“2007/8 was in many ways a challenging year for Quadnetics, as the Company made the transition to a new platform of core proprietary technology and products.”
David Coghlan Chairman
Introduction
2007/8 was in many ways a challenging year for Quadnetics, as the Company made the transition to a new platform of core proprietary technology and products. This transition brought with it a necessary move to more structured development and operating disciplines to enable the Group to generate and manage continuing future growth.
In the event, Quadnetics produced underlying profits for the year that were somewhat down on the record results of the previous year, though still relatively solid against a testing market background.
Results
In the year to 31 May 2008, Quadnetics recorded underlying profit (that is, profit before tax, goodwill reduction and share-based payment costs) of £3.7 million (2007: £5.3 million) on turnover that increased to £79.2 million (2007: £66.1 million). The primary reasons for the decrease in consolidated operating margin are set out in the Business Review. Profit before tax was £4.4 million (2007: £4.4 million), reflecting the benefit of the write-back of previously expensed share-based payment costs.
Sales in the nature of recurring revenue, primarily maintenance and managed services, are a key measure targeted by the Group. These increased by 23% to £14.1 million (2007: £11.5 million).
Underlying earnings per share were 18.9p (2007: 25.9p).
The Group’s balance sheet remained ungeared, with net cash at 31 May 2008 of £7.9 million (2007: £5.6 million). Cash inflow during the year was aided exceptionally by the £2.1 million sale and leaseback of Synectics’ new building in Sheffield. Free cash flow, that is cash inflow from operations less capital expenditure, was solid at £2.5 million (2007: £(0.1) million), despite significantly increased development expenditure of £1.1 million on Synectics’ new products.
Dividend
The Board is proposing a final dividend of 4.5p (2007: 4.0p) payable on 5 December 2008 to shareholders on the register on 7 November 2008. If approved by shareholders, this would bring the total dividend for the full year to 7.0p (2007: 6.0p). This total dividend cost of £1.1 million is covered 3.1 times by earnings, and the proposed increase reflects the Board’s confidence in the prospects of the Group.
People
Once again I would like to thank Quadnetics’ employees on behalf of the Board for their continuing efforts and commitment to the success of the Group. I am regularly and pleasantly surprised by the extraordinary lengths many of our people go to in order better to serve our customers, and therefore build the value of our businesses.
Outlook
In my statement last year, I listed certain market trends the Company perceived as important to the future shape of the electronic security and surveillance systems market in which we operate. These were that:
- an understanding of information technology and networking will continue to create opportunities and ultimately be vital for success at any level;
- margins available on most hardware sales will be heavily eroded over time;
- sales and margins from software will grow and are likely to be sustainable;
- security systems integrators will continue to consolidate, becoming bigger, more diverse and more global;
- information technology companies will seek and gain an increasing share of the security market;
- digital video surveillance is still sufficiently complex and demanding that it is unlikely to become simply a sub-set of the IT industry, at least not for many years;
- certain specialist customer applications requirements are likely to diverge increasingly from mainstream high volume market offerings.
Our belief at the time was that Quadnetics was well positioned to address these trends, in particular because of its critical mass, extensive experience in the technologies of digital video, leading market positions in certain customer sectors, record of successful acquisitions, and its heritage of combining both technology development and customer applications integration.
That belief has not changed and, if anything, these trends now look to be accelerating.
The general economic background has deteriorated and Quadnetics clearly is not immune from these macro-economic effects. We are fortunate, however, in that many of the end users of our products and services are in sectors of the economy that are, currently at least, less exposed to the downturn. Although our financial services and defence customer sectors are showing signs of weakness, our markets overall, judged by the visible pipeline of future business we have won or expect to win imminently, look to be holding up well. The Company anticipates that position continuing, though with a lesser degree of confidence than we would ideally like. Our firm order book at 31 May 2008 was £22.5 million (31 May 2007: £26.9 million) but as at 31 July 2008 had risen to £31.1 million (31 July 2007: £26.7 million).
Despite a longer and more expensive development cycle than originally anticipated, we are increasingly confident of the prospects for Synectics’ new products. In the current year Synectics expects to make substantial sales of these products; nevertheless, because of amortisation of capitalised development costs and lower margins on initial batches of low volume manufacture units, as well as launch marketing costs in the UK and other markets, their first net contribution to Group profits is likely to be in 2009/10. As a result of this continued investment, and uncertainties in the immediate future for the UK and global economies generally, Quadnetics’ businesses are being managed in the expectation of fairly modest financial progress this year.
Overall, the Board remains confident in the quality and growth potential of the Group’s business, and is reassured by the resilience Quadnetics enjoys from its profitability, diversified revenue base and ungeared balance sheet.
We remain confident in the quality and growth potential of the Group’s business, and are reassured by the resilience Quadnetics enjoys from its profitability, diversified revenue base and ungeared balance sheet.
