Second half sales up as Portrait Software turns in £1.3 million pre-tax loss

Source: Portrait Software

Financial highlights

  • Turnover in second half of £6.8 million was up 42% on first half of £4.8 million, and up 8% on equivalent period of 2005. Turnover for the year of £11.6 million (2005: £14.3 million).
  • Licence sales of £1.6 million in second half year - more than an eightfold increase over the first half (including Quadstone licence sales of £0.5 million).
  • EBITDA of £0.8 million before exceptional charges of £1.2 million (2005: £2.2 million before exceptional income of £0.2 million).
  • Adjusted pre-tax profit of £0.2 million. (2005: £1.4 million) Unadjusted pre-tax loss of £1.3 million (2005: profit £1.4 million).
  • Stronger Balance Sheet - net current assets up by £4.0 million to £6.7 million at 31 March 2006 (2005: £2.7 million), including cash balances of £5.3 million(2005: £3.6 million).
  • Adjusted diluted earnings per share of 0.13p (2005: 2.45p)Unadjusted diluted loss per share of 2.11p (2005: earnings per share of 2.49p).

    Operational highlights

  • High customer retention rate with support and services revenues from strong customer base of £9.8 million (2005: £9.5 million).
  • Notable customer wins during the year for the Company's core Portrait technology, included The Link, O2, ABN AMRO Imagine, Queensland Office of Health Practitioners Board and China Automobile Association, bringing number of Portrait customers to 20.
  • Successful acquisition and integration of Quadstone. New Portrait Customer Analytics products launched, delivering significant new customers
  • Fiserv sales gaining momentum, Fiserv royalty revenue more than trebled in second half year, OEM relationship extended within Fiserv providing greater sales reach.
  • Increased industry recognition including Microsoft Gold Partner status, Industry Analyst leadership recognition and further awards for our products.

    Nick Randall, Chief Executive of Portrait Software, commented: "Having established our core Portrait technology on an international basis we are now leveraging our position through the addition of Quadstone technology. We are encouraged by the level of our current sales pipeline and look forward to delivering growth and improved profitability in the coming year."


    The Company is now focused on achieving its goal of being a high margin software led business, with important steps having been taken in the last 12 months to reach this point. The pace of change accelerated in the second half of the year with a more than eightfold increase in software licence revenue compared with the first half. Total software licence and support revenues represented 68% of our business during the second half of the year, up from 58% in the first half. Overall, Portrait is in far better operational shape in all respects than 12 months ago and this has contributed to a significant increase in overall levels of sales in the second half. The steps we have taken to strengthen our balance sheet, management team, product offerings, customer base and sales execution capability means we now have a better platform to pursue our market and our growth strategy.


    Trading Performance

    For the year ended 31 March 2006, turnover at £11.6 million was down as expected compared to last year (2005: £14.3 million) as prior year numbers included £2.0 million from the release of deferred licence revenue. However, there are some positive trends with regards to the underlying figures.

    Revenue in the second half year of £6.8 million showed an increase of 42% compared with the first half and an increase of 8% compared with the equivalent period last year. The improvement in the second half was due to a combination of improved Portrait licence sales and the first time sales contribution of £1.0 million from Quadstone, acquired in December 2005.

    Fiserv OEM royalty revenue more than trebled in the second half and was £0.5 million for the full year. This compares to £1.6 million in the prior year, of which £1.4 million was a one off payment in connection with the signing of a major new collaboration agreement. Total Fiserv derived revenues for the year, including services and support, were £1.1 million (2005: £2.0 million).

    Other licence revenue totalled £1.3 million of which Quadstone contributed £0.5 million. Prior year comparable sales of £2.8 million included £2.0 million release of deferred licence revenue.

    Services and support revenues remained strong at £9.8 million for the year (2005: £9.5 million), demonstrating that we have good recurring revenues from a loyal and extensive customer base. Our focus on providing great service and relevant sales offerings to our customer base has been paying off in terms of account development, and there remains considerable potential for further revenue growth from the base.

    Full year EBITDA (being earnings before interest, tax, depreciation and amortisation) was £0.8 million before exceptional charges of £1.2 million. Prior year comparable EBITDA was £2.2 million before exceptional income of £0.2 million, although these earnings included a £2.0 million release of deferred licence revenue.

    Exceptional costs of £0.5 million were incurred in connection with the previously announced moves to reposition the business under the Portrait Software brand and to adapt the organisation to move towards a more efficient indirect sales model. Further exceptional costs of £0.5 million were incurred in connection with the integration of Quadstone and £0.2 million in connection with onerous leases and other legacy liabilities (2005: exceptional income £0.2m). Our continued attention to cost control has allowed us to take out excess cost, particularly in administrative overhead where the Company had previously been carrying certain legacy costs. Operating costs before exceptional items were reduced by 10% to £11.5 million from £12.7 million in prior year. Reductions in administrative expenses (excluding exceptionals and R&D costs) accounted for £1.0 million of the overall operating cost reduction, being £1.7 million compared to £2.7 million in prior year. Investment in new product development reduced in absolute terms by 13% as we are through the major platform development phase and can focus on value added application development, but overall remained at a healthy run rate at 27% of turnover (2005: 25%).

    We achieved an operating profit overall for the year of £0.1 million before exceptional charges of £1.2 million (2005: operating profit of £1.5 million before exceptional income of £0.2 million).

    Pre-tax loss after exceptional items was £1.3 million (2005: Pre-tax profit £1.4 million).

    Adjusted diluted earnings per share was 0.13p (2005: 2.45p) after excluding goodwill amortisation and exceptional items (see note 4). Unadjusted diluted loss per share was 2.11p (2005: earnings per share of 2.49p).

    Balance Sheet and Cash Flow

    As a consequence of the share placing in June 2005 referred to below, and as a result of the considerable efforts we have made to reduce debt and eliminate other legacy obligations we inherited at the time we commenced the turnaround in 2002, we have made great progress in re-establishing a firm financial platform for the Company and have improved significantly the strength of our balance sheet.

    In June 2005 we successfully raised £4.8m net of expenses from a share placing with institutional and other investors, including management, to strengthen the Company's balance sheet and to provide funds for future operations.

    At 31 March 2006, net current assets had increased by £4.0 million to £6.7 million (2005: £2.7 million). After debt repayments and net interest charges of £1.7 million, cash balances at the end of the period increased by £1.7 million to £5.3 million (2005: £3.6 million).

    Long term debt reduced to £4.4 million at the year end (2005: £ £5.8 million) and the Company returned to a net funds position of £1.0 million at year end from a net debt position of £2.2 million at prior year end.

    Quadstone Ltd. was acquired on 7 December 2005 for £3.9 million in a combination of cash and shares of which £0.7 million cash and £0.3m shares was deferred for payment after 31 March 2006. Purchased goodwill in connection with Quadstone, being the purchase consideration and costs of acquisition less the fair value of assets acquired, was £3.1 million.


    Our Strategy

    In overall terms, we have re-focussed our company as an international software business selling our increasing range of Portrait-based Customer Interaction Optimisation products through a much wider range of business partners worldwide. In particular, in the year ahead we will be focussing our efforts in the following key areas: -
  • Sales to our existing customers as part of our 'Extend & Evolve' strategy;
  • Working with partners (including Fiserv in retail banking), who build specialised customer facing applications, utilising our core Portrait Foundation technology and where we receive a royalty on each of our partners' sales;
  • Our new range of Customer Interaction Optimisation products, which includes our recently acquired Quadstone analytics set, Portrait Collaborative Customer Analytics and our new combined product offering, called Portrait Interaction Optimizer;
  • Our Portrait Response and Resolve products for police emergency and non-emergency call handling;
  • Specialised customer interaction applications utilising Portrait Foundation (for example, work similar to our recent projects at China Automobile Association and Chelsea Building Society).

    Customer Base Expansion

    During the period we have worked hard to provide a high level of support and service to the 200+ customers who we now support in 26 countries worldwide. These include 63 in the Asia-Pacific region, 54 in North America, 6 in South America, and 78 in Europe.

    We now have twenty customers using the latest generation Portrait-based technology, with the remainder using previous customer interaction and analytics products. Our aim is to work with our existing customers to ensure a high level of continuous support whilst at the same time providing increasing ways for them to gain access to new features and capability to drive further business benefits.

    This approach has been well received by existing customers, with the result that we have had over 95% customer retention and were able to sell £0.5 million of new licences to existing customers in the period.

    New Portrait clients during the year included The Link and O2 for a hosted customer authentication solution in partnership with GB Group; ABN AMRO Imagine in Spain for a customer loan application; The Office of Health Practitioners Board in Australia in partnership with QCOM (a Unisys subsidiary); and the previously announced China Automobile Association in partnership with Ultrapower in China.

    Portrait Customer Analytics also delivered significant new customers, including the largest mutual fund company in the US, Bank of Ireland, TSTT (telecoms) and TJX (retail).

    OEM Collaboration Initiatives

    In our 2005 Annual Report we indicated that we would be moving progressively towards a much more indirect sales model, particularly for large 'front end' software renewal projects. We are pleased to report that good progress has been made with this initiative in the period. Fiserv remains our most significant OEM partner in the retail banking market.

    Fiserv Inc. are a US$4.1 billion turnover group, specialising in software sales and business process outsourcing in the financial services marketplace. We have worked with their Fiserv CBS Worldwide division over the last 18 months to develop two product offerings powered by Portrait technology which they sell under their brand 'Aperio', and we are paid a royalty on each sale. To date, Fiserv CBS have sold 6 Aperio installations and have a growing pipeline of further opportunity.


    Our Portrait family of software products are based on Microsoft technology and this provides us with unique differentiation in our chosen market. Working with Microsoft provides us with the opportunity for marketing support, access to a community of complementary partners and also provides direct sales opportunities in Microsoft's managed accounts.

    One of our key initiatives for financial year 2006 was to start working more closely with Microsoft both in the technology area and importantly, in sales and marketing. Good progress has been made in this area, with a number of new leads and opportunities being passed to us from Microsoft. I am delighted to report that in March this year, we became a certified Gold Partner of Microsoft, which ensures that we are recognised as a strategic partner in a number of key areas, including financial services and public safety, and more specifically a Global Insurance Value Chain Partner. In February 2006, Jeff Tumpowsky joined us from the Microsoft insurance business unit in the USA to lead our OEM collaboration initiatives in the insurance market sector. Jeff brings with him invaluable contacts and insight into the best way for us to maximise our opportunities with Microsoft and Microsoft's partner community.

    Public Safety

    Our first major emergency and non-emergency call handling system went into live running in an operational evaluation pilot on 24 x 7 full emergency call handling in late 2005, and good results are being reported. Our plan is to work with partners to help us to take our Portrait Response and Portrait Resolve products to the international market, in particular the USA.

    Quadstone Acquisition

    In December 2005 we announced the acquisition of Quadstone Ltd, better positioning Portrait to address the fast growing Marketing Automation market, which according to Gartner grew by 15.6% last year. Quadstone was spun out of Edinburgh University 10 years ago and has specialised in complex, high speed customer analytics. They have over 30 customers worldwide, including large organisations such as Washington Mutual, Bank of Ireland, British Telecom, Eircom and T- Mobile.

    The rationale for the acquisition was the fact that Quadstone's analytics technology can be incorporated into our product suite to further improve the effectiveness of real-time customer interactions.

    We have now integrated key aspects of the Quadstone product set into our Portrait Customer Interaction Optimisation suite, and this enabled us to launch a combined product earlier this year which we have branded Portrait Interaction Optimizer.

    We are very pleased with the integration so far and in particular with the calibre, commitment and obvious enthusiasm of the Quadstone team who have joined us. We have now combined our USA activities under Quadstone management, based from their Boston office and have retained their analytics centre in Edinburgh. Other operating activities have been successfully consolidated into the Portrait organisation.

    Industry Recognition

    In the last 12 months Portrait Software has gained endorsement from leading industry analysts such as Gartner and the Aberdeen Group. Portrait Software is recognised as a technology visionary for Analytics and as a specialist supplier for large business to consumer contact centres. Portrait Software is now positioned on two Gartner Magic Quadrants, positioning the Company as one of the top suppliers worldwide. Portrait Software's customer, Nationwide Building Society, won two industry awards in the last twelve months for their highly successful implementation of Portrait, including Aberdeen Group's prestigious Customer Intelligence Benchmark Award 2006.

    Staff and the Organisation

    There have been a significant number of important changes within the Company during the past year, mainly aimed towards improving our front-end sales execution, marketing and product management capability.

    John O'Connell joined us in June 2005 and at the same time, Robin Martin was appointed as COO. In January 2006, Kuljit Bawa was appointed as head of international sales and Mark Smith became head of our US sales team. Kuljit was formerly head of US sales at Staffware and Mark was one of the original founders of Quadstone, who moved to the US to run sales activities there five years ago. The new team has brought new focus, energy and discipline to our sales organisation and we are encouraged by the progress being made in this key area.


    Having established our core Portrait technology on an international basis, and having increased the customer base by 33% in the last 12 months, we are now leveraging our position through the addition of Quadstone technology. We remain committed to becoming a higher margin, software driven business. We believe the actions we have taken in the last year to strengthen our management team, sales capability, product set, customer base, and our balance sheet, provide an excellent base to achieve this goal.
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