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They do look very poor compared to the numbers from the prior year. A small dip into the company's £6m cash pile helped improve the interim dividend, the improvement being an "expression of confidence" towards the future.
The Y2K deferment had a greater impact on staff utilisation performances during January and February than MMT had originally expected at the previous full-year announcement. This led MMT to comment today that the Millennium slowdown had been "tougher, deeper and longer than anticipated", and would lead to profits in the year ending August 2000 being below current market expectations. Earnings forecasts for MMT's current financial year prior to today's announcement had hovered around the 46p mark.
(Just in case you're not fully up to speed with the background to MMT, you may wish to read the original MMT feature and also some follow-up thoughts on the potential risks of the group first.)
As I mentioned on Monday, I expected the results would, because of the Y2K slowdown, be "inevitably poor compared to the corresponding period from the prior year." More important than the figures, I thought, would be the outlook comments from MMT's management. Were there any signs of a "business as usual" statement as customers returned from their Millennium bunkers? Well, sort of.
The numbers
Firstly, the figures.
Six months to Change
29/2/00 28/2/99
Turnover (£k) 16,817 21,116 -20%
Operating profit (£k) 2,118 4,891 -57%
Earnings per share (p) 10.5 27.0 -61%
Dividend per share (p) 6.6 6.0 +10%
Looking at the sales figures, it does have to be borne in mind that the table is comparing figures from a Y2K-inspired drought to the most buoyant period ever seen in the IT industry. On that basis, perhaps a 20% decline in sales wasn't too bad in the circumstances. Certainly some subsidiaries faired worse than others. At Summers Associates, for instance, MMT's freelance recruitment agency, sales plunged 30% in the period. That no doubt had a quite significant effect overall, when the recruitment division contributed roughly 20% of group sales during 1998/9.
The real damage within the interim figures is, of course, at the profit level.
MMT differs from most other IT consultancies in that it employs largely permanent staff, as opposed to short-term contractors. Although permanent staff have historically been less expensive to employ than their contracting cousins, the employment philosophy does lead to a little inflexibility when an industry downturn occurs. So, with staff wages being by far the largest expense for MMT, it obviously created profit difficulties as and when the work from clients dried up. In other words, MMT had expensive and under-utilised staff on their hands during this weak interim period.
Utilisation rates
MMT's recent employee utilisation rates (the percentage of staff actually performing fee-earning work) makes for interesting reading. Bear in mind that MMT has averaged a 92% rate over the last five years, and 1998 witnessed near 100% figures.
Month Utilisation Rate
(%)
September 1999 92
October 1999 86
November 1999 84
December 1999 86
January 2000 80
February 2000 82
March 2000 87
But from the table above, it's clear that the company has returned to its historic productivity rate average, albeit too late to have any bearing on these interim results. According to MMT, the current level of staff efficiency should be maintained throughout the current financial year. Another reassuring sign that a sales recovery is underway is the increase in headcount at the company. Having had staff numbers decline from 605 in mid-1998 to 503 in February 2000, the headcount has risen over the last two months to reach 524, with recruitment generally being "stepped up".
Rather than sitting idly by, those employees without work during the period had been retrained in various Internet and e-commerce technologies, in readiness for the "rapidly-growing demand" of these types of applications. Of course, the costs to train the "unproductive" staff added further woe to MMT's bottom line. But it was mentioned at the results briefing that all those who had undertaken the e-commerce training were currently earning for the company in this "major growth area".
Specialist solutions
Away from the core IT consultancy and services division, of particular interest to me during the analyst meeting were the references to the "specialist solution" operation. This division, basically assembled from two acquisitions made in 1996, develops off-the-shelf software for the energy, financial derivatives and medical markets and contributed 23% towards overall group sales.
The division is dominated by the sale of electricity pricing and trading systems. In this interim period, these electricity applications made up 18% of total group revenues. The comment from MMT concerning this energy software was of "strong revenue prospects" for the second half, accompanied by an increase in margins. Alongside significant software orders from various players in the energy industry too, it appears the foundations have been laid for considerable future revenue growth in this area.
On the other hand, there is also the underperforming derivatives software operation. There's been no reversal of the poor trading conditions for software used on the London Metals Exchange. MMT have tried to establish themselves into other similar derivative markets, but encountered "extreme competition" on the way.
A question raised during the briefing asked whether both "troublesome" derivatives business and the tiny medical software operation could be sold. Although Tony Grellier, the Managing Director of MMT replied that the derivatives business wasn't actually troublesome, he admitted that possible disposals had been discussed. When pressed further, he said that he wouldn't rule out actively seeking a buyer.
An acquisition faux pas?
With the progress at the recently acquired Summers and derivatives businesses not reaching expectations during this period, I can't help but hark back to my comments from last month:
"So what can I say, other than I'm counting on one aspect with these acquisitions -- the MMT management. They've got a great operating record so far, and I'm hoping the deterioration in some of acquired trade is of a temporary nature, rather than leading to some corporate growth-by-acquisition faux pas. Comments from the company suggest it's the former, but the risks are there, nonetheless."
At this point, it looks like that of the three major acquisitions, only the business serving the electricity industry is currently firing on all cylinders. Not a particularly encouraging sign. But, to put some perspective on the underperforming purchases, they contributed less than 4% to group revenues in the six-month period under review.
In summary
I have to admit that I'm disappointed with the figures, especially with the inevitable downgrade the company will suffer in this current financial year. But, going back to my original proposal for the company, I was always aware that this interim period, and indeed the whole year, could prove troublesome. My thoughts and original valuations concentrated on the year after, a year in which a recovery is expected. After looking at the staff utilisation rate trend, and aligning it to the "extremely optimistic" prospects, there's certainly no real reason to become overly concerned that a recovery isn't on the way.
In fact, when I asked Tony Grellier this morning whether the general growth rate beyond this disappointing year would match the growth seen in the run-up to Y2K, he replied "there's no reason why it shouldn't".
In a nutshell, MMT was bought with four considerations in mind: its long, proven history of growth; its exposure within a rapidly growing industry; its subdued valuation due to the Y2K slowdown; and the prospects for a business recovery and share price re-rating.
At the moment, the reasons for purchase are still intact. It's just that the business and share price recovery are unexpectedly, but temporarily, delayed.
Your thoughts and comments to the Qualiport discussion board, please.
Related Links
• MMT -- Qualiport Material
• More on MMT
• Greed, Fear and a (MMT) Buy
• MMT Computing discussion board