Financial Highlights

• Group turnover up 10% to £429.5 million (2004: £390.0 million), including £44.2 million from Diagonal
• Adjusted operating profit* up 29% to £9.7 million (2004: £7.5 million)
• Adjusted profit before tax* £11.0 million (2004: £9.5 million)
• Loss before tax of £18.3 million (2004: £12.4 million
• Gross margin increased to 20.5% (2004: 19.4%)
• Net cash balance at 30 June 2005 of £36.3 million (2004: £62.0 million) following £21.3 million net acquisition expenditure and £2.8 million cash impact of restructuring
• Adjusted basic earnings per share before goodwill amortisation and exceptional items of 5.3p (2004: 4.9p
• Proposed final dividend of 2.6p per share (2004: 2.35p per share) resulting in a total dividend for the year up 10% at 3.75p per share (2004: 3.4p per share)

*Excluding restructuring costs of £6.1 million and goodwill amortisation of £23.2 million

Business Highlights

• Accelerated transition of the Group into a consulting, technology and support company
• Services turnover up 52% to £190.0 million; growth in Diagonal; organic services up 16%
• Acquisition of Diagonal in August 2004 and subsequent successful integration
• Continued success in Europe with operating profit before goodwill amortisation and exceptional items up 114% (excluding France)
• Sale of Morse France on 12 July 2005
• Substantial re-organisation of UK technology and integration business
• Establishment of new business structure
• Positive progress with our 'own' software products - Wisdom and mobileATM

Commenting on the results, Richard Lapthorne, Chairman of Morse plc, said: "This has been a year of significant progress for the Group. The acquisition of Diagonal, together with the sale of our French business, have been key to Morse's transformation from a pure reseller to a consulting, technology and support company. This transformation is a continuous process, driven by the changing needs of our client base. The content and product offering we can now make available to our clients, linked to the Morse brand, provides us with a strong basis on which to further grow the business."

Duncan McIntyre, Chief Executive of Morse plc, said: "The current financial year has begun satisfactorily and we are monitoring closely the commercial development of our Wisdom and mobileATM software products. We are confident the Group will continue to make good progress in the current financial year."

Overview
This has been a year of significant progress for the Group. At the end of the last financial year we welcomed the return of the business to revenue growth and we are now pleased to report a return to operating profit growth, (pre goodwill amortisation and exceptionals) up 29% year on year and ahead of our expectations. At the half-year we updated our strategic objective of generating 50% of our gross profits from services to 70%-80% and we are well on our way to achieving this. For the year to 30 June 2005, overall services revenue grew by 52% to represent 44% of Group revenue and 55% of Group gross profit.

Results
Group turnover for the year to 30 June 2005 was £429.5 million (2004: £390.0 million). Operating profit before goodwill amortisation and exceptional items was £9.7 million (2004: £7.5 million). Profit before taxation, goodwill amortisation and exceptional items was £11.0 million (2004: £9.5 million). The Group generated a net cash inflow from operations of £4.7 million before restructuring costs (2004: £6.3 million). The net cash balance at 30 June 2005 was £36.3 million (2004: £62.0 million) after funding current and deferred net acquisition expenditure of £21.3 million and cash outflows in relation to restructuring of £2.8 million.

The published loss before taxation was £18.3 million (2004: £12.4 million) after exceptional items of £6.1 million (2004: £3.4 million) and goodwill amortisation (generally written-off over three years) of £23.2 million (2004: £18.6 million). Morse France was sold subsequent to the year-end and is shown in the accounts as a discontinued business.

Dividend
The Board continues to pursue a progressive dividend policy with dividend cover set at a level to enable the Group to fund its medium-term growth and development requirements over the longer term.

At the half-year we announced a dividend of 1.15p per share (2004: 1.05p per share) and we propose a final dividend of 2.6p per share (2004: 2.35p per share). This would result in a total dividend for the year of 3.75p per share (2004: 3.4p per share), a year on year increase of 10%.

The final dividend will be paid on 7 November 2005 to shareholders on the register as at the close of business on 7 October 2005.

Strategy
Over the last few years we have focused on a strategy of transitioning the Group from a pure reseller to a consulting, technology and support company.

The solid foundations we have built in adapting to changing trading conditions, maintaining tight financial controls and safeguarding our strong financial position mean that we have been able to adapt our existing business and exploit new opportunities by making strategic acquisitions. These acquisitions have, in turn, enabled us to accelerate the implementation of our transition strategy, broaden our service offering to clients across infrastructure, software, services and management consultancy and build closer relationships with clients.

Over the last year, we have continued to reshape our infrastructure business. It remains an important aspect of the Group's overall offering and its strong base of international blue chip clients is an asset to the Group. Clearly, however, against a backdrop of continued product commoditisation and pricing pressure, we need to ensure that it remains sustainable and profitable. Significant steps were taken to achieve this through the restructuring of our UK infrastructure business and disposal of our business in France.

Today, the Group has five main business streams: Management Consulting, Business Consulting, Europe, UK Technology and Integration and "own" software.

Client base
Morse has a substantial, blue chip client base, with particular concentration in the finance, telecommunications and commercial sectors. As our clients' requirements have changed, moving towards broader offerings combining hardware, software and consultancy, so the focus of the Group has changed. Its transition, with a stronger emphasis on services, is a continuous process as we work to identify and meet our clients' needs and strengthen our relationships with them.

Our client base takes in a broad range of industries but is focused around a few key sectors. In finance, where turnover in the year was down 1% to £187.1 million, we saw no substantial change in market conditions with most additional revenue coming from retail finance and our flexible resourcing business. In telecommunications, where turnover increased 25% to £71.9 million, we saw evidence of increased client confidence. In the commercial sector, where turnover increased 21% to £146.0 million, Diagonal's strengths in retail and manufacturing brought about a significant positive impact on revenues. Public sector, although still a small market for the Group as a whole, saw turnover increase 12% on last year.

Acquisitions and disposals
On 27 August 2004, the Group acquired Diagonal plc, the largest acquisition in Morse's history. Diagonal gave us a leading SAP consultancy, change management expertise, resource placement, enhanced security capabilities and greater application development capacity. It has proved to be a good fit with our existing skills base. In addition, it has generated new business development opportunities for both Diagonal's and Morse's existing services operations and cross-selling across the combined businesses has been well received by clients.

It is to the credit of everyone involved that the integration of Diagonal into the Group was completed so rapidly, on time and on budget, without affecting day-to-day trading. When we acquired Diagonal, its financial performance was projected to decline. Since acquiring it, we have succeeded in setting it back on a growth path, with an increase in annualised turnover of 13%.

The net consideration for the Diagonal acquisition, after cash acquired, was £38.9 million: comprising £19.6 million of net cash; £17.4 million in new Morse shares; and costs of £1.9 million. Goodwill arising on the transaction was £35.7 million. Having exceeded our initial financial targets on this acquisition, we have made an initial annualised return of approximately 10% on capital. The Diagonal business contributed turnover of £44.2 million and operating profit before goodwill amortisation and exceptional items of £2.8 million in the year. The anticipated annualised synergies of £1.5 million have been achieved and further property savings of £1.0 million have subsequently been identified, which will be realised in the year to 30 June 2006.

On 12 July 2005, the sale of Morse France to Opengate Capital UK (Holdings) Limited was announced. Given that a substantial proportion of its revenues were derived from infrastructure and that significant further financial and management investment would have been required to transform it into a higher value-added business, this business was no longer considered core to the Group. Excluding France, our gross margin from services was £48.8 million.

The maximum sales proceeds are €1.0 million comprising an initial consideration of €1 and a further €1.0 million payable in cash in the period to 30 June 2007, dependent on the business achieving certain financial targets.

The sale of this business is expected to result in a non-cash exceptional loss of £7.0 million in the period to 30 June 2006.

Financial review

In the year to 30 June 2005 turnover increased to £429.5 million and profit before tax, goodwill amortisation and exceptional items increased to £11.0 million. Net cash at 30 June 2005 was £36.3 million.

Total turnover increased by 10%, benefiting from organic growth in the consultancy business and in our European business. This growth, in addition to the acquisition of Diagonal, more than offset the decline in the UK infrastructure business.

Group overhead reflects the revised organisational structure, with the majority of the other overheads being attributed to and managed by the operating units. This structure will provide improved operational focus and accountability.

Exceptional costs
There were £6.1 million of exceptional costs in the year in respect of restructuring activity. £3.1 million was related to the restructuring of Morse UK Technology & Integration, of which £2.1 million was for rationalising property and £1.0 million was for redundancy. £2.2 million arose on the reorganisation of Diagonal subsequent to its acquisition, of which £1.0 million was for the cost of rationalising property and £1.2 million was for redundancy. £0.8 million was incurred in the reorganisation of Morse France in 2005.

Earnings per share
In accordance with FRS 14, the basic and diluted loss per share after goodwill amortisation and exceptional items was 14.1p (2004: loss per share 11.9p).

Basic earnings per share, excluding the charge for goodwill amortisation and exceptional items, were 5.3p versus 4.9p for the previous year. In general, goodwill arising from acquisitions is amortised over three years.

Cashflow
Cash generated from operations in the year was £4.7 million before exceptional restructuring costs (2004: £6.3 million). The ratio of conversion of operating profit to cash is 46%.

Non-operating cash outflows in the year totalled £27.6 million. The principal elements of these flows were net acquisition payments of £21.3 million, dividends of £5.2 million and purchase of fixed assets of £1.7 million.

The net cash outflows in the year resulted in net cash balances of £36.3 million at 30 June 2005, the movements being as follows:

Taxation
The tax charge on a loss before tax of £18.3 million is higher than the UK rate of 30% because of non-deductible costs, primarily the amortisation of goodwill, and certain exceptional costs, offset by the benefit of credits resulting from the resolution of prior-year tax positions.

Operating review
Morse has developed rapidly in line with its strategy during the past 12 months and we now have a strong platform from which to further develop the Group.

Management Consulting
Management Consulting was formed around our acquisition of CSTIM in April 2004. In the year ended 30 June 2005, its revenues were £12.5 million (2004: £2.9 million) and the business recorded an operating profit before goodwill amortisation and exceptional items of £2.3 million (2004: £0.6 million). Since the acquisition, turnover of CSTIM and its associated businesses has grown by 70%. This business has benefited substantially from becoming part of the Morse Group. CSTIM brought with it an exceptionally high quality client base and we are now beginning to see opportunities emerging to sell a broader range of hardware, software and consultancy to certain of its key accounts.

This business unit is made up of four businesses: CSTIM, Systems Integration, Skillshub and Morse Transaction Services.

The core CSTIM business, which specialises in the provision of strategy and business improvement consultancy services to the investment industry, delivered a 37% increase in turnover. CSTIM experienced strong demand for its services throughout the year across all locations and is currently looking to develop service offerings for distributors of investment products, in particular for life companies and banks. CSTIM's fee rates and staff utilisation also showed an improvement during the year, reflecting both improved demand from its clients and its growing reputation for delivery.

The Morse Systems Integration business was created during the first half of the year in response to growing client demand within the investment management industry for application architecture, integration and implementation services and support. This business combines consultancy services with Morse's established expertise in technology and it contributed 7% of the overall turnover growth of the management consultancy business.

Skillshub, our resource placement business serving the financial services sector, made good progress during its first full financial year of trading and delivered turnover growth of 24% year on year.

Morse Transaction Services was created in the March quarter of 2005 to assist organisations undertaking merger or acquisition activities and contributed 2% to the overall turnover growth of the management consultancy business.

Business Consulting
Business Consulting was created from the consulting business of Morse UK, together with the consultancy businesses of Diagonal plc. The performance of this business was encouraging, with sales of £60.4 million reflecting growth of 29% to £26.9 million from the Morse UK consulting business, and annualised growth of 19% to £33.4 million from the Diagonal businesses. The revenue rise reflects a strong order intake and increasing utilisation levels, both of which have benefited from the reorganisation of the business and its increased sales and operational focus. The business unit consists of three main businesses: Diagonal, Delphis and Marshall Wilkins.

Diagonal
Following the acquisition of Diagonal on 27 August 2004, two of its divisions were transferred to other areas within the Morse Group. Its security division was transferred to Morse's UK Technology and Integration business and Diagonal Solutions (focused on its electronic records and document management product, Wisdom) was transferred to Morse's 'own' software and intellectual property business.

The remaining businesses, combined with the existing consultancy business of Morse, now trade as Diagonal. Trading has been positive, with the number of consultants active across the UK, USA and Asia-Pacific increasing from 328 in August to 379 at the year-end. In addition to its focus on three main sectors - consumer products, retail and manufacturing - Diagonal is now beginning to win and expand its business within other sectors. SAP remains one of our major strategic partners but we are now also able to provide a far richer offering to our clients. With a strong core of long-term clients, based around Diagonal's core SAP business, new business opportunities during the second-half of the year increased substantially and Diagonal's pipeline continues to be strong.

The successful performance of Diagonal post-acquisition reflects the strength of its business proposition, strong client relationships and sound execution and delivery. It combines Morse's strengths in marketing with Diagonal's strengths in delivery and has enhanced our ability to offer complete IT solutions.

Delphis, which provides project and support services around client's desktop infrastructure, mainly to City-based organisations, experienced a solid performance. During the year, utilisation rates were at 90%. Whilst there is pressure on rates in some of the standard desktop services, the business is focusing on developing its specialist areas where fee rates are higher. Over the last financial year, overall fee rates have grown slightly. We are now actively introducing Delphis' services into Diagonal's client base.

Marshall Wilkins (MW), a recruitment business that helps clients source both contract and permanent IT resource, had a very good year, taking full advantage of the upturn in demand for staff. Ongoing, we are targeting MW to service the majority of recruitment needs for both Delphis and Diagonal, whilst continuing to grow its external clients as well.

Europe
European turnover increased by 8% to £163.7 million. These revenues reflect a strong performance in all markets. European operating profit before goodwill amortisation and exceptional items increased to £5.5 million (2004: £0.7 million), primarily due to the reduction of losses in Morse France and an increase in profitability in Morse Germany, benefiting from the integration of Techsol.

Germany and Austria
Sales in Germany increased by 9% to £76.6 million and the business returned to profitability.

The integration of Techsol, which we acquired in November 2003, is now complete. This has brought our German operations a much broader client base and a substantial increase in scale, and the business is well-positioned to capitalise on the return to stability and the consolidating competitive landscape of the German market. We are actively looking to develop our capabilities in management consultancy and business consultancy to complement our existing technology integration business.

In February 2005 we extended our operations to include Austria by establishing an office in Vienna.

At 30 June 2005, Morse Germany/Austria employed 172 people (2004: 178).

Spain
In Spain, turnover increased by 13% to £26.2 million. We have in the current year invested in a wider services portfolio and a support structure that will allow us to further grow and scale this business.

When we acquired ISASA (now Morse Spain) in 2001, its revenues were skewed toward product sales from a single manufacturer. During the second-half of the year ended 30 June 2005 services accounted for 42% of its business. This transformation is continuing, and as a result we have gained a broader client base, stronger brand loyalty and a substantially enhanced portfolio. We believe the investments we have made will increase profitability, and we are looking at ways to expand our offering to include management consultancy and business consultancy in Spain.

At 30 June 2005, headcount in Spain had increased to 135 (2004: 86).

Ireland
The Irish business was historically run as part of the UK business but has now been moved to the Europe division, as its business profile more closely resembles those we operate in Europe.

It performed strongly in the year as it continues to develop its solutions, services and product portfolio, and it continues the performance trend set when we acquired our first foothold in this market three years ago.

Market conditions remain good in Ireland and the management team was strengthened in 2005 to deliver against this opportunity.

At 30 June 2005, Morse Ireland employed 37 people (2004: 31).

France
Sales in France grew by 10% to £43.6 million. At the year end, staff numbers in Morse France had been reduced to 124 (2004: 140).

UK Technology and Integration
UK Technology & Integration (MT&I), operating in an increasingly competitive market, saw a 12% decline in revenue. The nature of the MT&I cost base meant that a decline in revenues led to a much sharper decline in operating profits for the year. Going forward, the restructuring of the MT&I business will improve the operating and financial flexibility of this business and during the second-half we restructured MT&I, thereby accelerating its transformation. We reduced headcount by approximately 100 in the six months ended 30 June 2005, producing annualised savings of £3.0 million, with a corresponding reduction in property costs saving a further £1.5 million per annum.

Moving forward, we intend to focus on selected accounts and growth markets to ensure that this business remains sustainable and profitable. We are implementing a more efficient sales and marketing model, along with Morse-led and vendor-supported marketing plans and continue to look for opportunities to improve the efficiency of the back office in support of the business.

"Own" Software and intellectual property
"Own" Software comprises Diagonal Solutions' electronic records and document management (ERDMS) product business and mobileATM.

The ERDMS business is based on the Wisdom product line and has had a very successful year, with activity and order levels increasing substantially following the acquisition of Diagonal. It is gaining traction in governmental and non-governmental markets and, given its success, we are committed to developing Wisdom to enable it to fulfil its market potential.

MobileATM is a joint venture with LINK Interchange Network. mobileATM developed significantly as a proposition in the year. It is now being integrated into a first wave of UK banks and building societies, which will provide it as a service under their own brands. The first version of the system will allow banking transactions, such as balance enquiries and mobile top-ups, to be performed direct from the user's mobile device and is scheduled to be available to customers before the end of 2005.

It is the culmination of two and a half years of intensive development and represents an excellent example of successful intellectual property development, broadening the range of services we offer and ensuring we are well-placed to take advantage of the opportunities presented by the emerging mobile commerce market. We see this, potentially, as a very substantial opportunity and look forward to rolling out the solution not only in the UK, but into other geographic markets in due course.

Processes and people
At the year-end, Group headcount stood at 1,730 (2004: 1,302). This figure has since been reduced by 124 following the disposal of Morse France.

We continually examine our cost base. We have a tradition of strong financial management, and a good record of taking action to reduce the cost base where it is necessary to do so and increasing it where we believe we can develop our business. Our aim is to expand our capability and quality of our work in an effective manner.

As Morse has evolved over the years, we have become even more reliant on our people, rather than on the individual merits of the products and services we sell. Our compensation plans are regularly scrutinised to ensure we attract and retain high quality staff. Our policy of rewarding individual performance underpins our approach, and we believe our clients benefit directly from the culture of professionalism and expertise this helps to create.

The Board
During the year, we saw the resignation of Gavin James as Finance Director and the appointment of his successor, Stuart Cruickshank, in July 2005.

Following the year-end, on 24 August 2005, Gavin James formally left the Board. Gavin became Morse's Finance Director in 1998 and saw the Group through its IPO in 1999. Gavin has played a significant role in Morse's development and we would like to thank him for his contribution.

We were very pleased to welcome Stuart Cruickshank to the Board. He brings a wealth of blue-chip plc experience in financial roles, as well as experience of the technology sector through his most recent role with Eidos plc.

International Financial Reporting Standards
As a publicly quoted company, Morse will be required to adopt International Financial Reporting Standards (IFRS) together with revised International Accounting Standards (IAS) in issue at 31 March 2004 for its financial statements for the period commencing 1 July 2005. Full IFRS consolidated statements will be produced for the first time for the year ending 30 June 2006, with the first reported results under IFRS being the interim results for the six months ending 31 December 2005.

The consolidated financial statements for the year ended 30 June 2005 remain in accordance with UK GAAP. The Group's profit and loss account, balance sheet, cash flow statement and related notes for the current year will, however, need to be restated in the future for comparative purposes.

We have already made good progress in identifying and quantifying the key accounting changes and accounting policy differences that exist between UK GAAP and IFRS.

As a result of work performed to date, we are confident we will be able to fully comply with the accounting and reporting requirements of IFRS in the year ended 30 June 2006. The key differences arising that are expected to affect Morse are:

Goodwill amortisation
Under UK GAAP, the Group's policy is to amortise goodwill on a straight-line basis over its estimated useful economic life which is typically three years. Under IFRS, instead of an annual charge to the profit and loss account, an impairment review will be carried out at each balance sheet date. This is required irrespective of there being an indicator of impairment in existence. If impairment is identified, the resulting debit will be charged to the profit and loss account.

Amortisation of intangibles
IFRS requires that intangible assets in a business acquisition such as customer lists, brands and customer contracts should be identified and separately valued. The identified intangible assets are measured at their fair value which is capitalised and amortised over their estimated useful lives.

Share-based payments
Under UK GAAP the cost of share options is based on the difference between exercise price and the market value of the option at the date of grant. Since grants made under the Group's share option schemes have generally been made at an exercise price equal to the underlying market value of the shares, they have not resulted in a significant charge to the profit and loss account. Under IFRS the Group is required to measure the cost of all share options granted since 7 November 2002 that have not fully vested at 1 January 2005, using an option pricing model.

Outlook
The acquisition of Diagonal, together with the sale of our French business, have been key to Morse's transformation from a pure reseller to a consulting, technology and support company. This transformation is a continuous process, driven by the changing needs of our client base, and the content and product offering we can now make available to them, linked to the Morse brand, provides us with a strong basis on which to further grow the business.

The current financial year has begun satisfactorily and we are monitoring closely the commercial development of Wisdom and mobileATM. We are confident the Group will continue to make good progress in the current financial year.Download the document now 463.5 kb (Adobe Acrobat Document)