CIMdata PLM Industry Summary Online Archive

27 August 2009

Financial News

Sopheon plc Results For The 6 Months To 30 June 2009 Business Review And Outlook

Sopheon plc (“Sopheon”) the international provider of software and services that improve the return from innovation and product development investments, announces its unaudited interim results for the six months ended 30 June 2009 (the “period”) together with a business review and outlook.

Highlights:

•  Revenue:             £4.1m (2008: £4.3m)

EBITDA loss:        £0.3m (2008: EBITDA profit £0.5m)

Loss before tax:  £1.0m (2008: profit £0.1m)

•  Seventeen license transactions including extension sales completed. A number of opportunities expected to close during the first half of the year were delayed but remain in active sales cycles.

•  Revenue visibility now stands at £7.0m for full-year 2009 performance, up from £6.2m reported in mid June at the AGM. The licensee base now stands at 163.

•  Gross cash at 30 June stood at £1.6m. We have renegotiated our debtor-based revolving credit facilities from $750,000 to $1,250,000, though only $700,000 was drawn at 30 June.

•  We introduced Idea Lab™, our new idea development software for the front end of the product innovation process. Sopheon now offers the first software suite in the industry to provide all-in-one support for strategic product planning, ideation and execution.

Sopheon’s Chairman, Barry Mence said: “After our great progress in 2008, we are disappointed that wider economic conditions in the first half of this year affected the Group’s historical pattern of growth. Nevertheless, we continue to work hard at closing business, and believe that our considerable pipeline of new sales opportunities will enable us to return to growth in the second half of the year.”

CHAIRMAN’S STATEMENT

Trading Performance

Following landmark growth in 2008, consolidated revenues for the first half of 2009 were £4.1m compared to £4.3m in the first half of 2008. As noted in the AGM statement released on 16 June, the reduction can be attributed largely to delays in closing new license orders. This is borne out by the overall revenue mix between license, maintenance and services, which was 30:26:44 respectively, compared to 47:27:26 for the same period last year.

Sales performance during the six-month period included 17 new and extension license orders, in addition to a number of consultancy and services contracts. In spite of the weak economy, renewals of license rental, maintenance and hosting contracts have held up well, and our annualised base of such recurring business stands at £4.1m.

We have consistently noted our business dependency on a small number of relatively large deals, any of which can materially impact the revenue recorded in a particular period. When combined with current market conditions, this has resulted in deferment of a number of opportunities that we had expected to close in the second quarter. Several of these prospects attributed the delays to more stringent approval processes imposed due to market uncertainty. The majority of the affected prospects remain in active sales cycles and closures to date have resulted in an increase in full-year revenue visibility from the £6.2m reported at the time of our AGM to £7.0m today. Based on our current view of the forward sales pipeline, we continue to expect that we will close several of the delayed opportunities in the second half of the year, in addition to winning new business which was originally identified for the third and fourth quarters. This will be a major challenge, but one we will embrace with vigour.

From a geographical perspective, approximately two-thirds of revenues during the first half of the year were generated in the US, and one third in Europe. This balance of distribution is generally consistent with prior periods. The Alignent business acquired in June 2007 accounted for 13% of total revenues recorded in the first half of 2009 compared to 12% for the comparable period last year. Gross profit, which is arrived at after charging direct costs such as payroll for client services staff, was £2.8m compared to £3.2m the year before, representing a fall in the gross margin percentage from 75% to 67%. This reflects the relatively fixed nature of such costs. We expect the gross margin percentage to continue to fluctuate from period to period, in line with variation in our revenue mix.

Operating Costs and Results

The fall in the value of Sterling has resulted in reported costs being considerably higher across all parts of our business, since the majority of our staff are based outside the UK. Looking beyond this apparent overall increase, we have adjusted the staffing mix during the period. Total staff count at the end of 2008 was 105, up from 96 at the end of June 2008. Coming into 2009, to sustain a position of product leadership in the market, we recruited additional staff into our product development team. This was offset by a reduction of staff in other operational groups, implemented in April. The combination of these changes resulted in a total staff count at the end of June of 100. The financial benefit of the staff reductions will feed through in the second half of the year.

The overall operating result for the business during the period was a loss of £892,000 (2008: profit of £132,000). After net finance costs, which include interest on debt taken on to finance the Alignent acquisition, the final loss before tax reported for the period is £990,000 (2008: profit of £54,000). This result includes interest, depreciation and amortisation costs amounting to £658,000 (2008: £479,000). The majority of this increase is connected with the higher relative value of the US dollar, which has translated into higher reported costs in Sterling. The EBITDA result for the first half of 2009, which does not include these elements, was a loss of £330,000 (2008: profit of £533,000).

Corporate and Balance Sheet

Net assets at the end of the period stood at £3.1m (2008: £3.5m). Gross cash resources at 30 June 2009 amounted to £1.6m (2008: £2.1m). Approximately £0.4m was held in US dollars, £0.6m in Euros and £0.6m in Sterling.

Intangible assets stood at £4.2m (2008: £3.7m) at the end of the year. This includes (i) £2.3m being the net book value of capitalised research and development (2008: £1.5m) and (ii) £1.9m (2008: £2.2m) being the net book value of Alignent intangible assets acquired in 2007. Due to amortisation and impairment charges, the underlying dollar value of these assets has lowered since last year. However, the movement in Sterling does not reflect this fully due to the sharp change in exchange rates year to year.

As part of the funding raised for the Alignent acquisition, Sopheon secured $3.5m of medium-term debt from BlueCrest Capital Finance LLC (“BlueCrest”). The debt is being repaid in 48 equal monthly installments and is secured by a debenture and guarantee from Sopheon plc. BlueCrest also offered the enlarged group an additional two-year $750,000 revolving credit facility secured on accounts receivable. This has been renewed for a further year at a higher facility limit of $1,250,000. At 30 June 2009, the balances outstanding on the medium-term debt and revolving credit facility were $2m (2008: $2.8m) and $700,000 respectively (2008: $750,000). The equivalent figures in Sterling are £1.2m (2008: £1.4m) and £425,000 (2008: £377,000) respectively.

Market and Product

Over the last two years we have evolved Sopheon from a single product company to one with a product family. This has been accomplished through a combination of strategic investment, partnership activity and an unremitting focus on product development. Our first milestone in this expansion in scope was in 2007 with the acquisition of Alignent Software, bringing its Vision Strategist™ roadmapping solution into our product set. This was followed last year with the pivotal release of version 7.0 of our core Accolade® platform.

Most recently, we introduced Idea Lab, an Accolade module designed specifically for use in generating, nurturing and developing new product ideas. The new solution is the result of a partnership between Sopheon and Hype Softwaretechnik GmbH, a German-based supplier of idea management software. Idea Lab has received feature coverage from IT research and advisory firms such as AMR Research, ARC Advisory and Tech-Clarity. The new offering expands Accolade’s capacity to strengthen the entire product innovation process. At the front end of the innovation cycle, Accolade’s Vision Strategist delivers automated support for the development of strategic product plans. The plans are socialised, fleshed out and enhanced in Idea Lab. The most promising strategic concepts migrate from Idea Lab into the user’s Accolade-supported gate or phase-based innovation processes, reducing the time it takes to turn ideas into products.

Our software belongs to a major class of applications called product lifecycle management (“PLM”) solutions that help companies develop and execute their product strategies. The PLM market is comprised of multiple submarkets. Sopheon is focused on an emerging submarket called Product Portfolio Management (“PPM”) which addresses the business challenges associated with product innovation, including the management of innovation risk and reward. A number of vendors of project portfolio management solutions that have historically focused their software and go-to-market strategies on the project management needs of corporate information technology organisations continue to step up their attempts to migrate toward the PPM space. However, several analysts have labelled Accolade as best-of-breed among solutions in the product portfolio management sub-class, with AMR Research stating that it is the most mature and has the greatest traction. Moreover, we believe that our software can bring immediate value to recession-plagued companies that need to reduce costs without undercutting their prospects for long-term growth. Our solutions help them maximise returns from available resources, while also supporting their development of programs and strategies that will enable them to accelerate out of the downturn and emerge with increased competitive strength.

Outlook

Our sales pipeline remains strong, with good lead generation and high levels of activity. Our challenge is to convert this activity into signed contracts. This task has been made more difficult by current economic conditions, as customers prolong their investment decisions. Our first-half performance reflects the impact of this slowing of our sales cycles. We continue to evaluate both our cost base and our balance sheet; however the board is committed to maintaining its investment in product and its ability to service customers effectively. Accordingly, any cost adjustments will be carefully thought through and balanced against expected performance.

As we face the current challenges, we are fortified by our recent achievements. Sopheon’s strategic position continues to strengthen, with a customer base that now includes 163 licensees, the majority of which are global brands. With the launch of Idea Lab, Sopheon offers the first software suite in the industry to provide all-in-one support that encompasses innovation strategy, ideation and execution. We remain convinced that this represents a highly differentiated value proposition, and are encouraged by strong interest from the market and influential, positive affirmation from the business analyst community.

Our immediate operational focus is on short-term improvements in revenue and profitability, but we will continue to drive for strategic progress, and will maintain this balanced approach as we plan for 2010.

Barry Mence

Chairman

27 August 2009

Visibility

Visibility at any point in time comprises revenue expected from (i) closed license orders, including those which are contracted but conditional on acceptance decisions scheduled later in the year; (ii) contracted services business delivered or expected to be delivered in the year; and (iii) recurring maintenance, hosting and rental streams. The visibility calculation does not include revenues from new sales opportunities expected to close during the remainder of 2009.

EBITDA

EBITDA is defined as earnings before interest, tax, depreciation and amortisation and can be arrived at by adding back these charges, which amount to £658,000 (2008: £479,000), to the loss for the period of £990,000 (2008: profit of £54,000).

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