Data#3 flags challenges in 2010

Pressure on Commodity aspects of the business, downturn in government sector and hardware spend.

Despite improvements in the overall economy, Data#3 (ASX:DTL) has flagged challenging times ahead as it deals with a decline in the government sector and a number of internal challenges.

In the company’s report for the half year to 31 December 2009, the ICT services provider said it was facing pressure on the commodity parts of its business — particularly in software licensing — and a lack of investment in hardware.

“We expect capital investment in new hardware, especially in the data centre, to remain flat due to general, market constraints and a continued shift to outsourcing,” the report reads.

“While Licensing Solutions remains the national leader, the market in which it operates is increasingly commodity based and has come under considerable pricing and competitive pressure.”

Staff retention, and the company’s own internal IT transformation, was also a challenge.

“Implementation of some of the systems has been challenging as we accommodate the many and varied ways we engage with our customers and will require additional investment and time beyond that originally planned,” the report reads.

“While our team has always been the target for recruiters, we see this increasing in intensity as optimism returns.”

The comments follow strong overall revenue growth at the company of $306.7 million for the half year to 31 December 2009, up 33 per cent from $230 million a year ago.

Net profit after tax was more modest at $4.7 million for the half, up 17 per cent from $4 million year on year. EBITDA was up 16 per cent $6.8 million for the half year, up from $5.9 million year on year.

Managing director, John Grant, said in the report that services revenue had increased just 1 per cent overall in the half, reflecting the decline in recruitment and contracting revenue. This however had been offset by strong growth in both project and managed services.

Product revenues increased by 40 per cent in the half due to a change in timing for the billing of the Federal Government Microsoft licensing contract, a key state government contract and growth in Product Solutions Revenue, Grant said. When adjusted for timing differences, however, underlying revenue growth was 12.5 per cent.

During the half, year-on-year revenues at Data#3’s Licensing Solutions Group was up 54 per cent, Infrastructure solutions up 24 per cent and People Solutions down 27 per cent.

Growth in the Infrastructure Solutions business was underpinned by project services, revenues from existing contracts for desktops, notebooks and servers in NSW and QLD and managed services.

Declines in People Solutions were largely attributable to a downturn in the government sector reducing contract opportunities and a declining contractor base.

Looking forward, the People Solutions group was likely to face pressure from the trend in the commercial sector toward reducing and aligning the number of recruiting suppliers, and a new whole-of-government approach to contracting in Queensland.

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