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Clarification is needed with the above presentation. On the face of it, underlying revenues rose 2% from £638m to £652m. But as is the case with most Qualiport companies these days, an accounting change has been introduced to "provide a fairer presentation of the business' results and financial position".
After re-jigging the figures back to the old basis and excluding acquisitions, I consider a 2% underlying revenue increase to be about right. Indeed, subtracting the £145m of "additional" revenues from the top line figure of £709m leaves £564m, which is very close to the £560m I envisaged in this feature.
As could have been expected, Misys told of an "encouraging performance in a difficult year for the (IT) industry". But there is a definite "delayed recovery after the Y2K slowdown" feel about the commentary, although that's not explicitly stated.
The Y2K impact had a differing affect on each of the group's three major divisions. Banking software was hardest hit, whilst the marketplace for healthcare software was subdued. No Millennium slowdown was felt in the group's insurance division, as IFAs continued to ply their unFoolish trade.
The Y2K compliance and Euro-related work of 1999 was always going to make the comparable performance with fiscal 2000 difficult. But although revenues declined, a by-product of the 1999 order surge was this year's "conversion" of divisional revenues to an ongoing recurring basis. In 1999, only 24% of banking software revenues were from recurring license fees (RLF), fees that customers have to pay annually for systems and maintenance support. The figure for 2000 is 34%, a situation that leads to greater visibility of future banking revenues. Good to see.
Although sales of new healthcare systems "slowed significantly", growth in transaction-based and recurring revenues helped the division to declare increases in both sales and profits. The performance has led to over 60% of the divisions' revenues now being generated on a recurring basis. A "good order intake" in the Spring meant the closing healthcare order book had returned to "more normal levels". But reading between the lines, this particular subsidiary is not out of the Millennium woods just yet though.
Unfortunately, those individuals who have yet to discover the Motley Fool helped Misys and their IFA network to record double digit gains through out the year.
Like most IT companies, Misys have been caught out by the delayed emergence of their customers from the Millennium bunkers. A recovery certainly looks on the cards, but getting back up to historical growth rates will, I think, be slower than had been anticipated. Misys expect a "much better year" for the twelve months ended May 2001 and a "progressive return" to the group's long-term growth rate of around 20% is forecast. Unfortunately, no timescale was given for this "progressive return". But an increased recurring revenue base, an IFA network firing on all cylinders and solid order books all lay a solid foundation for the near-term future.
My review of Misys will be in two parts. Today's article will present most of the financial groundwork, while on Wednesday I'll cover the thorny topics of cash flow, acquisitions, reinvestment returns and valuation.
(If you're unfamiliar with Misys, you may wish to read this feature covering the group's financial record and this feature covering the group's different divisions and prospects)
Here are the reported figures.
Year to 31st May
2000 1999
(£m) (£m)
Turnover
-- Ongoing 651.7 637.8
-- Acquisitions 57.1 -
-- Discontinued - 33.3
708.8 671.1
Operating profit
-- Ongoing 110.1 130.0
-- Acquisitions (7.6) -
-- Discontinued - 2.2
102.5 132.2
Other gains/losses 11.1 (40.8)
Pre-tax profit 113.6 91.4
Basic earnings per share (p) 14.5 10.8
Dividend per share 3.73 3.24
Adjusted* earnings per share (p) 15.1 16.7
(* adjusted for goodwill amortisation, profit on fixed asset investments and losses from disposals of discontinued operations)
Clarification
The alteration concerns Misys' IFA network operation. Misys, alongside its software activities, acts as an "agent" for numerous IFAs. The agency role essentially provides these dastardly Wise salesmen with regulatory, systems and administrative assistance. In exchange for the services, Misys receives a slice of any policy commission payable. Up until this year, Misys had only included its part of the commission within reported revenues.
Under the new presentation, Misys now reports the gross commission payable within the turnover figure and the individual IFA's commission within the cost of sales figures. Financially, the impact of the change increased overall turnover by £145m (1999: £89m) and cost of sales by £145m (1999: £89m). So as you can see, profits (thankfully) were not affected by the change. This alteration now brings Misys into line with other quoted IFA network businesses.
Re-jigging the numbers
When it comes to profits, Misys like to "adjust" their figures to exclude expenditure within its Internet Services division. Although Misys "do not believe it is meaningful to aggregate the costs", I'm afraid the significant and ongoing nature of this expense, in my view, merits inclusion at the bottom line. Internet Services investment came to £11m during fiscal 2000 and is expected to be £30m in 2001. Taking the Internet expense into account and ignoring the £16.3m (1999: £2.5m) goodwill amortisation charge, operating profits fell 7% from £128m to £119m. And after more jiggery-pokery with various non-operating gains and losses, I calculate underlying earnings-per-share fell 10% from 16.7p to 15.1p.
Management commentary
Kevin Lomax, chairman of Misys, remarked that "our customers came through the Millennium particularly well, but their IT departments waited until after the leap year date to make new purchasing commitments". This was surprising, since it noticeably contrasted to the comments made at the interim results stage of late January.
Six months ago, in the Qualiport feature that covered the Misys interim results, I wrote: "The future of the Banking division did appear bright. Activity levels were 'very high' with a 'strong build up of prospects'. Howard Evans described demand bursting through after last October and, importantly, being sustained."
Certainly, the impression given by Misys at the January interim results briefing was that everything would quickly get back to normal. So, now that Lomax stated last week that "it is probably too early to confirm that the disruption to our normal trading patterns caused by the Y2K lock down is full behind us..." the aforementioned comments made at the interim stage now sound rather hollow.
Segmental breakdown
Banking
Banking and Securities Year to 31st May
2000 1999 change
(£m) (£m) (%)
Turnover
-- continuing 315.9 328.8 (4)
-- acquired 6.7 -
Operating Profit
-- continuing 87.4 97.4 (10)
-- acquired 0.1 -
The closing order book for new financial software was £38m at the end of May, slightly ahead of the same figure a year before. Having said that, the "prospect pipeline" is reported to be "significantly higher" than in May 1999. The "upward trend in orders" provides Misys with "confidence in the future performance" of the banking division.
Healthcare
Healthcare Year to 31st May
2000 1999 change
(£m) (£m) (%)
Turnover
-- continuing 180.2 169.6 6
-- acquired 1.2 -
Operating Profit
-- continuing 31.1 28.8 8
-- acquired (0.4) -
Insurance
Insurance Year to 31st May
2000 1999 change
(£m) (£m) (%)
Turnover
-- continuing 155.4 139.4 11
-- acquired 49.2 -
Operating Profit
-- continuing 17.4 14.1 23
-- acquired 1.5 -
Brief Summary
Another interesting point was the questioning at the interim results briefing in January compared to that the annual results get-together of last week. At the halfway stage, most questions revolved around the financially immaterial Internet developments, querying page impressions and hit rates and so on. After the bursting of the "tech bubble", questions at the full-year stage refreshingly concerned the more substantial parts of the business.
Having given a contented profit overview and outlook today, on Wednesday I'll concentrate on the unsettling cash flow, acquisitions and valuation aspects of Misys. In the meantime, your feedback is welcomed and can be directed to the Qualiport discussion board, in the Resources box below.
Where Next?
• Get up to speed with the financial background and recent business developments of Misys.
• And then reflect on the company's previous interim results.