2007  £m	Trading  £m	Exchange rate  £m	2006  £m
Recurring revenue	10.0	0.1	(0.5)	10.4
New business revenue	7.3	1.5	(0.4)	6.2
Total revenue	17.3	1.6	(0.9)	16.6
Divisional operating costs	(6.5)	(0.3)	0.3	(6.5)
Gross divisional contribution	10.8	1.3	(0.6)	10.1

The strengthening of Sterling during the year with a particularly weak US dollar resulted in the SMS revenue and profits being adversely affected.  The table above shows that at constant exchange rates SMS revenue is £1.6 million higher at £18.2 million (2006 £16.6 million) and the gross divisional contribution is £1.3 million higher at £11.4 million (2006 £10.1 million).

Markets and Solutions
Macro 4’s SMS division offers two complementary software solutions, each with a portfolio of products that address the performance and optimisation of mission-critical applications within large organisations. The effectiveness of mission-critical applications is fundamental to the performance of the organisation. Minimising application ‘downtime’ through application failure, and ensuring that application performance response times are consistent and reliable, is crucial in a large organisation’s ability to conduct business effectively and remain competitive. The Applications Availability Solutions (AAS) diagnose and rectify complex mainframe application failures quickly. Applications Performance Solutions (APS) diagnose and suggest remedies for the performance problems of an application.

IT environments are becoming more and more complex, and applications running in these environments are commonly central to business performance. Often, the application is the business. Tremendous long-term opportunities exist for software tools vendors who can offer ‘simple to implement’ solutions that improve the smooth running of these highly complex environments.

Competition
Competitive solutions in this market are principally offered by the established dominant IT tools vendors such as IBM, CA, Compuware and BMC. Macro 4’s ability to compete with such established vendors is based on the quality and innovative nature of our products, particularly in the area of the ease of implementation and use, competitive commercial terms, and the responsiveness and quality of our employees.

Strategy
The Group has made excellent progress against the threefold strategy laid out in last year’s Annual Report:

‘Investment in existing sales infrastructure’
The Group invested in additional sales resources across Europe with excellent results. As a result of this investment, major new customers were won in France, Benelux, and Spain, contributing significantly to the new business revenue growth achieved over the year. The French operation performed particularly well. This year the operation grew new business revenue by a further 80%.  Additional investment is again planned this coming year not only in sales resources, but also in market awareness and sales pipeline generation.

‘Adapting existing products for the internet’
Our Fault Analysis Portal (FAP) had an excellent reception. This is a sophisticated yet easy to use web-based user interface to the existing AAS products. A number of customers have now deployed the FAP as the primary user interface for the products. Development continues on the FAP this year, together with broadening the AAS offering into other areas of application optimisation such as data privacy and regression testing.

‘New products for new markets’
Macro 4 launched the first release of the Applications Performance Portal (A.P.P.) this year, entering the high growth Java performance tools market. A tool that is simple to install, highly intuitive to use, and competitively priced is all but unique in this market and offers exciting potential. Initial trials of the product have proved extremely encouraging. As well as the launch of A.P.P., Macro 4 also acquired the intellectual property rights of two products to broaden its APS offering. ExpeTune and ExpeTune DB are two performance diagnostic products entirely complementary to both A.P.P. and the existing FreezeFrame mainframe performance tool. These products will be increasingly integrated over the course of the year to provide a single solution with the ‘easy to use’ and ‘easy to implement’ characteristics which are the key pillars of Macro 4 product design.

Encouraging progress has been made over the year by the SMS Division. The threefold strategy described above remains as the focus for the division over the coming year.

 Trading and contribution reconciliation

	2007  £m	Trading  £m	Exchange rate £m	2006  £m
Recurring revenue	7.6	-	(0.1)	7.7
New business revenue	5.4	(1.9)	(0.1)	7.4
Total revenue	13.0	(1.9)	(0.2)	15.1
Divisional operating costs	(7.7)	(0.5)	-	(8.2)
Gross divisional contribution	5.3	(1.4)	(0.2)	6.9

As with the SMS division, the strengthening of Sterling during the year adversely affected the DMS revenue and profits.  The table above shows that at constant exchange rates DMS revenue is £1.9 million down at £13.2 million (2006 £15.1 million) and the gross divisional contribution is £1.4 million lower at £5.5 million (2006 £6.9 million).

Markets and Solutions
Macro 4’s DMS division offers two complementary solutions within the Document Management (DM) and Enterprise Content Management (ECM) markets.

Printing Solutions
Macro 4 Intelligent Printing Solutions allow customers to significantly reduce the costs of their corporate printing infrastructures, whilst improving their reliability and effectiveness. There are two variants of these printing solutions:

1. Business critical printing
   Reliability is paramount when running business critical applications and this expectation extends to delivery of output from the application.  Macro 4’s Columbus OM provides sophisticated print management capabilities to enterprise applications such as SAP to ensure this reliability. Some of the largest SAP implementations worldwide in global companies use Columbus OM for output management.
2. Office printing
   Macro 4’s Intelligent Office Printing solution enables organisations with large numbers of office printers to significantly reduce costs and improve efficiency by providing centralised control of these resources. Cost savings are achieved through a dramatic decrease in the wastage of consumables, such as paper and toner, as well as potentially decreasing the actual number of printers required.

Content Management Solutions
Macro 4’s solutions allow customers to easily store, index, route and view any document based on its content. These solutions are typically implemented to improve specific processes or business functions. One such example is Severn Trent Water, which has selected Macro 4 to implement a solution enabling all customer utility bills to be digitally stored and made immediately available for online viewing in their call centres and back office functions. The objective of the implementation was to dramatically reduce costs and improve business processes within the customer services functions.

Strategy
The DM and ECM markets are highly complex, and are evolving rapidly as companies wrestle with issues such as compliance, customer communications, and corporate governance. Macro 4’s DMS business has solid foundations with an enviable customer base, and high quality and functionally-rich technology. The key to success in this market, given these foundations, is the choice of target market. Macro 4’s primary route to market for printing solutions is via Managed Services Providers (MSPs), where our solutions are embedded in managed services offerings. Significant progress has been made in developing these MSP relationships over the year, but these relationships typically require time to deliver the revenue benefits we anticipate this channel to market can deliver. 

Very large vendors such as IBM, Oracle, and EMC have entered the Content Management solutions market through acquisition, offering highly sophisticated solutions targeted at the world’s largest enterprises. At the opposite end of the spectrum, Microsoft offers SharePoint for basic document archiving. In response to these market changes Macro 4 is targeting the mid-market to offer specific point solutions to address departmental needs, based on solutions that are easy to implement and easy to use.

Risks
Identification and management of risk is an integral part of the Group’s day to day activities; please refer to the paragraph headed “Internal Control” in the Corporate Governance section of this Annual Report for more detail on the Group’s risk management systems. The principal risks and uncertainties faced by the Group are as follows:

Competition and key markets
The primary risk in the SMS business is the strength, size and market dominance of the competition. IBM, CA, and Compuware are worldwide multi-billion dollar companies. They exert enormous influence over both large customers and the market in general. However, Macro 4 can successfully compete with these companies, through providing alternative solutions that are innovative, high quality, and keenly priced.

The DMS business presents different risks. The competition is more fragmented, the market less well defined and more complex than with SMS. A level of consolidation is occurring as the notion of ECM gains momentum in the marketplace and the large IT companies such as IBM, Oracle, and EMC are establishing positions through acquisition. Macro 4 believes the technology currently offered by such companies to address enterprise-wide ECM is highly complex since it attempts to integrate core business processes. Therefore significant opportunities exist for solutions that are highly focused, clearly differentiated and simple to implement.

Intellectual property rights
The knowledge developed in the Group’s intellectual property rights (IPR) has been a key factor in its success and the protection of these rights remains critical.  The infringement of the Group’s IPR by third parties could damage the business so the Group has taken reasonable steps to ensure its IPR is appropriately protected by law.

Foreign exchange risk
With 67% (2006 65%) of revenue arising overseas, Macro 4 is potentially exposed to fluctuations in exchange rates, particularly the US dollar and the euro. The Group’s treasury policy is designed to mitigate the effect of fluctuating exchange rates to the extent it can without involving undue risk. 

Employees
The Group’s employees are vital to the success of the business. The quality and reputation of its products and services rely almost entirely on the quality of the people delivering them. If the Group were to lose key managerial, sales or technical staff this could seriously affect its business.  The Group endeavours to ensure that employees remain motivated.  Although careful steps are taken to minimise the risks posed by disaffected employees, such as protecting the Group’s systems and trying to resolve any potentially volatile human resource issues, disaffected employees with access to critical information could potentially harm the Group.  There is a slight risk they could do significant damage to the business and reputation of the Group by impairing its systems. They could also endeavour to misappropriate the Group’s intellectual property by revealing its source codes and trade secrets or facilitating access to its systems by third parties.

Research and development
The Group has a significant ongoing investment in research and development to enhance its existing products and create and develop new ones.  If these do not meet customer requirements or competitors introduce a rival product which better suits the market, this may have a material impact on revenue and profit.

International operations
The Group operates internationally and is subject to the tax laws and regulations of several countries. Although the Group is careful to comply with applicable international tax legislation, a tax audit in one of the countries in which it operates could expose it to a challenge to its transfer pricing policies or other treatment of revenue, costs and capital expenditure. There is a possibility that the same profits could be taxed in more than one jurisdiction.

Acquisitions
The Group may acquire new businesses or companies and/or dispose of companies or businesses. Any given acquisition or disposal will entail costs but has the potential to increase the profitability of the Group. Although in-depth due diligence would be carried out by the Group and its advisers prior to undertaking such a transaction, an acquisition could have a negative effect on Group profits in the event that it could not be successfully integrated into the Group or did not prove as valuable as anticipated.

General market
Factors beyond the Group’s control include material downturns or disruption in the financial markets and  suspensions or consolidation amongst the customer base. Such events could adversely affect sales of the Group’s products due to the consequential reduction in the budgets for technology expenditure and the reduced requirement for such products.

Financial reporting rules
Changes to financial reporting rules and accounting standards could affect the reported assets, liabilities or profits of the Group for future periods as well as periods already reported.

Future Growth
The Group believes that both divisions have significant organic growth potential, which will result from a consistent and sustained strategic approach in each area. Nevertheless, the Group continues to seek acquisition opportunities that fit with current activities from market, product, customer and culture perspectives.

2006/2007 Results - Further Details