CML Microcircuits Regulatory News (CML)

22 November 2016

CML Microsystems Plc

Half Yearly Report

CML Microsystems Plc, ("CML" or "the Group"), which designs, manufactures and markets mixed-signal and Radio Frequency (RF) semiconductors, primarily for global communication and solid state storage markets, is pleased to announce results for the six months ended 30 September 2016.

Financial Highlights

· First half results materially exceeded initial expectations for the period

· Group revenues up 19% to £13.04m (H1 2015: £11.00m)

o Sicomm contribution of £0.40m (H1 2015: £Nil)

· Gross profit up 17% to £9.31m (H1 2015: £7.98m)

· Profit before tax up 28% to £1.94m (H1 2015: £1.51m)

· Adjusted EBITDA up 27% to £4.23m (H1 2015: £3.33m)

· Basic EPS up 33% to 10.25p (H1 2015: 7.69p)

· No borrowings and net cash of £11.56m (31 March 2016: £13.60m), following payment of net £3.58m cash consideration for the acquisition of Sicomm and £1.13m dividend payment

 Operational Highlights

· Successful acquisition of Wuxi Sicomm Technologies Ltd ("Sicomm"), expanding the Group's technological expertise and Far East presence

· Launch of three new products across Storage and Communications market sectors, expanding our addressable market

· Successfully implemented new sales and marketing structure in the Americas

· Continued investment in Research and Development to provide for long-term growth

· Several design wins from prior periods now entering the early ramping phase, expected to contribute to revenue growth in H2 FY17 and subsequent years

· Significant number of the Group's top 40 customers increased their spend in the period

Chris Gurry, Group Managing Director of CML, commented: "We are pleased with the operational progress we have made during the first half. We have continued to expand our product range, increased sales revenue from the existing customer base, made good progress with the integration of the Sicomm acquisition and successfully implemented a new operational structure within our American business."

"Our strong financial position, with a healthy cash balance, tangible assets and no borrowings provides us with the confidence to continue to invest in the expansion of our business. Trading in the second half of the year has begun well and we are confident of a full-year advance in both revenues and profitability."

All figures above represent Group total including the two month contribution from Sicomm, unless otherwise stated.

The information contained within this announcement is deemed by the Group to constitute inside information under the Market Abuse Regulations (EU) No. 596/2014.

About CML Microsystems PLC

CML designs and develops semiconductors for the industrial storage and communications markets. The Group utilises a combination of in-house and outsourced manufacturing and has trading operations in Europe, the Far East and the USA. CML targets niche markets with strong growth profiles and high barriers to entry. It has secured a diverse, blue chip customer base, including some of the world's leading telecoms equipment providers and industrial product manufacturers.

The spread of its customers and products largely protects the business from the cyclicality usually associated with the semiconductor industry. Growth in its end-markets is being driven by factors such as the ever-increasing trend towards solid state storage devices in the commercial and industrial sectors, the upgrading of telecoms infrastructure around the world and the growing prevalence of private commercial communications networks for voice and/or data communications linked to the industrial internet of things (IIoT).

The Group is cash-generative, has no borrowings and is dividend paying.

Chairman's statement

Strong revenue growth coupled with stable gross margins has meant that our first half unaudited results have materially exceeded initial expectations. This revenue uplift, assisted by weak Sterling and a two month contribution from Wuxi Sicomm Technologies Ltd ("Sicomm"), was underpinned by good growth in the underlying businesses, which is extremely pleasing. Our objective is to achieve long-term, sustainable revenue growth which, due to the natural gearing within our business, provides the ability to generate accelerated profit growth.

It is evident that we are now beginning to see the results of the strategic investments that we have made into the business over the last few years. With our focus on R&D and customer support, we have a more diverse customer base, an excellent customer reputation, and are delivering leading products within our market niches through our global distribution network.

One of the important strategic and operational highlights during the first half of the year was the completion of the acquisition of Sicomm, a Chinese fabless semiconductor and solutions provider for the global wireless communications markets. Sicomm's product range, trading relationships and technical support abilities complement and enhance the Group's existing skills and strategy. These are expected to enable compelling technical and commercial benefits for our customers. We have been pleased with the success of the integration thus far and look forward to further growth from the business.

The Group delivered a good trading performance, with growth from both Storage and Communications market sectors (Communications formerly reported separately as Wireless and Wireline Telecom). Revenues grew 19% in the half year to £13.04m (H1 2015: £11.00m). Organic growth, excluding the Sicomm contribution, was 15%. The operational gearing within the business contributed to a 28% growth in profit before tax to £1.94m (H1 2015: £1.51m), while maintaining high levels of investment into R&D. Cash levels, which are always a key management focus, stood at £11.56m (31 March 2016: £13.60m) representing a very positive outcome following payment of an increased dividend and the cash element of the purchase of Sicomm during the first half. We have no borrowings.

Considering this strong performance, I must thank our employees for their dedication and hard work. They and our growing customer base remain fundamental to the future growth of the business.

Market conditions appear to have improved and importantly there are solid underlying growth drivers within each of our target markets. This coupled with our strong financial position, positive trading momentum, expanded business and strengthened management team provide us with the opportunity to continue our pursuit of growth both organically and through targeted acquisitions. I am confident we are progressively putting in place the building blocks for the long-term success of CML.

Nigel Clark

Group Non-Executive Chairman

21 November 2016

Operational and Financial Review

Introduction

This has been a good first half of operational progress. We have continued to expand our product range through the launch of three new products across our Storage and Communications market sectors. We have increased sales revenue from the existing customer base, secured new customers, made good progress with the integration of the Sicomm acquisition and successfully implemented a new operational structure within our American business.

Financial Review

Total Group revenues for the six-month period amounted to £13.04m (H1 2015: £11.00m) which included a two month contribution of £0.40m from newly acquired Sicomm. Gross margins remained relatively stable leading to a 17% increase in gross profit to £9.31m (H1 2015: £7.98m). The Group has a somewhat natural hedge in respect of US dollar and euro exchange rate exposure.

Revenue growth was driven predominantly by increased shipments with existing long-term customers, with a significant number of our top 40 customers increasing their spend. In particular, our USB storage products started to generate meaningful revenues whilst our digital voice and data modem IC's contributed strongly.

Distribution and administration costs increased to £7.81m (H1 2015: £6.62m) due to a combination of a general increase in direct staff costs, higher amortisation levels for the R&D investment, and the addition of Sicomm.

Profit from operations climbed 29% to £1.99m (H1 2015: £1.54m). This increase consisted of 11% from the improved trading performance, with the balance derived from government grants received outside of the UK and rental income from the letting of commercial properties that the Group no longer trades from.

Profit before taxation amounted to £1.94m (H1 2015: £1.51m) with £1.81m generated from non-acquired operations and the remainder attributable to Sicomm.

Following payment of a £1.13m dividend in respect of the previous year (H1 2015: £1.12m) and a net cash outflow, including all costs relating to the Sicomm acquisition of £3.47m, cash balances fell from £13.60m at the 31 March 2016 to £11.56m at 30 September 2016. Inventory levels were £1.81m against £1.57m at 31 March 2016.

The basic earnings per share recorded from overall operations was 10.25p including a 0.75p contribution from Sicomm (H1 2015: 7.69p).

Strategy Overview

Our business is focused on two important niche markets, the industrial storage market and the industrial communications market, where our proprietary IP along with the quality and reliability of our technology sets us apart from our peers and makes us an integral part of our customers' products. We have developed a strong reputation in both of these markets and have a world-class customer base and an established sales network.

Growth in both markets is ultimately being driven by the on-going demand for increasing amounts of data to be delivered faster and stored more reliably and securely. We are committed to generating a diverse revenue stream across a broad range of customers and products. We are a single-source supplier to our customers, meaning that once designed in, the displacement of our chips would require end-product redesign.

R&D is a key tenet of our growth strategy. Our focus is on developing products which will lead to design wins with new and existing customers that we believe have the potential to develop into long-term, significant revenue generators. We intend to complement our organic growth with appropriate acquisitions.

Storage

The main element of our strategy within Storage is to ensure that the Group continues to increase business with our existing customers whilst simultaneously adding new customers through R&D investment. Our focus has been on expanding our product portfolio to include all major interface standards used within our target industrial end-markets and interoperation with all relevant third-party Flash Memory devices from the global tier 1 flash memory suppliers.

We have transitioned from a narrow "Controller" product portfolio with only CompactFlash as the available interface, to an enlarged product range that now also includes USB, SD, SATA & MMC interface technologies.

Through the period, Storage revenue increased by 17% to £6.56m (H1 2015: £5.60m). In line with our strategy, in the first half of the year we added our proprietary hyMap technology to the USB product range which greatly improves the reliability of non-industrial class flash memory technology. The flash memory itself is typically the most expensive component of the solid-state storage device and, as the capacity of the storage devices increase, hyMap enables our industrial customers to use memory that has a lower "cost per bit".

Communications

Our strategy within Communications (previously referred to as our Wireless and Wireline markets) has been to grow customer share and expand the customer base through R&D investments that increase the addressable chip content within the customers' end product. This includes expanding our product portfolio to include separate IC's with additional functionality and operation over a larger Radio Frequency (RF) range capable of addressing wider bandwidth applications. This significantly expands the size of the market that can be addressed.

We have progressed well with this strategy in the first half of the year evidenced by a 22% increase in revenue to £6.38m (H1 2015: £5.21m) with 15% coming from organic growth. We released two new products; one which is ideally suited to voice-over IP (VoIP) applications and digital voice interconnect systems and one enhanced Analogue Front End (AFE) IC for software defined radio (SDR) that bridges the gap between digital radio's RF section and the customers signal progressing circuitry.

In the second half of the year, we are planning to release a new Flash Memory controller, further hyMap enhancements and three new Communications products - all in keeping with our strategy for sustainable growth.

In total, the Group has released nine new products in the last three years, however it is important to note that first half revenues are predominantly from products that were released pre-2013. The more recent products provide us with a pipeline of additional future revenue, with numerous design wins already having been secured.

Market Developments

As previously stated, the Group is focused on two industrial markets which each show solid long-term underlying growth trends. The overriding factor in both is the incessant demand for ever-greater amounts of data, to be transmitted and stored more quickly and securely.

Within the industrial data storage market there are several specific areas which are going through exciting transitions, and for which we have secured design wins or are in the process of developing new products. These areas include the telecoms/network infrastructure market, industrial automation and the in-vehicle infotainment market.

A number of the major original equipment manufacturers (OEMs) or tier 1 suppliers to those OEMs in each of these markets are our customers meaning we are well positioned to benefit from the growing demand.

Within the Communications market, the exciting growth areas include: the transition to higher-capacity digital networks within voice-centric markets and, in data-centric markets, the increasing data throughput requirements within terrestrial and satellite communications applications. The latter is required to meet the needs of the growing Machine to Machine (M2M) and the Industrial Internet of Things sectors (IIoT).

Again, we are already suppliers to or working with many of the leading OEMs in these areas and believe we are well placed for future growth.

Key customer developments

During the period we were pleased that a substantial amount of our top 40 current customers increased their business with CML, predominantly through delivery of our more established semiconductor products but also through entering the shipping phase of relatively recent new products. By maintaining a high level of R&D spend we are constantly ensuring that we stay ahead of customer demand across our two market sectors. We believe we are in a strong position and have an increasing number of opportunities at all stages of our new business pipeline.

Products entering the early ramping phase include our latest USB controller; with one of the global leaders in flash memory technology adopting the solution and expected to complete full qualification in the second half.

For the Communications sector, prior design-wins achieved with customers for both wireless voice and wireless data products have commenced volume production and are in the early stages of growth.

Operational Development

Sicomm acquisition and integration

The need to improve market coverage in the Far East and more specifically in China to drive growth in that market, coupled with the opportunity to acquire a company with complementary solutions, led to the acquisition of Sicomm. This is an important strategic move targeted to give a long-term benefit. This acquisition builds on our existing resources in the region and provides an established Chinese trading operation with an instant impact. Coupling these benefits with those of the complimentary product line, with excellent cross-selling potential, demonstrates the compelling nature of this acquisition.

Throughout this year we will continue integrating Sicomm but this will not detract from pursuing suitable acquisition opportunities.

New Sales and Marketing structure

Operationally, important investments and enhancements were made in sales, marketing and engineering support resources to ensure the Group is positioned appropriately to handle the increasing customer engagement levels that an expanding product range demands. Our Americas business is already benefitting from efficiencies that arise from having dedicated resources allocated to specific sectors and products. Additionally, our structure is now inherently scalable to facilitate future growth objectives. In the second half of the year, we intend to continue enhancing our global operating structure through the investment in people and practices that will maximise our opportunities for success.

Outlook

Our strong financial position, with a healthy cash balance, tangible assets and no borrowings, provides us with the confidence to continue to invest in the expansion of our business. Trading in the second half of the year has begun well and we are confident of a full-year advance in both revenues and profitability.

Chris Gurry

Group Managing Director

21 November 2016

Condensed consolidated income statementfor the six months ended 30 September 2016

* See Note 11 for definition and reconciliation

Condensed consolidated statement of total comprehensive income

for the six months ended 30 September 2016

Condensed consolidated statement of financial positionas at 30 September 2016

During the six month period ending 30 September 2016, 774,181 shares in CML Microsystems Plc were issued in part consideration for the acquisition of Sicomm equity to the value of £2,632,000 (see note 8). As a significant non-cash transaction this is not reflected in the above consolidated cash flow statement.

Condensed consolidated statement of changes in equityfor the six months ended 30 September 2016

Notes to the condensed consolidated financial statements

for the six months ended 30 September 2016

1 Segmental analysis

Information about revenue, profit/loss, assets and liabilities

Geographical segments

The acquired Sicomm Group of Companies are included within the 'Far East' classification below.

Segmental reporting is, in accordance with IFRS 8, based on internal management reporting information that is regularly reviewed by the chief operating decision maker. The measurement policies the Group uses for segmental reporting under IFRS 8 are the same as those used in its full year financial statements.

Revenue

The geographical classification of business turnover (by destination) is as follows:

2 Dividend paid and proposed 

A dividend of 7.0p per 5p ordinary share in respect of the year ended 31 March 2016 was paid on 29 July 2016 (2015: 6.9p per 5p ordinary share in respect of the year ended 31 March 2015). No dividend is proposed in respect of the six months period ended 30 September 2016 (2015: £Nil per 5p ordinary share in respect of the period ended 30 September 2015).

3 Income tax expense

The Directors consider that tax will be payable at varying rates according to the country of incorporation of its subsidiary undertakings and have provided on that basis.

4 Earnings per share

The calculation of basic and diluted earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year, as explained below:

On 10 June 2015, the Company purchased 50,000 ordinary shares of 5p each in the Company at a price of 376.5p per ordinary share. These shares are held in treasury and are excluded from the denominators listed above for the purposes of earnings per share calculations.

5 Investment properties

Investment properties are revalued at each discrete period end by the Directors and every third year by independent Chartered Surveyors on an open market basis. No depreciation is provided on freehold investment properties or on leasehold investment properties. In accordance with IAS 40, gains and losses arising on revaluation of investment properties are shown in the income statement. At 31 March 2015 the investment properties were professionally valued by Everett Newlyn, Chartered Surveyors and Commercial Property Consultants, on an open market basis.

6 Analysis of changes in net cash

The cash flow above is a combination of the actual cash flow and the exchange movement.

7 Retirement benefit obligations

The Directors have not obtained an actuarial IAS19 Employee Benefits report in respect of the defined benefit pension scheme for the purpose of this Half Yearly Report.

8 Acquisition of Sicomm

Following the definitive agreement to acquire all its shares announced on 27 May 2016, and having satisfied the principal regulatory conditions and other transaction closing conditions, the Group took control of the China‑based Wuxi Sicomm Technologies Ltd ("Sicomm") and affiliated companies on 3 August 2016. The total consideration was $11.05m (£8.01m), payable in cash and in shares (see below). The 774,181 new shares were also admitted for trading by the London Stock Exchange in August 2016. The majority of the shares are subject to specific lock‑in restrictions over a three year period and were provided under existing AGM resolution approval.

Founded in 2003, Sicomm is a fabless semiconductor company and solutions provider specialising in the development of integrated baseband processors and RF semiconductors for global wireless communication markets. Sicomm has approximately 30 employees and is headquartered in Wuxi, China, with offices in Shanghai and Quanzhou. The company's product range, which partially competes with existing CML solutions, is targeted for use within consumer, industrial and professional radio products and focuses on the customer need to achieve the right balance between cost, functionality and technical performance.

This acquisition expands the Group's product portfolio, strengthens its Far Eastern regional support resources and reinforces CML's position as a leader in the professional and industrial wireless communication semiconductor market.

For the above reasons, combined with the anticipated profitability of Sicomm products in other Group markets, synergies to arise from integrating the Sicomm business into existing Group businesses, plus the ability to hire the workforce of the Sicomm group of companies (including the founder and management team), the Group paid a premium over the acquisition net assets, giving rise to goodwill. All intangible assets in accordance with IFRS3 Business Combinations were recognised at their provisional fair values on the date of acquisition, with the residual excess over net assets being recognised as goodwill. Intangibles arising from the acquisition consist of brand values, customer relationships and intellectual property and have been independently valued by professional advisors.

The following table summarises the consideration and provisional fair values of assets acquired and liabilities assumed at the date of acquisition:

There are no non-controlling interests in relation to the Sicomm acquisition. Fair values in the above table have only been determined provisionally and may be subject to change in the light of any subsequent new information becoming available in time. The review of the fair value of assets and liabilities acquired will be completed within 12 months of the acquisition date.

The acquisition cost satisfied by:

Net cash outflow arising on acquisition:

The cash consideration excludes a £346,000 (RMB3m) retention which is included in Other Payables. Other costs relating to the acquisition have not been included in the consideration cost. Directly attributable acquisition costs include external legal and accounting costs incurred in compiling the acquisition legal contracts and the performance of due diligence activity and amount to £277,000. These costs have been charged in distribution and administrative expenses in the consolidated income statement.

Sicomm, in common with other Chinese companies, has a 31 December calendar year end. In the two months to 30 September 2016 Sicomm contributed revenue of £402,000 and net profit before taxation of £127,000. Had the acquisition taken place from the start of the Group's financial year (from 1 April 2016), management estimate that Sicomm would have contributed revenue of £959,000 and net profit before taxation of £211,000 at the half year to the Group results.

9 Principal risks and uncertainties

Key risks of a financial nature

The principal risks and uncertainties facing the Group are with foreign currencies and customer dependency. With the majority of the Group's earnings being linked to the US Dollar, a decline in this currency would have a direct effect on revenue, although since the majority of the cost of sales are also linked to the US Dollar, this risk is reduced at the gross profit line. Additionally, though the Group has a very diverse customer base in certain market segments, key Group customers can represent a significant amount of revenue, though their end-customers may be a diversified portfolio. Key customer relationships are closely monitored; however changes in buying patterns of a key customer could have an adverse effect on the Group's performance.

Key risks of a non-financial nature

The Group is a small player operating in a highly-competitive global market, which is undergoing continual geographical change. The Group's ability to respond to many competitive factors including, but not limited to pricing, technological innovations, product quality, customer service, manufacturing capabilities and employment of qualified personnel will be key in the achievement of its objectives, but its ultimate success will depend on the demand for its customers' products since the Group is a component supplier.

A substantial proportion of the Group's revenue and earnings are derived from outside the UK and so the Group's ability to achieve its financial objectives could be impacted by risks and uncertainties associated with local legal requirements, the enforceability of laws and contracts, changes in the tax laws, terrorist activities, natural disasters or health epidemics.

10 Directors' statement pursuant to the Disclosure and Transparency Rules

The Directors confirm that, to the best of their knowledge:

a) the condensed financial statements, prepared in accordance with IFRS as adopted by the EU give a true and fair view of the assets, liabilities, financial position and profit of the Group and the undertakings included in the consolidation taken as a whole; and

b) the condensed set of financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting; and

c) the Chairman's statement and Group Managing Director's statement and operational and financial review include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face.

The Directors are also responsible for the maintenance and integrity of the CML Microsystems Plc website. Legislation in the UK governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions.

11 Basis of preparation

The basis of preparation and accounting policies used in preparation of the Half Yearly Financial Report are the same accounting policies set out in the year ended 31 March 2016 financial statements, with the exception of the additional accounting policy item and presentation:

Externally acquired intangibles

Externally acquired intangible assets have been recognised in accordance with the provisions of IFRS3 Business Combinations in relation to the acquisition of Sicomm (note 8). These acquired intangibles have been amortised in accordance with the following:

o Brand 10 years from date of acquisition

o Customer relationships 9 years from date of acquisition

o Intellectual property 10 years from date of acquisition

Amortisation of the above acquired intangibles assets is recognised on consolidation and reported in distribution and administration costs in the consolidated income statement.

Adjusted EBITDA

Adjusted earnings before interest, tax, depreciation and amortisation ('Adjusted EBITDA') is defined as profit from operations before all interest, tax, depreciation and amortisation charges and before share-based payments. The following is a reconciliation of the Adjusted EBITDA for the three periods presented:

12 General

Other than already stated within the Chairman's statement and Group Managing Director's statement and operational and financial review there have been no important events during the first six months of the financial year that have impacted this Half Yearly Financial Report.

There have been no related party transactions or changes in related party transactions described in the latest Annual Report that could have a material effect on the financial position or performance of the Group in the first six months of the financial year.

The principal risks and uncertainties within the business are contained within this report in note 9 above.

In the segmental analysis (note 1) inter-segmental transfers or transactions are entered into under commercial terms and conditions appropriate to the location of the entity whilst considering that the parties are related.

This Half Yearly Financial Report includes a fair review of the information required by DTR 4.2.7/8 (indication of important events and their impact, and description of principal risks and uncertainties for the remaining six months of the financial year).

This Half Yearly Financial Report does not include all the information and disclosures required in the Annual Report, and should be read in conjunction with the consolidated Annual Report for the year ended 31 March 2016.

The financial information contained in this Half Yearly Financial Report has been prepared using International Financial Reporting Standards as adopted by the European Union. This Half Yearly Financial Report does not constitute statutory accounts as defined by Section 434 of the Companies Act 2006. The financial information for the year ended 31 March 2016 is based on the statutory accounts for the financial year ended 31 March 2016 that have been filed with the Registrar of Companies and on which the Auditor gave an unqualified audit opinion.

The Auditor's report on those accounts did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. This Half Yearly Financial Report has not been audited or reviewed by the Group Auditor.

A copy of this Half Yearly Financial Report can be viewed on the Company website www.cmlmicroplc.com.

13 Approvals

The Directors approved this Half Yearly Report on 21 November 2016.

Glossary

ATA an advanced technology attachment

DTR Disclosure and Transparency Rules

EU European Union

IAS International Accounting Standard

IC integrated circuit

IIoT Industrial Internet of Things

IFRS International Financial Reporting Standards

IP intellectual property

M2M machine‑to‑machine

MMC multimedia card

OEM original equipment manufacturer

R&D research and development

RF radio frequency

SATA serial ATA interface

SD secure digital

SDR software defined radio

USB universal serial bus

VoIP Voice-over Internet Protocol