Axon Group plc

Preliminary Results

For the year end 31 December 2007

Axon Group plc, the Business Transformation consultancy, today announces its preliminary results for the year ended 31 December 2007.

Key Points: 

• Turnover* up 49% to £204.5m (2006: £137.5m):
  • US generated revenues of  £74m, 36% of the group, up from 23% in 2006
  • The proportion of revenues generated by our top 10 clients reduced to 67% (2006: 74%)
• Strong profit performance with adjusted operating profit** up 65% to £36.5m (2006: £22.1m)
  • Operating profit up 69% to £30.6m (2006: £18.1m)*
  • Profit before tax* up 67% to £29.5m (2006: £17.7m)
  • Adjusted profit before tax** up 63% to £35.5m (2006: £21.8m)
• Successful integration of acquisitions:
  • Two US acquisitions made in Q4 2006 were fully integrated in 2007 and now trade under the Axon name
  • The acquisition of JSPC, an SAP listed firm trading in Malaysia and China has now been fully integrated into Axon’s existing Malaysian off-shore centre
• Diluted earnings per share up 56% to 31.7p (2006: 20.3p)*
• Proposed final dividend of 2.5p (2006 2.25p) making a total dividend per share for the year of 4.5p (2006: 4.0p)

Commenting on the results, Steve Cardell, Axon’s Chief Executive said:

"We are extremely pleased with the performance of Axon in 2007.  We saw strong revenue growth across each of our operating regions, delivered an increase in operating margins and generated strong cash flows.  Client satisfaction remained high and the performance of our people was, once again, outstanding.

Whilst we achieved significant milestones this year, in particular the acquisition of JSPC in China and Malaysia, and the growth of our US business to over one-third of group revenues, we currently have less than 2% global market share of the SAP Services market and therefore continue to see significant opportunities for expansion.

Whilst we enter 2008 in an environment of increased macroeconomic uncertainty, we have yet to see any discernable consequence of this in our own orderbook and pipeline.  So whilst there is significant work still to win in 2008, we remain comfortable that Axon will continue to grow faster than underlying market rates.”

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* From continuing operations.

** From continuing operations, excluding amortisation of intangible assets on acquisition and share-based payments of £2.5m, and £3.5m respectively (2006: £2.0m and £2.1m respectively).

CHAIRMAN’S STATEMENT

I am very pleased to be writing my first Chairman’s report at Axon. Since I joined the Board as a non-executive four years ago I have seen the group deliver on the strategy laid out in 2003 to become a global player in the delivery of Business Transformation services for large organisations that use SAP as their strategic platform.

Mark Hunter moved to Executive Chairman in March 2007 and retired from the Board at the end of December. Mark founded Axon in 1994 and as CEO grew it into a leading UK player in the SAP services market. We all wish Mark the best for the future and thank him for leaving Axon in such good shape.

Steve Cardell was appointed CEO in March 2007, having joined Axon in 2001 and been COO since 2003. Steve has been the prime driver behind our expansion into business consulting and transformation services and in building our North American business from scratch.

Steve has set out a revised vision for the group to be the world’s leading consulting firm for major organisations who wish to transform themselves using SAP as their technology platform.

We grew group revenues by 49% to £204.5m (2006: £137.5m) this year while also improving operating margins. Revenues from our North American business more than doubled with organic growth of 41%. North America represented 36% of total revenues in the year (2006: 23%). With less than 2% of the global SAP services market (source: Gartner), Axon’s opportunity for growth in the future remains considerable.

Our European business has continued to prosper through the delivery of Pan-European transformation programmes and our continued success in the Local Government Sector. We have also seen encouraging early signs from our entry into the Financial Services sector which opens up wider markets in the medium term even if the sector may face its own difficulties in the short run.

The use of an offshore delivery model is integral to our proposition. We expanded our presence in Malaysia through the acquisition of JSPC which has also given us a foothold in China.

Cash generation remained strong, with 128% of total operating profit of £30.6m (2006: £18.1m) being converted into operating cash flow despite the high growth in revenues during the year.  Net cash rose by £19.1m to £25.3m (2006: £6.2m net of £6m borrowing).

Adjusted operating profit* increased by 65% to £36.5m (2006: £22.1m) reflecting further leveraging of the indirect cost base.

Adjusted diluted earnings per share* are up 49% to 38.4p (2006: 25.7p), a very strong performance for our sector, and diluted earnings per share are up 56% to 31.7p (2006: 20.3p).  We continue to have a progressive dividend policy, and the Board is recommending a final dividend of 2.5p per share, which combined with the interim dividend of 2.0p makes a total dividend for the year of 4.5p (2006: 4.0p). The final dividend payment will be made on 20 June 2008 to shareholders on the register as at 23 May 2008.

All of Axon’s people around the world should be proud of their performance and I would like to thank them for their outstanding contribution to the business.

There has been considerable uncertainty in the stockmarkets, with concern over potential regional and global recessions, which has had a very negative effect on technology sector valuations. However, based on SAP’s strong market position and Axon’s scope to increase market share outside the UK, I look forward with confidence to further revenue growth in 2008.

Roy Merritt

Chairman

4 March 2008

* Excluding amortisation of intangible assets on acquisition and share-based payments of £2.5m and £3.5m respectively (2006: £2.0m and £2.1m respectively) and related tax effect in relation to the adjusted profit after taxation.

BUSINESS REVIEW

Axon delivers Business Transformation programmes.  Globally.

Axon’s success in winning, and delivering, large Business Transformation programmes continues to deliver significant growth and has driven a 49% increase in revenues to £204.5m (2006: £137.5m).

Adjusted operating profit before tax grew by 65% to £36.5m (2006: £22.1m).  On the same basis our adjusted operating margin grew strongly to 17.9% (2006: 16.1%).  A summary of adjusted profit is detailed below.

Axon is a leader in its market

Axon is the largest consultancy in the world focused exclusively on the provision of SAP services and solutions for its customers.   We provide large organisations with Business Transformation solutions that encompass all elements of Business Consulting, Solutions Implementation and ongoing Applications Management.  In turn SAP is the leading player in the global enterprise software market with approximately twice the share of Oracle, the number two competitor (source: AMR Research).

We have seen strong growth across all three of our geographic regions.

We are a significant player in the UK and our Pan-European capability continues to grow

Axon is the dominant SAP services provider in the UK market. Due primarily to scope extensions with existing clients, we grew EMEA revenues by 22% to £129.3m (2006: £105.8m).  This growth was largely due to our position as the leading partner for Public Sector organisations seeking to transform their operations using SAP.

Major clients with whom we worked this year included Birmingham City Council, BP, Transport for London and Xerox, all of whom have had multi-year relationships with us.

In December 2006 we set out to enter the Financial Services market organically. In our first year we have secured contracts with four clients in this sector, including Barclays. While our revenues from this sector are not yet material to the group, they demonstrate the opportunities for growth despite the sector’s recent sub-prime derived troubles.

Our market share in continental Europe is low.  Based on Gartner data, we estimate the continental European SAP market to be at least six times the size of the UK.

We enhanced our delivery capabilities by adding Everis and Lodestone to our existing Axon International partners in the region during the year.

We are now a major player in North America

Axon’s strategy in North America has been a simple one: to acquire specialist SAP consultancies that are sub-scale and couple these skills with Axon’s proposition and critical mass to win large business transformation programmes. This has been very successful to date.

Our principal focus in 2007 was to bed down the three US acquisitions we made in 2006. The performance has exceeded our expectations. Revenues in North America increased by 130% to £73.6m (2006: £32.0m), of which approximately half can be attributed to a full year’s revenues from businesses acquired in 2007 and half is the result of organic growth. Organic growth was 41%, and 52% in constant currency terms.

Along with the high growth rates the region has also delivered an increase in margins. Our regional adjusted operating profit margin increased to 10.9% (2006: 6.7%)

Major North American clients in the year included Air Canada, Goodrich, New York Power Authority, Pratt & Whitney and TXU.

Axon has now become a significant player in the North American Business Transformation market, with strong positions in the utilities, travel & transportation and aerospace & defence sectors. New clients in 2007 included TXU, Smiths Detection, Delta Airlines, Union Pacific and a local government win at the City of San Diego which builds on our leading position in this sector in the UK. We are confident of further significant growth in 2008.

We were pleased to welcome Balance as an Axon International partner which secures delivery capability in South America.

We have grown and diversified our Asia-Pacific offshore centres

Axon provides remote development, testing and Applications Management services from its offshore support centres. In the last three years we had grown headcount in Kuala Lumpur, Malaysia organically to over 350 employees, and achieved CMMi (Capability Maturity Model Integration) level 3. 

In October 2007 we completed the acquisition of JSPC, a publicly quoted Malaysian provider of SAP services The consideration was £6.2m (net of £3.0m of cash balances which came with the acquisition). This has not only significantly increased the scale of Axon’s Malaysian operations with an office in Penang, but also provides us with a small base in China which further diversifies our off shore capabilities.

Direct third party revenues more than doubled to £2.5m (2006: £0.9m) due to wins with Boeing and Arch Chemical in China.  These will increase further in 2008 with the benefit of JSPC’s client base. The Asia-Pacific region contributed activity of £10.8m (2006: £7.1m) to the group before elimination of intercompany revenues, a rise of 52%.

The adjusted segment result for Asia-Pacific was flat at £1.0m.  This reduced profitability as a proportion of revenues is mainly a consequence of the cross-sale of services to the US and UK.

In order to diversify our offshore centres and to service further growth in EMEA and North America we entered an agreement with a partner in Mumbai in India to build a dedicated offshore centre. We have the option to acquire this centre in future.

We were also pleased to welcome Consulting Principles as an Axon International partner which expands our delivery capability in Australia.

Business Consulting growth is driven by Business Transformation programmes

Our Business Consulting division helps our clients to deliver more effective strategies by facilitating improvements in process, technology and people. It determines whether individual business functions and systems meet the current objectives of the business; can change fast enough to meet the future needs of the business and are communicating adequately with each other.

Business Consulting revenues grew by 60% from £25.0m in 2006 to £39.9m in 2007, which represents 19% of turnover (2006: 18%).

Solutions Implementation had a strong performance in 2007

We have a reputation for rapid, innovative implementation of complex business systems.  Our Solutions Implementation team works closely with the client at all levels defining and delivering new business processes and systems, whilst ensuring that the people within the organisation enthusiastically embrace the changes.  Once the transition to a new platform has been made, we ensure that the new working environment is stable prior to focusing on the delivery of quantifiable business benefits.

As anticipated, Solutions Implementation performed strongly in 2007 and revenues grew by 59% to £141.0m (2006: £88.7m) which represents 69% of turnover (2006: 65%). 

We are rebuilding our Applications Management proposition

We provide ongoing support and evolution for our clients that have undergone a Business Transformation programme.  Our focus is on niche, high value added applications management. We run and support critical business applications for our clients 24 hours per day, 7 days a week, 365 days a year globally.   This support ensures that the working practices and software systems enable the business to respond to any further internal or external imperatives. 

 Applications Management revenues decreased by 1% to £23.6m (2006: £23.8m) which represents 12% of turnover (2006: 17%) in part reflecting increased used of offshore resources. 

Chargeability remained high, and headcount grew throughout the year

Chargeability from continuing operations remained high at 75% (2006: 76%).

 Axon’s employed headcount at 31 December 2007 was 1,596 (2006: 1,144), a 40% increase over the course of the year.  The average headcount for 2007 rose 36% to 1,321 (2006: 970), with consultants comprising 85% of the total (2006: 85%).

Outlook for 2008

2007 was yet another landmark year for Axon: we grew the business by 49% and have a three year compound annual growth rate of 53%. We increased margins, won significant contracts, integrated the recent US acquisitions and acquired a business with operations in Malaysia and China. 

Whilst we enter 2008 in an environment of increased macroeconomic uncertainty, we have yet to see any consequence of this in our own orderbook and pipeline.  So whilst there is significant work still to win in 2008, we remain comfortable that Axon will continue to grow faster than underlying market rates.

Stephen Cardell

Chief Executive Officer

4 March 2008

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