Microgen profits and revenues fall in H1

Highlights

• Operating margin before intangible amortisation and exceptional items of 15.1% in line with 15% declared target range.
• Reinstatement of dividend payments for the first time since 2000 with an interim dividend of 0.5 pence per share (2005: Nil).
• Adjusted eps (excl. intangible amortisation, exceptional items) of 2.1p (2005: 2.6p). Basic eps of 2.0p (2005: 2.6p).
• In line with the defined investment programme and market expectations, operating profit before intangible amortisation and exceptional items of £3.0 million (2005: £3.3 million). Profit before tax of £2.9 million (2005: £3.6 million).
• Positive operating cash flow of £1.8 million (2005: £2.5 million)producing cash of £12.8 million and net funds at 30 June 2006 of £6.8 million.
• Investment in development and support of software products increased by 21%. All costs expensed.
• New name customers include Gasunie, Euler Hermes a subsidiary of AGF and a member of Allianz, Clydesdale Bank International, Guernsey Branch, a branch of Clydesdale Bank PLC and a member of National Australia Bank Group, Close Brothers, Saltus and Guardian Asset Management.
• Awarded framework agreement enabling the Group to provide services under the Catalist ICT Consultancy catalogue.

Chief Executive Officer's Statement
At the beginning of April 2006, Microgen announced that in future its strategic focus would be on the organic development of the Group and in achieving the full potential of the new products being launched this year. As a result, and given the Group's strong profitability and operating cash flow, the Board is recommencing dividend payments for the first time since 2000.

The results announced today reflect this period of strategic transition and provide some early indications of success in deploying Microgen Aptitude based solutions. The operating margin before intangible amortisation and exceptional items at 15.1% is in line with the guidance of 15% given at the time of the Preliminary Results for 2005 and is towards the upper end of the range for our peer group in the IT industry.

Group Financial Performance
In the six months ended 30 June 2006, Microgen generated operating profit before intangible amortisation and exceptional items of £3.0 million (2005: £3.3
million) from revenue of £19.6 million (2005: £21.2 million). Operating margin before intangible amortisation and exceptional items at 15.1% was in line with the Group's defined target of around 15%, a slight reduction on 2005 (15.6%), consistent with the investment in the organic strategy.

Operating profit for the period was £2.8 million (2005: £3.2 million). Profit before tax in the period was £2.9 million (2005: £3.6 million). Adjusted earnings per share were 2.1p (2005: 2.6p) with a basic earnings per share of 2.0p (2005: 2.6p). Headcount at 30 June 2006 was 409, of which approximately 7% were associates, contractors or temporary staff (2005: 431, of which 10% were associates, contractors or temporary staff).

During the period, the Group produced positive operating cash flow of £1.8 million (2005: £2.5 million) and continues to have a strong balance sheet with cash of £12.8 million (2005: £17.1 million prior to three acquisitions and purchase of freehold property) and net funds of £6.8 million at 30 June 2006.

Consistent with the organic strategy and the strong operating cash flow, Microgen is recommencing dividend payments to shareholders this year for the first time since 2000. An interim dividend of 0.5 pence per share (2005: nil) will be paid on 4 September 2006 to shareholders on the register as at 4 August 2006.

Operational Overview
Microgen's strategy is now focused on driving the organic development of the Group and achieving the full potential from the investments made over the past few years and in the new products being launched in 2006. The Group has completed the final integration of the three acquisitions made during the second half of 2005 and is focusing the company on growth through the sale of products and services to the enlarged customer base. Good progress has been made in these areas and we expect to see the benefits flow through into 2007 and 2008.

Microgen continues to invest significantly in its software products, with development and support expenditure increasing by 21%, compared to the first half of 2005. In the period to 30 June 2006, development activities totalled £3.6 million (2005: £3.0 million), comprising investment in new product/solution development, customer-funded developments and the support of existing products. The Group's development strategy is based around Microgen Aptitude which forms the core architecture for the development of the Group's application software products, the development of sector and client business solutions and as a Project and Enterprise Application Platform Suite (APS). All of the Group's software development activities are managed as a single organisation and have recently been consolidated into two main locations; Fleet in Hampshire and Wroclaw in Poland in a further move to make the Development operation as efficient and cost effective as possible. This has resulted in the announcement of the closure of product development activities in both South Africa and Belfast.

Both the Financial Services Division and Commercial Division are focused on identifying opportunities to position Microgen Aptitude as the technology of choice either as an APS (on an Enterprise or Project basis) or as the development platform for a specific business solution incorporating both the product and Microgen's business and technical consultancy resources. The Group has invested in an active campaign of marketing into its target market sectors, demonstrating a strong presence at exhibitions and conferences as well as strengthening our telemarketing, pre-sales and sales capability. This investment will continue during the rest of the year to position the Group to realise its organic growth strategy.

Financial Services: The Financial Services Division contributed 64% of Group revenue (2005: 63 %), delivering solutions for Wholesale Banking, Derivatives Trading, Payment Solutions and Asset & Wealth Management. Revenue in the period decreased to £12.5 million (2005: £13.3 million), primarily due to the completion of the BACS-IP upgrade cycle which peaked in the first half of 2005 together with the completion in May 2005 of two large contracts for the OST Business Rules product, the forerunner of Microgen Aptitude. However, operating margins before group costs increased to 21.5% (2005: 20.7%) resulting in operating income of £2.7 million (2005: £2.8 million).

The Asset & Wealth Management business unit has enjoyed a strong first half performance with new business wins at Clydesdale Bank International, Guernsey Branch, a branch of Clydesdale Bank PLC and a member of National Australia Bank Group , Guardian Asset Management, Saltus and Close Brothers through sales of 4Series and Microgen Aptitude along with the associated IPR related consultancy. Whilst the contracts were signed in the first half of the year, most of the revenue derived from these contracts will be recognised in future periods. In addition, the first release of Socrates+ was also launched and is undergoing extensive testing within the business ahead of a planned migration programme of the current user base starting in Q4 2006.

The Banking business unit continues to strengthen its presence in the sector with a set of vertical product and solution offerings. The business has achieved a number of significant new business wins, including those of Microgen Aptitude to Euler Hermes, subsidiary of AGF and a member of Allianz, which is the first phase of a wider roll out programme, and ABN AMRO and Triland, currently users of Cortex, who have committed to the roll out of Cortex+, Microgen's next generation of core banking product for the metals trading sector, which is based on Microgen Aptitude. The business has invested significantly in marketing activity, especially in the area of telemarketing and attendance at industry seminars and exhibitions. As a result a strong prospect pipeline for its product based solutions and services is developing.
The Payments business has now been fully integrated into the Banking business unit and as forecast has seen reduced activity as the BACS IP replacement programme, which was at its peak in the first three months of 2005, was completed in April 2006. We expect this part of the business to now enter into a period of steady state performance although we are actively seeking to identify further opportunities for our Microgen Aptitude based PCS.

As part of the organic development of this Division Microgen will be opening an office in Sydney, Australia in order to strengthen the sales and management presence in the Asia Pacific region as the demand for proven technology continues to grow. This presence will take time to establish but it is expected to increase growth in the region in 2007.

Commercial: Revenue in the period was £7.1 million (2005: £7.9 million). Generic IT consultancy continued to come under pressure and, as a result, operating margins decreased to 20.3% (2005: 23.3%) producing operating income of £1.4 million (2005: £1.8 million). Microgen continues to reduce its exposure to lower margin General IT consultancy as these services continue to commoditise. The strategy for this Division is to transition increasingly towards providing solutions based on Microgen Aptitude enabling the business to deliver benefits to target industry vertical sectors whilst continuing to deliver services that support this strategy (eg Business Intelligence, Data Warehousing).

The Commercial Division has achieved a number of successes in the first half, including the sale of a Microgen Aptitude based solution to Gasunie, a Dutch based energy supplier. This contract continues to build on Microgen's established presence in the European Energy sector. The multi-channel billing and analysis managed services provided within the Commercial Division benefited from Virgin Mobile extending its contract with Microgen to provide a complete bill fulfilment service. Other sectors that have been active include the Leisure Sector and Emergency Services although the revenue resulting from the NMIS programme declined in the first half as the programme came to completion and new business opportunities in this sector slowed as some programmes in the Home Office suffered delays.

The Division also entered into the Government procurement catalogue process, Catalist, and Microgen announced in May that the Division had been selected in four of the procurement categories. This opportunity will allow Microgen to build on the experience and knowledge gained during the past three years and expand its presence in both Central and Local Government.

Prospects
The Group's results reflect a continued focus on profitability, combined with prudent investment to accelerate organic revenue growth. The results are in line with the defined target operating margin. The Group has invested significantly in strengthening its sales & marketing activities and in broadening its geographic reach to take advantage of emerging market opportunities in the Financial Services sector. These investments are expected to enable the Group to realise its organic growth ambitions while maintaining strong profitability.

In addition, investment has continued in enhancing existing products and in new product development, particularly those based on Microgen's core architecture: Microgen Aptitude. Success in the sale of the products is expected to be reflected in recurring revenue as the Group continues to follow through on an Annual License model, whilst recognising the need for some of its clients to capitalise their investment in new systems by taking a traditional Initial Licence Fee.

In summary, the Board considers that the performance of the Group in the first half is in line with the defined evolution of the strategy. Looking forward, the Board expects the investments in product/solution development and sales & marketing to position the Group well in its target markets.

David Sherriff
Chief Executive Officer

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