Switched-on software

Smaller Companies
THE relentless advance of the silicon chip is leading to dramatic changes in the way governments and companies handle their finances. In order to implement change, clients are turning to third-party software houses for assistance, creating challenges and opportunities for software suppliers. The scale of the opportunity is indicated by estimates that the world market for client/server (network) accounting software packages is going to grow from $400m (pounds 253m) in 1994 to $2bn by 1998. Two UK-quoted companies that look well placed to benefit from this boom are Cedardata, at 168p, and Quality Software Products, at 702p.

Over the last decade and a half, organisations have moved from using giant number-crunching mainframes to open systems and client servers. Customers expect their software to run happily on a mixture of hardware platforms, and they want the networks of micro, mini and main-frame computers to be integrated into their financial systems.

The vendors of software and back-up services can benefit from these changes, but they need to adapt as well - and that has proved painful. The cost of creating new software is enormous, and the transition between new generations of software can lead to a temporary buyers' strike creating a nasty pincer effect on profits. There was a furore in the new issue market last year when shortly after flotation, Coda, a hitherto highly successful accountancy software supplier, said that its profits were going to be disappointing. The shares crashed, and the company made a loss. The reason was the delay - and associated cost - in adapting its software for the new world of open systems. Similarly Quality Software Products, which has spent pounds 20m so far developing its open systems product, Universal Olas, saw its shares take a less dramatic dive when it also had to warn about the short-term profits outlook.

Now shares across the board in the sector are recovering on hopes that the worst of the development spending is over and the time is coming to reap what could be substantial rewards. Quality Software Products, chaired by Alan Mordain, recently had the unusual distinction of announcing a rights issue (a seven for 20 at 535p to raise pounds 14.7m) and seeing its shares rise 70p to more than 700p. Usually shares fall after a rights call.

The fund raising is partly to finance the pounds 11.4m acquisition of Global Software, QSP's American distributor. Mr Mordain says it had always been its plan to do this, and if it waited until Universal Olas was selling well in the US market the price would have been much higher.

The American market is crucial to QSP, partly because of its size - 35 to 40 per cent of the world market for accounting software - but also because the company has done so well in Briain with its Olas package for EM mainframes that it has exhausted a great deal of the potential. Analysts are nevertheless still cautious about QSP, because it capitalises research and development expenditure; but for this it would still be making heavy losses. Mr Mordain justifies the approach because of the value of the products being created. Prospects look exciting. The company has so far sold the new software to seven clients in the US, 43 in the UK and nine in the rest of the world, giving it all-important coverage in many key areas. The shares are risky given the importance of success in the UK but with the market leader, Dun & Bradstreet, said to be losing its grip the opportunity exists to take a huge chunk of an exploding market.

Cedardata offers a less volatile mix of risk and potential but there is nothing pedestrian about the growth. Between l99l and 1995, this business lifted profits from pounds 560,000 to pounds 3.57m on turnover up from pounds 2.2m to pounds 9m. Lionel Arbis, at the stockbroker Greig, Middleton, is forecasting profits up to pounds 4.3m for the year to March 1996, followed by pounds 5.2m. But chunky accounts such as the Foreign Office make him suspect that he will be raising his forecasts after the interim figures are announced next month. Chris Ellis, the finance director, certainly does nothing to dampen the feeling that the company is enjoying a vintage year.

A key strength of Cedardata is its link with Oracle, the US supplier of relational database software with more than half the world market. That link is now critical with big company customers eager to buy accounting software that can be seamlessly integrated with their databases. The Oracle/Cedardata combination enables the latter to ride on the US giant's $200m annual research and should help it to keep growing strongly.