The September 2010 half year results published by Crimsonwing plc last week show that the IT services group generated total revenue in excess of €7 million during the six month period between April 1 and September 30. This represents a record level of turnover during the first half of their financial year and is 17 per cent higher compared to the revenue generated in the same period last year.

In the 2010 half-year report Crimsonwing revealed that the contribution from sales in euro increased to 47.3 per cent from under 30 per cent at the time of the IPO thereby helping the group to become less susceptible to fluctuations in the exchange rate between euro and sterling.

Earnings before interest, tax, depreciation and amortisation (EBITDA) during the six months to September 30 increased by 34.7 per cent to €542,617. This is equivalent to the level of EBITDA generated in the last financial year covering the 12 month period between April 1, 2009 and March 31, 2010 and shows the recovery in the financial performance of Crimsonwing following the downturn experienced in 2008 and 2009.

On July 26, Crimsonwing had reported in its interim directors’ statement that it achieved a 66 per cent increase in Q1 EBITDA to €325,000. As such, the EBITDA during the second quarter of the year was lower at €217,617.

The business in the UK and Malta remain the main contributors to the Crimsonwing Group with the Malta office generating a substantial increase in EBITDA to €477,657 compared to €255,600 in the six month period to September 2009. Likewise EBITDA from Crimsonwing UK grew by 31 percent to €248,096. Crimsonwing, however, continues to suffer in the Netherlands.

While the Promentum business (51 per cent owned by Crimsonwing plc) recovered and registered a profit once again contributing €131,000 to Group EBITDA, the fully-owned businesses in the Netherlands incorporating the company acquired in July 2008 (VDA) continue to post dismal results. These businesses recorded a worsening performance with a negative EBITDA of €271,749 from the break even position in the comparative period last year.

During the stockbrokers meeting held last July shortly after the publication of the March 2010 full-year results, Crimsonwing’s CEO David Walsh had warned on the reduced workload being suffered in the Netherlands as a result of the prolonged recession. The CEO had reported that he will be taking a more active role in managing the business in the Netherlands following the removal of the operational directors of the two companies in June.

During the past six months the losses in the Netherlands widened on increased expenditure as “remedial work was necessary to rectify problems on a number of contracts”. The performance in the Netherlands is disappointing for shareholders as it overshadows the progress being registered by the group in the UK and Malta. VDA was acquired for €1.8 million in July 2008 and is another example of an acquisition which has so far been detrimental for shareholders.

While the outlook in the Netherlands remains challenging shareholders should be pleased to note that Crimsonwing reported that it is currently investing considerably in recruitment and training in anticipation of further demand for services during the second half of the current financial year and beyond. Crimsonwing expects to have a total of 45 consultants qualified to provide E-commerce solutions under the Magento platform.

The IT services group reported that several new clients have been using this solution in the UK during the first half of the year and anticipates that “revenue and profits from the Magento based offer is expected to grow significantly in future periods”.

Moreover, during the second half of the current financial year between October 1, 2010 and March 31, 2011, Crimsonwing UK will recognise a full six-month contribution of the new contract with one of its major clients. The revised pricing terms of this contract commenced in June 2010 and cover a three-year period with the overall incremental benefit valued at circa €750,000 over the term of the contract.

In recent weeks, Crimsonwing reported that it successfully attained Microsoft Gold Competency for Enterprise Resource planning in Dynamics NAV and Dynamics AX as well as the Gold Competency for Software Development. Moreover, Crimsonwing also announced that it was awarded Gold Partner status in the Oracle PartnerNetwork (OPN). The recognition of such competencies by global IT companies such as Microsoft and Oracle is important for future business development for Crimsonwing.

At the time of the publication of the March 2010 Annual Report, CEO David Walsh had indicated that credit control remains an area for concern for the company. The balance sheet as at September 30, 2010 reveals that total bank borrowings decreased to €1.6 million from €1.7 million as at March 1, 2010. Meanwhile cash in hand decreased from €733,356 in March 2010 to €598,645 in September. A stronger cash flow generation and timely receipt from clients is of fundamental importance for the company to consider the reinstatement of dividends to shareholders which were aborted two years ago as the financial performance deteriorated.

During the past 11 months trading activity in Crimsonwing shares was particularly low with only 224,422 shares changing hands during the period. The share price performance was similarly disappointing with a slight decline of 2.6 per cent and the current share price level of €0.38 represents a drop of 17.4 per cent from its 2010 high of €0.46. While recent volumes were dismal, trading activity ought to rise once more meaningful profitability levels are registered. The global economic recession following the financial crisis in September 2008 negatively impacted all IT services companies listed on the Malta Stock Exchange. Crimsonwing is now showing signs of recovery in recent months and progress in addressing current problems in the Netherlands augurs well for shareholders.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.