BUSINESS CONNEXION COSTS SHOOT UP

Mergers, Acquisitions and Financial Results

Two cash-intensive projects conducted by technology company Business Connexion had dampened its financial performance, but prepared it to win more contracts in coming years, CEO Peter Watt said last week.

Building new R143m data centres and installing SAP software at a cost of R34m had driven its operating costs up 16% to R767m for the year to May 31, he said. That swiped its profit down to R138m, almost 50% lower than the R273m a year ago.

Revenue of R3,2bn rose 14% from R2,8bn, but diluted earnings a share tumbled from 106c to just 44,6c. Despite the decline, its cash generation of R106m topped up its cash reserves to R743m, and the board has declared a dividend of 15c a share.

Watt said the internal expenses were only partly responsible for the falling figures. Results last year had been inflated by "a number of windfall profits" from selling a subsidiary and settling a tax dispute.

Business Connexion had also suffered a slow second half as no major outsourcing contracts had been won. Several major tenders had been offered but none was granted, and that had absorbed enormous financial and technical resources without any reward.

Watt expects the new data centres to help the company win a new type of contract as customers opt to rent their computer processing power and data storage hardware from a specialist supplier rather than buy the equipment themselves. Such contracts were now being negotiated, although progress was slow as it required companies to break the habit of buying their own hardware, Watt said.

Meanwhile, the SAP software had replaced a clutter of eight systems that had made internal information difficult to find, and running costs should fall thanks to increased efficiency.

Revenue from operations in the rest of Africa rose by 20% but remained unprofitable. A specialised African unit had been disbanded because contracts from other African countries were sporadic, said Watt. Those staff had been reassigned within the company and would be drawn together again when necessary.

Its African operations would probably not grow much above their current value of R300m a year, but the company now needed to look at how to support major clients such as Sasol and Nampak in other parts of the world, said Watt.

The major uncertainty facing Business Connexion is its future ownership, pending a competition tribunal enquiry into its proposed R2.4bn takeover by Telkom. Shareholders overwhelmingly accepted the offer but numerous internet service providers are objecting, claiming the deal would give Telkom a monopoly over data as well as voice communications.

"We are not anticipating an answer until December," Watt said. "We really don't think there is an issue. A lot of people are making a lot of noise but there is a regulator in place so if anybody has an issue about cross- subsidising or unfair competition the regulator will investigate."

Up to 100 staff had left since the bid, citing an unwillingness to work for Telkom. They were only a fraction of the company's 4,500 staff Watt said.

Business Day