Business and IT advisory, technology solutions, and managed services provider, SMS Management & Technology (ASX:SMX), is pinning its hopes on the 2017 financial year after structural changes, cancelled contracts, and failed investments hit its 2016 earnings with a 45 per cent decline.
The company reported an eight per cent fall in revenue, to $328.7 million in its annual results in August, along with a fall in earnings before tax (EBITDA), which declined by 45 per cent to $15.7 million for the year ending June.
In its annual general meeting no 14 November, the company’s leadership team revealed the forces behind its poor annual results, with internal disruptions to the business in FY2016 seeing a deterioration in its sales pipeline, contract win tally, and revenue.
“The last year has been very difficult for SMS Management & Technology. Our 2016 results were extremely disappointing and well below expectations,” the company’s chairman, Derek Young, told shareholders in a statement.
The implementation of a national sales and delivery structure on 1July 2015 caused major disruption to the company’s sales effectiveness, resulting in a “significant deterioration” in the sales pipeline of its advisory and solutions business.
Meanwhile, the unexpected cancellation of a large client transformation project at the start of the financial year resulted in the under-utilisation of about 40 consultants that it was not able to redeploy in a timely fashion.
Additionally, an investment of $1.5 million in its managed services business development and contract bid efforts, aimed at winning certain large-scale managed services contracts, did not eventuate. SMS also fingered the market downturn in Western Australia as a force interfering with its business over the course of the year.
“The implementation of the national sales and delivery structure and focus on large-scale managed services opportunities resulted in significant internal disruption and a loss of focus on our core advisory and solutions business,” Young said.
“Both of these factors had a negative impact on our sales performance and staff engagement which, in turn, significantly impacted contract wins and revenue, particularly in the second half of the 2016 financial year,” he said.
Young told shareholders that when the company’s problems first became apparent in December 2015, its leadership team implemented several remedial actions aimed at addressing the issues that had been identified at the time.
This year, the board concluded that business performance was not improving, and undertook a number of senior management changes, taking on former CFO, Rick Rostolis, as its new CEO in May 2016, with former CEO, Jacqueline Korhonen, resigning from the role after just over a year in the top job.
“These were difficult decisions, but your board believed they were in the best interests of the company in order to stabilise the business and restore growth over time,” Young said.
“These changes provided for new leadership to refocus the business on both its core and emerging service offerings as set out in our strategic plan, which we believe will form the basis for long-term sustainable value creation for shareholders," he said.
In his new role, Rostolis has focused on lifting sales, aligning regional sales and delivery teams within the advisory and solutions business, and developing client service offerings nationally.
“Since assuming the role of CEO, I have spent considerable time reviewing our business operations and meeting with staff and clients,” Rostolis said. “I have been reassured by our clients that demand for our services and our delivery quality both remain sound.
“We have developed a detailed plan to restore stability to the business over time,” he said.
The company has outlined a strategy that is set to leverage its advisory business to drive growth in “referenceable and repeatable solutions,” and to build an annuity stream of revenue through managed services.
“Your board is confident that Rick, together with his management team, will ensure the successful delivery of that strategy,” Young added.
On the upside, the company claims that it has already affected a number of positive changes through its new strategy.
“A number of positive outcomes have been achieved; we have deepened relationships with our key strategic partners, won opportunities with new clients by focusing on our referenceable areas of expertise, improved our engagement with staff, and attracted high calibre people to our organisation,” SMS said in a statement.
The company cited its recent $8.7 million multi-year contract win with the ACT Education Directorate as a vote of confidence in its strategy of driving customer value by being an “end-to-end advisory, solutions, and managed services resonates in the market place”.
While Rostolis conceded that the internal disruptions the business has faced over the past year will continue to hit its financial performance into the first half of the 2017 financial year, he does expect to see the company turn its performance around, with FY17 being viewed as a critical “reset year” as it executes its strategy.
“I remain positive about our future prospects as we execute on our business strategy to deliver growth and improved profitability,” Rostolis said. “Our strategy is aimed at being an employer of choice while providing superior client outcomes in what remains a very competitive market.”
The company's share price stood at $1.405 at the time of writing.