Computacenter: services bail out product-distribution leaks

Computacenter relies on Germany, services and the euro to pull it through

(PresseBox) (Köln, ) Computacenter's group revenues for FY08 increased 7.6% year-on-year to £2.56 billion; adjusted profit before tax increased 1% compared with FY07 to £43 million. The group, which has subsidiaries in France, Germany and the Benelux region, benefited from the favourable exchange rate between the euro and sterling, but it also benefited from an increase of just over 10% year-on-year at constant currency in its annual services revenues.

Germany performed well, contributing to profit growth as services revenues grew 4.6% in local currency and margins benefited from the focus on networking and data-centre solutions. However, total German revenues grew just 1% year-on-year in local currency owing to the downturn and decline in product sales.

The UK subsidiary's performance was "lacklustre", according to CEO Mike Norris. UK revenues grew by 2.5% to £1.39 billion, on the back of sales growth in data-centre services, professional services and sales to the mid-market business sector. Profitability was hit after a poor start to the year and continuing investment and restructuring in its services capability.

The French subsidiary's performance remains patchy: revenues declined 7.1% in local currency, hit by the 'highly challenging' product market (France earns a smaller proportion of its revenues from services than the UK or Germany). Services revenues, on the other hand, grew by 12.2%, with particular successes in the managed services business. Services now account for 15.4% of the French subsidiary's revenues (12.8% in FY07), but there will be questions over the subsidiary's viability if it fails to renew a contract with its largest customer in France, the French Army, at the end of 1Q09.

Services lead the cavalry charge

For the past few years, at least since the 2001/02 downturn, Computacenter has been shifting its sales mix from products to services and climbing the services towers to get into higher-value managed services. Services now account for 27% of the sales mix and were a key contributor to margins in FY08. The PC and server markets slumped in the second half of the year, putting strains on Computacenter's reseller and trade distribution business. Competitive pressures were so great that in November 2008 Computacenter stopped selling PCs, laptops and printers through its trade distribution arm (CCD). Though this action is expected to cost it £70 million in lost revenues in 2009, it's not expected to cost it any profit, and will free up £15 million in capital.

Computacenter needs to speed up its execution

In the UK, the vendor was slow to integrate Digica, the data-centre services specialist which it acquired in early 2007 and which complemented its existing capabilities in desktop and networking services. Originally focused on the mid-market, it seems to us that Digica, which is now under the same management structure as the managed services business, has a role to play in expanding Computacenter's business with some of its existing larger accounts.

To that end, Computacenter's decision to drop the 'Digica' brand in March 2009 was the right one. Data-centre services are precisely the high-margin services that Computacenter needs to have to protect margins and counter the pressure in the reseller/distribution markets. It doesn't want to suggest to enterprise customers that this is a 'mid-market-only' capability.

Computacenter concluded a number of useful deals with enterprise customers in the UK in the second half of 2008, some of which didn't contribute to FY08 revenues but should come in during 1Q09. Given the decline in the European hardware market in the fourth quarter of 2008 and the unlikelihood of its revival any time soon, Computacenter will need these and more high-margin data-centre and networking-services deals to keep profitability on an even keel if, as seems likely, product revenues decline further.

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