Logica lowered its growth forecasts for 2011 on Wednesday and said that customers, especially in the Benelux region, were cutting spending on IT services.
Shares in UK-based Logica, which have lost 38 per cent of their value in the past year, closed down 7.3 per cent at 83p.
“We’ve seen slower demand with some of our clients where spending is just a bit lower than we might have expected,” said Andy Green, chief executive. He said that market conditions had become more challenging during August and September.
The company said it was now expecting just 3 per cent revenue growth, compared with guidance of 5 per cent earlier this year. Logica also cut its forecast for operating margin to between 6.5 and 7 per cent. It had started the year expecting to increase the 7.4 per cent margin it achieved in 2010.
The warning came as Logica revealed that third quarter sales grew 2 per cent to £914m in the three months to the end of September.
Logica provides services for a number of financial sector clients in the Benelux region and has seen this area of the business struggle for several years. The company has also seen a slowdown in Sweden, where sales fell 1 per cent, as well as in Australia and Portugal.
In contrast, the UK, where Logica is working with energy and utilities companies on smart meter projects, emerged as the fastest growing region in the last three months, with sales increasing 6 per cent.
Mr Green said helping companies adopt new technologies like smartphones and tablets was boosting business, and there was work in helping banks adapt to new regulations.
“New technology means there is no option for companies to stop spending. We are in nothing like the state we have seen in the past. We don’t feel like a sick business,” Mr Green said.
There is demand from companies wanting to outsource the management of their IT systems to Logica, and sales in this division grew 8 per cent. Demand for consulting and professional services, such as the design and implementation of large IT projects, however, fell 3 per cent.
Logica’s warning was no surprise and analysts had already edged down their forecasts as global economic uncertainty increased. The 7 per cent share price fall seems an over-reaction, leaving the company trading at seven or eight times forward earnings estimates, compared with the rest of the sector on a multiple of 13. But with the eurozone still in crisis, it is not time to start buying Logica shares yet. The structure of the business does not work well in a downturn. Logica has thousands of highly-paid professionals on its books, who are expensive to keep and even more expensive to fire. When there is not enough work coming in, Logica’s profits suffer. That said, at this low price, the dividend yield of more than 5 per cent could attract some investors.