JOHANNESBURG – Reporting  interim results for the six months to 31 March 2005, JSE-listed software and computer services company, UCS Group Ltd said that notwithstanding achieving turnover growth of 6,5% to R262 million, profit before taxation was 11% lower at R13,809 million (R15,516 million).

Results are not out of line with market expectations, since management forecast at year-end that the first half of 2005 would be very challenging.

Excluding a disappointing performance by UCS Software, the group’s various business units performed in line with expectations, with most achieving or exceeding budget targets.

Placing UCS Software’s performance in perspective, UCS Group CEO, John Bright reminds investors that the group’s focus on the generation of sustainable annuity streams means overhead structures may at times grow in advance of new business billings.

“The delays experienced with certain large customer software projects during the previous reporting period meant that the related roll-outs only got underway after the peak retail trading season in December. Installation delays, however, have a short-term negative impact on margins, and profits should catch up in coming months,” Bright explains.

In terms if its primary business objective, the group reported that annuity revenues grew by 12% to R159 million (2004: R142 million) during the review period. Now representing 61% of total revenues (2004: 58%), the group enjoys substantial revenue visibility.

EBITDA at R33,3 million (2004: R33,6 million) reflects the pressures on margins caused by the project delays experienced in the consolidated Software business. The consolidation strategy for the software business should deliver an improvement in margin going forward.

“We anticipate that the full synergistic benefits of consolidating our retail software businesses within the group into a single operating entity will flow through to the bottom line over the next 24 months”, states Bright.

The UCS Solutions business delivered a strong performance, trading ahead of budget in terms of both revenues and margins. During the period several major contracts were successfully completed and additional new opportunities secured. 

On a comparative basis, R&D expenditure was 16% lower, although the total for the year is expected to exceed the previous year. R&D costs continue to be fully expensed as incurred, except in the new UCS Software Manufacturing unit, where product development costs are capitalised until the product is released for sale in the market.

“Our group’s commitment to the sale of its own technology and services remains strong, with the sales of third party products and services accounting for only 15% of total revenues (2004: 18%),” adds Bright.

Depreciation, amortisation and goodwill write-offs increased by 3,4% to R19,5 million (2004: R18,9 million), whilst interest and investment income was almost totally offset by interest paid.

Taxation charges increased by 48% to R2,1 million (2004: R1,4 million), leading to a 17% reduction in profit after tax to R11,7 million (2004: R14,1 million).

A small increase in the minorities’ share of subsidiary earnings caused net attributable profit to be 18% lower at R11,4 million (2004: R13,9 million).

A 1% increase in the weighted average of ordinary shares in issue to 239,5 million contributed to an 18.6% decline in earnings per share to 4,8 cents (2004: 5,9 cents), whilst headline earnings per share fell 14,9% to 5,7 cents (2004: 6,7 cents).

Cash generated from operations was marginally less at R33,0 million. The outflow in working capital of R28,9 million includes amounts related to the settlement of significant creditors that had been reflected on the Group’s balance sheet at 30 September 2004. This, together with the additional cash applied to investing activities was the main reason for the decline in bank balances during the period.

For the period under review, cash applied to investing activities amounted to R30,7 million (2004: R22,8 million).

Bright says: “we anticipate a stronger second half performance. In particular, the ‘drive for efficiency’ program initiated in the consolidated Software business should produce short term improvements in margins, as well as having long term beneficial effects on the overhead structure of the business.

“The previously delayed projects are either in roll-out phase or are scheduled to roll out over the next few months.

“The Solutions business has a healthy order book and some exciting opportunities for growth. The rest of the operating businesses should continue to perform in accordance with budgets, although there are still challenges such as the uncertainty in the pharmacy market over regulatory issues.

“Though our international marketing efforts have not yet delivered in terms of large orders, they continue to show promise.

“Given these factors, management forecasts give promise of a significant improvement during the second half of the year, and indicate that the group should record real growth in earnings for the full year,” concludes Bright.
 
The group announced an interim dividend of 2,0 cents per ordinary share for the period.