Spirent Regulatory News (SPT)

Michelle Balch

Deputy Company Secretary

Spirent Communications plc

+44 (0)1293 767676

RISK

POTENTIAL IMPACT

MITIGATION ACTIONS

MACRO-ECONOMIC

Spirent is a global business exposed to current world economic conditions and political uncertainties over which it has no control. The business is also exposed to government spending priorities, principally in the United States.

Deterioration in economic conditions and a change to the terms of conventional international trade may lead to a reduction in the level of demand for Spirent's products and services and cause customers to delay their purchasing decisions.

The Group closely monitors both market and geographic trends in order to respond to changes in demand and be in a position to take timely actions to protect profitability where possible.

In addition, Spirent has a large number of geographically diverse customers, which may mitigate the impact of issues in any one area.

TECHNOLOGY CHANGE

Spirent sells complex solutions in industries that can be subject to rapid technological changes. Testing new technologies drives our business, but the opportunity also brings high risk since keeping at the forefront of these key future technologies is critical to our success and to ensuring that we remain competitive in our markets.

It is critical that our product development investment is directed at the right areas in order to deliver the solutions that our customers need, when they need them.

Spirent's success is dependent in part on proprietary technology which may be infringed by others.

Protecting the Group's proprietary technology is important to enable Spirent to compete successfully.

If product development investment does not keep pace with the speed of change in technologies, or if it is not directed at the right key areas, our competitive position and financial performance will suffer.

If Spirent's solutions take longer to develop than anticipated or longer to develop than our competitors then our competitive position and financial performance will also suffer.

Changes in technologies may lead to a short-term pause by our customers investing in our solutions.

Intellectual property claims can result in significant defence costs, and may affect Spirent's ability to market its products.

All Spirent's businesses work very closely with customers and remain focused on their requirements.

Each business makes investment decisions specifically related to their solutions portfolio based on market needs.

Spirent continues to focus its investment into areas that offer the most potential for sustainable earnings growth. In 2017 the product development investment was $103.0 million (2016 $111.7 million).

Spirent has active intellectual property protection programmes in place to obtain appropriate protection in a cost-effective manner.

CUSTOMER DEPENDENCE / CUSTOMER INVESTMENT PLANS

The Group sells its products and services to a wide range of companies and continually seeks to expand its customer base. In 2017, no one customer accounted for more than ten per cent of Group revenue, although the top ten customers represented 41 per cent of Group revenue (2016 40 per cent).

In some of our markets certain customers have a dominant market share, which makes doing business with these customers and their suppliers critical to the success of our business.

In addition, many of the companies with which we do business are some of the largest global telecommunications corporations. Therefore meeting our development obligations, producing high quality products, and being on time are vital to Spirent's reputation and success.

Changes in our major customers' priorities in technology investments can also have a significant impact on their spending on Spirent products and on those in the customers' supply chain.

The industry continues to experience consolidation which does disrupt the spending patterns of affected customers.

Loss of one or more of Spirent's major customers could have a significant impact on Spirent's financial results.

Spend on Spirent's products is often capital in nature and so customer spend can fluctuate significantly from year-to-year.

Significant failings in either quality or being able to deliver in the appropriate timescale could cause long-lasting damage to Spirent's reputation and relationships.

Over recent years there has been significant consolidation in our customer base amongst service providers and network equipment manufacturers. This trend continues and often results in delays in spending, thereby reducing demand for Spirent's solutions and services. It also reduces the potential number of customers to whom those solutions and services could be sold.

Changes in our customers' technology investments can result in reduced spending on our existing solutions before customers and those in the customer's supply chain increase spending on new technologies.

Strong customer relationships are critical to Spirent. We aim to provide innovative solutions which meet customers' needs and we place great emphasis on providing professional service and support.

One of the Group's strategic objectives is to invest in deepening our customer relationships. We place engineers on-site with our customers, undertake site surveys of the use and intended plans for the use of test solutions in their business.

We seek to establish thought leadership in our industry through participation in standards bodies and industry forums, which in turn creates additional links with customers. Our approach is to play a key part in the wider supply chain to our key service provider customers by aligning with early adopters of technology.

BUSINESS CONTINUITY

Operational risks are present in the Group's businesses, including the risk of failed internal and external processes and systems, human error and external events, such as a natural disaster or cyber security attacks. For example, a significant portion of our communications operations are located in California which has in the past experienced natural disasters, including earthquakes and wildfires.

Contract manufacturers are used for the manufacture of a substantial amount of Spirent's products. Spirent's major contract manufacturer is located in Thailand.

The incidence of cyber-crime continues to rise. Spirent is dependent on its information technology systems for both internal and external communications as well as for its day-to-day operations.

A significant natural disaster could disrupt the Group's ability to conduct business and adversely impact revenue and operating results.

Failed internal and external processes, systems or human error could lead to compliance issues.

Disruption, financial problems of contract manufacturers or limitations in their manufacturing capacity could limit supply and/or increase cost.

If a cyber-attack were to be successful it could result in loss of data, confidential information and damage to Spirent's intellectual property, causing major disruption to the business. There would also be a potential impact on Spirent's credibility in the security market.

An important component of Spirent's corporate governance is its risk management strategy. IT disaster recovery plans are in place for all core business systems and ensure that the wider operations are all fully covered. In 2017, we developed and implemented a new Group Business Continuity and Disaster Recovery Policy and Procedure.

Regular meetings are held with contract manufacturers and a regular on-site presence is maintained. In addition, the Group's largest manufacturing subcontractor has multiple worldwide sites and comprehensive business continuity plans.

During 2017, we continued with a programme of work to develop processes and procedures in the area of cyber security.

COMPETITION

Spirent operates in a range of highly competitive niche markets which experience rapid technological change. In order to compete effectively, it is necessary to establish and maintain technological differentiation in our solutions.

The Group faces competition from new market start-ups as well as more established and well-resourced companies.

Industry consolidation amongst our direct competitors may bring about a shift in competitive advantage.

Actions by competitors and increased competition can bring about pressure on Spirent's gross margin. These factors could also affect Spirent's competitive position, thereby reducing revenue and consequently affecting financial results.

In the last two years, significant consolidation has been announced in our sector. The consolidation of competitors may bring opportunities for Spirent but can also change the competitive landscape as competitors are able to leverage product capabilities or sales channels.

The Group's broad solution portfolio, market-leading capabilities and customer focus continue to address this risk.

Spirent aims to maintain market-leading positions through significant investment in the development of differentiated products.

Competitor activity is closely monitored with a view to maintaining clear differentiation based on Spirent's products, services and global reach.

ACQUISITIONS

A key element of Spirent's strategy is to develop new capabilities and technologies, sometimes through acquisition.

Integration of acquisitions can be a complex process and the results expected from acquisitions may not be achieved due to problems encountered in integration, changes in market conditions, the rate of adoption of new technologies, or sometimes deficiencies arising in the due diligence processes.

Underperformance by acquisitions will impact the Group's results and may lead to impairment of goodwill and/or intangible assets.

Rigorous strategic and financial evaluations of all acquisition opportunities are carried out. Detailed financial and commercial due diligence is performed. The Board will only authorise transactions after all due diligence has been successfully completed and where the financial hurdles are within the agreed guidelines.

Integration plans and processes are carefully considered prior to acquisition.

The Board reviews post-acquisition performance.

EMPLOYEE SKILLBASE

Spirent is its employees. Attracting and retaining highly qualified and skilled employees is essential to enable the Group to deliver on its strategy and to the success of the business.

Intense competition for personnel is faced from other companies and organisations and the loss of key employees, the failure to attract and retain other highly skilled employees, or the failure to adequately plan for succession may impair Spirent's ability to run and expand the business effectively.

Investing in people is at the core of the Group's strategy. The aim is to find, keep and engage the highest calibre of employees and encourage their contribution and development. An environment that fosters innovation and collaboration is critical to Spirent's success, as is ensuring incentive plans are competitive.

Succession planning for senior posts in the Company is reviewed periodically by the Board.

Appropriate career paths and internal recognition programmes are developed for both technical and non-technical staff.

Regular reviews are performed to ensure that all elements of compensation across the Group are competitive with the market.