Monday, 19 November 2007

Detica provides further evidence of Financial Services "sharp decline"

Further evidence of the sharp and sudden downturn in IT expenditure in the financial services sector came today from Detica.

On the surface, Detica’s results looked …OK. A 45% headline increase in revenues masked an 8% organic growth once acquisitions like were stripped out. But, let’s face it, we had become accustomed to double-digit organic growth from Detica. Indeed we got that from Detica’s Public Sector business which is not only doing well (it recorded a 16% organic growth in H1) but, with its recent award as a major subcontractor in eborders, the future looks reasonably bright too.

It was Financial services where investors scented trouble. Organic revenue growth in H1 was ‘just’ 3%. But it was the statement “towards the end of the half, however, we saw a sharp decline in demand from investment banks following the summer’s global liquidity crisis and, on balance given these current tough market conditions, we expect that full year revenues from this unit will be somewhat lower than the equivalent figure last year” that really spooked investors.

This was enough to set the share price into a tailspin – down 25% at one point before ending the day down 21% at 245p. Other UK SITS companies with significant Financial Services exposure – like Misys and Logica – were also hit with 5%+ declines today.

Detica’s CEO Tom Black said to Thomson Financial “the pure banking bit that is affected is about 10-15% (of the commercial unit's revenues). I would say flat growth is not an unreasonable estimate although like everyone else we don't know what will happen (in the investment banking sector).” Commercial is around 45% of Detica’s total revenues. All the same this will probably take 'a few million' off analysts' revenue forecasts for the year.

What is more concerning to the industry as a whole is the suddenness of this downturn. The tap has been turned off abruptly over a matter of just a few months. I would stress how important Financial Services is to the UK SITS sector as it represents some 21% of total revenues – second only to the public sector at 31%, which is facing its own growth downturn.

I’m afraid I can only reiterate my previous warnings. I believe that the industry forecasters have currently got it wrong and have not readjusted their forecasts to take into account the events of the last quarter. When they do, I expect UK SITS growth to evaporate. Rather than 6% for 2008 (the current consensus) I would suggest 1-2%. Or, put another way, a decline in real terms once inflation is stripped out. That, in turn, will play havoc to fee rates and utilisation which will have a much more serious effect on the bottom line .

Forewarned is at least forearmed.

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