Aptitude Regulatory News (APTD)

14 Oct 2008 07:00



14 October 2008

Microgen plc

Interim Management Statement, Management Incentive Scheme & Tender Offer

Microgen plc ("Microgen") provides its Interim Management Statement for the period 1 July 2008 to the date of this statement. Microgen announced its interim results for the period ending 30 June 2008 on 17 July 2008.

Despite the market instability, the Group remains on track to meet the Board's expectations for the current year ending 31 December 2008. All businesses are performing satisfactorily, although the Board remains cautious and prudent within the current very unpredictable business environment.

The Group's cash balance at 30 September was £20.0 million which reflects the seasonality of cash collections, the payment of the interim dividend and is in line with the Board's expectations. The Group has a loan of £3.9 million associated with the Group's freehold property. 

The Board anticipates the ramifications from the current unprecedented market conditions to continue through 2009, with a high probability of further deterioration in the business environment. Furthermore, as noted in the Interim Report, the Polish Zloty has strengthened by approx 25% against Sterling over the past year, increasing the cost of the Group's Poland based development centre in 2009. Actions to reduce costs are being taken to compensate for these external factors and the Board will continue to structure and operate the businesses in the Group according to the economic climate. 

In such times of instability, the foundations upon which the organisation has been built become paramount. Microgen has a strong balance sheet, a high proportion of recurring revenue (approximately 65% in H1 2008) and is seeing continued demand for Microgen Aptitude based solutions. As such, the Board considers that the Group's consistent prudence and balanced investments enable it to be well positioned to weather the current and continuing uncertain environment.

Group Structure

Microgen Aptitude, including the Microgen Accounting Hub ("MAH") and other products derived from the Group's Business Process Platform, continues to expand its blue-chip customer base in both Europe and North America. Microgen Aptitude enables organisations to rapidly deploy high transaction volume, process-based solutions to improve business control, management information and reporting. 

With confidence in the potential of this exciting product set, the Board has now determined to establish a dedicated business unit, Microgen Aptitude Solutions Division ("MASD") to realise the potential of Microgen Aptitude. Reflecting this priority and to ensure that this market-leading product receives appropriate focus, David Sherriff, Chief Operating Officer, is to directly lead this business through its next phase.  This strategy will include balanced investment in the Group's operations in North America to support a number of major projects where Microgen is currently engaged and where there are continued opportunities for Microgen Aptitude.  In 2008, Microgen Aptitude is anticipated to deliver strong revenue growth and the Board anticipates that the Division will continue to scale and hence move into profitability in line with the Board's plan for the business. In H1 2008, MASD had revenue of £3.7 million and an operating loss of £1.2 million. (It should be noted that all Microgen development costs have been, and continue to be, expensed in the year incurred and there is no capitalisation of the significant investment made in Microgen Aptitude.)

All of the Group's other software products, which are primarily financial services technology systems, will be consolidated into a single business, Financial Systems Division ("FSD"). This Division had revenue of £9.9 million in H1 2008, approximately 67% of which is recurring, and strong operating margins in excess of 40%. With a proven and successful track record of acquisition integration, the Board will continue to explore add-on acquisitions in compatible technologies and sectors. FSD will continue to distribute and support Microgen Aptitude and associated products to its extensive client base on an arms-length trading basis. The Group's Business Intelligence and Application Management activities, which accounted for revenue of £2.1 million in H1 2008, will be managed in this division.

The Group's Billing Services Division ("BSD") has continued to deliver on the migration to electronic document transactions, with over 50% of all output now being distributed electronically. Whilst the Division's telecoms customers continue to lead the migration, the benefits of Microgen's BPO service are increasingly being recognised in most of the vertical sectors represented within the customer base. As a result, the e-billing transaction hub which uses a Software-as-a-Service ("SaaS") business model, now has approximately 500,000 recipients, of which around 40,000 are business organisations, in over 50 countries. With approximately 90% recurring revenue and an operating margin of 30% in H1 2008, the Billing Services Division has a distinct and successful business model. BSD continues to have significant potential both from growth in its billing business and also through extensions of the business model. In order to develop these opportunities a new sales and marketing oriented Managing Director has just been appointed from within the Group.

The strategy and operations of each of the above businesses vary significantly. Correspondingly the drivers and metrics for the valuation of each business are substantially different. The Board's strategy for each operating division is aligned to deliver shareholder value in the medium term on a business-by-business basis. As a result, the Board's historic key performance metric of a Group-level operating margin is no longer appropriate and shareholder value will be enhanced by the performance of the individual businesses against their specific objectives. In practice, this is unlikely to change materially but the emphasis will be on the performance of the individual businesses rather than the consolidated Group metric.

Management Incentive Scheme

The structural changes outlined above establish three independent businesses with different strategies to enhance and ultimately realise shareholder value over time. As such, it is appropriate to structure management incentive programmes accordingly and the Board considers that the most appropriate structure is one based on the incentive model adopted by private equity organisations. 

In summary, it is proposed that each of the three businesses defined above, together with any other businesses acquired by the Group in the future, will be independently incentivised with up to 25% of the value enhancement above a base level valuation being allocated to key managers at realisation. The aggregate of the base level valuations of the current three businesses will be £52 million excluding the Group's net cash, freehold property and investments. This is equivalent to an aggregate base level valuation in excess of 70 pence per share which is approximately 33% higher than the highest closing mid-market share price over the past 12 months and approximately 95% higher than the closing mid-market share price on 10 October 2008.

The Board considers that such an incentive scheme aligns management objectives with the interests of Shareholders over the short, medium and long term. The scheme will not pay out unless a realisation event occurs but the incentive scheme for each business is independent of the other businesses. A Circular to Shareholders providing details of the proposed scheme will be distributed in due course.

Share Tender Offer

The Board recognises the illiquid nature of small-cap shareholdings, particularly in the current stockmarket environment. As a result, the Board is to propose to Shareholders to undertake a tender offer to repurchase and cancel shares by way of an on-market tender offer at a price range of 40 to 50 pence per share. The strike price of the tender offer will be determined by the tender process. Under no circumstances will the tender offer exceed the lower of £8 million or 24.9% of the Group's market capitalisation at the time of formal announcement and it will be scaled back if necessary. While the tender offer will reduce the Group's cash balance, the Board considers that the Group will still retain a robust balance sheet which is essential for customer confidence in the current business climate and to continue to pursue acquisition opportunities when appropriate. All members of the Board have advised that they do not intend to sell any shares under the tender offer. A Circular to Shareholders detailing the tender offer will be distributed in due course.

Share Buy Back Authorisation & Dividend Policy

Included within the Circular to Shareholders, the Board will also propose to renew the authorisation from Shareholders to purchase up to 14.99% of the post-tender authorised share capital, consistent with the Board's current authority. This will retain the Board's discretionary share buy-back facility.

The Board has also reflected on the implications of the new structure and the tender offer on the Group's dividend policy which should be funded from operating cash flow. Microgen's conservative accounting policies and operational management approach have produced a consistently strong cash flow conversion ratio and the Board therefore anticipates that the dividend to be proposed to Shareholders each year should typically be in the range of 25% to 35% of the Group's pre-tax profit, excluding any non-operating items. The 2007 dividend was within this range and the Board is not anticipating this policy having any impact on the 2008 dividend. The Board considers this range to be operationally prudent whilst also attractive to Shareholders.

Summary

The current unprecedented market conditions will have implications for virtually all companies globally and it is impossible to predict the extent and duration of this instability. While Microgen is not immune, the Board considers that the Group is well positioned with a strong balance sheet. 

The Board is neither complacent, nor resigned to a year of stagnation, and the actions being proposed reflect the Board's commitment to delivering shareholder value by both enhancing value from the operating businesses and their associated products and by providing the benefits of value realisation back to Shareholders.