Ilion Half-year Results Hit by UK Woes

Computergram International, August 13, 1999

Troubled European network and Unix product distributor, Ilion Group Plc had its half-year net results blighted by a slew of exceptional costs, mainly arising from its ailing UK operations. The Chessington, Surrey-based firm saw net profit of just $0.97m from $2.41m last time, due to severance costs, legal fees to foil a hostile takeover bid, a disputed transaction, and the partial sale of parts of its under-performing German operation. However, before exceptional costs it saw pre-tax profits up 85% on the same period last year to $3.38m, while revenue was up 10% on 1998 at $212.2m.

The company had its UK operation propped up by the performance of its French wing, which has now displaced the UK as the company's chief revenue earner up from 34% to 49% of the group's total sales. Revenue in France, where it distributes Sun Solaris servers and workstations and Cisco products, and is number one in the market, was up 55% to $103.1m, with operating profit up 32% at $4.8m. But UK business, declined from 53% of total group sales in the same period last year to 31%. Revenue was down from $101.65m to $66.34m. This was before the withdrawal of Ilion's exclusive franchise to sell Cisco products, which accounted for 20% of total UK sales is factored in.

Already this year Ilion has seen its customer base of value added resellers plummet from 1,400 to 1,000 - a figure it now believes it has bottomed out at. "The biggest problem this year has been the UK. We have done a lot of things, but still have a lot to do," said Serge van Gorkum, group CEO of Ilion.

Ilion had to hand over $161,000 in severance pay after cutting 15 jobs to ease overcapacity following the Cisco dealership loss at the end of June. And the company claims it is $997,000 out of pocket after a trading transaction with vendor Ciscom in March in which it says it was overcharged for networking products it was falsely told were eligible for a rebate from the manufacturer. It is suing Ciscom with a court date yet to be set.

Exceptional costs also arose from the write-off of $965,000 of goodwill associated with its 1997 acquisition of a German distributor after the company sold off 40% of its German operation to Garmhausen GmbH to form a joint venture. Ilion managers said the deal was aimed at revitalizing lagging performance in Germany by adding an indigenous player more familiar with the country's market.

The company has also incurred a $328,000 bill for legal and consultancy fees while it remains in a so-called "offer period" the subject of unwelcome interest from rival distributor, Netherlands-based Landis Group NV. Ilion managers said Landis's offer at $183.4 a share in cash undervalued the company. Landis has upped its stake in ilion from 6.6% in April to 13%.

However, a silver lining is ilion's positive cash flow at $5.22m compared to a net cash outflow of $6.35m for the first six months last year. This has been achieved it says through eliminating costly UK stockpiles, negotiating stock returns with resellers to sell off $10.94m of mothballed kit.

An entire tier of ilion senior management in the UK has been overhauled since the start of the year with the appointment of a new managing director, finance director, sales and marketing director, operations director and sales director.

The firm has also changed its business model in the UK moving towards the value added distributor, offering after sales support and away from high volume, low margin orders, which it believes has been responsible for the firm's UK decline.

The firm's operations, in France, Holland and Spain are the area of strongest growth. The company also operates in Belgium and Austria and closed a loss-making Swiss operation at the end of 1997.