Arun Sudhaman 05 Nov 2013 // 10:52AM GMT
LONDON—Next 15’s pretax profits have dropped by more than half for its 2013 fiscal year, although CEO Tim Dyson believes that the worst is now over for the communications group, which owns Bite, Text 100, M Booth and OutCast.
Pretax profits slumped to £2.09m, down from £5.9m, with Next 15 blaming accounting issues in two Bite offices, leading to a series of one-off charges. Adjusted profit before tax was £7.7m, down from £9.6m, and below the forecast £9.2m, which necessitated last week’s profit warning.
Dyson pointed out that the shortfall was largely attributable to an impairment charge of almost £2m at Bite Germany, which sees the value of its assets in the country written down to zero, along with some “poor housekeeping” at Bite in the UK.
In Germany, where Bite acquired Munich firm Trademark in 2011, Dyson noted that the group had “bought a business that had a management team that, unfortunately, didn’t make accurate representations to us about their business.”
“In truth, there were failings in the due diligence that was done,” said Dyson, noting that the agency’s German management team was fired earlier this year.
“Unfortunately, the finances of the Germany company are a mess,” said Dyson. “It’s very frustrating for the people that work there.”
That charge follows the £1.8m the group lost last year after discovering employee fraud at Bite’s North American operation. A further £265k has been added to the fraud charge in this financial year, along with £579k in costs associated with the investigation, although £317k has been recovered from the employee responsible, who has since plead guilty to two federal crimes.
Last week, Next 15 revealed that group finance director David Dewhurst is stepping down after 14 years with the company.
“He did the honourable thing,” said Dyson. “The finance function is his watch and this is the second year in a row where we had to deal with a lack of process and control.”
While Next 15 characterised the year as a “tough” one for the company, Dyson is confident that the “fundamentals of the business are strong.”
“We’re through the worst of this,” he said. “We’ve not had a problem in getting the business to grow, we just have some process and control issues which we’ve had to fix. And I think they are eminently fixable.”
“The profit result was very much a function of these process and control issues within Bite which, hopefully, are the last vestiges of the challenges we’ve had within the accounting function after the fraud,” explained Dyson.
“They don’t point to a broken business model. We’re not struggling to add good people or to add business to the company — we’ve not seen any of those challenges.”
While the bulk of Next 15’s issues relate to the finance charges, Dyson admitted that Bite Communications had “lost its way” after the fraud was discovered last year. Global CEO Andy Cunningham has since stepped down from her role, with Dyson heading the firm on an interim basis.
“I’m pleased with how Bite has responded from that,” said Dyson. “It’s definitely moving in a much better direction now. It was struggling before but it’s not now.”
During the year, Next 15 invested almost £1m in restructuring the business to help continue its transition into a more integrated digital communications group.
That shift has seen the group invest in agencies like Beyond, which has already secured major digital assignments for Virgin, Google, Sainsbury’s and HBO, and Agent3, which sells tech platforms and data-based marketing services.
The charges cloud an overall picture that saw group revenue up 5% to £96.1m, led by solid progress from Next 15’s business units in its key market, North America.
Text 100, OutCast, M Booth and the Blueshirt Group each achieved their highest ever revenues, with the US businesses in total delivering 10% organic growth and accounting for 55% of overall earnings.
Integrated agencies (the ‘traditional’ PR firms that account for 84% of group revenues) grew by a total of 3%, while its newer specialist agencies (such as Beyond and Agent3) grew by 15%.
However, EMEA continued to constitute a drag on earnings. The UK, Next 15’s second largest market, saw its revenues decline by 3%, due to net client losses at Lexis PR last year. EMEA remained flat, while Asia-Pacific declined 2% on local currency movements.
The group reported a decrease in net debt of £800k to £1.8m, and also bought Washington DC digital public affairs shop Connections Media during the year.