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

Volume 10 Number 2 Available by subscription only ISSN 0967-2583 December 1998

Secrets of Success1998 has certainly tested "May you live in interesting times" The Secrets ☜S☂s☝ which spell 1 yto its limits. Although we refuse to give specific investment 1 _ The business is SIMPLE to understand, we (uke mostadvice, there is little doubt that the more interesting the times analysts) are aiso very simple, If you can't explain what youbecome, the more investors should stick with the Quality do in afew sentences, forget ☜Istocks. . . 2 - The business is SECURE. |.e.Ana'YSIS 0f the Share Price SCS Share Performance by Sector you have long term customerPerfonnance 0f the C100 compan'es in 1998 relationships. Although many thinkwhich constitute our SCSI Index that means long term contracts,shows that the "conventional" SY$1em relationships are just as important.ouse/IT Services companies like That's why we would put

7 dmiral, CMG, LogicalV 59m? haVe Computacenter in this categoryjuststill been the best performers in 1998 as much as Fl Group,☁0 date: Although certain PWdUCt 3-The business makes (or could, ifcompanies like Sage are still showing IT Sta" Agencies n wished make) the majority of itsgains on the year, in general products revenues. from SERVICES.share p ce growth (at10%) was less 4 - The business has STABLEthan a third of that achieved by the Resellers management That doesn☂t meansystem houses. Resellers like Azlan tha☁ management doesn't changeand compu☁acemer were not the But that succession is well plannedplace to be; registering a 22% fall on . .

products (eg. Davrd Goldman stepping downaverage. But the sectorworst affected from Sage) rather than unexpected

was the IT staff agencies like Lorien, (look no {unher thanLorienl)

M33 and Del hi - hit b a 30°/ fall. . . .

Interestingly, l:an tennypedormance A" Shams i" 5 ' The bus'ness Is In a. SERIOUSis pretty much the same ( is it really SCSI '"dex pan of me market☁ Deal'ng W'th thIe

corporate reqUirements of the UKs10 years since we established the . .largest organisations often looks

System House SCSI Index?) except - - 0% 20% me I . I I

for IT Agencies. Here it was the °☂""☜""☁☜°""☂☝"" bonng "'1 companson Wlth games- software or the Internet. 30 be it...Be

phemmena' Share Pnce S,☝°°ess.9f SCSI Index Share Performance by Sector serious not excmnganty - up over 24-times Since Philip since 1939 I I ☁ I

6 - The busmess is SELECTIVE...it'winstead took the helm -which has _ Iis certainly focused on a very fewcaused almost all the gain. 5ystsm Houses

Bu" ye: again, it's the sySIem HouseBoring Award winners (even when _Sanderson and Trace for eVIdenceyou exclude those subsequently n' sun Aglnclu , ."excommunicated? that have been M1435 (oxeludlng Fully) that the "we can do everything"approach doesn☁t work.the real winners, both in the last ten . , . .

years and inthe shorterterm in 1998. Muslim 7 ☁ "STICK ☂0 the kn☂mngn' ☜"5 '5All the current holders have done well. panicu'ar'y the case f°r achiSi☁ions'Em Capita (up 5,200% Since its 1989 The best example is Sage which has

IPO and up 57%in 1998 alone) which Productl succeeded by extending its

takes the #1 slot. geographic spread by concentrating

Most readers know what makes a on acquiring only financial

System Houses

Boring company (10+ years of20% scsr ind-x accounting product suppliers to

p.a. earning growth and N0 ' SMEs.

reversals).ButwhatmakesaQuality o 2000 Anna was won 8 - Go for wide SHAREcompany? Not-SCSIbmmmIMu-iismhonllm ☜manna-maintainer»: OWNERSHIP. Companies with

Luv-n ll mi um pne- e um mmmy timeenlightened staff share ownership

policies (like FI andComputacenter)

After 30+ years in this business, we

actually thinkit's ..clear.

ig☂mm winders are; Admiral. Capila. Sage and Triadw. .coda so mad

nceieesi In 1998

We may have been seem to out-crafty, but it was All System House"Boring' Award Winners 4.233079 +28% perform thosequite easy to come (incl those excommunicated) where the founderu with... " ' ' ☁ ☁

. , .. . . . . hog all the equity.

December 1998 1 ♥♥ System HOUSE

Operating profits at Autonomy ,EASDAQ quoted Autonomy (dynamic reasoning engine)has recorded yet another set of ☜record☝ results. In 0398to end of Sep. 98, they recorded a 204% increase inrevenue to £1.7m (and this is also up 56% on 0298) but.more significantly, they recorded their first operating pro t- albeit a relatively small £62K. Of course for the full year asizeable loss will be made as, in the first nine months, theyhave tost over £1.2m before tax. But readers should bear

in mind that their current capitalisation is now over £100m!

Spectacular 303 growth at SelectAppointmentsSpecialist recruitment group Select Appointments hasannounced revenue for Q398 up 63% to £223m (note theyare now reporting in sterling not dollars as the switch "hasangered the London investment community) with PBT up39% at £8.9m.

IT revenue now represents C41 % of the total which equatesto an annual run rate of an amazing £365m. But ChairmanTony Martin said he did not want to see IT income ever tobe over 50%. "As far as a slowdown in the IT area, wehaven't seen it yet. We tend to concentrate on the muchmore highly skilled IT professional and there is still atremendous demand. You☁ve got such things as theMillennium, the Internet, a lot of new technology projects,so there☁s still a huge demand for these people☝.So there you have it. You can all sleep easy. Clearly Selectwill be immune from any problems in the future......(?)

and from Xavier

AIM quoted XavierComputer Group announced a good

set of results at the interim stage for the six months to 30thSep. 98. Revenue rose 16% to £9.06m, with PBT up a

higher 44% to £723K. But basic EPS actually fell 6%, dueto a loan note conversion in Apr. 98 which has strengthenedthe balance sheet. Fully diluted EPS (after taking into

account options and warrants) rose 37%.Chairman Nicholas Barham said ☜Individually, each of thethree operating companies reported record results for bothturnover and profit". He went on to say that current salesare ☜encouraging☝.

But then on 23rd Nov. 98, Xavier announced that it hadreceived a bid approach which ☜may ormay not lead to anoffer for the companyata substantial premium☝, As a result,

Xavier, which was launched onto AIM in Jul. 96 at 10p,

ended the month up 28% at 14p.

Better results from DelphiAt last we are able to report more positively on Delphi -

they have certainly not had a good 1998 so far (seeprevious System House reports). In their 0398 figures to30th Sep. 98, revenue rose 25% to £88.6m, with PBT

increasing 18% to £4.5m. EPS was up a higher 21%.European revenues from IT staffing now exceeded £60min the period. HChairman Tony Reeves has shrugged off tears that any

slowdown in the financial services sector would hit thegroup. "Typically, a slowdown affects permanentrecruitment first. People often resort more to using contractstaff. Also only 15% of our UKcontracts are in the financialsector☝. But so far they have not yet managed to sell

French Decan which they estimatenow to be worth

c£28m. US Alpine - also on the market for sale ♥ made

further losses, although trading is improving and the

company hope to achieve a breakeven position in Q4.Reeves also announced the appointment of former Grand

Met CEO, Lord Sheppard as non exec. Chairman from

Jan. 99. All this better news resulted in a much neededrecovery in the share price which rose 6% In Nov. to enon 278p - but still well down in the year. ☁

but bad news from Micro FocusMicro Focus has issued a profit warning due to lower thanexpected sales of Y2000 products and services particularlyin the America market. In their first full quarter☂s results toOct. 98 (and aftertheir Intersolv purchase) they now expectonly a breakeven position on revenues of an estimated

$87m. And this is before one♥off charges for the Intersolvacquisition - so in reality a plunge deeply into the red is

anticipated.

The share price crashed on the day of the announcement

but recovered somewhat to end the month still down a

massive 46% at 123p. Don☂t forget the share price had

been as high as 721p earlier this year.

Comment. The Intersolv purchase cost them $534m last

July in an all♥stock transaction. Most observers (incl. us)

think that this massive acquisition has caused management

to take their eye of the ball whilst integration takes place.

, Analysts had also been expecting revenues in 03 of well

over $100m and, as Y2K represents only 020% of theirbusiness, are there other unstated weaknesses elsewhere?

Is the present management up to the task? Shareholderson the ☜roller coaster☝ must again be feeling queasy.

_System HouseM l2

At long last...getting- it right at EDPElectronic Data Processing (EDP).produces systems forwholesalers and'retailers. They were the ☜wonderstock☝

back in 1993 when the shares hit 230p. That was whenthey declared PBT of £4.9m on revenues of £15.5rn. Since

then, it has been a one way slide.

Electronic Data Processing (EDP)Revenue and PET Record

Isl-tin In rul

Results for the year to 30th Sept. 98 showed revenue haddeclined from £1 2.56m to £11.52rn (mainly due to continueddeclines in both the price of, and share of, revenue takenby hardware and a continued reduction in hardwaremaintenance revenues. But, let's be blunt, there is notmuchsurpn☂se there!) PBT jumped 27% to £2,21m (i.e. back tothe 020% margins we had earlier come to expect from EDP).EPS was up 31% at 5.89p.Anyway. revenues are now firmly based on software andservices - rather than hardware - and over 50% of revenuesare now "recurring". Although EDP still faces strongcompetition from the major ERF vendors, expectations arenow more realistic. CEO Jowitt anticipates "furtherconsolidation in the sector In 1999☝. Although we agree.the problem we have is that EDP may well be the victim,not the hunter.

Maiden results from TouchstoneTouchstone was a new AIM IPO in July 98. They provide

(mainly) SunSystems (from Systems Union - one of our

favourite privately UK-owned software companies)

financial accounting systems. Maiden results for six

months to 30th Sep. 96 show revenue up 17% to £3.5m.

PBT of £460K (Le. a 13% margin) and EPS of 339December 1998

More impressive results from MMT Computing ' , . . ,We have come to expect rather impressive results from MMT. Results for the year ended 31st Aug. 98'were no:exception. Revenue increased_49% to £36.7m, PET was up. an ☂ ' ' »exceptional 80% with EPS up☁73%. To save you calculating, that☂s _a 27% profit margin - even higherthan☁the 20% or so they usually'make! These restilfs were ahead of market expectations'ahd the☜shares immediately rose; ending the month up 8% on £9.95p.MMT☁s mainstream business,based in London, did "spectacularlywe! "and they are to expand its usual strong operations in Retailing, ,investment Management, Banking ahd'Healthcare with a newproject for Railtrack. Even its recent 60% stake in SummersAssociates made an "encouraging stan"with a £250K contributionto operating profits. Of course, apart from actual trading profit,Chairman Mike Tillbrook is well known for his series of» cannyinvestments. In the period, thjeymade over £417K profit from the.disposal of their stake in Total☁Systems. MMT has also increased

its stake in Trace Computers to over: 12% "and continues to bepleased both to observe their good performance and to' was 'substantial paper profit on this int/estment☝. Tlllbrook went on to;say that "your Company is in good shape and we continue to feelstrong, confident and optimistic for the future". No argument here.MMT☂s broker, Credit Lyonnals Laing, is now forecasting 1999 PBTof £10.7m; aprdspective PE of 17.5.

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Profit warning from LorienThe market knew that Lorien had lost its second largestlT contractor contract with UBS to Manpower after itsacquisition by 880. But they still expected FY98 profit of

c£8.2m. Indeed we were rather critical of the company☁sproposed plan for directors to be given an incentive worth

26m based on this expectation. At the time, this target

was called ☜demanding☝by FD Ian Brookes. We disagreed

as, in the then climate, the company were expected to dovery well. But how wrong can you be? It would appearthat this ☜demanding☝ target is now beyond its reach asLorien has warned that a PET before exceptionals of "notless than £4.5m"will now be made. And these exceptionals(mostly closure costs) could be 021 .8m, Of course, Lorienhas in part blamed the loss of the U88 contract, but theyknew ofthis months ago. Lorien has also now reported "arecent marked slowdown in demand for IT contractors in

'.the financial services sector, a belowbudget performancein their EFiP start-up operation and higher than budgetedinterest and debt costs☝.

Another head is now rolling. Chairman and CEO MikeHeeley is stepping down. Bert Morris (present deputychairman and ex NatWest Group director) is taking overas Executive Chairman, with Operations Director lanBrookes and Managing Director Richard Fiddis nowbecoming Joint MDs. Don't forget that it was only a yearago that CEO Malcolm Coster left afterjust eight monthsin the role - an eight months which cost Lorien some 22min a generous salary/share package.Not surprisingly, the shares have now fallen again with a21% drop to 133p this month. What a far cry from the

806p high only as recent as May this year.Comment. Lorien is fast turning into an 808 disaster story.

Although we could be charitable and say that their presentmisfortune is due to the down♥turn in the IT contractormarketplace, in reality their problems are much more due

to past mismanagement. But unfortunately the whole SOS

sector tends to suffer in these circumstances. And onelast thought. Why were the directors allowed to apparent/yignore known problems when they said last July they knewof "no reason☝ for the share price fall?

December 1998

News from the privatesAs you know, we like to tell you about private as well asquoted companies.

We must admit that we had never heardof Sophos untilwe read their advert just after UK NASDAQer Dr

Solomons was acquired. Sophos extolled the virtues ofusing a UK computer security company. Sophos is in thesame field but, of course, are very much smallerthen theirwell known rival.Small they may be with only £7.7m revenue in the yearended 315i Mar. 98, but profitability is in no doubt. Theymade a PET of £2.9m in the year - and that☁s a margin of

nearly 38%. And even this is lowerthan the FY97 margin

of nearly 50% and the 47% achieved in FY96. Surely acompany to watch...☝ only to watch them being acquired.

Back in profit at Rolfe & NolanResults for the six months to 31st Aug. 98, show R&Nmade a small PBT of £205K (loss £569K last time) onstatic total revenue of £9.5m. Revenue, on continuingoperations. was down 4% at 29m with continuing operatingprofits down from £1 .1m to £528K.Comment. After the failure of the $115rn Sungard bidand the sale of the Capital Market's Division to IQ in Aug.

98 for £4.6m (causing an exceptional profit this half of£1.05m), these latest results from R&N are not all thatrelevant. What really matters is the future - or rather theFutures and Options business. 13 new bureau customers

and two funher licence sales have been made in the period

with a further five new bureau customers added since then.

MN is now winning clients from US rival SunGard andUS revenues are up 31% and now accounts for 27% of

group revenues.The SunGard bid failed due to a number of factors. The

main reason was the lack of support from clients of both

companies who feared lack of competition and almost

certain price rises. _

Now we feel that shareholders might well welcome another Ibid ☁ even at a much lower price. But who from? Thismonth Ft&N shares still managed to fall a funher 9% to210p. Afar cry from the Sungard bid price; System House *

Some tasty figures from Lynx Group ☂ - . t v - ,Lynx has continued its good progress with a pretty tasty set'of figures for the year ended 30111 Sep. 98. Total revenueincreased 50% to £180.9m (the'organic revenue increase was a lower,'bul excellent, 36%),HPBT☁was up 35% at£13.3m (☜underlying organic profit growth Was up'21%☂) with EPS up 27%. CEO☁RichardgLastmmmented "Theseresults demonstrate our ability to deliver sustained profits and earnings pershare. grthh. Thefmarlrets in which weoperate... give us a strong base for ' ' Ithe future☝. Indeed their growingorder book and good recurring

-tum.Lynx Group plc

Revenue and PBT Record☜50". L £150.9m

Rollllu to umrevenue of over £28m augurs well

for the future. The group have ""☜T 4'2been awarded ☜SAP SolutionsProvider of the Year" for the ☜☁""☜ 4☝

second year running and, for theseventh successive year are ☜TetraReseller of the Year☝. Impressive.Of course, Lynx have been prettyactive on the acquisition frontin thelast year or so, buying Globelle(network products - Dec. 97),Clifton Reed Training (Apr. 98)Tenhill (financial products v Apr.98). the rest of Dataware (Oct. 98)and Exepos (Nov. 98). The Groupnow has some 1,800 employees -500 more than a year ago.

Lynx have two main divisions. .Software and Systems (SS) with 221%"),m 5mm,

. £60.86m revenue (up 60%) and - . - . v 2operating profits up 45% to £8.11m. Computer Service's (CS) focuses of the resellertcorporate and. IT training

markets and had turnover up 46% to £124.57m with operating profit up 35% at 27.21m. Within the SS division,financial systems ☜is a major highlight ofthis year☂s recordperformance"wilh some important new contracts, commercial _systems has ☁rully met expectations☝ through the steady growth of the SAP. customer'oase but automotive systems☜under~performed☝. Lynx is now building up is comms business and this has been'helped this month by the purchaseof Exepos (see p7) and a new division has now been set up under Robert Arrowsmith (ex COO at DCS). Their. CS,

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demand☝. Further "substantial"growth is anticipated.

Cadcentre lifted by new businessCadcentre Group (3D software which aids the design of

process and power plants) has announced an excellentset of interim figures for the six months to 30th Sep. 98.Revenue rose only 7% to £8.8m but PBT went up 63% to

£1 .37m with EPS increasing 51%. CEO Crispin Gray saidthat recent big contract wins had led to strong new businessgeneration in the half. Cadcentre, and its larger US rivallntegraph, now claim 33% and 38% respectively of thisspecialised market, it is quite possible that this position

could be reversed in the near future as Cadcentre hasrecently won the BASF contract from lntergraph. ChairmanRichard King is confident "that the combination 0/ newproduct releases and an expanding customer base will

result in a successful outcome"for FY99. Analysts are nowforecasting FY99 profits of £3.1m ~ a prospective PE of23.5. The shares erlded the month up 8% at 253p.lDecimated DelcamDelcam (CAD/CAM systems) was a new AIM IPO a yearago in Nov. 97 at 260p. They have been a disaster since.in late Nov. 98 they issued yet another profits warning.

"One-off provisions for bad debts" will result in a pretaxiloss in H2 1998. This time it was blamed on ☁the recentcollapse in the Russian economy". Last time it was blamedon the Far East. But, of course, many of Delcam☂s

rcustomers are in the hard hit engineering sector.IAs Delcam shares are now just 29p - literally decimated in

has seen {asubstantial increase in

MSWjoins the market . . . ; > V v 1Although it is tiny, we were still pleased to see MSW'Technology .joining the main market thiemonth. .It is thefirst UK IPO since June. MSW came to the market with aPlacing at 97p - valuing the company at cam. They raised a.net £2m in the floatto expand further and to fund increasedFl&D. ☁ ☁ : 'MSW was formed in 1991 and is 'a software and ITconsultancy. They developed their MAPS software (☜adatabase for personnel records to plan cUrrent and futuremanpower requirements")☂in association with the MOD.According to latest accounts for the year ended atstMay98, MSW made £503K (1997: £134K) PBT on revenues ofjust £2.9m (1997: £1.6m) ♥ a 17.3% margin. Professional

services rep resented (235% of revenuesvbut ☜it is anticipated

that this will decline as sales of MAPSVdei/elop☝.But the shares ended the month on only 34p - a discountof 14%. We have now added them to our SCSI index.

Losing Misys and Sema?FI'SE International meets on 9th Dec. to decide who joinsand leaves the FI'SEi 00. Both Misys and Sema look likelyto lose their places - won only very recently. That would be

a great shame - not least because it would knock con dencein our sector still further.

Cedar Group plunges into lossAs reviewed last month, Cedar Group has announced

revenue up 36% at £7.25m but PBT plunging from £1.05m

to a loss of £971 K in the six months to 30th Sep. 98.

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Eldos (p10) has at last completed its vaUiSitiOn of USCrystal Dynamics (independent development studio) for

about £47.5m - half now in cash, the remainder in Apr. 99.Workplace Technologies (design and installation of datanetworks) was a spin off from ICL in SEP- 95 and floated inNov. 97. They have now acquired LanBase (another

network integrator) for a maximum of £19.56m (part cash,

part loan notes and the balance dependent on operating

profits of a min. £2m as at Dec. 98). LanBase had 1997revenues of nearly £20m and an operating profit of £1 .5m.

Workplace also commented on current trading which "is in

line with expectations" although they coupled this with awarning that "interest charges for the full year will be higher

than anticipated☝due to delays in receiving payments on

the Hong Kong Airport contract.Microsoft is to acquire LinkExchange - a provider of on-

line marketing services to Web site owners and SMEs. No

consideration was given but aceording to AFX News and

the Wall Street Journal, it is c$250m. They are also planning

a wireless data JV with Qualcomm and have teamed up

access to ML☂s in-house financial research via Microsoft☂s

Money-Central web site.Easynet Group has purchased Easynet GmbH, the

German corporate ISP for £1.55m cash and £100K

deferred. Easynet GmbH lost DM1.3m on revenues ofjustDM1.2m in the ten months to end Oct. 98.Lynx Group (see also p4) has acquired Exepos for £3.3m.

Exepos provide computer and telephony integrationsoftware and consultancy and had 1998 revenues of £911 Kand PET of £265K.

Sema Group UK has purchased Meridian Information

Systems (systems for bus companies and claimed market

leader in this field) for £2.8m. Meridian had 1997 revenues

of £2.9m and 40 staff.

4Front Technologies has acquired IT training company

Penagen for $335K.Entegrity Solutions (Public Key cryptograph specialist)has bought Sapher Servers for an undisclosed sum. SSis evidently best known for providing secure e-mail to HM

.with Merrill Lynch to enable Microsoft Internet users

. Government (including No.10).CMG has acquired German CMS Data Consult forDM9.25m (c£3.3m). CMS has 25 staff and revenues of£1.5m in H198). _Capita has acquired the remaining 33% it did not own inEquitable Revenue Holdings for £8.2m - all in shares.Equitable had 199] revenues of £11.4m and PBT of

£2.65m.

Online direct marketing company US lntellipost isacquiring MotlvationNet, Mypolnts and DirectValue fromIS giant Experlan. Experian is a subsidiary of GUS.SAM UK (a Northampton-based Digital reseller since 1988)has called in the receivers (KPMG). SAM UK☂s lastaccounts to 31st July 97 showed a loss of £176K onrevenues of £1 2.7m. Interestingly it "had started to struggleafter it spent a large amount on a new building..." Source >MicroScope 17th Nov. 98.

Stordata Solutions shares crashed this month to 2.75pafter it first said (on 9th Nov.) that it was ☜atan advancedstage ofdiscussions which it hopes will lead to a substantialnetwork services acquisition. " Then just a week later

☜decided for the time being not to proceed."Mega<fast growing IT staff agency Best International hasacquired Yorkshirebased Sky IT Contracts which had

Mergers and Acquisitions continued

97, Best now has over 1200 IT staff out with customers anda annual revenue run rate of £120m. Quite amazing!

☜The dramatic fail suffered by IT consultancy Parity onthe fears ofa slowing in the UKeconomyprompted directorbuying. The stock stood at 863p earlier this year beforerecent declines, and Chairman Philip Swinsteadyesterdaybought 250,000 shares at 415p. The shares fell 11p to405p". Source - Financial Times 18th Nov. 98. Parity did recover,

however, to end Nov. on 485p.According to a report in The Sunday Times (16th Nov. 98),☜ICL has terminated discussions with Servus Holdings,Nomura☂s FM arm, to take over the management of its 120UK properties. The two sides failed to agree on a price forthe 10-year deal worth up to £1 billion. lCL is now seekinga new partner☝.AIM-quoted Carlisle Holdings has submitted an agreedbid for Abacus Recruitment (mainly but notexclusively ITstaff) valuing them at £14.6rn. At 130p this was a 40%premium to the previous closing price. Carlisle already ownsThe Recruitment Group.Internet Technology Group has acquired 2m shares at50p in Redstone Telecomm pushing their holding to 8.7%.Spring Group has disposed of three "non core"operations- Catalyst Contracting, Morgan REM and the BowerleyHotel - for £900K.We understand that US Gartner Group has acquired UKWentworth Research for "a few million". The way thingsare going, it will be just Ganner (owning the world) and us!As previewed last month, the ☜substantial UK company'which has purchased Aurora Unicomp from Unicomp Inc.is Sx3 - a subsidiary of Nonhern Ireland utility Veridian.CMG (70%) has formed a JV with HM Govt☁s RadioCommunications Agency and won a contract to manageRussia☂s radio spectrum.US TRW Inc. has sold its UK manufacturing softwaredistribution operation to QAD Inc. The UK operation was

best known as BDM Largotim.WS Atkins is planning to acquire Bovis Group (fee-basedproject and construction management ) from P&O for£350m. Given that WS Atkins has a market capitalisationof £550m, that☂s a pretty big bite. Bovis' profit margins areminuscule compared with WS Atkins.

Broadview pulled off its largest European deal of all time

this month when it represented Vivendi (the French water/utility operation) in their purchase of Cendrant Software☜one of the largest PC consumer publishing companies inthe world☝for a consideration of c£640m. Cendrant Softwareis a one of the world leaders in each of its three marketareas - entertainment, productivity and education a and hadrevenue of c$600m. Vivendi is to put theacquisition intotheir Havas publishing company, which has revenue of $5.5billion.

revenue of 029m. From its inception as recently as Apr.

The insanity of Internet stocksMention the words Internet or e-commerce and normally

careful investors open their watlets and throw money.There are a few examples of this in the UK but it's the USwhere insanity really rules.The IPO of theglobexom this month on NASDAQ setnew records for madness in a pretty insane market.

Launched at $9 they hit a high of $97 on the first day withthe shares on offer changing hands three times! So avaluation, at one time. of c$1 billion fora company which

designs chat rooms for teenagers and lost $11.5m onrevenues of $2.7m in the first nine months of 1998☁? Youcould buy 100% of Admiral for $1 billion! on well.

i

December 1998 _

♥ System House ♥

(System House

How do they do that? - e I.On 10th Nov., HSBC put out a research note on Admiral.it was headlined by AFX News as ☜House broker HSBCsecurities slashed PBT forecasts". . ' ' 'Abit misleading as 1)-Warb_u_rgs. hot- HSBC,,is nowAdmirals broker, 2) H880 didinot alter their☁1998 PBTforecast of £23.8m but merely reduced the 1999 forecastfrom £29.4m to £28.3m and, 3) Warburgs had beenforecasting PET in 1999 of £28.1m since 1 st May 98;The story gets even more intriguing when we werepersonally assured by Clay Brandish that Admirals internalforecasts for 1999 had not altered - certainly not beendowngraded - in anyway. ☁So, you might say, why give a jot? .The problem is that this one story caused Admiral☂s shareprice to drop from 1045p on 9th Nov. to a77p; in theprocess writing off about £150m from their market value.They did recover most of this to end the month on 970p.

You might well repeat ☜So what?" 'The rollerooaster share price variations we have seensince July have. we believe, been very damaging to UK808 companies. New lPOs have been cancelled, many

acquisitions have been, at best, delayed. Staff morale hassuffered (a point rammed home to us at a recentconference when we mentioned the effects on managersholding share options to be greeted with the biggestcollective audience moan we have every experienced).And that☁s before you take into account that, yes, people

do buy and sell shares and therefore there are investorssuffering real losses.

The FTSE lT index is likely to end 1998 with an averagec30% gain. it it had been produced consistentlythroughoutthe year, we would all be smiling. But we could equallyaccurately report that "805 shares ended 1998 over60%off their July 98 highs☝.And as for Admiral?

Clay Brendish has a dream. He wants to lead Admiral tobe the leading UK-owned 808 company of the newmillennium. We suspect that expansion into the US willbe the next step. They really don☂t get much better than

the original ☜Boring☝ Admiral. They have a better chanceof weathering the downturn than most. in other words, if

this is what the market thinks of Admiral. God help therest. '

Kewill flourishes under new managementIt☂s been an exciting year at Kewill Systems. Andy

Roberts took over as Chairman and Geoff Finlay wasappointed as CEO. In Jun. 98, they bought their USdistributor - Granitek - and last month acquired US e-commerce software supplier - Tracer Research - forc£11.7m.

Results forthe six months to 30th Sep. 98 are complicatedby Kewill adopting FRS1O and amortising goodwill onacquisitions. At the headline level. revenue is up 42% at£27.5m and PBT up 26% at £4.5m. EPS was up 21%.The Electronic Commerce division was the real star withrevenue up47% at £63m and profits up 50% at £1.56m.Finlay described it as "a hotmarkel"and anticipated further

strong growth in the next period. Logistics, at £7.6m,reflects the Exeter Software and Alpha-Numericacquisitions in H2 last year. ERP (£10.2m) and Design

(£3.7m) make up the remainder.The new management and emphasis has done greatthings for the share price too - up 108% this year so far.

New dealsWe always get into trouble when we report newcontracts...as in ☜you reported X☂s new deal, so why notours?"But some are worth the effort. The Affinity Consortiumhas been named as preferred bidderfor the Accord BenefitsAgency System. Affinity is led by EDS UK &,|BM and alsoincludes C&W and PriceWaterhouseCoopers. importantbecause it is worth £7 billion over 10 years ~ and therebyrepresenting c3% of the whole SCS sector in its own right.That makes a significant (positive) difference to ourforecasts post 2000.

We had got used to reporting EDS ☜mega☝ deals but ratherless often for IBM Global Services UK. At one time weseemed to major on their ☜mega☝ deals being cancelled.Well, no more! Hot on the heels of the £1 .Bb/1O year dealwith C&W and the £100m deal with Bradford & Bingley,IBM UK has this month won a c2130m extension to its

£500m UK Equifax outsourcing deal announced in Jul. 93.The point being that outsourcing deals announced alreadyin 1998 double IBM UK☁s outsourcing revenues to >£500mpa. Indeed, IBM UK☁s SCS revenues (they are already #2)

might well rival EDS☂s #1 slot shortly. .Another deal which caught our eye was Sema Groupreplacing CSC at NHS in Scotland worth £58m over 5years.Interesting because it☂s still pretty unusual for an incumbentoutsourcer to be replaced.

Then there was CMG & ICL winning a £200m/10 yearcontract from the DTI to provide their IT infrastructure. Thelist goes on. Is it our imagination, or are the "golden" daysof outsourcing mega deals returning again? We have

certainly altered our forecasts (upwards) as these deals

alone make a material effect.

Tales from the network distributors...AzlanTo describe the last year at Azlan (network distribution andassoc. services) as interesting" would be' testing the oldChinese saying somewhat. Last Sep., we devoted a greatdeal of space under the_headllne ☜A truly ghastly tale".-We (do not want to repeat the tale, other than to give creditto Barrie Morgans forthe La'zerus☁like revitalisatlon he hasachieved. EonBM UK MD Morgans joined in early 97 as aNED. As all about him were disgraced. he took on the ExecChalrmanrole in what must have been the mostdlfficult ofcircumstances. How many readers ☂fhave experienced anSFO probe☝ on their GVs? ☁ »Latest results for six months to 3rd Oct. 98 showed revenuesup 9% at £153.7m but losses reduced from £7.9m to just£424K. It is ironic that the training business grew thestrongest - up 16% at £17.9m. .You may remember that itwas the rights issue at 620p to back the purchase of Akam

(which we so publicly endorsed) in Nov. 96 that was thecatalyst that exposed all the problems. VProfits of c£5m are now expected for the full year. Azlanshares put on 18% to 57p this month. '

...and ilion takes nose-diveAzlan☂s main competitor - lllon (previously known asPersona) t saw its shares go into free fall this month but didlater stage a recovery. They put out their second profits

warning in six months; saying that PET from continuan

operations would be "materially below expectations for theyear to 319mm. 95". This was principally due to a reductionin sales and profitability in the UK". Negotiations arecontinuing for the sale of its German operations . "Further torecent press speculation, the board confirms that it hasreceived approaches but is not currently in talks with any

offeror☝. ilion shares fell another 4% this month to 52p.

December 1998

Big companies do bestIn a month when the FFSE100 surged 7.5%, the weightedFTSE IT Index was up 5.5% but our SCSI Index up just1.4%. Le. the "smaller" 808 stocks underpen☁ormed.The worst performer was Dialog - down 55% (see p10) intheir profit warning, closely followed by Micro Focus (p2)down 46% and Delcam (p4) - also on profit warnings.

AFA Systems (up 34%) and Zergo (up 32%) led the list ofhigh gainers. Xavier (p2) put on 28% as a result of theirbid

approach. Also amazing to see Fl Group put on another28% this month.

Month (31/10/55 - 27/11/95)From 1501 Apr 89From Isl Jan 90From 1s1.lan 91From lsl Jan 92From 151 Jan 93From 1st Jan 94From Isl Jan 95From Isl Jan 95From Isl Jan 97From tst Jan 98

9134,4134:+1 05.31 %.7095☁36+90.54%458.41%941.90%+13.SD%

AdmiralAFA systemsAlT GroupAnita GroupAzien GroupBond internationaloaocomre Groupsaplie GroupCedar GroupCFS Groupcrlnloai computingcMGCompei GroupComputeoenter

Delphi GroupDiagonalDialog corporationDlvlslon GroupDRS Data 5 ResearchDruid GroupEcsoitElectmnlc Dela ProcesslngElooeFl GroupFlomenos GroupGreahem ComputingGuardian iTHarvey Nash GroupHlpname Systems Servicesch Computerlllon Groupintelligent Environmentsi 3 solutionsITNETJBA HoldingsJSB sortwereKalamazoo ComputerKewlli SystemsLoglcaLondon Bridge SollwereLorlonLynx HoldingsM-R GroupMacro 4MDIS GroupMicro FocusMlcrogen HoldingsMieysMMT Gomputlncon asoorepey Group

M55 InternationalMsw TechnologyNSE Retail Systemsoxiord MolecularParityPegasus GroupPhaneLlnkPollcymeaterproteue InternationalGuallly Soitware ProductsouanrlceRaga SottwareReal Time controlFlabue GroupRecognition SystemsRiver GroupRM GroupRolls 5. NolannomtecRoyalblus Groupsage GroupSanderson Group555 GroupScience systemsSame GroupSherwood InternationalskillsgroupSp ngstaiiwareSuperecepe VRSystems integratedTblraTorox GroupTotal SystemsTouch-loneTrace GumpulomTriad GroupUllJmilVega GroupWorkplace Technologiesxevlar computer GroupZero Hololne

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£1.135.00m£25.10m219.com£10.40m

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Note: CSI index set at 1000 on 15th April 1989. Any new entrants to the Siock Exchange are allocated an index oi 1000 based on ihe issue price. The CSI Index is not weighted; 5 change in theshare price 01 the largest company has the same aliecl as a similar change ior the smallest company.

December 1998

9

System House ♥♥

_.System House_

What☂s missing at Rebus?Back in Apr. 96, Rebus was ☜demerged☝ from CE Heath

and floated onto the London market at 88p. Rebus was(perhaps, still is) better known for its subsidiaries

Peterborough Software and Datasure.

Two and a half years on Rebus shareholders have hardlygained from the ☜explosion☝ in IT services company

valuations. Rebus ended Nov. 98 on 130p - a 47% premiumto the float price

Latest results for the six months to 30th Sep. 98 showrevenues up19% at £48.2m, PBT up 32% at £3.9m and

fully diluted EPS up 37% at 2.69p.The largest part of the revenues still come from HR andpayroll, where Rebus claim to be the UK market leader.Indeed, it is remarkable that over 60% of The Times 100

use their products/services and Rebus is responsible forpaying over 6m employees - over 20% of the workingpopulation. Although revenues here grew by just 8% to

£21 .6m, this masked the real results. Uniservice, which is

a mature business, actually suffered a 2% decline to £8.1m.

5% attrition was made up for by price hikes and newcustomers signed up by users such as ITNET and Capita.

But the bureau and outsourcing operations grew by 11%(to £2.6m) and the Peterborough Software (PS enterprise)software operation was up 16% at £10.9m. Indeed 36 new

PS Enterprise customers were signed up.

Elsewhere, the Insurance Division increased revenues

by 18% to £14.3m although profits increased by 33% to

21m. Rebus also claims to be the London market leaderwith 62 brokers and 74 underwriters. Revenues from

Rebus☂ Local Govt/Housing management systems grewby 51% to EIBBm.The Computer services division, with a 44% increase in

revenue to £9.8m anda 37% increase in profits to £810K,was the real star. Here, Rebus Resourcing - the IT staff

agency operation - doubled revenues to £4.7m.Comment. As per usual these days, we got into troublewith our Hotnews comments about Rebus. In so many

ways Rebus is exactly the kind of company we like. 55%

recurring revenues, good mix of product/services, strongmarket leader in its niche markets, long term contracts

with blue chip customers. But, there just seems to besomething missing. How else do you explain the currentsituation?A £10.5m PBT is still forecast for the full year

which, at the end of Nov. share price equates to aprospective P/E of less than 20 - one of the lowest around.

We still think that Rebus would be better off as part of a

larger group. Whatever happens, shareholders might soon

get their just rewards.

SKILLSGRDiiP iiii'i☁ééisup M.Acuma operation) hasacquired ISL (business

intelligence solutions for corporate customers) for £2.9m

(£1.4m cash, ESOOK shares, £1m cash performance

related).Skillsgroup also put out a very positive trading statementreporting strong growth in the year to 30th Nov. 98. QA

and Acuma ☜are bot/7 trading strongly" withrevenues up20%. Operating profits before head office costs "will notbe less than £12.8m ♥ representing growth of

35%....Growth prospeCts for Skillsgroup in 199.9 and

beyond continue to look bright despite warnings of| economic slowdown". But despitethis positive statement,

IAtheishares ended the month down 11% at 1739;"

Dial-☁a-dog' V _We have probably reported 55% share price declines in a

month'belore, but notin companies the Size of Dialog.We have certainly never read a Lex (in the Fl☝) headlinelike that we reproduce above! ' ' 'Given that most of the City, seems to bejpeopled by cockyyoungsters, why is, it that they takean instant dislike toother cocky youngsters? Since their London lPO (as MAID)in Mar. 94 at 110p. the City has reviled Dan Wagner. Then »he had the audacity togo for a NASDAQ lPQ:in Sep. 95 at242p. Then, in Aug. 97'he bid £286m for US Knight Ridder

Information financed by aplacing at 220p. Soon afterDialog was worth £330m - now it worth just £108m.Looking back through our press tilesbn Dialog, you canunderstand the oft-made ☁bvercptimiSt/c" criticism madeof Wagner. ☜Dan ,Wagner. had little credibility even before

the profit warning. Now it is torn to shreds☝writes Lex.Wagner's response, yet again,vis☂to blamevthe analysts.It☂s all getting a bit juvenile. ' g V I 'The bare facts of the situation are that Dialog has saidthat Q4 revenue will not exceed QB ~☁i.e. £42m. Given that 'just two months ago we were 'all assured that ☜the KF.merger is ahead of plan", this came as a bit of a shock as ' "house brokers ABN Ambro slashed earning forecasts byover 40%. Dialog tried tovblame the fact that Christmasfell in Q4 for part'of the shortfall. But it just looksas ifWagner bit off far more than h'e'could chew with this megaacquisition in the US. Andhowmany times have we written

that comment before? 'He also has to nd a way of meeting £140m of interestpayments...comment. It Is very easy to criticise ~ even easier to pokefun at - Dialog. But here we have a young man leading aUK company with innovative products, most associatedwith the Internet, taking bold moves overseas. When

embryonic US Internet companies with no revenues andmega losses get valuations of $1 billion +, Dialog is nowworth considerably less than one-times~revenues. EvenWagner admits that he is now a sitting duck to anacquisition bid. "Great", beleaguered shareholders mightsay. But it's more than likely to be from a non-UK grourecognising that, with the right management, Dialog oculbe a real star performer. I . vYou can☂t have it both ways. Perhaps the reason why theUK does not produce lT entrepreneurs in the US manneris because we tend to treat them like Wagner?Acquisition - On the day of the profits warning, Dialogalso announced that it was to acquire Write Works for upto £6.3m (£2.5m now, rest over 2 years). Write Works is☜an Oxford-based operation which has developed Britain☂srst on~line publishing and management control system

for businesses☝.

10Losses increase at EidosOK, we know we should only cover the really Boring SCS

companies but surely ☜forthcoming releases including Deep

Cover Gecko, Legacy of Kain, Soul Flea ver aridAjuki: The

Heart/ess"is more interesting than ☜Oracle Financials V8☝.Lara Croft is also more interesting than Ellison!

Anyway, latest results from Eidos show losses increasedfrom £18.3m to £18.9rn on revenues more than doubledfrom £21 .8m to £47.6m for the six months ending 30th Sep.98.£5.25m of the extra loss related to the fall in the marketvalue of Eidos' 15% stake in Norwegian Opticom SA.

December 1998

Holway #1 fan at RM ploy V V. » _VAs readers know we are a great fan of RM (was Research Machines J☂The UK☂s leading supplier ofilT to education). VLatest results for year to 30th Sep. 98 show revenue up 1 9% at£131m, PBT up 25% at £10.0m andEPSVup 27%Cai -37.9;). We were evenmore pleased to see revenue from softwareiup' 48%at £31.9m and from service's 'up sweat--£21..7m_- that was the reason for the increase in margins. Revenues from sales of PC hardware were up6°/p at £62m I f

☁ ☂ and distribution .up 12% at 02mm. j☁ I " ,; :Revenue :21, 31°31- Rewrd FlM has quite superb prospects. In theUK they'are winning :

Relative to 1983 signi cant outsourcing contracts to whole councils handingoverschool☂s ITto RM The recentlyawarded Dudley£43ml »

10 year Managed Services contract is typicalot the genre. VWe think the RM☂s Internet tor Learning is great withrevenue up 71% at £2.2m andwith RM☂s involvement in'theNational Grid tor Learning it has impressive prospects.

@ HM Govt. has- var put an extra RM Share price since launch in Dec

☜W £19 billion into 1994ed U C at i O n

with its ☁°°"£700m IT 35""expenditure 30"☝

. . . , . programme to 2509

☜MN,☝ I 2002. Then 200p

.... .... mo .... ☜1☁,☝ i... .... nu there is the '509_ £ 2 3 0 in mop

Lottery tundingior teacher training. And RM has even taken their firsttentative steps overseas with the maths deal with Ernst Klett in Germany.RM could well be the most recession-busting stock ♥ assuming that NewLabourstickto their guns. Whatever, there is everything in these results _ V V V V V V V Vto confirm our confidence in RM. -RM☂s shares have beenone of the best performers this year ☁ up 159% in 1998 alone. With PBT of £11.3m nowforecast for FY99, that's a forward PIE of (:45. It is a measure of the market☂s confidence in PM that Paul Taylor in the

FT (24th Nov. ass ended hlsureyiew with ☜but ecu/d still go higher!☝

Adiusted Iortive-lor♥one split

SOP

0P

Sep97

Del:

97

«Mar

-98

Jun98

1Sep

98

1De

r:QB

☜MONEY® for nothing and the are free☝With no excuses to a certain Dire Straits track

We hope most readers are Bored with our "You have to be prepared to give away your product for free inreturn for services revenue☝ argument. After all we have flogged that donkey for over tour years now. Nat.Semis CEO Brian Halla, in an excellent interview with Roger Taylor in the Financial Times this month,predicted that banks will soon give away PCs running MS Money as a way of attracting new business andkeeping the customers away from making expensive visits to their local branch. Cheap PCs will be

.marketed just like mobile phones are today. -

But how about the ☜free service"? Well that☂s exactly what Dixons launched with their Freeserve 'lntemet service. In just eight weeks Dixon☁s claim that a quite staggering 475,000 customershave been signed up. We find that difficult to believe, given that the latest Durlacher report - .v.gives AOL/Compuserve lust 500,000 UK users after many years. Perhaps Dixons have counted /

every 00 they have handed out? ,Anyway, we have long predicted the demise of most of the c300 lSPs in the UK; believing that ' .V ☜ ☂it would be the telecomms operators that would offer a free Internet service in return for ;_☁telecomms traf c. Another move was made towards this end this month when BT took a 50% .-»stake in Excite UK ior $10m. Via the new Excite.Click model (like BT.C|ick and Yahoo.Click) the | S Pservice is ☜free☝ but an extra to per minute is added to the local call rate. We suspect that this will be abandoned soon.BT is already one of the ☜Top Five" lSPs in the UK.Freeserve is offered in conjunction with Energls who bought Planet Onllne for £85m earlier in the year. So the Dixonsservice is also a way of stimulating telecomms traffic. But Dixons hopes to make the service pay by ol☁iering adverts

and by levying commission on e-commerce deals generated. BT also intend to raise revenues from these sourcestoo. Given that Dixons have a Premium Service telephone Support line - and we all know how much that costs! - thetelecomms companies seem to be the "Nar"winner whatever!But, before too long. you will be able to link the two together. A tree PC it you sign up for the lntemet via an lSP? Weguess that☁s a more advertising campaign away.What it all says is that the metrics of your business are changing. Seriously, if you believe you will be charging your lcustomers in the same manner ~ for products or services - in five years time ☜you might be In fora very unpleasantshock".Footnote: Never mind the losses...Exclte has a market value of $2.5 billion on NASDAQ but managed a loss of $40m in Vthe nine months to 30th Sept 98☁ Mind you, every NASDAQ Internet stock makes losses but has astronomical valuations. ADecember {998 11 ♥♥ system House ♥

__System House

Excellent results from CominoAIM listed Comino is really motoring now with revenuesup 71% at £8.72m, PBT up 52% at £1 .27m (that☂s a verytasty 15% profit margin) and fully diluted EPS up 42% sat6.94p tor the six months to 30th Sep. 98. 'CEO Garth Selvey said Comino was ☜firmly on track". Theyare market leaders in their three niche markets; socialhousing (Context) where the recently acquired Excelsis"has been successfully integrated" and ☜the new Aurora

product is now widely installed", clothing supply chainsystems (Prologic) where "seven new contracts won the

lastyear"and electronic document management (ISE).

I international. banking software☜ by. Roger Foster tot

I Dec. 95. VCs Schroder Ventures and Thompson Clive took

20%+ margins at Real Time ControlThe moves away from EPOS hardware manufacturingtowards software and services for retailers, really seemsto showing success at FlTC. The customer list is blue chip- including the new Selfridges store in Manchester andHarvey Nicholls. C&A are installing FlTC systems

throughout Europe. In the six months to 30th Sep. 98 rev.

was up 20% at £8.6m, PET was up 28% at £1.89m (a 22%

margin!) EPS was also up 28%."The prospective P/E of 12 is unreasonably low☝ saidTechinvest. We agree.

AnglotechnoanorexiphobiaWe have always credited the above to Goldman Sachs -

meaning ☜a fear of being underweight in UK technologystocks☝. We were amused to see Computing misquotingit as Anglo techno anoraks aphobia. Seems almost better!

Sema Group SEMA @Very goodreview of Sema this month in The Times (23rd Nov. 93)

suggesting that the City is losing patience with Sema☂slong anticipated $1 billion US acquisition. ☜l☂m not goingto be bullied into it - /'m a cautious man" says PierreBonelli. Also interesting as The Times kept referring toSame as ☜a British company☝. As it's now majority ownedby UK shareholders, that☂s true. As it does more businessin the UK and more is managed from the UK than anyother country, that☂s true. So why still no UK executive

directors on the board?

Financial Objects totloat in Dec; 98 I ' .Financial Objects plc ☂ilvas established todesign, develop

and implement ActiveBank ♥ a. new. generation of

tame) and Jess Dorrell (former ACT marketingdirector) in

a 20% stake for 022m. lnAug. 96.. FO'acquiredtheJcngestablished wholesale banking software-group ribis' ~ for

around£4m. it looked an even better deal, when the cashin the company was taken into account. ibis had been 90%owned by the ltallan international Bank and 10%;by☁ mm,The ibis ASIAOO based System has "an internationalolientbase of over 100 bankswith over 200.:s'ites,☝'and re'Venu'es'of £16m in 1996. At the time of the de'al'Foster saidlthis:makes Financial Objects number two hie. t ,Misysj in thebanking software market in terms of sitesln'stalled and willsignificantly accelerate our grthh plans". g ☂ ☁ - .[Results for .the period ending 31st. Dec; 97 showedrevenues nearly trebled from £5.6m tov£15§7m and therewas a remarkable turnaround ☁in.protitability'from anoperating loss of £1.47m in 1996 to an operating profit of£2m and a PET of £1.8m in. 1997. This'imjonientumhasbeen maintained with,revenue.ol£15;9m and PET of £2n.in the six months to 30th Jun. 98. , v 't ☂ ' ' , »This month. PC has announced its intention toflo'at those.98 with aEiOOm valuation anticipated,- - ' V 'We are absolutely delighted: _ " . ' f ☂ I ' ., . I ☁ .0 delighted because it shows that _UK [PCs are, possibleagain. F0 had planned to float in Oct. ~ we all know why ithad to be delayed. . ☁ ☁- delighted because we have a greatideal oi respect torFoster and have enjoyed our ☜robustn sessions.0 delighted, because our friends at VCs Schroders VentLiresand Thomson Clive prove, yet again, their ability to backwmners,- delighted, because Foster still manages to annoy Misysin its claim to be the second latgest'Supplier 'oi internationalbanking software. (Ed: Why can☁t Lomax take Foster☂s adult ,approach to people with differentvie'ws? Weirespect bothFoster and Lomax. We would like to think that Fosterrespects us - everything he has done over the last fewyears would support this - but Lom☂axc/early doesn't.) .

'♥ _____________ _♥6R_DTER FORM

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12 December 1998