QXT.L Regulatory News (QXT)

25 March 2019

Quixant plc

("Quixant" or the "Company")

Final Results

Quixant (AIM: QXT), a leading provider of specialised computing platforms and monitors for gaming and slot machine applications, is pleased to announce its Final Results for the year ended 31 December 2018.

Financial Highlights:

1. Adjusted by adding back items included in the adjusted PBT reconciliation in note 2 to the financial statements totalling $3.9m (2017: $2.7m).

2. Adjusted by adding back the items included in note 1 above and subtracting the associated tax effect as set out in note 3 to the financial statements. In 2018 these amounted to $3.1m (2017: $2.1m).

Operational highlights

*Source: G3 Global Gaming Market report 2018 - 475,000 annual replacement cycle

Jon Jayal, Chief Executive Officer of Quixant, commented:

"2018 saw another year of record revenue and profits with revenue for our core gaming platforms up 14%. This was achieved despite softer than expected demand from several of our key customers. Market conditions have normalised during 2019, although some of our key customers have indicated to us that their demand for our gaming platforms will be more second half weighted than previous years, and we consequently anticipate our performance to mirror this trend. In light of this, we are taking a modestly more prudent view of our anticipated revenues for 2019, although our flexible cost model will ensure that the consequential impact on our anticipated profitability for 2019 is minimised. Following a wealth of organisational enhancements we believe Quixant is excellently positioned for robust long-term growth, with a substantial new business gaming pipeline in excess of $30m for delivery in 2020 and beyond. Our Densitron vertical market focused strategy is delivering results with the order book in the broadcast sector now reaching $4.5m."

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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. 

The information contained in this announcement is inside information for the purposes of article 7 of Regulation 596/2014.

Chairman's Statement

I am delighted to report on a successful year of record financial performance combined with undertaking significant enhancements in the fabric of the organisation as we become a larger and more complex enterprise.

Our core gaming platforms business has experienced another year of strong double-digit growth. Our share of the global market for gaming platforms has grown to around 13% (2017: 11%), giving us plenty of scope to continue our record of revenue growth. Despite some softness in 2018 impacting gaming in the short term, the outlook for the industry remains buoyant with significant long-term opportunities, not least the opening of the market in Japan.

During the course of the year we restructured the business to create a more scalable operation and also made several significant hires to the senior management team. Guy Millward was appointed as Chief Financial Officer in October 2018, taking over from Cresten Preddy who retired after many dedicated years of service to the company. I would like to personally thank her for her invaluable contribution and wish her well in her retirement. We also appointed Andrew Miller as Head of Corporate Operations with a remit to maintain an effective organisational infrastructure to support our ambitious growth trajectory. In early 2019 we also have made exciting appointments to bolster the management of our Densitron division.

Our business operations continue to generate healthy cash balances despite the demands on working capital over the last few years. Our confidence in the future growth of the business and cash generation leads the Board to recommend an increase in the dividend by 19% to 3.1p per share (2017: 2.6p per share).

Michael Peagram,

Chairman

Chief Executive's Report

Quixant has continued to deliver healthy year on year growth in 2018 driven by the core gaming platforms business posting 14% growth in revenue over the year to $62.5m (2017: $54.8m) relative to the previous year. As explained in the interim results, during the year we made a strategic decision to reduce the amount of low margin, commoditised gaming monitors business we were supplying due to increasing competition and the low achievable return on investment. As a result, gaming monitor revenue reduced to $15.1m from $16.3m in 2017. Densitron revenue was stable as expected at $37.5m (2017: $38.1m) and the business continues to be profitable and provide interesting opportunities in markets outside gaming.

Gross margins across the group remained stable over the year despite significant upward pressure on component prices.

Gaming division

Business model

Quixant's gaming platform solutions have been the core of our business proposition since the Company started in 2005. The founders of Quixant have a pedigree in industrial computer and display systems and identified a niche opportunity to develop bespoke computer solutions specifically for the casino gaming and slot machine industry. These gaming platforms have always incorporated both computer hardware and computer software elements packaged in solutions which meet the stringent regulatory needs of global gaming markets.

The game software is the most important factor in our customers' commercial success - a game which attracts players and retains them at machines for longer is the objective all customers seek. However, many manufacturers allocate significant resources developing the underlying computer platforms on which the games operate, despite the fact that the player does not directly experience these elements. Quixant brought to market a credible, purpose built, outsourced option which enabled customers to focus on the core element of game design and rely on Quixant for a regulatory compliant gaming computer platform.

Our continued investment into the gaming specific hardware and software features of our gaming computer platforms has earned us the recognition for being the industry leaders in outsourcing for these elements of the machines. Outsourcing computer platform design also enables customers to bring products to market quicker. Whilst typically there is a 12-18 month gestation period for new gaming platform wins generating revenue, we have helped reduce this to as little as 6 months on occasions, providing customers with a short cut to bringing products to market.

Our Gaming Ecosystem® is the cornerstone of our gaming proposition. Combining all elements of our hardware and software solutions, third party device support as well as our partnership and customer support model, the industry recognises Quixant's Gaming Ecosystem® as the standard-bearer in regulatory compliant, fit for purpose, gaming technology. The strength of the Gaming Ecosystem® is that it empowers customers with a wealth of compatible, supported hardware and software which accelerate game design, enable faster new market penetration and save development costs.

Some of the largest customers in the industry have started to recognise the benefits of Quixant's Gaming Ecosystem, opening doors to us in niche areas of these businesses. These types of engagement provide an excellent platform for these major customers to test Quixant's value proposition and lead to further outsourcing. We have seen this already with one of our customers in this space who first started working with us in 2016. We have since won another project with them and they contributed several million dollars of revenue in 2018.

Quixant introduced gaming monitors to its product portfolio in 2015 to augment the revenue generated by the platforms business. There is at least one but typically several gaming monitors per machine, all of which are connected to the gaming platforms. Whilst the extent of innovation in these products is more limited, we have been gradually adding increased functionality which enables Quixant to differentiate itself. This is particularly true in gaming button decks which are the control device used for the latest machines to replace mechanical buttons.

New Gaming Ecosystem® features

A new feature we started promoting in the Gaming Ecosystem® in late 2017 was our LED driving solution called QxLED. Slot machines are increasingly making use of LED illumination around the cabinet to make them more vibrant and enticing. Driving these LEDs requires both hardware and software elements which are time consuming to develop. QxLED brings an off-the-shelf product to the industry which manufacturers can use to drive the LEDs while minimising development effort. With Quixant's tools, the LEDs can be synchronised to content on the screen to enable ambient lighting effects as part of game play.

This new feature is a blend of both hardware and software elements and is available on our newer gaming platforms as well as through an add-on product which can be retrospectively purchased.

Gaming platforms

The success of the business strategy has resulted in Quixant increasing its market share every year and in 2018 we supplied 61,000 platforms, an increase of 17% over the 52,000 we supplied in 2017. Based on an annual replacement cycle of around 475,000 machines this suggests a market share of around 13%.

During the year we also made the first volume shipments to Novomatic, one of the largest gaming companies in Europe, after several years of collaboration. We have undertaken several projects with Novomatic and enjoy a privileged relationship with them as a technology partner. We see scope for continued and expanded collaboration with them over the coming years.

We also saw strong growth in 2018 from a major manufacturer who we started supplying for the first time in 2017 with one of our cost-effective computer platforms used in their jackpot controllers. This exciting new business win has led to us collaborating on several other projects which strengthen our pipeline. Overall, we saw a migration of the mid-tier of customers (by volume) growing into top tier customers as their consumption of Quixant computer platforms grows. This is a typical scenario as new business ramps.

We also saw healthy growth in our cost-effective platform range, which is well suited to casino systems product and lower cost markets where high levels of graphical intensity are not critical.

Sales by customer unit purchase quantity

Gaming monitors

In 2018, we shipped 13,150 button decks (2017: 12,950) and 17,650 (2017: 18,500) main screen monitors. We also shipped a significant value of associated monitor product such as touch sensors and controllers which are not reflected in the figures above. Quixant's gaming monitors business has been broadly separated into two product categories: main screen monitors and electronic button decks.

The majority of the competitors for gaming monitors originate in Asia (mainly Korea) and have typically been more focused on the main screen monitors (which have widespread adoption in markets outside gaming) rather than the gaming specific button decks.

Our decision to reduce exposure to some of the highly price sensitive main screen gaming monitors business has released resources to develop more bespoke button deck solutions, which we believe represent an increase in our addressable market by around $250m. Whilst this as expected resulted in our 2018 gaming monitors business revenue falling to $15.1m from $16.3m in 2017, it has led to profitability improvements and in the long term we believe a more stable platform for sustainable growth.

During the year we commenced shipments of button deck solutions to a major Japanese gaming manufacturer. Supported by our Tokyo team who were brought on as part of the Densitron acquisition, this exciting business win positions us well for further opportunities in this significant market.

We will be launching a new modular design 27" floating monitor in 2019 which offers the flexibility for cost-effective customisation of the main screen monitors to fit customers' specific requirements.

Sales by gaming monitor type

Supply chain challenges

Shortages in the electronic components industry have presented a significant challenge to electronics equipment manufacturers over the last couple of years. The supply of several categories of component, including memory components (DRAM) and sub $1 commodity "passive" components (resistors, capacitors and inductors) has failed to meet the demand in the market. The resulting shortages have placed major upward pressure on prices and dramatically extended lead times for these components. The table below illustrates the spot memory price of DDR4 progression of a specific type of DRAM memory components over the last 24 months.

DDR4 memory price relative to June 2016

Passive components have historically been available with, in some cases zero lead times but during 2018 were being quoted with up to 8-month lead times.

Quixant recognised the potential dislocation early and in 2017 we gradually started to build strategic stock of critical component lines. This continued throughout 2018 and the elevated stock position has enabled us to maintain gross margins and, critically, maintain committed customer lead times.

Whilst this environment has been challenging for us to navigate, our expertise in component sourcing has enabled us to maintain our historic core gaming platform business gross margin. 

Gaming market outlook

The land-based gaming industry continues to present major opportunities for market share expansion. With the opening of new territories such as Japan, there is scope for a general growth in regulated markets which Quixant is well-positioned to benefit from. With a background of overall market growth, we continue to grow market share of the annual replacement cycle as manufacturers continue to look to outsource.

Densitron division

Business strategy

Densitron's business has traditionally been in the supply of small display components which are used in industrial equipment in a wide variety of vertical markets. The business has global reach and an experienced sales and engineering team capable of identifying and delivering suitable display solutions which meet customers' specific requirements. An understanding of the environmental characteristics, performance requirements and available technologies has been a key strength of the business.

The commoditised nature of the display components market and the strengthening capability for industrial equipment manufacturers to source directly from Asia has increased competition in Densitron's core business. When Quixant acquired Densitron in November 2015, we embarked on a change in direction for the business to identify opportunities for higher value, differentiated products.

To be successful in the crowded electronics marketplace, it is essential to focus on specific verticals and offer compelling products which are difficult for the bulge bracket component suppliers to attack.

This change in business strategy has required a change in management and mindset to enable us to identify suitable vertical market opportunities and thereafter evolve new product offerings which capitalise on them.

Broadcast market opportunity

Shortly after completion of the acquisition, we undertook a detailed analysis of the vertical markets Densitron supplied and evaluated the products supplied, market dynamics/size, technology requirements and other participants in the markets with a view to identifying opportunities for Densitron to execute its vertical market focused strategy. We built a set of criteria which a vertical market needed to meet to be suitable for consideration.

Broadcast was identified as one of several sectors which fulfilled many of the necessary criteria and as a result in early 2017 we exhibited at a London broadcast industry show, BVE 2017. We have since exhibited twice at IBC in Amsterdam and once at NAB in Las Vegas which address the EMEA and North American broadcast markets.

We have also started launching market-centric products. Our UReady TFT display range won a best of show award at NAB in 2018 and gives broadcast customers a unique, high quality display for their rackmount equipment. Densitron's mission in broadcast is to empower customers with a route to implementing the benefits of touch screen technology whilst addressing the lack of tactile feel which is essential for certain applications.

We are also introducing embedded computer products and software to make driving these displays easier and have brought our first solutions to market, which are now being marketed to customers.

Our broadcast pipeline has now grown to $4.5m and we have confidence the industry represents a major opportunity for a diversified source of revenue for Quixant Group. We believe the business secured to date is a source of top line growth for Densitron in the coming 12-24 months.

Investment case

Quixant has built a successful business focused on delivering technically innovative products targeted at specific vertical markets. The business has an ingrained culture of engineering competence, innovative thinking and commerciality which has delivered healthy growth in the gaming industry. The highly regulated nature of the gaming industry, the size of the market and strength of Quixant's brand and products provide the engine for continued strong growth in the gaming sector.

Alongside this growth, Quixant's ability to generate vertical market focused technology has wider applications in a variety of other markets and Densitron has the ability to identify those markets and augment the growth in gaming. The broadcast opportunity is in its infancy but is starting to gather momentum.

The Company also generates significant cash, has a strong balance sheet and low leverage.

Organisation enhancements

Quixant's growth over the last 5 years has been strong with revenues increasing close to 5 times. In addition, the acquisition of Densitron and the trebling in the headcount creates a more complex enterprise to manage. It is therefore right that we have taken significant steps to ensure an effective management structure to deliver the business today and the significant growth potential for the future. We undertook the move to a Corporate/Divisional operating structure to ensure both Gaming and Densitron business are expertly managed and leverage Group resources in HR, finance, IT and legal effectively.

Alongside the appointment of Guy Millward and Andrew Miller to Quixant's corporate team, we have also brought two high calibre executive directors to Densitron's Board in early 2019. Simon Jones will be joining Densitron as Group Managing Director for the Densitron Division. Simon has a distinguished career, initially as a consultant at Mercer, Capgemini and KPMG and subsequently and latterly as a director in B2B businesses such as Dyson, Jewson and PHS. Martyn Gates was also appointed in January 2019 as Product Director and brings 36 years' commercial, engineering and research experience in the broadcast sector to Densitron.

 We have also complemented these Board level hires with staff across a spectrum of roles to enhance our commercial and technical edge. For example, we have brought on former gaming industry engineers which not only enables us to collaborate more effectively with customers but also to be more innovative in our solutions.

We enter 2019 with a significantly strengthened management team and an effective scalable organisation structure which positions us well for the future.

Summary and outlook

Our core gaming platforms business continues to grow strongly and as expected, the gaming monitors business saw reduced revenues in 2018, but the focus on higher value product and our greater technical expertise leads us to believe in strong, profitable growth potential for this area of the business. During the year we experienced softer than anticipated demand for our platforms from some of our key customers. Overall market conditions have normalised during 2019, although some of our key customers have indicated to us that their demand for our gaming platforms will be more second half weighted than previous years, and we consequently anticipate our performance to mirror this trend. In light of this, we are taking a modestly more prudent view of our anticipated revenues for 2019, although our flexible cost model will ensure that the consequential impact on our anticipated profitability for 2019 is minimised. Nonetheless, with a substantial gaming opportunity pipeline, we remain confident in long term buoyant growth and we believe a nuanced sales message, our strategy of targeting a range of stakeholders in the customers and continued investment into innovation in our product will lead to long term success in converting the largest manufacturers to increasingly adopt Quixant.

With a healthy pipeline, we will be delivering revenue in the broadcast sector through the Densitron business in 2019. We have a considerably strengthened team and combined with our streamlined organisational structure, we believe Quixant is excellently positioned to deliver sustainable, healthy growth in revenue and profits.

Jon Jayal,

Chief Executive Officer 

Financial review

Revenue

The Quixant Group achieved revenues of $115.2 million in the year, an increase of 5% on 2017 ($109.2 million). Gaming division revenues were $77.6 million, an increase of 9% on 2017 ($71.1 million). This was split between Gaming platform revenue of $62.5 million, a 14% increase on 2017 (2017: $54.8 million), and Gaming monitor revenue of $15.1 million, a 7% decrease on 2017 (2017: $16.3 million). Densitron division revenues were $37.5 million, a decrease of 2% on 2017 (2017: $38.1 million).

The growth in the Gaming division has largely been driven by the continuing development of existing customer relationships. Gaming monitor revenue declined following the strategic decision to reduce the amount of low margin, commoditised gaming monitors business we were supplying. Densitron revenues declined marginally as sales of new products are yet to ramp up to replace declining older product revenue.

Gross profit and gross profit margin

Our gross profit for the year was $39.8 million representing a gross margin of 35%. This compares with a gross profit achieved in 2017 of $37.0 million and a gross margin of 34%. The underlying gross margin for each part of the business has been maintained in the year with the improvement coming from the move away from low margin gaming monitor sales. Component pricing and lead times have proved challenging in 2018 with component shortages raising prices and pushing some lead times out to 9 months, we have adapted our buying to accommodate this and maintain our margins.

Profit before tax (PBT)

Adjusted PBT increased 3% to $18.2 million (2017: $17.7 million). PBT decreased by 5% to $14.3 million (2017: $15.0 million). Adjustments to profit before tax amounted to $3.9 million in 2018 (2017: $2.7 million) and comprise share-based payments and amortisation of acquired intangibles that are not cash expenses and restructuring costs, which are not comparable with the prior year, as we strengthened resources in the business - see note 2.

Expenses

During the year the Group expenditure on research and development increased by 21% to $6.4 million (2017: $5.3 million) representing 16% of gross profit (2017: 14%). These costs relate to investment activities principally undertaken in Taiwan, Italy and Slovenia. $2.6 million of these costs were capitalised (2017: $1.6 million) with amortisation for the year on total capitalised development costs of $1.3 million (2017: $1.0 million).

We have continued to strengthen the business across all areas in the year, including increasing our headcount to 203 people (2017: 176 people). Staff costs, being the largest contributor to overheads, increased by 27% in the year to $16.3 million (2017: $12.8 million).

Taxation

The tax charge for the year decreased to $0.2 million (2017: $1.9 million), representing a corporation tax charge of 1.2% on pre-tax profits (2017: 12.6%), due to higher tax allowances and lower taxable profits. The Group continues to benefit from enhanced tax reliefs available in respect of qualifying research and development expenditure and has also benefited from patent box relief, tax relief on the exercise of employee share options (some of which relates to prior years), prior year double tax relief not previously claimed and the use of brought forward losses in Densitron.

Earnings per share

Basic earnings per share increased by 7% to $0.214 per share (2017: $0.200 per share). Diluted earnings per share increased 8% to $0.213 per share (2017: $0.197 per share). Adjusted fully diluted earnings per share as set out in note 10 to the financial statements increased by 14% to $0.260 per share (2017: $0.229 per share).

Balance Sheet and Cash Flow

Non-current assets have increased in the year to $22.5 million (2017: $21.3 million) due to the increased R&D discussed above. We have changed the methodology for assessing impairment of intangibles this year, the Densitron group of CGUs has been used, rather than the 4 subdivisions of Densitron used in prior years, because the Board of Directors no longer monitor goodwill at the lower level of sub-divisions for internal purposes. Reporting to the Board has also changed in the same way. Inventory has decreased to $19.4 million (2017: $21.2 million). Raw material inventory has increased as we have made purchases to counter long lead times and to ensure we have sufficient components that are no longer sold by suppliers to continue to deliver our product set. Finished goods have decreased owing to a strong trading month in December which also caused the large increase in trade receivables. Trade payables have increased as we continue to maintain stock levels for growing sales.

The cash generated from operating activities in the year amounted to $11.3 million (2017: $8.1 million). The increase in cash generated is largely due to the movements in working capital in the year which have been explained above. The Group has continued to invest in the business, spending $4.1 million (2017: $2.3 million) on investing activities including capitalised product development.

In the year $5.4 million has been used to repay borrowings (2017: $2.2 million). The only remaining debt at 31 December 2018 was a $0.9m mortgage on the Taiwan property and a factoring facility in France of $0.3m which was repaid in February 2019.

Dividend

The Board intends to maintain its progressive dividend policy while continuing to invest in the business. As such, the Board proposes a dividend in respect of the year of 3.1p per share, an increase of 19% on the previous year (2017: 2.60p per share) payable on 10 May 2019 to all shareholders on the register on 23 April 2019. The corresponding ex-dividend date is 18 April 2019.

Guy Millward

Chief Financial Officer

CONSOLIDATED STATEMENT OF PROFIT AND LOSS

AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED 31 DECEMBER 2018 AND 2017

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CASH FLOW STATEMENT

FOR THE YEARS ENDED 31 DECEMBER 2018 and 2017

NOTES

(forming part of the financial statements)

1. General Information

Whilst the information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") as adopted by the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRSs. The accounting policies adopted in this preliminary announcement are consistent with the Annual Report for the year ended 31 December 2018.

The financial information set out in this document, which was approved by the Board on 25 March 2019, is derived from the full Group accounts for the year ended 31 December 2018 and does not constitute the statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group accounts on which the auditors have given an unqualified report, which does not contain a statement under section 498(2) or (3) of the Companies Act 2006 in respect of the accounts for 2018, will be delivered to the Registrar of Companies in due course.

The Board of Quixant plc approved the release of this preliminary announcement on 25 March 2019.

Pursuant to AIM Rule 20, the Annual Report and Accounts for the financial year ended 31 December 2018 ("Annual Report") is available to view on the Group's website: www.quixant.com and will be posted to shareholders who have requested a paper copy shortly. Quixant will hold its AGM on 16 April 2019.

2. PBT reconciliation

PBT and adjusted PBT for the current and prior year have been derived as follows:

1. The amortisation of customer relationships and order backlog has been excluded as it is not a cash expense to the Group.

2. Share-based payments expense has been excluded as they are not a cash-based expense.

3. Other items of income and expense - where other items of income and expense occur in a particular year and their inclusion in PBT means that a year-on-year comparison of year-on-year results is not on a consistent basis the directors will exclude them from the adjusted numbers. During the years under review the directors have excluded the costs arising from the replacement of faulty DRAM component and restructuring costs due to their incomparability with the previous year.

3. Earnings per ordinary share (EPS)