QXT.L Regulatory News (QXT)

Quixant plc

("Quixant" or the "Group")

2019 Trading and COVID-19 update

Quixant (AIM: QXT), a leading provider of innovative, highly engineered technology products principally for the global gaming and broadcast industries, today provides highlights of its unaudited financial results for the year ended 31 December 2019 and a trading update in light of COVID-19. As announced on the 27 March the full audited results have been delayed until 6 April, due to the Group's auditors, KPMG LLP, decision not to sign any audit opinions or consents until 5th April 2020. The Group does not expect any deviation from these published figures once the audited results are announced.

2019 Unaudited Financial Highlights

· Revenue reduced by 20% to $92.3 million (2018: $115.2 million)

· Quixant Gaming division revenue $56.2m (2018: $77.6m)

o Gaming Platforms revenue $46.6m (2018: $62.5m)

o Gaming Monitors revenue $9.6m (2018: $15.1m)

· Densitron division revenue of $36.2m (2018: $37.5m)

· Adjusted1 pre-tax profit of $10.7m (2018: $18.2m)

· Net cash at period end of $16.1m (2018: $9.7m)

2019 Operational Highlights

· Revenue decline in Gaming due to major customers facing stiff competition which has led to a reduction in demand for our products.

· No major customers lost during the year.

· New products launched by Densitron to target the broadcast market expected to generate revenue in 2020. Increased pipeline of new business to $12m.

· Appointment of key senior management, including a Densitron Managing Director, Densitron Product Director, Gaming Product Director and a new Gaming Global Sales Director.

· Enhanced systems and sales discipline to improve revenue visibility.

· Acquisition of IDS to enhance Densitron product offering in Broadcast sector.

2020 YTD Trading and Outlook

· Group has seen a robust performance in first quarter 2020 trading despite supply chain challenges

· While Quixant has so far managed the supply chain impact of COVID-19 with minimal disruption to customers after February, the shutdown of the gaming sector and many other industries for an indefinite period clearly presents a material uncertainty to the Group's operations

· COVID-19 will therefore have a material impact on the financial performance in 2020 but it is too early to form a view on the expected outcome and we are therefore withdrawing guidance for 2020 and thereafter

· Cash conservation, employee safety and protection of the business to support normal operations once we see demand returning is our immediate priority.

· We have a strong balance sheet with a healthy net cash position and therefore severe downside scenarios suggest the business can operate for at least 6 months before additional measures would need to be taken

o Net cash of $17.7m at 29 February 2020 (gross cash of $18.5m) with undrawn bank facilities of $3.0m

· Dividend suspended until the impact of COVID-19 on the business becomes clearer

· Change in board composition - Effective 31 May 2020, Nick Jarmany will become non-executive deputy chairman, Gary Mullins will become a non-executive director and C-T Lin will step down from board responsibilities but continue to support the Taiwanese operation as a consultant. Gaye Hudson will also leave the board effective 19 May 2020.

Jon Jayal, Chief Executive of Quixant, commented:

"The events of the last couple of months are unprecedented and, of course, with no experience of a similar crisis it is difficult to accurately predict the extent of the impact the pandemic will have on our business. We have taken early action to manage the business effectively, remain in close contact with our customers and continue to monitor the reopening of the global gaming markets. In addition, we have a broader, diversified revenue opportunity with a strong pipeline in the broadcast sector through our Densitron business. Some sectors supplied by the Densitron business have seen continued demand for our products and we have prioritised those customers operating in the medical sector to ensure they are able to manufacture essential equipment.

"The Group maintains a strong balance sheet and material net cash position which gives us confidence we can continue to operate until at least October 2020 even on severe downside scenario modelling before additional measures would need to be taken.

"The Board remains confident in the long-term future of the Group and our ability to weather the current crisis."

COVID-19 - Impact Assessment

It is clear that the COVID-19 pandemic will have a significant impact on the business and consequently we have taken a number of actions to weather the storm. When the pandemic first appeared in China, the initial threat was to our supply chain. It is now very clear that the risk to customer demand is by far our greatest challenge and we are prepared for a significant downturn in sales for the duration of the pandemic.

We have no experience of a similar crisis so it is difficult to accurately predict the extent that the effect of COVID-19 will have on our revenues. It is not yet clear how widespread the virus will become, how long the pandemic will last and what the medium to long term effect of this pandemic will be on consumer and business behaviour.

The global technology industry relies almost entirely on Far Eastern manufacturing for the electronic components used in its products. We manufacture our Gaming division products in Taiwan which has skilfully handled the outbreak and therefore seen limited impact from reduced manufacturing capacity. However, many of the components which are used on the gaming manufacturing lines are sourced from China and we have therefore suffered some delays in the delivery of such components in the first quarter. Densitron saw a more direct and immediate supply side impact from the COVID-19 outbreak. Many of the products in the Densitron business are manufactured in China in factories which were operating at a fraction of their normal capacity during February.

The Chinese government's rapid and weighty response to the outbreak has meant that capacity returned very quickly to most of our suppliers over the course of February and into March and we have seen an ongoing improvement in the delivery dates we can quote customers. Our strategic stock holding and the intelligent handling of the outbreak by the Taiwanese authorities has meant our production impact has been minimised. We are continuing to monitor the effects on our manufacturing capability.

With a return to relative normality on the supply side, we are now focused on customer demand. The impact of Macau closing for two weeks immediately after the Chinese New Year holiday was an 88% reduction in overall gaming revenues in February in the territory (a fall of around $2.8bn compared to prior year). As COVID-19 has spread outside Asia, we have now started to see the impact on the key Australian and American casino markets with MGM Resorts and Wynn closing down their Las Vegas resorts for an indeterminate period. On 17 March there was a state directive for all gaming machines in Nevada to be switched off for 30 days. We have since seen other markets such as the US tribal gaming market and the Australian market closing down their operations. Globally, we are seeing the few gaming venues which haven't closed applying severe restrictions and "distancing measures" (turning off every other machine to distance players from one another). This loss in casino revenues is already weighing heavily on our customers' income and longer term will likely weigh on demand for new machines and therefore our customers' consumption of our products this year.

From a position where the focus was on our ability to meet expected delivery dates, the Densitron business has seen the first signs of customers looking to postpone/cancel orders as their manufacturing facilities close and demand for products across most industrial markets reduces. We have nonetheless seen continued demand in certain sectors and have been actively offering help to our medical customers to source components where they have faced challenges.

We have been in constant dialogue with customers to understand the direct impact on our Gaming Division at a senior management level. Given the greater unpredictability around lead-times, we have been seeking orders further out into the year to solidify deliveries. Gradually we are forming a clearer picture of their short term (next few months') demand which unsurprisingly has been significantly reduced. The uncertainty principally relates to the outlook for the second half which will be heavily influenced by governments' response to the crisis. Some Densitron customers have signalled reduced demand and requested postponed deliveries while others have continued or even accelerated demand.

Our priority is to do all we can to keep our offices as safe as possible for customers and staff. At the same time, we must prepare the business for varying levels of sales declines. To that end we have modelled the effects of differing levels of sales declines along with all the measures we can take to ensure that the Company remains within its cash and bank facilities, and have prepared cash flow forecasts for a period in excess of 12 months.

The Board's central case scenario is based upon a separate analysis of irrevocable sales orders already received and their related costs of sales, along with an assumption that we will only get paid for 50% of these orders and we see no return of demand from our customers. Under this scenario, the Group would have sufficient funding to pay existing overheads without reducing them until the second half of 2021. The analyses depend greatly on the amount of orders assumed to be collectable in cash, major changes to this could significantly change the result.

The Board's severe downside forecast is based on a scenario where customers stop paying entirely for orders already placed or delivered from April 2020 and do not order any further goods for the rest of the 12-month period. Cost reductions can be made to offset this reduction in cash receipts with a 50% reduction in staff costs and a significant reduction in other controllable costs meaning the Group should have sufficient cash until October 2020 before either further costs reduction would be required or external funding would be required if customer demand had not restarted. The Group has a $3.0m loan facility in Taiwan that is currently undrawn and is part of the mortgage on the Group's property in Taiwan.

The Board therefore consider that the Group's strong balance sheet and material net cash position means it is well positioned to navigate through the impact of COVID-19.

While the Directors' have no reason to believe that customer revenues and receipts will decline to the point that the Group no longer has sufficient resources to fund its operations, should this occur, the group may need to seek additional funding beyond the facilities that are currently available to it, as well as making significant reductions in its fixed cost expenses. There would be an opportunity to mortgage or sell certain property and inventory assets to accelerate cash generation and/or mitigate risk, but in the economic environment that would see customer revenues and receipts decline severely, such sales would be likely to be difficult to achieve.

The potential impact of changes in assumptions arising from matters outside the Group's control, or the unlikely event of a culmination of events, may result in the group requiring additional working capital beyond the group's existing facilities. Therefore, we anticipate that the audit report for the year ended 31 December 2019 will make reference to a material uncertainty relating to going concern.

2019 Review

Looking back to last year, despite 2019 having been a challenging year financially for the Group, we took significant steps to improve the business and the fundamentals which underpin our growth opportunity remain intact. In the year, Group revenues fell by 20% to $92.3m due to an unexpected and pronounced decline in expected consumption from some of our bellwether gaming customers. Most of this loss of revenue has been due to these customers experiencing fierce competition, reducing demand for their machines and hence their production volumes with the consequential effect on demand for Quixant's gaming products integrated into their machines. While we have continued to drive revenue from new customers it has been insufficient to offset declines in our established customer base.

Densitron performed in line with expectations in 2019, delivering broadly flat year on year revenue despite us closing the non-performing Nordic business. Our focus on the broadcast vertical continues to progress, with a strong pipeline forecasting further growth, which will not only deliver in the near term but also into future years.

Despite the difficult year Quixant remains profitable and cash generative, generating profit before tax of $9.4m (2018: $14.3m), adjusted profit before tax of $10.7m in 2019 (2018: $18.2m) out of which we generated cashflow from operations in excess of 140% of profits.

Segmental Revenue Analysis

Customer headwinds in the land-based gaming business

In the Gaming division, our long-standing major customer, Ainsworth Game Technology, has been detrimentally impacted by the exceptional success of one of its rivals: Australian listed Aristocrat Leisure. The latter launched a game called Lightning Link in 2015 which has become the top performing slot game in Australia and North America and in doing so has fuelled the company's market capitalisation growth from under AU$5bn to AU$24bn. In the Australian market, Lightning Link holds more than 60% of the "pokies" market according to Goldman Sachs. The success of Lightning Link, and the derivative games which have followed, has been unprecedented in the last 20 years in gaming and propelled Aristocrat to the dominance it has today. Aristocrat's success has also impacted, albeit to a lesser extent, revenue from several of our other customers.

It is important to note that, during this period, Quixant has not lost any material customers. Improvements in the demand for our customers' products will immediately positively impact our revenue. Nonetheless, the reduction in our customers' revenue has weighed heavily on our financial performance in 2019 across both the gaming platforms and gaming monitors product lines.

We shipped just over 40,000 gaming platforms in 2019 compared to 61,000 in 2018, a reduction of 34%. Several of our customers to which in previous years, we have shipped in excess of 5,000 platforms a year reduced orders to 1,000 and 5,000 in 2019as detailed below:

Sales by customer unit purchase quantity

We sold 14,000 gaming monitors and button decks in 2019 compared with 17,650 in 2018.

The average selling price of our products increased slightly as we saw an increase in demand for the mid-range platforms with reductions in demand for the cost-effective range and (mainly due to the major customer declines) a reduction in high-end product sales. We also shipped several hundred of the Ultimate platform range, our highest specification range, in the year as this new product range starts to gather traction in the market.

Quantity of gaming platforms sold split by product family

New business wins with long term growth prospects

During the year we secured a significant win for gaming boards with a major Japanese manufacturer who currently has extensive business in the North American, Australian and Asian markets. This is expected to develop into a multi-million dollar annual revenue stream in the coming years. We already supply this customer with electronic button deck solutions, but from the fourth quarter of 2021 will be supplying them with our highest performing gaming computer product, the QMax-2. The business was won on the technical depth of hardware and software features of the product, as well as the expert, gaming-focused support infrastructure Quixant has globally. This is an exciting business win and while not due to contribute significantly to revenue until next year, positions us well to benefit from their existing international markets and from the casino resorts opening in Japan in the middle of the decade. We have already shipped samples to them for their engineering teams to work on developing the new machines.

In addition, we have converted around $3.5m of new business pipeline to revenue in 2019 which we expect to grow over coming years as the customers reach their full year run rate. Our new business pipeline gives us confidence in achieving healthy growth in 2021 and 2022, subject to any extended impact of COVID-19.

The major game manufacturers, aside from Aristocrat, have all had challenging periods in their land-based gaming businesses. Their focus on content to reinvigorate their competitiveness has led to opportunities for us to pitch for strategic outsource arrangements which have been supported by the sales and product team members we brought in during Q3 2019 and Q1 2020.

As we look to build on the recent new business wins, we are focusing on delivering market appropriate solutions to our current and prospective customers, based upon a segmentation and needs analysis. For our Strategic Accounts, our value proposition is clear in that we can help our customers deliver a higher quantity of better games faster, with reduced costs and reduced time to market. Our business enables a global standard for Strategic Accounts (Tier 1) to build their next generation games upon, and our market leading hardware, and embedded Gaming Ecosystem® allows game developers to excel creatively, whilst ensuring the hardware can deliver the ultimate player experience. For our Key Accounts (Tier 2), we are focusing on account retention and new account penetration via a focused product range, at differing price points, and SKU distribution maximisation across the portfolio of current products. For our Core Accounts (Tier 3) we are bringing to market turnkey outsource options, enabling these customers to focus solely on game design and distribution, with Quixant providing every element of the solution. Our sales team structured around this market segmentation, ranging from Strategic Account Directors for the Strategic Accounts, to a Tele-Accounts function for our Tier 3 customers, ensuring the appropriate level of contact and focus to maximise the account experience.

Sports Betting market entry

In 2019, we launched Quixant's entry to an adjacent market to Gaming: Sports Betting. The legalisation of Sports Betting in the US has led to a major focus on this market as a growth driver in the gambling industry. There is already a well-established European sports betting industry in which technology (online and retail) plays a significant role. A number of the existing slot machine manufacturers already have business in sports betting but all are viewing the market as a revenue growth driver alongside the limited growth available in global slots. Many of our prospective customers in sports betting are businesses new to Quixant, so this industry represents a diversifier to our land-based gaming business.

At a high level, Quixant is offering two products to the sports betting market: an optimised computer platform designed to drive customers' own sports betting terminals onto which they integrate their sports book software and a turnkey, full terminal solution which integrates our computer platform into a regulatory compliant cabinet. We have already received significant interest for both of these solutions since their launch at the G2E trade show in Las Vegas in October 2019 and will have first pre-production samples shipping to customers in H1 2020.

While we had expected to generate revenue from the sports betting opportunity in 2020, the suspension of almost all sporting events and the consequential shutdown of most sports betting operations means that we believe there is uncertainty around this revenue being realised during the year. Nonetheless, we continue to be optimistic of future business in the sector and have a a weighted new business pipeline which builds up to business worth several million dollars annually over the next 5 years.

Densitron - Densitron 2.0 - Control Surface Growth Strategy

Within Densitron, we have continued to execute our change plan across all areas of the business as we pivot towards Densitron 2.0 (one product to many customers) to generate growth through our range of Broadcast-centric control surfaces, while protecting our traditional Densitron 1.0 display component core business (typically one product for one customer). Densitron 2.0 control surface products bring together our expertise in display, touch/tactile, embedded computing and mechanical engineering to help our customers modernise the human interaction with their products while accelerating their time to market and reducing their execution risk.

Broadcast industry progress with Densitron 2.0 products

Our Densitron 2.0 control surface product sales efforts are focussed in the broadcast vertical. Of the 100 blue-chip broadcast equipment manufacturers in this space we chose to focus on when we launched this strategy, we are now actively engaged in sales conversations with the majority. The pipeline of new business in this vertical stands at over $12m and continues to grow, as we now move to focus on the next 100 priority target customers. In 2020 we forecast c. $0.5-1.0m of this pipeline will convert into in-year revenue, the point in the range dependent on how quickly our customers are able to move into mass production after telling us we have won the deal - something we are unable to control.

In addition, our One Densitron culture and operating structure change plan is yielding tangible results because we are now structured internally to allow us to deal globally with large customers such as Panasonic and Grass Valley.

Acquisition of (IDS) launching our Densitron 3.0 product set

In July 2019, we completed the acquisition of a small UK-based technology business called IDS. This took our product strategy one step further by adding market leading software to the base of our expertise in control surfaces. We call this addition of software to our control surface products Densitron 3.0. The IDS technology is already in use extensively in the most prestigious broadcasters including the BBC, CNN and Channel 4. The product enables content distribution, such as world time clocks or programme schedule data to be displayed across a network of end-points driven by a GUI based server. The real power of IDS however comes from its support to automate and control a wide range of third-party hardware and software products. IDS can save broadcast systems integrators and equipment manufacturers development time through adoption of a scalable, flexible off the shelf solution.

IDS is already contributing to revenue in the business and we are investing in the technology which we purchased to launch an enhanced solution which will can be offered under as SaaS model.

New senior gaming business hires

We made two key hires to the business in 2019.

Abhinay Bhagavatula joined us in September 2019 as Gaming Product Director. With overall responsibility for our gaming business product strategy and innovation, this is a key role to ensure our products align well with the market requirements and are driving technology change in the gaming industry. Abhinay joins us from the leading gaming manufacturer, Aristocrat where he was Director, Product & Commercial Strategy. His deep knowledge from 10 years working in game manufacturers positions him uniquely in Quixant with a knowledge of computer technology, game design and commercial value creation in our customers.

We also introduced Duncan Faithfull as the new Global Sales Director in January 2020. Duncan is responsible for leading our gaming sales team. His focus will firstly be on retention and growth in our existing customer base, ensuring predictability and reliability in our revenue, and secondly, through redefining our proposition to the top tier accounts, boosting our new business pipeline for revenue delivery in 2021 and beyond. He comes from a background as Sales & Marketing Director at Cardtronics and prior to that G4S with experience in strategic outsource selling to some of the largest global financial institutions.

Given the strengthened senior management team we have in place, the founders of the business will also be changing their roles as we look to streamline operations. Effective 31 May 2020, Nick Jarmany will become non-executive deputy chairman and Gary Mullins will move to a non-executive director role. C-T Lin will be stepping down from the board.

Global SAP and Salesforce deployment

We successfully completed the implementation of our global SAP Business One ERP system in December 2019, with just one or two smaller parts of the business to begin using it in 2020. This two-year project has been undoubtedly the most complex technology project the group has undertaken but now gives us a strong, global infrastructure to run the business. In 2020 we will continue to build out the reporting functionality and automation in the business to maximise its benefit.

During H2 2019 we brought Salesforce.com to the gaming division, having already used the product in the Densitron business. We continue to refine the usage and integration of the system with SAP and other Quixant technology systems, but already are running our sales pipeline and activity tracking from it. We believe this, alongside enhanced SAP reporting and improved sales process and discipline will lead to improvements in our revenue visibility going forward.

Summary and Outlook

While the challenges of 2019 in the Gaming division have been painful to endure, the actions to enhance our sales discipline to improve revenue visibility and forecasting accuracy were already being addressed during the year and are now complete.

We have an undiminished opportunity with the land-based gaming business to grow, despite the short-term headwinds from major customer slowdowns and an uncertain negative impact across the global economy from COVID-19. Allied with the new growth sources in sports betting and Densitron this leads to the desired diversification to de-risk this growth. We constantly monitor the risks to the business as a result of the COVID-19 outbreak and while it will certainly have a profound impact on our business in both Gaming and Densitron divisions in 2020, at this point the magnitude of this impact remains uncertain and hence we believe it necessary to withdraw our guidance for 2020 and thereafter. We are necessarily cautious and tracking the situation daily but believe our strong balance sheet provides a high degree of resilience. Nonetheless, our severe downside modelling case indicates scenarios in which there may be a requirement to access additional funding in Q4 2020 and we continue to closely monitor this position.

Over the medium to long term we are confident in our ability for Quixant to grow materially. We have made many of the adjustments necessary to position the business for this growth from a sales, product and operational perspective as the challenges presented by COVID-19 subside.

The Board remains confident in the long-term future of the Group and our ability to weather the current crisis.

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

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About Quixant

Quixant, founded in 2005, designs and manufactures highly optimised computing solutions and monitors principally for the global gaming industry. The Company is headquartered in Cambridge in the UK where the global sales function is based. North America sales and sales support is run from their subsidiary in Las Vegas. Quixant has its own manufacturing and engineering operation based in Taiwan and software engineering and customer support team based in Italy. All the specialised products software and manufacturing are produced in-house and Quixant owns all its own IP some of which is protected by patents and design rights.

In November 2015 Quixant acquired Densitron Technologies plc. Densitron has a strong heritage in the sale of electronic display solutions to global industrial markets. Through Densitron's experienced sales team, Quixant has a robust platform to build its business into wider industrial markets. In-depth information on the Company's products, markets, activities and history can be found on the corporate website at www.quixant.com.