Fool's Eye View

[ November 29, 2000 ]

Comment: Marconi

By Christopher Spink

Great Titchfield Street, London -- Since GEC sold off its defence business last year to British Aerospace (LSE: BA.), the market has struggled to come terms with its successor Marconi (LSE: MONI). In essence this arm is a hastily constructed supplier of all sorts of telecom equipment. Chief executive Lord Simpson splashed out $4.6b in June 1999 to acquire Fore Systems. This Internet switch maker was Simpson's main purchase but Reltec, which makes network equipment, was also acquired in the previous April.

In theory therefore today's interim figures, covering the six months to the end of September, reveal for the first time the new look Marconi, unadulterated by any of the sold GEC businesses. The remaining communications bits and bobs have performed well, with total group turnover up 19% to £3.19b on a like-for like basis. Like-for-like sales at the Communications Networks arm rose 32% to £1.51b.

However, expenditure on research and development went up 56% to £323m. This meant operating profit before exceptional items and goodwill only rose 7% to £320m and earnings per share, before these items, improved 13% to 7.1p. Although on an underlying operating level things seem to be progressing well, investors should not simply ignore goodwill write offs as Marconi's management encourages us to do.

There is no getting around the huge sums Marconi has spent on acquiring its new business. Indeed there would be no sales or profits to report at all if Lord Simpson hadn't undertaken this investment programme. Going forward this business is central to Marconi's operations. So add goodwill of £374m back in and the figures look less attractive. On the bottom line the group made 5.4p of losses per share, 56% less than last time.

The company is leaking cash as well, losing £110m in this period, despite only making one small acquisition, which soaked up £157m. This extra seepage is attributed to intensive investment in developing and researching new modern equipment. Also cash-strapped telecom companies (Marconi's main clients) are taking longer to pay their bills, as the expense of acquiring third generation mobile telecom licences mounts.

The Fool's Comment:

Marconi shares shot up in the first half of this year in an initial burst of enthusiasm after Lord Simpson divested the GEC defence businesses. Since peaking in April at 1250p, though, the stock has lost 48% of its value. This could be put down to the recent gyrations all tech shares have experienced in line with the Nasdaq.

However, Marconi has also had to endure profit warnings from competitors Lucent (NYSE: LU) and Nortel (LSE: NT), knocking back its own shares as well. Marconi has similar worries that the demand for telecom broadband is not as strong as it was nor the telecom companies pockets so deep, following the expensive mobile 3G auctions.

Today's interim figures do little to make the picture clearer. Sure, underlying growth remains strong. But Marconi has paid a price for acquiring its new businesses. Some of these were picked up at flighty premiums. These businesses would have cost less to acquire now.

Marconi is trying to disguise the goodwill payments it has incurred, but investors should include these for a proper picture of Marconi's financial health. Marconi has £6b worth of forward orders. Hopefully this time next year things should become clearer about the long term direction of Marconi's business.

Where Next?

• Fool's Eye Views -- Mobile Marconi ; Marconi Profit or Loss? (Full Year Results)

• Tech talk - Unravelling Marconi

• Marconi discussion board