Axon - Interim results 2008

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Interim Results 2008 26/08/2008

Revenue up 28%
Adjusted operating profit* up 23%

Axon Group plc, a global leader in the delivery of Business Transformation programmes for large organisations that use SAP as their strategic platform, today announced interim results for the six months ended 30 June 2008 (“H1 2008”).

Key points for the six months include:

Revenue up 28% to £123.9m (H1 2007: £96.7m)
Revenues outside EMEA grew 58%
Americas is 42% of the business, based on revenue of £51.7m
Adjusted operating profit* up 23% to £20.2m (H1 2007: £16.5m)
Operating profit up 19% to £16.5m (H1 2007: £13.8m)
Adjusted diluted earnings per share* up 26% to 21.5p (H1 2007: 17.0p)
Diluted earnings per share up 25% to 16.8p (H1 2007: 13.4p)
Interim dividend per share up 12.5% to 2.25p (H1 2007: 2.00p)

Infosys announced yesterday a recommended offer to acquire Axon Group to be implemented by way of a Scheme of Arrangement. Under the terms of the acquisition, Axon Shareholders will receive for each Axon Share 600 pence including the interim dividend of 2.25 pence announced by Axon today. For further details please refer to the announcement made on 25 August 2008.

Stephen Cardell, Chief Executive Officer said:

"Our strategy is to become the global leader in the delivery of Business Transformation programmes for large organisations that use SAP as their strategic platform. I am delighted that even in this more challenging economic climate Axon continues to make significant progress towards delivering this strategy with revenues up 28% and adjusted operating profits up 23% compared to H1 2007. We have also consolidated our position as a global SAP services provider, with the Americas now accounting for 42% of our revenues.

In an increasingly competitive and challenging market environment, we have been particularly focused on margin protection. We have been strengthening our off-shore delivery capability with new delivery centres in China, Penang (Malaysia), India and Puerto Rico and our resources in these centres now account for 33% of total headcount.

Our business continues to be fundamentally strong and our sales pipe-line continues to grow globally."

For further Information please contact:

Stephen Cardell, Chief Executive Officer
Iain McIntosh, Chief Financial Officer
Axon Group plc
01784 480 800

Mike Davies/Chris Hamilton
Bell Pottinger
020 7861 3232

* excluding amortisation of acquired intangibles and share-based payments of £1,056,000 and £2,593,000 respectively (H1 2007: £1,235,000 and £1,389,000 respectively) and related tax effect in relation to the adjusted profit after taxation as calculated in note 6.

Market consensus of the analyst research notes published for the year to 31 December 2008 are revenues of £244m, adjusted operating profit £40.7m and adjusted profit before tax £40.3m.

Chairman’s statement

Our strategy is to become the global leader in the delivery of Business Transformation programmes for large organisations that use SAP as their strategic platform. Pursuit of this strategy has delivered revenue growth of 28% and a 23% increase in adjusted operating profit.

For the six-month period to 30 June 2008, revenue has increased 28% to £123.9m (H1 2007: £96.7m), adjusted operating profit* has increased 23% to £20.2m (H1 2007: £16.5m), unadjusted operating profit has increased 19% to £16.5m (H1 2007: £13.8m), adjusted diluted earnings per share (see note 6) are up to 21.5p per share (H1 2007: 17.0p) and diluted earnings per share are up 25% to 16.8p per share (H1 2007: 13.4p).

Our targeted acquisition strategy continued with the purchase in May of EnterSys, a leading provider of SAP consulting services to the Oil, Gas and Chemical sector in North America. This builds on our established strong position in this sector in EMEA. Following the period end we announced in July two further small acquisitions: SCM Solutions in the US and Consulting Principles in Australia. Both strengthen our position in Supply Chain and Logistics solutions.

Axon has a progressive dividend policy and it is proposed that the Company pays an increased interim dividend of 2.25p per share (H1 2007: 2.00p), to be paid on 21 November 2008 to shareholders on the register as at 24 October 2008.

I would like to thank our people worldwide for their dedication, commitment to client delivery and performance, which continues to be exceptional.

Roy Merritt
Chairman
25 August 2008

Business Transformation delivered
Our strategy remains unchanged: to work with large organisations to help them deliver major programmes that will transform a key aspect of their business using SAP as the enabling technology. This singular focus has increased our profile in the marketplace and enabled us to continue to grow our 2% share of the global SAP services market.

Our global aspiration has become a reality
The increasingly global nature of our proposition drove a 45% increase in non-UK revenues to £66.0m (H1 2007: £45.5m) and we continue to pursue further opportunities within EMEA, Asia-Pacific and the Americas.

EMEA continues to deliver a strong performance
Revenues in the EMEA region grew by 12% to £69.2m (H1 2007: £61.9m) and this growth was driven primarily in the UK through the expansion of our offering to our existing clients, as well as continued strength in demand in the Public Sector and Utilities markets.

A significant new win during the first half was a 10-year transformation partnership contract with Wolverhampton City Council, announced in March. This is the largest ever contract for which Axon has been appointed as prime contractor and reinforces Axon's established position in the Local Government sector.

Other new clients include Domestic & General in the Insurance sector and Thames Water in Utilities, building on our strength in the American utilities market.

Overall, EMEA delivered an excellent adjusted operating profit* of £16.2m (H1 2007: £12.9m), which equates to 23% of EMEA external revenues (H1 2007: 21%), and an unadjusted operating profit of £14.4m (H1 2007: £11.2m). This high level of profitability can be attributed to excellent performance on some fixed price contracts completing in the half, high consultant utilisation, good client satisfaction and control of indirect costs.

The American business continues to grow strongly
We were very pleased to announce in April the recruitment of Steve Peck from SAP as President of Axon's American operations. Steve joins Axon from SAP Americas & Asia-Pacific Japan, where he was Senior Vice-President and also served on the CEO Council.

Our strategy for the American market has been to acquire small SAP consultancies that have leadership in vertical industry sectors, and then to drive rapid organic growth through the application of Axon’s scale and proposition. We continued to implement this strategy with the purchase in May of EnterSys, a leading provider of SAP consulting services to the Oil, Gas and Chemical sector.

On 1 July we acquired the business of SCM Solutions in the US. This enhances our capabilities in SAP Supply Chain solutions which are applicable to a wide range of industries.

This strategy of selective acquisition coupled with rapid organic growth has resulted in the Americas growing external revenues to £51.7m (H1 2007: £34.3m) and adjusted operating profit* to £3.8m (H1 2007: £3.5m), while unadjusted operating profit fell to £2.3m (H1 2007: £2.6m). The Americas now accounts for 42% of Group revenues. Adjusted and unadjusted operating margins have been negatively impacted by continued investment in building the American leadership team, including increased share-based payment charges, combined with lower margins on a couple of older fixed price projects which took longer to complete than originally expected.

New client wins include Port Authority of New York & New Jersey, Snohomish Public Utility District and Oklahoma City Water Utilities Trust.

Our offshore capability continues to expand
Virtually all of our major programmes incorporate an element of offshore services. However, the proportion of work delivered by offshore resources remains well below that of many of the large competitors in the IT services sector. This represents a competitive threat to which we need to continue to respond.

To date, Axon’s offshore resources have been delivered from the Asia-Pacific region. The region contributed revenue of £9.0m (H1 2007: £4.2m) to the Group before intra group eliminations, adjusted operating profit* rose to £0.4m (H1 2007: £0.1m) and unadjusted operating profit fell to £0.04m (H1 2007: £0.14m) due to increased share-based payment charges.

Integration of the October 2007 JSPC acquisition in Malaysia, Singapore and China was completed in January 2008.

In June we signed an agreement to enter a joint venture to build a ‘near-shore’ centre in Puerto Rico jointly with Pratt & Whitney, part of the UTC Group, a long-standing US client. This will serve both UTC and other third-party clients. Axon Group will own 49% of the joint venture company. This expands the range of offshore delivery alternatives available to our clients.

We continue to focus on large programmes
Our focus on large programmes of work for our clients is reflected in relatively high levels of client concentration. In the first half of 2008, our top 5 clients accounted for 50% of revenues (H1 2007: 54%) and our top 10 clients accounted for 61% of revenues (H1 2007: 65%).

Adjusted gross margin reduced
Adjusted gross margin* fell to 25.8% (H1 2007: 28.7%). This reflects the larger share of lower margin American revenues as a proportion of the Group total reflecting higher revenue growth in the Americas than in EMEA. Unadjusted gross margin fell to 24.2% (H1 2007: 27.7%) as share-based charges in cost of sales more than doubled. Consultant chargeability** remained high but fell on last year at 73% (H1 2007: 76%) reflecting increased sales support activity. Levels of client satisfaction remained high.

We continue to leverage our administrative cost base
Despite the high levels of recruitment costs sustained in the first half, adjusted administrative expenses* only grew by 4% to £11.8m (H1 2007: £11.3m). This represents a 2.2 percentage point reduction in indirect costs as a proportion of revenues. Unadjusted administrative expenses grew by 4% to £13.4m (H1 2007: £13.0m).

Working capital increased in line with growing revenues
Combined WIP/Debt has been maintained at 71 days in H1 2008 (H1 2007: 71 days). After payments of £14.8m in H1 2008 relating to recent and past acquisitions, net cash levels fell to £19.2m at 30 June 2008 (H1 2007: £14.5m).

More recent client wins have included less favourable payment terms which are expected to have an impact on working capital in future.

Our people have, yet again, delivered an outstanding performance
High levels of demand across the business kept consultant utilisation*** high at 85% (H1 2007: 86%). In response to this demand we continued our recruitment drive and we finished the first half with a total employed headcount of 1,881 which is up 47% from the 1,277 employees that we had on 30 June 2007.

The performance of the business has only been possible through the talent, focus and responsiveness of our people. As we continue to execute our growth plans, I am confident that our current expanding team will continue to excel and in doing so they will create an environment which will attract further talent into the business.

Outlook
The principal risks and uncertainties impacting the second half of the year are the usual ones we face: that resource levels do not match demand, that clients cancel work at short notice or that the cost of delivering commitments on fixed price contracts is not in line with expectations.

The fortunes of IT projects businesses have historically been impacted significantly by the global economic cycle. Axon is fortunate that many of our largest clients are in relatively defensive sectors. We have seen some first limited signs of market softening in some sectors with more competitive pricing behaviour by competitors.

Despite this, we have a strong order book and pipeline and we expect revenues to grow in the second half despite the uncertain macroeconomic environment.

Stephen Cardell
Chief Executive Officer
25 August 2008

* excluding amortisation of acquired intangibles and share-based payments where relevant.
** percentage of total hours charged to client projects
*** percentage of total hours charged to client projects or to sales, management and training activities

To see the full statement please click here (PDF file).