QXT.L Regulatory News (QXT)

24 March 2015

Quixant plc

("Quixant" or the "Company")

Final Results

Quixant (AIM: QXT), a leading provider of specialised computing platforms for casino gaming machine applications, is pleased to announce its Final Results for the year ended 31 December 2014.

Highlights

· Revenue growth of 32% to $31.9 million (2013: $24.2 million)

· Adjusted EBITDA1 increased 22% to $7.9 million (2013: $6.5 million)

· Adjusted profit before tax1 increased 18% to $7.2 million (2013: $6.1 million)

· Adjusted fully diluted EPS2 of $0.0941 per share (2013: $0.0777 per share)

· Proposed full year dividend of 1.2p per share (2013: 1.0p)

· Net cash from operating activities of $2.1 million (2013: $2.5 million)

1. Adjusted by adding back $0.16 million in respect of share based payments (2013: $0.11 million).

2. Adjusted by adding back $0.16 million in respect of share based payments and subtracting the associated tax effect of $0.032 million (2013: $0.11 million adjustment less tax effect of $0.023 million).

Operational highlights

· Further penetration of Tier 1 and Tier 2 customer segments and overall growth of customer numbers.

· Significant investment for future growth with an increase in human resources and enhancements in facilities and infrastructure.

· Launch of new high and low end products.

Nick Jarmany, CEO of Quixant commented:  "I am pleased that we are again reporting strong growth in revenue and profits, in line with market expectations. We continue to attract new customers, both large and small, as the benefits of outsourcing computer platform development become more widely adopted.

There has been widespread M&A activity amongst the larger gaming manufacturers which has resulted in them seeking increased efficiencies. I believe this could be of significant benefit to Quixant and look forward to 2015 and beyond with confidence."

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About Quixant

Quixant, founded in 2005, designs and manufactures complete advanced hardware and software solutions (Gaming Platforms) for the pay-for-play gaming and slot machine industry. The Company is headquartered in Balsham, just outside of Cambridge, in the UK. Quixant UK Ltd is responsible for the Group's global sales function (excluding North America) and its Las Vegas based subsidiary, Quixant USA Inc, is responsible for sales and sales support to the North American market. Quixant has its own manufacturing and engineering operation in Taiwan, which has evolved with the rapid growth of the Company. Quixant's Italian subsidiary, Quixant Italia srl, houses the Group's software engineering and customer support team.

Quixant's high quality, specialised products provide an all-in-one solution, based on PC technology but with augmentative hardware features and operating software developed specifically to address the requirements of the gaming industry. Products feature innovative mechanical designs which are optimised for operation in the gaming and slot machine environment. Quixant's proprietary hardware and embedded software is flexible in its design, enabling Quixant to easily respond to changes in regulation or customers operating in different markets or jurisdictions.

Chairman's Statement

I am delighted to report on a highly productive 2014 for Quixant. We have successfully delivered on ambitious targets, posting strong growth in both revenue and profit. We have also made progress in reaching important milestones with respect to development of our brand, products, operations and people.

We are uniquely positioned to capitalise on the growing trend amongst gaming machine manufacturers of outsourcing the computer platform used to power their machines. The computer platform is no longer a differentiator, but is a crucial component that must meet or exceed their needs. Our progress to date still represents a fraction of the available opportunity. 

Our reputation in the industry is of paramount importance to Quixant, and we are proud to be suppliers and trusted partners to many highly respected manufacturers in the industry. During 2014 we have continued to build and strengthen these relationships and would like to express our gratitude to our loyal customers, many of whom have worked with us for several years and believe in the Quixant model.

We have worked hard over the last twelve months to develop our business, brand and infrastructure to ensure that Quixant represents an attractive proposition for even the largest of manufacturers in the gaming industry, the so called Tier 1s. Our AIM listing in 2013 has supported this effort and increased our profile and status as a public company. During 2014 we announced our first large project with a Tier 1 manufacturer, which represents a significant milestone in Quixant's history. We have seen continued success in building a healthy book of business in the Tier 1 space which underpins our growth for 2015 and beyond.

In keeping with our progressive dividend policy, and in light of continued growth in 2014 and a strengthened balance sheet, the Board is pleased to propose a 2014 full year dividend of 1.2p per share (1.0p per share in respect of 2013 full year dividend).

The Company is fortunate to have a remarkable team of individuals whom I would like to thank for achieving excellent progress over the year. I would also like to express my sincere gratitude to our shareholders for their support to the Company and we are confident that the year ahead will be an exciting one.

Chief Executive's Report

In 2014 we delivered record revenue and profits. Revenues over the year grew by 32% from $24.2 million to $31.9 million, adjusted EBITDA grew by 22% from $6.5 million to $7.9 million, and adjusted profit before tax increased 18% from $6.1 million to $7.2 million (EBITDA and profit before tax are adjusted to add back $0.16 million and $0.11 million in respect of share based payments in 2014 and 2013 respectively). Despite strategic investment in inventory and an increase in working capital requirements, our operations generated cash of $2.1 million.

Continuing growth & customer spread

The increase in revenue in 2014 was primarily due to the ramping up of the new Tier 2 project wins previously reported. These projects represent long term business relationships with manufacturers to supply them with computer platforms over a multi-year period. Our experience has been that, once manufacturers have selected Quixant as a supplier of computer platforms for their machines, when they come to develop their next generation of machine this is typically designed around a Quixant platform. These platforms are engineered to offer a straightforward upgrade path, reducing customer development costs.

I am pleased to say that during 2014 we made good progress in our ongoing efforts to both grow and broaden our customer base. We have already made healthy progress in capturing significant business in the Tier 2 space and during 2014 we have started a number of new projects with several Tier 2 and Tier 1 manufacturers. We expect that shipments for some of these projects should commence in 2015.

The tables on this page illustrate the number of project design-ins and volume production projects, split by tier of customer at the end of 2013 and end of 2014. 

We classify our customers and prospects in terms of three tiers of manufacturer: "Tier 1" incorporates the largest gaming machine manufacturers, typically producing over 25,000 machines per annum. "Tier 2" typically produce between 5,000 and 25,000 machines per annum, and "Tier 3" typically produce less than 5,000 machines per annum.

Number of Project Design-ins

Number of Volume Production Projects1

1. Please note that due to industry consolidation, one project in volume production in respect of a Tier 2 customer at the end of 2013 became a project under a Tier 1 customer at the end of 2014.

Quixant operates in a long gestation period market. It typically takes two years from the commencement of the first serious discussions with a new customer, or for a new project with an existing customer, to the commencement of volume production orders. Winning new business with a customer leads to an initial period of intense engineering cooperation between Quixant and the customer to "design-in" our products into their surrounding systems and develop the game on our platform. After that the regulatory approval process commences and once that is complete machines can be installed in venues. Once volume production commences, volumes ramp up over a period of around 12 months or more before full run rates are achieved. This long lead-in is balanced by the stickiness of the business once projects are won.

Australian based Ainsworth Game Technology has historically been a key contributor to Quixant's revenue and they remain a very important customer. It was therefore reassuring to have signed a contract extending out to 2019 for a new generation of Quixant product to power their machines. As a proportion of total sales Ainsworth now represent just under 60% of our total revenue, reduced from 72% in 2013, despite sales to Ainsworth growing during the year. The majority of this reduction in concentration is due to other Tier 2 projects which together contributed to over 27% of revenue in 2014 (including the contribution from a Tier 2 project which became a Tier 1 project in 2014 as a result of industry consolidation), up from 11% in 2013. 

In 2014, we shipped 28,500 units, a 30% increase over 2013. This remains a small percentage of the total available market, which has been estimated to conservatively consume around 500,000 units per annum.

Commercial landscape

Quixant has been at the forefront of the trend towards outsourcing computer platform development by gaming machine manufacturers, and has cultivated lucrative, long-term, stable business relationships with many of the major participants in the industry. Quixant is the only company focused exclusively on the design and manufacture of highly optimised computer platforms for the global gaming industry, which has proven to be a major competitive advantage.

In July 2014 we announced the securing of a significant project with a Tier 1 manufacturer, later named as Novomatic Group. Tier 1 manufacturers, which are the largest gaming machine manufacturers in the industry and typically supply over 25,000 machines per annum, have historically undertaken computer platform development in-house using their own engineering teams. For several reasons, however, there is a gradual transition away from in-house development to outsourcing computer platform development:

Firstly, internal development of the computer platform no longer represents a competitive advantage for manufacturers, particularly now that optimised, high quality solutions can be sourced externally. Players do not choose one machine over another because of the computer platform inside - the decision is based on the attraction of the game presented to them. Internal development of the computer platform is complex and requires significant resources. Manufacturers are increasingly looking to focus a higher proportion of their expenditure in the areas crucial for competitive success, principally in game development.

Secondly, development of computer platforms in-house is no longer cost effective due to the increasing complexity of computer design and the increased competition between manufacturers.

Thirdly, manufacturers increasingly have to compete globally in markets that have a variety of cost/performance profiles. They are finding their historic "single platform" approach does not fit in with these regional differences, and access to a range of different but compatible solutions, such as offered by Quixant, is required.

Finally, internal development also tends to be much slower. They do not have the range of skills and access to advance information needed to deliver the latest technology to market quickly. The internal solutions therefore tend to be several generations behind when their products are launched, compared to Quixant.

There has been widespread M&A activity between the large gaming machine manufacturers over the last 18 months. Many have made public commitments to significant overhead savings as part of the justification for this activity. We believe this activity provides an increased opportunity for Quixant to penetrate the Tier 1 manufacturers, as they are now actively looking at efficiency savings. This is causing the traditional working methods of these long established companies to be reviewed in detail at the most senior levels, making it easier for us to present the commercial benefits of the Quixant approach.

Our progression into working with Tier 1 manufacturers is a necessarily gradual process and requires significant time from a commercial and engineering perspective. Typically Tier 1 internal hardware engineering teams have been a key asset and redeployment of these resources away from computer platform development to other areas of gaming machine development requires a period of adjustment. Our success with the Tier 1 manufacturers has therefore been gradual; we typically win specific projects initially (which may relate to a new jurisdiction or market which the manufacturer wishes to enter into and for which it does not currently have a suitable solution) which then exposes customers to the Quixant benefits, builds their trust and allows them to adjust to the outsourced approach. Success in these initial projects should lead to further opportunities in larger projects and, potentially, the opportunity to replace the manufacturer's main in-house developed computer platform.

Building infrastructure for growth

Winning major new business requires Quixant to expend significant sales and especially engineering resource in the design-in phase of a new project. It is therefore essential to have the necessary expert resources in place. We have been proactive in growing our infrastructure and resources to ensure we are well positioned to service these projects and to deliver unrivalled levels of service and innovation to customers. 

In 2014 we grew the number of employees by 11% from 63 to 70, the majority of whom were hired into engineering roles. As at the end of December 2014, 50% of our employees were engineers directly involved in product development. In 2014, 30% of total operating costs were attributable to R&D activities, representing reinvestment of 7% of sales revenue and 15% of gross profit into R&D.

Ensuring our core business values, methods and ethos continue to permeate through the rapidly growing organisation is an important challenge. We have worked hard to do this through regular employee newsletters and enabling networking of employees at every available opportunity. With an organisation based in 3 continents, good communication is vital. In 2014 we completed the roll out of a global telephony system that enables staff to speak to anyone in our four office locations simply by dialling their internal extension number. We will continue to invest in this area in 2015 to enable interactive engineering meetings between offices.

In 2014 we completed the move to our prestigious new facility in Las Vegas, which serves as our North American customer sales and support operation. With our increasing US customer base and the enormous scope for further growth in this market, we have benefited from having purpose built training and large scale warehousing facilities, both of which are vital to success in this market. Sales to North American customers now represent 45% of total revenue (2013: 34%).

Towards the end of the year we also committed to expand our software development and customer support centre near Rome, Italy. The ability to provide expert training, and for our customers to interact directly with the engineering team responsible for developing our products, is one of Quixant's key differentiators. The new facility is currently completing construction and is expected to be ready in May 2015. It will provide much needed extra space for our growing Italian engineering team, specialised customer seminar and training workshop facilities; a dedicated testing lab and a conference room. 

Product development

At the ICE Exhibition in London in February 2014 we previewed our latest Ultra High Definition (4K) capable high performance gaming platform, the QX-50, to a select group of customers under NDA. 4K technology offers four times the graphics definition of current HD screens and is already making inroads in the consumer market. We believe Quixant is the first company to bring this technology to market for gaming manufacturers. Our AMD Elite Embedded Partner status provides us with early access to AMD's latest embedded chipset technology, which, along with our expert engineering capability, enabled us to preview the complete working QX-50 gaming platform even before the official AMD launch of the chipset. Demonstrating how quickly Quixant can deliver complete gaming platforms using the latest technology to the market reinforces the benefits that Quixant brings. We publically launched the QX-50 at G2E Asia in May 2014 on the same day that AMD publically released the chipset around which it is based.

At the other end of Quixant's range we also launched the QXi-306 and QXi-307 which are low-cost platforms targeting the Italian and Spanish / Latin American markets respectively. We developed a unique plastic enclosure design for these products which meets with specific market regulations but also facilitates cooling of the electronics without the use of fans, which are a major contributor to hardware failures. We have an EU registered design for this product and have also filed a patent in the UK for the enclosure design.

We have been active in continuing to secure IP protection for Quixant's technology, filing two patent applications in 2014 and being granted one further patent in the US in early 2015.

10 year anniversary

In 2015 Quixant celebrates its 10 year anniversary. Over that time the Company has consistently achieved year on year growth despite being in the midst of the deepest recession since the 1930s. I am immensely proud of the business that we have established and the incredible enthusiasm, creativity and capability of the high-calibre people that have made this happen. The Company has transformed itself from its origins as a small number of founding individuals to being a global organisation comprising a wealth of talented individuals working closely together in a well-structured and managed environment. I would like to thank the fantastic team of people who have made the original dream become a reality and who continue to make the future look ever more exciting.

I would also like to take this opportunity to thank Ainsworth Game Technology, who became our first significant customer back in 2007. Their early belief in the Quixant business proposition and trust placed in us was instrumental in enabling Quixant to get to where it is today. We are honoured that this relationship continues to grow. 

Outlook

We remain confident in the progress we are making penetrating more customers, including those in the Tier 1 and Tier 2 segment. As already outlined we also believe the recent M&A activity amongst many of the major manufacturers serves to further open up the industry to our business proposition, causing decision-makers to reject historical prejudices towards outsourcing in order to achieve cost reductions. As a result, we are confident in achieving our expected strong growth targets for 2015 and beyond.

Financial Review

Revenue

Revenue for the year grew by 32% to $31.9 million (2013: $24.2 million) driven principally by the continuing ramp up of two Tier 2 projects under which initial shipments commenced in 2013 (including the contribution from a Tier 2 project which became a Tier 1 project in 2014 as a result of industry consolidation). Customer concentration fell during 2014 with the broadening of our customer base to a total of 89 customers (2013: 82). Within these customers we have increased the number of active projects in progress.

The geographical split of our revenue was more heavily weighted towards the North American market in 2014 compared to 2013, driven by significant growth from customers in that region.

Profit

Our gross profit for the year was $14.1 million (2013: $11.2 million), representing a gross margin of 44% (2013: 46%). A higher proportion of sales in 2014 were derived from newer products than in 2013, which typically initially carry a higher cost of sales. Historically, we have seen an improvement in the margins on products as they become more mature.

Adjusted EBITDA increased in 2014 by 22% to $7.9 million (2013: $6.5 million), and adjusted profit before tax grew 18% to $7.2 million (2013: $6.1 million). EBITDA and profit before tax are adjusted to add back $0.16 million and $0.11 million in respect of share based payments in 2014 and 2013 respectively. Reported profit before tax therefore increased by 18% to $7.1 million (2013: $6.0 million).

We are committed to reinvesting profits in the business to ensure the delivery of long term growth and during 2014 15% of gross profit was reinvested into R&D (2013: 17%). $1.0 million of our development costs were capitalised (2013: $0.9 million). Amortisation of capitalised development costs over the year was $0.4 million (2013: $0.1 million).

The 35% increase in overhead expenses to $7.0 million (2013: $5.2 million), is primarily attributable to advance investment in the business to gear up for the range of major business opportunities which are in the pipeline. Our headcount increased by 7 to 70 people at year end, primarily to support our product development functions.

The tax charge for the year was $0.9 million (2013: $1.2 million), representing an effective tax rate of 13% (2013: 20%), including a prior year tax credit of $0.3 million. Our appointed tax advisors help to ensure we contribute a fair and proper allocation of tax between the jurisdictions in which we operate.

The resulting profit after tax increased 27% to $6.1 million (2013: $4.8 million).

Cash Flow 

Despite making a strategic investment into inventory in 2014 and an intensive use of working capital to finance strong fourth quarter sales, we continue to be cash generative and in 2014 we netted $2.1 million from operating activities (2013: $2.5 million). We have identified holding strategic inventory as a competitive advantage to be able to offer customers short lead times for deliveries compared to our competitors. As we carry a relatively small number of stock lines, we are able to operate this policy effectively. As a result of this investment, we held stock of $5.5 million at year end (2013: $2.6 million).

To support growth aspirations, we spent $2.4 million (2013: $1.9 million) on investing activities, including the payment of a deposit on our new, enhanced Italian facility, and the completion of the fitting out of our USA facility. Intangible asset investment accounted for $1.5 million (2013: $0.9 million), which included investment into key product development and manufacturing systems in Taiwan.

The $1.9 million cash outflows from financing (2013: $0.1 million, after excluding IPO related net inflows of $4.8 million) are due to the repayment of our mortgage on the Cambridge office in the UK ($0.9 million), and the payment of our maiden dividend in May 2014 ($1.1 million). The sole remaining monthly financing outflow is in respect of the repayment of our mortgage loan in Taiwan, on which we have secured attractive interest rates.

Overall, we netted a cash outflow over 2014 of $2.3 million (2013: $5.2 million cash inflow) which gave a cash balance at the year-end of $4.7 million (2013: $7.0 million).

We are in a strong financial position to finance our future plans.

Balance Sheet

Our consolidated balance sheet strengthened over the year with net assets increasing to $20.5 million (2013: $15.5 million).

Non-current assets principally relate to the Group's investment in tangible property, plant and equipment, intangible computer software, and the internally generated development. We own premises in the UK, USA and Taiwan and are in the process of completing on a new facility in Italy. This means that by the end of 2015 we will own property in all four of the locations from which we operate.

Current assets have increased to $20.3 million (2013: $15.6 million). The high level of trade debtors is a reflection on the high weighting to sales in the fourth quarter of the year. This seasonality of our revenue is consistent with historic trends. Since period end, we have collected all outstanding trade debtors as at 31 December 2014. Higher inventory levels of $5.5 million (2013: $2.6 million) evidences our strategic investment into inventory to be able to offer customers the short lead times previously mentioned.

Current liabilities have increased to $5.7 million (2013: $3.7 million) primarily as a result of the impact on trade creditors of heavy fourth quarter sales.

Dividend

The Board proposes a full year dividend of 1.2p per share (2013: 1.0p per share) payable on 19 May 2015 to all shareholders on the register at the close of business on 1 May 2015. The corresponding ex-dividend date is 30 April 2015. The Board intends to maintain a dividend policy which considers the balance between the growth in earnings per share and the investment needs of the business.

CONSOLIDATED INCOME STATEMENT

for the years ended 31 December 2014 and 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the years ended 31 December 2014 and 2013

All items of other comprehensive income may be reclassified to profit and loss in future periods.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2014 and 2013

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the years ended 31 December 2014 and 2013

CONSOLIDATED CASH FLOW STATEMENT

for the years ended 31 December 2014 and 2013

Notes

1. Basis of preparation

The basis of preparation and summary of significant accounting policies applicable to the consolidated financial statements of Quixant Plc can be found in Note 1 of the Annual Report and Financial Statements, available from the Company's website. The consolidated financial statements of Quixant Plc have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU.

The information in this news release does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006 ('the Act'). The statutory accounts for the year ended 31 December 2014 will be delivered to the Registrar of Companies in England and Wales in accordance with Section 441 of the Act. The auditor has reported on those accounts. Its report was unqualified and did not contain a statement under Section 498(2) or (3) of the Act.

2. Analysis of turnover

3. Earnings per ordinary share (EPS)

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of shares outstanding during the period.

4. Share capital

Share based payments

In 2013 the Company issued share options to employees. To be able to exercise these options, employees are required to be employed by the Company for a period of three years from the grant date. In addition exercise is conditional on the Company achieving a minimum level of EPS growth over the vesting period.

Options have been issued over 1,710,200 shares, with an exercise price of £0.49. Options issued under the scheme expire 10 years from grant date.

The fair value of employee share options is measured using a Black Scholes model. Measurement inputs and assumptions are as follows:

The fair value at grant date of £0.19 was converted at the exchange rate on the grant date to give a fair value of $0.29 per option. The total expense recognised in the period in respect of share options is $160,000 (2013: $113,000).