Introduction
I am pleased to report that, after a weak first half, Quadnetics produced a significantly stronger underlying operating performance in the second half of 2008/9 as anticipated in the Company’s interim statement. Nevertheless, results continued to be patchy across the various security and surveillance markets Quadnetics serves, with some areas seemingly more affected than others by the downturn of the past year or so. In particular, the gaming market in North America was subject to a sharp decline as projects for systems upgrades suffered lengthy delays, whereas Synectics Networks’ products and systems in all other regions produced good revenue and profits growth.
2008/9 was also a year of investment for Quadnetics, both in a new Group technology platform, and in establishing a more integrated operating structure. Firstly, we brought to market our suite of new H.264 digital surveillance products. The net cost of development of these products charged to the income statement in 2008/9 was £1.6 million (2008: £88,000). Secondly, we began during the year a substantial reorganisation of the Group’s operating and management structure to consolidate and further integrate our activities and so enable greater focus on specific core customer groups, and greater efficiencies of operating scale. We expect the benefits of these actions to become apparent in the second half of the 2009/10 financial year.
Results
In the year to 31 May 2009, Quadnetics recorded underlying profit (that is, profit before tax, exceptional reorganisation costs, goodwill reduction and share-based payment costs) of
£1.8 million (2008: £3.7 million) on revenue of £70.7 million (2008: £79.2 million). The primary reasons for the decreases in both revenue and operating margin are set out in the Business Review. Profit before tax was £0.5 million (2008: £4.4 million), after charging £1.35 million of exceptional costs related to the reorganisation referred to above.
Sales in the nature of recurring revenue, primarily maintenance and managed services, are a key measure targeted by the Group. These grew by just over 15% to £16.3 million.
Underlying earnings per share were 8.2p (2008: 18.9p).
The Group’s balance sheet remained ungeared, with net cash at 31 May 2009 of £8.1 million (2008: £7.9 million). Free cash flow, that is cash inflow from operations (excluding exceptional payments) less capital expenditure, was £1.9 million (2008: £2.5 million).
Dividend
The Board is proposing a final dividend of 4.5p (2008: 4.5p) payable on 4 December 2009 to shareholders on the register on 6 November 2009. If approved by shareholders, this would bring the total dividend for the full year to 7.0p (2008: 7.0p). The proposal of an unchanged dividend reflects both our strong balance sheet and, more importantly, the Board’s confidence in the prospects of the Group.
People
Last year was particularly difficult for our employees, given the amount of change they were asked to implement at the same time as responding to the increased pressures of unusually challenging markets. I would again like to pass on the Board’s sincere thanks for the continuing commitment, creativity and good humour of all those who help to make Quadnetics what it is.
As part of the process of recognising this commitment from our people, and ensuring that future performance is appropriately rewarded, the Board has recently put in place a revised share-based long-term incentive plan for senior managers, and we will be introducing shortly a new all-employee share ownership plan.
During the year we have had a number of changes among the Company’s executive Board members. In November John Shepherd was appointed Group Chief Executive. John brings with him an impressive track record of achieving growth in medium-to-large technology businesses in markets similar to those Quadnetics addresses, and the Group is already benefiting from his experience. Glenn Robinson, Technical & Business Development Director, left the Group in March this year.
Russ Singleton, founder of Synectics and Chief Executive of Quadnetics from 2002, has become Strategic Development Director, with the key responsibility for technology, products and business development across the Group. Russ has been the vital inspiration in the growth and evolution of Quadnetics, and I am delighted he has decided to re-focus his unique skills in this way.
Strategy
At the time of his appointment, the Board asked John Shepherd to lead a thorough review of Quadnetics’ strategy and objectives. The key conclusions from his review have reaffirmed our strategy of focusing on a small number of specialist security and surveillance end markets with complex or highly critical needs. We continue to believe that the growth potential in building on Quadnetics’ positions in mobile, extreme environment and high security surveillance applications is very substantial.
The changes John has introduced are centred on consolidating and further integrating the Group’s operations, as well as strengthening the senior management team. The new structure was formally put in place on 1 June 2009, and the operational changes are being implemented progressively across the current financial year. We expect the benefits to be measurable in terms of larger contract wins, more predictability in sales and increased overall operating margins. The newly recruited members of our senior management team, Paul Moonan and Graham Jones, come with records of having successfully led and grown larger businesses, and we look forward to the added impetus they will bring to achieving our objectives.
Outlook
The general economic background Quadnetics is addressing continues to be difficult, particularly in areas involving discretionary capital spending. Our gaming, financial services and defence customer sectors remain subject to lengthened sales cycles and therefore lower current revenues. Other areas, in particular oil & gas and mobile surveillance, continue to hold up well. Overall, the firm order book at year end was relatively low at £17.2 million (2008: £22.5 million); the sales pipeline, however, has risen to record levels since that date.
Synectics’ new products are continuing to gain sales, and we expect a much improved contribution from that area in the financial year just started. The actions taken to reduce costs through consolidating similar activities in a reduced number of sites will also have a positive impact on margins, from 2010 onwards. The actions initiated so far will, when fully implemented, result in annualised cost savings of approximately £1.8 million, as well as providing tighter operational control. Overheads have been increased in certain areas, notably senior operations management and sales resource in faster growing geographic regions.
The reorganisation and transition towards a more integrated structure initiated by our new Chief Executive are continuing and should be completed early in the second half of 2009/10. Combined with the still uncertain timing of large orders in several business areas, this will inevitably affect results in the short term, as costs are being incurred now to position the Group for economic recovery and future growth. Results for the first half of this financial year are therefore likely to be relatively weak, with again a much stronger second half expected. More fundamentally, the Board is confident that the increased senior management resources and more integrated organisation now in place give the Group the scalability to deliver consistent growth as we build on the strong market positions established over the past few years.
David Coghlan
Chairman
9 September 2009