Phoenix IT Group claims it has put its financial house in order after the recent discovery of accounting irregularities at its Servo arm dragged it to a £54.4m annual loss.
The London-listed IT services outfit said it expects to return to growth in the second half of its current fiscal year after admitting a recent re-organisation of its business also dented sales and led to higher customer attrition for its fiscal 2013 to 31 March.
Phoenix swallowed a £68.1m one-off charge in respect to the accounting irregularities uncovered in September at Servo – the managed services firm it bought in 2006 which now largely constitutes its mid-market arm.
A subsequent forensic investigation carried out by PwC and Nabarro LLP found no evidence of cash misappropriation, instead concluding that the misstatements arose from the "deliberate and repeated circumvention of control processes".
Getting the house in order
Phoenix stressed it has since moved to shore up its control environment and is implementing PwC's recommendations following a control review by the auditor.
This includes a restructure of the finance functions, partly through relocating Servo's accounting and finance activities to a new centralised shared service function based in Northampton. A new accounting system will be implemented during the current year, which Phoenix said will result in more efficient, controls-focused processes.
Meanwhile, a new internal audit, risk and compliance manager has been appointed, while the financial controller and divisional finance director of Servo have left the company. Phoenix said it is also in the process of appointing a further internal auditor, while KPMG has been appointed as an internal audit adviser.
Executive chairman Peter Bertram admitted it had been a tough year for the firm.
"This was a challenging year for the group," he said "The difficult economic climate, a disruptive reorganisation and the discovery of accounting irregularities all had a detrimental effect on the business and the results for the year. There are issues affecting the group, which whilst being resolved, will continue to negatively impact in the short term."
The accounting probe also revealed that mid-market – one of three divisions under Phoenix's new structure alongside partner services and business continuity – has been underperforming.
As a result, Phoenix has carried out a profitability review of the division, which saw underlying operating losses widen from £1.2m to £4.4m in fiscal 2013.
As CRN reported in April, Martin O'Donnell, who ran hosting – one of two business units that was merged to form the mid-market unit in February – is understood to have left Phoenix and the company confirmed today that it had made a "number of senior management changes" to the division.
It is also focusing its sales function back to the mid-market after acknowledging that its strategy to target large managed services deals did not bear fruit and led to increased attrition among mid-market customers. A "significant" investment is also being made in its hosting service delivery team and platform during its current year.
Revenue for the mid-market division rose one per cent to £87.3m, while revenue at its business continuity arm were also roughly flat – down four per cent to £54.2m.
By far the biggest revenue dip came at its partner services arm, which was born out of the recent merger of its systems integrators and communications divisions, which hauled in £109.2m sales compared with £117.2m last year. Phoenix admitted disruption caused by its recent reorganisation precipitated a drop in customer service levels, affecting both volumes and attrition rates in the year.
Total revenue fell 4.1 per cent to £250m but Bertram claimed the firm can put its woes behind it this year.
"We are planning for revenue growth, particularly from the second half of the current financial year, and believe the group can recover from the difficulties of last year," he said.
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