MCN Direct Newswire

Vol. 3 No. 28, 19 July 2004

This issue is sponsored by:

Magic Software

This issue news

1. IBM turns in solid second quarter
2. Morse bids to buy Diagonal
3. Cable & Wireless steps in at NHS
4. Detica continues along growth path
5. EDS slams credit rating setback
6. Further information - feedback/pass on to a colleague/remove from mailing list

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1. IBM TURNS IN SOLID SECOND QUARTER

IBM has reported second-quarter financial growth, reflecting a slowly improving market. Its net quarterly profit rose 15% to $2 billion (£1.1 billion), on revenues climbing 7% to $23.2 billion.

Revenue from IBM Global Services - the company's consultancy and IT services group - increased 7% to $11.3 billion, but grew more slowly than revenue from hardware, which rose 12% to reach $7.4 billion. Software was flat at $3.5 billion.

IBM chairman and CEO Sam Palmisano commented: "IBM Global Services signed more than $10 billion in new business in the quarter and we are off to a strong start in the emerging business process transformation services opportunity. We saw first-half growth of roughly 40% over last year and we continue to invest heavily in this growth segment."

IBM also gained ground in emerging geographic markets, particularly China, Russia, India and Brazil. Elsewhere, revenue from EMEA rose 9% to $7.5 billion, with the Americas rising 2% to $9.7 billion and Asia-Pacific up 13% at $5.2 billion.

Looking forward, Palmisano said: "We continue to improve the operational effectiveness of the company. We are confident about our prospects."

* IBM Business Consulting Services has won a contract from the Swedish Road Administration to pilot a congestion charging system for the city of Stockholm. IBM will build, implement and run an 'on-demand' solution.

2. MORSE BIDS TO BUY DIAGONAL

Systems integrator Morse has made a £50.2 million cash and share offer for SAP consultancy Diagonal, just a month after the struggling consultancy rejected an unsolicited proposal from IT services firm Microgen (MCN Direct 3-23).

The Morse offer has been better received, with the Diagonal board recommending it should be accepted on the grounds that it would provide "good value for shareholders, additional opportunities for many people who work in the group and a stability that will provide reassurance to Diagonal's clients".

After a difficult trading period when Diagonal warned it would not meet market expectations this year and CEO Colin Burnside departed for health reasons, the company has turned in reasonable returns at the interim. A pre-tax loss of £300,000 has reversed pre-tax profits of £300,000 a year ago. Revenues were down 19% at £24.8 million.

Company chairman Malcolm Gloak commented: "The board is confident that Diagonal's recovery will continue through close attention being paid to achieving a good balance between controlling costs tightly and investing in those parts of the business where increased revenue and improved profits can be achieved."

Morse believes the acquisition of Diagonal will bring significant strategic and commercial benefits, combining its strengths in marketing with Diagonal's strengths in delivery, and adding to its services portfolio and customer base.

Morse said acquiring Diagonal could produce annualised cost savings of over £1.5 million by June 2005 and generate sales of £170 million, giving the combined firm the size it needs to compete in the tier-two IT services market.

As well as providing a safe haven for Diagonal, the acquisition makes sense for Morse as it moves away from its traditional hardware reseller and integration business, to build up services revenues that last year reached 40% of total.

3. CABLE & WIRELESS STEPS IN AT NHS

The National Health Service has chosen Cable & Wireless to take over an email and directory service contract from which EDS was summarily ejected earlier this year (MCN Direct 3-11).

EDS issued an £11 million compensation lawsuit when NHS IT director Richard Granger cancelled the £90 million email contract in March, but the parties have now settled the dispute without any attribution of blame and a commitment to keep the details of the agreement confidential. Part of the settlement includes continuity of the service by EDS until it is handed over to Cable & Wireless.

The C&W contract is believed to be at a discount compared to the EDS deal made in 2002, and is pitched between £50 million and £90 million over nine years.

The email and directory service is a key element of the NHS' £6 billion National Programme for IT and provides NHS staff with email, access to a central directory and additional services such as email to fax, SMS text messaging and an online calendar.

4. DETICA CONTINUES ALONG GROWTH PATH

Detica, the IT consultancy dedicated to national security and enterprise information management, claims it made a good start to its current financial year - supporting this growth with the recruitment of two key executives from LogicaCMG.

Speaking at the company's annual general meeting, Detica chairman Chris Conway said: "Our government business has begun the year strongly. This market continues to be buoyant and we anticipate good growth in both our services and products businesses. In our commercial business, there is greater market stability than there has been for some time and growth in this area is in line with our expectations."

Conway added: "The outlook for our business is positive and we remain confident about our ability to perform well again in the current year."

The trading statement follows a year of strong growth to 31 March, when Detica reported pre-tax profit up 24% at £9.2 million, on revenue up 37% at £53.3 million (MCN Direct 3-21).

Backing its business growth, Detica has hired LogicaCMG's Simon Bailey as head of project management services and Jonathan Scarfe as head of utilities.

5. EDS SLAMS CREDIT RATING SETBACK

EDS has hit back at last week's downgrading of its long-term credit rating by investment service Moody's to 'below investment-grade' status. EDS says it is in "strong disagreement with the decision".

The downgrade follows a stream of poor financial results from EDS and an ongoing attempt to turn the company around. Moody's Investors Service believes the turnaround is moving too slowly and has resulted in a level of free cashflow that is not sufficient to support an investment-grade credit rating.

From EDS' point of view, the downgrade could adversely affect its ability to compete for new business and may mean an increase in the cost of borrowing on a portion of its outstanding debt.

Defending its disagreement with Moody's, the company said: "EDS has significantly reinforced its financial foundation, improved its competitiveness and fully expects to meet its guidance on second-quarter 2004 results."

Ahead of the results announcement later this month, EDS said it expects revenue to achieve the high end of prior guidance of $5.1-5.2 billion (£2.7-2.8 billion). Contract signings in the quarter are expected to be 25% up year-on-year at $4 billion. EDS says it will end the year with zero net debt.

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