eg Solutions PLC Regulatory News (EGS)

22 Mar 2007 07:01

EG Solutions plc22 March 2007 22 March 2007 eg Solutions plc Preliminary results for the year ended 31 January 2007 eg solutions plc (AIM: EGS), the IT software and services company, announcespreliminary results for the year ended 31 January 2007. Despite a strong first half, in which turnover increased 36.5% to £3.43m, thefull-year performance was disappointing. Momentum slowed in the second half sothat sales declined to £5.47m and gross margins eased from 73.3% in 2006 to68.8% in 2007. Following an operating profit of £738,000 in 2006, eg reported an operating lossof £402,000, due to a decline in revenues, investment in increased capacity andan accounting error which occurred in the last quarter. This represents a lossper share of 1.3p (2006: earnings of 4.4p). Although no final dividend isrecommended, the Company paid an interim dividend of 0.6p. Despite the loss,year-end cash increased from £2.04m to £2.43m. Highlights • Continued expansion beyond core UK markets of Mortgages and Life & Pensions - Legal & General signed as second major client in General Insurance - Contract with Computer Patents Annuities demonstrates another successful application of eg's Operations Management solutions outside financial services • Sales infrastructures established in Nordic region and South Africa • Continued investment in product development to offer a hosted solution, an image-enabled version of eg work manager(R) and new functionality for new markets • Strategic review undertaken; cost base reduced by £0.9m. Elizabeth Gooch, Chief Executive Officer, said: "Following the disappointments of 2007 the current financial year will be one ofoperational transition and margin recovery. As a result of a strategic reviewundertaken at the start of the new financial year, our cost base has alreadybeen brought into line with our 2007/8 revenue ambitions. "The actions we have taken will take several months to deliver visible resultsand we are very aware that we have much to do, both to improve performance andto rebuild the confidence of our shareholders. "Despite the decline in sales in 2007, eg has increased its revenues by morethan 20% every year since 2002 and this growth was delivered by a coremanagement team that has been with the company for many years. This team iscommitted to driving the company back to higher levels of growth andprofitability." Enquiries:eg solutions Rodney Baker-Bates, Chairman 01785 715772Elizabeth Gooch, Chief Executive Officer College Hill 020 7457 2020Carl Franklin/Ben Way Brewin Dolphin Securities (Nominated Adviser) 0845 270 8602Richard Evans About eg Solutions eg Solutions uses a combination of proprietary software and operationsmanagement methodology to deliver significant improvements in the performance ofits clients. Current operations are focused on the financial services sectorwith clients that include Norwich Union, Legal & General, Portman BuildingSociety and Co-operative Financial Services. Chairman's Statement In this second annual report as a quoted Company, I have to report that 2007 wasa year of two markedly-different halves. The first half was strong on manyfronts: turnover increased 36.5% to £3.43 million and adjusted operating profitrose 10.5% to £0.63m. Cash conversion was robust at 237% and the Company added£1.34m to the Interim balance sheet. We began to expand into new territories, at the same time strengthening our UKbusiness with major client wins including Co-Op Bank and two UK mortgage-lendingsubsidiaries of a US investment bank. Legal and General became the second majorGeneral Insurer to roll out our Operations Management solutions, following asuccessful pilot. We also delivered our new hosted-application service to itsfirst client. The strength of our trading throughout the previous year, and the first half of2007, gave us the confidence to increase our marketing and invest in additionalstaff to fulfil a growing pipeline of new business opportunities. As it turnedout, however, the opportunities we were pursuing in the second half proved moreelusive than we had hoped. A small number of larger bids did not come tofruition because we encountered increased competition in what is a growingmarket. Furthermore, because we were pursuing larger and more complex contracts,we found that our sales cycle had increased and contracts were taking longer toclose. As a result, our performance in the second half was disappointing and we endedthe year with revenues falling 7% to £5.47m (2006: £5.88m). This figure reflectsthe discovery of an accounting error in the final quarter of the year in whichsome £0.23m of revenues had been recognised earlier than they should have been.These will now be recognised in the current financial year. However, ourinvestment in increased capacity left us supporting these lower revenues withhigher costs and we ended the year with a loss of £0.17m (2006: £0.53m). Despitethe loss, our cash position actually increased to £2.43m at the end of the year. During the year we were pleased to appoint Andrew McRae as a Non ExecutiveDirector. Andrew brought with him a wealth of international business experiencethat is proving invaluable. Paul Thomas decided to resign as a Non ExecutiveDirector as a result of developments in his career and Finance Director DavidBlain also left the company. We continue to look for a permanent replacement. The Board recognises that eg experienced a difficult year in which our ambitionto expand and increase shareholder value outpaced our ability to close importantdeals. We have since taken firm action to realign our cost base with a morepragmatic view of our sales pipeline. We have also taken an opportunity to reflect on what we do and to validate ourpotential in the market. I am pleased to report that after extensive marketresearch, our confidence in the future remains undiminished. We operate in a market that is replacing the "gut instinct" of management withthe hard facts provided by Operations Management software. We continue todeliver the dramatic improvements in efficiency that we guarantee our clients,and are demonstrating that our software and methodologies can generate theseefficiencies in different markets - both in the UK and abroad. Despite a difficult year, we have learned a great deal and are determined torestore investor confidence by returning the Company to sales growth andprofitability. Rodney Baker-Bates, Chairman Chief Executive Officer's Review Financial results The year ended 31 January 2007 was disappointing. After a strong first half,sales declined to £5.47m and gross margins eased from 73.3% in 2006 to 68.8% in2007. This decline in revenues, as well as our investment in increased capacityand the discovery of an accounting error, led to an operating loss of £402,000for the year (2006: profit of £738,000). With the benefits of interest and tax credits, the Company ended 2007 with aretained loss of £173,000 (2006: profit of £530,000), representing a loss pershare of 1.3p (2006: earnings of 4.4p). Despite the operating loss, cashconversion was strong and improved debtor management resulted in a final cashposition of £2.43m (2006: £2.04m). Although no final dividend is recommended,the Company paid an interim dividend of 0.6p. Operational review When eg listed on AIM in June 2005 we had a strategy for growth based upon threecore objectives: • To build upon our success in the UK financial services industry by extending beyond our core markets of Mortgages and Life & Pensions; • To expand into other UK service sectors; and • To develop new markets overseas. In the previous financial year, to 31 January 2006, we delivered a 43.3%increase in revenues and a 21.4% increase in underlying operating profit.Because of this strong performance, we invested in marketing, sales andfulfilment capability both in the UK and abroad to service a growing pipeline.Indeed, the sales momentum we generated in 2006 continued in the first half of2007, with turnover increasing 36.5% and adjusted operating profit rising 10.5%in the period to 31 July 2006. As the second half progressed, however, it became apparent that although oursales pipeline remained good, deals were becoming harder to close - and for anumber of reasons: • Contracts were becoming larger and more complex and were therefore taking longer to negotiate; • Overseas and new UK markets took longer to develop, with a similar impact on sales cycles; and • As is typical in expanding markets, we faced an increased level of competition from direct competitors offering rival products and services, and from indirect competitors offering wholly alternative solutions. As a result, we experienced the growing pains that are common to many small andambitious companies. Although we worked hard to increase shareholder value, weover-estimated the speed at which we could capture market share and over-reachedourselves. Despite the unsatisfactory outturn to the year, there were a number ofencouraging developments. We further demonstrated that our Operations Managementsolutions could deliver benefits beyond our traditional markets of UK Mortgagesand Life & Pensions. Legal and General became our second major client in theGeneral Insurance sub-sector, deploying eg operational intelligence(R) and oursupporting Operations Management methodology in its contact centre. Of even greater note was our success with Computer Patents Annuities Limited, aprovider of software and services to the intellectual property market. CPA istransforming its patent and trademark operations in Jersey and India with thehelp of eg operational intelligence(R). This contract win is further proof thatsectors and territories beyond UK financial services will benefit from deployingeg's Operations Management tools. Market development The disappointing performance in the second half led us to take stock of ourposition in the market and conduct further research into the potential for ourOperations Management solutions. Typical adopters of our solutions are forward-thinking management pioneers.However, many companies are recognising the need to move towards "scientific"management based upon hard facts and real-time measures of performance. Indeed,industry research suggests that many companies will soon adopt real-timeperformance-management solutions. We believe the reasons for this are several: • Capacity management and workforce flexibility need to be managed in real-time to maintain high levels of customer satisfaction; • Management tools will need to operate across the networks of companies that are evolving to deliver the end-to-end customer experience; • Companies need faster and more granular information to support decision making as customer service is increasingly expected to be delivered "on demand"; and • Companies need to maintain efficiency while delivering this enhanced customer service. eg is in a strong position to deliver these benefits to companies in a widerange of industries. Our research has confirmed that the market potential remains as initiallyforecast and that we are in a growing market for real-time Operations Managementsolutions. Furthermore, we have proved that our software and workingmethodologies can be applied beyond our core UK financial services client basein new territories and new markets. To this end we will continue to refine our approach to new market developmentand target sectors that are of similar size and complexity to the UK's financialservices industry. We have already established sales infrastructures in theNordic region and in South Africa following evaluations of their marketpotential. Product development During the year we invested £0.8m in product development (2006: £0.38m). Wedeveloped a full image enabled version of our software which allows seamlessintegration with any document image processing solution. In addition newfunctionality was developed so it can be deployed to manage operationalperformance in the front office, branch networks and third-party suppliers ofour clients' companies. Our software now provides proactive process and customerservice management capability - irrespective of where the process is performed. eg operational intelligence(R) now fully supports our vision for global/virtualoperations management and provides: • Absolute consistency in work, resource and performance management across all locations of a client's business; and • The capability to manage operational performance from anywhere in the world via the Internet. Major new releases of eg work manager(R) (V5.0) and eg operational intelligence(R) (V2.0) will be launched in April and further product development will addthe ability to integrate inputs from a wide variety of sources including paper,voice, SMS, interactive television and image-based documents. The development of our web-based 'thin-client' software is underway and thiswill significantly reduce deployment times as well as the total cost ofownership. The business case for adoption will, therefore, be much morecompelling. Based on the positive customer and prospect feedback we continue to receive, theBoard believes this investment in product development will be rewarded. We willimprove the return on this investment by establishing an offshore developmentcentre in Johannesburg, South Africa. This will enable us to tap into a readilyavailable source of high-quality developers who will add creativity andstrategic value to our business. South Africa will become a centre of excellenceand we intend to expand our team there in the longer term. Business development We have a strong and established position in two important segments of the UKfinancial services industry - Mortgages and Life & Pensions. Increasing demandfrom these two sectors, as well as the new markets and territories beingtargeted, will provide us with a firm foundation for growth. At the same time eg's business model is evolving to take advantage of thesegrowth opportunities and our focus will be on: • Volume - targeting new customers, new sectors, new markets; and • Value - with new pricing and customer value models, and increasing repeat purchases from existing customers. Current trading and outlook Following the disappointments of 2007 the current financial year will be one ofoperational transition and margin recovery. As a result of a strategic reviewundertaken at the start of the new financial year, our cost base has alreadybeen brought into line with our 2007/8 revenue ambitions. The actions we have taken will take several months to deliver visible resultsand we are aware that we have much to do, both to improve our performance and torebuild the confidence of our shareholders. Despite the decline in sales in 2007, eg has increased its revenues by more than20% every year since 2002 and this growth was delivered by a core managementteam that has been with the company for many years. This team is committed toour strategy and returning the company to higher levels of growth andprofitability. Elizabeth Gooch, Chief Executive Officer Profit and Loss Accountfor the year ended 31 January 2007 Notes Year ended 31 Year ended 31 January 2007 January 2006 £'000 £'000 Turnover 5,472 5,879Cost of sales (1,710) (1,572) Gross profit 3,762 4,307Administrative expenses (4,164) (3,569) Operating (Loss)/profit (402) 738Other interest receivable and similar income 113 50Interest payable and similar charges - (19) (Loss)/Profit on ordinary activities beforetaxation (289) 769Tax on profit on ordinary activities 116 (239) (Loss)/Profit for the financial year (173) 530 Earnings per share- basic (1.3p) 4.4p- fully diluted (1.3p) 4.3p Turnover and Operating Profit are derived from the company's continuingoperations. No separate Statement of Total Recognised Gains and Losses has been presented asall such gains and losses have been dealt with in the Profit and Loss Account. eg solutions plcBalance Sheetas at 31 January 2007 Notes 31 January 2007 31 January 2006 £'000 £'000 Fixed assetsTangible assets 132 141 132 141 Current assetsDebtors due within one year 619 1,602Cash at bank and in hand 2,431 2,035 3,050 3,637 Current liabilitiesCreditors: Amounts falling due within one year (970) (1,218) Net current assets (2,080) 2,419 Total assets less current liabilities 2,212 2,560 Deferred tax (1) (4) Net assets 2,211 2,556 Capital and reservesCalled up share capital 143 143Share premium account 2,910 2,910ESOP reserve 123 72Own shares held (1,000) (1,000)Profit and loss account 35 431 Shareholders' funds 2,211 2,556 eg solutions plcReconciliation of movements in shareholders' fundsfor the year ended 31 January 2007 2007 2006 £'000 £'000 (Loss)/Profit for the financial year (173) 530 New share capital subscribed - 3,500 Share issue costs - (554) Shares to be issued reserve movement 51 72 Purchase of own shares - (1,000) Dividends paid (223) - Net addition to shareholders' funds (345) 2,548 Opening shareholders' funds/(deficit) 2,556 8 Closing shareholders' funds 2,211 2,556 eg solutions plcCash Flow StatementFor the year to 31 January 2007 Notes Year ended 31 Year ended 31 January January 2007 2006 £'000 £'000 Cash flow from operating activities 811 (210)Returns on investments and servicing of finance 113 31Taxation (225) -Capital expenditure and financial investment (80) (1,118)Equity dividend paid (223) -Cash outflow before financing (396) (1,297)Financing - 2,946Increase in cash in the period 396 1,649 Year ended 31 Year ended 31 January January 2007 2006 £'000 £'000 Reconciliation of net cash flow to movement in net debtIncrease in cash in the period 396 1,649Net cash/(debt) at 1 February 2005 2,035 386 Net cash at 31 January 2006 2,431 2,035 Notes to the financial information 1. Basis of preparation The financial information has been prepared on a consistent basis using the accounting policies set out in the report and financial statements for the year ended 31 January 2006. 2. • Non statutory accounts • • The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2007 and 31 January 2006. 3. Earnings per share Basic earnings per share is calculated by dividing earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period excluding those held by the employee trust which are treated as cancelled for earnings per share calculation purposes. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, which comprise employee share options. Adjusted earnings per share is calculated based on the adjusted profit for the period as defined in note 3. Year ended 31 Year ended January 31 January 2007 2006 £'000 £'000Weighted average number of shares:Basic 13,117,377 12,102,067Diluted 13,424,841 12,376,067 4. Notes to the cash flow statement Reconciliation of operating profit to net cash flow from operating activities: Year ended 31 Year ended 31 January January 2007 2006 £'000 £'000 Operating profit (402) 738Depreciation 89 52Share option charge 51 72(Increase)/decrease in debtors 990 (1,162)Increase in creditors 83 90Cash (outflow)/inflow from operating activities 811 (210) Analysis of cash flows for headings netted in the cash flow statement Year ended 31 Year ended 31 January January 2007 2006 £'000 £'000 Returns on investments and servicing of financeInterest received 113 50Interest paid - (19)Net cash outflow for returns on investment and servicing of finance 113 31 Capital expenditure and financial investmentPurchase of tangible fixed assets 80 118Purchase of own shares - 1,000Net cash outflow for capital expenditure and financial investment 80 1,118 Year ended 31 Year ended 31 January January 2007 2006 £'000 £'000FinancingIssue of ordinary share capital - 3,500Share issue costs - (554)Debt due within one year:- increase in short term borrowings - 1,000Loan repayments - (1,000)Net cash inflow from financing - 2,946 Analysis of changes in net cash: At At 31 January 31 January 2006 Cash flows 2007 £'000 £'000 £'000 Cash at bank and in hand 2,035 396 2,431 5. AGM The Annual General Meeting will be held on 6 June 2007. This information is provided by RNS The company news service from the London Stock Exchange