Computacenter's millennium hangover

For most of us, the arrival of the new millennium is but a distant memory of late-night festivities fuelled by alcohol, followed by a late-morning headache dominated by regret. This not the case for Mike Norris, chief executive at Computacenter: for him the new year hangover goes on and on.

For most of us, the arrival of the new millennium is but a distant memory of late-night festivities fuelled by alcohol, followed by a late-morning headache dominated by regret. This not the case for Mike Norris, chief executive at Computacenter: for him the new year hangover goes on and on.

The company, which sells businesses their computers, and also helps to install and run them, yesterday unveiled a dismal set of first-half results. Pre-tax profits in the six months to 30 June dived to £21.2m from £40.7m a year ago. Turnover increased fractionally to £926.7m.

Investors took fright even though Computacenter had issued a warning in June that a downturn in businesses' IT spending following the date-change had persisted far longer than it had predicted.

Shares in Computacenter slumped 45p to 380p yesterday, a far cry from their high earlier this year above 1,500p, when they soared on New Economy optimism. Yesterday's close is also far below the shares' offer price of 670p, set when the company floated in a blaze of publicity in May 1998. The listing catapulted founders Peter Ogden and Philip Hulme to the ranks of the country's richest - albeit largely on paper.

Assessing the problems yesterday, Mr Norris said: "There was clearly a hiatus. People stopped projects at the back end of last year. It's taken time for them to come back again ... Q1 was pretty much in line with expectations. Q2 was much worse than any industry pundit had forecast."

The chief executive's earlier forecasts do appear to have been rather wide of the mark, albeit in an industry where fluctuations in demand make the art of predicting problematic. In March, Mr Norris bravely told reporters that: "We're already seeing demand recover past the millennium."

Computacenter's main problem is a simple - if harsh - one. Corporations knocked fresh IT spending and projects on the head at the end of 1999, fearful of what might happen, and have yet to jack it up again. The slump in demand left Computacenter, and its rivals, with expensive payrolls and not enough customers.

"The market was slower to recover than we originally anticipated and a reduction in project work meant lower levels of service billings," Mr Norris said.

The interim results highlighted what Computacenter euphemistically calls a problem of "staff utilisation". In layman's terms, that translates as ranks of IT professionals sitting about without enough work.

Luckily for them, Computacenter has kept on paying their salaries, in the hope that the work will come back. Mr Norris is betting the sums spent on them now will be less than the cost of laying people off and trying to rehire them.

Computacenter's executives can take some comfort from the fact that all their competitors are in the same boat. (Getronics, a Dutch company that ranks as Europe's third-largest computer services company, yesterday saw its shares drop sharply as it said first-half profit from operations had collapsed 77 per cent to 17m euros.)

However, Computacenter's problems are not just about the timing of large corporate orders. The results also revealed that margins, especially on computing hardware, are under pressure.

Tony Conophy, finance director, told reporters that gross margins had slipped to 21.2 per cent in the first half from 22.6 per cent last year. Next year, they were seen dipping a further half percentage point, Mr Conophy said. The slippage was most pronounced in the UK, which accounts for more than 85 per cent of Computacenter's turnover.

Despite the difficulties, the future for Computacenter does not look entirely bleak. Unlike many victims of the hi-tech sell-off, Computacenter has a viable business model and remains profitable; has £26m in the bank and should see demand accelerate in the second half. Despite the slip in earnings, its management is generally well regarded.

Ross Jobber, an analyst at Deutsche Bank, said: "Investors should ask themselves two questions: is it a fault of the management, or is it a fault of the market? The first half was extra tough, but the second half should be better. It's a well-run company. I'd be very surprised if things got worse."

Mr Norris said he may look to boost the scope of Computacenter's presence in Germany, which he admits is under-strength. "We are undersize," he said. "We've got to get bigger." The unit lost £1.7m in the first half, up from losses of £747,000 last year. With Computacenter shares bombed out, using paper as an acquisition currency is unlikely, so Mr Norris may look to increase the company's borrowings.

In the UK, Computacenter still has an offer pending for Compel, a much smaller IT sector rival, which it pitched in June at 275p a share. Mr Norris downplays the likelihood of any movement here, however, describing the situation as "drifting".

The company may also look to revive float plans for its e-commerce joint venture, Biomni, in which it has a half stake with Computasoft, a database software provider.

The IPO, set for the first half, was scuppered by the sell-off in technology stocks. It had attracted valuations of up to £700m, but it will be priced far more modestly, if it is listed at all.

For now, Mr Norris is hoping the poor first-half figures will be the end of the long-standing hangover. "For the first time in my 17 years ... we did not announce an increase in record profits," he said. "It's character building, isn't it?"