Some revealing insights from Infosys at a recent investor concall on the stark contrast between demand in Europe vs the US. Infosys COO, SD Shibulal, said that Infosys is “continuing to see growth in the US”, but “Europe is where the US was a couple of quarters back. The speed of decision-making (has) not really picked up.” He added that although (Continental) European firms are considering offshore as “a very, very viable option”, they are not making decisions.

On the other hand, CFO V. Balakrishnan noted that “the UK is much better off that the rest of Europe”, and that Infosys is seeing “good traction” in retail and manufacturing sectors. According to my estimates, Infosys’ UK revenues have actually been declining in each of the past six quarters on a rolling 12-month basis, and now stand at around £390m. It has to be said, though, that this is mainly the ‘BT effect’, as our ‘favourite telco’ is Infosys’ largest client.

Bala also pretty much ruled out making a concerted effort to get into the UK public sector market “in the near future”, due to the Government’s cost-cutting agenda – though I have always thought this actually gave the India-based players the best opportunity in a long while to strut their stuff. We’ll comment more about the ‘Indian onslaught’ on the UK public sector in a forthcoming PublicSectorViews research note. Interestingly, Infosys does not see the same barriers to entry in the US public sector, where they have recently appointed a sector CEO and will explore (initially) subcontracting opportunities. Bala also alluded to “opportunities coming on the way for M&A”, but frankly, they’ve been humming that tune for as long as I’ve been following them but have yet to burst into song.

In an unrelated news article, it was reported that Deutsche Bank is pulling back in house some of its BPO activities outsourced to Infosys. What really caught my eye about this was the comment that the 150 employees affected will apparently transfer to the DB captive at 50% higher salaries! The proverbial “source close to the development” said that “most are accepting this (DB) offer”. Can’t imagine why. I was aware that the Indian captives of MNCs (multinational corporations) pay more than the IT/BPO players, but I must admit I hadn’t appreciated that the wage gap was quite that high. No wonder all the Indian grads want to work for foreign banks! By the way, Deutsche Bank is a huge believer in offshore, and has had relationships (including shareholdings) with many of the India-based IT players going back yonks. 

Well, it looks as if the HP/Dell/3Par story has come to an end. (To follow the saga, start at North of Stupid and work back through the hyperlinks) Today, first Dell trumped HP with a $32 per share bid. But it contained restrictions (like 3Par having to sell their products to Dell for a fixed price if Dell lost the bid) that were unacceptable. Then, in what seems another act of madness, HP actually increased the price on the Dell bid that 3Par had rejected. Anyway, HP seem to have won 3Par at $33 or $2.4b.

Although we (and our readers) have had some fun in suggesting even increasing terms of ‘madness’ to describe the deal, we really do understand the strategic logic for both bidders. But there surely comes a time when the price paid becomes way too much to justify. That point was reached several bids ago. Remember 3Par was trading at <$10 when the bidding first started. The only question now is ‘Who will Dell bid for next?”. They now have an extra $72m in the war chest from HP for termination fees on the 3Par deal too.

This evening's papers are full of bid talk surrounding Autonomy. All because the share price ‘recovered’ by c5% today to end at £17.12. Autonomy was trading at £19.60 just three months back. Microsoft and Oracle are said to be the likely bidders.

Far be it for me to speak for Mike Lynch but it would take an awful lot more than this to separate Lynch from his beloved baby. I’ve learnt that everyone does actually have a price (at least when it comes to selling their company) but I can’t see Lynch being interested in anything less than twice the current price. Even then I’d be campaigning hard to keep perhaps the best pure software company this country has ever produced in UK ownership.

A year ago, in Sept 09, I branded 2010 – the Year of the Tablet. At the time, the prediction was highly controversial – I have your emails to prove it! “A toy”, “passing fad”, “will never take off”, “will never replace a laptop” etc were typical views.

A year on, and the world seems to have gone tablet mad! The Apple iPad was launched in January and went on sale in April. Apple sold a massive 3.3m in the first quarter. Now it seems everyone is launching their own ‘iPad killer’. First Dell, today Samsung with the Galaxy. A Blackberry Blackpad is rumoured as well as an HP slate (powered by WebOS or Windows 7? Or both?). Asus and Acer too.

The tablet seems to have gone mainstream faster than any device I can remember. Forecasts for iPad sales in the first year range up to 12m. iSuppli reckons that Apple will get 75% of all tablet sales in 2010. Indeed the proportion will only fall to 62% in 2012 when other forecasters are reckoning upwards of 50m will be sold. Gartner's 2014 forecast is 200m tablets sold. Forrester are suggesting tablets will eat into netbook sales. In 2010 Q2, 20% of all Western European computer sales were netbooks (again according to Gartner).

The predictions we made a year back that tablets would become an important new ‘form factor’ seem to have come to pass. It has also moved into the enterprise space very quickly. (We called this the ‘consumerisation of IT’ but others have suggested the “Appleisation of IT” would be more appropriate!) We have reported many times on new enterprise applications for the iPad.

I also see multiple tablets becoming the norm. Every room in your house, every person aged from 2 – 100, multiple iPads in reception areas (already seen that), every hairdresser position in place of magazines (seen that too), iPad menus on every restaurant table (read about that one). So the market could be much, much larger than even the most optimistic pundits are currently suggesting.

We noted back in June that IDOX’s purchase of Grantfinder – first announced in May – was under review by the OFT (IDOX acquisition investigated by OFT). Today the OFT announced it would not refer the acquisition to the Competition Commission and so the deal is safe. As we said at the time (IDOX on the acquisition trail) this is a sensible move by IDOX, moving it further into specialist content around its existing offerings and augments its recurring-revenue base.

We first wrote about Eaga – provider of green support services and “the UK’s largest residential energy efficiency supplier” - in January this year. Much of what the company does is of little consequence to the SITS industry – just under half of its revenues come from two divisions – ‘Carbon Services’ and ‘Heating and Renewables Services’. However, it’s the activities of its ‘Managed Services’ division that deserve some attention. In the financial year to end May 2010, the Group as a whole reported a 3.1% rise in revenue to £762.2m and a 10.1% rise in EBITA to £52.0m. The ‘Managed Services’ business, meanwhile, saw revenues drop by 2.3% to £429.5m.

Performance in the ‘Managed Services’ business is predominantly driven by two key deals – its Warm Front Scheme contract and its Digital Switchover Help Scheme contract. Increased activity on the DSHS contract failed to offset the impact of reduced funding levels on the Warm Front scheme. However, the reason the traditional SITS and BPO companies should be watching Eaga is because the company is trying to expand its contract base in local and central government BPO. In February we saw the company selected for the Child Maintenance & Enforcement Commission’s (CMEC) four year procurement framework for support services (alongside Capita, IBM, Steria, Vertex, Vangent and Ventura) (see CMEC - now we are seven). Eaga also reveals today that it made good progress bidding for the Flexible New Deal programme... until the tender process was suspended pending a review of the 'Welfare to Work’ agenda. Like other UK public sector BPO players we speak to, Eaga will be bidding for the enlarged ‘Work Programme’ in the coming year. In the meantime, the company has resigned itself to the fact that it is “unlikely to win material new revenues” in this part of its business over the current financial year. Sound familiar?

Its cautious optimism for the future mirrors the message from other BPO players in the sector i.e. Eaga reckons they’ll be an increasing number of outsourcing opportunities in UK Government in the medium-term. We’d agree that for players like Eaga, building from a small BPO revenue base, there are likely to be a few decent opportunities that will allow it to grow the business. However, across all of Eaga’s business much will depend on policy and funding decisions to be made by the Government – in relation to fuel poverty, energy efficiency and renewable technologies - over the coming months.

FY10 (to 30^th June) was an even more ‘horribilis’ year for multinational, multidiscipline recruitment firm, Hays, pretty much across the board. This was especially the case in UK IT, where operating profit almost disappeared (£500k) on £22m in net fee income (NFI - i.e. gross margin), down 21%. UK IT NFI had already dropped by 57% in FY09, so looking on the bright side, the decline is slowing! IT recruitment remains at 9% of Hays’ UK NFI.

As we reported in July (see UK public sector hits Hays), UK public sector recruitment suffered, with NFI down 19%, though ‘frontline’ staffing in Education and Health continued to grow. CEO Alistair Cox is rather pinning his hopes on a UK private sector recovery, but the increasingly uncertain outlook for the economy makes this a less safe bet. 

Specialist provider of maritime identification and tracking technologies, Software Radio Technology (SRT) has released a Q1 trading update to coincide with its AGM today. The rapid uptake of AIS equipment (marine radio tracking and identification) driven by impending or actual mandates by different countries has fuelled considerable growth. In Q1, revenues were up 147% to £1.8m and the company reported an (unaudited) PBT of £448k – its maiden profit. In the last FY, revenues were up 41% overall, to £3.6m.

The company has seen some hard times but things really look like they’re coming good – for more analysis see SRT’s focus gamble paying off. SRT estimates that of the world’s 26m vessels, approximately 200,000 have been fitted with an AIS device already but a further 1m vessels are required to fit an AIS device during the next four years, with further mandates expected to add to this. That said, price/performance is improving rapidly so increasing volumes aren’t directly proportionate to revenues. The company must also fend off competition – this isn’t a monopoly market. But it’s looking good right now: SRT has an order book of over $6m, plus a further order of ‘up to’ $2.4m has just been received, and it has signed a new distributor in China.

To be honest there’s no real UK angle to this story, but it is indicative of where the IT services industry sees its growth (and global delivery) markets.

Capgemini is to take control of Brazil’s largest IT services player, CPM Braxis, with a €233m cash payment for 55% of the business, valuing the enterprise at €437m. Capgemini has a call option on the remaining 45% which it can exercise between years 3 and 5. CPM Braxis, which is 45% owned by leading Brazilian bank, Bradesco and 21% by private equity, is expected to turn over €450m this year, with a 6% ‘adjusted’ EBIT margin (i.e. Cap is in effect paying around 1x revenues and 16x adjusted EBIT). After the deal, Bradesco will still own 20% of the company and private equity 11%.

The transaction boosts Capgemini’s presence in Latin America by another 5,500 FTEs to around 7.400 employees, not that far off its total headcount in North America (8,100). While most of the CPM Braxis business will concentrate on the domestic market, Cap also intends to use it to boost its own nascent remote infrastructure management services into the North American market.

As it happens, I will be in Brazil at the end of the year and hope to arrange a meeting with CPM Braxis management.

Diligenta, the Life & Pensions (L&P) BPO business launched in 2006 by leading India-based SI, TCS, has won a major contract to take on the policy administration for closed life fund consolidator, Phoenix Group (the erstwhile Pearl Group) that was previously handled by UISL, the L&P BPO division of Unisys UK. The UISL policies will be migrated to Diligenta's BaNCS processing platform. Diligenta already processes some 3.2m L&P policies for Phoenix from the original Pearl deal (see UKHotViews archives for the history). About 2m of these policies have since been migrated to BaNCS.

There are some interesting facets to this story:

First, this deal marks Unisys’ exit from the UK L&P market. Basically, they sold the UISL business to TCS , but we don’t know how much for or whether it was profitable. UISL’s biggest client was Phoenix, with some 1.7m policies. Also moving to Diligenta as part of the deal is Old Mutual, though with rather fewer policies under management. Why did Unisys get out of the UK L&P market? I’m assuming management decided that Unisys was never going to be a major player, at least not without a huge investment to transform its legacy mainframe-based processing platform to modern technologies. A graceful exit therefore made supreme sense.

Secondly, the new contract stretches to 2018, and adds some £250m to Phoenix’s spend with Diligenta over the period. By my estimates, this means Dilgenta will be a £100m p.a. business this year, about 15% of TCS’ UK revenues. Of course, the rules of the game in closed book pension administration are that revenues inevitably decline as policies run off, which means L&P players have to keep winning new business to keep growing.

Thirdly, like with the original Pearl deal, none of the core processing will be done offshore, at least not yet. All 1,000 UISL staff are transferring to Diligenta.

But TCS does not have all of Phoenix’s L&P business. There are two other L&P BPO players in the mix: Capita (through the £580m/12 year deal at Resolution in 2007); and HCL, in the guise of Liberata Financial Services, which HCL acquired mid-2008. I understand that Diligenta now becomes Phoenix’s largest L&P outsourcer, followed by Capita and then HCL. Phoenix told me that they have no plans to consolidate their BPO suppliers any further in the short- to medium-term. Fair enough – for now. After all, it’ll likely take a couple of years to migrate the new policies to Diligenta’s BaNCS platform. But after that, I wonder if there will still be room for three in that bed?

So this is a great win for TCS, particularly as it takes another player out of the market. It also marks the first new contract for the Diligenta BaNCS platform since the original Pearl deal - that's a four year wait! But even with (now) 5m policies at Phoenix, and some 0.5m from the Jan. 2008 Sun Life Financial of Canada UK deal (not on BaNCS), TCS still has a ways to go to catch up with Capita’s 23m policy L&P business. But there again, I suspect we won't have to wait another four years for the next BaNCS deal!.

We have commented consistently that we see considerable opportunity in software testing tools and services (for example see Software Testing Trends). Thus we were very interested to read a recent report by our friends at Pierre Audoin Consulting (PAC) that endorsed our view, and which puts some numbers around the opportunity: worldwide, the market for testing software and services is a massive €80bn (£65bn) and will approach €100bn in 2014. That’s a CAGR of over 5%, compared to much, much less for the SITS market as a whole: we’re currently revisiting our UK forecasts and moving them downward toward a likely CAGR for the next few years of around, or below, 1%...

This enthusiasm for testing amongst IT shops is crucial for several of the companies we are particularly interested in. These include testing services specialist SQS, and Micro Focus – which has pretty much bet the company’s future on testing with its recent acquisitions – plus NCC (with its recent acquisition of SDLC) and the testing divisions of the large systems integrators both here and in India (eg see Cognizant tests the French market).

PAC comments that two factors have helped drive testing up the list of priorities for IT decision-makers: pressure on IT to contribute to company-wide cost reduction programmes, and an increasing appreciation of the cost of inadequately or insufficiently tested systems on the business, highlighted by recent high-profile system failures at the London Stock Exchange, the US Aviation Commission and the State of Queensland. We would add that the need for new tools and methods for cloud-based testing – and, conversely, testing of cloud-based services ­– will be a further driver for companies to look to the use of external tools and services.

For more details contact PAC at www.pac-online.com

Set-top box software specialist ANT has unveiled its interims showing half-year revenues up slightly to £2.1m, though down sequentially, with operating loss almost halved to £500k. Licence and royalties fell, although professional services grew: we would have liked to see the opposite – generally a better indicator of future growth – although the company argues this service work is evidence of activity leading to future roll-outs. 

There is currently a lot of discussion in the industry around the future of broadcast TV – for instance the FT this week had several articles on the subject – as major players like Apple, Google and Intel seek to disrupt the industry by merging web, computing and TV platforms, while the BBC and others push Internet based player models. In our view all this change presents a big opportunity for Ant but also a huge challenge as the tectonic plates shift. Speaking to the company earlier, CEO Simon Woodward was keen to stress that the increasing popularity of the model of rich free-to-air model linked to selective pay-per-use plays to the strengths of Ant’s Galio software. Ant is closely involved with the standards-based approach being adopted in Germany and France and rolling on across Europe, including the Canvas project being championed by the BBC, ITV and others (but opposed by Sky and Virgin!) in the UK.

Ant must navigate the tidal flows and align with the biggest waves. In its favour it has built relationships with some very big industry names, including Cisco, France Telecom, Humax, Philips, and Samsung, and a global footprint for its sales, with 31% of sales in North America and 35% in Europe. 

Well, they said it would be gruesome and it is. Chairman Philip Swinstead, and CEO Paul Davies, the ‘encore’ management team at ITSA (IT staff agency) and project house, Parity, had warned the market in July that major surgery was required (see Swinstead & Davies start Parity ‘slash and burn’). In fact a second ‘operation’ was required to cut out more flesh as the troubled Solutions business sunk deeper in the mire. What also didn’t help was that the Training business sold by prior management in March 2009 (see Parity finds some solace in UK Public Sector) went belly-up, leaving Parity saddled with onerous leases and a likely defaulting debtor. All of this left Parity nursing a £2m operating loss in H1 (to 30^th June), as revenues declined by 16% to £53m. Swinstead and Davies confirmed that Parity will not be profitable over the FY.

But they’re not standing idly by, wringing their hands. The core ITSA business managed to keep gross and operating margins almost stable (8.3% and 2.5% respectively) on a 15% revenue decline, to £45m. They plan to pump up the private sector side of the business and will launch a new ‘Talent Management’ division focusing on graduate development. The loss-making Solutions business will be renamed ‘Parity Systems’ and will concentrate on Microsoft Cloud and Sharepoint projects, as well as mobile internet (via partners).

As we’ve said before, Swinstead and Davies know what they’re getting themselves into, but frankly they have their work cut out, especially in the newly rebadged Systems business. It’s really hard to see how they will be able to make ‘Systems’ stand out in the crowd, and in any event, the effort to do so will surely be highly distracting.

Continuing its build out into social media analytics, Alterian is to buy Intrepid Consultants, a market research consultancy operating in that space. It is paying up to $11.5m, depending on performance, in cash and shares for Intrepid, which has 40 staff in London, Seattle and Vietnam. Intrepid staff already use Alterian technology in their project work.

We have commented many times on the growing power of social media, and the concomitant hunger within marketing departments to utilise and analyse social media. Indeed this is becoming a pre-eminent marketing tool. For Alterian this is a natural move to consolidate and leverage its increasing technology scope in that direction (eg see Alterian ticks social media analytics box).

Not the best of months to be an investor. NASDAQ fell 6.1% in the month making it a 6.8% fall for the year. In the UK the techMark100 fared marginally better with a 1.8% fall but is still showing a 5% gain for the year. The FTSE SCS Index, that we follow most closely, fell 2.4% but is still showing a pretty impressive (in the circumstances) gain of 6.7% for the year. The Telcom sector was a lonely beacon of hope. The FTSE Mobile Index was up 5% - mainly because Vodafone (which dominates that index) was up 7.5% in Aug as it got continued accolades for its high dividend.

In the UK EG Solutions was the fastest riser – up 35%. This was due to excellent performance as Eg updated on its first half. Blinkx continued its excellent performance – up another 28% this month. See Keeping faith with Blinkx. Blinkx was 17p at the start of 2010 – so that’s a 335% rise this YTD. Highams battles on was our headline reporting their return to profit. Highams was rewarded with a 18% increase in their share price this month. Telecity hosts another good half and was also rewarded with a 11% share price rise.

We, at long last, said goodbye to Total Systems – see Total totalled. Listed in 1988 at 85p they really should never have been a listed company. The ‘poor old’ shareholders lost about 75% of their investment in the 22 years – about the same again in inflation! For my take (re) read Total recall.

Warnings hit Xchanging – down 35%. See Xchanging warns on FY revenues. Also Micro Focus fell another 27% this month. See Micro Focus misses expectations and brings in new management. Confidence has been hit hard (mine in particular…) by all the management changes of late. I’m seeing chairman Kevin Loosemore next week who I hope will reassure me. Kewill lost 17.5% as its takever ‘hopes’ evaporated. See Kewill retains its independence.

I note that Serco fell 2.5% yesterday – although they had recorded a 5% gain in August. See FT’s Serco misses out on FTSE gains. "Merrill Lynch, Serco’s joint house broker, moved to “neutral” ahead of next month’s government spending review. “The group, which takes about half its revenue from central government, was under pressure to cut existing contracts and was unlikely to pick up any material new deals, said the broker.” Serco’s management dismissed the concerns in a meeting with its other house broker, JPMorgan Cazenove".

The FTSE Support Index fell 3.5% in the month. We are revising our Public Sector forecasts – downwards – as we too await the 20^th Oct spending review. This kind of comment might be repeated for others highly dependent on public sector revenues – including others in the Support Sector

Globally the real excitement on the share price front came, yet again, from takeover targets. 3Par - currently still subject to the ‘ping-pong’ bidding process from Dell and HP – rose over 3-times from $10.10 to $32.12. Given that this is above the latest $30 offer from HP, clearly someone believes there will be a further bid. See 3Par lunacy to follow the 3Par madness of the last month. The other major riser – putting on 42% this month – was McAfee which was also an M&A target. This time from Intel. See Intel buys McAfee. We don’t fully understand the logic of the Intel/McAfee deal but the price is OK. Conversely we completely accept the logic of the HP (or Dell) 3Par deal; it’s just the price that is ‘mad’. Anyway, shareholders ‘punished’ all bidders for the 'madness' this month -  HP was down 17% and Dell down 11%. Intel also fell 14% - but this was more to do with Intel warns of PC slowdown.

Other global fallers of note this month included Unisys – down another 17% this month despite a brighter quarter,  Patni – down 13.5% (See Difficult quarter for Patni) and CSC – down 12% (See Gruesome quarter for CSC).

UK-based support services and BPO player Mouchel has appointed a new Group FD and confirmed its expectations for the year haven’t changed since it updated the market at the beginning of August (see Mouchel: short-term uncertainty, long-term optimism). David Tilston will join Mouchel from SABMiller in two weeks time, replacing Kevin Young.

The Group’s order book and pipeline both remain around £2bn and it has won new business in Australia and the Middle East. It also reports an increasingly positive medium and longer term outlook as the new UK government’s policies are implemented across central and local government. But in the short term uncertainty prevails in the UK public sector market in the run up to the Spending Review on October 20.

My 3Par “lunacy” post last week ended with the footnote:

Footnote - Several newspapers printed my ‘totally insane’ description of the $27 bid. I was actually referring to the FT’s description of  ‘madness’ which described the $24 bid! I am now having to test my word power. If ‘totally insane’ tops ‘madness’ is ‘lunacy’ adequate to describe the latest $30 bid? 

One reader (name supplied) commented “No way. Lunacy is related to the lunar cycle, periodic in nature and therefore clearly less mad than totally insane. What about "stark, staring, glass-eyed, full on spark-bonkers"?

But the one I liked best was the suggestion that I should resurrect “North of Stupid”. Old readers might remember that I got the biggest headline ever in the Financial Times back in early 2000 when I was asked for my views on the Sage share price hitting £10 – a P/E of 184. Ten years on, Sage closed today at 245p.

By the way, no further news to report on the 3Par saga. Main HP-related news today was the record $55m fine from the US Dept of Justice “in relation to influencer fees to employees in the [US] government for recommendations to purchase its products”. Also of note that Mark Hurd’s indiscretions have now cost him his seat on the News Corporation board too.

Another Footnote - Just to make clear that I really do understand the 'logic' of the HP and Dell bids for 3Par. It's just the price I don't get...

We are delighted that Deloitte has chosen the TechMarketView banner service to let applicants know that they only have until 17^th Sept to apply to be recognized in the Technology Fast 50. Indeed, what better way to get directly to the leaders of many thousands of IT companies operating in the UK market than TechMarketView.

Deloitte have just released their review of Technology Fast 50 companies over the last decade as well as the results of a survey of  entrants to the 2009 Deloitte Technology  Fast 50 programme. To download your copy Click here. Deloitte estimate that over the last ten years, UK Technology Fast 50 companies have generated in excess of £5 billion of wealth for their owners since they first appeared in the rankings.

The UK has consistently provided a significant proportion of Deloitte’s combined ranking of fast-growing European companies, the Technology Fast 500 EMEA programme. Last year, for example, the UK provided 87 of the Technology Fast 50 EMEA region top 500 and only France was anywhere near as significant.

In four of the last seven years, the UK has had more companies in the EMEA Fast 500 than any other country, including 2006, 2007 and 2009 – in each instance ahead of the second most successful nation, France.

It’s also interesting how optimistic entrants are. Over 43% of respondents to the survey of 2009 entrants felt the recent economic conditions had either a positive or no effect on their business.   

Applications are free and can be submitted online at www.fast50.co.uk, after which you will be asked to supply signed audited accounts for the first year and last year of the five years being measured. Winners of this year’s UK Technology Fast 50 will be decided in mid-October with a gala dinner at the Emirates Stadium on 25 November.

There was a small bit of good news for educational IT supplier RM at the end of last week, which we didn’t get a chance to comment on at the time. It was appointed preferred bidder on a £6.8m Building Schools for the Future (BSF) contract with Hertfordshire County Council under which it will supply ICT services to three schools. The schools in question are the ‘sample’ projects from Hertfordshire’s BSF programme which were listed as ‘for discussion’ on the Department for Education’s now infamous list on the future of school capital projects (see for example BSF cuts slash £3.5b from supplier hopes). The contract isn’t exactly huge, but ‘every little helps’ as they say. And, as suppliers anxiously await the outcome of the James Review into the school building and refurbishment programme, it’s encouraging that at least some ‘sample’ BSF schools are being allocated funding.

Seasoned followers of the UK healthcare IT market will be forgiven for feeling a sense of déjà vu on reading Australian-headquartered iSOFT’s results, which were released to the Stock Exchange ‘down under’ early this morning. The story has similarities with the tale of woe that developed following the then UK-based iSOFT’s acquisition of Torex some seven years earlier. 

We’ve spent some time digesting the small print in the 79-page document (here if you want some bedtime reading), but the headlines tell the story pretty well:

• Total revenue was down 20% in the year to 30 June, or 7% on a constant currency (ccy) basis, to A$431m (£264m).
• Reported EBITDA was down a whopping 77% to A$30m (-78% ccy).
• EBITDA pre-exceptional items didn’t fare much better, down 69% to A$41.5m
• A A$341m impairment - primarily on goodwill from the 2007 acquisition of UK-based iSOFT, whose name the then IBA Health later adopted – led to a pre-tax loss of A$383m compared to a profit of A$35m the year before.
• The Group’s balance sheet has worsened – net cashflow was -A$49m last year compared to +A$29m in FY09, while operating cash is now -A$0.7m. iSOFT is trying to restructure its debt yet again.
• In light of the results, CEO Gary Cohen is stepping aside (apparently taking on a role advising the Board on strategic options). His seat will be kept warm by COO Andrea Fiumicelli while a replacement is sought.

iSOFT was clearly hit by the appreciation of the Aussie dollar – almost half of its revenue is in sterling and a quarter in the euro. But delays to England’s National Programme for IT in the NHS (NPfIT), where it is a key software supplier via a sub-contract to Local Service Provider (LSP) CSC, have also taken a heavy toll. Indeed, excluding NPfIT, iSOFT’s total revenues were flat at A$356m on a constant currency basis.

As we feared, delays to NPfIT have not been compensated for by increasing demand outside the programme in the UK, as iSOFT had previously predicted. Total UK & Ireland revenues declined by 17% (ccy) in FY10, to A$169m (£103m). Within that, NPfIT revenue was down 32% to A$65m (FY09: A$95.1m) and revenues generated outside the programme dropped 3% to A$104m.   

Unfortunately for iSOFT, the situation with NPfIT (which accounted for 17% of the firm’s turnover in FY10) is unlikely to improve. As we await the outcome of the government’s review of the programme, few would bet on supplier revenues from NPfIT increasing in the years ahead. And with local NHS budgets also severely squeezed, money will be harder to come by directly from Trusts too.  

Whoever takes the helm at iSOFT will need to be up for a challenge and prepared to make some tough decisions. In the meantime, according to Chairman Robert Moran, steps are already being taken to get the company back on track. We know, for example, that the workforce will bear the brunt of cost cutting in the short term - expect savings from headcount reductions from Q410. Other steps include reviewing the company’s capital structure, possible asset disposals and approaches from prospective investors. These initiatives are at an early stage though, and their timing and outcome is uncertain. In other words, watch this space...

Business software company Unit4 has reported half-year revenues up 7%, to €199m, with new licence sales up 18% to €30m. Organic growth was 4%. PBT jumped from €4.2m to €10.9m, although that’s still low for a software company at around 5%. In the UK (including, of course, the UK-based Coda business) revenues were flat – accounting for 19% of revenues, but new licences were up 20%, a good forward indicator for the future, and included “several” large public sector/third sector sales.

Unit4 invested around €5m in FinancialForce, its software as a service (SaaS) venture utilising the Coda IP, which is reported to be seeing ‘a consistently increasing pipeline’ but clearly revenues are not yet significant enough to be broken out. We hope to get some more information on how that’s going, next week.

At present revenues outside Europe and North America are only 8% of total. Of that, 5% is North America, but the company says it saw a 36% increase in licence and service revenue in Asia Pacific. It has “ambitious expansion plans” to target the region in H2 and beyond, leveraging its Coda installed base to offer its Agresso ERP suite across the region.”

Misys CEO Mike Lawrie expected to get around $1b for the divestment of most of its stake in Allscripts (see Misys to become ‘half the man it used to be’) –  and he delivered. The deal closed on Friday with Misys’ coffers swollen by just under $1.2b, with Misys still holding 10% of Allscripts’ stock as planned. Thus ends the woeful tale of the Medic acquisition - what an elegant and profitable way to make a silk purse out of a sow’s ear!

Pilat Media Global, the London-based supplier of business process management software for broadcasting companies, has announced good first half results, with revenues up 25% to £10m, and an operating profit of £1.4m compared to a £1.5m loss a year ago. Last year's thumping loss, as we read the accounts, appears to be related to currency hedging contracts.

Back to the real business of the company, and the second quarter was particularly good with a 31% revenue increase year on year and the company observes that traditionally, its second half is stronger than the first so there are prospects of good news to come. That said, management is only cautiously optimistic, to the extent of saying that if certain contracts come to fruition then it is ‘hopeful’ the company will exceed last year’s revenues (of £19m).

A recent major contract ($11m, multi-year) signed with a US telco gives Pilat greater revenue visibility but more important, in our view, is an indicator of the potential for Pilat outside its historic markets, as other companies in the Internet and telecoms industry look to provide TV and video-on-demand services. It also shows Pilat’s ability to further increase its presence in the US market. It recently opened a new sales office in New York to further establish itself; in the half, Americas revenues reached 66% of the total compared to 55% a year ago.

Hardly has the ink dried on Intel’s offer to acquire McAfee (see Intel buys McAfee), than off it went shopping again, this time for the Wireless Solutions (WLS) business of Infineon, the semiconductor business spun out from Siemens back in 1999. Intel will pay $1.4b cash for WLS, which lost money in FY09 (to 30^th Sept.) on €917m of revenues, but has since returned to profit to the tune of €50m for the 9 months to 30^th June on €883m in revenues. Like with McAfee, Intel intends to run WLS as a standalone business.

Just before the weekend, Intel had warned of a global PC slowdown (see Intel warns of PC slowdown) and wants (indeed, needs) to spread its wings beyond processor chips, particularly in mobile technologies. Sounds like a smart buy.

Further to my Thursday post – 3Par ‘madness’ - on Friday, after Dell topped the $27 HP bid  by 30c, HP upped it to $30. This values 3Par at c$2b. See FT article. This is now way in excess of 10x 3Par’s revenues. As they haven’t made a profit in all their trading history, P/Es area bit problematic! But it’s a 95 P/E even on forecast earnings (before everything including the ‘bad bits’)

In some respects, this saga is linked to the Intel PC slowdown news on Friday. Both HP and Dell are BIG PC players. They are both looking to new markets. For this reason, both have moved into IT services (HP with EDS, Dell with Perot) But clients are moving to the Cloud in a big way. Both need a major data storage offering to counter EMC and Cisco. Dell needs 3Par more than HP – there are few (if any) other purchases they could make. At least part of the sky high valuation HP is putting on 3Par is a “stop Dell” premium. But there has got to come a time when the madness ends.

Footnote – Several newspapers printed my ‘totally insane’ description of the $27 bid. I was actually referring to the FT’s description of  ‘madness’ which described the $24 bid! I am now having to test my word power. If ‘totally insane’ tops ‘madness’ is ‘lunacy’ adequate to describe the latest $30 bid?

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A few months ago I reported ‘rumours’ of slowdown in semiconductor orders right at the very start of the IT ‘sausage machine’. I warned that, if true, it presaged a downturn in PC  sales and on through the rest of the line in time. But at the time everything really looked great. Intel, ARM and then all the PC manufacturers were reporting near boom times. Much of this was down to consumers but also the there was much talk of the great ‘Enterprise PC refresh’ actually having started.

On Friday, as the FT reported, Intel warns amid global PC slowdown. Intel will miss their revenue forecast and, indeed, trading in their shares were temporally halted. In the end they lost 15%. Intel blamed slower than expected consumer demand in mature markets but reported robust enterprise sales. It looks like everything started to go pear-shaped in July and has continued into August.

In the UK, there are two problems with this:

• Consumers haven’t really been hit too hard as yet. Most of the real cuts in spending power, benefits and employment are yet to come. In other words if it is starting to get bad NOW – just wait for the misery to come
• We really have never really bought the ‘Enterprise PC refresh’ story anyway. But even assuming it was true, HM Govt spending cuts will hit it stone dead. Remember that Govt is around a third of the enterprise IT market. A combination of severe It spending cuts plus reduced public sector employment (=fewer PCs required anyway) will severely affect the PC market. In addition, the continued and accelerated move to the Cloud will reduce the need for on premise servers (where Intel also makes much of it high end revenues)

Intel is and has always been a reliable bellwether. Let me remind you what Peter Rowell (Ch of Regent) said when Intel last warned a few years back - “these guys are right at the front end of the food chain. In other words they supply the equipment …to build the chips …which go into the systems …that run the software …that require the services…etc.” You need strong reasons not to take heed this time too.