System HouseThe monthly review of thefinancial performance of the UK software and computing services industry

Volume 10 Number 4 Available by subscription only ISSN0967-2583 February 1999

Internet Frenzy arrives in UKIt there is one new thing we have learned in the last year it this month selling a c25% stake - receives c70% of the callis that lndices matter. In Dec. 96, FI'SE International charges ol those using Freeserve BT has complained not

n IT Index ° hare is ut that it 45 service

companies

to be too r _had little ideLogica andwe have showthe mid year.

back to end 199. up 45%. .

damaging to the sector; for example causing both IPOs and internet service via its Argos stores. In Iact, we have backedacquisitions to be cancelled or postponed. GUS ♥ or rather its Experian operation - Ior a long time as

Well, now they are at it again. As we have reported, lrom THE e-commerce venture to watch. (Note - Martin Trees

Apr. 99 the IT Sector will be further divided into SOflware & from EDS has recently moved in as President). Later evenServices and Hardware. Within the former, the sub Toys R Us and Tesco☁s announced a tree service!divisions are Software, Computer Services and the lnternet. We, in turn, probably did our bit to stimulate demand in HM

On 21 st Dec. 98 FTSE International posted how companies as an ☜internet stock". We are a great fan of their Livingwould be categorised on their web site. They didn't seem Libraryoffering and suggested It would beahitil RM madeto tell anyone...not even their PR ,, ,, _ _ the same version available at

Internet (7) riceistDec Price Gist . .agency, Ludg re Coman ea Jan99 home as used wrthrn schools.

Hutchinson

ns to offer a

Communications! On 19th Jan. Easynei I 248 in "Every thinking/caring parent99, The Times announced thatjust ☜S ' 1323: WON/(1319" UP"~ (N0te ' "W35 ori'yfive companies - Easynet, Internet mtgme☁Technologyel I isabp after writing this that it was

Technology, Netcall and VossNet - 235-09 pointed out that access to Livingfrom AIM and, amazingly, Gresham _ 12:38: Libraryis availableon VirginNet,Computing from the main market : 2250;, But, of course, RM don☂t reallywere going to be classified as - 54-09 - like to exploit their assets too☜Internet☝. Readers cannot fail to 655'0" commercial/y...)have missed the Internet frenzy in cums catching me We believe;

the US where the Goldman Sachs Internet vlrua 1) The creation of a UK Internet

Internet Index is up over 150% in ' 724-09 ☁0☁☝? 4 subsector, at present, is not only. 624.0p 780.5p 2 ,Just three months. Where an 4☝ 61740,; premature and meaningless. butInternet company like Yahoo, with ' 475.0 594.0 2 downright damaging. nwm distort

a market capitalisation of c$40b, is apparently worm twice share prices and could even mean death for emergingthat of the News Corp. companies unable to survive the inevitable massive shareUK investors - and this time it seemed to be predominater price gyrations.

private investors - wanted a share of the action too, 2) ALL SCS companies have (or certainly will have)So they piled into every stock with the letters ☜net☝ in their involvement in the Internet and e-commerce. Indeed thenames (Netcall has practically nothing to do with the EDS, Cap-Gemini, Logica and Sema☂s in this country doInternet!) and responded to every press article hinting at a 100♥times more e-commerce business than the total of thecompany _ -. 0 called ☜net__companies listed above. Investors need

the internet H ' ' . = _ ☁ehave ng warnedth'e"conventional☁SCSin turn, gav ' ☁ ' ☁ ' -

inception B☜ Willicomaahd "eat theirt ofimn-SCS' companies

. __ _ , , )is☂eai'ty proof. You ☜poohI☁the PC - don☁t clottagain! ' '

' t 4) Ha rig said that, a neminterest in UK'IT shares and

Freeserve ☜free -break into profi

Freeserve is to b I UPI out" as sible forerunn" to'an associated investment in- matter private companies, is toeventual float. Energis. where the National Grid raised c£1b be welcomed with open arms.

February 1999 1 System House _ _

☁ operation, believing

We have just obtained Specialist Computer Holdings☂ accounts for the year ending 31 stMar. 98. Revenue increased 22% at £536.3m (and this is after the impressive 38% rise theprevious year). The bulk of the revenue, £513m, comes from the UK with £18.5m in Europe

and £5m from the ROW. The FY97 accounts have now been revised and consequently operatingprofit was virtually static at £10.5m but PBT increased 8% to £11m. The 2.1% margin is thelowest for years and far less than half that achieved in both FY95 and FY96~and exactly halfthat achieved by Computacenter in the year ending 3tst Dec. 97.

Specialist Computer But let☂s look at the figures in greater detail. Although we were not a great fan of the Byte retail

Holdings '

Specialist Computer HoldingsRevenue and PBT Record

Relative to 1969

that Specialist shouldhave concentrated on

the corporate sectorand, atthe same time,

increase its servicesrevenues. But we

admired Fligby for

putting his own money

behind a scheme inwhich he clearlybelieved. But, lastMarch, SCH did

indeed dispose of the

PC stores operationByte to Dixons. At the

time the consideration

was stated as

☜nominal☝ but this has

resulted in an

exceptional gain in theaccounts of £2.78m,This sum has more _

than balanced the net increase in interest paid of c£2.1m. Byte☂s revenue in the year appears to be c277m with 'anoperating loss of £4.8m. " -Specialist Computer Centres (direct PC seller and value added services arm - thebit that we really rate) continued tobe the main contributor to operating profits with £9.7m on revenues of £237m. The distribution arm. EnhancementTechnologies Corp., returned excellent operating profits of £5m on revenues of £176m. During the year, Specialist

acquired loss making Preview Data Systems and this acquisition has now improved the group☂s capabilities in the fieldof mobile computing.The only blot now on the horizon is the legal claim by acustomer for £2.77m in respect of software systems work. This.claim has been contested and so far we are unaware of the outcome (judgement was expected in Autumn 1998). Butas a private company, we will probably have to await the FY99 accounts before we find the true cost.

Chairman, MD and major shareholder Peter Rigby in his Chairman☂s statement believes "that SCH is in excellentshape for the future and is now rmly focused on supplying and supporting the business secfom The start of thecurrent financial year has been positive and it is anticipated that the Group will show significant growth for FY99☝.Comment. We like the "new" positioning of SCH, Mind you, it they had stuck with what they did best. SCH could havebeen a rival in size to Computacenter. Maybe we would have seen SCH as a quoted company. Now SCH is a "mid-sized☜ reseller with quite a few competitors. If it wasn☁t for Rigby's personal and family involvement in the business, we

mum

Year ending Ctlsl March

☁ would have said that SCH made a pretty attractive acquisition target to small band of companies wanting to gain, orextend size, in this attractive sector of the UK SCS market.

More news from the privatesProbably very few readers have heard of Mastek UK. They are partof a leading lndian software company, Mastek, founded in 1982.The group now claim worldwide revenue of £25m with over 750

staff employed though their international offices in Singapore, USAand the UK. The group provides software projects and productservices with the stated aim of becoming a major global player inthe offshore development marketplace.

In the UK, the company claims to be growing at over 55% annually,

We are unable to substantiate this as revenue has not been made

available in the accounts. As at May 98, over 120 staff were employedin the UK and the company had a gross profit of £3.6m. They nowemploy over 200 people according to MD M] Cast.

System House

and Data Communications AssociatesNetwork services specialist DataCommunications Associates (UK) acquired030 Network Services from CSC in late 1996.They have show spectacular growth since withrevenue trebled in FY98 to c£12m and the

previous loss of £207K turned into a PBT ofcESOOK. They have won several significant newcontracts during 1998, including 300m, Asda and

Debenhams, MD and majority shareholder Ian

Parsons said "we have enjoyed enormous

growth... and expect to grow furtherin 1999". Wewill monitor progress and keep you posted.

February 1999

Read Weaves his spell at GreshamIt can't be in the genes so it must be in the surname! That ☜other☝ Mr. Read ♥ the illustrious Trevor♥ continues to workhis magic at Gresham, announcing record results forthe company he has led since Jul. 97. Full year turnover to 315☁Oct. 97 was up a startling 165% to £23.1m (FY97: £8.7m) and PET (pre-exceptionals) was almost equally dramatic,up 156% to 23m (FY97: 1.2m). EPS rose 142% to 5.78p (FY97: 2.37m. Acquired businesses more than doubled theirrevenues under Gresham☂s wing. Nonetheless, turnover from ongoing businesses still rose a very respectable 36%.Let us remind ourselves of the exciting story that is Gresham! if someone wanted to produce a soap opera orwrite anovel based on a SCSI company, they shouldlook no further. The current group came intobeing from the merger of Gresham andTelecomputing plc. Founder Sid Greenstepped down in 1994 replaced by anewChairman (Hamish Donaldson) and MD(Chris Swinbank). Although "record" resultswere reported for FY96 and FY97, there WereClear rumblings of discontent ' amongshareholders who had seen the Greshamshare price fall from its 186p high in 1993 toabout 30p. Organic growth was ☜insufficient☝and clearly unsustainable.In Jul. 97, the main shareholders could standno more and anothernew managementteamwas brought in, headed by Trevor Read asCEO and Roger Graham (from Close), initiallyas a non exec. but now elevated to Chairman.The web gets more intriguing. in Sep. 97,Read initiated the purchase of the Systel product from Performance Software (now Cyrano) for ctx rev. Given thatSystel's £400K maintenance revenue was the definitive ☜cash cow". it looked like an excellent move. Then in Nov. 97Read bought CirCa Business Systems (financial services sector) for an initial £475K + 1m Gresham shares and afurther 2m based on profit to 1998. Read has made some other shrewd acquisitions since: Newlog SA (Jun, 98),Open Microsystems (Jun. 98) and Canadian Online Financial Services (Sep. 98).Meanwhile, each of Gresham☂s four operating divisions had a good story to tell. Gresham Commercial Solutions, ineffect their legacy ERP business, grew revenues overall by 33% to cE☂Im and generated 44% of group operating profit(pre-exceptionals). But please note that services revenues actually grew 86% whereas the products side grew at ☁just☂11% (yes, we know you know the message, butjust in case ...). Gresham Computer Personnel (which absorbed thestaff recruitment business from CirCa) grew 75% to c£6m and boasted margins of 10% < very much the high end ofthe spectrum for a staff agency and indicative of longer term customer relationships and projects. Gresham FinancialSystems, the new division formed from the CirCa businesses, generated £8.2m in revenues and is now supported byOnline Financial Services. The other new division, Gresham Enterprise Storage, formed from the Newlog and OpenMicrosystems acquisitions, added £1.7m to turnover. Read envisages ☜making furtheracquisifions to strengthen bothour product and service offering and to enhance our geographical coverage☝.As a result of these impressive numbers, brokers 86 are upgrading 1999 PBT forecast to £3.75m andEPS to 6.9p,and are listing them a ☜strong buy". At current PE of 21 .8, SG forecast a drop to 18 in 1999 and 15 in 2000, which looksremarkably modest compared to the rest oi the sector.Comment: Loyal readers will know our ☁vested' interest in Trevor Read. Whilst non~exec. chairman at Performance

Software. Holway had appointed Read as CEO. He more than achieved his objectives enabling the company to besold to French Cyrano. Holway also had a hand in Read going to Gresham. We had great confidence that the newGresham executive team led by Read would move the company into a new phase of investment (in which it was sadlylacking) and that this would be reflected in the results. Our confidence was not misplaced! Read has restructured the ☁company into selected industry verticals and moved the products businesses into ☁solutions☁ (read ☁services☂) businesses,all in accordance with the Holway mantra. But we did not anticipate that Gresham would be rebranded as an Internetwonderstock (see p1), Anyway it all did wonders for the share price which not only made them the top performer in ,1998 (finishing 1998 at 102p, up 341%) but they also surged ahead in 99 too ~ ending Jan. 99 up another 37% at 1140p. Along with the focus on e-business and expected geographic expansion. we fully expect more exciting and

Gresham Computing picRevenue and PET Record

run-rm (B m:

_230m

:25...

non.

csm

v-nuo

Var-mama☁s:-

__rewarding times ahead.

MMT ComputingAt their AGM, Chairman Mike Tillbrcck said the companywas "performing broadly in line with expectations"despite"a reduction in staff utilisation rates from the exceptionallevels seen last year". Not quite as bullish as his statementonly two months ago that he was "very strong, con dentand optimistic for the future☜, The shares fell 36% thismonth to end on 598p - way below their high of (£14.20

February 1999

Intelligent Environments - losses well downThe latest trading statement from IE indicates thatrevenues for FY98 will be c£6.6m (up 50%) with 24m ofthis in H2. Overall losses forthe year should now be downfrom 93m to 021 m and again H2 was much improved withlosses down to "just" £100K. At this rate. the companymight even make a profit this year! The shares reacted tothe news, more than doubling this month to end on 95p_

System House

Quality shows atFl☂s results for the six F - I 0 GROUP PLCmonths to 31 st Oct. 98show the importance of quality. Quality of management.Quality of earnings. Quality of customers. Fl has them all.Revenue was boosted 53% to £108.9m, PBT increaseda massive 75% to £43m with diluted EPS up 60%. Thishas increased operating margins to 6.5%. Cash in handstood at nearly £18m.

During the period, Fl obtained £184m in new orders - an

increase of 86% ~ and the order bank now stands at an all

time record of £253m. The prime new business was the£150m/5 year London Electricity contract.AM now represents 68% of total revenues - and clearly at

1 an annualised c£150m makes Fl the undisputedi ☜outsourcing independent" leader in this important, high

☁ quality, fast growing sector.But all three of Fl's market sectors recorded strong growth;

☁ Finance now represents 41% of the total, Services 33%i and Retail the remaining 26%. The Dec. 97 acquisition oflndian IT specialist llS lnfotech (criticised by some at thetime - but not us) produced ☜an excellent first half result☝with worldwide revenues of £8.8m and £550K PBT

contribution. It should also be noted that their staffingoperations, Fl Recruitment and Fl Training, now

represents 12% and 3% of revenues respectively.

CEO Hilary Cropper has commented that, despite theslowdown in both the financial and retail sectors, (over

two thirds of total revenue) the slowdown itself is provinga boon. ☜IT outsourcing is not suffering much at all... Clearlythe economy is slowing and that makes us cautious...Butpeople are so dependent on lTsuppon, it☂s not somethingthey cut".Comment. Over many years we have made no secret of

the fact that we are a fan of Fl. Theirquality shines through.However there was some adverse press comment on the

☁ sale stakes by Steve Shirley, Cropper (she still retains

i c6.5%) and other board members. But why should theyi not take pro ts?l The question now remains whether other investors decideto take their healthy profits. Articles in both the FT andTimes basically said that investors should considerfollowing the example set by Cropper.

But we have heard that argument ever since Fl Group

was floated back in Mar. 96 at c61p equivalent. Every☜Sell...F| is overvalued" has been followed by still more

-, rapid rises. There are, perhaps, two fundamental pointsto make:

1) Fl is about asrecession (or slowdown) proof as they

come. If Fl stumbles, most others in the sector will crash., 2) As we have shown, time and time again, average☁ valuations in the SOS sector tend to track projected

l earnings growth. Fl is currently growing earnings by 60%so P/E☂s of 60 are not so out of court.

3) Ahhh, you may say, but how can Fl continue to boostearnings if growth slowsdown? Fl☁s margins, even at6.5%. are still less than the UK SCS average and far lower

than many skill-based companies. Aslowdown might easestaff cost pressures and, as Fl is on long term contracts,

☁ that might help increase margins and boost earnings.

4) Fl might be up for a Boring Award in 2001. There has, never really been a wrong time to invest in other Boring- companies like Admiral, Capita, or Sage.

☜Official☝ profit warning from RivaWhen Riva (services for the retail sector) announced itsinterim results last October. comments from ChairmanPeter Giles implied that H2 would be adversely affectedby overseas operations (particularly Switzerland). Theshares fell 44% in that month.

Now they have made if ☜official☝ saying that they do notexpect profits for FY98 to exceed £700K, i.e. about halfthat achieved in FY97 (analysts had been forecasting

around 22m). The fall has been caused by c£1mexceptional costs resulting from the closures of theirSwiss, Spanish and Danish activities and a ☜disappointing☝December. Their major operations in UK, France andBenelux "have continued to maintain a good

performance☝.

The shares fell 31% this month to end January on just24p.

Europe (and services) help IBM,Results for lBM in 0498, show revenue of $25.1b withrecord Q4 earnings. US revenue rose 8% to $11.6b withEuropean (inc. Middle East and Africa) up a higher 13% '.

at $8.7b. 'Yet again it was Services, where revenue was up 20% inthe quarter at'$7.1b, that was the real star. But software☜with particular strength in database, transactionprocessing and Trvo/imanagementsystems☝also did well.For the year ended 31st Dec. 98, total revenue increased4% (a higher 6% at constant currency (cc)) at a record

$81.7b with net income up from $6.1 b to $6.3b. Asexpected, hardware revenues fell 4% (8% cc), servicesincreased 21% (24% cc) to $23.4b, software was up 5%(8% cc) to $13.5b, maintenance was down (no surprisehere either) 7% (4% cc) to 56b with rentals and financingrevenues up 8% (10% cc) at $4b. Lou Gerstner pointedout that ☜Nearly 60% of our total gross profits now comefrom global services. where $9b new contracts Weresigned in Q4, and software. Both businesses providesubstantial recurring revenues".Due to common shares purchases during the year, dilutedEPS increased from $6.01 to $6.57 ♥ and they still ended .the year with $5.8b cash (down 23.6%).

As yet, we have not obtained separate figures for the UKbut anticipate that SOS revenues will be much improvedfrom last year☁s £800m - possibly to well over £1 billion.They need to go some to rival EDS UK ☜estimated☝ rev. ofc£1.3b in 1998. But with significant new outsourcing winsin ☂98, lBM could well rival EDS for the #1 spot in ☁99.

.Elensiegibe 97991?) 99 15%.??939-MSystem House

Torrid times ending for Systems Integrated?Systems Integrated Research (SiR), which develops

educational software, was an AM new issue back in Mar. 96.

They have had a torrid time since; sinking to a low of just 4p.

Most of the directors and workforce lost theirjobs as SiR joined

the club of companies where losses exceeded revenues.

But results to 30th Nov. 98 look much brighter. PBT of £32K

was reported (loss £278K last time) on revenues up 23% a1

(a still meagre) £661 K. But almost all of that now comes fromsoftware (up 50%). A £150K p.a. contract with the FurtherEducation National Consortium helped! "SiFl's recurringincome stream underpins 032% of group overheads".SiFi☂s share price rose over four-fold to end the month on 43p.

M&A in 1998We had intended to bring you a major review of UK SOS mmin 1998 in this issue but, as there was so muoh other news,

.wesiesided Rancid it overgriextoo ibFebruary 1999

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10.30 12.20 454.917 EPs -9.20 43.30 -3.20 Loss baiComlnu It: Is Solutions Iclnal . ar Wing:89 Comparlslon r1 arlm . Jun 97 F7001 - We nienm . Jun ☜towns...213113171513☜ "' E 6.721.565 '""""" 31371743] F! "E'TIUHETU☁DD "E'WTTEWIUU☁O ' "" "£217312 1,950,000 2 1206.000 252.57 PET 2 247.000 2 404 000 403.517

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February 1999

KLV Ltd (a TPM based in Guildford) has ceased trading.They made a loss on revenue of £1 .7m in 1997. Theyjoina string of TPMs throwing in the towel recently - a list

which has included Cytek Engineering, Fourthrite and

Services Industries in the last month or so.Adaytum Software (budget management solutions) has

now becomea US corporation as part of a $5.1m venturecapital deal led by swam Venture Capital. The capital isto be used to expand US operations.French comms software house BVRP Software hasacquired distributor Kommunicate for $6.2m. Seems agood buy as Kommunicate made £1.1m PBT on £4.4mrevenues in FY98.Catalyst Solutions has acquired Datel AdvancedSystems (the IBM RS/SOOO and SP Server resellerdivision of Datel Group) for an undisclosed sum.

Acorn Group has sold its 50% interest in educational ITsupplier Xemplar Education to its JV partner Apple

Computer for £3m. Xemplar had FY97 PBT of £200Kand net assets of £42m.Hays Group has purchased 97% of French FrancePartners (FP) for an initial FFr150m (cE15.9m) with uptoafurther FFr50m payable in 2000/1 on performance. Apart

from specialising in the medical and optical sectors, FP

has an IT element ♥ providing cheque clearance and ITsupport for banks. FP had FY98 revenues of FFr276m

and profits of FFr11 .1 m.Flexible Management Systems (financial sectorsoftware) has acquired German financial softwaredeveloper Banking Software Partners for DM38m. £10mequity was provided by 3i and Lloyds Development with a

further £5m from Lloyds Bank. FMS now expects c£20mrevenue in 1999.Cable and Wireless has bought German ISP ECRCNetwork Services for £27.5m cash. ECRC was owned by

ICL (who always seem to sell at the end of their financialyear) and were one of Germany☂s Top 5 lSPs. They have

forecast revenues of c£1 7m for 1999. Regent Associates

acted in this deal.US SPSS has acquired Integral Solutions (ISL) for $7.1 mcash. ISL had FY98 revenues of 22m, PBT of £48K andemploys 30 people. Both SPSS and ISL ☜are recognisedleaders in data mining and business intelligence".Reuters has sold its two healthcare subsidiaries, ReutersHealth (better known as VAMP) and Distal SA toCegedim SA for an undisclosed sum.Cadcentre Group and AEA Technology haveannounced a strategic alliance for both 2D and BD plantdesign software products. Cadcentre will pay up to $4.5mfor rights to integrate and develop the joint 30 technologyand client base and will also receive rights to sell AEA☂sZD software.

Nomura International has acquired a 17.5% stake inARC Cores (processors for the IP market). Apax Partners

will also provide further capital to increase the funding to

£3.5m.

Olympia UK has called in the administrators. Thecompany manufactures its own PCs for sale by mail<order

firms. Their latest accounts for FY97 show revenue of£6.5m and losses of £1.7m.Datrontech has hived off subsidiary Xenon Training toshell company Dalkeith Inns in a reverse takeover.

Mergers and acquisitions - continued

15.59m shares on AIM.We missed the announcement that resellers Keltec andProgress merged last November. Their combinedrevenues now approach £40m. In this market size doesmatter.

Talks between Microsoft and AT&T are said to be ongoingconcerning the possible purchase by AT&T of MicrosoftNetwork and other media assets. Microsoft has alsoinvested £300m in NTL ☜the third largest UK cable TVnetwork operatof☂. Coincidentally, the last bit of the oldISTEL - the travel/travel agency part - has been sold byAT&T. The new companyis called Extant. NTL have amajority stake. ☜New☝ MD is Daman (who left Istel over 5years ago - and Chris Chiles (who was CEO of Istel in its☜glory days") is non-exec. Chairman.UK-NASDAQer 4Front has acquired I-NEA SA - theFrench maintenance bit of Siemens AG - for $4.2m.

Internet Technology Group has acquired Dutch ISP

Internet Facilities Europe for c£4.27m.

Druid hasacquired Gamut Technologies for £4.63m.Gamut had 1997 rev. of £2.6m but a pre-tax loss of £62K.

New name for Micro FocusTo reflect a change of focus for struggling Micro Focus,they are proposing achange of name to Merant. Butnamechanges for ailing companies rarely seem to-workl'

Dalkeith raised the £3.9m plus costs involved byplacingFebruary 1999 7

Another company goes westYet another private company we have featured in System

House has been acquired. This time it☂s Alison

Associates that have been bought byUS Bell & Howellfor an undisclosed sum. Broadview acted for Alison inthe deal. The latest filed accounts for Alison are for theyear to 31st Mar. 97 and show a PET of £951K onrevenues of £14.4m ♥ 55% of revenue comes from outside

the UK. They provide systems for vehicle manufacturers;especially systems to manage the distribution from the

plant to the dealer.Comment. That☂s the serious bit. Now for somebackground. In Richard Holway☂s 1997 CSSA

presentation, some amusing chairman's statements werefeatured. One was from Gatton (acquired last month), andanother was from Alison☂s Chairman Chris Bennett whodeclared "Turnover for vanity, profit for sanity... Marginswill be given priority". The next year☂s accounts showedhigher revenue but PBT plummeting to just £22K. Bennettthen prefaced his comments with ☜How difficult it is towrite the appropriate Chairman☂s remarks☝. To be fair, the

FY97 accounts recovered well and were sent to us byBennett with the comment "Richard I know how suspiciousyou are about the motives of Chairman who do this...".Well, it would appear now that his motives were crystalclear!

We are not complaining but we really ought to be in the

M&A business, as we appear to have become a bit of a

dating agency recently.

London Bridge buying again ☁5London Bridge Software has bought Hatton Blue for ian initial £15m (£11.25m cash, the rest shares) with up to 'a further £6m payable on performance. Hatton Blue ownsVectus, a customer relationship management softwareproduct for financial institutions. HB had net assets of;£879K, trading profits of £487K and employs 60 staff. i

KPMG acted for Hatton Blue after beating off stiff;☜conmetition. m, m ☁

system Hausa☜;

Stunning figures from Microsoft0299 gures for Microsoft are literally stunning. Earningsare up 75% to $2 billion on revenues up 38% at nearly $5

billion. Their cash hoard increased to over $19 billion (up' from c$14 billion at the end of FY98). But CFO Greg Maifeiis reported as saying that despite strong growth in PCshipments and Y2000 demand ☜we remain guarded about

growth in 1999, given the likelihood that organisations willreduce their non-YZK-related ITspending and the uncertain

international economic outlook".

We have to disagree. We think that SMEs in particular will

turn to PC replacement as their way around the Y2Kproblem.

Overall revenue growth in the UK, France and Germanywas solid and was particularly high in Sweden, Holland,Belgium and Denmark. Asia suffered with ☜only☝ a 14%increase to $378m (Japanese revenue was flat). Nonproduct licence revenue grew 36% to £467m, i.e. about10% of the total (and still a long way to go before it reaches

our50% prediction by2002!) But practically all of Microsoft☁s

recent acquisitions have been in the services/content sector(see p7 for this month's crop).

New System House Sub-sector IndexWe have been monitoring the performance of the various

Sub~sect0f5 In♥ Movein1998 MoveinJan99our SCSI Index System Houses 192% r 7.7%oven-"any years IT Stan" Agencies ♥u|.71% ☁ if?

bUt.have now :gfstfvaerEProducls ☂62:: ☁ 20.9%dectded to »publish them each month. We decided against an Internet

index ♥ preferring for the time being to report these asServices or Products companies as appropriate.Reversing the trend of 1998 (and before!) the Internet frenzy

(59 p1), however, meant that the produCt companies (+21%)

performed much better than the System Houses (+8%) in

Jan. 99. The IT agencies (6%) continued their decline.

A happy new year at AzlanWe do not intend to go overthe sorry Azlan saga ♥ you willhave to re-read the many reports in our archives. But it

would appear that the worst is now behind them as theSerious Fraud Office investigation has now been completedand no further action is planned. Good news for the

company and all credit to Barry Morgans (now returned to

the non-executive benches) for his annus horribilis. Azlan

shares rose 4% in the month to 64p.

.....but not so at JBAAgain readers must visit ourarchives to find previous

reports on JBA - none have

been positive recently. We hadthought that the position wasimproving but they issued yet another profit warning thismonth and the share price went into treefall with animmediate 74% drop to just 50p (at one time not too longago the shares were c£12.50).A "significanl"operating lossfor FY98 is now expected and analysts have beenbusyrevising forecasts from profits of £10m to a £1 Om loss.At least the shares recovered a little later in the month to

end on 94p - down 49%.JBA also announced the sale of their North AmericanComputer Solutions Division to US Avnet for a maximum

of $24m (c£14.4rn). This should generate an exceptional$18m profit "to reduce debt and fund acquisition strategy".Comment. Can Chairman Alan Vickery now survive? Heoffered to resign after the previous profit warning. It wasonly as recently as last August that he said of FY98 "Weare comfortable that £13m PET is achievable☝. JBAdesperately needs to restore its credibility in the eyes ofthe City and other investors.Of course it has not been helped by increasing evidencethat the business software/ERP new licence market isgetting tougher and tougher - as others such as SAP andBaan know only too well especially now that the Y2K andEuro pressures in Europe are (largely) over. Of course theon-going support and ERP outsourcing market will continue,but JBA relies on new business. Can JBA ltselfnowsun/ivein its present form? Although a prime takeover target thenumber of potential purchasers must also be dwindling.

,☁System House

Eidos shares soarUK NASDAQer computer games company Eidos was anew issue in 1990 at 100p and was launched onto

NASDAQ in Dec. 96 at $12.125 (c732p). Since then theshare price has been on a bit of a roller coaster rising to

nearly £13 (Jun. 98) and down to 0% in Aug. 98. Thismonth the board said that they expect results for FY99(end March) will show a level of profit before goodwill

☜substantially in excess of current market expectations".Profits of c230/35m are now predicted - double last years.All this success is put down to high Tomb Raider 3 sales

(amongst others) with its popular heroine Lara Croft.

The market reacted immediately with a 65p rise andfinished the month up 25% at £11.75.

Defence cutbacks actually help VegaVega specialises in the defence, aviation and spacemarkets but strangelyenough, although overall defencebudgets are reducing, they are prosperihg. in their interimresults for the six months to Stst Oct. 98, revenue

increased 24% to £12.9m with PBT up 77% at £1.43m.EPS was up an evenhigher 75%.The reason for the apparent anomaly is due to theincreasing complexity of IT used in the armed forces.According to Vega this means that the need for lT-basedtraining systems is even more acute and they can actuallysave hard-pressed military managers much needed

resources. Vega has won more than £20m of contracts inH1 and has a £30m backlog of orders.MD Roger Gilbert said ☜there is an enormous demand forour sort of services☝, The company now wish to broadenthe portfolio of sectors, possibly toinclude finance andtelecomms and acquisitions are being considered.

House brokers, Beeson Gregory, are leaving theirfull yearestimates at c£4.3m ♥ a prospective P/E of 27.

Strong interims fromFirstly, let us apologise for, more than once, not mentioning

Triad as a current holder of our

coveted System House Boring R AAwardr Fortunately results for the T -

six months to 30th Sep. 98 indicate

that it is unlikely that Trlad is in any

danger whatsoever of losing said Award. Revenue increased

56% to £22.1m, PBT went up 34% at £3.8m with EPS up37%. To save you working it out, that☂s an impressive 17%

margin.Chairman Alistair Fulton commented ☜Trading continues to

be in line with expectations. I look forward to another verysuccessful year☝. Analysts are now forecasting full yearprofits of c£3.9m. But the share price has fallen from its

1998 high of 774p to 483p ~ down another 9% in Jan. 99.

February 19.99

A dramatic start to the year 31-Jan-93 sCSI Index 4430.99

A 21% rise in the FTSE IT Index in the first month of 1999 was 2::1lgolnd" "51:30?actually higher than the 14% gain it made in Jan. 98. We hope .this is not a portent for another volatile year. The dramatic rises V .335. 11173.5.in Internet stocks (see p1) were not the cause..as none are mmmnmwm, mm,included in the FTSE IT Index. Misys (p11), which heads the E l 'j ? 13:33:22 .weightings, was up (recovered?) a massive 46% - rising in value £33333; $333: 333;:by £1 .1 b to £3.6b and increasing their chances of re-entering the m 5313 :igggg: ☜°☂_☁3"- : ij iij;FTSE100. Others in the Top Five alsodid well - CMG up 12%, m 1:322: 133☁}:Logica up 19%, Sage up 22% and Sema up 15%. Biggest taller $33233; '33:ng

was JBA down 49% (p8). M58 (-36%) and Riva (p4) down 31%. ☁m'i'J-m ☁15☝

0551 SCSI snuro prico snoro pricoR-Ilo inoox movo .inoo % move move llnc

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February 1999 9

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We had high hopes of Division with its ☜serious☝ VRproducts for lighting design and drug design - rather than

just for entertainment. But the VR market did not blossomas expected and they have produced pretty consistent

losses. The latest ☜disappointing☝ results for the yearended 31st Oct. 98 are no exception. Revenue tel] 10%

to 26m with losses more than doubling at £3.8m.Earlier in the month, Division put out a statement

confirming a bid approach and saying ☜Ifan offer were to

be forthcoming... it would be are level below theprevailing

marketprice". As the price then stood at 032p, this provedto be misleading. The bid from Parametric Technology(UK) was at 40p valuing Division at £28m.Comment. Probably best for everyone that the saleproceeds. Their products are excellent but the market justdoes not appear to be there. As part of a largerorganisation perhaps they still stand a chance. Strangelyenough, it you hadbeen an original investor way back in

May 93, you would now have exactly got your money

back. But if you hadtaken profits at their highest price in1995, you could have more than trebled your outlay!

Division increases losses and is acquired I

AGMs, trading updates and other miscellany...On-Line. Shares in AIM quoted computer games company

On-Line have been ona steep roller coaster ride this month.They started on c13p, rose to 285p and then fell back to end

the month on 129p. Chairman Michael Hodges ☜could seeno reason why the increased interest in the shares should

not herald the start of UK and European companies havingsimilar valuations to US companies". See our p1 article. But

he has ☜reluctantly☝ sold more than half his holding (25%) to

improve liquidity in the stock (at one time directors held 080%of the shares).MSB International. MSB share price has been ☜volatile☝

this month - mainly due to adverse comment on the ITrecruitment sector especially in the City. But the board reports

that current trading is "satisfactory". Mind you ex-chairmanMark Goldberg might be forced to sell more shares later thisyear to ease his problems at Crystal Palace FC if pressreports are correct. This won☂t help the share price....SBS Group. ☂The new FYhas gotoff to a very encouraging

start with 0199 revenue and profits ahead of expectations"commented Chairman John Davies.

Staffware. Early in January, Staffware put out a statementthat it was "unaware ofany specific reason for in increase inthe share price ". Afurther trading announcement is expected

shortly....Zergo. Zergo is linking with KPMG to help clients make

their e-commerce projects more secure. The share price

reacted strongly. See also p1.

...Pegasus Group. Due to much increased R&D costs of

c£4.4m, Pegasus has announced that FY98 profits areexpected to be down some £5OOK despite an increase inrevenue of 20%. The share price has fallen 18% this month.

UK Star Shines in Gap Gemini FirmamentAs presaged earlier this year (System House Nov. 98), itwas Cap Gemini☂s UK operation that'stole the limelightwhen the group'announced its preliminary results for theyear to at" Dec. 98. RevenUes at group'level rose 28.4%.at Eur03,95 billion, with net profits up 62% at 'Eurotaam(actually 120% if you take cut thecEuroaom'gain on'th☂e1997 sale of its 19.6% stake in debis Systemhaus).Considering this grovlnh was entirely organic, and thehighest Cap Gemini has postedsince it went public in1985, they have a right to be pleased wiihlthese results.They have also turned net debt of Eur0249m into net cash

of Eur0570m. I I _ .Operating profit was Euro406m - which means a marginof 10.3% this yearcompared with 8.1% last year. PerhapsSema could aimior that...'What☁s morerCap Gemini isexpecting . to increase its revenues in_.1999 by approx.20% and to improve its margins further".But it was Cap Gemini UK that was the star of the show,with revenues up 59%to Euro865m (cESOSrn). much as

we predicted at the halfway stage. The UK now topsFrance as Cap Gemini☂slargest operation, (by revenue ~

France has the higher headcountl). France grew reVenues☁iust☁ 30% to Euro759m; ♥ even so, pretty good compared

to a more modest growth in the French 808 market. .The other big market, Benelux,wa☁s Up 26% at Eur0636m

USA was up 22% at Etirosoamand Nordic regionro's'e28% at Euro446m. Gemini Consulting was basicallystatic at Euro485m V ' . ' v_ v ☂

Given the UK results, it was not sitrprising to see thatoutsourcing was the group☂s fastest growing service line,♥ up 43% on the year. Software developmentgrew 35%andSlby30%. ☁ , w »Comment - Seems a sound performance to us -♥ and anachievable forwardforecast for a quality company like CapGemini. Why then did the CapGemini'share price takesuch a beating days before these excellent results wereannounced? Seems like a suitable case Iorlnvsstigation.Note. Sorry our ☜old☝ Macs'doh☂t have the Euro symbol;We☁ll haveto consider moving to our newer PCs whichdo! ' .

l UKSoftware Partnering & Investment Forum1 We happen to think that the first UK Software Partnering &

☁3 Investment Forum to be held at Hotel Inter-Continental on; 24th-25th Feb. 99 is important. So much so that we are on5 the Advisory Board and moderating the debate on what the,r UK needs to do to become more competitive,

l Fifty ☜pre IPO☝ UK companies will be showcased and the

initial list looks exciting. It gives them a venue to present

directly to V023 and other investors. This kind of show is very

3 popular in the US and we are pleased to see it coming to the

☁ UK. Contact Zoe Hemmings at the CSSA on 0171 8956717l for more information.

*☁System House

10

EFiPJapanese sales problems hit SAPSAP shares tumbled after a preliminary announcementfrom the company that FY98 profit growth would be wellbelow its own forecasts despite an expected 40% increasein revenue. Profits would now probably be only up a much

lower 15% against the expected ISO/35% rise. They have

increased staff worldwide by 06,500 in 1998 to cover

expected demand.

ICL moves in on the ERP marketAccording to reports, last year ICL set up an ERP "base"

in Finland and has also acquired 51% of Czech based

PC Dir - one of the biggest Czech implementers of SAP

software. lCL have also set up a partnership with SAP.

....as IBM strengthens its EFiP servicesIBM Global Services (led from the UK) has acquired the

minority shareholding from the founders of Managementand Applications Support (MAS) Group therebystrengthening its lead in the fast growing EFiPmarketplace. MAS has some 800 staff to add to their7,500staff working on ERP and EMS solutions worldwide. IBMresults see p4.

February 1999

BPO WatchMega-deals drive growth in UK BPO market v

Preliminary analysis of BPO deals signed in 1998 reveals that this market has at least doubled in size during lastyear. With help tromthe lTNET☁lndex, we currently estimate that BPO contracts to the total value of some £650m♥£700m were awarded during 1998 ♥ that's about twice the EBOOm - £350m we saw in 1997. Mind you, almost half of

the 1998 figure came from the☂zsosm/s year deal at the DSS Benefits Agency won by Sema early that year. On theother hand, we have not included the UK☂s biggest BPO deal ever -th'e £1 billion/15 year National Savings contractwon against the odds by Siemens Business Services (EDS were not amused!) asthe contract was not actuallysigned until the end of Jan, 99. ,

All these BPO contracts came from the public sector ♥ we have yet to untangle the web of contracts signed by the☁unusual suspects☂ such as Hays and Serco. Some of these deals will undoubtedly reveal themselVes to be ☁genuine☂

BPO contracts - we will update you when we know more.Meanwhile, we were bemused to read (Microscope 19Jan. 99) that ERP specialist, Druid, has predicted the BPO marketwill stall and that "less would be spent on 8P0 over the next five years than over the past two". We think not. Thereis every indication that the public sector will continue to seek waysto relieve themselves of burdensome back-officebusiness processes. Meanwhile, business support services companies likeHays, Serco.WS.Atkins ♥- and perhapsArthur Andersen ♥ will quietly expand their presence in commercial businesses. Druid☂s comments (it accurately

TEDOrted) are a little ☁surprising given that ERP and related areas such as supply chain management are where we seemuch potential for BPO in the private sector ♥ indeed, Hays is earning a nice living doing just that. Add to this thecontinuing growth in the outsourced call centre market (yes, we think that counts as BPO), let alone the expected

"follow~on☂ BPovopportunity on the back oi the emerging application outsourcing market (☜we run the application ~ whynot let us' run the business process too☂? ♥ and to us the future seems rosy.

What The Doctor Ordered at Misys?Misys is the most valuable, probably most important UK-owned 808 company. It is alsothe company that we have more problems with than any other. Despite our involvement

as an NED at BOS Software and TlS (both of which Misys acquired in the late 80$), ourobvious long standing professional interest and our equally long standing interest as a_shareholder, some years ago Misys (well, Kevin Lomax to be precise) decided not to talk to us anymore it all came to a

head after criticism of their accounting policies at the time of the ACT purchase. The invitations to the analyst☁s briefings

ceased abruptly. As so many people say » current and past directors of Misys, major shareholders and other intelligentobservers - the current situation is somewhat "stupid". For our part we have gone out of our way to ☜build bridges".

Lomax has built a 808 company from a valuation of £8m in 1987 to over £4 billion in 1998. We, and almost everyone wetalk to, thinks that's pretty fantastic. Lomax, you are a torch bearerfor our industry. Everyone we know wants you to playan important part in the development of the UK SOS sector as a whole.

Anyway whatever concerns we might have had about Misys☂ $923m acquisition of US healthcare software companyMedic back in Sep. 97, the latest set of results seem to be quite superb.

Misys group results for the six months to 30th Nov. 98 showed revenues up 62% to £288m and PET up 83% to £59m.

This was way ahead of expectations. EPS rose 46% to 7.9p. At the headline level these results were buoyed by theMedic acquisition but, even so, organic growth was impressive - revenues up 31% and operating profits up a sparkling54%. As a consequence, Misys☁ share price rocketed by 46% to 639p this month (still lower than their 740p 1998 high).This added over 21.1 billion to the capitalisation and puts them on course to re-enter the FTSE100.In Misys☁ Banking 81 Securities Division, revenues rose 36% to £158m and profits up 64% to £46m - a 29% margin(both revenue 81 PBT were reported slightly higher at comparable exchange rates) - indeed, this division accounted for55% revenues and 71% of profits at group level. Although Misys has clearly benefited from Y2K and Euro projects (thelatter of which represents some 10% of turnover) Misys chairman Kevin Lomax is not worried ab0ut fallout afterthe dustsettles. Misys reckons that this work will be replaced by new systems and deferred projects.Healthcare Division (i.e. Medic) showed revenues of £81m and profits of £13m, giving a 016% margin. Indeed, Lomaxreported that the aSSimilaiion 0f Medic had made "good progress" and that the business ☜is well placed to fulfil theGroup☂s aspirations forprolitable growth in this sector☝. Their +Medlc product aims for the smaller physician☁s practice inthe US and boosted orders 42% over the same period the year before. However. shipments of upgrades and add-ons"were disappointing☂. Their Vision product for large practices showed increased sales in the period but ☜the order bookdeclined given the generally slower demand in this segment". However, recurring income streams (e.g. maintenance,upgrades, transaction processing) "continue to grow wel

Misys also sold, as expected, most of its Information Systems Division in a £29.7m cash sale (c285m if debt is taken

into account) to a group of investors led by Kleinwort Benson Development Capital. Misys will take a C£20m loss on thedisposal this FY. The press release only mentioned ☜Certain members of the management☝. But the Financial Times(29th Jan. 99) showed a beaming Malcolm Coster on the sofa with KBDC☂s lan Grant. Coster will be the CEO of the newMBI. Coster was the "senior VP at Unisys☝whc took a pay cut ☜of between £500K and £1m"to join Lorien at a salary ofjust £125K in Nov. 96. Eight months later he had left Lorien with a payout of c£2m. We would lose too many readers it weattributed any views aboutCoster to them directly. You get the drift?But you can imagine the scene on the settee at Burleigh House for the ultimate interview (after all, Misys had beenthrough many suitors). ☜So what do you think of Ho/way, Malco/m7", ☜He☂s a """says Coster. ☜You got it!" says Lomax.Whatever, great deal for both of you...great performance from Misys. Long may it continue, Misys up for System HouseBoring Award in 2001_

February 1999 11

♥♥ System House .vw

Services helpUnisysCit-troubled Unisys has reported profits for the first time

since 1993 in FY98. Revenues increased from $6.6b to$7.2b with a net income of $387m (loss $854m last time).The group is slowly transforming itself from a traditionalmainframe company with proprietary technology, into agroup dominated by services. Services already representsc67% of total revenue and according to CEO LarryWelnbach, they hope to increase this to 75%. ☜That iswhere the value-added lies...as wins new contract with [CL

A consortium led by ICL and Unisys has been awarded aPFI £183m/10 year desktop IT infrastructure/servicescontract (known as Project Libra) for magistrates☂ courts.This has upset EDS as their £120m bid forthe same workin the same timescale was refused after EDS wereclassified as a Category A risk, Le. would not deliver ontime. So HM Govt. is evidently prepared to pay more inan attempt to ensure completion on time. Due to the riskof upsetting someone, we will not comment further.

FI'SE IT Sub sectorWe happen to believe that the new FTSE Internationalcategorisation of UK IT stocks is bordering on the crazy.It proves, it proof is needed, that those in the City who

decide on these things have noknowledge of the sector.If they did would they put ilion in the ☜Distributor☝ sectorbut Azlan in "Computer services☝? Would'they put M83in ☜Computer services" but leave Lorien, Harvey Nash,Quantica and $38 as ☜Education, Business training andEmployment Agencies"? The list of crazy anomalies goeson and on and on.FTSE International has made it so difficult for people toknow what category they are now in. If FTSElnternational☂s PR people ♥ Ludgate - are'unawareyou

can hardly be surprised that even the companiesthemselves don't know what category theyare in. Anyway,we have done all the donkey work for you and posted thecomplete Excel spreadsheet on our website .holway.co.uklhotnews. ☁

CCI remoulds the clayAIM listed shell company CCI Holdings, which made claypigeons, is transforming itself into a software group afterthe £14.7m acquisition of Xavier Computer Group -anotherAlM company - KSE for £11m and up to £13m forCSL Xenon (Isle of Man). A new company called XKOGroup is being formed under Chairman & CEO Brian

Beverley specialising in EFtP. Funding will be £15m cashand the rest in shares. CCI shares have now been

suspended at 125p. More next month when trading inthe shares should have resumed.

Good news on the job front....CSC European HO

According to our local newspaper reports, CSC is to buildits new UK and European headquarters down the roadfrom us in Aldershot. If it all goes ahead, then up to 1,800staff will be employed. The present offices in nearbyFarnborough will be vacated and staff transferred,hopefully towards the end of 2000.

....ED$ Services Delivery CentreEDS is to open its new Services Delivery Centre inSheffield which should create an immediate 300 new jobs

during 1999, with up to another 700 in the longer term.

Erratum

Our readers are very swift in pointing out our mistakes.Last month we said that Network Technology ended

Dec. 98 on 8p. The correct figure was 33.5p. Worth notingthat they have fallen slightly to 30p this month (they werelower at one stage)...so you might only have to wait.

Highams complained that we quoted their IPO price at

72p. They have undertaken a split since - so the basewas meant to be 36p. Due to a "Sell" recommendation in

Techinvest, Highams fell by 12% to 75p in Jan. 99.

About one third will be transferred from the Employment

Service and the remainder will be experienced IT staff.

Software and Computing Services Industry in EuropeThe latest (sixth edition) Software and ComputingServices industry in Europe Report (our co-productionwith PAC) is available for immediate despatch. It really isa massive work - undoubtedly the most respected analysisof the markets and players in Europe available. Seordering details below.

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L_Dete_= _____________System Housoal is published monthly by Richard Holway Limited, PO Box 163, Farnham, Surrey, GU10 1V6. Telephone 01252 781545; Fax;01252 781546;E-mail Inlernet:HolwayébCompuservecom which also publishes the annual 'Holway Report' and the ☜Software and Computing Services Industry in EuropeReport☝. Richard Holway has been a director ol several computing services com

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