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March 23, 1999

R&D Costs Bite Into Pegasus Profits

By CBR Staff Writer

Shares in Pegasus Group Plc slid 6.5% to 235 pence as, despite an earlier warning, the market was still disappointed by results for the full year. Net profits of the UK-based accountancy software company fell 34.3% to 1.3m pounds on revenue that rose 20.3% to 14.9m pounds.

Pegasus products are widely admired in the financial community but the company is suffering because it is confined to the UK market — whereas arch-rival Sage has pursued an aggressive acquisition strategy in Europe and the US. That leaves Pegasus highly vulnerable to the problems it faced last year, when higher than expected R&D costs for 32-bit Windows applications bit deep into profits. While not an unexpected difficulty for a software company, it represents a major problem for Pegasus, which lacks the revenue base to disguise such spikes in costs.

With 25,000 existing, deeply conservative customers still running on DOS, Pegasus has plenty of growth potential and it now has a new range of products to break into new markets. This year it begins a belated push into Europe, looking for partners rather than takeover targets, to get its software into the channels.

For the moment, Pegasus itself looks vulnerable to a takeover. Sage tried to buy it in 1996 and an undisclosed European company wooed it in April 1998 (CI No 3386) but Pegasus felt the offer was too low. After a grim year for the company, Pegasus may find another offer difficult to resist.

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