Megabuyte

Megabuyte morning round-up 28.03.08

The markets were perky again yesterday as the FTSE gained 1% to 5,718 and the Megabuyte Leaders Index ended up 0.2% to 845.9. However, weaker than expected revenues and negative comments on current trading from Oracle overnight are likely to weigh on sentiment this morning. The NASDAQ ended the day nearly 2% lower at 2,281.

Civica follows Northgate in bid to go private with 3i

The management team of Civica, which supplies software and services to the local authority and housing market has launch a 270p per share all share cash bid for the company backed by 3i. The bid represents a 34% premium to last night's closing price and values the company at £190m. The bidco has irrevocable undertakings 41.5% of Civica shareholders.

First thoughts: Stock market interest in Public Sector IT companies seems to be inversely proportional to that of private equity. Valuations for the PSIT sub-sector are amongst the lowest in the SCS sector and yet most of the suppliers offer stability and strong cash flow - attractive attributes for private equity. The parallels with Northgate are interesting. As well as being competitors in the PSIT space, both companies announced initial private equity interest a year before the eventual bid. In June last year, Civica revealed that it was talking to a private equity firm (widely rumoured to be Alchemy, the investor that took the company private) but the deal came to nothing as the debt markets tightened. Since then, Civica's share price has slipped from 275p to 200p which has clearly made private equity deal more attractive, even with the required premium.

The 270p take-out price values Civica on 12.7x current year earnings which is almost bang in line with the Megabuyte 50 Index of which it is a constituent. Given the state of the markets and Civica's fall from investor favour, this looks like a good deal for shareholders. On a wider note, with Northgate and Civica in the hands of deep pocketed private equity players, it will be interesting to see what happens to the three other listed PSIT players. On that point, it is also interesting to note that the statement specifically says that 3i will provide further capital for growth. Anite's public sector business is currently for sale and, we understand, is also doing the rounds of the private equity community. It's not beyond the bounds of reason that 3i might look to acquire one of the other large players. They have proved their appetite to do this kind of large scale roll up with Telecity, with has made them a great deal of money. In addition to Anite, targets could include IBS OpenSystems which has stumbled recently and IDOX, which is the only one of the quoted players that seems to have any momentum at present. On thing seems certain, more change of ownership in PSIT looks like a certainty.

IBS warning is another stepping stone to consolidation

Shares in software vendor to local authorities and housing associations, IBS OpenSystems have slumped 25% to 125p (an all time low) following a negative trading update this morning. Interestingly, contrary to our earlier prediction, shares in Civica, Anite and Idox are either up or unchanged. In a period end trading update issued this morning, IBS said that revenues and profits for the year to December would be modestly below expectations and that the market outlook for 2008 is 'tightening'. As a result of the statement, brokers have trimmed their estimates by around 5% this year and 10% for 2008.

We had a conversation with the management team earlier today and the tone of the conversation was very much that the market was still solid enough, just that local authorities were tightening their belts somewhat, especially in revenue and benefits where there were only two significant tenders in 2007. Interestingly, Northgate CEO Chris Stone was bullish about the prospects for revenue and benefits systems at the Northgate interims analyst briefing in December. Stone's bullishness stemmed from the belief that many revs and bens systems were reaching the end of their useful life and that this would kick off a replacement cycle over the next few years. The newly appointed CEO of IBS, Richard Smith said to us that, whilst they are seeing dissatisfaction with some current systems out there, this is yet to translate into RFPs. On the housing association side of the business, trading still seems to be good for IBS as the trend to housing association mergers or shared service centres drives investment in new systems.

Our View

Whilst this statement is disappointing, given the overall focus on government budgetary tightening, it is not surprising that local authority spending on technology is moderating. IBS remains a solid, focused company with a strong market position and attractive financial dynamics. Because of these attractive qualities and because it has long been seen as a potential bid target, IBS has traditionally traded on a premium to its peers. Perhaps then the weakness in the shares today is merely an acknowledgement by the investment community that, whilst it may be a storng company, it is still subject to the same market pressures as other companies in the sub sector. Certainly, after today's price move, the shares now trade on a single figure 2008 PE, which is in line with the peer group.

After a long period of stalemate in the ongoing consolidation amongst public sector IT vendors, Anite putting a 'for sale' sign up over its Public Sector business before Christmas and the KKR bid for Northgate have heighten speculation that we are about to see another wave of consolidation in the public sector IT space. In our view, the share price move today from IBS can only serve to fuel this speculation further.

Megabuyte morning news 17.12.07

Anite - interims results, signals break-up

As expected following a recent profit warning, Anite's interim results were held back by a poor performance from part of the telecoms software division. Revenues in this business were down from £32.3m to £26.4m and the contribution dropped from £7.3m to £5.9m. The statement notes that there is no improvement expected in H2. In Wireless (recently acquired Nemo), trading remains robust. The weak performance in Telecoms meant that, despite strong performance from Travel an steady progress in Public Sector, underlying revenues (before the maiden contribution from Nemo) were down slightly and operating profits dropped significantly from £10.3m to £7.2m. Also with the results, Anite has said that it has been aware that the conglomerate structure of the group has resulted in a discount in the shares and it is looking to take action. In our view, this is clearly signalling that the group is to be broken up and we would expect Public Sector and/or Travel to be divested.

NSB - Offer from Epicor

Having announced that it was in talks which may lead to a bid last week, NSB Retail Systems has announced a cash offer for the company at 38p per share - a healthy 60% premium to the price before initial announcement. Epicor is a California based mid-market ERP vendor listed on NASDAQ with revenues of around $400m.

Other news

In other news, K3 Business Technology has announced the acquisition of Microsoft Dynamix supplier to process manufacturers, Index Computer Systems for £2.75m whilst Alphameric has said that its bid talks are off but it will continue with its rights issue.

Anite falls into the 4G chasm

Telecoms to travel software conglomerate Anite has issued a profit warning this morning saying that a weak start in its handset testing software business had continued through H1. In its recent IMS, Anite had said that it had experienced a slow start in its handset business but that its network business (Nemo) was trading well. This pattern of trading has continued through the first half although the handset business did have a strong October. Management is now guiding the market to a flat operating performance for H1 which, given that there will be a first time contribution from Nemo, indicates that profits will be down sharply in the handset business. In response to the poor performance, Anite has instituted a cost reduction programme which should take around £6m of cost out of the division on an annualised basis. Also announced today is a partnership with Agilent for co-development and marketing on the 4G platform. Agilent has been Anite's hardware partner on the handset testing business for the last four years and it has been a generally strong relationship. However, Agilent had not been proactive in developing its 4G platform and Anite had determined to develop its own. The announcement today puts the relationship back on track although Anite will incur £3m in exception cost which will not please those that accuse the company of clouding the picture with repeated exceptionals.

Elsewhere in the group, trading is in line with expectations. Travel continues its strong run, Local Government is stable and the central government business will be lower in H1 as expected but H2 is looking better.

Our View

We believe that Anite's warning today is more a function of where its customers are in the technology cycle than a company specific issue. Anite's handset business sells to the both captive and independent research labs developing mobile phones and demand for its products is therefore generated at the beginning of each technology cycle. Whilst 3G is now going mainstream in the consumer market, handset developers are already turning their attentions to 4G technology but it will take some time for demand to build up. It is important to remember however that in the demand chasm between 2G and 3G, Anite Telecom's performance may have been poor, but it was not catastrophic. Although the picture was clouded by the presence of other businesses in the group such as telecoms billing provider Calculus (which fell apart in the technology downturn in 2001/02.), the core telecoms business remained solidly profitable throughout. Nevertheless, it seems likely to be fiscal 2010 before 4G products become material to Anite's revenues and hence we foresee a weak period for the division for the rest of this year and all of next. Given that Anite's profits and the valuation are closely linked to the Telecoms business, it would be optimistic to predict a rapid recovery in the share price which is down 8.5% to 53p as we write, but is down over a third from their 12 month high of 85p.

As a broader point, this warning serves to underline why software conglomerates like Anite and Northgate tend to trade on a discount to the sum of the parts. Whilst, in theory, if the whole group traded well, the shares look undervalued, the reality is that there always seems to be one division dragging back overall performance.

Detica set to win e-Borders contract

s It has been widely speculated in the press that the Raytheon consortium of which Detica is a part has been selected as preferred bidder for the e-Borders contract with The Home Office in competition with BT. There's a good article from Washington Technology here. This is also good news for Qinetiq and Serco who are also in the Raytheon consortium but bad news for Logica and Anite who are in the BT consortium. Detica's share price has gone through some wild moves as speculation circled and then faded that BT had been successful. The shares are down slightly this morning sosuggesting that the market hasn't seen the news yet or that it is priced in anyway.

UK Technews 12.10.07

Anite shares were steady at 71.5p yesterday on news that CEO Steve Rowley had added to his holding with a purchase of 260,000 shares at 72p. Retail software vendor Workplace Systems seems to be getting its act together under the leadership of ex-Sherwood International sales director Barney Quinn. The shares added 7% to 11p yesterday on the back of a positive trading statement. Innovation Group shares were up 1p to 34p following a positive trading update and acquisition. We attended the analyst meeting and were impressed with what we heard - see separate post. Sage had been 7% down following its trading update earlier in the day but recovered somewhat close 3% down at 244p . Iomart bounced again yesterday - the shares were up 2p  to 47.5p as it seems like an overhang has been cleared. Finally, Aveva continued to perform following its recent trading update and closed up another 4% up to 1122p.

Very little news this morning. FDM Group shares are steady on news that COO Julian Divett sold 115,000 shares at 130.5p taking his holding down to just over 1m shares. Shares in financial services software vendor Focus Solutions are up 10% to 47.5p on the back of a positive trading update. We'll be at an analyst teach-in at Phoenix IT's Farnborough facility later this morning but there will be no news on current tradinf.

UK Technews 2.10.07

Better late than never, a quick round up of the day's news. First, Mediasurface shares are deep in the red after a bad profit warning - the shares are down over 50% (see separate post). Phoenix IT is also under pressure today following its trading update yesterday - the shares are down 6.5% to 350p. On a more positive note, Blinkx has said that current trading is ahead of expectations and that results for the first half to September will beat the top end of expectations. The shares are up 16% to 34p.

The SmartStream IPO bandwagon came to a sad end yesterday as the company announced that it had delayed its IPO indefinitely. This follows news on Friday that the company was going to give it a couple more days to see if they could fill the book. However, according to the FT, the company's hand was forced by the SEC which was unhappy about the IPO being finalised so close to the SIBOS trade show where SmartStream management would be making presentations. Even without that though, news of massive losses at Citigroup and UBS resulting from sub prime mortgages may well have been the last straw anyway. It's always a shame when IPOs don't get away but it will be interesting to see whether TA Associates, who have only owned SmartStream for a year or so, stick with it or look for a trade exit. We watch with interest to see whether Telecity gets a warmer reception and whether others that are rumoured to be trying for an IPO, such as Sophos, carry on with their plans.

We've just spotted that Anite has replaced UBS as its broker with JPMorgan Cazenove and Landsbanki as joint brokers.

We're at the Future of Web Apps (FOWA) conference tomorrow which should be really interesting. At a time when Web 2.0 is attracting so much attention, this event brings together many of the top people making it happen as well as some very funky start ups.

UK Technews 21.8.07 update

A couple of bits of follow up from this morning. We only managed to pick up half of the Anite story on this morning's post. In addition to Chris Humphrey, Chairman Clay Brendish (72,000) and CEO Steve Rowley (100,000) also bought shares in the company yesterday. After a couple of days in the red, the shares stabilised today and ended up 1p to 70p. The share purchases seem to suggest that management doesn't share the market's view that this week's trading update indicated some worrying trends in the business.

The real casualty of the day has been Alphameric which ended the day down 60% to 12p on its trading update this morning. Significant losses, litigation and a weak balance sheet is a pretty lethal combination. The share price seems suggests that some kind of rescue funding is in the offing.

Looking at next week we have Gresham Computing reporting interims on Monday, Servicepower on Tuesday and AT Communications on Thursday.

SmartStream, which is currently in the middle of its IPO process, is talking to analysts in more detail about the company next week. Press comment following our last post on the company suggested that a valuation of £250m-£300m was the target - not the £400m plus that the FT had previously suggested. Given the state of the markets, it will be very interesting to see how they are getting on. There are a number of IPO hopefuls waiting in the wings watching SmartStream's progress with interest.

UK Technews 21.9.07

Anite continued to come under the cosh yesterday as the market digested Wednesday's trading update - the shares lost another 5% to close at 69p. We note however that FD Chris Humphrey bought 100,000 shares yesterday. Group NBT had a reversal of fortune ending up down 3% to 274p having started the day in positive territory after full year results. It seems that the market may not have fully appreciated that the recent acquisition of Envisional has resulted in profit downgrades to current year numbers.

There seems to be  a number of smaller stocks that are drifting without any particular reason. Financial Objects dropped nearly 8% yesterday on no news and relatively thin volumes and is now around its 12 month low. GB Group is another one that has been on a seemingly relentless downward path for some time now. It closed down another 3% yesterday and is now lower than it has been  for over two years and is trading at half its 12 month high.

Alphameric has issued what looks like a pretty severe trading update - see seperate post. ANT has announced poor results in line with expectations set at the June trading update. Revenues in the six months to June were down from £1.4m to £0.9m and the operating loss nearly doubled to £2.0m. Net cash at the end of June was £6.5m. The problems at ANT have promoted the board to initiate a strategic review of the company. Last but not least, IS Solutions has announced interim revenues up 26% to £4.3m and pre-tax profit of £0.2m.

UK Technews 19.9.07

Anite has issued a rather downbeat interim management statement indicating that underlying revenue and profits will be lower in H1 than in H1 fiscal 2007. Particularly significant are comments that the Telecoms business has been marginally disappointing in H1. Following the acquisition of Nemo, Telecoms is now clearly at the heart of Anite's strategy so any slip there is particualry disappointing. Within Public Sector, the local government business is in line with expectations but SIS has been slow. Travel remains the bright spot with management reporting trading there ahead of expectations. Anite shares have opened 3% lower at 77.5p.

The interim management statement from Misys was altogether more positive. Trading in H1 in the Banking business has been robust with good growth in initial licence fees driving the performance. Restructuring in the healthcare business is now largely complete but the management report that it is too early to get a feel for the impact of changes on the business. Misys shares are up over 8% to 225p.

In addition to these trading updates, there are a clutch of fledgling results this morning. Healthcare software company Ascribe increased revenues in H1 by 55% to £15.3m and adjusted profit before tax by 46% to £3.3m. The market has reacted well to the results and the shares are up 5% to 42p. Business Control Solutions showed interim revenues up 10% to £4.6m but losses up to £0.4m from £0.1m - the shares are unchanged at 2.75p. Simulation software provider Flomerics reported interim revenues up 23% to £7.0m but a drop into losses of £0.5m from a profit of £0.2m. The market doesn't like the results and the shares are down nearly 9% to 42.5p. Last but not least is Atlantic Global which reported a return to profit on revenues up 24% to £1.1m. As importantly, the company has said that it intends to pursue an agressive acquisition strategy. Atlantic Global shares have opened upchanged at 16.5p.