| Tue 20 Nov 2001, 0:00 | | Softline - Group Interim Results |
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Softline Group Limited
Group interim results
for the six months ended 30 september 2001
financial indicators
REVENUE R232 MILLION
OFFSHORE REVENUES 42%
OPERATING PROFIT, EXCLUDING EXCEPTIONAL ITEMS, R48 million
OPERATING MARGIN 20,6%
CASH GENERATED AS A PERCENTAGE OF REPORTED OPERATING PROFIT 74%
KEY
1H01 six months ended 30 September 2000
2H01 six months ended 31 March 2001
1H02 six months ended 30 September 2001
FY01 fiscal year ended 31 March 2001
FY02 fiscal year ended 31 March 2002
*1H01 line item totals include SVI for the six month period ended 30
September 2000
Definitions
SVI SVI Solutions Inc.
Softline Softline group excluding SVI Solutions Inc.
GROUP INCOME STATEMENT
1H02 2H01 *1H01 FY01
30 Sep 2001 31 Mar 2001 30 Sep 2000 31 Mar 2001
(unaudited) (unaudited) (unaudited) (audited)
R 000 R 000 R 000 R 000
Revenue 231 933 209 025 322 144 531 169
SVI - - 118 705 118 705
Softline 231 933 209 025 203 439 412 464
Software sales 71 650 68 614 85 446 154 060
Maintenance and
services 160 283 140 411 117 993 258 404
Gross profit 199 062 169 595 236 534 406 129
SVI - - 72 551 72 551
Softline 199 062 169 595 163 983 333 578
Operating expenses 182 428 182 630 198 176 380 806
SVI - - 98 533 98 533
Softline 182 428 182 630 99 643 282 273
Selling, general
and administration 134 355 119 267 67 692 186 959
Research and
development 11 901 9 635 8 671 18 306
Depreciation 5 029 7 549 6 523 14 072
Amortisation
of intellectual
property and
goodwill 14 676 11 302 4 044 15 346
Impairment of share
trust loan 16 467 22 063 22 063
Start-up
operations closed 12 814 12 713 25 527
Profit/(loss) before
finance income 16 634 (13 035) 38 358 25 323
SVI - - (25 982) (25 982)
Softline 16 634 (13 035) 64 340 51 305
Net finance income 6 862 6 967 4 402 11 369
SVI - - (4 580) (4 580)
Softline 6 862 6 967 8 982 15 949
Profit/(loss)
before taxation 23 496 (6 068) 42 760 36 692
SVI - - (30 562) (30 562)
Softline 23 496 (6 068) 73 322 67 254
Income tax expense 15 557 12 430 12 771 25 201
SVI - - (4 974) (4 974)
Softline 15 557 12 430 17 745 30 175
Profit/(loss)
after taxation 7 939 (18 498) 29 989 11 491
SVI - - (25 588) (25 588)
Softline 7 939 (18 498) 55 577 37 079
Attributable from
minorities - - (11 105) (11 105)
Profit attributable to
ordinary
shareholders 7 939 (18 498) 41 094 22 596
GROUP STATEMENT OF CHANGES IN EQUITY
1H02 1H01 FY01
Ordinary Ordinary Ordinary
Shareholders shareholders shareholders
interest interest interest
30 Sep 2001 30 Sep 2000 31 Mar 2001
(unaudited) (unaudited) (audited)
R 000 R 000 R 000
Balance at beginning of year 461 679 447 156 497 146
As previously reported 461 679 447 156 447 156
Change in accounting policy
in terms
of AC102
deferred taxation - - 49 990
Net profit for the period 7 939 41 094 22 596
Transfer to/(from)
non-distributable
and translation reserves 12 555 (108 328) (106 796)
Issue of share capital - 19 108 68 973
Decrease in vendor liabilities - (4 535) (20 240)
Balance at end of period 482 173 394 495 461 679
other group information
Capital expenditure commitments - 5 821 -
GROUP BALANCE SHEET
1H02 1H01 FY01
30 Sep 2001 30 Sep 2000 31 Mar 2001
(unaudited) (restated & (audited)
unaudited)
R 000 R 000 R 000
Assets
Non-current assets 462 842 386 919 488 240
Fixed assets 20 424 18 164 20 350
Intellectual property and goodwill 126 649 79 036 129 830
Capitalised development costs 32 334 21 076 24 781
Share incentive trust 20 210 46 922 36 798
Investment in SVI 111 504 111 504 111 504
Other investments 33 829 37 179 33 829
Deferred taxation 32 896 - 40 055
Loan receivable 84 996 73 038 91 093
Current assets 127 954 141 093 107 699
Inventories 7 896 7 016 7 004
Trade and other receivables 66 597 62 045 61 886
Cash and cash equivalents 53 461 72 032 38 809
Total assets 590 796 528 012 595 939
Equity and liabilities
Capital and reserves 482 173 394 495 461 679
Non-current liabilities 154 22 060 243
Interest-bearing debt 154 15 963 243
Deferred taxation - 6 097 -
Current liabilities 108 469 111 457 134 017
Trade and other payables 94 364 105 567 120 025
Vendor liabilities 13 542 4 996 13 542
Interest-bearing debt 563 894 450
Total equity and liabilities 590 796 528 012 595 939
Total number of ordinary shares
in issue (000s) 386 511 364 481 386 511
Net asset value per share (cents) 124,8 108,2 119,4
GROUP CASH FLOW STATEMENT
1H02 1H01 FY01
30 Sep 2001 30 Sep 2000 31 Mar 2001
(unaudited) (unaudited) (audited)
R 000 R 000 R 000
Cash flows from operating activities 35 251 77 036 84 785
Taxation paid (13 658) (6 383) (17 802)
Cash flows from investing activities (13 053) (106 777) (119 976)
Cash flows from financing activities 6 112 (97 576) (106 763)
Net movement in cash and cash
equivalents 14 652 (133 700) (159 756)
Cash and cash equivalents at
beginning of year 38 809 206 305 206 305
Net cash obtained from
operations acquired/
disposed of - 3 819 (3 348)
Cash effect on deconsolidation of SVI - (4 392) (4 392)
Cash and cash equivalents at end
of period 53 461 72 032 38 809
EARNINGS PER SHARE
1H02 2H01 1H01 FY01
30 Sep 2001 31 Mar 2001 30 Sep 2000 31 Mar 2001
(unaudited) (unaudited) (unaudited) (audited)
R 000 Cents R 000 Cents R 000 Cents R 000 Cents
Sustainable
earnings
per share (cents) 41 016 10,6 37 495 9,8 67 307 18,5 104 802 28,3
Reconciled to basic
earnings per share
as follows:
Start-up
Operations
closed - - (16 628) (4,4) (8 899) (2,5) (25 527) (6,9)
Notional deferred tax
on trademarks (2 307) (0,6) (4 613) (1,2) - - (4 613) (1,2)
SVI losses net of
amortisations - - - (14 483) (3,9) (14 483) (3,9)
Impairment of share
trust loan (16 467) (4,2) (22 063) (6,0) - - (22 063) (6,0)
Amortisation of
intellectual property
and goodwill (14 303) (3,7) (12 689) (3,4) (2 831) (0,8) (15 520) (4,2)
Basic earnings per
share (cents) 7 939 2,1 (18 498) (5,2) 41 094 11,3 22 596 6,1
Fully diluted basic
earnings per
share (cents) 2,0 (5,3) 11,2 5,9
Weighted average
number of ordinary
shares in
issue (000s) 386 511 364 481 370 327
Fully diluted number
of ordinary shares
in issue (000s) 388 096 366 263 380 215
Commentary
The business
Softline is a developer of accounting and payroll software applications.
Operations provide accounting, payroll and e-commerce software and related
services to small and mid-size businesses. Softline has a well-established
market position in South Africa (SA), Australia, the USA and Canada. More
than 335 000 businesses, encompassing approximately 5,2 million individual
users, utilise its applications. The group s research and development (R&D)
centres located around the globe are responsible for the continued
development and enhancement of technology applications ensuring Softline is
able to further its position in an increasingly competitive global software
environment.
Review of group results
The detailed income statement has been presented in accordance with South
African Statements of Generally Accepted Accounting Practice (GAAP), and
international accounting standards with exceptional items reported in the
body of the income statement. This format provides clarity in determining
Softline s operational performance as distinct from non-operational and non-
cash items. The accounting policies are also consistent with those used in
the annual financial statements for the year ended 31 March 2001.
Softline has recorded an improved performance in the current interim period,
1H02, from the second six-month period in FY01, (2H01). However, the results
for 1H02 are down in comparison to the same period in the past financial
year, 1H01. This was as a result of key contracts concluded in that period,
1H01; a comparably better performance by Sybiz Software, (Australia); lower
interest income recorded in 1H02 compared to 1H01 due to funds utilised to
fund acquisitions in 2H01; and the absence of AccountMate, (USA).
AccountMate, which has been included in the full six-month period 1H02, has
had a dilutionary effect on earnings. Notwithstanding the impact on
earnings, AccountMate has provided robust technology and is considered key
to Softline s strategy in entering the North American market. Taking the
above factors into account, as well as the higher effective tax rate and
number of shares in issue, the board of directors is satisfied that the
results clearly indicate an upward trend from 2H01.
Softline achieved revenue growth of 14% from R203 million in 1H01 to R232
million in 1H02, primarily as a result of organic growth. The geographic
breakdown of revenue is as follows: South Africa 58%; North America 25%; and
Australia 17%.
The component of revenues derived from maintenance and services experienced
a pleasing improvement to represent 69% of revenues from 58% in the
comparable period. This improvement is attributable to Softline s ongoing
focus to grow the group s base of annuity income. The continued effort to
shift the business model of all operations towards a recurring revenue model
will provide an increasingly sustainable, cash generative and predictable
income stream.
Selling, general and administration (S,G&A) expenses as a proportion of
revenues increased from 33% in 1H01, (57% 2H01), to 58% in 1H02. The
increase is due to a rise in infrastructure costs related to the recurring
revenue model, as well as the inclusion of AccountMate. AccountMate s
expense base has been increased as it has added depth to its sales and
marketing infrastructure, adding to overall group S,G&A expenses, thereby
impacting operating margins. The impact has been exacerbated by the
depreciation of the rand against the US dollar. The benefits of AccountMate
s strategy are expected to flow through in FY03. In the interim AccountMate
is expected to breakeven.
Softline achieved an operating profit of R17 million net of the amortisation
of intangible assets and the impairment of the share trust loan, hereto
referred to as exceptional items. The non-repetitive nature of the non-cash
adjustments relating to each period render it difficult to make a relevant
comparison to the R64 million operating profit achieved in 1H01. Thus
comparing operating profit, excluding the effect of exceptional items,
provides a better comparison. Operating profit from Softline s operations,
excluding exceptional items, was R48 million compared to R81 million
achieved in 1H01. Relative to 1H01, Softline s performance was down
primarily due to the large increase in S,G&A expenses. However, operating
profit increased substantially from the prior period s (2H01) R33 million to
R48 million, an increase of 44%. The significant improvement can be
attributed to stronger results recorded by operations that had
underperformed in the prior period. Softline s offshore operations
contributed 50% of operating profits.
The operating margin, excluding exceptional items, for Softline decreased in
line with expectations from 39,9% reported in 1H01 to 20,6% in 1H02.
Relative to 2H01 the operating margin demonstrated a solid improvement from
15,9% to 20,6%. The upward recovery trend is expected to continue and is
supported by the growth in revenues derived from higher margin maintenance
and services.
The continued investment in research and development (R&D) forms an integral
component of Softline s strategy and is essential in sustaining and
enhancing the group s competitive positioning in a highly competitive global
software environment. In 1H02 Softline invested R19,5 million in R&D,
comprising 8,4% of revenues.
R10,4 million, or 4,5%, was expensed relating to ongoing product enhancement
and development. R7,6 million or 3,9%, net of amortisations, was capitalised
as a result of the investment in new or substantially improved product.
Included in this figure was R1,5 million relating to capitalisation from
FY01 that was expensed in line with Softline s policy to amortise such
expenditure over the useful life of the product.
In accordance with international accounting standards, a further impairment
of the share trust loan is required in order to reflect the loan at market
value of shares issued to the trust. The writedown reflects the diminution
in value of shares purchased by the trust in respect of options that had not
yet been exercised. The writedown confers no benefit on management or option
holders.
Softline s effective tax rate increased from 19,7% in the comparable period
to 28,5% largely due to the higher effective tax rates applicable in the US
and Canadian operations and permanent differences no longer applicable.
Profit after tax, including the effect of exceptional items, was R7,9
million in 1H02. Sustainable earnings, excluding exceptional items,
decreased from R67 million in 1H01 to R41 million in 1H02 and improved by
9,4% from R37 million reported in 2H01.
Sustainable earnings per share for Softline is 10,6c as compared to 18,5c in
1H01, and 9,8c in 2H01. The large increase in the number of shares in issue
from both 1H01 and 2H01, 22 million and 16 million shares respectively, (on
a weighted average basis), had a dilutionary effect on sustainable earnings
per share. The issue of shares relates predominantly to acquisitions in the
prior period.
A detailed reconciliation of the sustainable earnings per share calculation
has been presented in order to provide clarity on the actual operating
profit achieved, excluding the effect of exceptional items. In this respect
the table provides a detailed breakdown of the effect of exceptional items
on the earnings per share calculation.
Cash generated by operations constituted in excess of 70% of trading profit
attesting to the quality of earnings. Softline s cash position increased
from R38 million at year-end FY01 to R53 million. Softline generated R35
million in cash from operating activities. The ratio of cash to operating
profit is marginally lower than in previous periods, nonetheless, Softline s
operations continue to generate cash on a monthly basis and this ratio is
expected to increase in 2H02.
The group s working capital position has improved during 1H02. There
continues to be no significant interest- bearing debt and debtors days have
decreased from 55 days at the year-end to 52 days. Furthermore, although
current liabilities appear comparatively high to current assets, deferred
revenue and vendor liabilities are both of a non-cash nature. Vendor
liabilities will be settled via the issue of shares. The balance sheet for
1H01 has been restated to account for the deconsolidation of SVI, for
comparative purposes.
No dividends have been declared for the period. The board continues to
consider that it would be advantageous to shareholders to retain funds
within the group for future growth.
SVI transaction
With reference to the cautionary published on 7 September 2001, which
outlined the basis of a transaction with SVI and Jeffreys & Co to further
reduce Softline s interest in SVI, this transaction has not been concluded.
The worsening of trading conditions and financial markets in the US
following the events of 11 September has made it increasingly difficult for
SVI to fulfil the conditions required by the Union Bank of California in the
short term. SVI is presently in negotiations with the Union Bank of
California to waiver the conditions precedent to this agreement. The final
outcome of negotiations in this regard is pending. Consideration will be
given to the valuation of SVI in the event that the agreement is not
concluded within a reasonable time.
Operational comment
Trading conditions have improved following the post-Y2K slowdown experienced
during the past financial year.
The group continues to focus on converting users into customers that pay an
annual fee for software and services in an effort to further grow Softline s
base of annuity income. This business model exists successfully in a number
of the group s operations, underpinning revenues and profitability. Other
operations are in the process of moving towards a similar business model via
the introduction of innovative maintenance and support programs, release of
new technology and sale of add-on services.
The consolidation of vendors in the US accounting mid-market has provided
AccountMate with an opportunity to capture a larger share of this market. In
order to capitalise on this opportunity Softline is investing in improving
the operational, marketing and sales infrastructure, as well as implementing
new channel programs. This strategy will not translate into immediate growth
in revenues, but is considered essential in providing AccountMate with the
foundation for increasing its market share.
Particular attention is being paid to leveraging R&D resources and expertise
across the globe to ensure the realisation of synergies and efficient
utilisation of common technologies where possible. Development is under way
to introduce AccountMate s technology into the mid-tier South African and
Australian market during the first half of calendar 2002.
A continually changing technology landscape, new government legislation and
increased recurring revenue continues to provide Softline with growth
opportunities.
For and on behalf of the board
Ivan Epstein Steven Cohen Rob Wilkie
Chief executive officer Chief operating officer Group financial director
21 November 2001
Directorate
M J A Golding* Chairman, I M Epstein Chief executive officer, S M Cohen
Chief operating officer,
R P Wilkie Group financial director, J A Copelyn*, C S dos Santos*, E
Ellerine*, I B Ferrer*, S R Maharaj*,
L M Nestadt*, G B Rubenstein*
* Non-executive
business address and registered office Softline Technology Park, Softline
House, 151 Katherine Street, Atholl Ext 12, Sandton, 2031, PO Box 76182,
Wendywood, 2144 contact numbers Tel: +27 11 292 8200, Fax: +27 11 292 8202
registration number 1977/002304/06
international security identification number (isin) ZAE000012316 investor
relations E-mail: investor-relations@softline.co.za transfer secretaries
Mercantile Registrars Limited, First National House, 11 Diagonal Street,
Johannesburg, 2001
SPONSOR Cazenove South Africa attorneys Fluxman Rabinowitz Raphaely Weiner
Inc.
www.softline.co.za
