SysGroup issues profit warning amid slow business transition

Managed IT services and cloud hosting provider SysGroup updated the market on its trading for the six months to 30 September on Monday, saying that during the period it focused on executing the continued transformation of the business to managed IT services and cloud hosting.

The AIM-traded firm said it pursued that strategy due to the board’s belief that managed services offered the highest growth opportunity, and the potential for increased margins and longer-term contracts providing greater revenue visibility.

It claimed that it had further underpinned the strategy with the investment in, and addition of, both a seasoned managed services group sales director and a group marketing director.

Both of those hires were made towards the “back end” of the first half, with the board claiming it was already starting to see a positive impact.

“As part of the transition process the group has actively engaged with its customers, educating them on the benefits of managed services and the concept of moving from a capex to an opex model,” the board explained in the update.

“The group has seen increased traction, growing order inflows in recent months and the sales pipeline, as at 31 October, has grown to £3.91m [from £2.19m at the end of 2016].

The shift in focus apparently had a consequential impact on revenue, with revenues generated for managed services contracts recognised over the duration of the contract, rather than upfront.

During the period, the group delivered revenues of £3.92m, up from £2.68m a year ago, and adjusted EBITDA of £0.14m, up from £0.23m.

“Due to the shift in the group's revenue base, the board expects revenue and profitability to be significantly weighted to the second half,” the board said of its outlook.

“However, the transition to, and growth of, orders in higher margin managed services has not been sufficiently rapid to deliver the required gross margins year to date.”

SysGroup said that given the nature of managed services revenues, and the longer sales cycles that were typically experienced, it would be difficult to claw back the margin under-performance of the first half.

“The board therefore expects that EBITDA and adjusted profit before tax for the full year, prior to the contribution from the recently acquired Rockford IT, will be significantly below market expectations.”