Microgen plc is issuing its regular fourth quarter trading and business update, ahead of its close period.
Operating Performance of the Group
The Board considers the Group to be on track to achieve its expectations for the current year ending 31 December 2007, with a significant contribution from Microgen Aptitude based solutions. As a result, the Board anticipates reporting Microgen's third consecutive year of operating margins (before goodwill and intangible impairment/amortisation and exceptional items) in line or ahead of the Group's 15% target, after expensing all product development costs. This consistent strong profitability and corresponding cash flow is achieved by balancing the contribution from the Group's more mature products and services with the investment to drive the organic growth from the Microgen Aptitude Business Process Management Suite (BPMS) and other growth opportunities.
The two material contracts for Microgen Aptitude ('Aptitude') that have been in negotiation over the summer, have been signed and are now being implemented. Both projects are anticipated to deliver in excess of £1 million each, including licence and associated services, and should continue through to at least the middle of 2008.
During 2007, good progress has been made on sales of Aptitude solutions to new and existing customers. While the majority of these solutions are currently within the Financial Services sector, with deployments in the UK, Continental Europe, South Africa and the USA, successes in the Commercial and Energy sectors have also been achieved. Revenue from Aptitude solutions has increased substantially in 2007 and the Board anticipate that the proportion of revenue derived from Aptitude-based solutions will continue to increase in the future.
General IT Consultancy Market
In recent years, the Board has consistently reported its concerns regarding the commoditisation of the general IT consultancy market and accordingly has pro-actively been reducing its exposure to this sector, whilst managing to maintain strong profitability throughout this period. The Commercial, Public and Utilities Division is now making good progress in its transition to Aptitude-based solutions, with a number of established reference sites and the division is responsible for the Group's largest Aptitude licence sale to date.
As a result, the Board has now decided to complete the strategic transition of this division and to exit the testing services consultancy segment in order to focus resources on the Aptitude opportunities. The remaining general IT consultancy activity in the division is principally related to business intelligence which is a skill set applicable to a number of Aptitude solutions and where consultants are being cross-trained.
Balance Sheet & Cash Flow
Microgen continues to be cash-generative with cash of £17.5 million at the end of November 2007, equivalent to approximately 17.0 pence per share and net funds of £13.2 million. In addition, the Board has now contracted to dispose of the Group's long-leasehold property in London for £2.05 million, before costs, which will further increase net funds by approximately 1.5 pence per share after tax. The transaction is anticipated to be completed in the first half of 2008, when a leased office facility will be taken in London. While some of the funds from this disposal will be used to repay the mortgage on this property, additional cash will be released and an exceptional profit after tax in the order of £0.5 million is anticipated from this transaction in 2008.
The strong cash position and consistent cash flow of Microgen provide the Board with the potential to evaluate corporate development opportunities. While there can be no certainty that any transactions will be undertaken, the current market instability and possible CGT tax changes may provide increased opportunities for consideration.
Microgen expects to report another year of strong profitability and cash flow, while also investing in successfully gaining market momentum behind the Group's flagship product Microgen Aptitude. This consistency is achieved by managing the Group's portfolio of products and services, in-line with market sector conditions and the maturity of the product or service offering. The Group's operating model enables the stability derived from the high recurring revenues to fund investment in the new products. As a result, the progress made over the past year and the recognition and success being achieved for Aptitude should provide a good platform for 2008.
With a consistent track record of solid profitability and cash flow, a flagship product producing good organic growth and a strong balance sheet, the Board continues to have confidence in the future of the Group and remains committed to delivering both operational performance and value to shareholders.