Aptitude Regulatory News (APTD)

25 February 2013

MICROGENplc ("Microgen")

Audited Preliminary Results for the Year ended

31 December 2012

Microgen, the software and services provider to the global financial services, digital media and commercial sectors reports its audited preliminary results for the year ended 31 December 2012.

SUMMARY

·; Resilient performance in difficult market conditions.

·; Revenue of £32.3 million (2011: £38.8 million) with growth in annual software licences and other recurring revenue offset by a decline, as anticipated, in consultancy and non-core activities.

·; MASD annual software licence and recurring revenue growth of 23% to £7.2 million (2011: £5.9 million) representing 44% of the Division's revenue (2011: 27%).

·; Operating margins increased to 28% (2011: 24%). Operating profit of £9.0 million (2011: £9.5 million).

·; Diluted earnings per share of 8.3 pence (2011: 8.7 pence).

·; Strong balance sheet with net cash of £32.1 million (2011: £27.0 million).

·; Proposed final dividend of 2.2 pence per share (2011: 2.2 pence) representing a full year dividend of 3.3 pence (2011: 3.3 pence).

·; Proposed special dividend of 5.2 pence per share.

·; Upon payment of the proposed final and special dividends, the Group will have returned 100% of its market capitalisation prior to the introduction of VERBS in October 2008, while maintaining a very strong balance sheet and creating a highly profitable business.

Contacts

MICROGEN plc ("Microgen")

Audited Preliminary Results for the Year ended 31 December 2012

Chairman's Statement

Microgen reports a resilient performance for the year ended 31 December 2012 in difficult market conditions. Operating margins increased and strong cash flow was maintained demonstrating the benefit of the Group's conservative operational approach and annual licencing model.

The Microgen Aptitude Solutions Division ("MASD") reported a 23% growth in annual software licences and other recurring revenue, benefitting from the Group's annual licencing model and customers extending the use of Microgen Aptitude and Microgen Accounting Hub. (Recurring revenue includes annual licence fees, software maintenance and support). However, the Division's consulting revenue reflected the economic climate as customer budgetary pressures reduced deployment levels. While the market environment has made the transition more challenging, the increase in software as a proportion of Divisional revenue is consistent with the Board's strategy of value enhancement for this Division.

The Financial Systems Division ("FSD") which provides software products and services in more mature financial market sectors remains highly profitable producing operating margins of 52% in 2012 (2011: 46%) with strong cash flow and high recurring revenues. The FSD division continues to see growth opportunities in the wealth management sector endorsing the investment made in the Division's trust and fund software in recent years.

In summary, taking into account the challenging market environment throughout most of 2012, the Board is satisfied with the financial performance of the Group, particularly the resilient operating profit and cash flow. While sales cycles continue to be extended, the Board remains cautious in its outlook and prudent in its management of the business, but is also responding to the market by developing solutions compatible with more limited customer budgets.

The Group's balance sheet remains very robust with net cash of £32.1 million at 31 December 2012 (2011: £27.0 million). As a result of the strong financial position of Microgen, the Board has decided to propose a special dividend of 5.2 pence per share. The Board is also recommending a final dividend of 2.2 pence per share (2011: 2.2 pence), representing a full year dividend of 3.3 pence (2011: 3.3 pence). Subject to shareholder approval, the proposed final and special dividends will be payable on 28 May 2013 to shareholders on the register at the close of business on 26 April 2013.

As shareholders are aware, the Board introduced the Value Enhancement and Realisation Bonus Scheme ("VERBS") in October 2008 at which time the market capitalisation of Microgen was £37.0 million. Upon payment of the proposed final and special dividends, the Group will have returned 100% of its October 2008 market capitalisation to shareholders through ordinary dividends, special dividends, share buy-backs and tender offers. Furthermore, in addition to this substantial return of capital to shareholders, Microgen had a market capitalisation of £99.1 million at 31 December 2012.

Despite the challenging economic climate in recent years, Microgen has delivered significant value to shareholders and the Board considers the return of 100% of its market capitalisation to be a significant milestone achievement. At the same time, Microgen has maintained a very strong balance sheet throughout this process while reporting excellent profit margins and investing in its products, solutions and operating businesses. The Board continues to explore opportunities to extend this successful value creation and realisation strategy as appropriate.

Martyn Ratcliffe

Chairman

Chief Executive Officer's Report

Microgen has reported a resilient financial performance in 2012 despite the difficult market environment which caused new business sales cycles to be extended and reduced consultancy deployment on existing projects. The resilient financial performance has benefitted from the Group's long term promotion of software sales on multi-year annual licence contracts, conservative revenue recognition policies and the Group's disciplined approach to overhead and operating costs.

·; Microgen Aptitude Solutions Division ("MASD")

MASD provides enterprise level application products and solutions to some of the world's largest financial and digital media organisations, typically where customers require very high volume (often referred to as "Big Data") processing of complex, business event-driven transactions.

Revenue from annual software licences and other recurring revenue grew by 23% to £7.2 million (2011: £5.9 million) and now represents 44% of the Division's revenue. However, customer budgetary constraints, particularly in the financial services sector, have led to reductions in the number of consultants deployed and services revenue declined to £8.8 million (2011: £15.3 million). While the market environment has made the transition more challenging, the growth in higher margin annual software licences and other recurring revenue, and its increase as a proportion of Divisional revenue, is consistent with the Board's strategy of value enhancement for this Division.

As a result, MASD reported revenue of £16.3 million (2011: £21.8 million) with 57% of the Division's revenue being generated by its top 5 clients (2011: 64%). Strong operating margins of 18% (2011: 19%) delivered an operating profit of £2.9 million (2011: £4.2 million) while increasing investment in research and development to £3.5 million (2011: £3.2 million) and continuing to expense all research and development costs.

MASD has continued to invest in the Microgen Aptitude and Microgen Accounting Hub software and technology. The results of Microgen Aptitude performance tests at a third party test facility in 2012 demonstrated that this high performance Enterprise Application Platform achieved 7 billion transactions per hour performing in-memory processing and further tests, involving database to database processing, resulted in Microgen Aptitude achieving over 800 million transactions per hour. This exceptional performance, combined with the rich functionality provided in both Microgen Aptitude and Microgen Accounting Hub, confirms Microgen's leadership in delivering the high transaction-processing performance required in addressing the challenges associated with "Big Data" in high volume complex systems.

The Division also launched Version 4 of Microgen Aptitude and a new 3D Navigator module. This new module, together with the additional functionality within Version 4, further strengthens the product's market leading combination of functionality, business/IT collaboration and transaction-processing performance. To protect the Group's intellectual property Microgen continues to file patents related to the innovative enterprise technology associated with Microgen Aptitude. Patent applications have now been filed internationally for 13 separate inventions within Microgen Aptitude, the first of which was granted by the US Patent Office during 2012 with a further two being allowed for grant by the US patent office subsequent to the year end.

In response to the caution and budget constraints being demonstrated by organisations to large-scale investments in enterprise projects, MASD is modularising the Microgen Accounting Hub to provide targeted solutions to specific industry requirements within organisations. These highly functional software modules are capable of being extended to a full finance transformation solution while providing a lower entry-level commitment appropriate to the current economic climate. For example, as part of this strategy, a "Profitability" module has been developed providing a solution to address the increasing market need to improve cost allocations and profitability modelling, an area of demand MASD is seeing across a number of vertical sectors.

·; Financial Systems Division ("FSD")

The Financial Systems Division has a well-established customer base with 74% (2011: 69%) of Divisional revenue being derived from its core financial systems software including software for the wealth management and banking sectors. Reflecting the market maturity of the Division, the recurring revenues account for 78% (2011: 78%) of the Divisional revenue, with 28% of the Division's revenue being generated by its top 5 clients (2011: 24%).

FSD reported revenue of £16.0 million (2011: £17.0 million which as previously reported benefitted from unusually strong consultancy demand and some one-off benefits). Core financial systems reported growth in revenue to £11.9 million (2011: £11.8 million) of which £9.5 million is recurring (2011: £9.6 million). As anticipated, non-core activities declined to £4.1 million (2011: £5.2 million) of which £2.9 million is recurring in nature (2011: £3.6 million). The Division remains highly profitable producing operating margins of 52% in 2012 (2011: 46%).

The FSD division continues to see growth opportunities in the wealth management sector endorsing the investment made in the Division's trust and fund software in recent years. In parallel, the Division continues to review the viability of a number of its smaller product offerings and non-core activities with a view to optimising profit contribution as these offerings approach end-of-life. At the same time, the Group's strong balance sheet affords the Division the capability to evaluate add-on acquisitions in financial back office processing to complement its current market offerings if such opportunities arise.

Operations Summary

The Group has a strong and established portfolio of products and solutions, combining proven domain and industry expertise with leading technical and functional capability. The benefits of scale are achieved through the use of shared services centres for support functions. This foundation has enabled the Group to report a resilient financial performance in 2012 despite a challenging market environment.

David Sherriff

Chief Executive Officer

Group Financial Performance and Finance Director's Report

Revenue for the year ended 31 December 2012 was £32.3 million (2011: £38.8 million), with the higher margin annual software licences and other recurring revenue comprising 61% of overall revenue (2011 : 49%), producing an operating profit of £9.0 million (2011: £9.5 million). The Group reported a profit for the year attributable to equity shareholders of £6.9 million (2011: £7.3 million).

In accordance with IFRS, the Board has continued to determine that all internal research and development costs incurred in the year are expensed and therefore the Group has no capitalisation of development expenditure. The overall group expenditure on research, development and support activities in 2012 was £5.7 million (2011: £5.4 million) of which £3.5 million (2011: £3.2 million) was incurred by the Microgen Aptitude Solutions Division.

Despite the reduction in revenue, operating margins increased to 28% (2011: 24%) due to the Group's conservative operational approach. This has been achieved by the growth in the Group's higher margin annual software licences and other recurring revenues together with reductions in the use of contractors and associates, lower variable remuneration and reduced discretionary expenditure. Headcount at 31 December 2012 was 238 including contractors and associates (31 December 2011: 273).

Diluted earnings per share for the year ended 31 December 2012 was 8.3 pence (2011: 8.7 pence). The total tax charge of £2.2 million (2011: £2.3 million) represents 24% of the Group's profit before tax (2011: 24%). The Group's tax charge benefitted from the recognition of £0.2 million (2011: £0.3 million) tax losses in the year. The deferred tax asset in relation to taxable trading losses represents only £0.2 million (2011: £0.2 million) of the overall deferred tax asset of £1.0 million (2011: £1.3 million) with short term timing differences representing the principle component at £0.4 million (2011: £0.5 million).

The Group continues to have a strong balance sheet with net assets at 31 December 2012 of £64.7 million (2011: £60.0 million) including net cash at 31 December 2012 of £32.1 million (2011: £27.0 million). 97% of cash at the year end was held in the United Kingdom. Benefitting once again from excellent customer debt collections in the final quarter, the cash generated from operations in the year was £10.3 million (2011: £12.5 million) with cash conversion, measured by cash generated from operations as a percentage of operating profit, of 115% (2011: 132%).

Philip Wood

Group Finance Director

Group Income Statement

group statement of comprehensive income

Group Balance Sheet

Group Statement of changes in shareholders' equity

Notes to the Audited preliminary results for the year ended 31 December 2012

1. Segmental analysis

Business segments

The Board, which is considered to be the chief operating decision maker, has determined the operating segments based on the reports it receives from management to make strategic decisions. 

The segmental analysis is split into Microgen Aptitude Solutions Division ("MASD") and Financial Systems Division ("FSD").

The principal activity of the Group is the provision of IT services and solutions, including software based activity generating the majority of its revenue from software licences, maintenance, support, funded development and related consultancy. 

The Divisions and business categories are allocated central function costs in arriving at operating profit. Group overhead costs are not allocated into the Divisions or business categories as the Board believes that these relate to Group activities as opposed to the Division or business category.

1 (a) Revenue and operating profit by Division

1(b) Geographical analysis

The Group has two geographical segments for reporting purposes, the United Kingdom & Ireland and the Rest of the World.

The following table provides an analysis of the Group's sales by origin and by destination.

2. Income tax expense

The total tax charge of £2,238,000 (2011: £2,348,000) on continuing operations represents 24.4% (2011: 24.5%) of the Group's profit before tax of £9,187,000 (2011: £9,598,000). 

After adjusting for the impact of amortisation, change in tax rates, share based payment charge and prior year tax charges, the tax charge for the year of £2,319,000 (2011: £2,687,000) represents 25.2% of the profit before intangible amortisation (2011: 28.0%) which is the tax rate used for calculating the adjusted earnings per share.

At the balance sheet date, the Group has unused tax losses of £7,606,000 (2011: £8,518,000) available to offset against future profits. A deferred tax asset has been recognised in respect of £790,000 (2011: £822,000) of such losses which is the maximum the Group anticipates being able to utilise in the year ending 31 December 2012. No deferred tax asset has been recognised in respect of the remaining £6,816,000 (2011: £7,696,000) due to the unpredictability of future profit streams.

The difference between the total tax charge and the amount calculated by applying the effective United Kingdom corporation tax rate of 24.5% (2011: 26.5%) to the profit on ordinary activities before tax is as follows: 

3. Earnings per share

To provide an indication of the underlying operating performance per share, the adjusted profit after tax figure shown below excludes intangibles amortisation and has a tax charge using the effective rate of 25.2%

 (2011: 28.0%)

Adjusted earnings per share are calculated using adjusted profit after tax.

4. Dividends

The proposed final and special dividends were approved by the Board on 22 February 2013 but were not included as a liability as at 31 December 2012, in accordance with IAS 10 'Events after the Balance Sheet date'. If approved by shareholders at the Annual General Meeting the proposed final and special dividends will be payable on 28 May 2013 to shareholders on the register at the close of business on 26 April 2013.

5. Trade and other receivables

6. Trade and other payables

7. Provisions for other liabilities and charges

Provisions have been analysed between current and non-current as follows:

8. Share capital

The movement in authorised and issued Ordinary Share Capital of 5 pence each during the year is detailed below.

9. Notes to the Group Cash Flow Statement

Reconciliation of profit for the year to net cash inflow from operating activities

10. Statement by the directors

The preliminary results for the year ended 31 December 2012 and the results for the year ended 31 December 2011 are prepared under International Financial Reporting Standards as adopted for use in the EU ("IFRS"). The accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2011.

The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 December 2012 or 31 December 2011. The financial information for the year ended 31 December 2011 is derived from the Annual Report delivered to the Registrar of Companies. The Annual Report for 2012 will be delivered to the Registrar of Companies in due course. The auditors' report on those accounts was unqualified and neither drew attention to any matters by way of emphasis nor contained a statement under either section 498(2) of Companies Act 2006 (accounting records or returns inadequate or accounts not agreeing with records and returns), or section 498(3) of Companies Act 2006 (failure to obtain necessary information and explanations).

The Board of Microgen approved the release of this audited preliminary announcement on 22 February 2013.

The Annual Report for the year ended 31 December 2012 will be posted to shareholders in due course and will be delivered to the Registrar of Companies following the Annual General Meeting of the Company. The report will also be available on the investor relations page of our web site (www.microgen.com). Further copies will be available on request and free of charge from the Company Secretary at Old Change House, 128 Queen Victoria Street, London, EC4V 4BJ.