Interim financial reporting for the first quarter of 2008
Software Innovation had operating revenue of NOK 115.4 million in the first quarter of 2008, compared to NOK 115.4 million for the same period last year. Earnings before interest, tax, depreciation and amortization (EBITDA) ended at NOK -2.2 million for the quarter, compared to NOK -0.1 million for the same period in 2007. The result for the quarter is as expected and there are three main reasons for the reduction in earnings: (1) Easter fell in the first quarter of 2008 in contrast to 2007, when Easter took place during the second quarter, (2) the conclusion of the project for the Court Administration in Denmark (DSS) and (3) several changes in the operating management. Further, Software Innovation had an extraordinary license revenue of NOK 6,5 million in the first quarter of 2007 related to the conclusion of the cooperation with Software Innovation Inc. in Canada.
Highlights
• Operating revenue of NOK 115.4 million
• EBIT (earnings before interest and tax) of NOK -5.5 million
• Licence revenue of NOK 20.0 million
• Cash and cash equivalents of NOK 77.6 million
• Launch of the new 360° suite, fully integrated with Microsoft®
Group financials
Software Innovation had operating revenue of NOK 115.4 million in the first quarter of 2008, compared to NOK 115.4 million for the same period last year. Earnings before interest, tax, depreciation and amortization (EBITDA) ended at NOK -2.2 million for the quarter, compared to NOK -0.1 million for the same period in 2007. The result for the quarter is as expected and there are three main reasons for the reduction in earnings: (1) Easter fell in the first quarter of 2008 in contrast to 2007, when Easter took place during the second quarter, (2) the conclusion of the project for the Court Administration in Denmark (DSS) and (3) several changes in the operating management. Further, Software Innovation had an extraordinary license revenue of NOK 6,5 million in the first quarter of 2007 related to the conclusion of the cooperation with Software Innovation Inc. in Canada.
At the end of the first quarter, the Group's total assets amounted to NOK 373.4 million. Equity came to NOK 133.0 million, an equity to assets ratio of 36 %. Current assets amounted to NOK 201.6 million, and current liabilities were NOK 147.6 million. Of the non-current assets totalling NOK 171.8 million, deferred tax assets recognized in the balance sheet comprised NOK 47.3 million and other intangible assets NOK 12.9 million.
Cash flow from operating activities during the first quarter ended at NOK -26.8 million, a reduction of NOK 32.5 million from the same period last year. The most important reason for the change in cash flow from operations is the settlement related to the conclusion of the project for DSS, which was reported in Q4 2007. The effect on the cash position in this connection came to NOK -29.5 million during the quarter. The cash position is as expected and is regarded as satisfactory. Cash and cash equivalents at the first quarter amounted to NOK 77.6 million.
A closer look at operations
Revenues
Licence revenue during the first quarter amounted to NOK 20.0 million, unchanged from the same period last year. In the first quarter of 2007, however, NOK 6.5 million was recognized as extraordinary license revenue in connection with the sale of a copy of the ProArc source code to Software Innovation Inc. in Canada. Adjusted for this, the underlying development in licence revenue is therefore good. The underlying growth in licence revenue is primarily driven by two factors: good growth in the sale of own licences and the full effect of OpenText licence sales throughout the quarter. For Q1 2007, activities related to OpenText were only consolidated in March in connection with the acquisition of SaveIT.
Service and maintenance revenue during the first quarter came in at NOK 27.0 million, up 20 % from the same period last year. The growth is mainly driven by two factors: growth in service and maintenance revenues related to own products and a full quarter of service and maintenance revenues related to the OpenText activities.
Revenue from consulting services during the first quarter totalled NOK 68.4 million, down 6 % from the same period last year. There are two primary reasons for the decline in income from consulting services: the Easter holiday which fell during the quarter and the conclusion of the project for DSS, which released a considerable number of consultants at the beginning of the quarter. The development in hourly rates was satisfactory in the quarter, while the utilisation rate was somewhat lower than expected.
Expenses
The cost of goods sold during the first quarter totalled NOK 8.9 million, up 51 % from the same period last year. The growth in the cost of sales is mainly attributable to the integration of the activities related to OpenText from the acquisition of SaveIT. In 2007, this operation was integrated only from March, while this year the entire quarter has been consolidated. In addition, the trend in the cost of goods sold reflected somewhat higher onward billing of third-party suppliers in connection with projects in Norway, Sweden and Denmark.
Personnel expenses during the first quarter totalled NOK 91.1 million, up 5 % from the same period last year. Although there were fewer employees during the quarter compared with the same period in 2007, personnel costs are increasing due to necessary and competitive growth in salaries. Demand for IT staff in the Nordic labour market remains strong, placing pressure on the development in salaries in the Group. The trend in the number of employees is driven by a combination of the tight labour market and more selective recruitment.
Other operating expenses during the first quarter totalled NOK 17.6 million, down 21 % from the same period last year. The reduction in other operating expenses is primarily due to lower rent in the Norwegian operation, less use of external consultants and a generally lower level of costs.
Results
Earnings before interest, tax, depreciation and amortization (EBITDA) during the first quarter ended at NOK -2.2 million, an improvement of NOK 8.4 million from the previous quarter and down NOK 2.1 million from the same period last year.
Earnings before interest and tax (EBIT) during the first quarter came in at NOK -5.5 million, an improvement of NOK 9.4 million from the previous quarter and a decrease of NOK 2.4 million from the same period last year.
Important new contracts
The company signed a number of contracts during the first quarter. Some of these are listed below:
• The Norwegian Prison and Probation Department (Kriminalomsorgen) (NO) – Extension of DocuLive
• The Norwegian Armed Forces (Forsvaret) (NO) – Extension of DocuLive
• Aspelin-Ramm Gruppen (NO) – 360° 4.0 (new version)
• Østfold Energi (NO) – 360° 4.0 (new version)
• Vesterålskraft (NO) – 360° 4.0 (new version)
• Asker and Bærum Hospital (NO) – 360° 4.0 (new version)
• Aker Borgestad (NO) – ProArc extension
• APL (NO) – ProArc extension
• Ministry of Refugee, Immigration and Integration Affairs (DK) – Public 360°
• Nordic Council of Ministers (DK) – Upgrade of Public 360°
• Linköping University (SE) – Public 360°
• Marks Municipality (Kommun) (SE) – 360° 4.0 (new version)
• Government Offices of Sweden (Regeringskansliet) (SE) – Public 360°
• TeliaSonera (SE) – Framework agreement
• Patria Oy (FI) – CRM
• MTV3 (FI) – CRM
• Rudus Oy (FI) – CRM
Business status
The Group's principal markets
Software Innovation is the leading centre of competence in the Nordic countries within Information- and Enterprise Content Management. The Group's ambition is to develop this position further as well as to take a position as an international supplier of software within the same segment.
Software Innovation is established in the four Nordic markets: Norway, Sweden, Denmark and Finland. The most important events during the quarter:
• Adjusted for revenue of a non-recurring nature in 2007 as well as the effect of Easter in the first quarter, the Norwegian operation reflects growth. Licence revenue has increased, but the utilisation rate has been weaker than expected. This was due to the conclusion of several larger projects and somewhat later start-up of new projects in anticipation of the new 360° suite. Satisfactory hourly rates in the consulting units.
• The trend in the Swedish operation was weaker than expected, primarily due to fewer consultants. Satisfactory development in hourly rates and utilisation rate.
• Positive trend in the Danish operation. Low utilisation rate in the consulting business, but considerable growth in hourly rates because of fewer problem projects from earlier periods.
• Sustained good development in the Finnish operation with higher utilisation in the consulting unit and satisfactory trend in licence revenue.
The Group's main products
Software Innovation offers solutions for controlling, managing and sharing information and documents. Our solutions are based on more than 20 years' experience with the world's leading innovators within their fields, including the public sector in the Nordic countries as well as international oil and engineering enterprises. Software Innovation is the leading Nordic player in this segment.
Software Innovation develops and delivers two main products:
• 360° - for administrative document management, case management and collaboration
• ProArc - for technical document management and collaboration
During the first quarter of 2008, the Group launched a new version of 360°, a product that fully reflects the product strategy chosen at the beginning of 2007. 360° now gives customers full control over the information flow in a highly user-friendly way. 360° makes it easier to share, store and retrieve all types of information and documents, since the functionality is now directly available in the tools and interface with which the user is familiar. The solution is fully integrated with Microsoft® Office, Microsoft® Outlook and Microsoft® SharePoint.
ProArc is one of the world's leading solutions for technical document management and collaboration. The solution is suitable for both larger and smaller organizations, and for both simple and complex projects. ProArc provides control and a clear overview right down to the smallest change in documents and drawings – all the way from the idea stage, via engineering and construction to operating and maintenance. During the third quarter of 2008, Software Innovation will launch new ProArc functionality for global organisations and SharePoint collaboration room. A new generation of ProArc featuring full integration with Microsoft® Office, Microsoft® Outlook and Microsoft® SharePoint is under development.
Organisation and management
The Group had 530 employees at the end of the first quarter of 2008, compared with 559 employees at the end of the first quarter of 2007 and 541 employees at the end of the fourth quarter of 2007.
On the first of January, Lennart H. Liljenberg-Hane started as new Managing Director of SI Sweden. In February, Halvor Walla took over as the new Managing Director of SI Software, and on the first of March Kjell Erik Tenold took over as the new Managing Director of SI Norway. During the last three quarters, significant changes and strengthening in management have been made.
Focus areas
The Group has three overarching objectives:
• Restore profitability
• Increase customer satisfaction
• Increase employee satisfaction
Outlook
Enterprise content management (ECM) is one of the fastest growing sectors in the IT sector, according to IDC. Software Innovation is the leading Nordic player in this market. IDC expects the market to grow by more than 10 % per year until 2011 - a growth rate more than twice as high as in the general IT market.
Growth in the ECM market has three strong drivers:
• Radical growth in the volume of information
• Increased extent and new forms of digital collaboration in and between enterprises
• More stringent regulatory requirements for corporate management and internal control in the form of new EU directives among others
The total Scandinavian market is currently of the order of 470 million euro, while it is estimated to reach 650 million euros in 2011.
On the basis of the considerable market potential and the positive market trend, Software Innovation will give priority to full commercialization of the new 360° suite in the time ahead. A number of activities have already been completed: training of salespeople and consultants, presentation and demonstration to more than 400 customers, and the establishment of a Nordic Early Customer Programme (ECP) with six customers. The feedback from customers is highly positive so far, but despite this a somewhat later start-up of new projects is expected in anticipation of feedback from the ECP. It is also important for Software Innovation to ensure high quality and maximum learning in the implementation of the first projects in the new 360°, so the number of new projects will be limited in the short term. In parallel with the commercialization of the new 360° suite, the process of completing the new ProArc generation will be in full focus.
Software Innovation is the leading centre of competence in the Nordic countries within Information- and Enterprise Content Management. The Group's ambition is to develop this position further as well as to take a position as an international supplier of software within the same segment. The Group's objective is to be one of the Nordic countries' most attractive IT employers and to develop an organization which is genuinely customer- and market-focused. 2008 will be a profitable year for Software Innovation.
The Board of Directors at Software Innovation ASA
Lysaker, 23 April 2008