SDL
21/08/2014 11:07
FLLYR
REL: 1107 HRS Solution Dynamics Limited
FLLYR: SDL: Full Year Financial Performance 2014
MANAGEMENT DISCUSSION AND ANALYSIS
Business Overview
Solution Dynamics Limited (SDL) operates in the Customer Communications
market (essential mail, interactive marketing communications & on demand
communications). The Company's products and services are represented by two
business segments. The first is Services, a digital print and mail house
services business that prints and provides document handling for mail items
such as invoices, statements and promotional material. These are then
distributed predominantly through NZ Post's mail delivery system. This
service differs from traditional printing in that each document printed is
personalised and unique.
The second sector, Software & Technology, develops and markets software
products related to a) multi-channel marketing communications, which includes
digital asset management, templating and campaign management, b) document
archiving and c) document composition. The company expanded its product
offering in FY2014 through the development and launch of a desktop mail
product (DejarMail) which allows users to electronically route their mail to
SDL for physical printing and posting. A range of further technology
services are offered relating to SDL's own software and the management of
client data around the formatting, electronic output and archiving of
customer communications.
Despite the slow erosion of mail volumes, the Directors believe there is
additional value to SDL's communication services in continuing to offer an
integrated platform across both physical print and digital technology. Some
communications are simply better suited to print and will likely remain so
for the foreseeable future. In other cases, use of software technology such
as Dejar Mail can improve the handling efficiency, management and cost of
physical mail.
The company operates from leased premises in Albany, Auckland.
Description of Revenue Streams
SDL Services
SDL Services predominantly provides mail house operations to high volume
postal mail users, mainly those in the business-to-customer sector although
the introduction of DejarMail expands the market for SDL's print and post
service down to the SME (small to medium enterprise) sector.
Services operates leased high-speed colour digital presses, as well as a
number of high-speed monochrome printers. In addition to digital printing,
Services also provides the usual ancillary document handling operations such
as automated envelope inserting and flowrap. Late in FY2014 SDL Services
added a further flowrap machine to handle increased customer volumes under an
expanded three year contract with a large magazine publisher. The Company
has also contracted to swap out two of its ageing printers for one more
modern, higher-speed colour unit at lower overall lease and per page print
cost.
Services revenue also includes a variety of outsourced functions or
components such as postage, offset printing, scanning, freight, paper and
envelopes. During FY2014 the company signed an access agreement with NZ
Post. This provides bulk mail discounts off NZ Post's retail rates, subject
to SDL meeting minimum volumes requirements over a twelve month period. The
access service began rolling out across SDL's client base during the second
half of FY2014.
In spite of the general mail volume market decline, SDL's H2 2014 mail
volumes grew 9% and digital print volumes increased 6%, supported by the new
business wins (new customers and new projects within existing customers).
These increases are partly driven by our technology-based approach to
customer communication solutions, as well as a strong customer service ethos.
SDL Services Revenue Breakdown
(all figures $000) FY2014 FY2013 Percentage
Change
Digital Printing and
Document Handling 5,286 5,133 3.0%
Outsourced Services 2,324 2,143 8.5%
Total Services Revenue 7,610 7,276 4.6%
SDL Software & Technology
SDL Software owns, sells and supports four products in the Australasian and
European markets:
1. Dejar
Dejar is a digital archival system that provides the ability to efficiently
store and retrieve electronic documents created from most formatting tools.
Dejar allows users to exactly reproduce the original document and access
these via a browser over the local network or via the Internet. The
reproduced image can be printed, faxed or emailed and Dejar's security and
history features ensure every image creation and subsequent access event is
recorded by User ID and date/time stamp.
2. Composer
Composer is SDL's electronic online document creation software. It is
flexible and allows customised documents to be built on the fly, based on
information retrieved from databases. It automatically creates templates,
documents and letters with predefined, customised content, formatted to each
customer's requirements. Composer allows companies to easily standardise
corporate documentation formats for all users, including regional and legal
variations. Templates, documents, emails, letters and newsletters created by
Composer are automated, ready to archive, print, publish online, or to email
and fax to customers in one step.
3. Bremy
Bremy is an integrated multi-channel management and publishing solution for
businesses across a broad spectrum of industries. It manages the work flow
of digital assets, through document creation and revision, to final email or
print-ready files and distribution through multiple channels, including
print, email, web, digital signage and mobile. It helps streamline and
provides integrity to document proofing and integrates with data sources to
produce complex documents such as online or physical catalogues.
4. DejarMail
A web browser based desktop mail management solution which allows customers
to route mail correspondence to SDL or any other service provider for
printing and delivery via post or any other medium. This delivers savings on
the total cost of mail for smaller businesses and in the cost of ad hoc mail
for larger companies.
Software & Technology revenue is earned from four sources.
The first is licence sales, where customers pay an upfront fee to acquire a
licence to utilise SDL's software and then pay subsequent annual maintenance
fees to receive support and the right to future upgrades. Licence revenue is
material to SDL Software's performance, but is also volatile from year to
year.
The second is an alternative to licencing, where, rather than pay an upfront
fee, customers opt to run SDL's software on a SaaS (Software as a Service)
basis. This sees them use a pay-as-you-go model, typically by way of a
per-document or per-electronic transaction charge. Under this model, SDL
will usually host the software (using third party hosting infrastructure) and
related data on behalf of the client. While SDL forgoes the benefit of the
large up-front revenue, the SaaS approach does build an annuity revenue base
that generates long term value.
Thirdly, the company offers bespoke software development services where this
is related to a customer using its software. An example is a customer
requiring a front end, web-based access portal to allow its clients to access
the underlying data being stored or managed by SDL's software.
The fourth is the provision of programming, consulting, business analysis and
design services that help clients to manage essential and marketing
communications both by mail and electronic transfer.
The SDL Software division encompasses all international software revenue and
all revenue from all of our software products and services. It also includes
Dejar revenue in New Zealand for digital document archival and management for
SDL Services' customers. Note that a significant part of the revenue from
DejarMail within the Asia Pacific region is generated in SDL Services from
the printing and postage component of the service.
In addition to New Zealand and Australia, both Dejar and Composer are sold
internationally, mainly in the UK and Europe. Bremy is predominantly a New
Zealand product, with several Australian and UK sites, although an improved
distribution arrangement in Australia during FY2014 means SDL is likely to
see increased growth from that market.
Software & Technology generated revenue of $3.32 million in FY2014, an
increase of 9.6% on the prior year's revenue of $3.03 million. The year saw
no large, one-off licence revenues achieved although several smaller licences
were sold and SaaS revenues continue to build.
Financial Performance
Revenue growth in FY2014 was approximately split between SDL's two main
divisions. However, the gains in SDL Services were predominantly from the
company's rollout of a postage offering as part of SDL's access agreement
with NZ Post. This is very low margin revenue. Gains in Software &
Technology were mainly from development revenue (largely Bremy) and modest
one-off licence revenue (also Bremy).
Summary Financial Performance
(all figures $000) FY2014 FY2013 Percentage
Change
Total Revenue 10,927 10,303 6.1%
EBITDA (Operating1) 853 544 56.8%
Depreciation 190 205 (7.3)%
Amortisation 128 291 (56.0)%
EBIT (Operating1) 535 48 n.a.
Provision for Doubtful
Debts 0 (151) (100.0)%
EBIT (Reported) 535 (103) n.a.
Interest 29 64 (54.7)%
Income Tax 2 0 n.a.
Net Profit after Tax (
as reported) 504 (167) n.a.
1. Operating numbers are non-GAAP and before Provision for Doubtful Debts
shown separately
The allowance for doubtful debts in FY2013 almost wholly related to SDL's
long-term distributor in the Czech Republic. SDL is now contracting directly
with the major end client in the Czech Republic.
Net profit is before a charge of around $6,000 for the Employee Share Option
(ESOP) which is separately accounted for by a charge to Other Comprehensive
Income (refer to the Note 2.7 for ESOP details).
SDL produced an improved and more consistent financial performance in FY2014
with the second half seeing improved revenue growth (partly low margin
postage) and underlying profitability. The second half is seasonally the
quieter half of the year and a period in which the company has historically
struggled to achieve profitability. However, better print asset utilisation
from improved client (both new and existing) volumes coupled with ongoing
cost controls now means SDL should be profitable across the whole year. The
following table highlights first and second half performance for the last two
financial years and then adjusts the reported EBITDA numbers to provide a
better picture of the underlying performance gains and trends.
SDL Half Financial Years
(all figures $000) 2H
FY2014 2H
FY2013 Percent
Change 1H
FY2014 1H
FY2013 Percent
Change
Total Revenue 5,442 4,770 15.2% 5,485 5,533 (0.9)%
EBITDA (Operating1) 352 271 29.9% 501 273
83.5%
EBITDA (Operating1) margin 6.4% 5.7% 9.1% 4.9%
EBITDA after one-off items2 352 171 93.4% 501 364 37.6%
Adjusted EBITDA margin2 6.4% 3.6% 9.1% 6.6%
1. Operating numbers are non-GAAP and before Allowance for Doubtful Debts in
FY2013
2. 1H FY2013 adds back $91,000 of restructuring. 2H FY2013 deducts $100,000
one-off cost benefit.
Statement of Financial Position, Liquidity and Debt
FY2014 saw SDL rebuild its financial strength following banking covenant
problems during FY2012 and FY2013. This was partly assisted by a $200,000
($190,000 net of legal costs) placement to sophisticated investors during the
first half, but more importantly, improved and sustainable financial
performance is now seeing SDL generate consistent free cash flow.
The company has moved from a position of net debt of $189,000 to a net cash
position of $749,000 over the year. As a result, SDL's banking facilities
with ANZ Bank have been reduced to an overdraft facility with $200,000 limit
(presently unused) and around $195,000 remaining on a term debt established
in early FY2013. It is likely the balance of the term debt facility will be
repaid early as SDL has the option of making lump sum payments without
penalty, subject to providing a short period of notice.
Selected Statement of Financial Position and Cashflow Figures
(all figures $000) FY2014 FY2013 Change
Net Bank Cash/
(Debt & Borrowings) 749 (189) 938
Non-Current Assets 1,478 1,622 (144)
Net Other Liabilities (507) (406) (101)
Net Assets 1,720 1,027 693
Cashflow from Trading 685 391 294
Movement in Working
Capital 256 166 90
Cash Inflow from
Operations 941 557 384
The bulk of the reduction in Non-Current Assets of $144,000 is accounted for
by amortisation of previously capitalised software development costs. The
amount of amortisation in FY2014 was $128,000 with previously capitalised
software now down to a balance of $106,000 which should be amortised during
FY2015.
SDL's Net Assets value of $1,720,000 has increased substantially over the
financial year. The increase is mainly from the improvement in the Company's
liquidity from net debt of $189,000 in FY2013 to a net cash position of
$749,000 in the current financial year. The balance of net assets is
predominantly represented by goodwill related to the original purchases of
the software products Dejar and Bremy. Bremy accounts for around three
quarters of the $981,000 carrying value of goodwill. An impairment test is
conducted against the carrying value of these assets each year and the
Directors believe the current value of these products is in excess of their
carrying values.
While the Company's Statement of Financial Position now shows a net-cash
position, the Company is also carrying leases on its premises and much of its
printing and document handling equipment. The annual cost of these leases
was around $1,237,000 in FY2014 and represents off "Balance Sheet" leverage.
SDL's premises lease at Canaveral Drive, Albany, runs until September 2016
and the Directors expect that material rental savings should be achievable on
either lease renewal or change of premises.
The total of future lease payment commitments excluded from the Statement of
Financial Position, mainly associated with the building lease and production
equipment, has fallen to $2,187,000 (2013: $3,329,000).
Dividends
The Company had approximately $748,000 of tax losses available at the Group
level (approximately $642,000 at the Parent company level) at the end of the
FY2014 and no imputation credits available. Until the Company resumes paying
tax in New Zealand, imputation credits will not be available to attach to
dividends. SDL does not intend to pay dividends until sufficient imputation
credits are available to allow fully imputed dividends to be paid. If the
Company's FY2015 profit improves on FY2014, then depending on the rate at
which non-Parent level tax losses are able to be absorbed, it is possible
that SDL may begin paying tax by late FY2015, at which point the Directors
will review the dividend position.
Operational Performance
Despite the industry-wide decline in general mail volumes, SDL's mail volumes
grew 9% in 2H '14 and digital print volumes increased 6% on last year,
supported by the new business wins (both new customers and new projects
within existing customers). The combination of the printing equipment
reconfiguration just completed plus a number of efficiency initiatives means
SDL's current equipment is now capable of increased utilisation with the
current level of labour force. SDL's technology solutions have been an
important component of these increases, and also aided in customer retention.
During FY2014, SDL re-established a distribution channel with a previous
partner to market Bremy in Australia. This is now working effectively and an
initial large customer has been signed up (on a SaaS basis). A pipeline of
further opportunities has been identified for SDL and the channel partner to
jointly market to in FY2015.
SDL signed an access partner agreement with NZ Post during the first half of
the financial year. This provides bulk mail discounts off NZ Post's retail
rates and should offset some of the removal of mail volume rebates the
company previously received.
New Zealand Postal Market
The domestic postal services market continues to evolve. NZ Post has amended
its Deed of Understanding with the government. From mid-2015, this will
allow it to reduce the number of delivery days per week for standard letter
mail in urban areas to not less than three, although NZ Post added that it
will continue to provide six-day-per-week delivery for premium mail.
NZ Post is also developing an electronic mail box to allow the secure
delivery, management, archiving and payment of electronic communications,
although the overseas track record of this type of technology suggests market
penetration will be limited unless it is mandatory. NZ Post is also facing
the geographic expansion of mail delivery by new entrant Freightways Limited,
which may, in time, offer a competitive postal network alternative for SDL
and its customers.
Changes at NZ Post are expected to create opportunities for SDL as it may
force some customers to accelerate moves to greater use of digital
communications solutions. SDL is well positioned to capitalise on this,
given its breadth of technology offerings. SDL has proven solutions for
digitally communicating with and servicing customers, and these can also
deliver significant communications and document creation cost savings.
Nevertheless, if NZ Post's three-day-a-week urban delivery causes an abrupt
switch towards greater electronic communications, SDL may suffer short run
lower utilisation of its printing assets and the earnings gains from SDL
Software & Technology may be insufficient to offset this.
Risk Factors
The physical transactional mail market will inevitably continue to decline in
volume. This has several industry-wide implications. First, the mail house
physical print sector will remain plagued by excess printing capacity.
Secondly, the likelihood of heightened competition implies ongoing pricing
and margin pressure, requiring SDL to continue to manage costs closely. The
risk is mitigated by our ability to add value through our technology
offering.
The NZ postal market may be disrupted by NZ Post's planned move to reduce the
frequency of urban deliveries and this may have a negative effect on the
company's mail house services operation.
SDL's top five customers provided 46% of the company's revenue in FY2014.
Loss of one or more of those customers could cause financial results to
differ materially from those outlined in the FY2015 Outlook section below.
Four out of five clients are under contract, mitigating this risk.
The Company's software provides critical document management and storage
functions for its clients. SDL needs to ensure it continues to maintain
adequate levels of software quality control.
The Company relies on several third party distributors to market and support
its software products, especially in international markets. There is no
certainty that these arrangements will be successful in meeting revenue
expectations and SDL may be required to devote more time and funds to support
its existing international distribution structures.
Technology Innovation
SDL operates in both the old economy print/mail house business and the new
economy document management business. While there are many areas where
printed mail is continuing to decline, some elements of print and mail remain
reasonably resilient. Nevertheless SDL must continue to innovate and develop
its software offerings to ensure the company is able to offer its customers a
range of channel agnostic methods to communicate with their customers.
Technology allows the benefits of SDL's mail house service to reach smaller
businesses. Most smaller businesses lack the scale or in-house technology to
utilise mail houses and typically will handle the printing, enveloping and
mailing process themselves. And even larger organisations will usually
utilise high cost in-house printing and mail for their ad hoc communications
needs. During FY2014, SDL developed a desktop mail solution, DejarMail, to
provide smaller businesses with access to lower cost printing and mail rates
by electronically routing their correspondence to enable consolidation to
capitalise on postal discounts and provide much needed control over the
communications including an audit trail.
DejarMail is cloud based, so accessed by users through their web browser and
provides access and control over the production and routing mail to SDL, as
well as review, archiving and reporting. SDL's initial client is a
multinational software supplier to a sector of the health industry, with
software installed in excess of 2,500 health practices in Australasia.
Rollout is presently proceeding across this client base of practices although
it is still too early to assess what the final take-up rate of practices
which switch on the DejarMail functionality will be. This health software is
also installed in practices globally, mainly in the UK, and SDL may possibly
have the opportunity to supply DejarMail to those users.
Employee Share Option Plan (ESOP)
During the second half of FY2014, SDL introduced an option plan for key
staff, which saw 415,000 share options issued to six staff members in March
2014 at an exercise price of $0.375 per share. These options may not be
exercised until at least three years have passed from the date of issue. The
ESOP is intended to ensure that staff interests are closely aligned with
shareholder interests and operate in conjunction with SDL's strategy to
attract and retain the very best people possible.
SDL's Managing Director, Nelson Siva, was not issued options in March due to
a requirement of NZAX Listing Rules that director participation in the ESOP
must have prior shareholder approval. The Directors (other than Mr Siva, who
excluded himself from the discussions) consider it in the best interests of
the company that he also participate in the ESOP and intend, at the upcoming
annual meeting of the company, to introduce the necessary resolution for him
to be issued options under the ESOP on the same terms as other key employee
participants.
FY2015 Outlook
With the liquidity in the Statement of Financial Position stabilised, costs
well under control, and a sustainable profit platform established, the final
leg of improving shareholder value - and the most challenging - is to grow
revenues.
In the slowly declining, traditional "ink on paper" Services division, which
suffers from excess industry print capacity, revenue growth is inevitably a
difficult exercise, especially without generating a "race to the bottom" on
pricing. Nevertheless SDL is managing to differentiate itself via both a
strong service culture that has produced some innovative print solutions, as
well as marrying print services up with SDL's technology offerings. These
efforts have seen improvements in capacity utilisation for SDL's printing
equipment and this is directly increasing profitability, which should
continue into FY2015.
SDL Software & Technology should show growth as the company becomes more
effective at leveraging sales channels, particularly in Australia in the near
term. While SaaS revenue is forecast to build steadily, we assume no major
license wins for FY2015.
SDL's budget outlook for FY2015 is for further improvement to profitability
with a base budget for net profit in excess of $600,000 although this is
partially dependent on modest growth in new business. The Company expects
its first quarter result to exceed budget as a result of one-off revenue
gains, however, the overall FY2015 outlook comes with the usual caveats that
competition in the mail house market remains intense and software licence
sales are difficult to predict and close.
For further information on this matter please contact:
John McMahon Nelson Siva
Chairman CEO & Director
Solution Dynamics Limited Solution Dynamics Limited
Mobile: +61 410 411806 Mobile +64 21 415027
End CA:00254190 For:SDL Type:FLLYR Time:2014-08-21 11:07:48
