Advanced Computer Software is the cat amongst the NHS software pigeons

Not only would the history of its senior management demand investor attention alone, but thanks to a large but non-dilutive acquisition Advanced Computer Software (Advanced) is now a solid software business with strong recurring revenues, powerful cash generation, and internal and external drivers for growth. 

The management team of Chairman Michael Jackson, CEO Vin Murria and CFO Barbara Firth - who had confirmed their ability to combine and bring superlative shareholder returns at erstwhile AIM star Computer Software Group by generating a tenfold return in under five years via an accelerated acquisition strategy – created an acquisitive management super-group by joining another band of acquisitive aces, Marwyn Capital, a investment company that likes to exploit expanding or fragmented niches via a buy-and-build model.

Marwyn Capital - whose other AIM creations using this modus operandi include Concateno, Talarius, Zetar and Silverdell - had floated shell company Drury Lane Capital on the junior market some 18 months ago. With its initial acquisition, via reverse takeover, of Adastra in the summer of 2008, Murria came aboard with Jackson, with Firth joining  the fold a year later for her acquisition and integration experience.

These two parties came together after identifying the major driver for demand that was building in the healthcare sector, where the gargantuan budget of UK’s National Health Service (NHS) is forcing the search for greater operational efficiencies, particularly from software. This, happily for Advanced, coincides with a fragmented market of software companies serving the area.

While the initial purchase of Adastra gave the group a market-leading position in out-of-hours ‘hubs’ and walk-in clinics, with it, it generated a relatively modest £7m in revenue and £1.1m pre-tax profits in the six months to Sept 09, although this had grown at 20% +  since being acquired by the Group (compared to its prior year growth
Having set the foundations, last June the group drummed up £43m from new equity to speed acquisitive growth, increasing cash reserves to around £55m. Four additional small businesses were quickly snapped up between June and November to add products and offshore development capabilities.

At this stage the group had patient-management software already in 95% of all out-of-hours Primary Care Trusts and 60% of NHS walk-in clinics, others products provide the automated information that feeds the NHS Direct helpline, with a number of roster and administration products to serve community care providers, hospices and GPs.

In February of this year Advanced stepped up through the gears to complete the £100m purchase of COA from private equity group Alchemy Partners, which had rescued it from the brink of insolvency (as fully listed Cedar Group in 2002) before building it up through five of its own acquisitions into a cash generative provider of solutions to the healthcare and commercial sectors  including business intelligence, e-procurement, HR and Accounting  software. The purchase was non-dilutive to Advanced shareholders as it was funded by cash balances and a 3.5-year £55m new debt facility of which only £42m of debt was used.  Murria says ‘our cash generation is excellent and our structure is one equivalent to an offset account so that we will pay minimal levels of interest’.

The Group now services   Health, Care and Outsourcing for

•    Patient management systems  across  95%  of all  Out-of-Hours Primary Care Trusts  and

•    60% of NHS Walk-in Centres, Equitable Access Clinics, Darzi clinics etc
•   
•    88%  of Primary Care Trusts , Foundation,  NHS Trusts, Acute Trusts, Ambulance Trusts and Hospital Trusts are Customers of the Advanced Group (344 of 392), many at CEO and FD level.
•   
•    100  NHS sites use Advanced Hosting and  Outsourcing  services
•   
•    7,000+ direct and indirect customers

This new addition takes Advanced up to pro-forma annual revenues of £90m+ for the year to end February, of which more than 57% half is revenues consisting of recurring contract subscription maintenance. Moreover, 90% of new business sales are coming from existing customers. COA crucially provides, as well as its product set, ‘excellent  access to NHS FDs and CEOs,’ says Murria, allowing the group to sell to the ultimate decision makers rather than those on lower rungs who were liable to avoid buying the efficiency-focused Advanced group’s  products ‘because the powerful  efficiency improvement  made their  existing results look  more  challenged’, says Murria. She adds that COA also brings excellent internal infrastructure, with ‘everything in place – policies, payroll, people - and so we’re reversing our back office systems into theirs’.

COAs principal products include systems for budgeting around patient pathways, data analysis, business intelligence, compliance, accounting and billing, procurement and document management. It provides business process outsourcing and hosting of customers across 100 NHS sites.

So, as things stand, of the 392 NHS trusts across the UK, 344 (88%) are already customers of one of the group’s various software applications, yet each of these customers only uses a small fraction of the solutions Advanced provides, presenting considerable potential for cross selling. On top of this, Murria is excited about immediate prospects from two of the group’s projects, in pharmacies and for district nurses, neither of which have been included in forecasts.

Murria explains: ‘There’s a big push to get pharmacies doing healthcare screening themselves to take the weight off GPs. We’re talking to people like Lloyds and Boots about our SaaS [software as a service] product that would record the results of the screening and feed them back directly into the patient’s records.’  Advanced plans to charge per transaction and, with the UK pharmacy trade body predicting around 10-12m transactions per year, this could be a lucrative new business line. One chain of  chemists has already gone live with early sites and Murria says ‘early indications suggest demand is strong’.  

For district nurses, the company has been trialing its iNurse system for some time. This product works with the nurse’s PDA to help organize workflow and scheduling and helps nurses minimise the time spent travelling back and forth between patients and their office paperwork. ‘The ROI on iNurse is based on increasing nurses efficiency to two more visits per month, our results are showing that they are actually doing two more visits per day,’ declares Murria. 2,500 nurses have been signed up ((to iNurse and iConnect combined)) and the total market is over 365,000, including domiciliary care workers.

Overseas expansion is also on the cards. Of Advanced 800 staff, the majority is based in the UK, but there are already over 100 in Vietnam, which is providing a low-cost base to sell into Australia, and 30 in India that are primarily developers but are being expanded with support and sales staff.

 Joint house broker Mirabaud believe the COA purchase increases Advanced’s likely earnings per share for the full year from around 0.5p to 3.7p. A prospective P/E ratio of 10.8 is still some way below the sector average.