Don't fret about today's 6%-plus share price fall to 116.25p at IT for schools supplier RM (RM.). Today's news can only be good for shareholders in the long-run. The Abingdon-based £108 million cap's decision today to ditch PC hardware sales is absolutely the right thing to do, if a little late in coming.


The switch will carry a £10 million one-off price tag and slash revenues and profits next year. Its Education Technology division sales look set to be cut in half over the next couple of years. They were £109 million in the full year to November 2012 and £82.6 million in the first half of 2013. Yet operating margins are paper thin, 3.3% at the last count.


The firm's broker, Numis Securities, anticipates overall revenues and pre-tax profit falling to £198 million and £7.3 million respectively next year to end November 2014, against £259 million and £15.4 million in the year about to close. It'll also cost 300 staff or more their jobs, which is unfortunate. That's the bad news.


Beyond the near-sighted impact, there is plenty of promise in this strategic shift. For starters, it will allow RM to properly concentrate on the software, apps and services that schools really need.


RM has for a while been working behind the scenes, such as RM Unify, a cloud-based content distribution system, and RM Books, an e-books application.


With smartphones and tablets in the hands of every kid in the country, schools simply have to embrace technology as part of the curriculum. RM has the potential to exploit this long-term shift having spent years developing relationships with headteachers across Britain.

RM - Comparison Line Chart (Rebased to first)

Fair play to chief executive David Brooks, appointed in March this year, for setting in motion a meaningful business re-think, and then having the cojones to act.


Beyond next year, shareholders should start to see the shift pay-off with higher-quality profits from lower revenues. Numis estimates revenues in 2015 of £173 million will produce £12.4 million of taxable profit. This implies a rough £15 million cash cost, yet RM is still predicted to have at least £46 million on the books 12 months from now, with no debt, suggesting that the rough 3.5p per share dividend (yielding 3% currently) faces little threat.


Some of today's news appears to have been anticipated by the market – the share price has doubled since July – which makes it all the more puzzling that investors are marking the stock lower today. That oddity aside, RM looks a much better investment on paper now than it did yesterday.

Issue Date: 23 Oct 2013