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Computacenter on Tuesday reported that annual pre-tax profits fell by half to £34m ($59m) from £67.9m in 2004 - a figure that was at the high end of market expectations after group trading recovered significantly during the second half of the year.

The computer services company, which operates in the UK and Europe, attributed £27m of the profit decline to lower vendor rebates in the UK. The company was hit particularly hard last year by competition in the hardware sector, and when Hewlett-Packard, its largest supplier, made big cuts to the terms of its reseller agreement.

Group revenues were down 4.9 per cent at £2.29bn and operating profit was down 58 per cent to £27.6m from £66m. Earnings per share for 2005 were down to 10.9p from 25.9p a year earlier.

Ron Sandler, chairman, said there was no denying that 2005 had been a difficult year and that the group’s financial performance was disappointing. But he said significant steps had been taken by restructuring the group in the UK “to create an organisation that is considerably better equipped to respond to the challenges posed by the continuing commoditisation of IT.”

Also strong operating cash flow, with net funds of £100.4m at the end of the year, allowed the company to pledge to return £75m to shareholders in the second quarter of 2006 - a move however, that could be seen as narrowing the company’s options for growth.

“Whilst much remains to be done to improve Computacenter’s profitability, there is a sense of optimism within the company that we are getting back on the right track,” said Mr Sandler.

The company reported that trading activity in the first two months of 2006 had been below the comparable period in 2005, but that sales in recent years had become “increasingly weighted towards the end of each quarter, so that trading in the early weeks of the quarter “now provides a less reliable indicator of performance for the period as a whole”.

Sir Peter Ogden and Philip Hulme, who founded the company 24 years ago and control more than 44 per cent of the stock, called off buy-out talks in January after it emerged that the computer hardware and services company had seen a sharp improvement in trading at the end of 2005.

Tom Gidley-Kitchinan, an analyst at Charles Stanley, said the buy-out now appeared to be off the agenda, although it could be back on if the situation in 2006 deteriorated. There was uncertainty about the impact of the company’s restructuring, which had so far involved “refocusing rather than radical surgery”. He also noted that if the company failed to increase earnings to the 15p to18.75p range deemed necessary before increasing the dividend, the shares must fall “whatever action is taken on distributing cash”.

The board recommended a final dividend of 5p per share, bringing the total dividend for 2005 to 7.5p Shares slipped by 2.03 per cent to 277¼p.

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