Microgen buy-and-build risk worth taking
RevStream deal complicates stellar organic growth
Financial services software supplier Microgen (MCGN) has agreed the £9.7m purchase of RevStream. It is a California-based enterprise revenue management software designer with more than half its revenues earned on a recurring contracts basis. Microgen is paying £9.7m in a cash and shares deal.
This fits neatly for the UK company. Microgen operates two divisions; Aptitude Software and Financial Systems. The latter business largely designs and runs a suite of tools in the wealth management sphere, particularly in the trust and fund administration market (T&FA), although it provides other financial systems and application management services also.
Aptitude is a very high-throughput transaction processing engine. The platform allows financial chiefs to streamline finance functions and deliver strategic analytics, all under the umbrella of industry red tape.
RevStream will be folded into the Aptitude business, expanding its North American footprint and bolstering attempts to supply services beyond the financial space, telecoms in particular.
‘The deal looks to have high strategic merit, providing another route for further geographical and vertical expansion,’ says Rob Warensjo of the Megabuyte IT analysis consultancy.
NOT WITHOUT RISK
Microgen appears to be taking a calculated growth risk with RevStream. The company’s Aptitude division has been growing rapidly during the past couple of years. Microgen announced a 45% jump in first half revenues this year to 30 June, with Aptitude income up 60% at constant currencies. That accelerated from the division’s constant currency 48% revenue increase in 2016.
Upsetting that impressive organic progress with acquisitions ‘seems daring’ in the view of Megabuyte’s Warensjo.
Among the immediate implied threats is to the Aptitude unit’s profitability. Last year the division posted a 71% jump in operating profit to £3.8m, once foreign exchange gains were stripped out. In contrast, RevStream record a £0.8m loss before tax in 2016, on £2.7m revenue.
A profit impact this full year may be partly offset by management’s confident prediction that RevStream sales are ‘expected to more than double in 2017.’
Microgen shares have enjoyed a stunning run in 2017, soaring 173% in the year to date. The stock is currently changing hands at 503p, levels last witnessed in the death throes of the dot.com boom and bust nearly 20 years ago. That implies a chunky-looking 2018 price to earnings multiple of 27.8-times next year’s 18.1p forecast earnings per share. (SF)