Ann: HALFYR: SDL: SDL - Interim FY2013 Earnings A

• Release Date: 20/02/13 13:56
• Summary: HALFYR: SDL: SDL - Interim FY2013 Earnings Announcement
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SDL
20/02/2013 11:56
HALFYR

REL: 1156 HRS Solution Dynamics Limited

HALFYR: SDL: SDL - Interim FY2013 Earnings Announcement

The Directors of Solution Dynamics Limited (the Company) announce the
Company's results for the six-month period to 31 December 2012.

Interim 2013 Overview
The Company recorded a loss of $18,000 for the half year, after incurring
$91,000 of restructuring costs aimed at significantly lowering on-going
operating costs.  Much of the first half was affected by protracted
negotiations with several parties who expressed interest in acquiring
Solution Dynamic's mail house (Services) business. These discussions did not
result in a transaction as satisfactory terms were unable to be reached.
Moreover, the disruption to both management time and staff morale from the
sales process was considerable. The directors have committed to retaining the
Services operation.
The restructuring occurred at the end of the half and will result in a cost
base that is more appropriate for the scale of the business, both by reducing
central overheads and lowering operating expenses in the Software division.
This will progressively result in lower costs during the second half and the
annualised run rate of savings is in excess of $600,000, of which the bulk is
salaries.
Counter to industry trends of declining print and mail volumes, Services saw
modest gains in both transactional volumes and revenue, predominantly from
its existing customer base. This trend seems likely to continue, in the short
term at least. The Software business is inherently more volatile with lumpier
sales and there are initiatives in place to broaden our sales channels, but
nothing of substance to report at this stage. The cost reductions in the
Software business, along with on-going growth in recurring revenue, should
ensure the business is now sustainable and able to contribute to overall
performance.

Board Changes
The annual meeting in December saw the retirement of the Company's Chairman,
Colin Giffney. Both the Board and Management express their appreciation to
Colin for his tireless dedication and guidance, in particular his efforts
during what were difficult sales negotiations for the Services operation. The
annual meeting saw the election of John McMahon to the Board and he was
subsequently appointed as Chairman.

Summary Financial Performance
Earnings before interest, tax, depreciation and amortisation (EBITDA)
declined $94,000 on an overall decline in revenues of 13%. We had budgeted to
match the prior year's earnings, so the results were similarly adverse to
budget.

Consolidated Income Statement
Six Months to December 2012 v same period to December 2011 ($000)
     2012  2011  % Change
Total Income 5,533  6,364  (13%)
EBITDA    364 458  (21%)
Depreciation 138  137  1%
Amortisation 118  184  36%
EBIT  108  137  (21%)
Restructuring Cost   91  -  n/a
Interest     35  43  19%
Net (Loss) / Profit Before and After Tax (18)  94  (119%)

Services
Supported by new work, largely from existing customers, transactional volumes
continue to grow. The prior period includes a one-off, very low margin, print
job of $390,000 which did not repeat this year. Excluding that, Services
revenues grew 2.3% with a $75,000 increase in segment earnings.
The postal services market is likely to undergo many changes, largely brought
on by NZ Post's reaction to declining mail volumes. NZ Post is considering
fundamental changes to the manner in which it services its customers;
proposals include the launch of a digital post box service and a reduction in
letter delivery from six to three days a week. If these come to fruition,
they may result in an acceleration of the transition from physical print to
electronic mail solutions.
This would inevitably be disruptive to the entire print sector and our
Services business. Nevertheless, Solution Dynamics has a strong capability in
developing and utilising technology to manage and enhance postal and
communications services to its customers. We are well placed to capitalise on
this transition.

Software
Solution Dynamics' software products are an integral component of the overall
business and a key driver for the success of the Services business in the New
Zealand market. The push to generate sales for these products in Australia
and Europe has not delivered the expected results. Consequently, we have
reduced Software costs in order to ensure the business is in a more
sustainable position based largely on the present level of recurring revenues
(both maintenance fees and Software as a Service, or SaaS, income). This cost
reduction process has largely been completed.
Market prospects in Europe remain depressed. A number of potential sales are
currently progressing (in Europe, Australia and New Zealand) but have not
been included in our outlook for the current financial year due to the level
of uncertainty.
An evaluation of distribution options for the Software business is under way
to identify stronger sales channel partners and options for the marketing of
our products. In the meantime, we will continue with just core product and
sales specific development and a more limited sales and marketing effort.

Balance Sheet
The current balance sheet shows the level of debt is well up on the prior
interim result. However, this is solely because last year's result included a
special arrangement with one customer which saw a sizeable prepayment for a
print job.  Excluding this prepayment for comparison purposes, Solution
Dynamics' total debt is $139,000 lower than last year.
We remain in breach of our interest rate covenant (twelve month trailing
interest to EBITA) with ANZ Bank, although on our monthly forecasts we should
move back into compliance around April. A key priority for the Board and
management is to lower the company's debt level to both ensure we do not
subsequently breach our obligations, and to provide the capacity to take
advantage of any growth opportunities that might require capital expenditure.

The lower operating cost base and reduced level of software development
should produce higher free cash flows and these will be initially aimed at
reducing our debt obligations. This should, subject to meeting out present
earnings forecasts, begin to become apparent by financial year end.

Outlook
Following the conclusion of sale negotiations and the decision to retain
Services, the Company moved to simplify its management structure and reduce
its cost base. There is clear recognition that financial results have been
poor in recent years and a number of initiatives have been taken to address
this. These include reducing management headcount, a number of changes to
staff in other positions and better aligning the costs to revenue in the
Software division. Solution Dynamics has reduced the floor space it utilises
at the Company's Albany premises and will attempt to sublease the excess
capacity to offset some of the cost of the onerous lease terms (the lease
expires in late 2016).
Services continues to operate in an industry that suffers declining volumes
and excess capacity. The business of "ink-on-paper" remains highly
competitive and profitability is dependent on capacity utilisation.
Software is subscale for the number of products and geographic breadth of
sales, and needs more structure to its distribution strategy in particular.
Discussions with potential channel partners are underway but this will be a
slow process. Our pipeline of potential new business is reasonably solid,
although the current economic climate in our main markets means we are more
likely to sell our products on a SaaS basis. This is where the customers are
charged as they use the product, rather than paying larger upfront licence
fees.
Solution Dynamics is on target to meet its internal forecast of around a
breakeven result for FY2013. Meeting this target relies on modest incremental
revenue growth in both Services and Software and there are projects in both
divisions that would see this achieved, although some risk remains around the
timing of when these projects are finalised and the revenue booked.

For and on behalf of the board
John McMahon - Chairman (m: +61-(0)410-411 806)
End CA:00233172 For:SDL    Type:HALFYR     Time:2013-02-20 11:56:13