Friday, 14 November 2008

Logica battens down the hatches and raises outlook

(By Anthony Miller) Logica turned in a very respectable Q3 result (see here) with 7% like-for-like growth. Based on this performance and a 13% larger order book than this time last year, CEO Andy Green inched up his FY08 growth expectations to “slightly above” 4%. At the same time, he’s tightening Logica’s corporate belt another couple of notches, delaying capex, slashing recruitment, and accelerating offshore transition. Green still expects the European IT services market to outgrow GDP next year and wants Logica to grow even faster, and expand margins another 50 bps.

It’s interesting to compare and contrast Logica’s performance with that of Capgemini (see Capgemini reaffirms FY targets). Let’s keep this all at constant currency. At the top line, Logica did better; 7% growth (to £845m) vs Cap’s 6% (to €2.1bn, say £1.6bn). In the UK, Logica clearly accelerated, though off a weak 3Q07. While Cap ‘only’ managed 4% UK growth to €482m (say £375m), Logica grew 12% to £180m, its best quarter since 4Q06. By the way, the UK is now Cap’s largest market by a gnat’s crotchet, and its UK financial services business soared 30%.

Netherlands was a different story. Logica managed 2% growth to £133m, clearly losing share to Cap’s 14% (Benelux) growth to €326m (~£255m). For the other major European markets, in France, Logica grew 6% to £168m; Cap matched that growth, reaching €481m (~£375m). In the Nordics, its largest region, Logica grew 7% to £220m, while Cap grew 8% to €126m (~£100m). It’s hard to call Germany as Cap doesn’t split this out, but Logica went backwards 4% to £52m.

Andy Green also reported progress on his four-point “Revitalising Logica” plan, laid out in April. It still sounds early days for The “Focus for Growth” initiative, with new Outsourcing Services chief, Jean-Marc Lazzari, only on board since September after his stint as head of Unisys’ Continental Europe business. Although Green expects 25 new UK sales guys in place by the end of the year there was no mention of progress towards the 1,000-man boost in Consulting headcount, which we see as key to stimulating growth. Finding this many rain-makers was never going to be easy, especially in a downturn.

On the offshore front (the “Accelerated Blended Delivery” initiative), total “nearshore and offshore” headcount sits at 4,400 (about 500 higher than in August) with a 5,000 FTE year-end target. We’re still not clear what proportion are in ‘real’ low-cost countries like India, or how many are doing internal back-office work rather than customer projects. Still, onwards and upwards! There is of course a bit of a twist in the tail with offshore. The more successful you are in moving work offshore, the lower your blended fee rates, which makes top line growth a challenge if all you do is migrate existing work. By the way, Cap will have some 20,000 FTEs in India by the end of the year.

Logica has developed a new bid process management tool to be rolled out this quarter as part of its “One Logica” initiative. There’s also a unified resourcing tool being implemented which should be in place by end Q109. This is absolutely key as we are still unclear how Logica’s global delivery network will fit together given what appears to be fragmented reporting lines for the different elements of Logica’s ‘end-to-end’ services.

Finally, Green has put the brakes on spending to further the “Competitive Costs” initiative. He talks of another £10m in ’09 cost savings on top of the £50m already predicted, though is sticking to the £80m 2010 cost reduction target. It’s not clear if all the additional savings are from cost avoidance, like the announced capex and recruitment cuts, or whether there will be more restructuring. In any event, by a fortunate delay in the WM-data minorities’ buy-out, Logica has a little relief in net debt/EBITDA, a key measure for its banking covenants, an area some equity analysts have been nervous about.

So, a pretty good report and sensible cost-saving measures; it could have been a lot worse so credit where it’s due. Of course, steering to GDP growth in Europe is not that much of a target if we have a recession, but if Logica can beat it, well that would be a result. We are meeting Andy Green next week and hope to gain further enlightenment.

PS For those at all interested, Logica’s £845m revenues were just £5m shy of my own forecast when I was on the ‘dark side’ as an equity analyst. Even so, I’m thankful I don’t have to play that game any more!

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