Qualiport

[ November 9, 2000 ]

MMT's Reposition For Recovery

By Maynard Paton (TMFMayn)

Carburton Street, London -- This week has been busy for Qualiport member MMT Computing (LSE: MMT). On Tuesday, the IT consultancy announced that it "had received an approach which may or may not lead to an offer being made for the company". Today, MMT published its annual results, the details highlighting the company's sizeable push towards Internet-related work.

But before delving into today's numbers, was there any further news about the ongoing corporate activity? In a word, no. At MMT's results presentation, Tony Grellier, the company's Managing Director, was unable to add anything to that already published.

So, on to the financial details.

                            Year to            Change
                       31/8/00    31/8/99       (%) 

Turnover (£k)           37,734     41,024        (8)
Operating profit* (£k)   5,257      8,219       (36)
Pre-tax profit* (£k)     6,181      9,821       (37)
Earnings per share* (p)   34.3       53.8       (39)
Dividend per share (p)    19.8       18.0        10

(* -- excluding goodwill)

On the face of it, pretty glum numbers. But as previously conveyed on these pages, MMT's year to August 2000 was always going to consist of two differing performances. The first half (the six months to February 2000) was severely affected by the IT industry's Millennium slowdown. But what of the second half? Here's how the two periods compared:

                          Six months to        Change
                       31/8/00    29/2/00       (%) 

Turnover (£k)           20,917     16,817        24
Operating profit* (£k)   3,291      1,966        67
Pre-tax profit* (£k)     4,063      2,118        92
Earnings per share* (p)   22.9       11.4       100

(* -- excluding goodwill)

Repositioning

The company has substantially recovered from the Y2K nadir, with revenues generated during the latest second half roughly equalling those produced in the comparable period in 1999. However, second half operating profits reported today are about 20% below the figure attained in the run up to the Millennium. The reason behind not really emulating the pre-Y2K accomplishments are largely MMT's "repositioning" to reflect the trend in its marketplace.

MMT can now be largely split into two types of working practice. On one side, there is the traditional operation of placing IT staff on "time and material" assignments to third parties. And on the other, MMT is a provider of overall IT "solutions", bespoke software and the like. Having accounted for just 5% of turnover in 1995, the solutions side now generates around 50% of group sales.

"Customers are increasingly seeking solutions rather than resources" was how MMT described the aforementioned industry repositioning. As demand for MMT's traditional "time and material" work continues to be "sluggish", so the group has made a "substantial investment" to benefit from the increasing requirements for Internet-based applications and solutions. Alongside the costs associated with the "rapid re-training" of permanent staff, examples of other expenses incurred from this business shift were:

• Over £1m of fee-earning opportunities lost as a result of cross-training and losses sustained on early fixed price projects;

• Increased infrastructure costs to support the greater percentage of staff who now work within MMT offices rather than on client sites, and;

• £300,000 spent on recruiting additional staff with sought after skills.

Energy and Hypnosis

Perhaps the stars of the second-half, and those operations which show most promise for the future, were MMT's Energy division and the recently acquired Hypnosis outfit.

The recent performance of MMT's Energy division, an operation that supplies pricing and trading systems to the electricity industry, validated the comments of "strong revenue prospects" made at the interim stage. With second half Energy revenues of £6.4m comparing favourably to the £3.0m produced in the six months prior, the division now generates 25% of both group sales and profit. MMT remained upbeat about the prospects for the Energy business too. "Excellent opportunities" were said to exist as European electricity industry accelerated its deregulation, while further out, the US was said to hold "exciting" potential.

Hypnosis, a subsidiary that specialises in website development, continues to grow rapidly, albeit from a very small base. After recording sales of £0.3m for the 8 months to November 1999, MMT announced today that Hypnosis contributed £0.75m to group turnover over the 8 months to August 2000. With a 21% operating margin to boot, "continued growth" and a "strong order book" were the outlook remarks applied to the website designers.

As well as the growth prospects and the cross-fertilisation of e-skills within the core group, MMT also revealed an interesting point about Hypnosis. Apparently, additional sales can be generated through the combination of MMT's "secure and reliable" background ("appealing to the IT director") coupled with Hypnosis' "young and dynamic" approach ("appealing to the marketing department"). Very few competing companies were said to have both of these "assets".

And one other small, but notable, highlight of the second-half was MMT's derivatives software business. Although contributing little to the group's overall performance, there's been a sudden turnaround in its performance. Whereas I wrote the words "underperforming" and "troublesome" to describe the derivatives operation at the interim stage, a "good second half performance" has now encouraged MMT to even comment upon broadening this division's product set.

Staff utilisation

One striking absence from today's results was the staff utilisation rate. Having suggested on Monday that it was "the key investment ratio to look out for", MMT then go and deliberately don't report the figure! Grellier said the figure was now "less relevant" and would be "misleading", given the company's ongoing move away from individual resource-based work. The emphasis is now on project profitability of the IT solutions provided, rather than the utilisation of the company's "outsourced" staff. For the record, MMT's headcount has risen from 524 to 556 since April.

Summary

In May, I described MMT's previous interim results as "a delayed recovery". And it seems, for the traditional part of the MMT business, the Y2K recovery delay continues. As MMT Chairman, Mike Tilbrook, commented today: "It is proving extremely difficult to forecast with any great accuracy the timing and extent of recovery in trading conditions in our traditional marketplace."

The disappointment in the traditional operation, where lower margins are foreseen, can be offset by the "good growth" expected from MMT's Internet-related work and Energy division. But with the "exceptional" repositioning costs clouding the financial picture, it's difficult to come to any firm conclusion over the numbers. Overall, I'd say the results were neutral, although the ever-increasing headcount underpins my faith that a full recovery to the company's historic growth pattern will occur (eventually!).

After this brief rundown, I'll revisit MMT's results in the near future. Then, I'll peruse the numbers in more detail and specifically look at valuation. However, with some sort of takeover premium currently in the share price, my "gut feel" suggest that the shares unlikely to be "great value" at the moment. Nevertheless, it's encouraging to have a mystery suitor who may ultimately agree with your investment interpretation of MMT.

Where Next?

• MMT's interim results -- a delayed recovery
• MMT and the Millennium Glitch
• MMT -- Qualiport Material?
• MMT Computing discussion board