Outlook

After a solid performance in 2018 Microgen Financial Systems looks forward positively to the future with a number of investments either underway or planned to accelerate growth within Trust & Fund Administration as the business prepares for its future independence. The business continues to benefit from excellent revenue visibility arising from its strong Recurring Revenue Base and the signing in 2018 of material multi-year contract extensions with a number of its Application Management clients.

The opportunity for Aptitude Software is significant with the business benefitting from a number of new applications and services focussed across a number of different geographies and verticals. This increasingly well positioned suite of applications have enabled Aptitude Software, assisted by its growing partnership network, to establish a strong pipeline of opportunities allowing the business and the Group to look forward confidently to achieving continued success in 2019.

Ivan Martin

Chairman

Aptitude Software Report

The Aptitude Software business provides a series of specialised financial management software applications which have the common capability of unifying, analysing and rapidly processing high volume, complex, business event-driven transactions, scenarios and calculations to deliver finance insight and control. Development continues to be performed principally at the Aptitude Technology Centre in Poland with sales, support and implementation services provided from Aptitude Software's London headquarters in addition to the North American and Singaporean offices. The business generates revenue from its software through a combination of licence fees (primarily annual recurring licences), software maintenance/support, software subscriptions for its cloud-based offerings and implementation and other support services.

Highlights and Financial Summary

Aptitude Software has made good progress in the year as the business transitions from its previous focus on the Aptitude Revenue Recognition Engine to the significant opportunity with its latest application, the Aptitude Insurance Calculation Engine ('AICE'). The business has now completed multiple sales of AICE across Asia, Europe and North America to both existing and new customers demonstrating Aptitude Software's increasing geographic reach and the complementary nature of the broadening suite of applications. The business also achieved an encouraging number of sales of Aptitude Software's growing suite of cloud-deployed applications, the Aptitude Lease Accounting Engine and Aptitude RevStream.

Software revenues recognised in 2018 have increased 37% to £24.8 million (2017: £18.1 million), Organic Growth of 23%. At 31 December 2018 the Recurring Revenue Base stood at £24.0 million (31 December 2017: £19.3 million), an increase of 24% during the year. The business continues to be focused on increasing its Recurring Revenue Base by promoting the annual licence fee model, however, the Recurring Revenue Base also now includes software subscription income in respect of the cloud-deployed applications with such income included within the software revenue disclosed above.

Overall revenue for the Aptitude Software business has grown by 17% to £52.3 million (2017: £44.7 million), Organic Growth of 7%. Overall revenue was impacted by the anticipated slowing of growth in services revenue principally due to the growing partner model, with services revenue increasing by only 3% to £27.5 million (2017: £26.6 million), marginally below the prior year if the benefit of the 2017 RevStream acquisition is excluded.

Adjusted Operating Profit increased by 21% to £10.4 million (2017: £8.6 million) representing an Adjusted Operating Margin of 20% (2017: 19%). Operating profit on a statutory basis was £9.4 million (2017: £7.8 million).

Acceleration of Investment

Building on the recent sales successes and in anticipation of the proposed new structure of the Group, the Board has accelerated investment in the future growth of Aptitude Software to both maximise current opportunities and to ensure the continued long-term development of the business. Overall, these investments moderate margin growth expectations for 2019 only.

The focus of investment has been the strengthening of the product development, product management and subject matter expertise capability of the business with a number of new senior hires. Investment has especially been accelerated on AICE where the new business opportunity will be at its peak in the period leading up to the effective date for IFRS 17 (accounting periods commencing on or after 1 January 2022).

Investment has also been accelerated ahead of earlier expectations in establishing the new Solution Management Service and further strengthening Aptitude Software's cloud capability, with both services attracting new customers in 2018.

Our People

Aptitude Software's people are the key asset of the business, whether through their knowledge of the market and the complex accounting challenges our clients face or the technical know-how on the development and implementation of our market leading specialised financial management software applications. This knowledge and know-how is leveraged through the outstanding commitment of its exceptionally talented employees across the globe enabling the business to make the excellent progress it achieved in 2018. The Board continues to be grateful to the wider Aptitude Software team for their outstanding contribution to the business. To ensure we retain knowledge leadership it is important that career development and training remain a key focus for the business. A series of training courses aimed at developing functional, technical and managerial skills within the business continue to be rolled out with further initiatives planned for 2019.

It is considered that re-naming Microgen plc to Aptitude Software Group plc will be a positive contributor to employee engagement with the Group, with the proposed demerger of Microgen Financial Systems likely to increase the effectiveness of future long-term incentive schemes for the Aptitude Software team.

Key Product Review

Aptitude Software has a growing suite of specialised financial management software applications which have the common capability of unifying, analysing and rapidly processing high volume, complex, business event-driven transactions, scenarios and calculations to deliver finance insight and control. During the year the business strengthened its product management capability highlighted by the appointment of a Chief Product Officer, a newly established role within Aptitude Software. The strengthened product management function ensures market driven insight remains at the heart of the decision-making process determining the focus of Aptitude Software's investment in both existing and new applications.

Aptitude Insurance Calculation Engine ('AICE')

Aptitude Software has made excellent progress in 2018 with its latest application, the Aptitude Insurance Calculation Engine. After completing the strategically important first sale to an Asian insurance group in February 2018, further contracts have now been signed with major insurers in three separate continents with a further material new business contract signed in the opening months of 2019 with an insurer in the UK. Success has been achieved with both insurers contracting for their first application with Aptitude Software as well as existing clients contracting for the application to build on their use of the Aptitude Accounting Hub ('AAH').

AICE allows insurers to address the requirements of IFRS 17, an accounting standard focused on insurance contracts. This new standard will require significant change by the insurance industry, a sector within which Aptitude Software has had a longstanding presence with a number of insurers using Aptitude Software's applications, a number of whom have now contracted for AICE. This new application leverages both Aptitude Software's existing technology and its experience of the insurance industry.

IFRS 17 will now be effective for accounting periods commencing on or after 1 January 2022, twelve months later than previously expected due to a recent extension in the effective date. Whilst this change has caused some delay to certain on-going sales processes, it is considered that in the medium term it will be beneficial to Aptitude Software as it provides insurers further time to select and implement more strategic and specialised software to address the requirement as opposed to short term tactical solutions.

There are a number of further global opportunities for AICE, the success of which will be a key part of the continued development of the business in both the short and medium term.

Aptitude Accounting Hub ('AAH')

AAH is a high volume operational accounting platform and sub-ledger that centralises control, improves reporting and generates a rich foundation of contract level finance and accounting data. Regulatory and industry change continues to be a driver of demand for AAH as complexity of contracts, products and services increases across a number of industries. AAH allows clients to simultaneously address the regulatory change and also leverage the detailed finance and accounting data within the system to drive commercial change within their business. AAH has clients within banking, healthcare, insurance and telecommunications with both new name business and account growth in 2018.

The opportunity for AAH remains significant. Whilst a number of target companies are currently prioritising regulatory requirements within their business (requirements addressed by a number of Aptitude Software's applications), AAH, regardless of regulation, is often the first element a client will licence to allow them to better control and manage the complexity of the finance transformation.

AAH is the cornerstone system in a number of client accounts and integrates with Aptitude Software's other leading applications. A number of sales of AICE or the Aptitude Revenue Recognition Engine have been made in recent years to existing users of AAH whilst sales of AICE to new customers will frequently be accompanied by a sale of AAH.

Aptitude Lease Accounting Engine ('ALAE')

The Aptitude Lease Accounting Engine has made good progress in 2018 with a number of new business sales building on the first contract for the application in December 2017 with a global technology firm. With the demand for ALAE expected to be sustained in the short term the business is satisfied with the Recurring Revenue Base already established for this application.

ALAE addresses the requirements of IFRS 16 / ASC 842, the leasing accounting standards effective for accounting periods commencing on or after 1 January 2019. Contracts have been secured across a number of different industries including insurance, logistics, facilities management and manufacturing. ALAE is a particularly compelling proposition when the accounting complexity is high and / or involving a multi-currency, multi-entity, multi-country dimension.

With ALAE well suited to cloud deployment the majority of the users of ALAE have subscribed for Aptitude Software's growing Software-as-a-Service offering, a capability accelerated by the addition of the 2017 RevStream acquisition.

Aptitude Revenue Recognition Engine ('ARRE')

ARRE addresses the requirements of IFRS 15 / ASC 606 the revenue accounting standards first effective for accounting periods commencing on or after 1 January 2018 (1 January 2019 in certain markets). Whilst providing capability applicable to many sectors the base is comprised of telecom clients where the capabilities of ARRE are well suited to the accounting complexity and data volumes experienced in this market.

The majority of users have now entered live use with the application with future growth anticipated to be generated from growth in existing accounts.

Aptitude RevStream

Aptitude RevStream continues to see a number of new business opportunities due to the broad revenue management capability of the software. In addition to a number of new clients secured in 2018, 2019 has started well for this application with a material new business contract secured at the start of the year. The software provides clients with business benefits in addition to regulatory compliance and Aptitude Software is committed to this revenue management market with ongoing investment. In addition to the positive financial contribution from the application, the contribution of the RevStream acquisition to the development of the cloud offering of Aptitude Software's other applications is material. The knowledge and references provided by RevStream has significantly accelerated the introduction of Aptitude Software's cloud offering for the Aptitude Lease Accounting Engine.

New Service Offerings

In addition to Aptitude Software's growing software-as-a-service revenues, the business completed the first sale of its Solution Management Service ('SMS'), a three year contract with a large North American telco client. The revenues for these services are disclosed within Aptitude Software's service revenues, however, they are fixed and recurring in nature.

The services, which are expected to further enhance the longevity of applications with clients, extend the responsibilities of Aptitude Software beyond traditional maintenance services to include services typically performed by the clients' own IT teams, for example monitoring of system performance, user administration and release management. Investment was made in both the proposition and the delivery capability of this new service in 2018, earlier than previously expected by the Board. The business is now targeting a number of opportunities within the client base to whom it can sell and deploy this new capability.

Research and Development

The Aptitude Technology Centre in Poland is responsible for the development of Aptitude Software's applications with the exception of Aptitude RevStream where development is augmented by teams in California. Modern development methodologies are followed with multi-discipline teams focused on specific applications. Benefitting from this approach the teams are able to rapidly and frequently release new functionality, a key requirement given the continuing and evolving requirements from Aptitude Software's client base. Research and development expenditure, including the cost of the growing product management function, in the year was £8.5 million (2017: £6.0 million) with all costs expensed as incurred with the increase in cost including £1.6 million in respect of the full year of Aptitude RevStream development costs.

Geographical Expansion

Aptitude Software's opportunity is worldwide with an established presence in Asia, Europe and its largest market, North America which represents 57% of the Recurring Revenue Base. Particularly pleasing is the material growth during the year in the value of the Recurring Revenue Base from Asia.

At the start of 2018 a Chief Revenue Officer for International (Asia and Europe) was appointed to lead business development across these two regions. Under his leadership an office in Singapore was established in the year with a multi-discipline team established to support this market and Aptitude Software's growing client base. In addition, Aptitude Software will be strengthening its presence in North America during 2019 with a senior appointment to lead the strategy and business in this key market, a market that has grown its Recurring Revenue Base from £1.6 million on 31 December 2013 to £13.1 million on 31 December 2018.

Whilst activities in Asia, North America and non-European Union European states are unlikely to be impacted by the United Kingdom's withdrawal from the European Union, Aptitude Software performs its development at the Aptitude Technology Centre in Poland and has a number of on-going implementation projects within European Union states (2018 revenue from European Union states excluding United Kingdom: £8.6 million). The business is continuing to monitor the developing situation, however, whilst there may be short term disruption it does not believe that there will be a long-term material impact given Aptitude Software's experience in deploying its highly skilled consultants across the world in addition to the flexibility provided by the partner network and the option of expanding the consulting capability of the Aptitude Technology Centre located in the European Union.

Partner Network

Aptitude Software's partner network is a very key influencer in our target markets where consultancies are frequently engaged to advise on technology selection. A significant number of partner resources have been training in Aptitude Software's applications providing partners with the capability to implement, or contribute to the implementation of, our applications. This capability augments the delivery capability for Aptitude Software's applications helping to accelerate their adoption.

Aptitude Software's partner network has continued to develop during 2018 with the majority of new business being partner influenced. A series of partnerships and alliances were publicly announced in 2018 with a number of different organisations including Deloitte, KPMG and Workday. In addition, Aptitude Software has hosted 25 partner events across 13 countries in 3 different continents.

Foreign Exchange

Aptitude Software is an increasingly international business with 54% of its revenues invoiced in US Dollars to North American clients (2017: 57%). Aptitude Software's 2018 revenue would have been reported higher at £52.7 million on a constant currency basis (compared to actual result of £52.3 million). On a constant currency basis adjusted operating profit in 2018 would be unchanged to that reported at £10.4 million. Constant currency is calculated by comparing the 2017 results with 2018 results retranslated at the rates of exchange prevailing during 2017.

Summary

In summary, the business has achieved excellent early success with the Aptitude Insurance Calculation Engine establishing an already valuable Recurring Revenue Base for this application. Good progress has also been made to develop new service offerings with the launch of its Solution Management Service and it is particularly pleasing to see a number of sales of the cloud-enabled Aptitude Lease Accounting Engine. Early success has also been achieved in the opening months of 2019 with material new business contracts secured for each of the Aptitude Insurance Calculation Engine and Aptitude RevStream applications.

The opportunity for Aptitude Software remains significant. With a growing suite of products and services focused across a number of different geographies and verticals the business looks forward confidently to achieving continued success in 2019. 

Tom Crawford

Chief Executive Officer, Aptitude Software     

Microgen Financial Systems Report

In 2018 the Microgen Financial Systems business made good progress in increasing the proportion of its revenues from the Trust & Fund Administration ('T&FA') sector, both through organic growth and the disposal of the non-core Payments software business. Microgen Financial Systems' key product in this sector is Microgen 5Series which addresses the core operational and regulatory requirements of a number of organisations including Trust Administrators, Fiduciary Companies, Corporate Services Providers and Fund Administrators. In addition to Microgen Financial Systems' T&FA operations, revenue is generated from an Application Management business covering a range of Microgen-owned and third party systems principally focused on the financial services industry. Until 2 July 2018 revenue was also generated by a Payments software business at which time this business was disposed. Revenues are generated through a combination of software licence fees (primarily annual recurring licences), software maintenance/support fees and professional services.

Highlights and Financial Summary

Microgen Financial Systems' Ongoing Revenue for the year ended 31 December 2018 increased to £17.3 million (2017: £16.9 million) of which 75% (2017: 75%) is recurring in nature. Total revenue, impacted by the disposal of the Payments software business on 2 July 2018, of £18.0 million (2017: £18.3 million).

The key highlight in 2018 was the disposal of the Payments software business for cash consideration of £6.9 million. In 2018 this non-core part of Microgen Financial Systems contributed revenue of £0.8 million (2017: £1.4 million) and operating profit (before non-underlying items) of £0.5 million (2017: £1.0 million). Following the disposal of this non-core part of Microgen Financial Systems the 2018 Ongoing Revenue generated by T&FA increased to 70% (2017: 62%).

Adjusted Ongoing Operating Profit is reported at £6.5 million (2017: £6.5 million) representing an Adjusted Ongoing Operating Margin of 38% (2017: 38%). Operating profit on a statutory profit basis is reported at £9.1 million (2017: £6.1 million) with 2018 benefitting from a £3.2 million gain from the disposal of the non-core Payments business.

Trust and Fund Administration

T&FA saw solid progress with revenue growing by 7% to £12.1 million (2017: £11.3 million), Organic Growth of 7%. T&FA recurring revenue in 2018 increased by 7% to £8.7 million (2017: £8.1 million), Organic Growth of 7%.

The T&FA Recurring Revenue Base increased during the year by 5% to £9.0 million at 31 December 2018 (31 December 2017: £8.8 million). Within the T&FA Recurring Revenue Base of £9.0 million at 31 December 2018 is £5.0 million (2017: £4.5 million) relating to the Microgen 5Series product with the Recurring Revenue Base on acquired and legacy T&FA products of £4.0 million (2017: £4.3 million).

In preparation for being an independent business a number of investments are being made to accelerate the growth of Microgen Financial Systems' T&FA revenues. In addition to further strengthening of the management team, investment has increased in particular within product and business development with profitability expected to be impacted in the short term.

Application Management

The Application Management business comprises a number of Microgen-owned and third party systems focused principally on financial services. The Application Management business reported revenue in line with management expectations at £5.2 million (2017: £5.6 million) with a number of long-term contract extensions secured in the year to provide the business with increased visibility and resilience in coming years.

Our People and Leadership

Following the departure of Microgen Financial Systems' Chief Executive Officer in October 2018, Philip Wood has been leading the business and providing support to the management team headed by Robert Browning. It is now confirmed that Robert will lead the business through its proposed demerger at which time it is expected he will be appointed Chief Executive Officer of Microgen Financial Systems.

The wider Microgen Financial Systems team are a key strength of the business and the Board are grateful for their excellent contribution in the year. Since the start of 2018 the team have successfully embraced several changes, whether the adoption of new modern development methodologies, enhanced approaches to implementation or refined go-to-market strategies. It is particularly pleasing to see individuals flourish in their new roles or responsibilities as part of these changes.

Summary

Microgen Financial Systems made solid progress in 2018 and enters 2019 with an increased focus on T&FA following the disposal of the non-core Payments business in July 2018. Microgen Financial Systems is now looking to accelerate its growth within T&FA through investment in several different areas of the business. Benefiting from these investments, high levels of recurring revenue and the material multi-year contract extensions with a number of Application Management clients, the business looks forward to being an independent software business focused on its core market and further improving its competitive position.

Philip Wood

Acting Chief Executive Officer, Microgen Financial Systems

Group Financial Performance and Chief Financial Officer's Report

Throughout this report:

·    The FY 2017 comparatives have been restated as a result of changes in accounting policies, see note 13 for further information

·    Recurring Revenue Base includes recurring revenues contracted but yet to commence and excludes recurring revenues which are currently being received but are known to be terminating in the future

·    Organic Growth percentages have been provided with the benefit of the acquisitions completed in 2017 and the impact of the 2018 small disposal removed, see note 1(c) for further information

·    Adjusted Operating Profit, Adjusted Operating Margin and Adjusted Basic Earnings per Share excludes non-underlying operating items, unless stated to the contrary. Further detail in respect of the non-underlying operating items can be found within note 2.

·    Ongoing Revenue, Ongoing Adjusted Operating Profit and Ongoing Operating Margin are calculated to exclude the contribution from the Payments software business, a non-core part of Microgen Financial Systems, disposed on 2 July 2018, see note 1(d) for further information

Revenue for the year ended 31 December 2018 was £70.3 million (2017: £63.0 million) resulting in an Adjusted Operating Profit of £15.7 million (2017: £14.5 million) representing growth of 12% and 9% respectively. Organic Growth in revenue was 6%. Operating profit on a statutory basis was £16.8 million (2017: £12.0 million) benefitting from non-underlying costs of £2.2 million (2017: £2.5 million) and a £3.2 million gain on disposal of the small non-core Payments software business (2017: nil). Group overhead costs were £1.6 million (2017: £1.7 million). The Group reported a profit for the year attributable to shareholders of £13.8 million (2017: £10.5 million). In accordance with IFRS, the Board has continued to conclude that all internal research and development costs are expensed as incurred and therefore the Group has no capitalisation of development expenditure.

Non-underlying operating costs in 2018 of £2.2 million (2017: £2.5 million) includes a £1.9 million (2017: £1.3 million) amortisation charge in respect of acquired intangible assets.

The total tax charge for the year is £1.6 million (2017: £1.1 million). After adjusting for the effect of non-underlying and other items, the Group's tax charge represents 22.93% of the Group's adjusted profit before tax (2017: 21.90%) which is the tax rate used for calculating the adjusted earnings per share. Adjusted basic earnings per share for the year ended 31 December 2018 was 19.4 pence (2017: 18.0 pence). Basic earnings per share for the year was 22.6 pence (2017: 17.3 pence).

The Group has a strong balance sheet with net assets at 31 December 2018 of £64.8 million (2017: £54.4 million), including cash at 31 December 2018 of £29.2 million (2017: £19.1 million), and net funds at 31 December 2018 of £17.3 million (2017: £4.9 million). During the year there were corporate cash inflows of £2.9 million comprising £6.8 million net proceeds from the disposal of the non-core Payments business less £3.9 million dividends. The net loan balance outstanding was £7.9 million at 31 December 2018 (2017: £9.8 million) with a further £4.0 million of capital lease obligations pursuant to the adoption of IFRS 16 (2017: £4.2 million). Trade and other receivables outstanding at 31 December 2018 were £14.7 million (2017: £13.6 million) with the growth in the Group's revenues also resulting in deferred income increasing to £28.3 million at 31 December 2018 (2017: £26.7 million).

Continuing to be a focus of the Group, cash conversion (measured by cash generated from operations as a percentage of operating profit adjusted for the non-underlying items with no cash effect) was once again excellent in 2018 at 97% (2017: 113%) with the Group continuing to benefit from a growing Recurring Revenue Base with customers typically paying annually in advance.

Philip Wood

Chief Financial Officer

Group Income Statement

group statement of comprehensive income

*see note 13 for details regarding the restatement of the prior year financial statements which has arisen as a result of a change in the Group's accounting policies.

Group Balance Sheet

*see note 13 for details regarding the restatement of the prior year financial statements which has arisen as a result of a change in the Group's accounting policies.

*see note 13 for details regarding the restatement of the prior year financial statements which has arisen as a result of a change in the Group's accounting policies.

Group Statement of changes in shareholders' equity

*see note 13 for details regarding the restatement of the prior year financial statements which has arisen as a result of a change in the Group's accounting policies.

*see note 13 for details regarding the restatement of the prior year financial statements which has arisen as a result of a change in the Group's accounting policies.