Micro Focus - full tank, but we need a map!

(By Philip Carnelley, 30 Sep 09, 17:00) A large crowd attended a Micro Focus analyst teach-in earlier this week, keen to catch up after the recent major acquisitions and the loss of CEO Steve Kelly. Confident performances by Chairman Kevin Loosemore, by CTO and Micro Focus 25-year veteran Stuart McGill, and especially CFO Nick Wray – who in many ways sounded as much CEO as CFO – gave the impression they’re hardly missing Kelly. Operationally, perhaps, but we suspect they will feel the loss more acutely on business development.

The focus of the briefing was the impact of the Borland and Compuware deals, which brought the tally to five acquisitions in the past 12 months. Micro Focus claims with its enlarged range to have expanded its addressable market tenfold: from a $600m market opportunity three years ago to upwards of $6bn now – particularly in testing, inside and outside the Cobol arena. Maybe so, but it wasn’t awfully clear how they plan to address it.

Micro Focus’s big challenge now is that, other than in PC Cobol, it’s a smallish player in different sub-segments of a big market, competing with the likes of HP and IBM. And it’s surely fair to ask: if the Borland and Compuware products were also-rans before Micro Focus bought them, why should they be world-beaters now? Micro Focus argues – with some justification – that Borland management just lost the plot, while Compuware had other fish to fry than testing. Fine, but we need proof that new management can do better. First off, we really want to see a product roadmap as to how it will all fit together, and a compelling marketing strategy. We were told the roadmap is still a few weeks away from public consumption.

Management also pointed to a major developing opportunity in IBM mainframe application migration. That said, pundits have been heralding the demise of the mainframe since client/server first emerged 20 years ago and there’s an awful lot of mainframes still out there. Still, Cobol migration is the backbone of Micro Focus’ business, and at current course and speed should serve them well for the next 20 years…

With testing tools to complement the migration product set, Micro Focus should, in theory at least, be able to gain a bigger share of the CIO’s ‘application modernisation’ budget. Longer term, Micro Focus looks to migrating applications to the Cloud as a significant (and trendy) opportunity. We think that’s reasonable, but still some years off even by its own admission. We trust that management will map out a clear course for the immediate future before worrying about the longer term.

NHS IT localisation: A world of opportunity?

Six years after the English NHS IT market was effectively closed to new entrants by the £12 billion National Programme for IT in the NHS, there are once again opportunities for a new tranche of suppliers to get a piece of the action. As NHS IT becomes more localised – a process that would be accelerated by a Conservative government – software and IT services (SITS) suppliers with an interest in the UK healthcare market should be taking a fresh look at the sector.

In TechMarketView’s latest AnalystViews note, NHS IT ‘localisation’: A world of opportunity?, Tola Sargeant examines the trend towards localisation in NHS IT and the opportunities it creates for SITS suppliers. Chief among them is the upcoming Southern Choice Project, which will choose replacements for former LSP Fujitsu and its main application provider Cerner in the south of England. This procurement alone could be worth as much as £1 billion to suppliers. ‘NHS IT ‘localisation’: A world of opportunity?’ analyses this and other areas of opportunity, identifying suppliers that are likely to benefit, and considers the implications of a change in government and cuts in government spending.

Of course, NHS IT ‘localisation’: A world of opportunity? is only available to TechMarketView subscription service clients, so don’t end up as the English Patient – contact Puni Rajah (prajah@techmarketview.com) to find out how you can keep market-fit!

Misys simmers under ‘white hot’ US healthcare sector

(By Philip Carnelley – Wednesday 30th September 2009 9:30am). Misys issued a Q1 IMS this morning in conjunction with the results from its Allscripts-Misys operation. While it might be unfair to use the phrase ‘jam tomorrow’ there was a more than a hint of that phrase in the air. As reported, revenues jumped 48%, to £169m, due to the Allscripts acquisition, and adjusted profits more than doubled. On a like-for-like basis, revenues fell 2% but adjusted profits rose 15%. The best news was that order intake, like-for-like, had risen 20%.

On the earnings call, CEO Mike Lawrie described the healthcare sector as “white hot”. Despite that, like-for-like, healthcare revenues (59% of group total) were flat, with licence fees down 3%. But orders have jumped 30%, and Lawrie was very excited by several large deals signed as well as a strong pipeline.

Treasury and Capital Markets (TCM) he firmly announced has “bottomed” and following a weakish Q4, had signed several new deals, such as US mortgage behemoth Freddie Mac, some of which had been held over from the previous quarter. Revenues were up 1%. The Banking division looked a little weaker with revenues down 8% (ILF down 27%). But Lawrie was upbeat here too, explaining that pipelines were building particularly in “new solution areas” – he particularly cited Trading Solutions where the pipeline had quadrupled.

Lawrie was quick to admit that pipelines need to be turned into sales, but it’s certainly a start. Even at this early stage, he is “pretty comfortable” about Misys meeting full year targets.

Harvey Nash keeps its head above water

(By Anthony Miller – Wednesday 30th September 2009 8:30am). There were frankly few surprises in recruitment, and now burgeoning offshore IT services player, Harvey Nash’s H1 results, given the signals sent in last month’s trading update (see Offshore outsourcing helps Harvey Nash). A pretty much flat revenue line (£200m) would have looked 15% lower had it not been for positive FX movements, given over 70% of revenues derives from outside of the UK. Operating margins more than halved, from 2.2% to 1.0%, but the business remained profitable, which must be considered a result.

I have just spoken to Harvey Nash CEO, Albert Ellis, and he confirmed that their Vietnam-based offshoring operations now contribute 21% of GP. The landmark Alcatel-Lucent contract, now approaching its first anniversary, is on track, and Harvey Nash has signed some new clients to use the offshore service – all of them existing recruitment services clients. However, Ellis noted that although outsourcing is still ‘reasonably robust’, clients are even delaying decisions on cost-reduction proposals on the basis that ‘may be we’ll get a better deal next month’ – a classic response in a recessive market. On the core recruitment business, Ellis sees no signs of any upturn, but commented that US bulge-bracket banks are headhunting again.

There’s nothing here that makes me change our view that we’ll have to wait until the second half of next year before we see any meaningful upturn in the IT sector. Meanwhile, recruitment firms like Harvey Nash will need to keep the hatches well battened down, a sentiment we are likely to hear repeated when Michael Page and Hays update the market next week. Indeed, the Hays update will be even more interesting given today’s news of a £30m fine by the Office of Fair Trading for breaches of the Competition Act in the construction industry. I am scheduled to meet Hays CEO, Alistair Cox, next week and hope to bring you more (assuming the meeting goes ahead!).

Apple free publicity

(By Richard Holway 10.00pm Tuesday 29th Sept 09) I cannot think of any company in living memory that gets the ‘free’ publicity that Apple does right now. All the media, including the BBC, have carried as headline news both Vodafone and Orange being awarded contracts to carry the iPhone on their networks – much to the chagrin of the current exclusive UK carrier O2. The iPhone has attracted over 1m to O2’s UK network since its launch. Now a price war is expected. Vodafone (which we use) won’t carry the iPhone until the new year. So expect some ‘spoiler’ price plans to persuade people to delay that Xmas present until the new year.

I’ve just finished watching an intriguing programme on BBC4 about ‘Gadget upgrades’. In one scene a classroom of 10 year olds demonstrated their mobile phones. (49 out of the 50 had a mobile – the odd one out was NOT featured). Then the interviewer asked them what phone they REALLY wanted and the class erupted with just one answer…I’m sure you can guess what!

Finally, The Telegraph stokes the growing excitement with its headline Apple tablet rumoured for 19th Jan 10 launch – quoting as its ‘reliable source’ the Apple rumour site iLounge. Apparently the Tablet will have a 10.7inch screen, come in 3G and WiFi only versions (as in iPhone and iPod Touch) and be available for purchase in May/June 2010. The article goes on to make the same points as we have made on Hotviews countless times. In particular that Amazon and Sony must be fearful that the tablet will sour the prospects of the Kindle and Sony eReader (see my 24th Aug 09 post) and that Microsoft might ‘spoil the Apple party’ with the Courier (see my 24th Sept 09 post).

BSF supplier Redstone in the red

(By Tola Sargeant, 29th September 2009, 19:00) We haven’t traditionally tracked converged IP and network managed services supplier Redstone plc but its annual results caught our eye this week because it supplies ICT services to the UK’s £45bn Building Schools for the Future (BSF) programme.

In August, Redstone was awarded the ICT element of Birmingham’s BSF contract as part of a consortium led by Catalyst Lend Lease & Bovis Lend Lease. The 15-year deal, which involves the redevelopment of 89 schools, is the largest in the group’s history and is expected to be worth £150m to Redstone over the next 10-15 years.

The BSF deal was a rare bright spot for Redstone, which has had a pretty torrid year financially culminating in the refinancing of its debts and the sale of its Telecom and Mobile divisions. In the twelve months to 31 March 2009, Redstone’s revenues were fairly steady at £197.8m (FY08: £200.7m) but the company made an operating loss of £49.7m (including a £43.8m goodwill impairment) compared to a £3.2m operating profit in FY08. Also worryingly, the firm’s liquidity worsened – its current ratio (the ratio of current assets to current liabilities) was just 0.7 in FY09, down from 1.07 the previous year.

Having sold the Telecoms and Mobile divisions, Redstone’s business is now focused around ICT. A key part of the company’s strategy is to increase its presence in BSF and other areas of the public sector, including local government and the Academies programme. These are competitive, risk averse markets and taking market share will be an uphill challenge for a supplier with shaky financial footings.

Redstone has three remaining divisions: Converged Solutions (providing IP solutions); Managed Solutions (network management and internet services) and Ireland-based Radstone Technology, which has expertise in enterprise storage. If Redstone is to see its way beyond 2011, when its banking facilities come due, all three divisions will have to pull their weight. This is particularly true of Converged Solutions, Radstone’s largest division and the home of the BSF deal: it made an £18.3m loss last year on revenues of £92m (FY08: £93m).

Vero Software – battling on, but will it be bought?

(By Philip Carnelley, 29 Sep 2009, 09:00) AIM-listed Vero Software, specialist producer of CAD software for mould and die manufacturers, has reported flat revenues in its interims to 30 June, of £6.6m. We know from our research that selling to manufacturing is tough right now: Vero called it “the worst downturn in the manufacturing sector for decades.” One of its key sectors is automotive, which as we all know has had a particularly bad time. So Vero’s done pretty well to maintain revenues. Operating profit fell, in part due to restructuring/cost cutting and the development and launch of a new version of the product (the company capitalises software production). It's also paying more interest on bank financing as it breached a covenant last year and had to renegotiate. New facilities are 'being pursued'. Good news is that EBITDA rose 19% to £0.6m and £1.3m cash was generated in the half year.

Vero’s resilience in the face of downturn is due to several factors: judicious cost-cutting before it’s too late; recurring revenue base (now over 50%); a spread of target sectors and geographies; and a sales proposition that works even in a sector as hard hit as automotive: helping cost savings efficiency. The company observes that its clients “continue to design, plan and produce new models to sharpen their competitive edge” – and indeed Vero is doing the same. What the future holds is dependent on two things. The first is macroeconomic recovery. The second is external forces: the company reports it had a provisional approach a couple of weeks back from ‘a financial institution’ which may lead to an offer for the company. It certainly looks to have potential 'as market conditions improve' - we await a more definite outcome.

Sorry...

(By Richard Holway 8.00am Tuesday 29th Sept 09) We've been having some problems with our email delivery system in the last 24 hours which has meant that some of you have received emails of our stories as we have posted them - rather than once per day. This was all caused by the firm we use - Feedblitz - doing a maintenance upgrade over the weekend. A familiar story for IT folk!

The BIG story yesterday was Xerox 'copying' Dell by taking over ACS. Just in case you missed it, you can, of course, follow the link and read it on the http://www.techmarketview.com/ website. It is interesting to muse 'Who Next?". CSC, Unisys, Logica, Capgemini, Atos Origin, Steria... Certainly no shortage of candidates.

All this proves that if you keep predicting things for long enough they do come true. Big Eat Big (indeed using the graphic above!) was one of the themes of our 'State of the ICT Nation' presentation back in the 1990s. First it came true in Software. Now it seems to be coming about in IT & BP Services too. We used it again in our forecast in Jan 2007 and Jan 2008. When HP bought EDS in 2008, it all started to come about. Then we got Dell and Perot and now Xerox and ACS. All the more reason for HotViews.

Xerox ‘copies’ Dell – buys ACS

(By Anthony Miller – Monday 28th September 2009 6:00pm). Well, one in, all in, I say. Now it’s copier-flogger, Xerox, that wants to muscle into the ‘grown up’ services world by acquiring diversified BPO and IT services player, Affiliated Computer Services (ACS).

Let’s look at the deal from the financial side first. Xerox will be paying $6.4b for ACS of which 30% will be in cash. At $63.11 per share, this is a 34% premium to ACS’ $47.25 closing price last week. Based on ACS’ FY09 numbers (to 30th June) Xerox is paying a PSR of 1x sales, though if you add in the $2b of debt that Xerox is also going to assume, then that’s an EV/sales more like 1.3x. The price represents 9x FY09 EBIT (12x EV/EBIT) and 18x FY09 P/E. Although these are not ‘fire sale’ prices – and nor should they be – they seem much fairer prima facie than the outrageous price Dell is paying for Perot (see Dell, Perot try the Texas Tango).

Unlike Perot, ACS looks like a classic ‘boring’ BPO/IT services play, with steady margins (around 10-11% vs 7-8% at Xerox), long-term contracts, diversified portfolio of services etc etc – I guess in some ways like an 'American Capita'. That’s why the price doesn’t raise my eyebrows. Indeed, Capita is currently valued at 1.8x FY08 revenues and 15x EBIT but runs at a 12% margin, again making the ACS price not look daft.

But yet again it’s the strategic value of the deal that I struggle with. Xerox has already confirmed that it will not combine its existing managed print services into the ACS business, so the growth case appears to be predicated on the famous ‘revenue synergies’. So tell me this. If you buy your copiers from Xerox, would you be more inclined to buy BPO/IT services from ACS? And if you are already an ACS client and you are in the market for copiers, wouldn’t you already be looking at Xerox? And if you chose a competitor instead, would its ownership of ACS have changed your mind?

I am even more worried that the headlong rush of product companies acquisitively moving into services is going to end in a multiple pile-up. Even if the financial argument is compelling – and it isn’t (the cost savings in this deal are more to do with delisting ACS and unspecified procurement and back office savings – nothing to do with service delivery) – the market proposition just has to make sense. And to me it doesn’t.

By the way, ACS is tiny in the UK, much like Perot. Their last UK accounts (to 31 June '08) showed some £16m in revenues, probably including some of the Syan acquisition (see Goodbye Syan. What does this mean for ITO to SMEs?), which still would leave them under £50m p.a., I would think. So no landscape-changing stuff here, then.

And finally (for now) ... who's gonna be next? We're fast running out of independent IT services players to be acquired. Dare we suggest CSC? But who would buy them? Let's see now, on current track record, it needs to be a completely inapppropriate hardware vendor. Hmmm. I know! How about Cisco?

Clarity raises finance on positive trading

(By Anthony Miller – Monday 28th September 2009 9:30am). As one of the earn-out milestones fast approaches for its MATRA acquisition (see May be earn-outs aren’t quite so great just now), EPOS and retail management software, Clarity Commerce, is placing 6.8m new shares to raise £2.8m gross. The new shares were offered at a 5% dicsount. About 60% was funded from AIM VCTs, which is a pretty good result given the scarcity of venture funding, as readers of our IndustryViews Private Equity reports will well know. However, money is there for ‘worthy causes’, particularly established plays that are near or have hit positive cash flow and profits, as was the case with Clarity in its most recent FY (to 31st March ’09). The placing was coupled with a positive trading update which otherwise lacked, dare we say, much ‘clarity’, so we will have to wait till November for the mists to clear.

Phoenix steadies

(By Anthony Miller – Monday 28th September 2009 8:30am). After a somewhat downbeat Q1 (see Phoenix flutters), infrastructure support services group, Phoenix reported a better Q2 in today’s trading update. There was little other detail, so it was not clear whether the improved Q2 trading was enough to bring H1 back on an even keel; that we will find out towards the end of November.

ACS tries an Indian take-away

(By Anthony Miller – Monday 28th September 2009 8:00am). Vin Murria continues to dig into Advanced Computer Software’s cash pile (see ACS raises £44m for acquisition spree), this time adding dash of spice by acquiring ACS’ Bangalore-based development partner, Oak Labs.

From what I can see, Oak Labs is a small ‘Build-Operate-Transfer’ outfit specialising in supporting mid-sized European software and IT services players on their first offshore excursion. They have 22 FTEs and were generating a 5-6% EBITDA margin on around £500K revenues, which puts revenue per FTE broadly in line with what I would expect for a small India-based pure-play, but with somewhat undernourished margins. No mention of deal value, other than a combination of cash and shares, the latter valued around £260k.

Murria intends for Oak Labs to continue serving its other – quite diverse – client base, and indeed wants to broaden it. I can only assume ACS alone does not have enough work to keep Oak Labs profitable, in which case, fine for now. But surely there will come a point where resourcing conflicts will arise between Oak Labs’ third-party work and ACS work. In any event, running an Indian ‘BOT’ shop under the covers of a healthcare software play may confuse investors, who tend to prefer simple business models. I’m sure Murria realises this and that it all fits into the ‘grand plan’. This point aside, most of you already know my views on the necessity for software companies, as well as services firms, to take full advantage of low-cost R&D and delivery, so nothing much more to be said other than ‘right on’.

Twitter worth $1b? Or has the world gone mad again?

(By Richard Holway 6.00pm Sunday 27th Sept 09) Several readers sent me the 37Signals Valuation tops $100b after bold VC investment spoof. It’s all about how a minute $1 investment theoretically implies huge valuations. It has a lovely paragraph –

In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”

Of course, all this is not so far-fetched. Last week Twitter raised $100m (from Insight Venture Partners, T. Rowe Price, Institutional Venture Partners, Spark Capital, Benchmark Capital, and Morgan Stanley) which implies a valuation of $1b. Twitter doesn’t sell ads. Indeed, as far as I know it doesn’t have any monetization business model. Maybe they will use the funding to work out how it might make some money at some point before the $155m they have raised so far runs out? All this is a bit like the $15b valuation which Microsoft’s 1.6% $240m stake in Facebook in Oct 07 implied. See my post 24th Oct 07 post – Microsoft stake values Facebook at irrelevant $15b. It’s now pretty much common knowledge that Facebook tried to buy Twitter last year. Now Facebook is developing its own competing micro blogging features. Leading me to wonder if Twitter’s popularity has peaked?

It’s all so reminiscent of the crazy dot.com days of 1999 when eyeballs were the currency and revenues and profits just got in the way. The current boom is already littered with huge writedowns – like ITV and Friends Reunited, eBay and Skype, YouTube and Google and News Corp and Myspace.

Nobody has so far come up with a viable monetization model. Ads on their own won’t be enough. Subscriptions will probably fail in the 'World of the Free'. Can a backend sales model be built? Well, no one has even tried that yet for social networking sites.

Which leads me on to my long held view that these sites are really only of value as a marketing come on; attracting visitors to something else from which you can make money. (That’s the only justification for the YouTube/Google coupling). But, what I am certain about is that, longer term, none are worth these kind of crazy valuations.

'Even the Bad Times are Good' slidedeck

We have had many requests for the slidedeck Richard Holway used at his "Even the Bad Times are Good" speech at the Prince's Trust Technology Leadership Group ICT Leaders Dinner last Monday at the BT Tower.

We've now put a pdf of this on the Research portion of the site - Click Here - to add to the Summary we published last week. Just to make clear, this is only accessible to our 'paying' clients. But this clientbase grows by the day. Indeed, WELCOME to all our recent new subscribers who now represent a majority of the leading suppliers to the UK SITS market. Thanks!

Civica acquires In4tek

(By Tola Sargeant, Friday 25th September ’09, 09:55) Software and services firm Civica has made a move into the UK health and social care market with the acquisition of in4tek, a provider of integrated health and social care software. Financial details were not disclosed.

The deal takes Civica into health and social care, which on the face of it seems a sensible addition to its existing portfolio of products and services which are mainly in local government (the home of social care), social housing, enforcement and education. Civica also has some track record in healthcare where it has been a reseller for many years. Moreover, government policy clearly sees closer integration of health and social care, which will create opportunities for forward-thinking suppliers (see also System C’s acquisition of Liquidlogic)

But is in4tek the best possible vehicle for this move? True, it is the only UK-based company with a truly integrated offering for health and social care. But in4tek hasn’t got a large share of the market and it hasn’t won many new deals in recent years. In its last reported fiscal year (to 31 March ’08) the company had a turnover of £3.8m and made an operating loss of £398k. Civica might have been better off acquiring a traditional social care application provider with a larger market share. Of course, price and availability will also have been important factors for Civica – and I’m sure in4tek CEO Tom Nawojczyk was pretty keen to sell and spend more time in the Caribbean.

System C has another healthy year

(By Tola Sargeant, Friday 25th Sept. ’09, 09:30am) 2009 has been another good year for AIM-listed healthcare IT firm System C Healthcare. Its annual results reveal a 21% increase in revenues to £21.9m and a 24% improvement in PBT to £4.1m. This impressive performance was driven by organic growth in both the products division (+13% to £6.5m revenues) and services (+25% to £15.4m). Cash generation has also been strong resulting in a net cash position as at 31 May 2009 of £14.7m (2008: £12.4m).

System C’s management team has done a great job of reading the UK healthcare IT market and diversifying to meet the needs of the NHS. Indeed, CEO Ian Denley used the opportunity presented by the NHS’ National Programme for IT back in 2003 to add a services stream to the portfolio. Today services make up the bulk of revenues but it’s not all from System C’s work with the LSPs or directly with NHS CFH, the agency in charge of NPfIT. The company reports substantially increased demand for deployment and post go-live services provided directly to NHS trusts in 2008/9.

Over the last few years, System C has also quietly continued investment in its own electronic patient record software (EPR) recognising that the iSoft/Cerner duopoly created by NPfIT might not last forever. The next generation of its Medway Sigma product range, launched in 2008/9, is already proving popular with NHS Trusts, and now stands a good chance of benefiting from the upcoming NPfIT EPR procurements in the South of England.

System C continues to augment its product range through careful acquisitions. Recent additions fit extremely well with NHS priorities and bode well for future growth. These include software for out-of-hospital care, infection control software, healthcare business intelligence, information governance systems and RFID tracking systems. The Group’s latest addition, the £14.2m acquisition of social care software provider Liquidlogic, makes System C the largest provider of both health and social care systems in the UK and puts it in a great position to benefit from the move towards closer integration of health and social care.

While 2010 will undoubtedly be a more challenging market economically, System C’s range of products and services, many of which improve efficiency in hospitals, should stand it in good stead. And, with cash in the bank, it is unlikely Liquidlogic will be the group’s last acquisition. Ian Denley is still on the lookout for companies that provide new clients in related markets or strategic technologies for use within its product range.

Kagermann boosts Wipro’s SAP street cred

(By Anthony Miller – Friday 25th September 2009 8:30am). Wipro has appointed SAP ex-CEO, Dr Henning Kagermann, to its board. This is actually a bit of a scoop for Wipro and should significantly boost its SAP ‘street cred’ as well as give the India-based player even closer ties to the ERP software giant.

I have enjoyed many lively conversations over recent years with Wipro’s SVP and Head of Enterprise Application Services (EAS), Sangita Singh, especially about Wipro’s relatively low revenue contribution from EAS compared to peers. Last quarter, Wipro generated 13% of its IT services revenues from EAS compared to 18% at TCS, 24% at Infosys and – thanks to Axon – 24% at HCL. However, my scepticism was somewhat turned around in August 2007 when Wipro became only the second India-based SI to gain SAP’s elite Global Service Partner status (TCS was the first, in May 2006), even ahead of the erstwhile Satyam (now Mahindra Satyam) which had boasted some 45% of its business from EAS. Size, as they say, is not everything!

Despite the economic downturn, the EAS segment is still generating business for SIs, especially in SAP. Even though there’s not much new SAP work out there (but there is some), many companies are trying to cut costs by rationalising their (usually) multiple SAP platforms and standardising on common product releases. But Wipro still has a long way to catch up with TCS and Infosys in terms of worldwide EAS revenues. Over the past 12 months, both Infosys and TCS reached over $1b in EAS revenues, with Infosys’ $1.2b just pipping TCS’ $1.1b. Wipro’s 12 month take was $525m, still ahead of HCL’s $400m. But knowing the fiercely competitive Ms Singh as I do, I am sure Wipro will eke every drop of kudos from Kagermann’s appointment to further their EAS cause!

By the way, for those curious to see who else is among SAP’s services ‘elite’, just look here. You may (or may not) be surprised to learn that 7 of the 21 GSPs are what I would refer to as India-based SIs.

Microsoft expands Dynamics - the elephant grows

(By Philip Carnelley, 24 Sep 09, 18:30) Microsoft has moved to extend its Dynamics AX product by buying the rights to four different packages developed by its partners in the US and Europe – in process manufacturing, professional services and retail. (For details, see here). The products, which already run on the Dynamics platform, will now be offered by Microsoft itself. The new functionality allows more industry-specific solutions to be offered, for instance store management, point of sale and merchandising capability in the retail sector.

Microsoft has multiple offerings (four ERPs and a CRM). It appears to be taking the view that AX is the product that it must extend the most – dare we say, the most strategic – while allowing partners to take more of the strain with the other products aimed at smaller organisations. Microsoft’s partners are an essential part of its business model for Dynamics: see Microsoft aims for 1m partners. So it has to tread a fine line between allowing partners space to develop competitive and innovative extensions to the core products, while ensuring the core is competitive against specialists in one or more vertical sectors. It will perhaps have upset the plans one or more of its partners with this move – those who offer competing functionality to the packages Microsoft is now offering. But in the interests of the whole ecosystem, not just its own self-interest, it must keep improving and developing the offering.

Partnering with Microsoft can be a very sound business move, leveraging those huge software investments. But you always have to be prepared to see it extend its own domain. The trick for partners, for example K3 Business Technology, is to leverage Microsoft’s own products but to continue to provide value-add around that core. As the core expands, so the value-added part must change. Many years ago a Microsoft partner told me: “It’s like being in bed with an elephant. It’s OK until it decides to roll over!”

SciSys returns to profit (just)

(By Tola Sargeant, 09:30am Thursday 24th September ‘09) AIM-listed IT services group SciSys has made progress in its drive to return to profitable trading. Its interim results for the six months to 30th June '09 reveal a PBT of £0.1m (H1 08: £0.5m loss) and 5% growth in revenue to £20.3m. SciSys can also have some confidence in its 2010 performance having secured various new contract wins in the year to date worth in excess of £30m.

Almost all of SciSys’ growth can be attributed to its Government division where clients include the Environment Agency, Metropolitan Police and Ministry of Defence. Government saw an almost 30% jump in revenues during the period to £7.2m. Profitability in the division also improved dramatically as SciSys cut the number of external contractors used.

However, PBT at the group’s other three divisions – Space, Media & Broadcast, and Support – declined by 24-48%. Delays to procurement decisions held back Media & Broadcast, although it did sign a strategically important deal with the BBC worth £10-£15m between 2009 and 2013. The Space division, which was restructured in 2008, has seen margins come under pressure following delays in the completion of some projects within the UK.

All in all, there may be early signs that efforts to turn around the company are bearing fruit but there is still a long way to go. Management remain rightly ‘mindful of uncertain market conditions’ and ‘take a cautious view’ on the trading outlook. In the months ahead they need to keep the focus firmly on organic growth and, most importantly, improving margins. In the meantime, we wouldn’t be surprised to see SciSys, which rejected Microgen’s advances in April 2008 (see SciSys rejects Microgen approaches), attracting interest from other potential buyers.

SmartFocus confident for 2009

(By Philip Carnelley, 24 Sep 09 09:00) SmartFocus, the AIM-listed multi-channel marketing software company, has reported solid interims to 30 June with a very upbeat statement for the year, confirming its earlier trading statement (see SmartFocus' SaaS move paying off). Revenues were up 13% to £5.6m, and it made a small profit before tax of £0.2m, reversing a £0.6m loss a year ago. Recurring revenues have risen to 61% of the total as the company continues its switch to a SaaS model.

Many solutions providers to the retail industry are struggling. So it’s refreshing to hear an upbeat tone: the company reported “strong trading conditions” in the half. CEO Chris Underhill commented: “2009 revenue visibility has risen to nearly 87% … This, combined with strong second half trading and continued new business wins, supports the Company's confident 2009 outlook.” The continued switch to online sales means good online marketing solutions are something companies need, even if they’re cutting back elsewhere. New customers include Sony, Betfair and Virgin Games.

2010 - The Year of the Tablet

(By Richard Holway 9.30am Thursday 24th Sept 09) Both HotViews readers and those who attended my "State of the ICT Nation" presentation on Monday know that I have branded 2010 "The Year of the Tablet".

So I was interested in the following from StrategyEye today (I was an early stage investor in their parent company - MarketClusters):

"One in five consumers say they are interested in buying an Apple tablet even though no one has seen the rumoured device, according to a survey from RBC Capital Markets. The firm asked 3,100 people if they would be interested in buying an Apple tablet priced between $500 and $700. Of those surveyed, 21% said they are interested, more than twice the proportion who expressed an interest in the iPhone before its release in 2007."

But it doesn't look as if Apple will have it all its own way. StrategyEye also carries news of Microsoft tablet details leaked. According to the tech blog Gizmodo (who published the picture above) the device is rumoured to be called Courier, uses eInk technology and is being developed in secret away from Microsoft's Redmont HQ.

All limbering up to be an exciting few months on the new gadget front!

Sales up at Maxima

(By Anthony Miller – Thursday 24th September 2009 8:00am). A much rosier picture painted in today’s trading update from mid-market software and services company, Maxima. Chairman Kelvin Harrison reported the best monthly bookings in August since the beginning of the year and was emboldened to confirm FY market expectations. Given we are not even 4 months in to Maxima’s FY (May), that’s a pretty confident statement.

I recently met up with the New brace of management at Maxima, CEO Graham Kingsmill and CFO David Memory. We discussed the challenges in simplifying the service portfolio of the rather broadly spread group (see New Maxima team goes for ‘focus and simplicity’) and it was clear to me they see where they need to get to and have a pretty good idea how to get there. This will not be any easy task and we won’t get the first real sightings of progress until after H1 closes at the end of November, so let’s wait till then.

HP Enterprise Services and the changing face of the global IT services sector

(By Richard Holway 6.00pm Wednesday 23rd Sept 09) Further to the post and announcement below re: HP dropping the EDS name in favour of HP Enterprise Services, let's add a bit more flesh after our conversations with HP's senior execs this afternoon.

Many readers have asked where Nick Wilson, who took over last month from Steve Gill, fits in. Nick is HP's UK MD but he doesn't have any P&L responsibility for any of the units that operate here - HP Enterprise Services (the old EDS) is still headed by Craig Wilson (who took over from Sean Finnan a few months ago - See my 21st May 09 post Sean Finnan leaves EDS for IBM). Craig will report into Mike Nefkens when he takes over from Bill Thomas when he leaves at the end of the month - see our 13th Sept 09 post Bill Thomas to leave EDS. Mike reports into Joe Eazor in the US. HP Enterprise Services is in Joe's words "a $24b IT services powerhouse" whose clear objective is to take the #1 IT services slot from IBM. This same P&L line responsibility applies to the other HP units operating in the UK - HP Enterprise Business, HP Software, HP Tech Services and HP Servers, Storage and Networking. They (together with HP Enterprise Services) all come under the newly renamed HP Enterprise Business group (was HP Technology Solutions Group) and report ultimately into Ann Livermore. The group is now responsible for 47% of HP's revenue and 60% of its operating profits.

In a way, Nick's role is at the heart of the new HP organisation. His job is to ensure that HP maximises what it sells into its accounts. HP reckons that IBM gets 'twice the wallet share' in its big accounts as HP. HP wants a similar share. Put bluntly, it wants 'old' EDS accounts to buy more HP kit, software and other offerings and vice versa in 'old' HP accounts.

And that, as they say, is the rub. 'Old' EDS clients maybe rather liked trusting 'old' EDS salespersons to recommend 'best of breed'. On top of that the 'old' EDS had many partnership relationships with HP's competitors in storage, servers, software, PCs etc. They would be right to be concerned. The clear intent - indeed the whole raison d'etre of the EDS deal - is to sell more HP 'stuff' into every account. Readers no doubt know my concerns over this. I was at least heartened that HP understood and empathised with these concerns. That is better than pretending that the problem doesn't exist!

Maybe this is one of the really big changes going on right now in the IT sector. Maybe the day of the 'independent' supplier of this 'stuff' (hardware, software etc) to the enterprise are numbered. IBM has already gone that way. Fujitsu believes that the 'solution' rather than 'services' led sale is the most appropriate for the future. Oracle clearly believes that it must 'own' more of the solution that it sells to clients with its Sun acquisition. Dell has seen the writing on the wall and, for better or for worse, has bought Perot.

This leaves the remaining 'independents' in an interesting position. We have already seen CSC almost going the same way as EDS. Maybe someone will try again? Capgemini looks an even more attractive target with its strong European coverage. Then there is Atos, Logica, Steria etc - all possible targets for your now diversifying hardware/products company. I doubt if Accenture would go that route - but 'never say never'.

I suspect the 'old' IT services world of my last 40 years will never be the same again.

eg solutions wades through the chewing gum

(By Anthony Miller – Wednesday 23rd September 2009 3:00pm). I caught up again this morning (Wednesday) with Elizabeth Gooch, founding CEO of ‘Little British Battler’ operations management software player, eg solutions (see eg – setting an example). They’d just reported their interim results, which pretty much reflected the somewhat more upbeat market assessment in their trading update a month ago.

What piqued my curiosity was Gooch’s carefully nuanced observation that “our financial services client base is gradually returning to 'business as usual' in operational terms”. She explained to me that meant clients were now thinking about managing the end-to-end business again rather than just survival. However, getting customers to sign on the dotted line was still "like wading through chewing gum” with many customers still abdicating decision-making responsibility to endless committees. Contracts that should have been done and dusted last July are still 'awaiting signature next week'. As such, Gooch is expecting a tougher H2 despite clients taking their fingers off the panic button. In fact this ties in very much with the sentiment expressed in Richard’s earlier post (see Corrugated), and why we think we’re still the best part of a year off any meaningful software and IT services sector recovery.

But Gooch is valiantly pressing onwards and upwards. She is moving the business model to more of a ‘pure' software play, i.e. sell and train, while leaving the implementation to customers and partners. As such, SaaS (now just a small part of revenues) will play an increasingly important role. It’s pretty key for eg solutions to step up growth as its fortunes are too closely concentrated in the hands of a few marquee names. Indeed, over 40% of eg’s revenues derives from its top three clients.

The new and arguably biggest market opportunity for eg is public sector, to which they currently have no exposure. eg's ‘operational intelligence’ message should ring especially true with local authorities, but this will be a tough sell without a partner. Just as it happens, Capita Life & Pensions is already a client – sounds like an entree to us!

Goodbye EDS. Hello HP Enterprise Services

(By Richard Holway 2.30pm Wednesday 23rd Sept 09) HP has just announced that EDS, which it acquired a year back, is to be renamed HP Enterprise Services. See HP press release.

In addition Technology Solutions Group (TSG) will be renamed the HP Enterprise Business. "This group is focused on business and government organizations of all sizes. In addition to enterprise services, its portfolio includes servers, storage, software, networking and technology services".

Good comment on this in today's New York Times.

I've been in IT for 43 years and EDS has been around for all of that time (47 years to be precise). So this is quite a moment to be added to so many other great tech names which have been 'retired' in the name of progress. Mind you Electronic Data Systems does sound pretty dated nowadays. HP Enterprise Services, of course, sounds much more like the real rival IBM Global Services. If you remember BT had IBM in their sights when they named BT Global Services. Proving that leopards can change their name but not their spots.

Lately I've reported on many EDS retirements and leavings. I've lamented on the decades of contacts, networks and downright experience that has evaporated from EDS. I happen to think, just as we have reported in the last day on Dell's acquisition of Perot, that the way that Services and Products companies should be managed is different.

We will bring you more on this later today after we have spoken to management.

Corrugated

(By Richard Holway 9.30am Wednesday 23rd Sept 09) What with my own ‘State of the ICT Nation’ dinner on Monday and Harvey Nash’s Chairman’s Dinner last night, I’ve had mass exposure to the very top executives in the UK this week. I’ve been able to ask many of them, in confidence, what their own views are for the economy, their own business and its outlook. Their views are remarkably consistent:

1 - Confidence has increased – or maybe the word is ‘returned’.

2 - Clients are starting to talk about dusting off shelved projects and/or hires.

3 – The last month or so has been the best for some time.

4 - Quarter-on-quarter declines have ‘bottomed out’. But that’s a far cry from saying that real growth has returned.

5 – There is a wide spread fear that recovery is, in the words of the CBI ‘feeble’. Helen Alexander, the new President of the CBI, said as much when she addressed the Harvey Nash dinner last night.

6 – The 'W' shape seemed to be the most ‘popular’ choice. Although several described the shape of the economy in the years to come as ‘Corrugated’ – which I rather like!

7 – There was a unanimous view that tax increases/public sector cuts would come next year, would be deeper than most expected and would have a profound effect on consumer confidence and therefore business outlook. Ie causing the second dip in the 'W' or just the second of many dips if you subscribe to the ‘Corrugated’ theory .

8 – There was also widespread agreement to my own statements of recessions being game-changing. Ie that they accelerate technological and process changes. The ‘Double Whammy’ of recession plus change (Cloud, netbooks, smartphones, MIDs, ‘free’, online content v physical, offshore etc) was talked about by many as the major challenge facing their businesses.

As usual, I’d love to hear your views too. Just email me on rholway@techmarketview.com.

The Texas Tango (2)

(By Anthony Miller – Wednesday 23rd September 2009 9:30am). There’s been some very supportive analyst commentary about Dell’s proposed acquisition of Perot Systems (see Dell, Perot try the Texas Tango), but I still don’t get it. Some commentators believe that Dell’s global scope will somehow rub off on Perot’s rather limited geographical coverage (nearly 90% of Perot’s revenues derive from the US). But how does this help? If Perot doesn’t have the service delivery capability in those other geographies, what does it matter how many countries Dell operates in? Other analysts talk about the complementary nature of the two businesses. OK, then, so how does the sales pitch work? “Hello, Mr Customer, I’m from Dell. We make great laptops - how’s about we develop and maintain your mission-critical SAP systems?" Am I missing something here?

iSoft, Cerner, InterSystems make Wales NHS shortlist

(By Tola Sargeant, Wednesday 23rd Sept., 09:20am) Informing Healthcare, the organisation in charge of Wales’ healthcare IT programme, has announced the shortlist of suppliers for the new national Laboratory Information Management system contract. The three shortlisted suppliers for the £7.9m contract, which is due to be awarded in a couple of months, are: iSoft, Cerner and InterSystems. The national networked pathology system will replace the 13 different applications in use by Wales’ 18 pathology labs from 2010.

While the contract is not huge, it is interesting because of the marked contrast to the way national systems were rolled out by the National Programme for IT in the NHS (NPfIT) in England. Gwyn Thomas, Chief Executive of Informing Healthcare, has made change management a priority, recognising it as more important than arbitrary timescales. He has also gone out of its way to ensure buy-in from local clinicians – something NPfIT was late to acknowledge as important. The Welsh IT agency is demonstrating the three systems at road shows across the country giving relevant clinicians the chance to share their views. Local staff will also be involved in formulating deployment plans.

We also spotted a couple of other bits of healthcare news this week that are worthy of note. In a further, albeit small, extension to its healthcare business, Capita has won a £3.3m contract from NHS Hounslow to provide ICT managed services (see also Capita sinks its teeth into the NHS). We expect more trusts to opt for similar deals as spending cuts bite. And, in a rare piece of good news for NPfIT, CSC, the Local Service Provider for the North, East and Midlands, has deployed its 1000th GP system. Great news for UK minnow TPP, whose SystmOne software CSC is now using in primary care.

Services outshining software at Bond

(By Philip Carnelley, 23 Sep 09, 09:00). Recruitment and HR software and services player, Bond International, has announced its interims to 30 June. Unusually for a (primarily) software company, it is seeing more traction with services than software. It also has a small outsourcing operation which is also doing quite well - more to be expected. Despite the malaise in the recruitment industry, the company managed to increase sales in its biggest division, recruitment software/services, by 2%, to £9.5m. Overall, revenues were up 11% to £17m, which is pretty creditable, considering the markets it operates in, through a mixture of organic growth plus contributions from acquisitions. HR and payroll software revenues grew most strongly – up 45% to £2.9m – and outsourced Payroll/HR has also seen an increase in revenues, up 28% to £2.4m with an increasing number of sales into the state schools sector.

In the core recruitment division, growth was strong in the USA (up 49%) with an increase in services rather than software. UK revenues fell 15% – partly due to a switch to a software rental model – and AP fell 37%. However the company says it sees “encouraging signs of new business” in the UK, with several new contract wins due to feed through into results. Overall, confirmed forward orders are up 5% on 2008. However a rise in the service element of its operations, less profitable than software licensing, has impacted profitability and so operating margin has fallen from 18% to 14%. As we noted previously (see Bond not sticking its head in the sand) the company’s move to an increasing proportion of software rental – while a good thing strategically, increasing visibility and reliability of revenues – also tends to depress margins at least in the short term. Finally, last time we expressed our doubts about the Abacus software acquisition. While the strategic rationale for this is still unclear to us at least its low profitability has been addressed as margins have jumped from 14% to 30%.

Capita sinks its teeth into the NHS

(By Anthony Miller – Tuesday 22nd September 2009 9:30am). Capita is soon to pick up a £100m, 7-year deal with the NHS Business Services Authority (NHSBSA) to process NHS dental claims as well as manage the entire NHSBSA IT infrastructure. The contract is expected to be signed this year. The NHSBSA handles a range of services including claims processing and payment for pharmacists as well as dentists, along with other ‘front line' services.

The deal is interesting for a couple of reasons. Firstly, it’s further evidence of Capita’s intent to more deeply penetrate the UK healthcare services market, signalled most recently by the Feb. ’09 acquisition of healthcare intelligence and benchmarking firm CHKS (see Capita makes 'intelligent' healthcare acquisition) and of Membership Management Online (MMO), a web-based service which provides NHS foundation trusts with public and staff membership services. Capita’s first major deal with the NHS was back in Nov. ’08, when it won a £60m, 3-year contract to develop and run the NHS Choices portal. Prior, Capita’s NHS presence was pretty much limited to a few payroll and pensions BPO contracts with some NHS Trusts.

Which brings us on to the second point. At first blush, you might think NHSBSA is a similar type of ‘shared service’ operation to NHS Shared Business Services (NHS SBS), the joint venture between the NHS and the erstwhile Xansa, now Steria. NHS SBS provides F&A and HR BPO services for a number of NHS Trusts and other bodies. But there is a big difference. Whereas NHS bodies can choose whether or not to use NHS SBS (over 100 of several hundred do so), if you are a dentist or a pharmacy, you have to use NHSBSA if you want to get your money! This highlights one of Capita’s immutable rules about when and when not to bid: it eschews the high-risk, ‘jam tomorrow’ deals in favour of those guaranteed to make the return to support its 11-12% group margin. In contrast, NHS SBS has only just turned profitable after nearly 5 years (see Steria UK update).

Capita now derives about 2% of its £2.4b revenues from the health sector. This is sure to grow as more NHS Trusts look to find better ways of procuring services.

RM expects growth in FY09

(By Tola Sargeant, Tuesday 22nd Sept. 09:40am) Education solutions business RM said today that trading during 2009 “has so far been consistent with expectations for the year as a whole”. RM anticipates revenue growth in FY09 (to 30th Sept.) thanks to delivery on some Building Schools for the Future (BSF) contracts, the inclusion of its recently-acquired US subsidiary Computrac, and growth in its general resources business. It's therefore not clear how much of this growth will be organic.

However, there was no mention of profitability. Having reported virtually no operating profit in H1 (see RM – Worthy cause deserves a worthy profit), we will be hoping to see some improvement when the full year results are published in November. The business is, after all, traditionally skewed towards the second half. However, the 12 BSF contracts remain a drain on profitability and are not expected to turn a profit collectively until FY10 at the earliest.

RM is not the only supplier to have found the BSF bidding process expensive and up-front costs high. But for RM, which was keen to protect its leading position in the UK education SITS market, BSF was an opportunity it could not ignore. The question is whether that investment will pay off? With Children’s Secretary Ed Balls looking for £2bn in ‘efficiency savings’ in education, is BSF safe? My gut feeling is that future waves of BSF are likely to be a casualty of funding constraints, but existing contracts are somewhat safer (although by no means immune). So, even if the programme is cancelled, RM could continue to benefit from the long-term support contracts which currently make up around 18% of revenues.

Last night

(By Richard Holway 9.30am Tuesday 22nd Sept 09) Last night I gave my "State of the ICT Nation" speech for the Prince's Trust Technology Leadership Group at BT Tower. Because of the BT sponsorship, and the ticket price of £1250, the event raised a record £65,000.

I posted a full summary of Even the Bad Times are Good on Hotviews yesterday. A copy of the deck is available for our clients if you email prajah@techmarketview.com - Puni will also be delighted to tell you how you too can join our growing band of clients with full access to all TechMarketView research.

It was also good to see so many avid HotViews readers (and quite a few of our paying subscribers too). We must have the highest penetration of any such service at the highest CEO level in our sector. Busy CEOs are very selective in their reading matter - so even better when they choose us. Something of which I and the TechMarketView LLP team are justly proud. But the downside is that the audience tends to be well aware of your views even before you open your mouth! Always makes me a bit nervous when I 'criticise' BT, Microsoft etal in front of their CEOs! But, in a way, that's what makes these evenings so 'special'. The conversational buzz around the dinner tables was electric! I could write another dozen Hotviews posts on the comments made - except nobody would ever talk to me again if I did! But I'm sure they will work their way into future posts in some anonymous manner.

Finally a BIG THANKYOU to Jamie Webb from the Prince's Trust and all his team, as well as Adam Hale (Chairman of the Technology Leadership Group) and the committee for all their hard work in making the evening so special.

Dell, Perot try the Texas Tango

(By Anthony Miller – Monday 21st September 2009 12:45pm). Too late for our email run this morning (Monday), we’ve just heard that Dell is to buy Perot Systems for $3.9b cash, a near-70% premium to Perot's closing price on Friday. This is landscape-changing stuff – for both parties. The news release claims that “Dell and Perot Systems share several key characteristics and our products, services and structures are overwhelmingly complementary”, which is not the way I would describe the situation, especially regarding products and services!

OK, so Dell wants to ‘do an HP’ and get into ‘grown up’ services. This itself is a dodgy decision - way beyond its 'knitting'. Putting this 'small' point aside, HP was part of the way there in terms of ‘enterprise services’, though had nowhere near the scope and scale of EDS. But Dell is surely even further distant than HP, and Perot is hardly the standard-bearer in the field. I just can’t see at the moment where this is any sort of natural fit.

On the financial side, Dell is paying 1.4x Perot’s 2008 revenues and 21x 2008 operating profit which just sounds so over the top. When HP acquired EDS in May ’08 for some $14b, this represented a 33% premium to EDS’ closing price and about 0.6x EDS’ prior year’s revenues. Admittedly, EDS was far less profitable than Perot, recording a 1.8% operating margin in Q1 08 (its last report prior to the announcement) vs Perot’s 7.6% for Q2 09 (Dell reported a 5.3% margin in its latest quarter). But EDS was also 10 times larger than Perot, with (2007) revenues at $22b vs $2.8b for Perot in 2008.

So, first reaction; strike one on the strategy and strike two on the financials. By the way, Perot’s UK revenues were $123m (then £66m) last year, so this announcement is unlikely to be a game-changer on our fair shores. We’ll have lots more to say about this in future posts.

Sophos: growing revenues again, but not profits

(By Philip Carnelley, 21 Sep 09, 08:30) In our piece on Iris on Friday (Iris accounts for itself) we erroneously endorsed its claim to be the largest privately owned software company headquartered in the UK. An eagle-eyed reader pointed out we’d overlooked Sophos, the security software vendor. And indeed we had. Sophos was founded in the UK in 1985 by Dr Peter Lammer and Dr Jan Hruska and has its UK HQ in Abingdon. So, to put the record straight: Sophos is the largest, with £125m in revenues, just pipping Iris (£119m) at the post.

We are kicking ourselves because we had Sophos in our database. But had neglected to write up their latest annual results, which were quietly filed at Companies House in the middle of the August holiday season with no public announcement. The report tells an interesting story. Sophos is a large and growing firm, and no wonder: IT security is one of the biggest headaches for any CIO and gets ever more so by the day. Sophos’s products are well-respected and sold around the world. During the year Sophos added to its armoury with the acquisition of German company Ultimaco – see Sophos – battling the giants – for £162m, which added around €58m to its top line (pro-forma). This acquisition catapulted them to the top of the privately held UK-HQ’d software company rankings - ahead of Iris.

Sophos' revenues for FY09, as reported, grew 49%, to £125m for the year with most of this coming from the acquisition discussed above. Excluding acquisitions, revenue growth was 22% in UK£ but a somewhat more pedestrian 5% in US$ – still acceptable in today’s climate. (US dollars are relevant: much of its revenue is earned in dollars or dollar-linked currencies, and also because its major competitors report in dollars. Symantec also reported 5% growth for FY09). Sophos’ revenue is fairly widely spread geographically: US 36%; UK 22%, Europe 29% and RoW 13%. Growth was over 50% in all regions except the UK (9%). Sophos reported a small adjusted operating profit: up one-third, to £2.1m. But, in large part due to the acquisition, the true operating loss widened, from £7.8m to £22.4m, and net losses reached £15m (£3m). The company now boasts an enviable 21 years of revenue growth, but has not made an operating or net profit since FY05/06.

However, we are pleased to note that Sophos writes off all software R&D as an expense in the year it is incurred. R&D amounted to £33.8m in FY09. Although we disapprove, they could have capitalised this as some others do. That would have transformed the current year’s P&L account!

Thus, while the company remains small compared to gorilla-in-the-market Symantec (c$6bn in revenues) as well as others like McAfee and of course Microsoft, it is holding its own, growing market share and making potentially smart acquisitions. It has strong cashflow, and advance billings are considerably ahead of revenues. As we said above, security is a hot area right now. Last year, UK-headquartered MessageLabs was snapped up by Symantec for £400m (See our 30^th Oct 08 post - Symantec buys Messagelabs). That was a massive 5.5x revenues, making Sophos ‘worth’ nearly £700m/$1b on a similar multiple. Sophos was considering an IPO back in late 2007, then pulled it, blaming "market conditions." Perhaps the time will soon be coming when it tries again.