EOH: Loss of Microsoft contracts will hit profits

Technology service group flagged that its profits could take a R10 million hit from contracts’ cancellations

TECHNOLOGY services company EOH Holdings fell nearly 30 percent on the JSE yesterday after it flagged that its profits could take a R10 million hit as a result of the termination of two contracts by multinational technology giant Microsoft.

EOH said it remained committed to resolve the issues as soon as it could.

The group said Microsoft notified its subsidiary EOH Mthombo on Friday that it was planning to terminate the company’s Channel Partner Network agreement within 30 days.

The notice sent the shares tumbling to close 25.87 percent lower at R19.80 from Monday’s close of R26.71.

Last week EOH fell 12 percent after Eskom published allegations that its former chief procurement officer, Jay Pillay, and “other senior officials” in the procurement team were involved in acts of misconduct.

However, EOH said the allegations were matters that had been fully investigated and they were concluded last year.

Yesterday EOH confirmed that it was seeking further clarity from Microsoft on its decision to terminate its Channel Partner Agreement with EOH Mthombo, one of the group’s subsidiaries, with 30 days notice.

“At this stage, EOH has not been provided with any reason for the notice of termination,” EOH said.

“The effect of this notice, if acted on, will be that group subsidiary company, EOH Mthombo, will no longer be a direct reseller of Microsoft licences with a profit impact of approximately R10 million in the current financial year.”

EOH said despite the expected termination of the contract, Microsoft remained an important part of its network of the more than 50 technology partners and resolution of this matter is a priority.

The group said its executive was seeking further clarity from Microsoft.

“EOH has initiated plans to ensure minimal disruption to customers and to limit the potential impact on the business, until more clarity has been obtained. In this regard, EOH Group chief executive, Stephen van Coller, is actively engaging Microsoft to better understand and resolve this matter as soon as practically possible,” the group said.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said the market had taken the “sell first and ask later” approach as the situation remains uncertain and with no guidance on the way forward.

Takaendesa said EOH had done a lot to strengthen its corporate governance and executive leadership but legacy issues as well as a weaker domestic IT market are slowing the recovery process.