Logica, one of the largest providers of contract computer programmers in Europe, is to turf more than 1,300 of its employees onto the dole as it responds to an increasing reluctance on the part of its clients to commit to contract reneweals.
The FTSE 250 company, which has seen its share price slump more than 40% in the last six months, warned at the beginning of November of weakening revenues and margins in the third quarter, and the disturbing trend on revenues has accelerated in the fourth quarter.
Full year revenue growth is now set to be around 3%, with underlying profitability in the range of £240-250m. In its trading update at the start of November, the company had indicated revenue growth for the year was expected to be above 3%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
In a statement, the group said: "Recent market forecasts now predict GDP [gross domestic product] declines of 1% to 2% in our European markets in 2012. We are therefore accelerating the restructuring that we would otherwise have spread over the next two years."
The unwelcome Christmas surprise for a large chunk of Logica's workforce will lead to charges in the current financial year of around £80m related to restructuring of jobs and £13m relating to property.
The good news for shareholders is that the firm anticipates that a financial benefit of £25m - £35m will flow through from the second half of 2012, with full year operating margin expected to be above 6.5% in 2012 "despite difficult market conditions".
The full annualised benefit in 2013 will be in the region of £50m - £60m, the group said.
This year, Logica will incur a one-off charge of £39m, most of which reflects a change in provision for expected lifetime contract losses as a result of the likelihood of lower expected revenue on a small number of volume-dependent contracts with between four to six years still to run.
As a result of the programme, the firm expects that its Benelux business will return to profit in 2012, its Swedish business will deliver an improved margin in the same year, and the Logica IM business will be "strongly competitive going forward".
The firm intends to pay an unchanged final dividend for 2011 of 2.3p, bringing the full year dividend to 4.4p, a 5% increase on 2010. The group intends to maintain its dividend policy of a 40% payout in 2012.
Chief executive officer Andy Green said: "We deeply regret the impact job losses will have on the people affected in many of our businesses, but we are confident that it is best for our clients, people and shareholders that we face squarely into the difficult economic conditions ahead. This decisive action will result in sustainable margin improvement in 2012, with the benefits starting to flow through in the second half."
The shares plunged to a new 52-week low on the announcement.
NR
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it?
MPs warn over Lifetime ISAs which could leave savers out of pocket
