Prudence probably best describes the Misys Plc management team’s attitude to business at present, as it reports interim pre-tax profits down 70% to UKP1.5m on turnover down 12% to just under UKP34m. New business dropped by 25% which affected profitability, but at the same time maintenance and recurring revenues grew by 25%, so that the group now derives a third of its business from new orders, a third from service and maintenance and a third from contractual, ongoing orders. To some extent, service revenues have mitigated the new business shortfall. One factor that it has been unable to mitigate, however, are the UKP380,000 severance costs and the UKP191,000 it cost to move up to the Official List from the Unlisted Securities Market last September, which together make up the UKP571,000 exceptional item in the interim statement. Ironically, although profits have dropped, gross margins have increased and this, according to Misys chairman Lomax, is because the greatest fall in sales has been at the low margin end of the business. Lomax believes that the businesses market share has not fallen, and Misys Dataller has managed to increase its market share over historic levels because of the demise of a close competitor, but new business has remained slow. Mentor has performed well, since although positioned in the construction market it offers a high end product to the top end of the construction industry and this has cushioned it from slowing business at the low end. TIS Software has turned in good profits and is well set to advance. However, the Networks division is trading at a loss and is not considered to be strategic, although Lomax reckons it is not worth selling at the moment. He does intend to keep ICC, the travel software business that is part of this division. Meanwhile, the Enterprise division lost money over the interim period because of a move from Thames Ditton. Neither Networks nor Enterprise are expected to make a profit or to deteriorate further over the rest of the current finiancial year. Kevin Lomax has worked hard to get overheads down by UKP425,000 per month, equivalent to a reduction of over UKP5m per year, while 200 jobs have been cut over the past six months. Despite reduced overheads, Misys has managed to increase its research and development budget by 8% as it develops a range of new products that will be launched over the next 12 months. It is also benefitting from a UKP2m fixed price contract with UK universities to develop administrative software, which will be available in six months’ time but for which no profits will be taken in the current financial year. The research and development will form the basis of a new generation of DEC-based products for Misys. In the short term Lomax says that he has a confident management team, many members of which have weathered recessions before, and that cash flow is good, thanks to the group’s service revenue. Provisions for bad debts have been increased: 8% of the ledger is held in reserves, 16% of stock is reserved. Misys has no borrowings, is cash positive and expects to end the year in a cash positive position. Financial director Ross Graham says that Misys can take a 10% drop in sales and still end the year with satisfactory profits – the second half is always the stronger half for the group. As for the long term, Misys, which already earns 60% of its revenues from open systems, intends to move more of its business over to this market. Misys Dataller will be totally based on open systems within the next 12 months, while the DEC and IBM business will be moved over to a stronger open system footing. Misys subsidiary CP Programming is an IBM Agent for the AS/400 and will remain so, although it is also moving to become an RS/6000 reseller. As for the AS/400, the Misys opinion is that it has not been as successful a product as IBM would have wished and hasn’t taken on the System 36 user base as IBM would have liked.

Healthy margins on Unix

Misys reckons it can keep healthy margins on Unix boxes by putting systems together on site, rather than buying them c

omplete from hardware vendors. Graham said that Misys is being offered a lot of companies looking for an owner and is waiting for one or two companies in particular to fall on hard times so that they may be picked up inexpensively. In sum, there appears to be no panic at Misys about the recession, Lomax was preparing the company for economic dificulties a year ago (CI No 1,396) there have been no acquisitions over the past 18 months, and the group’s book to bill ratio is very short, being measured in days rather than weeks. It seems likely that Misys will bounce back quicker than others when the economy picks up. In the short-term it could do with a good big sales order to ramp up the share price which has been languishing near its year low of 62 pence. The share price rose 8 pence to 76 pence on the results re-flecting faith in the group’s managerial strength.