K3 Business Technology

Transcription

1 K3 Business Technology Focus on growth from product development Preliminary results Software & comp services K3 s investment in its retail AX solution is starting to see returns, driving new orders in H114. The company continues to invest in AX resources and product development, and in anticipation of growing international demand for the new solutions, is developing the reseller channel. SYSPRO & Sage continue to show solid performance and the Managed Services division has returned to profitability. We see scope for further share price upside as evidence of sustained demand in all divisions emerges. 19 March 2014 Price 199.5p Market cap 63m Net debt ( m) at end H Shares in issue 31.6m Free float 76.6% Year end Revenue ( m) PBT* ( m) EPS* (p) 06/ / /14e /15e DPS (p) Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. P/E (x) Yield (%) Code Primary exchange Secondary exchange Share price performance KBT AIM N/A H114: Improving demand, further AX investment K3 saw 9.3% y-o-y growth in revenues in H114 driven by improving demand in the Microsoft UK and Managed Services divisions. Investment in Project Gemstone is starting to pay off, with four new ax is fashion orders received in H114. Microsoft UK reduced operating losses despite continued investment in AX retail resources. With development of key hosting platforms complete, Managed Services returned to profitability. The SYSPRO & Sage division performed as expected with a high level of SYSPRO renewals providing material cash inflow. The International division continues to see weakness in the Dutch retail market, but on a more positive note, the Inter IKEA relationship continues to provide meaningful levels of business. Outlook and changes to forecasts Microsoft UK is likely to see increased services revenues in H214 as recent orders for ax is fashion are implemented. The International division should see a typical seasonal uplift from the Pebblestone business and continued strength from the Inter IKEA relationship. The increased run-rate at the end of H114 supports further revenue growth in the Managed Services division. Our group normalised operating profit forecast is substantially unchanged for FY14 and FY15, although we have made changes to divisional forecasts to reflect H114 results. A slightly higher share count and higher net interest expense reduces FY14 normalised EPS by 3% and FY15 EPS 1%. Valuation: Discount closing, but more to go On news that Microsoft UK is seeing a recovery in demand, the stock has rebounded from its lows. The stock trades on a P/E of 13.1x FY14e and 9.5x FY15e and an EV/sales multiple of 1.0x FY14e. This is still at a material discount to its peers (sub- 200m market cap UK software current year P/E 24.0x, EV/sales 3.3x). With evidence of sustained demand for the new ax is solution, continued debt reduction and progress in the Managed Services division, the share price could move towards 15x FY14e EPS (229p per share, EV/sales of 1.2x FY14e). % 1m 3m 12m Abs Rel (local) week high/low 190.0p 93.0p Business description K3 Business Technology provides Microsoft- and Sage-based ERP solutions and managed services to SMEs in the retail, distribution and manufacturing sectors. Next events Trading update July 2014 Analysts Katherine Thompson +44 (0) Dan Ridsdale +44 (0) tech@edisongroup.com Edison profile page K3 Business Technology is a research client of Edison Investment Research Limited

2 Investment summary Company description: ERP specialist for the supply chain K3 is a value-added Microsoft channel partner and owning the channel to market is key to the business model. K3 designs and implements supply chain software solutions generally based on Microsoft technologies in the retail, distribution and manufacturing sectors. The group has a wellbalanced business model of predictable, recurring licence income in the manufacturing software sector combined with higher growth opportunities in retail software. Recent acquisitions have built out the Managed Services business and added Sage solutions to the product suite. The company is focused on developing its own software to enhance margins and create specialist solutions in target market verticals. Financials: AX investment starting to pay off H114 revenues grew 9% y-o-y as the Microsoft UK and Managed Services divisions saw improving demand. Investment in Project Gemstone to develop AX retail solutions has started to pay off, with orders worth 8.3m received in H114 for the first solution ax is fashion. We make no material changes at the operating profit level, but reduce our EPS forecasts by 3% in FY14 and 1% in FY15 on a slightly higher share count and higher net interest expense in FY14. We continue to forecast a reduction in net debt to 12.3m by the end of FY14 and 9.2m by the end of FY15. Exhibit 1: Changes to forecasts EPS (p) PBT ( m) Net debt ( m) Old New % chg. Old New % chg. Old New % chg. 2014e (3.0) (1.8) e (1.0) (0.5) Source: Edison Investment Research Valuation: Discount closing, but more to go With confirmation that demand is improving in the Microsoft UK division, the stock has now recovered to earnings multiples that are closer to its peer group. The stock is trading on a P/E multiple of 13.1x FY14e EPS and 9.5x FY15e EPS. Sub- 200m market cap UK software stocks are trading on 24.0x current year and 18.0x next year EPS and UK IT service companies are trading on 19.2x current year and 16.2x next year EPS. The company is in the process of investing further in resources for its retail AX business (across the UK and International divisions) to support the increasing demand for the new ax is solution. Combined with a focus on growing the SYSPRO & Sage business and selling hosting services to a larger proportion of customers, the company has the potential the grow the business on a multi-year basis. We would expect triggers for a re-rating of the stock to include evidence that ax is deals are being signed, confidence is returning to the Dutch retail market, debt is reducing year-on-year, and the Managed Services business is winning customers. We believe that the stock could trade up to at least 15x FY14e EPS (229p per share), equivalent to an EV/sales multiple of 1.2x FY14e. Sensitivities: Macro, organic growth, technology The main sensitivities or risks to our forecasts are: 1) the macro environment; 2) organic growth, which depends on the ability to hire and retain skilled staff; and 3) technology the Managed Services business uses third-party datacentres and could be negatively affected by service disruptions; and the timing and outcome of product development (including AX for Retail) is uncertain. K3 Business Technology 19 March

3 Company description: ERP specialist K3 is a value-added Microsoft channel partner and owning the channel to market is key to the business model. K3 designs and implements supply chain software solutions in three industry sectors: retail, manufacturing and distribution. The group has a well-balanced business model of predictable, recurring licence income in the manufacturing software sector combined with higher growth opportunities in retail software. Recent acquisitions have added Sage solutions to the product suite. K3 is also building a Managed Services business through a combination of in-house development and acquisitions. Background K3 started life in 2000 as the result of a buyout of the UK manufacturing Enterprise Resource Planning (ERP) business of Kewill Systems, comprising two business units and c 1,500 customers with a high proportion of recurring revenues. In 2001, K3 joined AIM through a reverse acquisition, and the initial strategy was to hone the group down into a focused IT services company. Since then the company has broadened its ERP offering with a number of acquisitions, and moved into the Managed Services market. Exhibit 2: Acquisition history Date Company Details Sector Oct-04 Alpha Landsteinar One of Microsoft's largest UK Dynamics resellers. Develops a version of Dynamics for retailers Retail Jun-05 IEG Resells SYSPRO, a Microsoft-based ERP solution for SME manufacturers. Adds high recurring Manufacturing revenue business and upgrade path for existing customers. Mar-07 MBL SYSPRO reseller Manufacturing Sep-07 Landsteinar Nederland Dutch sister company of Alpha Landsteinar. Over 50% of revenues from franchised outlets of IKEA. Retail Dec-07 Index Microsoft Dynamics AX reseller Manufacturing Mar-10 DigiMIS Specialises in hosting ERP applications, particularly SYSPRO. Hosting Mar-10 Pebblestone Dutch trade and assets. Specialises in fashion retail software. Retail Jun-10 Pebblestone Remainder of the business, ie IP and international sales channels Retail Nov-10 Panacea Managed services and IT solutions provider: Sage ERP and CRM, Microsoft Dynamics NAV-based distribution solutions, Dynamics CRM, SAP BusinessObjects and Microsoft Business Intelligence Managed Services/ Sage Dec-10 FD Systems Sage 200 business Sage Mar-11 Sense Enterprise Solutions Microsoft Dynamics AX reseller Manufacturing Mar-11 Clarita Microsoft Dynamics NAV reseller Retail Jul-11 Azurri Proprietary retail solutions with substantial maintenance base Retail Jul-11 FD Systems Sage Enterprise and e-commerce solutions with substantial maintenance base Retail Dec-11 Unisoft POS Retail point of sale solutions for the Dutch and Scandinavian market Retail Dec-11 IBS Proprietary "make to contract" manufacturing software with substantial maintenance base Manufacturing Dec-11 Retail Systems Group Microsoft Dynamics RMS reseller focused on smaller UK and Ireland retailers Retail Source: K3 Business Technology Software solutions business model: Grow internal IP The group supplies ERP products based on Microsoft and Sage solutions and business intelligence solutions from Microsoft and QlikView (see Exhibit 3). Group strategy has been to focus on adding internal IP to the product range. As a straight reseller of Microsoft products, K3 would achieve a gross margin of c 40-45% on software sold. By adding its own proprietary software to customise products for more specific requirements, K3 is able to retain a higher percentage of the software licence fee. K3 also continues to look for complementary acquisitions that will expand product/ service lines and feeder businesses that can be migrated to Dynamics, SYSPRO or Sage. The company is organised into four divisions and reports financials on this basis. K3 Business Technology 19 March

4 Exhibit 3: Product range Microsoft-based Sage-based Other SYSPRO (based on.net) Sage ERP 1000 Unisoft POS Dynamics NAV Sage Line 500 QlikView (business intelligence) Dynamics AX Sage 200 Dynamics CRM Sage ERP X3 Dynamics RMS Sage CRM Business Intelligence Sage SalesLogix Source: K3 Business Technology Managed services: Cross-sell and support SYSPRO globally K3 has developed its Managed Services business through a combination of in-house development and acquisition (DigiMIS, Panacea). In addition to offering outsourced IT support to its customer base, K3 offers application hosting to its 3,100-strong customer base. Only a small proportion of customers have taken the service since its launch in March 2010, and we expect K3 to focus heavily on selling managed services across its customer base. K3 has an agreement with SYSPRO to provide hosting services to the wider 15,000-strong global SYSPRO customer base, providing an additional source of hosting customers. Management The executive management team has recently gone through some changes: the CEO Andy Makeham left in January, with David Bolton (the then CFO) stepping up to the CEO role. David had worked closely with Andy over the last 15 years in the formation of the K3 group. Brian Davis, the group head of finance since 2007, has stepped up to the CFO role. The company has also appointed a group operations director, Andrew Hodges, who previously had commercial and operations director roles in K3 s Microsoft UK division. Microsoft UK (32% of H114 revenues) The division includes Microsoft Dynamics AX and Microsoft Dynamics NAV solutions sold in the UK as well as Azurri s retail business and the Microsoft Dynamics RMS business acquired with RSG. K3 sells NAV-based solutions to retailers. The Alpha Landsteinar acquisition formed the bulk of this business, enhanced by the Clarita and Panacea acquisitions. The company develops own-ip products such as modules for multi-channel, EPOS, fashion and CRM. K3 has AX-based solutions for both the retail and manufacturing industries. The most established AX solutions are designed for food and process manufacturers, and incorporate solutions from the Index and Sense Enterprise Solutions acquisitions. More recently, the company has invested heavily in AX for Retail. AX for Retail opportunity spans UK and International divisions Under the project name Gemstone, K3 has been working for the last 18 months to add retail and wholesale IP to Microsoft s Dynamics AX solution, combining the functionality of K3 s NAV multichannel retail solution and Pebblestone s wholesale solution (see International (16% of H114 revenues)section for more on Pebblestone). The first commercial release was made available in H213 and the company completed initial implementations at reference sites, resulting in initial orders in Q4 worth 1.0m from four customers. In November 2013, K3 released version one of the solution, which has been named ax is fashion. While the initial focus is on the fashion segment of the retail market (the second largest after food retail), the company expects to use the core ax is technology to develop other retail verticals. Development of ax is fashion is ongoing but should be complete by mid-2014 after which the company should be able to start selling the solution K3 Business Technology 19 March

5 through its international partner channel in 27 countries. Development is then likely to move onto other verticals. The target is for the final product to be Certified for Microsoft Dynamics (CFMD) and ultimately K3 wants to be selected as Microsoft s preferred partner for AX retail and wholesale solutions. The company wants to develop strategic partnerships with large system integrators and other Dynamics AX partners to widen the channel. Review of H114 performance Exhibit 4: Microsoft UK half-yearly performance m H113 H213 H114 H-o-h Y-o-y Revenues % 29.6% Operating profit (1.26) (0.40) (0.18) Operating margin -14.9% -3.9% -1.6% Source: K3 Business Technology The division grew revenues nearly 30% over the year, and a further 6% over H213, boosted by new ax is orders and some recovery in demand for NAV products. Software sales of 2.75m were significantly higher than the 0.97m reported a year ago. Services revenues and support and maintenance revenues both grew over the year ( 4.34m [+11%] and 3.89m [+8%] respectively). The increase in revenues is helping the company to reduce the loss at the operating level, although we note that the company continues to invest in global recruitment and training for the AX workforce, including near-shore and off-shore resource. The division is also working on upgrading the multi-channel NAV solution to add functionality and bring it onto the 2013 platform. We note that this period saw the introduction of Microsoft Enterprise Agreements (EA) for customers with an EA in place, K3 receives a commission (revenue at 100% gross margin) as opposed to recording the full licence value and related cost of sale. ax is driving new order intake The company received new orders totalling 9.3m in H114, of which four major orders worth 8.3m related to ax is and one worth 0.5m was for NAV. This is a substantial increase compared to the 0.6m in new orders received in H113. The company had noted that the 1m in ax is orders received in H213 could lead to orders worth 8m in total, and the recent order intake bears this out. These orders are likely to drive increased service revenues in H214. The pipeline of 40.2m at the end of H114 (+12% y-o-y) includes 4.8m of recent wins that have not yet been delivered. International (16% of H114 revenues) The International division comprises Microsoft NAV-based solutions sold to overseas retailers, particularly European fashion customers, as well as the Unisoft point-of-sale (PoS) solution. The division is headquartered in the Netherlands and has an office in Singapore to service clients in the region. This division was created by the Landsteinar Nederland acquisition and strengthened by the 2010 Pebblestone acquisitions (which included the international reseller channel for Pebblestone s IP). A significant percentage of the original Landsteinar business s revenues are generated via Inter IKEA Systems BV (Inter IKEA): it signed an exclusive five-year agreement at the end of FY12 for K3 to support the IKEA Master Version software used by franchisees outside of the IKEA group. There are 14 franchises based in Europe, the Middle East, the Far East and Australia. While it is unlikely that more franchises will be granted, existing franchisees are encouraged to open up new stores in existing and new countries, and when they do so, IKEA expects them to use K3 s solution. K3 Business Technology 19 March

6 Review of H114 performance Exhibit 5: International half-yearly performance m H113 H213 H114 H-o-h Y-o-y Revenues % 0.9% Operating profit Operating margin 8.7% 23.9% 7.4% Source: K3 Business Technology Group Revenue increased marginally y-o-y (the sequential decline was due to typical seasonality). The retail environment in the Netherlands remains difficult, particularly for the smaller retailers that K3 targets. Business with Inter IKEA, however, saw good levels of services income related to store openings and projects. In order to optimise the staff and cost base, the division has retrained some staff to work on Inter IKEA projects. The Unisoft business performed in line with management s expectations, despite the difficult market environment. The RetailVision Enterprise(RVE) point of sale product is doing well and the division is looking at its wider sales potential. Subscription-based sales are doing well as this enables customers under a tight budget to sign up for the software. Software revenues of 0.8m increased by 0.1m y-o-y, services revenues at 2.4m were flat, with support and maintenance revenues of 2.2m down marginally y-o-y. As in the Microsoft UK division, profitability has been suppressed by the investment in Dynamics AX resources for the ax is solution. In addition, the division hired two senior executives who had previously worked at Microsoft. Outlook The division received new orders worth 0.79m in H114, up from 0.53m a year ago. The prospects pipeline stood at 5.2m at the end of H114, down from 7.1m a year ago. The company expects the Inter IKEA business to remain strong through H214. SYSPRO and Sage (41% of H114 revenues) K3 sells SYSPRO solutions to manufacturing customers and is the exclusive distributor of SYSPRO in the UK. K3 charges an annual licence fee renewal in October, creating a heavy weighting of revenues to the second half of the calendar year and contributing to the c 7m in annual recurring revenues. K3 has designed a variety of add-on modules for functions such as advanced planning and scheduling, warehouse management, delivery route planning, recipe management, personnel, and time and attendance systems. The acquisitions of Panacea and FD Systems added Sage solutions to the product range and K3 now has more than 900 Sage customers. Although operating margins tend to be lower than for SYSPRO, Sage customers generate more than 6m in annual recurring revenues. The division is also home to a group of customers using legacy systems that generate recurring revenues of more than 2m a year and provide a source of upgrades to other products within the K3 group. K3 Business Technology 19 March

7 Review of H114 performance Exhibit 6: SYSPRO & Sage half-yearly performance m H113 H213 H114 H-o-h Y-o-y Revenues % -3.3% Operating profit Operating margin 28.2% 13.6% 26.0% Source: K3 Business Technology Group The division sold a non-core Sage business in May 2013, which sold SAP Business Objects solutions, accounting for the 3% decline in revenues y-o-y. Excluding this business, the division saw 5% growth y-o-y. As usual, the company saw a high level of SYSPRO renewals in the period ( 5.51m, +1% y-o-y), at a renewal rate of 97% by value (H113: 98%) and 99% by customer. Sage operations were reorganised at the beginning of the year and in October 2013 a new sales director (ex-sage) was hired. The business recently won several Sage partner awards: Sage CRM Business Partner of the Year, Sage ERP X3 Business Partner of the Year, and Sage Mid-Market Europe Business Partner of the Year. Software revenues were essentially flat y-o-y at 1.93m whereas services revenues grew by 0.1m to 2.62m. Support and maintenance revenues of 9.4m declined 0.56m y-o-y; 0.4m of the decline was due to the disposal of the Sage business in May 2013 (we note the disposed business was operating at break-even). The division invested in sales, marketing and finance resources in the period, increasing overheads by 0.3m y-o-y. Outlook The SYSPRO business received orders worth 1.44m (H113: 1.2m) and the Sage business received orders worth 1.2m (H113: 0.84m). Pipeline prospects increased 0.8m to 14.8m over the year. Sage X3 deals made up 35% of the 10.3m Sage pipeline at the end of H114. For the SYSPRO business, the company is targeting larger deals, and sees potential for growth over the medium to long term. Managed Services (11% of H114 revenues) K3 introduced its Managed Services offering in November 2007 to provide specialist IT support to customers. The move into hosting via the March 2010 DigiMIS acquisition expanded the service into the infrastructure space, and enables the company to offer a full outsourced IT service to customers. K3 now has hosting platforms in place for SYSPRO, Microsoft Dynamics NAV and AX, Sage X3, Sage 200 and website hosting. Business operates through two key streams: Hosting/ Cloud and On Premise Managed Services. Hosting: Cross-selling opportunity enhanced by SYSPRO deal K3 s hosting business uses datacentres in London, Edinburgh, New York and Toronto. Contracts tend to be multi-year, resulting in a high level of recurring revenues. At the time of the acquisition, DigiMIS was the only SYSPRO hoster in the UK. In February 2011, K3 signed an exclusive agreement with SYSPRO to provide its hosting service on a worldwide basis SYSPRO s global partner network has more than 15,000 customers globally. More than 500 of K3 s 3,100 customers use SYSPRO. SYSPRO s new hosted solution, SYSPRO BusinessLive, can be deployed on an ondemand (subscription) basis or upfront licence fee basis. Customers tend to sign up with K3 to use one element of the service and as they undergo changes in their IT or business processes, eg hardware changes, office moves, software upgrades/changes, they adopt K3 s hosting services on a wider basis. K3 Business Technology 19 March

8 Review of H114 performance Exhibit 7: Managed Services half-yearly performance m H113 H213 H114 H-o-h Y-o-y Revenues % 27.2% Operating profit (0.16) (0.40) 0.10 Operating margin -5.2% -11.9% 2.5% Source: K3 Business Technology Group The division saw strong revenue growth on a year-on-year and sequential basis, and ended H114 with annualised run-rate revenues of 5.8m (compared to 4.8m at the end of H213 and 4.3m at the end of H113). The division was re-organised in H213, and with the development of all the major hosting platforms complete, the division is now focused on sales and marketing. The division moved into profitability in H114, helped by the reduction in development spend. Several multi-site overseas AX and SYSPRO deals were won in H114, and most new SYSPRO business is sold on a hosted basis. The company is currently discussing potential hosting contracts with non-k3 SYSPRO licensees in North America and Asia and could see deals later this year. Sensitivities The main factors influencing our forecasts and the share price are: Macro environment: consumer spending has an impact on retail and manufacturing demand. Organic growth: in all divisions, organic growth depends on the ability to hire and retain skilled staff. This is particularly evident in the Microsoft UK division, where the company is in the process of hiring AX resources to meet customer demand for the new ax is solution. Technology: the Managed Services business relies on third-party datacentres any breach in security or service disruption could influence customer demand. The outcome in terms of timing and uptake of new product development is uncertain. Valuation K3 s share price reached a low of 95p after the trading update in June 2013, which highlighted continued order slippage in the UK Retail business. In July the company was able to report that order inflow had started to improve, driving the share price recovery to the 130p level, which was further bolstered by full year results in September. The trading update in January 2014 gave additional confirmation that trading was on a more positive footing, supporting the share price rise to the 180p level. The stock has now recovered to earnings multiples that are closer to its peer group, trading on a P/E multiple of 13.1x FY14e EPS and 9.5x FY15e EPS. Sub- 200m market cap UK software stocks are trading on 24.0x current year and 18.0x next year EPS and UK IT service companies are trading on 19.2x current year and 16.2x next year EPS. The company is in the process of investing further in resources for its retail AX business (across the UK and International divisions) to support the increasing demand for the new ax is solution. Combined with a focus on growing the SYSPRO & Sage business and selling hosting services to a larger proportion of customers, the company has the potential the grow the business on a multi-year basis. We would expect triggers for a re-rating of the stock to include evidence that ax is deals are being signed, confidence is returning to the Dutch retail market, debt is reducing year-on-year, and the Managed Services business is winning customers. We believe that the stock could trade up to at least 15x FY14e EPS (229p per share), equivalent to an EV/sales multiple of 1.2x FY14e. K3 Business Technology 19 March

9 Financials Review of H114 results Exhibit 8: H114 results highlights 000s H113 H114 Change Revenues 31,547 34, % Normalised operating profit 2,976 3, % Reported operating profit 620 1, % Normalised profit before tax 2,541 3, % Normalised net income 1,827 2, % Reported net income % Reported EPS (p) % Normalised EPS (p) % Net debt 12,322 9, % Source: K3 Business Technology Group, Edison Investment Research We have discussed revenue and operating profit performance in the divisional sections above. Net interest expense of 444k included FX losses due to the strengthening of sterling versus the euro. Reported operating profit is after an exceptional 581k charge for restructuring. The company expects to incur further exceptional costs in H214 for the changes to the management team. The company reported a tax credit of 19k in H114 arising from a deferred tax credit of 447k. Net debt fell more than 2m over the year. Outlook and changes to forecasts Our overall normalised operating profit forecasts are substantially unchanged for both years, although we have made changes to the revenue and profitability forecasts for certain divisions. Microsoft UK: we have made a small increase to our revenue forecasts for both years on the basis of stronger H114 revenues. Similarly, with losses being reduced more than expected in H114, we have increased our profitability assumptions for H214 and FY15. International: we have reduced our FY14 and FY15 revenue and profitability assumptions by a small amount to reflect slightly lower than expected revenues and higher investment in resources in H114. SYSPRO & Sage: our revenue and profit forecasts reflect the disposal of a non-core Sage business at the end of H213. Managed Services: we have increased H214 and FY15 revenues and profitability forecasts in the light of stronger performance in H114. Net interest: due to FX losses in H114, our FY14 net interest expense forecast has increased by 150k. Tax: we have reflected the H114 tax credit and assumed a tax rate of 23% for H214. EPS: the main impact on our normalised EPS forecast in FY14 is the increase in net interest expense. We have also increased the share count marginally to reflect recent option exercises. K3 Business Technology 19 March

10 Exhibit 9: Changes to forecasts 000s Old New Old New FY14e FY14e Change FY15e FY15e Change Microsoft UK 25,588 25, % 26,355 26, % International 13,535 13, % 13,941 13, % SYSPRO & Sage 26,880 25, % 27,686 25, % Managed Services 7,050 7, % 7,403 8, % Revenues 73,052 72, % 75,385 74, % Microsoft UK (600) % 882 1, % International 2,411 2, % 2,367 2, % SYSPRO & Sage 5,933 5, % 6,246 5, % Managed Services (200) % % Head office costs (470) (666) 41.7% (470) (470) 0.0% Normalised operating profit 7,074 7, % 9,099 9, % Operating margin 9.7% 9.8% 12.1% 12.1% Normalised PBT 6,474 6, % 8,549 8, % Normalised net income 4,997 4, % 6,737 6, % Reported EPS (p) % % Normalised EPS (p) % % Net debt 12,251 12, % 9,204 9, % Source: Edison Investment Research K3 Business Technology 19 March

11 Exhibit 10: Financial summary 000s 2010* e 2015e Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 59,783 52,800 67,961 63,513 72,345 74,674 Cost of Sales (22,460) (23,486) (28,491) (30,375) (31,832) (32,110) Gross Profit 37,323 29,314 39,470 33,138 40,513 42,564 EBITDA 10,327 10,574 12,942 7,261 9,610 12,160 Operating Profit (before am of acq. Intang. and except.) 9,013 9,633 11,405 5,164 7,110 9,060 Amortisation of acquired intangibles (2,892) (2,826) (3,586) (3,182) (3,200) (3,200) Share-based payments 39 (52) (72) (70) (70) (70) Other 0 (942) (395) (727) (1,081) 0 Operating Profit 6,160 5,813 7,352 1,185 2,759 5,790 Net Interest (1,365) (905) (1,309) (723) (750) (550) Profit Before Tax (norm) 7,620 8,728 10,096 4,441 6,360 8,510 Profit Before Tax (FRS 3) 4,767 4,908 6, ,009 5,240 Tax (1,018) (428) (319) 780 (241) (1,106) Profit After Tax (norm) 5,770 7,108 8,591 4,165 4,860 6,704 Profit After Tax (FRS 3) 3,749 4,480 5,724 1,242 1,768 4,134 Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - normalised fully diluted (p) EPS - FRS 3 (p) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 48,602 59,457 68,325 69,398 67,648 63,748 Intangible Assets 13,176 17,635 21,255 21,040 19,590 15,990 Tangible Assets 1,393 1,993 2,722 2,927 2,627 2,327 Goodwill 33,467 39,082 43,540 44,610 44,610 44,610 Other Current Assets 14,808 23,456 32,418 25,523 29,525 31,533 Stocks Debtors 14,439 22,642 30,322 25,251 27,749 30,688 Cash , , Current Liabilities (19,510) (29,300) (48,043) (39,272) (40,665) (35,624) Creditors (5,491) (7,874) (8,797) (5,842) (6,635) (6,844) Other Creditors (9,719) (16,628) (21,468) (19,379) (19,979) (18,729) Short term borrowings (4,300) (4,798) (17,778) (14,051) (14,051) (10,051) Long Term Liabilities (12,457) (16,371) (5,797) (4,524) (3,815) (3,792) Long term borrowings (7,051) (11,502) 0 (32) (23) 0 Other long term liabilities (5,406) (4,869) (5,797) (4,492) (3,792) (3,792) Net Assets 31,443 37,242 46,903 51,125 52,693 55,865 CASH FLOW Operating Cash Flow 7,331 5,640 7,284 8,022 7,824 8,180 Net Interest (1,303) (947) (839) (820) (750) (550) Tax (1,637) (1,368) (1,312) (1,217) (1,000) (1,806) Capex (1,638) (2,055) (3,160) (4,613) (3,950) (2,400) Acquisitions/disposals (2,856) (5,407) (7,132) (1,917) (400) 0 Financing 1, ,026 2, Dividends (247) (64) (214) (286) (314) (332) Net Cash Flow 1,084 (4,027) (347) 1,846 1,513 3,092 Opening net debt/(cash) 13,012 10,982 15,486 15,682 13,811 12,298 HP finance leases initiated Other 946 (477) Closing net debt/(cash) 10,982 15,486 15,682 13,811 12,298 9,206 Source: K3 Business Technology Group, Edison Investment Research. Note: *18-month period. K3 Business Technology 19 March

12 Contact details Baltimore House, 50 Kansas Avenue, Manchester M50 2GL +44 (0) Revenue by geography 72% 22% 1% 5% UK Europe US Other CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 11-15e -6.1% EPS 13-15e 22.1% EBITDA 11-15e 3.6% EBITDA 13-15e 29.4% Sales 11-15e 9.1% Sales 13-15e 8.4% Management team CEO: David Bolton ROCE 14e 10.5% Avg ROCE 11-15e 14.1% ROE 14e 9.2% Gross margin 14e 56.0% Operating margin 14e 9.8% Gr mgn / Op mgn 14e 5.7x David qualified as a chartered accountant with Ernst & Young in the mid-70s. He has held finance positions with both quoted and unquoted companies, most notably BTR, where he spent 12 years. He held the role of CFO from 1998 before moving into the CEO role in January Chairman: Tom Milne Tom was appointed as chairman of the board in May He has a wealth of experience in developing successful retail software companies. Gearing 14e 23.3% Interest cover 14e 9.5x CA/CL 14e 0.7 Stock days 14e 0 Debtor days 14e 140 Creditor days 14e 160 CFO: Brian Davis Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices Brian joined K3 in 2007 as group head of finance and was appointed to the CFO role in January Prior to K3, he worked at several listed companies in financial and commercial roles (including as group financial controller and company secretary at Spring Group plc) and before that spent 10 years at Arthur Andersen. He is an FCA. Principal shareholders (%) PJ Claesson 19.0 Hargreave Hale Ltd 12.8 Kestrel Partners LLP 12.0 Investec Asset Management Ltd 7.7 BlackRock Investment Management (UK) Ltd 4.7 Herald Investment Management Limited 4.4 Henderson Global Investors Ltd 3.9 Companies named in this report Microsoft (MSFT), Sage (SGE) Edison, the investment intelligence firm, is the future of investor interaction with corporates. 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