Trading Statement & AFA Systems
microgen
Information Management Solutions
www.microgen.co.uk
12 October 2004
Update on Trading and Integration of AFA Systems plc
HIGHLIGHTS
* Full year results for the continuing business (pre AFA) anticipated to be
ahead of current market expectations
* Integration of AFA progressing rapidly
* Net free cash (after planned AFA restructuring costs) of £11.7 million
UPDATE ON TRADING
The Interim Results for the period ended 30 June were issued on 15 July 2004,
when the Group reported 62% growth in earnings per share compared with the
prior year and an operating margin of 11.9%. In the third quarter of the
financial year, operating margins have remained strong and it is now
anticipated that the full year results for the continuing businesses (before
the effect of the AFA acquisition) will be ahead of current market
expectations.
Net free cash at 30 September 2004 was £11.7 million up from £9.1 million at 30
June. Operating cash flow has been augmented by the proceeds from the sale of
our stake in Diagonal plc and the recent share placing, offset by cash outflows
related to the acquisition of AFA Systems plc (including anticipated cash
restructuring costs).
The IT solutions and services market continues to be unpredictable with buyers
remaining cautious. As such the Board continues to adopt a disciplined
management approach, with tight cost control while increasing investment in new
product development. We launched a completely new range of products addressing
the BACS-IP payment upgrade cycle that have been well received by our
customers. In November we are launching a next generation Rules-based product,
with performance comparable to stand-alone integration (EAI/ETL) tools and
incorporating Business Process Management (BPM) capability.
While Microgen continues to seek acquisition opportunities that may further the
strategic development of the Group, the Board is committed to the organic
development of the business. Microgen's performance in 2004 is evidence of the
success in integrating acquisitions and investing in new product development
for the future, while maintaining the Group's consistent profitability.
Through the Group's acquisitions, Microgen has now accumulated tax trading
losses being carried forward in the order of £17 million. The Board anticipates
being able to progressively utilise the majority of these credits, which will
result in a lower effective tax rate for the foreseeable future, thereby
enhancing earnings per share and cash flow.
INTEGRATION OF AFA SYSTEMS PLC
Following the announcement on 13 September 2004 that the Offer for AFA Systems
plc ('AFA') had been declared wholly unconditional, the Board provides an
update on the integration of AFA into the Microgen Group.
For reference, in the six months to 30 June 2004, AFA reported an operating
loss before goodwill amortisation and exceptional items of £1.2 million on
revenue on £4.1 million. Therefore, the initial focus of the integration
process has been to realign the cost base of the AFA businesses with the
ongoing revenue, taking into account :
* The completion of the SAMS application management contract scheduled for
November, which accounted for £0.5 million revenue for AFA in the first
half of 2004,
* Support contract terminations prior to the acquisition of AFA by Microgen,
for which AFA recognised £0.3 million revenue in the first half, and
* The termination of certain loss-making AFA contracts by Microgen since
completion.
Microgen's acquisition model is based on a rapid integration process, which the
Board considers to be the most appropriate to deliver the strategic and
operational benefits of the acquisition whilst minimising the risks associated
with any merger/acquisition activity. Microgen has again adopted this model in
integrating AFA and has to date completed and/or initiated the following
actions :
* The AFA UK-based staff headcount has been reduced, or consultation has
commenced to reduce this headcount, by approximately 40%. These actions are
anticipated to reduce the direct base salary costs by approximately £1.7
million and total UK staff costs by approximately £2.4 million.
* The restructuring of the South African operations has commenced with a 60
day notice period given under South African employment legislation. This
restructuring will separate the South African business (sales, delivery and
support) functions from the Group's development operations, which will be
integrated with the Microgen Group's development organisation. It is
anticipated that the headcount in South Africa will be reduced by
approximately 35%, producing a saving of approximately Rand 6 million (c.£
0.5 million).
* Indirect cost savings associated with the reduction in headcount are
anticipated to produce a further £0.9 million saving. Additional cost
savings in the order of £0.2 million have also been identified.
* AFA's two London properties have been vacated, with retained staff
transferring to Microgen's existing office facilities in London. The annual
aggregate rent, rates and service charges for the AFA properties is £
340,000 and the leases expire or have break clauses on 1 January 2006.
AFA's headcount at the end of June 2004 was 165 with 97 in South Africa, 66 in
the UK and 2 in Hong Kong. Following completion of the restructuring program
outlined above it is anticipated that the incremental headcount to the Microgen
Group will be between 90 and 100. It is estimated that this restructuring
programme will give rise to exceptional operating charges, in line with the
indications given at the time of the acquisition, of approximately £2.0
million. The benefits from these actions are unlikely to materially impact the
performance of the AFA businesses in 2004, but should position these businesses
for the future.
Upon completion of the integration of AFA, Microgen will have significantly
increased the Group's presence in the Financial Services sector. The AFA and
Microgen businesses are being consolidated to realise the benefits of scale,
such that the Group's presence in this sector will be organised into three
business areas :
* A Banking business unit combining Microgen OST, with its Business Rules,
Reconciliations and Financial Data Repository products, and the AFA
Musketeer business. Since the majority of the Musketeer customers are based
in the UK, the support operations will be consolidated in London.
* A Derivatives business unit which combines the Microgen Cortex and AFA DART
businesses.
* Asset Management which comprises a European and a South African business
unit. Microgen's existing consultancy services to the Asset Management
sector in the UK have been integrated into the European Asset Management
business. The transition of the Socrates development to South Africa,
previously announced, has been reviewed and it has been determined that the
ongoing development of this product will now remain in the UK.
This structure should position Microgen to benefit from a recovery in the
Financial Services sector while having a sustainable cost base in the event
that such recovery is protracted. Investment in developing new products to
address each of these business areas is anticipated.
End
Contact:
Microgen plc www.microgen.co.uk
Mike Phillips, Group Finance Director 01753-847122
Financial Dynamics
Giles Sanderson 020-7831-3113
Ben Way
Latest directors dealings
- 7 minutes ago Frasers Group
- 7 minutes ago Cavendish Financial
- 7 minutes ago Diaceutics
- 7 minutes ago AB Dynamics
- 13 hours ago Johnson Matthey