This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
By Rob Davies (TMFEssex)
Yesterday the Motley Fool, in the form of TMFs Googly and Essex, attended a presentation by Misys (LSE: MSY) to analysts. A band of 30 or so be-suited city scribblers, and 2 casually dressed Fools, sat through a two-hour review of the business. From a very low base this Fool certainly found it most informative. As an aside, I was surprised to discover that most city firms now have a dress-down policy all week and all year. No wonder The Gap (NYSE: GPS) is doing well over here at the expense of Moss Bros (LSE: MOSB). Anyway, back to Misys. Howard Evans, the Finance Director, and John Graham, the Business Development Director for Banking and Securities, gave an excellent overview of the business, but provided no fresh information on current trading conditions. So no excuse for moving the shares.
For those not familiar with Misys it might be worth repeating a few key points.
The company was founded in 1979 as a supplier of computer systems to UK insurance intermediaries but did not list on the USM (Unlisted Securities Market) until 1987 and got a full listing 2 years later. In the mid-nineties it made a number of acquisitions that took it into the banking and health businesses and today it is the UK's largest independent software products company and a FTSE 100 stock with a market cap of just over £3b. For the year ended May 1999 it had sales revenue of £582m and operating profit of £135m. Despite its modest size, it spent £70m on research and development last year.
Over the last five years Misys has enjoyed rapidly rising revenues and profits, mostly driven by the banking sector. Last year was particularly good for this division as banks prepared for the introduction of the euro and worked to prevent Y2K problems.
OK, that's the background, but what does Misys actually do? The business model says it has a version-based product business. That means that it takes standard software, like Windows NT and Unix operating systems, and develops generic products that can be used many times over with little modification. Through its R&D programme, it is able to offer continuous product enhancement and upgrades. As a result it is able to negotiate rising revenues for essentially the same core product.
Perhaps the key to the success of Misys is that the software it sells is vital to the smooth running of an operation; to use their cliché, it is "mission critical". In other words if the system were to fail then the client's business would be jeopardised. This could be something as dramatic as the enterprise risk evaluation model for a bank to something more mundane such as medical records for a doctor's practice. Whatever it is, Misys ensures that the role its software performs is sufficiently important that any decision to junk it, and replace it with a rival product, would be a considerable upheaval for the client.
The beauty of this model is that once the software is installed at some key point in the system it is easier for the client to upgrade it than to junk it.
The FD spent some time talking about the revenue model for the group. He made the point that the Initial Licence Fee (ILF) generates predictable follow-on revenue streams, through recurring licence fees, transaction processing and professional services. The revenue is only booked after acceptance of the product and the final invoice has been dispatched.
Banking is the most important division of the group, accounting for 60% of sales, followed by Healthcare at 31% and Insurance at 9%. Although the firm counts all of the top ten banks, and 75% of the top 200 banks, as customers, my suspicion is that the profitability of this business is skewed heavily in favour of the smaller banks in Asia, eastern Europe and Africa. Having 1600 customers in over 100 countries at 3,900 sites suggests a very diverse business. If deals with the big banks in the developed world were profitable, why would you go chasing after small fry in emerging markets?
On Misys' figures the global banking and securities software market is worth about $70b and growing at 6 to 7% a year, split into one-third new systems and two-thirds maintenance. In the current year it is growing at more than 15%, because of euro and Y2K issues, and part of the share price weakness over the summer has been acceptance that this rate cannot be maintained.
What is significant is where the IT spend is directed. In the US, IT investment is directed at increasing revenues, but in Europe the idea is to reduce costs, and in both markets banks are seeking to protect the customer franchise. Of course, most of the IT spend is executed by the in-house technical people and only about 10% goes on third-party software products like those from Misys.
An expanding area for Misys is middleware. This is software that allows systems integration between different departments or even different banks. This last feature can be particularly important in the case of bank takeovers and mergers.
In overall terms, Misys aims to provide its services to commercial banks, investment banks and fund managers in areas such as front office, back office, connectivity and at the enterprise level. Last year all these activities earned the company £95m of operating profit on revenue of £329m.
Turning quickly to Healthcare, which last year earned £28.8m on revenue of £169.6m, it is clear that is going to be an increasingly important division. The combination of electronic record keeping and the use of the Internet for settling health claims will make a dramatic difference to US Managed Care Organisations (MCOs). Essentially what Misys is offering is a total technology solution to what has been a rather naïve client base. In that environment it is not surprising that fees, and margins, can be very high. The pressure is on doctors to reduce costs as the cost risk of US health care is transferred from the payor, the insurance company, to the provider, the MCO.
It seems to this untrained observer that the healthcare industry's attitude to technology is roughly the same as the banking industry's was 10 or 20 years ago. If that is the case then Misys is well placed to take advantage of this trend.
Time prevents me from covering the Insurance and Internet aspects of the business this time, but we will try and cover those in a later session.
In the meantime tell us your thoughts on Misys, and the other Qualiport stocks, on the Qualiport message board.
Company Change Bid DELL(US)+0.70 43.70 EMA -0.15 8.74 IIG -0.01 2.78 MSY -0.12 5.35 PIZ +0.02 8.15 RTO +0.02 2.16 ULVR -0.15 5.63 LLOY -0.21 7.57 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.78 7.8% 04/11/98 245 Pizza Exp 7.93 8.15 2.8% 29/09/99 356 Lloyds TSB 7.56 7.57 0.2% 27/01/99 74 Dell (US) 44.63 43.70 (2.1%) 22/04/99 348 Misys 5.76 5.35 (7.1%) 19/12/97 783 Rentokil 2.55 2.16 (15.3%) 17/04/98 169 EMAP 11.34 8.74 (23.0%) 17/07/98 266 Unilever 7.53 5.63 (25.2%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2098.90 126.26 04/11/98 245 Pizza Exp 1966.34 1996.75 30.42 29/09/99 356 Lloyds TSB 2723.20 2694.92 28.28 27/01/99 74 Dell (US) 2007.42 1959.88 (47.54) 22/04/99 348 Misys 2028.71 1861.80 (166.91) 19/12/97 783 Rentokil 2046.53 1691.28 (355.25) 17/04/98 169 EMAP 2341.32 1765.48 (575.84) 17/07/98 266 Unilever 2052.00 1497.58 (554.42) Cash: £2,710.26 Current Total : £18,276.85 Total Invested: £18,184.62 Profit/(Loss) : (£ 1,907.77) Value Per Share Day Month Year Qualiport -0.74% 0.10% -13.46% FTSE 100 0.21% 1.12% 3.65% FTSE All Share 0.20% 0.99% 6.74%