Ann: Capital Raising, Acquisition, Earnings Guidance Presentation, page-11

The earnings update for FY2017 demonstrates a continuing competitive environment that has plagued IT service providers (DWS, SMX, RXP...) over recent years - the commoditisation of their services, offshoring work and large foreign entrants all cited as causes. The response to the lack of organic growth is .... make acquisitions of private companies in related fields with a more unique service offering with defendable margins. But this strategy can only continue so long as free cashflow can be generated from acquired businesses to retire the debt associated with the acquisitions, otherwise leverage becomes excessive and the risk profile of the company changes dramatically for the worse. Not many companies can pull off this strategy successfully ( HSN comes to mind as an example of a company that has been successful).

The good news is that RXP have raised capital to keep leverage relatively low (despite shunning their existing shareholders in the process) and most importantly (as pointed out by Saintly 96) free cashflow appears to be strong in 2H2017 to meet dividend payments and hopefully reduce some of the $6m deferred consideration.

Also, regarding the earnings update, probably we should also wait to see if there is an explanation for the subdued trading in 2H2017 when FY2017 results are released. These companies are prone to have a few large lumpy contracts and the difference between a great year and an average year can depend on which side of Balance Date the revenue recognition falls on!

On the topic of margins, while pleasing that EBITDA margin improved in 2H2017, the overall FY2017 margin 0f 13.8% is below the 14.3% of FY2016, and well short of the + 16% of FY13 and FY14 - emphasising the competitive industry as mentioned above. Since 'The Works' is forecast to earn margins above 23%, I trust management will throws all available resources at this business in an effort to grow the proportion of earnings that it contributes to the overall group (lifting group margins).