Profit problem at Computacenter

SHARES in computer services group Computacenter fell sharply today after the company shocked the City with a surprise profits warning. The shares dropped 27p to 262p in early trading after it reported a substantial decline in sales and said profits would be similarly down this year if business didn't pick up.

The warning comes just two months after it said it was being squeezed between corporate customers after a better deal and computer makers who wanted to reduce suppliers' margins.

The company said this morning that it was still experiencing 'difficult' trading conditions with group sales down about 10% on the first quarter last year. Although some sort of improvement was seen towards the end of the first quarter the extent of the decline means that there will have to be a substantial pick-up to make up for the shortfall.

Computacenter blamed lower product sales and said that although service revenues had improved this was still not enough to compensate for the worse-than-expected product sales. The French market remained particularly stubborn, thanks to government customers deferring spending on information technology last year, something that has not improved this year.

There has been no let-up in the pressure from hard-pressed PC suppliers either. Computacenter said earlier this year that Hewlett-Packard had renegotiated a major contract on tougher terms last November as manufacturers squabbled over market share. Chief executive Mike Norris said at the time that December had been 'stunningly good' but hopes that this marked the beginning of a turnaround proved illusory.

Computacenter's warning will worry analysts as it indicates a downturn in corporate IT spending and could mark reduced business confidence, which could impact other key suppliers in the IT industry.

Before this morning's falls, Computacenter's shares had performed in line with the rest of the industry and closed last night at 291p ? this compares with 303p in January. It said it would issue a further trading update in early July ahead of its close period, but admitted that unless there was a marked change in market conditions its profits for the year will be 'substantially' below last year's.

'We are projecting product revenues for the balance for the year to be broadly similar to last year and margins to be lower for the rest of the year, although not to the same extent as we have experienced in the first quarter,' Norris said in a statement this morning.