Friday, 18 September 2009

Iris accounts for itself

(By Philip Carnelley, 09:30, 18 Sep 2009). We’ve just received the first published annual report from Iris Software Group, provider of business software to SMEs. It’s the first really good look we’ve had at the numbers since the “new” Iris was created by the merger of “old” Iris and CSG, back in July 2007. Iris is now backed by two PE firms, Hellmann & Friedland (with the largest share) and HgCapital, together with staff and management. H&F funded the £500m merger with CSG.

Iris proudly claims that it is the largest privately owned UK software company, with annual revenues of £119m. In fact that's not quite true: at £125m, Sophos is a little larger. Also, for the record, Northgate’s software revenues are around 50% higher; it too is now privately owned, but is principally an IT services organization. Civica is also larger than Iris, at £134m, but we estimate that its software product revenues are a shade lower than Iris’s. [Paragraph corrected 14:00 19 Sep 09]

Revenues at £119m were 4.6% up on the prior year (pro-forma) but organic growth was just 0.8%. 70% of revenues are recurring. The company made 6 small acquisitions during 2009 – at a cost of £13m - to add coverage in legal and not-for-profit as well as general business solutions. Adjusted operating profit was £39.7m – a margin of 33%. In both profit and growth terms this is spookily similar to the UK performance of its closest competitor, Sage – whose UK business is approximately twice as large as Iris. Operating profits (including amortisation) were £9.3m, a margin of just 7.8% - low for a software company but which, given the company’s MBO and M&A history, is not so surprising.

Almost all of Iris’s revenues are derived in the UK, and it claims 60,000 customers with a retention rate of 90%. It also says it has contracts with 14,000 of the UK’s 30,000 accountancy practices – an excellent statistic belying the widespread notion that they all run on Sage. It also claims 5,000 of the country’s 10,000 legal practices, 50% of the 100 biggest charities and 60% of the Premiership football clubs.

So, Iris has built a strong, stable and profitable base in the UK. What next? Most interesting is that one of its recent acquisitions, PROJECTminder, is a pure-play SaaS solutions provider. Iris CEO Martin Leuw has asked each of Iris’s five business units to build the Cloud into their three-year planning, but to take things at the pace they think appropriate. Iris derived revenues from SaaS provision of just £4m last year and given the fragmented nature of its portfolio, could well face as much difficulty as Sage in producing SaaS offerings (see Sage heads for the clouds – again). But on the other hand, if done right, the Cloud could provide Iris with a route to competitive advantage.

Finally Iris makes clear that it has access to further cash. We think further acquisitions look to be on the cards. Iris will certainly be one to watch in the coming months.

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