from operating activities reached £19.4m, up from £15.8m.

The Business Continuity division saw revenues drop £1.4m on the prior year to £50.6m because certain customers reduced contract scope or terms, in addition to some contract attrition, the firm said. Underlying operating profit dropped to £12.4m versus £13.2m in the prior year.

The Managed Services wing saw turnover collapse by £16.3m to £68.4m "largely as a result of the continued reduction in one large labour-only, low margin, professional services contract", the firm said.

In addition, several contracts moved from being classified as direct sales to users to being sold by partners and were therefore transferred to the Partner division.

Managed Services was also hit to a lesser extent by the loss of a supplier contract - the Cisco break-fix business. Last October Phoenix was one of a 1,000 businesses across EMEA given their marching orders by the networking giant for flouting Ts&Cs.

The network operation centre element was subsequently offloaded to Misco earlier this year.

The division made an operating profit of £1.2m versus an £800k loss in fiscal '13.

The Partner business, which provides IT support services to large system integrators and other outsourcers, was hit much harder by the Cisco debacle, but turnover grew £1.1m to £114.4m due to the transfer of the previously mentioned deals from managed services biz. Operating profit dropped by £2m to £7m.

The order book in the Partner unit crashed by some £11.5m to £165.3m on the back of the Cisco issue and the value of the existing pipeline fell £8m to £94.1m.

In his review, Vaughan said he took stock of the firm's strengths and weaknesses, devising a strategy designed to "improve its fortunes". But he added "a sale or break-up is not the right approach".

The Business Continuity and Managed Services divisions both address medium sized customers, that are showing more willingness to adopt some cloud services, the big boss said. The Partner segment, he added, adds scale to the other two divisions.

Vaughan said it has hosting capacity for nearly 2k racks, and its Partner and Managed Services operations took nearly 300k calls in fiscal '14.

"Despite those positives, there has been scant attention paid to the quality of some of our delivery, assessment of contract profitability and lack of discipline on return on the valuable capital we employed," said the CEO.

"A series of restructuring have left a group that is overly complicated in structure and too diverse in the services provided - it needs better focus," he added.

Vaughan said the group needs "stability and a long term direction" and must "deliver on our promises", as "for too long there have been disappointments, shortfalls and surprises". These undermined shareholders confidence and the "faith of our customers and employees".

The Managed Services and Business Continuity segments will "converge" as mid-market punters "exploit cloud-based services", the big boss claimed.

Year one of the turnaround effort will be focused on generating cash, and improving the reliability and efficiency of the business to shore up profit.

In the second year of the turnaround plan, Phoenix will move to a "more standardised set of services" to boost cross selling among between Manage Services and Business Continuity.

"Account management will also help to move the Partner business away from headcount related revenues towards a more compelling service-based model. The outcome will be profit growth (not necessary revenues growth) and better cash generation."

In the third year of turnaround, with account management "bedded down, we will be able to credibly build a business that offers customers greater value than our competitors" predicted Vaughan.

The idea is that with the convergence between the Continuity and Managed segments, sales staff will be able to convince customers to buy additional services, and Partner business will "concern itself more with transformation of services when they [customers] transfer to us".

The welcome news for staffers is that the grand vision unveiled by Vaughan does not include headcount reduction, something that was a big feature of the turnaround plan instigated by his predecessor Dave Courtley.

But of course pushing through these corporate changes will perhaps be easier said than done. We will of course keep you posted on developments. ®

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