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The Foolish Lunchbox
Great Titchfield Street, London -- A slightly unfair headline. Misys (LSE: MSY) reported their interim results this morning, showing a 6% decrease in operating profits before the amortisation of goodwill. But such a decline wasn't entirely unexpected. There seem to be two main reasons for the slight fall in profits.
First up was the well-publicised slowdown due to customers delaying orders in the run up to Y2K. The comparisons with the previous year were made even less glowing because last year saw a surge in demand as companies rushed to get systems upgraded in time. It seems reasonable that this is just a shift in demand from one period to another. The final results, due in six months' time, should clarify the situation once and for all. Misys's chairman, Kevin Lomax, reported that the current order intake was strong.
Misys was perhaps more vulnerable than most, due to its concentration on serving the banking and healthcare sectors, both of which had to carry out some of the most rigorous bug checking. Misys said that the long term growth rate for technology in financial services runs at 6%, quoting a report from Ernst & Young. This seems a little low to me and perhaps Misys think so too. They are forecasting that they will achieve long term organic growth of around 20%. Hopefully this target won't go the way of Rentokil Initial's (LSE: RTO). At the moment this division accounts for almost 60% of the group's sales and it is the key growth driver of the business.
The second factor was the increased investment in e-commerce activities. Misys is developing various finance portals and recorded an operating loss of £3m in the period for these operations. The total war chest set aside for this new division is £50m. The IFA portal should be launched in this financial year, that is before 31 May, and promises a comprehensive service for the life and pensions industry. The Consumer portal should be open by the end of 2000. But these dates seem a long way in the future, in Internet time anyway. Misys could find that they have been lapped before they even start the race.
I've always been a little wary of Misys due to its IFA connections. There were some slightly worrying numbers in their latest figures as well. The ABI say that 55% of new business comes through IFAs and they are the most important distribution channel for unit trusts and pensions. Another little concern was the deterioration in cash flow. This seemed to be due to a fall in cash paid upfront. Whether this was another Y2K phenomenon or indicative of a longer term trend is unclear. Cash upfront is obviously preferable, but Misys' cash flow record has been good over the past few years. The occasional blip can be excused.
More encouraging was the growth in the healthcare division, which accounts for just over 30% of sales. This operation produced turnover growth of 10% and also increased its operating margins; however, it still has a quite a way to go to match the margins produced by the larger Banking division. There was also a promising trend in the mix of revenue type. Recurring and transaction-based income increased from 40% to 45% of the group's total sales.
The shares fell as much as 10% initially this morning but this was attributed to a slowdown warning by the French IT services giant, Cap Gemini. It didn't take long for the price to recover to just shy of the £8 level where it began the day.
Well, that's the initial view. TMFMayn donned his suit and headed off for the results presentation this morning, in place of TMFGoogly. In fact he's just re-appeared. Initial thoughts are "business as usual". No doubt upcoming Qualiport articles will comment on the presentation in more detail.
Morning Movers
In the wake of this month's mega media mergers, the continuing battle, conducted by Scottish banks, to take over English rival NatWest (LSE: NWB) seems to have been slightly sidelined. This morning, the campaign came to the forefront again. The market paid attention as the Bank of Scotland (LSE: BSCT) raised its offer for NatWest to 1456p a share. That comes in at £24.3b, which is 11% above the bid by rival the Royal Bank of Scotland (LSE: RBOS). This sent NatWest's shares up 42p, or 3.4%, to 1276p. Other banks got swept up in this renewed enthusiasm as well.
Fitness First (LSE: FTF) reported healthy full year figures this morning. Profits before tax rose 141% to £6.62m after sales doubled to £27.2m. The group now runs 80 clubs. 22 of them are based in Germany and the Low Countries. A £40m share issue last summer helped fund this expansion. The shares rose 132.5p, or 12.5%, to 1190p. This puts the group on a racy rating of over 60 times earnings. For more comment on this growth extravaganza look at this morning's Breakfast Fool. Rival LA Fitness (LSE: LFS) also shot up 50p, or 13.4%, to 422.5p on the back of this performance.
Electronic components maker Critchley (LSE: CTY) shot up 200p, or 48.4%, to 612.5p after US company Brady made a 575p a share bid for the group. This values Critchley at almost £94m.
Miller Fisher (LSE: MFG) issued a trading statement, which expressed fears that full year results would show a drop in profits. Shares in the insurance group shed 24p, or 21.5%, to 67.75p.
Perhaps upset by Nasdaq's falls overnight as well as earnings worries from French software and services giant Cap Gemini and UK equivalent Misys (LSE: MSY), covered above, many investors' tech favourites also subsided slightly this morning. More news on this in this evening's Foolish roundup.
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