Xchanging Shares Plummet on Half-Year Report – Questions About Future of Procurement Business [PRO]

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The half-year results for Xchanging released yesterday were intensely disappointing to shareholders, who saw the value of their shares fall by 20% instantly, to a new 3-year low of £0.97. That is still above the bad days when founder David Andrews resigned, in 2011, after major profit warnings, and the shares fell to £0.50, but the current price is close to half what it was as recently as last autumn. We typically view Xchanging as a procurement outsourcing business, yet the results highlight 2 points. First, the procurement outsourcing and software element only accounts for some 6.5% of total revenue – £13 million out of £200 million. Yet it also casts a very long shadow, in that the poor results are being almost totally laid at the door of the procurement business. Before looking at the specific procurement issues, just run through the headlines. Gross revenue was £240.2 million in the half year, down from £282 million compared with a year earlier. Net income was £199 million against £205 last time. Operating profit was £20.4 million against last year’s £20.0 million, but statutory operating profit was down from £24.2 million to a loss of £41 million after the write-offs, discussed below. In terms of the divisions, the business process outsourcing (BPO) arm lifted adjusted operating profit 8.8% to £28.4m, with the technology segment 52% stronger at £4.1m. Procurement, which contributes just 6.5% of net revenue, saw some growth in the software business but a weak performance in the traditional outsourcing business, combined with underperformance in one of the new “tail-end spend management” contracts. “Net revenue was £13.0 million (HY 2014: £15.9 million), and the adjusted operating loss was £6.8 million (HY 2014: £1.7 million loss). This was after allocating central overheads of £1.8 million (HY 2014: £1.9 million),” the company said in its half-year report. “

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