Tuesday, 27 January 2009

Phoenix sees growth slow

(By Anthony Miller). Infrastructure support services group Phoenix reported a notable growth slowdown in this morning’s trading update, along with the likelihood of higher restructuring costs and impairment provisions. Q3 (to Dec. ’08) revenues grew 1% yoy, compared with 11% pro-forma growth in first-half (to Sep. ’08). However, margins are up. The order backlog fell 3% yoy as Partner Services (where Phoenix delivers services via outsourcers) continued to weaken.

We commented in November (see Phoenix loses CEO) that Phoenix’s play at different parts of the support services market is a difficult one to optimise. At least in the mid-market (38% of 1H09 revenues) Phoenix has a wide range of services to offer and a larger number of prospective customers which they sell to directly, so there’s a better chance of finding business somewhere. Indeed, the order book seems to be growing here as well as in Business Continuity (20% of 1H09 revenues), though this latter market is very competitive, with high fixed costs making margins (1H09: 25%, highest in the Group) extra sensitive to utilisation levels.

But with Partner Services (42% 1H09 revenues), Phoenix is entirely dependent on a small bunch of big players who, in effect, sell on their behalf. Outsourcers are themselves under pricing pressure and I would not be surprised if they are ‘inviting’ Phoenix to share the pain. Also, Phoenix’s business growth depends on its partners winning more large deals. Given TPI’s downbeat assessment of European outsourcing megadeals last week (see TPI reports megadeal famine) this is looking a much weaker market.

This is a real shame as we have long liked Phoenix and remain convinced that the mid-market in particular is best served by similar sized suppliers. However, at the high end, Phoenix is now rather at the mercy of much larger players facing declining deal sizes and with whom its bargaining power is likely to be waning.

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