Servo profit scandal puts £60m dent in Phoenix's H1 numbers
Services firm discovers accountants "manipulated and overstated profits for a number of years"
Phoenix has been dragged to a £60m first-half operating loss after an investigation found its Servo business overstated its profits for several years.
The services heavyweight announced earlier this year that an internal review had discovered that "certain control processes... were repeatedly and deliberately circumvented". Law firm Nabarro and auditor PwC were retained to conduct an "independent forensic investigation", which has found that, although there is "no evidence of cash theft", number-crunchers at Servo "manipulated and overstated [profits] for a number of years" from FY09 onwards.
For the six-month period to the end of September, Phoenix had to swallow a non-cash goodwill impairment charge of £68.1m relating to the restatement of Servo accounts.
Total sales for the period dropped 5.3 per cent annually to £124m. The Servo writedown contributed to the firm booking an operating loss of £61.2m, compared with a profit of £11.6m in the corresponding period last year.
Executive chairman Peter Bertram said: "The first-half results were disappointing. The business suffered from transitional issues caused by the new structure and the discovery of the accounting irregularities. As a result we are cautious in the short term, however, with the new contract win which we announced on 26 November, along with our strengthening pipeline of opportunities in the second half of the year, we believe we are well positioned for the medium to long term."
Divisional breakdown
All three of Phoenix's divisions - business continuity, mid-market IT and partner services - suffered from a decline in sales and order-book value in H1. Business continuity displayed the most resilience, with sales down 2.1 per cent and operating profit growing by £1m to £8m. However, £17m was wiped off its pipeline value, with the order book now standing at £91.2m.
The mid-market unit - which contains the former Servo business - saw sales slump 5.7 per cent to £42.7m, while the £1.3m operating profit of last year was turned into a £2.6m loss this time around. The worth of the division's order book has declined by a sixth in the last 12 months to £62.6m.
Phoenix's channel revenues fell 6.6 per cent to £53.7m in H1 FY13. Operational profit fell by more than a quarter to £5.8m, while about £8m has been wiped from the unit's pipeline, leaving it with a value of £130.8m.