SDL
12/02/2015 10:17
HALFYR
PRICE SENSITIVE
REL: 1017 HRS Solution Dynamics Limited
HALFYR: SDL: Financial Performance H1 2015
EARNINGS ANNOUNCEMENT 1H FY2015
Management Discussion and Analysis
Solution Dynamics Limited ("SDL" or "Company") produced an unaudited net
profit after tax of $559,000 for the half year. This represents 71%
year-on-year growth. The result was largely driven by ongoing improvements in
SDL's traditional digital print business and contains no unusual items or
material one-off software licensing revenue.
Revenue growth was strong, up 22%, however, much of this stems from the ramp
up in low margin postage revenue following SDL's postal access agreement with
NZ Post late in 1H FY2014, and consequently, the Company's gross margin
percentage declined (although dollar gross margin grew).
Revenue gains in the traditional digital print and document handling services
arose from a combination of the annualised effect of new business from FY2014
as well as ongoing new business wins and incremental business from existing
clients gained in 1H FY2015. The ability of the Company's software technology
offerings to add value to client communications has been a crucial factor in
digital print gains. This technology edge, coupled with a strong service
delivery capability, is seeing SDL gaining market share in digital print,
more than offsetting the steady erosion in overall market print and mail
volumes.
As digital print and document handling revenues grow, SDL is seeing
increasing asset utilisation rates for its print imaging and document
handling equipment. The company has reconfigured work practices and
undertaken modest capital expenditure to improve physical throughput rates,
resulting in sustainable cost and productivity gains during the half year.
Despite the positive impact from software technology on print revenue, SDL
has not been successful to date in gaining material software and technology
new business contracts. Nevertheless, the Company is continuing to broaden
third party distribution channels to increase its sales reach. This is a slow
process and while SDL is making progress it is as yet too early to tell
whether these efforts will prove successful. The pipeline of software
opportunities is strong and SDL is focused on improving what is an
historically low ratio of converting prospects-to-sales.
The Company's balance sheet continues to strengthen with half year net cash
on hand (i.e. cash less interest bearing debt) of $1,108,000. All bank debt
was repaid during the half year. The balance sheet does understate the
Company's effective financial gearing as most of SDL's plant and equipment is
financed under operating leases.
During the half year the Company's CEO, Nelson Siva, was included in SDL's
Employee Share Option Plan (ESOP) following shareholder approval at the
annual meeting. Nelson was issued 140,000 options on the same terms and
conditions as the initial ESOP tranche earlier in 2014. The interim financial
statements include a $14,000 charge to Comprehensive Income for the non-cash
ESOP expense.
Financial Performance
Earnings before interest, tax, depreciation and amortisation (EBITDA)
improved by $221,000 (+44%) on sales volumes that rose 22%.
Summary Financial Performance Yr-on-Yr Yr-on-Yr
(all figures $000) 1H FY15 1H FY14 $ Change % Change
Total Revenue 6,711 5,485 1,226 22.4%
Cost of Goods Sold 3,698 2,810 888 31.6%
Gross Margin 3,013 2,675 338 12.6%
Gross Margin (%) 44.9% 48.8%
Selling, General & Admin Costs 2,294 2,174 120 5.5%
EBITDA 719 501 218 43.4%
EBITDA Margin (%) 10.7% 9.1%
Depreciation 103 94 9 9.6%
Amortisation 48 63 -15 -23.8%
EBIT 568 344 224 65.0%
Interest 8 17 -9 -52.9%
Net Profit before Tax 560 327 233 71.1%
Taxation 1 0 1 n.a.
Net Profit after Tax 559 327 232 70.8%
The EBITDA gain is partly the benefit of higher gross margin from revenue
growth in digital print and document handling, coupled with holding selling,
general and administration (SG&A) costs to a low year-on-year increase.
Underlying SG&A costs remain well managed; most of the SG&A increase is
accruing for higher staff incentive payments as a result of improved
operating results.
SDL has grown its digital print and document handling revenues despite the
ongoing erosion of mail volumes. This is the result of market share gains and
we expect this trend to continue as a result of:
? SDL's ownership of intellectual property (IP) relating to document
creation, handling and archival, enabling technology-based solutions to
clients' communications needs. This also provides an ability to quickly meet
changing client requirements;
? a strong service-oriented and customer-focused culture; and
? new products such as D?jarMail driving growth in variable print-on-demand
volumes.
Around one-third of the growth in digital print revenue is attributable to
non-mailing, variable print on demand services.
SDL currently lodges well in excess of 20 million mail packs a year with NZ
Post. After signing a postal access agreement with NZ Post in late 2013, SDL
began offering postage services. Currently, more than 10% of SDL postal
lodgements fall under the SDLPost programme with NZ Post. This programme is
primarily responsible for the revenue increase in the Outsource Services
category shown in the following Revenue Analysis table. SDLPost is only a
very modest contributor to earnings as margins are very low. However, it
supports the Company's strategically important D?jarMail growth opportunity
(which simplifies handling of mail-based ad hoc communications for customers)
and has largely offset the reduction in NZ Post's mailhouse rebate scheme
revenue.
Revenue Analysis Yr-on-Yr Yr-on-Yr
(all figures $000) 1H FY15 1H FY14 $ Change % Change
Software & Technology 1,784 1,713 71 4.1%
Digital Print & Document Handling 3,110 2,691 419 15.6%
Outsourced Services 1,817 1,081 736 68.1%
Total Revenue 6,711 5,485 1,226 22.4%
While SDL's market share gains are more than covering general mail volumes
erosion, the development of non-mailing revenue is key to successful longer
term growth. We continue to develop SDL's core software products and are
building distribution channels, although channel development progress is
slow. The 4% revenue growth rate for the first half was below our internal
target although recurring revenues grew at a faster pace and the second half
pipeline of opportunities is robust. Despite not meeting first half
expectations, the contribution of software to our revenue growth in digital
print and document handling was critical and is a key differentiating factor
in gaining new digital print and mailing business wins.
Balance Sheet, Liquidity and Debt
SDL repaid its outstanding bank debt during the half year and closed the half
year with net cash on hand of $1,108,000. A $200,000 overdraft facility
remains in placed but is presently unused.
Selected Balance Sheet and Cashflow Figures Yr-on-Yr Yr-on-Yr
(all figures $000) 1H FY15 1H FY14 $ Change % Change
Net Cash on Hand (net of debt) 1,108 174 934 536.8%
Non-current Assets 1,480 1,544 -64 -4.1%
Net Other Liabilities -307 -171 -136 79.5%
Net Assets 2,281 1,547 734 47.4%
Cashflow from Trading 708 503 205 40.8%
Movement in Working Capital -126 -235 109 -46.4%
Cash Inflow from Operations 582 268 314 117.2%
As a result of the above items, book value (net assets) has increased by 47%
to $2.28 million. Working capital remains well controlled.
SDL made capital expenditure additions during the half totalling $224,000.
The key item purchased provided incremental capacity as well as redundancy
for existing document handling equipment to support a substantial new
contract. This contract generated revenue of approximately $230,000 during
the half year.
In reviewing the above cash flow figures, a degree of seasonality should be
noted. Historically, sales and earnings are substantially higher in 1H
compared to 2H and accordingly the movement in working capital is negative in
1H, and positive in 2H.
The strength of the balance sheet and the cash flows now provides SDL with
the flexibility to take advantage of any growth opportunities that might
require capital expenditure, although the directors intend to adopt high
return on investment hurdle rates and require short payback times before
making incremental investment in print-related assets.
The Company has a cautious stance in relation to acquisitions with a strong
preference for organic growth. The directors are conscious that acquisitions
often fail to add value to shareholders. Acquisitions would typically either
need to be "bolt ons" where removal of duplicated costs means the effective
acquisition multiple is very low, or product extensions where the acquisition
fills a gap in SDL's software portfolio plus SDL has the opportunity to sell
its software into the acquired company's customer base.
Taxation and Dividend Policy
The Company commenced FY2015 with tax losses of approximately $748,000, split
between losses at the New Zealand parent company (approximately $642,000) and
losses at SDL's United Kingdom subsidiary (approximately $106,000). If the
Company is successful in achieving its earnings targets for FY2015 then it is
likely that some tax will be payable for the year. SDL has already started
accumulating imputation credits.
The directors have previously noted the Company would not pay dividends
unless it was able to provide full imputation. To the extent that SDL does
pay tax in FY2015, the directors advise that the company will pay a dividend
to fully utilise any imputation credits generated, noting that any tax
liability is likely to be very modest for the current financial year.
On an ongoing basis the directors intend to pay out at least 75% of after tax
earnings as dividends, subject to sufficient imputation credits being
available to allow full imputation. This forecast payout ratio may be reduced
depending on the availability of organic growth opportunities that require
more than business-as-usual capital expenditure, or acquisition
opportunities.
FY 2015 Outlook
The half year result was around expectations, although a couple of contracts
that were expected to be completed in December were delayed until January.
The Company's forecast for the full year contains an element of new business
which has yet to be secured. However, the new business "gap" is narrowing,
partly the result of new business secured during the latter part of 2014
which is expected to be progressively implemented during the second half of
this financial year.
While there is still a degree of new revenue required to meet SDL's forecast,
the pipeline of new business opportunities suggests the Company should
generate full year profit before tax in excess of $700,000.
For further information on this matter please contact:
John McMahon
Chairman Solution Dynamics Limited
Mobile: +61 410 411806
Nelson Siva
CEO & Director Solution Dynamics Limited
Mobile +64 21 415027
End CA:00260566 For:SDL Type:HALFYR Time:2015-02-12 10:17:13
