Shares in IT services company Cambridge Technology Partners Inc all but collapsed Friday, plummeting $9.625 (45.8%) to $11.375, following a warning about its first-quarter performance. The Cambridge, Massachusetts-based firm announced late Thursday that based on a preliminary review, revenues for the quarter will show only about 12% growth, down from 60% in the year-ago period. Revenues are now expected to be between $148m and $151m, with earnings in the range of $0.12 to $0.14 per share. Analysts, meanwhile, had been looking for revenues of $163m-$170m and the First Call consensus estimate for earnings was $0.24 per share. The company also lowered its projections for the full year, saying it expects revenue to be between $660m-$675m, with earnings per share of $0.72-$0.74. Wall Street had been expecting $750m-$795m in revenues and $1.06 to $1.15 in earnings per share.
Cambridge says the benefits of its North American restructuring initiatives undertaken during the fourth quarter and completed by last month did not materialize as quickly as anticipated and, as a result, sales growth for the first quarter was lower than expected. A decrease in market demand for ERP software licenses also hurt the quarter. Making matters worse for the short term, Cambridge will be investing quite a bit in sales and technical training, the new managing partner (dealing with client relationships) and alliance organizations, field marketing, and project delivery methodologies. The strategic initiatives are taking a bit more time and management attention than originally expected, the company says, and thus the full-year adjustments were made. Cambridge will report actual results for the quarter on April 15.
Cambridge has seen a fast and furious rise, with year-over-year growth rates of roughly 50% since its inception in 1991. But last Fall the company began warning that it would be experiencing a slow-down in growth, blaming project delays due to customer concerns over Y2K. All told, adjusted market expectations for first quarter growth had been around 30%, still well above the 12% the company now expects to achieve. Some analysts are now beginning to think that the company has reached a plateau and needs to re-assess its approach to the market.
Christian Munz, senior analyst at IDC, says the company grew by winning medium sized contracts with large enterprises, providing them with focused services – for example, e-commerce or supply chain management applications integration – rather than the end- to-end services provided by larger players such as Anderson Consulting or PriceWaterhouseCoopers. But to win the volume of smaller contracts needed to sustain the level of growth that Cambridge has enjoyed so far will not be easy, says Munz, and the company may have to try to extend its highly successful and pioneering fixed-time/fixed-price model to broader, end-to-end consultation contracts – which could prove to be a real challenge. Failing that, says Munz, Cambridge will have to morph into a large systems integrator and forgo the very business model that was responsible for its early success. Munz believes that the company is slowing down its growth just so it can make these sort of assessments.
