Quadnetics Group plc

Preliminary Results for the year ended 31 May 2008

Quadnetics Group plc, a leader in the design, integration and control of advanced CCTV and networked video systems, reports its preliminary results for the year ended 31 May 2008.

Highlights

* Underlying profit represents profit before tax, goodwill reduction and share-based payments (credit)/charge. Underlying earnings per Ordinary share is based on profit after tax but before goodwill reduction and share-based payments (credit)/charge.

Commenting on the results, Russ Singleton, Chief Executive, said:  

"This was a year of considerable progress in a number of areas, in particular in strengthening our portfolio of specialist product and service solutions for electronic surveillance in difficult or complex environments. With accelerated investment in our new technology platform, we continue to build a sustainable and growing position in this attractive market."

For further information, please contact:

Media enquiries: 

Chairman's Statement

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 below. 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 £1.1m is covered 3.1 times by earnings, and the proposed increase reflects the Board's confidence in the prospects of the Group.

Business Review

Quadrant Security

The Group's security services division, providing integrated security systems, security management support and mobile surveillance services

Turnover                                    £58 million

Underlying Operating Profit    £3.5 million

Quadrant Security Group ("QSG") achieved an overall increase of 24% in turnover for the year to £57.9 million (2007: £46.6 million). Of this growth, around half came from an increase in very low margin pass-through turnover within its security management activities, so a fairer measure of actual achieved growth would show an increase of 12%. Although operating profits from the division declined from £4.2 million to £3.5 million, this reduction was entirely due to the previously flagged expected decline in profits from the run-off of old contracts within the security management activities. The overall result for the division was in line with the Board's expectations for the year.

As reported at the interim stage, the UK systems integration activities suffered in the first half from delays in award of central government contracts in the high security area. This effect was largely reversed in the second half, with resulting much improved turnover and profit levels compared with both the first half and the second half of the prior year.

Of particular note was the good progress made in our on-vehicle CCTV activities, which enjoyed a strong year in almost all aspects of its operations. In July we announced we had signed a new £1.5m contract for the supply, installation and maintenance of CCTV on Stagecoach's new buses. The 12-month deal will ensure all new buses ordered by Stagecoach in 2008-09 are fitted with state-of-the-art digital CCTV systems from Look CCTV, a subsidiary of Quadnetics.

Synectics

The Group's security technology division, providing security network products and software, hazardous area systems and defence surveillance technology

Turnover                                    £23 million

Underlying Operating Profit    £1.6 million

Synectics' turnover for the year grew by 11% to £23.1 million (2007: £20.8 million), the most positive component of which was continued growth of network products and software in the North American gaming surveillance market where turnover grew by 27%. In the core security network products and software area overall, average gross margins increased notably, though overhead cost increases associated with the new products restricted the relative bottom line growth.

As previously announced in May, problems with two large contracts in the hazardous area and defence surveillance activities, and related knock-on operational effects, had a significant impact on the Synectics division expected profit. Although turnover from those areas rose, their combined contribution to operating profits was around £1.1 million lower than in the prior year.

Management changes have been made and process improvements implemented in both areas. The two contracts, which nevertheless have been profitable, are now close to finalisation and are not anticipated to have any further negative impacts. The defence surveillance sector generally, though, continues to be adversely affected by customer budget constraints and contract award delays. 

Towards the end of the year, Synectics launched its important new range of H.264 digital video products, benefiting from investment in research and development costs capitalised in the year. This level of capitalised investment will reduce in the current year. Deliveries of Synectics' mobile video recorder will begin shortly, following recent completion of successful trials, and they have already received an enthusiastic response from existing and potential new customers. The manufacture of these products will be largely sub-contracted. We are currently finalising manufacturing agreements to ensure that we successfully achieve the benefits of higher volume manufacture as sales growth feeds through.

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.

David Coghlan

Chairman

3 September 2008

Consolidated Statement of Recognised Income and Expense

For the year ended 31 May 2008