MEDIASURFACE (MSR)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

MEDIASURFACE (MSR): Bolt Fromm the Blue - Oct 2007

RHPS Recommendation – SELL

Mediasurface has made a very disappointing loss of £1.3m in its latest financial year. Sales of Morello have suffered from confusion surrounding the launch of Microsoft’s Office Sharepoint Server. The hiatus in the banking industry has delayed some deals, while Pepperio has not sold as well as expected. This illustrates the vulnerability of small companies in the fast-moving software industry.

MEDIASURFACE (MSR): Popular Pepperio - May 2007

RHPS Recommendation – HOLD

Independent consultant the Butler Group has said, “Pepperio is an ideal solution for any SME company that does not have the resources to develop and maintain a bespoke website or to maintain the infrastructure. We would recommend a closer inspection of the product by any company that falls into that category and requires a Web presence.” This message seems to getting through because Mediasurface and its distribution partners are now signing up new Pepperio customers at the rate of about

15-20 per month. In order to promote sales of Pepperio, Mediasurface invested £400,000 on various marketing initiatives in the six month period to the end of February. This cut the reported profit to £0.4m, despite the fact that sales of the Morello Web Content Management product for large organisations generated 37% revenue growth for the group. The pipeline of potential business for Morello is better than ever, and as revenues from Pepperio, which is rented by its customers, grow it should contribute to profits from next year. This is the reason why earnings per share are expected to double to about 2.5p next year, which makes the shares look good value. I am not changing my buy limit just yet, though. So HOLD.

MEDIASURFACE (MSR): Foreign & Commonwealth Office takes Morello - Mar 2007

RHPS Recommendation – HOLD

Mediasurface has announced another important contract for its Morello content management software, this time with the Foreign & Commonwealth Office.

 Broker KBC Peel Hunt forecasts a £1.1m pre-tax profit for 2007 followed by £2m in 2008. Earnings per share rise from 1.3p this year to 2.5p in 2008, and Mediasurface is expected to have £3.4m of cash by the end of next year. HOLD.

MEDIASURFACE (MSR): Best of Breed - Feb 2007

RHPS Recommendation – HOLD

Mediasurface claims that the Morello product is “best of breed” and this was born out by the good annual results. The market for Web Content Management software is growing at 13% per year – but Mediasurface is growing sales three times as fast.

Meanwhile, Pepperio, the web management content product aimed at smaller customers, has also made a promising start and provides a more stable income than

that from the sale of Morello licences. Earnings per share were 0.9p and Mediasurface finished the year with £1.1m in the bank. The shares have responded well and I have raised my buy limit to 20p. HOLD.

MEDIASURFACE (MSR): Cherry-picking - Jan 2007

RHPS Recommendation – BUY

Here is one party game that you did not play on New Year’s Eve. Imagine you are the manager of the Ramada Hotel, Brighton. You have decided to organise a Murder Mystery Weekend, and want to advertise it on the internet. Time is short and you have tickets to sell. What do you do?

Until now the only answer has been to get down on your hands and knees in the IT department and beg. But wouldn’t it be much better if you could create your own advertisement on the Brighton Ramada’s website – and only have it denied if you are doing something that you shouldn’t? Like, for instance, not using the official corporate colour scheme, or failing to link your advertisement to other Ramada sites.

A work of art

In a nutshell, this is precisely what a nifty piece of software called Morello enables you to do. Morello was devised by a small AIM-listed company called Mediasurface, and you don’t have to take just my word for its efficacy. The Butler Group, an IT research organisation, has said “Morello should be considered by any organization looking to implement a specialist Web Content Management solution.” Another IT consultancy, Gartner Group, goes further. It says “Morello’s technology is sound, metadata, integration and digital asset management tools are strong, and the .NET-based rich client is a work of art.” While CMSWatch, which assesses content management software on behalf of potential buyers describes Morello as “a unique and spiffy Windows-based authoring and site management tool.” Now I don’t know whether the author of this has been reading PG Woodhouse, or if “spiffy” is a new technical term. But I think you get the point that Morello is pretty highly regarded by those who know.

Boys in blue

What is more important though, is that Mediasurface is actually selling Morello to some serious organizations. Take the Staffordshire Police for instance. It has chosen to use Morello, to “deliver standard features such as web pages for local policies, contracts, news, information on jobs and crime appeals. But additionally it allows the necessary secure access for the police force’s stakeholder groups and partners”. “The force will be able,” it continues, “to utilize some of the more ground-breaking features of Morello such as Instant Site, giving them the instantaneous power to launch mini-sites to support critical events or even major incidents. Sites that can be published minutes after the event and provide up-to-date information, contact details and press liaison information.”

This is very much in accord with the progress of the world-wide web, which is fast becoming one mega-blog. The vision is that content should be instantly created by the person on the spot rather than, after some delay, an editor. All that is required is that the new content is delivered in a way that conforms to the requirements of the system of the employer.

Right place, right time

So Mediasurface seems to be in a sweet spot, and to find out more about it I went down to Newbury to find it located in one of the town’s few offices not occupied by Vodafone. Like most executives of small software companies, Chief Marketing Officer Andy Peart and Chief Financial Officer David Deacon clearly think that their shares are undervalued, and in this case I agree with them. However, as with many small technology companies, the City’s perceptions are clouded by the recent past.

Mediasurface was founded in 1996, but by the time new directors came into the business in 2002 they found a company which had a technically sound product for creating and managing websites, but needed to come up with something different if it was to survive. So it developed Morello, and having seen a demonstration I can vouch for the fact that this software has “an interface that is massively intuitive”. In other words any idiot can use it, an essential quality if it is to be used by non-specialists down  the organisation.

Morello contains pre-built templates, definitions of content types and all the other components necessary to construct a website. Anybody familiar with the Windows operating system will find it easy to navigate, but its crucial features are the workflow trail of authorizations and sign-offs, which mean that content created locally will only appear if it is permitted. Morello also makes it possible for users to collaborate on the creation or review of content, again something that is becoming increasingly important in large organisations.

Citigroup, EMI and New Star, to name but a few

Aside from the Staffordshire Police, Mediasurface has signed up several noteworthy customers including Citigroup, EMI, New Star, the Oxford University Press, and InterContinental Hotels, while in the public sector it has sold Morello to many of the largest central government departments including the Office of Fair Trading, the Home Office and the Department of Education. These are chunky contracts. The initial licence and implementation fee is upwards of £100,000 with 22% of this amount then billed as an annual maintenance charge, to cover helpdesk support and upgrades.

Contract worth £1.2m

Recent contracts include one for the Department of Transport worth £1.2m over three years, and a second for the Office of Deputy Prime Minister worth £750,000.

But for real evidence of the strength of the product, last year Mediasurface won a deal with a top 10 global pharmaceutical company, which will use Morello to power its 300 global websites. The initial licence fee alone will be over £500,000.

Such a fee is obviously beyond the scope of small companies, and so for them Mediasurface has introduced Pepperio. This is a rental solution offered by Mediasurface’s network of accredited partners, and also by the agencies that typically design websites for small businesses. It allows the customer to run a professionally designed website without worrying about hardware, software, connectivity or other technical issues, all for a low fixed monthly fee.

Mediasurface sells both directly and through system integrators, and has offices in the Netherlands, the USA, India and Australia. Recently it has been adding to its sales team, especially in order to capitalize on November’s release of Morello 5.5. Until now the application of Morello has required an Oracle database, but this new version will support Microsoft ASP .NET, extending its reach into the vast Microsoft community.

Profits set to double

RHPS Verdict: First impressions are never more important than with a company’s website. If it is not user-friendly and up to date, then a potential customer will simply click away never to return. Morello and Pepperio enable websites to be up to the minute, while at the same time conforming to required standards. Morello has proved itself by winning major contracts against stiff competition, and the launch of Version 5.5 widens the field of potential customers. Profits are set to double next year, and the shares are just starting to move ahead. I rate the shares as a high risk BUY.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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