EARNINGS FALL AT BUSINESS CONNEXION IN SOUTH AFRICA

Mergers, Acquisitions and Financial Results

Telkom's potential acquisition of Business Connexion is just one of three events that weighed on the technology group's financial performance for the six months to November.

Disappointing results show its revenue of R1,72bn was up only a fraction from R1,7bn during the corresponding period in 2005, and the cost of sales and gross profit were static. But headline earnings fell from R52,5m to R45m, knocking headline earnings a share from 21,6c to 18c. The figures would have looked worse had they not been pumped up by a R52m profit from selling some properties.

Disruption caused by the potential Telkom takeover was "a bit of an irritation" compounded by a huge investment in a new software system from SAP throughout the group and by building R150m data centres, said CEO Peter Watt.

The uncertain future inflicted by the pending takeover has cost the company some staff, with the remaining staff largely supporting the deal, Watt said. Another direct effect has been a loss of business for its communications division, with some customers buying their communications services directly from Telkom instead of paying Business Connexion to be a middle man. "That has knocked us back to the tune of R6m-R7m," said Watt.

Implementing the SAP software had soaked up resources from every level of the business, but would allow it to meet corporate governance requirements without employing "an army of accountants", Watt said. The new system will streamline various software systems that the group's 25 businesses have run on as it grew through acquisitions. Watt said the construction of new data centres to host software and data services on behalf of its customers had been equally essential.

All customers had been switched to those centres, which had withstood Eskom's power failures "without missing a beat". No new customers were taken on while the centres were built, but new contracts were being signed now and should boost its income in the coming months.

Financial director Alan Farthing said capital expenditure had touched R96m, up from a more normal R70m for an entire year. That has cut cash on hand from R657m to R562m.

Watt expects second-half revenue and profits to improve now its major spending is behind it. "I believe we will return to our previous levels of revenue and profitability in the next six months," he said.

Business Connexion earns about a third of its revenue from selling hardware. That is a low-margin but essential part of its services, Watt said, and customers were beginning to spend more on hardware than in previous years.

Plans to move into Africa have been scaled back, even though its African division saw a 45% rise in revenue to R118,2m and turned a previous loss of R12m into a profit of R5,1m. The company has offices in Tanzania, Mozambique, Namibia and Zambia, with no intention of opening more. Tenders were sporadic and took a long time to be awarded, creating an unnecessary drain on resources. The group would still chase African opportunities, but not through a dedicated division.

Business Day