James Faulkner on Microgen: The cheaper way into the Big Data story…

“Big Data” has taken the investment world by storm. Stocks like WANDisco (WAND) and Fusionex International (FXI) initially soared and were then brought back down to earth as valuation became stretched. However, the long-term opportunity is still there, albeit perhaps one more of evolution rather than revolution, as so often turns out to be the case with “the next big thing”.

One company that seems to have been overlooked by all the hype, all the while quietly developing its own technology, is Microgen (MCGN). For those looking for long-term access to the Big Data story, but one that’s wrapped within a successful company in its own right, Microgen could be worth a look…

According to IT website ZDNet, “If BYOD [Bring Your Own Device] is the story of 2012, “big data” is definitely the one that’s immediately behind it. The hype is huge, the potential seemingly limitless and the promises far-reaching.” ‘

Big data’ is tech slang for collections of data so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications. As our IT infrastructure becomes ever larger and more complex, it requires concomitant improvements in the capabilities of the software designed to deal with the myriad of data flying around. Exponential growth in input must be met with exponentially more powerful computing. This problem is particularly acute when it comes to large organisations, where data flows are huge and represent a potential vulnerability.

In tests conducted over three weeks at IBM’s Innovation Centre at Hursley in Hampshire, Microgen said that it managed to process 7 billion transactions per hour using in-memory processing on IBM System x and its Aptitude enterprise application platform. With Oracle database-to-database processing running on a combination of IBM System x and IBM Power Systems, the company’s platform processed more than 800 million transactions per hour.

On the back of these results Microgen observed that, “This exceptional performance, combined with the rich functionality provided in both Microgen Aptitude and Microgen Accounting Hub, confirms Microgen’s leadership in delivering the high transaction-processing performance required in addressing the challenges associated with “Big Data” in high volume complex systems.”

While that might mean little to those of us who struggle to keep pace with technological developments, in the real world it “promises improved computing for the finance, telecom, utilities and media sectors – things like intra-day P&Ls, dynamic pricing treatments, daily product and customer profitability analyses, and so forth – which translates to a better way to handle ballooning data volumes and, with luck, a competitive edge, too,” according to ZDNet.

What it does…

Microgen serves many of the world’s top financial services, telecommunications and digital media firms, and is widely recognised for both its domain expertise in finance systems and for its high performance technology platform. The firm’s software applications, such as the Microgen Accounting Hub, are used to integrate finance applications and data, automate operations processes, address regulatory reporting requirements and generate multi-GAAP/IFRS accounting. The company’s flagship technology platform, Microgen Aptitude, enables business teams to rapidly implement software and achieve breakthrough transaction processing performance.

Microgen is a highly cash generative company with market-leading technology. What’s more, it is highly investor-friendly, having returned 100% of its October 2008 market cap to shareholders through ordinary dividends, special dividends, share buy-backs and tender offers. Despite all this, the firm is still sitting on net cash of £20.2 million, (just over a fifth of the current market cap). The shares have marked time for the past two years, as recent progress has been slow due to a cyclical drop-off in consultancy work, although software licence sales and other recurring revenues have continued to grow.

Recent trading…

In its interim results covering the six months to 30th June, Microgen said it made “satisfactory progress” on the strategic direction set out at the time of its strategic review, the goal of which is to “Acquire, Enhance and Realise Value” for Microgen shareholders. As a result Microgen is now the corporate parent of technology businesses operated as independent business units. Pursuant to the review, investment has been significantly increased in the Aptitude Software business in order to pursue the developing Big Data opportunity. In parallel, the Financial Systems business is concentrating resources on the wealth management sector and reported a substantial increase in return on capital employed (ROCE) following the change in capital structure (i.e. increase in gearing to reflect the division’s ‘cash cow’ status).

Group pre-exceptional operating profit fell to £3.7 million (H1 2013: £4.4 million) as investments were ramped up in in the Aptitude Software business. Group operating profit on a statutory basis was £3.3 million (H1 2013: £4.4 million). Revenue was slightly lower at £14.7 million (H1, 2013: £14.9 million), but this included a -£0.3 million forex impact due to the strength of sterling during the period. The group maintains a strong balance sheet with net assets at 30th June 2014 of £55.5 million (H1 2013: £62.2 million), including cash of £37.9 million (H1 2013: £26.8 million), and net funds of £20.2 million (H1 2013: £26.8 million) following the return of £12.5 million in the last twelve months to shareholders by way of tender offer and dividends.

In Aptitude, software revenue increased by 13% to £4.5 million on the back of new client wins, with recurring revenue now representing 55% of total revenue (H1, 2013: 54%). Overall revenue increased £0.2 million to £7.6 million, but the increased investment in the business pursuant to the Strategic Review has led to operating margins momentarily falling to 11% from 20%, which delivered an operating profit of £0.8 million (H1 2013: £1.5 million).

Several improvements have been made to the platform, including the ability to incorporate Hadoop (an open-source software framework for storage and large-scale processing of data-sets) into Aptitude-based Big Data solutions; and the the Aptitude Revenue Recognition Engine which provides a solution to the new IFRS 15 accounting requirements which apply to a number of industry sectors including telecommunications. Sales activity is said to have increased with a number of opportunities “well advanced” with paid proof of concept and scoping exercises underway in the telecommunication and other sectors.

In Financial Systems, revenues from Wealth Management were flat at £3.9 million with continued growth in the 5Series product for trust and fund administration offset by slow declines in legacy products. Overall reported revenue was £7.2 million (H1 2013: £7.6 million). Profitability in this division remained exceptionally strong with operating profits of £3.6 million (H1 2013: £4.1 million) representing an operating margin of 50% (H1 2013: 54%). Return on capital employed (ROCE) increased to 24% from 10%, as a result of the financial gearing following the new loan.

Big Data, Big Prospects?

The incorporation of Hadoop into Microgen Aptitude is a significant development, as Hadoop has come to dominate the Big Data space. The firm continues to exhibit strong and reliable cashflows, market leading technology, heavy investment in R&D, and a clear focus on shareholder returns. With a stable and relatively predictable stream of revenues, Financial Systems is Microgen’s cash cow and has furnished the company with cash to drive investment in the fast-growing Big Data arena.

It is worth stressing that an investment in Microgen should be treated as a long-term affair, as implementation of the strategic review will impact profitability in the short-term. Broker Investec is forecasting a pre-tax profit of £6.9 million for the current year, which feeds through to EPS of 6.7p, implying a current rating of 18.7 times. Although this doesn’t look particularly cheap on the face of it, there is also a sizeable cash pile to take into account, and the incubation of a technology like Microgen Aptitude Solutions could prove to be rewarding in the future.