The UK AIM market-listed Tikit Group plc has published its prelim financial results for the year to 31st December 2009. Here are the key financial figures presented under IFRS...

•  Group revenues down 11.5% to £25.2 million (2008: £28.5 million)

o   Recurring support and outsourcing services revenues up 10.2% to £13.7 million (2008: £12.5 million)

o   Total Group services revenues down 6.2% to £19.2 million (2008: £20.4 million)

o   Total software sales down 27.9% to £5.0 million (2008: £6.9 million)

o   Tikit-developed software sales down 13% to £1.4 million (2008: £1.6 million)

•  Operating profit before amortisation of acquired intangibles and share-based charges down 26.5% to £3.0 million (2008: £4.1 million)

•  Cash generated from operations was £3.5 million (2008: £5.7 million)

•  Proposed final dividend of 4.1 pence per share resulting in a full year dividend held at 6.0 pence per share (2008: 6.0 pence)

The year to 31 December 2009 was challenging for Tikit as clients adjusted their spending plans in the uncertain economic climate.  The Group’s performance in the first half was, as reported in the trading update early in July, below the Board’s expectations set at the beginning of the year.  Disappointing software sales in the second quarter, along with the prospect of continuing weakness in that area of the Group’s markets, caused the Board in July 2009 to revise its expectations for the financial year as a whole and I am pleased to be able to report that profits are slightly ahead of those revised targets.  During the year the Board has implemented a business restructuring and cost reduction programme, the benefits of which will impact the current year and beyond.

Against this background, I am pleased to report that the Group generated operating profits during the second half of the year of £1.8 million and that operating profits for the full year were £3.0 million.  The actions taken to restructure the business in light of the difficult trading conditions have resulted in annual cost savings of £1 million and the benefit of this is shown in the significant improvement in margins, which were 15.1% in the second half of the year compared with 9.1% in the first half.  Additionally, cash generated from operating activities was £3.5 million and the Group’s net cash resources at the year-end amounted to £1.6 million, a significant increase on the £0.3 million reported at the end of 2008.

Good progress has been made in many areas of the business, with continued solid growth in our recurring support and outsourcing revenues.  In addition, positive customer response to Tikit-developed software, particularly the enhanced version of Tikit eMarketing and the Tikit House Style Manager for Microsoft Word, as well as the sales of TfB-developed practice management software, resulted in solid sales of Tikit-owned software. However, sales of third party software and the associated implementation work were weaker as clients held back on capital project commitments.  The Group continues to develop its own enhancement software modules, but sales were constrained by the general weakness in demand for the Group’s third party software.  Nevertheless, these proprietary enhancement modules differentiate Tikit from the competition and we are committed to developing further the market for these products.

The Board remains confident of the financial strength of and prospects for the Group and its potential to generate positive cashflow. 

Results

Total Group revenues for the year fell by 11.5% to £25.2 million (2008: £28.5 million).  Revenues were below expectations mainly as a result of the deferral of capital projects by clients in the current economic environment and, to a minor extent, due to the implementation of subscription-based pricing on some of our products, which should however secure more predictable long-term revenues for the Group.

Recurring revenues derived from support and outsourcing services grew by 10.2% to £13.7 million (2008: £12.5 million) representing 55% of total revenues, up from 44 % in the previous year.

Total services revenues of the Group, consisting of our consultancy, implementation and managed services businesses, fell by 6.2% to £19.2 million (2008: £20.4 million).  This was largely attributable to the fall in implementation revenues from £8.0 million in 2008 to £5.4 million in 2009.

Software sales in total were down overall by 27.9% to £5.0 million (2008: £6.9 million) and now represent less than 20% of total Group revenue.  Sales of Tikit-developed software fell by 13% to £1.4 million (2008: £1.6 million) and third party software sales declined by 32.1% to £3.6 million (2008: £5.3 million). Sales of third party software products, such as Interaction from LexisNexis and Autonomy Worksite, suffered from the caution exercised by clients committing to large capital projects in the current economic environment.  There were, however, strong sales of Tikit’s own eMarketing software, especially in the USA, and the newly-launched Tikit House style manager which is a subscription priced product.  Sales of the TfB practice management software were down 11.5% year on year, although their second half performance of £0.45 million was similar to the second half of 2008 (£0.47 million). 

Full year operating margins fell to 12.0% (2008: 14.4%), although there was a significant improvement in the second half where margins improved to 15.1%, from 9.1% in the first half, as a result of a better product mix and the impact of some of the restructuring cost reductions.

Operating profit for the Group, before amortisation of acquired intangibles and share-based charges, declined by 26.5% to £3.0 million (2008: £4.1 million).  Share-based charges during the period were £0.12 million (2008: £0.25 million). Amortisation of acquired intangibles in the period were £0.37 million (2008: £0.28 million), which relate to the amortisation of the customer-related intangible asset associated with the TfB acquisition.  Profit before taxation decreased by 29.1% to £2.5 million (2008: £3.5 million).

Earnings per share, before amortisation of acquired intangibles and share-based charges, fell by 29.2% to 15.3 pence (2008: 21.6 pence).  The effective tax rate on profits was 25.8% in 2009 (2008: 26.7%).  Basic earnings per share were 12.7 pence (2008: 18.1 pence).

Our balance sheet remains strong, with net assets at 31 December 2009 of £15.2 million (2008: £14.3 million), including much higher net cash balances of £1.6 million (2008: £0.3 million).  During 2009 the cash generated from operations was £3.5 million (2008: £5.7 million).

There was no cash expenditure on acquisitions during the year and there are no outstanding acquisition liabilities.  In respect of financing of the business, £0.05 million of net interest was paid in the year (2008: £0.10 million), which related to the annual fee on unused loan facilities, and £0.87 million was paid in respect of dividends (2008: £0.69 million).  No share options were exercised during the year.  However, £0.11 million was used to purchase shares into treasury and the Tikit Employee Benefit Trust (EBT).

Summary and Outlook

During the year the Board undertook action to restructure the Group’s operations. This has resulted in reducing the fixed cost base and places the business in an excellent position for rapid profit improvement as conditions improve. 

Our clients continue to operate in tough and uncertain conditions and, as a result, some have chosen to defer investment in IT systems.  We believe that the general uncertainty in the economic outlook will continue to hold back commitment by our clients to large capital projects involving third-party software and to some extent the Tikit enhancement products associated with those projects.  Tikit is, however, uniquely positioned to benefit once these tough conditions ease and clients’ investment plans revert to the prior norm.  As in previous years, we do not expect our clients to firm up their annual plans for expenditure on IT systems and support until the second-quarter.

Tikit entered 2010 with a substantial number of project opportunities, and trading in the early months of 2010 has been encouraging.  Our focus for 2010 will be to improve margins through our emphasis on greater sales of Tikit-developed software, and to increase recurring revenues, combined with strong cost control and cash management.

Our balance sheet remains strong and the Group has a good record of cash generation, providing a sound basis for us to continue to seek out opportunities to expand our ability to deliver a wider range of services to our clients.  Combined with Tikit’s leading market position in the UK, the Board continues to be optimistic about the future trading prospects of the Group.

Mike McGoun

Chairman, Tikit Group Plc

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Operating review

The past year has been particularly difficult for Tikit. However, I strongly believe that the Group that has emerged from 2009 is a much more robust and focused business as a result of the actions taken during the year.

The management team has proactively tackled the challenges we are facing and has also achieved good progress on developing many parts of our business. We have reviewed all operations and business locations and re-structured the business onto a lower fixed cost base. This included terminating leases on a number of offices and closing them through the successful migration of employees to a work-from-home environment, creating more profitable business units. In addition, the rationalisation of some of our offerings has resulted in the potential for higher margins and higher utilisation of resources. The costs associated with the disruption, closure of offices and redundancies have been absorbed during the year so that we begin 2010 with a clean sheet.

It has been evident for some time that the weakening economic conditions have caused many law firms to revise their capital expenditure budgets and we saw a subsequent reduction of spend on large-scale software projects. As a result, our consultancy business was affected by lower than planned implementation revenues, and third party software sales in the year were disappointing.

I am, however, pleased to report that we continue to make good progress with the Group’s strategy of building revenues from our proprietary software and support operations. Our leading position in the UK legal market sector enables us to design software that meets our clients’ requirements and provides a depth and breadth of support that is unmatched by our competitors. Our managed services business performed particularly well and now represents over 55% of total Group revenues.

The Group currently operates across three core business streams: consultancy, managed services and software sales. Clients are delivered an integrated solution based upon a managed blend of these areas of expertise.

The table below summarises Group revenues by business category:

Consultancy

Revenues from consultancy were 33% lower than those achieved during 2008. Many projects were delayed at short notice by clients and this had a significant effect, not only on revenues, but also on utilisation levels which have a larger effect on profits. Although we reduced the absolute level of consultants during the year, we feel it is fundamentally important to retain core expertise and, as a result, our utilisation levels fell to a greater extent than the straightforward effect of lower than planned software capital spend by some of our customers. 

Document Management, the backbone application for Tikit over the past 15 years, has developed to encompass the entire content management area within law firms and large accountancy practices. Enterprise search and web portal access now form an integral part of the expertise needed to be credible with clients and Tikit is recognised as leading consultants in all of these areas. The acquisition by Autonomy of Interwoven, our core document management software supplier, in February 2009, has been well received by our market. However, the subsequent integration of the core Autonomy IDOL Enterprise search functionality into the worksite family of products resulted in many law firms reviewing their document management and search strategies. We are confident that many opportunities will result from this but it had a short-term impact on business for Worksite software and implementation revenues during 2009.

Despite these factors, Tikit still commenced work on two large scale Autonomy Worksite projects at Cameron McKenna and Denton Wilde Sapte, as well as delivering a successful proof of concept of the IDOL search platform to Uria y Menedez in Madrid.

Tikit is now established as the leading UK consultancy and implementation experts for Riverbed, a product used to resolve remote networking performance issues, and we have now successfully deployed this exciting product into 14 large UK clients, including Kingston Smith, S J Berwin, Clyde & Co and Thomas Eggar. We are also implementing a large installation at Norton Rose. Our expertise in this area of infrastructure is now being more widely recognised and there have been a number of significant support contract wins including TIS, Goodman Derrick, Thomas Eggar, Travers and Boston University. We continue to secure large infrastructure refresh business, such as Radcliffes.

Managed Services

A key strategic goal is to grow contracted, recurring revenues and so I am particularly pleased that, in 2009, revenues from Managed Services increased by 10% to £13.7 million (2008: £12.5 million). Tikit now has approximately 1,000 clients taking contracted support services, including many in mainland Europe and the USA. Contract retention rates remain steady at over 95%. The consolidation of our helpdesks into a single client interface and the implementation of the Client Care Management integrated software have not only improved our service to clients but have also improved the efficiency of our own operations. Clients can now receive self-service support and our management reports guide us to further opportunities for Tikit to offer other services, for example, training.

An important software-development project at Freshfields, where we are upgrading Tikit’s accounting software, Firmware, to a 64 bit version, has been well received and should further improve our ability to provide managed services support to other Firmware clients as they upgrade to the latest version. In addition, the release of eMarketing version 4.6, one of Tikit’s flagship products, has had a new interface written that was released at the end of 2009. This exciting new version will form the basis of a range of new developments and enhancements scheduled for this year and will improve software sales as well as increase recurring revenues.

Software Sales

Revenues from software sales fell to £5.0 million (2008: £6.9 million) as a result of the deferment by some clients of capital projects. Sales of the market-leading CRM software, LexisNexis InterAction, were lower than anticipated, with a commensurate shortfall in implementation revenues.

Sales of Tikit-developed software, the intellectual property rights to which are vested in the Group, remain strong. Total sales of such Tikit software were £1.4 million in the year and, although this is a slight decrease on the prior year (2008: £1.6 million), the key products (eMarketing, House Style manager and Partner for Windows) all showed strong sales in a tough market. In addition, the use of subscription pricing, especially on House Style manager understates the progress being made.

TfB

The addition of TfB to the Group in April 2008 not only made an important contribution to both revenues and profits during the year but has also increased the number of law firm clients serviced by the Group by about 500. It has been particularly satisfying to see the positive impact upon TfB‘s business as a result of TfB being part of the Group.

During the worst economic downturn in the legal sector for over 20 years, profitability at TfB was maintained broadly in line with the previous year, itself a record year for the Company.

TfB won 43 new business contracts in 2009 compared to 52 in 2008. However, the average order value almost doubled and therefore the Company had its best new business year on record. This now takes us to 95 new business wins since TfB has been part of the Group.

Partner for Windows development continued to be at the forefront of PMS and CMS development with the integration of MS SearchServer, redevelopment of the Purchase Ledger, an eCopy Connector and AGFS Billing for criminal work. These highlights were amongst over 200 enhancements added during 2009.

Our European subsidiaries, based in France and Spain, had a difficult year. This was not unexpected, given the change in the economic environment, as they are much more dependent upon new software sales than the more established parts of the Group. However, their performance in the second half was encouraging and profitable. Overall, they achieved a breakeven position on revenues of £3.0 million (2008: £3.2 million) and both companies are now making good progress with new customer wins and increased market share.

Outlook

Given that challenging trading conditions are expected to continue over the next 12 to 18 months, we will continue to focus on providing excellent service levels in order to maintain the high renewal-rate of our managed services contracts. Revenues from these contracts represented 55% of Group revenues in 2009 and are a key element of our strategy.

Implementation of Tikit-developed software should enable our clients to capitalise on their existing investment in CRM and Document Management systems as we provide high-value, low-cost, add-on applications. In addition, we anticipate increased penetration by TfB into the mid-size law firm market as a result of it being part of Tikit Group.

The operational focus for 2010 will be to continue to place particular emphasis on Tikit-owned software sales, together with better utilisation of resources with strong cost control and cash management in order to deliver increased margins from an improved business mix.

Trading in the first 10 weeks of 2010 has been encouraging and we expect to meet our internal first quarter budgets. The reduced cost base and more focussed operations in 2010 should help to mitigate our exposure to any further capital project deferrals by our clients.

David Lumsden, Chief Executive

Tikit Group plc