Shares in Logica CMG, the Anglo-Dutch IT services group, closed down 9 per cent yesterday after the group issued an unexpected profits warning and expressed caution about government spending.

The group, Europe’s seventh-biggest IT services company, said in a trading statement that margins and revenues in its core UK division would be lower in the first half of 2007 than at the same time last year.

The performance, described by analysts as a “major disappointment”, was blamed by the group on issues in its commercial business, where a key transport contract reached its end.

The group, which employs more than 39,000 staff world-wide, said that it had also been forced to make a surprise £10 million to £15 million provision for delays on another commercial contract.

Logica said that, in contrast, its performance in the public sector had held up. It has been one of the biggest winners of government work over the past few years.

However, in a further blow to investors, Martin Read, the chief executive, said that the 10 per cent year-on-year sales increase in the first quarter would “not necessarily be representative” of the rest of the year.

He said: “There is less [government] money to spend, although we hope a disproportionate amount of it will be spent on IT systems.”

Although he declined to comment on the potential impact of Gordon Brown taking over as prime minister, analysts believe that the change could hit the group further.

Analysts at Deutsche Bank said in a note that the danger of growth in the public sector starting to subside was now a “key risk” to Logica. They said that there was a “risk of a change or slight delay in contract letting when the prime minister changes.”

Although the business in the UK had “lost a bit of momentum”, Mr Read said that he was confident about the group’s British strategy. It has already taken action to stabilise the division, including a management shake-up. Second-half revenue in Britain should improve, it said, although overall full-year UK revenue will be “slightly lower” than in 2006.

The group created by the 2002 merger between Logica, of Britain, and CMG, of the Netherlands, said that its other divisons had performed well, with revenues up in the Nordic countries, France and the Netherlands. The shares closed down 16¼p at 164¼p. The group said its woes in the UK were exacerbated by a “slow start” on contract wins in the energy and utilities sector.

Under so-called “framework deals”, it said that it had won promises of work that had been slow in getting off the ground.

This year Logica unveiled plans to return £130 million to investors through a share buy-back after selling its SMS text messaging business to a private equity consortium for £265 million in cash. Logica said that the sale would help it to focus on expanding its IT services business. The group has spent about £1.8 billion on acquisitions over the past 18 months as it strives to become a top-ten global player.

Government use of consultants

— A National Audit office study last year named LogicaCMG, IBM and Accenture as the biggest winners of government business over the past few years

— The spending watchdog found that consultants had cost taxpayers £7.2 billion across the public sector with no actual proof of any benefits

— The report calculated that the annual bill could be slashed significantly through more use of in-house staff and sharper negotiation

— It criticised civil servants for failing to share information on the most cost-effective companies

— The six highest spenders in Whitehall were the Department for International Development, the Ministry of Defence, the Department for Environment, Food and Rural Affairs, the Home Office, the Department of Health and the Environment Agency

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