Microgen's conundrum

(By Anthony Miller – Tuesday 24th Feb. ’09 9:15am). The basic conundrum facing Microgen management is that their fastest growing business line is less than 25% of company revenues and is losing money. Revenues for Microgen Aptitude Solutions Division – which sells their suite of business process management (BPM) products – grew 39% to £7.6m but losses ticked up from £2.3m to £2.4m. There again, on the ‘glass half full’ principle, this is a margin improvement from ‑42% to ‑31%. BPM is one of the fast-growing ‘middleware’ product areas. It’s finding greater favour now as companies try to make their business processes more efficient. The BPM market is highly competitive, though, with the likes of IDS Scheer’s ARIS establishing a strong market position due to its OEM relationships with major ERP players like SAP, Oracle and Microsoft.

At the other end of the spectrum, so to speak, Microgen’s largest division (58% of group revenues), Financial Systems (FSD), is by far the most profitable (margins hiked from 41% to 47%). But revenues are on the decline, falling 11% to £19m, mainly due to a drop in generic IT consultancy. FSD has nearly 70% recurring revenues, which is a pretty strong backbone for Microgen, albeit in a troubled vertical sector.

The smallest ‘leg’ of Microgen’s business is Billing Services, the ‘legacy’ printing services business. Revenues were flat at £6.4m (19% group revenues) and margins trimmed 90bps to just under 30%. Microgen has moved more of this business to electronic document distribution (now 60%) but pricing is page-based so revenues directly suffer the vagaries of customer printing demand.

For the record, FY08 revenues were just under flat at £33m but ‘adjusted’ margins rose 40bps to 18.3% (see here). All in all, these are actually pretty good results, and management's firm grip on the reins is reflected in the strong cash flow (OCF up 45%). While it’s hard to see why Microgen remains public, at least management has kept investor interest through a dividend and share buy-back programme. As such, Microgen’s stock, down around 20% over the past 12 months, has not suffered as much as some mini-conglomerate-style software and IT services businesses such as Anite (-45%). Management should decide which of its businesses it really wants to be in (hint, hint: BPM) and go for it - but not in the public eye.