Loss-making AIM listed internet technology specialist cScape Group suffered a 26% collapse in its share price today as investors awaited publication of its results for the year to 30 June.
As reported here last month (see Board changes at loss-making internet technology specialist cScape), cScape has parted with three directors in the past year and its majority shareholder Keith Young has taken charge as executive chairman. The skinny board of just two executives was then joined by Robert Killick who is chief executive of the principal operating subsidiary.
The company has also changed its auditors.
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I keep dreaming that one day the publicly listed online advertising sales group Burst Media Corporation will have made a profit. But I always awake to be disappointed and last week was no exception.
For the six months to 30 June Burst lost $745,000, bringing its accumulated losses to $10.8 million. The position would have been worse if Burst had chosen to amortise any of the $1.7 million spent so far on software development costs.
Although listed on the London stock exchange, Burst is a US-based operation that abandoned an attempt to get a listing in the US some time ago. It can’t be very popular among investors in the UK either, as it continues to eat into the $26 million capital they have provided.
Talks about selling the business over the past year have all come to nought and no discussions are in progress at the moment. Indeed Burst has deduced that it would not obtain optimal value for its shareholders during the recession although it claims it is “demonstrating an ability to grow with, and even ahead of, a recovery”.
Not that Burst’s monotonous stream of losses seems to dent its management’s enthusiasm: “The board is confident that the company is well positioned to achieve its goals for the year”, commented chairman David Hanger. It would be interesting to know whether any of those goals includes making a profit.
At first sight a 24.7% fall in operating profit is not good news, but at M&C Saatchi it could have been much worse if its balance sheet was not relatively strong.
Indeed the reasons for the decline announced last week were predictable and not life-threatening.
The group lost revenue because of the recession. Profits suffered a particularly nasty dent at the relatively recently acquired subsidiary Clear Ideas because it is a cyclical project-based consultancy business and fewer clients spend money on consultancy in tough times even if they should (something that perhaps could have been highlighted more prominently when it was acquired).
Interest rates dropped and deprived the group of some income from the cash flow it normally generates in its media buying operations. And its investment in new offices lopped £588,000 off the bottom line.
On the plus side, profits benefitted from a £429,000 paper gain arising on the latest estimate of notional interest on the amount that would have to be paid to acquire outstanding minority interests in subsidiaries - one of the accounting regulators' more balmy innovations.
But, by comparison with many of its peers, the outcome of a post-tax profit of £3.6 million for the half year to 30 June compared with £4.8 million in the same period last year looks pretty good, if not something to write home about. Perhaps that's one reason why its share price stengthened last month (see table below).
And the balance sheet remains fairly strong with net borrowings of just £0.4 million and shareholders' funds of £52 million - a situation doubtless helped by owning a media buying business like Walker Media. Shareholders' funds might be reduced a little if any potential impairment charge were to become necessary in relation to the cost of acquiring Clear Ideas. But hopefully the company's silence on this topic can be interpreted as a reassuring feature.
However, the group continued to owe its short-term creditors more than its readily realisable assets - the gap was £5.9 million at 30 June compared with £8 million last December - and would have to draw more heavily on its overdraft facility if all its creditors wanted to be paid at once. M&C Saatchi is not alone in that.
On the basis of the limited information available AIM listed digital marketing group Tangent Communications is paying up to 1.4 times last year's £2.27 million revenue to acquire the data based customer relationship management agency Snowball, announced today.
The principal owners of Snowball were Damian Bentley and David Powis and they appear likely to receive the lion's share of the £3.2 million maximum purchase price. The deal involves buying two businesses - a company called DDG Network that was owned equally by Bentley and Powis and a limited partnership Double D Management in which Bentley, Powis and their wives were all members.
According to Tangent the "pro forma" profit in 2008 before interest and tax was £878,000 - rather a big proportion of the £2.27 million revenue earned in that year. Indeed such a substantial profit would normally command a much higher multiple than the £3.2 million maximum purchase price that will be based on profits to be earned over the next three years, unless Tangent is not very confident about how maintainable last year's "pro forma" profit will prove to be.
According to their accounts, profits retained by the two entities from trading in 2008 amounted to a more modest £300,000. If that figure is anywhere close to the maintainable post-tax profit earned for that year after allowing for normal levels of owners' remuneration, the maximum purchase price would equate to about 10 times the historic post-tax profit (which would normally be about 7 times the pre-tax profit). That sounds more realistic, and more in line with the multiple of 1.4 times last year‘s revenue.
Tangent has parted with £1 million in cash as a down payment. The earnout component will be satisfied by a mixture of cash or shares.
AIM listed website developer IS Solutions failed to improve its profit in the first six months of 2009 despite increasing revenues by 40% on those achieved in the same period last year.
The group blamed increased charges for goodwill amortisation and share incentive schemes for the lack of post-tax profit growth. A decline in investment income also contributed to the unexciting outcome. If these items are excluded, the company said that its adjusted operating profit would have increased by 36% and generated an operating profit margin of 14%.
The group remained cash rich with a relatively strong balance sheet at 30 June.
Asia Digital, the AIM listed online advertising sales agency that formerly traded as Deal Group Media, has reported a further loss of £1 million for the half year to 30 June, pushing its shareholders' funds into a £1.9 million deficiency. The group's short-term liabilities exceeded its readily realisable assets by £2.4 million at 30 June.
Despite this disappointing result, the company gave no indication of how it intends to fund its ongoing business which now depends entirely on its creditors for operating capital. The group's fortunes are inextricably entwined with the Asia market after its Australian operation lost a major client.
Chief executive Adrian Moss, who is also acting as chief financial officer on an interim basis, remains optimistic: "Asia Digital is well positioned to capitalise on the many opportunities that lie ahead", he said.
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In a surprise appointment, AIM-listed WIN - the technical facilitator of digital entertainment, information and interaction services - has appointed former AKQA UK executive Michael deKare Silver as chairman in succession to Richard Joyce while announcing a near break-even result for the first half of 2009.
WIN's operating costs increased in the half year to 30 June while revenue remained virtually unchanged by comparison with the same period last year. The result was a post-tax loss of £93,000. In the same period last year the group made a post-tax profit of £692,000
deKare Silver describes himself as "a leading business figure" who is "heavily involved in new technologies and digital and mobile marketing". However, he had a less than distinguished spell at the UK arm of AKQA in 2005 where he performed the role of managing director (although according to Companies House records he was never appointed to the board) and presided over an office move and a period of losses.
He held an executive director role at Modem Media in the UK for a brief period between 2003 and 2004, while being a non-executive director of telecoms group Thus between 2000 and 2006. deKare Silver has also been an e-commerce adviser on the boards of companies like Experian Finance and BestDigitalJobs.com.
AIM listed Cello Group has had to write off £3.6 million of the cost of acquiring its SMT Consulting market research business and £0.9 million of the cost of acquiring its Chairos Holdings HR consultancy business to reflect lower assessments of their future earning capability. These write-offs exacerbated a decline in normal operating profits in the half year to 30 June and resulted in a group post-tax loss of £4.2 million.
Cello had warned of a difficult year in July (see Cello warns of reduced out-turn for year) but the extent of the decline may come as a surprise. Revenues were down by over 12% on the same period last year. The group's operating profit margin fell from 11.5% to 6.8%, before taking account of impairment losses and other acquisition related items.
With much of the half year's loss caused by the relatively recent accounting rule that requires companies to assess the sustainability of the value placed on acquired businesses, acquisitive groups like Cello are being made more accountable for the prices they have paid for past acquisitions. And while it is easy to dismiss the impact on reported profits as a so-called "non-cash" item, the reality is quite the opposite. There may be no immediate cash "hit" arising from the write-offs but they clearly represent excessive amounts paid out in the past.
But even this cloud may have a silver lining. What will happen if the value of acquired companies recovers after an earlier write-down has been incurred? Presumably the impairment provision will be reversed.
Cello's balance sheet has not been too seriously dented by the half-year's loss. Net current assets (the amount by which readily realisable assets exceed short-term obligations) actually improved between January and June as amounts set aside to meet earnout obligations were reduced by the poorer performance of acquired companies. But net debt increased by £4.9 million to £14.8 million in that period as other immediate earnout obligations were discharged. Nevertheless the ratio of debt to shareholders' funds remained prudent at 0.26:1. That assumes past acquisition costs are not subjected to any further major write-offs.
"2009 will continue to be a challenging year", commented chairman Allan Rich when announcing the half-year's loss. "However, the actions taken in 2008 and 2009 mean that Cello is more focussed, more professionally cohesive, and on a strong financial footing from which to expand in due course."
Cossette, the Canadian listed marketing group with substantial interests in the UK, gave another brush-off yesterday to attempts by former vice chairman François Duffar to acquire the business (see Cossette actively seeking other suitors).
With undisguised disdain, the special committee set up by Cossette to review all sale options announced that “present circumstances do not warrant allowing Cosmos to participate in the sale process of the company”. In the committee’s view Cosmos investors include Cossette insiders, giving them an “unfair imbalance of knowledge relative to other potential acquirers”.
Meanwhile, Cossette claims it has executed confidentiality agreements with “a significant number" of potential acquirers who have had access to its data room. Potential acquirers are being invited to submit written expressions of interest, but Cossette did not indicate whether any such submissions had been received so far.
Cossette's UK operations include Miles Calcraft Briginshaw Duffy, Elvis Communications, Band and Brown, Dare and Identica.
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Senior executives of the biggest Japanese marketing group Dentsu will be forfeiting between 5% and 15% of their pay entitlement for the rest of the company's financial year in the belief that "harsh operating conditions are going to persist for the foreseeable future". The executives, who include chief executive officer Tatsuyoshi Takashima as well as vice presidents and executive officers, have already returned similar proportions of their salary entitlement for the six months ending 30 September.
Whether other recession-hit marketing groups will follow the Dentsu lead seems rather doubtful.
Havas seems likely to have suffered the biggest revenue decline of the global groups in the first half of 2009 if measured on a constant currency basis but is being very coy about it.
The reported actual fall in revenue was 7.4% compared with the first half of 2008, but this included an unquantified “positive exchange rate impact of a recovering US dollar offsetting weaker sterling and other currencies against the euro”.
By contrast with Havas' coyness, other global groups disclosed their revenue change on a constant currency basis as well as on an actual basis (see chart). On a constant currency basis Publicis Groupe suffered a 6.5% decline while Omnicom Group and The Interpublic Group of Companies suffered 8.5% declines. Acquisition activity boosted WPP's revenues by 8.6% on a constant currency basis.
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