QDG Quadnetics Grp

to GBP52.0 million (2008: GBP57.9 million). The major part of the decline in 
turnover came from a decrease in low margin pass-through revenue within its 
security management activities. Although the overall profit result for the 
division was around 10% below the Board's initial expectations for the year, it 
was a creditable performance in light of a tough economic and competitive 
background in the UK. 
 
 
The UK systems integration activities suffered from a substantial decline in 
anticipated business from both the UK banking sector and, the commercial high 
security market. Offsetting these declines, business remained stronger in the 
government public space and high security area and in the Middle East. 
 
 
The Group's on-vehicle CCTV activities produced a strong result, with further 
growth in revenue, profit and operating margin in the year. In particular, the 
new Synectics mobile video recorder is offering unique advantages to customers 
that should solidify Quadnetics' position as the UK market leader in this 
sector. 
The retail security managed services activities performed above expectations, 
and are now well positioned for expansion into larger facilities management 
contracts with their customers. 
 
 
Synectics 
The Group's security technology division, providing security network products 
and software, hazardous area systems and defence surveillance technology 
 
 
+-------------------------+-------------------------+-------------------------+ 
| Revenue                 | GBP21 million           |                         | 
+-------------------------+-------------------------+-------------------------+ 
| Operating Profit        | GBP1.3 million          |                         | 
+-------------------------+-------------------------+-------------------------+ 
(before product development costs) 
 
 
Synectics' revenue for the year was GBP21.5 million (2008: GBP23.1 million), on 
which the overall operating profit was GBP1.3 million (2008: GBP1.7 million), 
prior to charging costs associated with developing and bringing to market the 
new digital product suite. The most significant impact was a decline of 37% in 
revenue in the North American gaming market, after several years of consistently 
high organic growth. This appears to be a function of the general economic 
downturn, with projects delayed rather than lost or cancelled. Regulatory 
requirements should mean that the projects do happen over time, once an air of 
greater normality has returned. The North American activities were still 
profitable, but substantially less so than in the previous year. 
 
 
The UK defence activities also suffered from reduced volumes during the year, 
and produced an unacceptable loss-making operating contribution. Reduction of 
the cost base in this area to align with the reduced activity levels has been 
addressed within the overall Group restructuring. 
 
 
On the positive side, the Synectics Networks business outside North America 
recorded modest revenue growth compared with the previous year, as well as a 
substantial increase in operating margins as the benefit of increased sales led 
to improved efficiencies. The net result was very healthy and ahead of our 
expectations. 
 
 
The Group's sales into the global oil & gas and marine markets grew appreciably 
and, more importantly, internal efficiency gains resulted in much improved 
operating margins. This was achieved through substantially better process 
management, as well as increased focus on cross-selling other products from 
within the Group. This is an example of the success of Synectics in leveraging 
its wider systems products into opportunities for growth in our established 
customer base, of which we expect to see much more as we go forward. 
 
 
Revenues from Synectics' new H.264 products ramped up significantly in the 
second half, particularly in the mobile surveillance market where important 
sales gains were made in the UK bus and rail sector. The products include a 
range of digital video recorders and encoders that our customers tell us provide 
performance and, in particular, picture quality that are well ahead of competing 
offerings in the market. This is an example of the Group's strategy to develop 
proprietary core elements which, when combined with the best available third 
party system components as needed, provide differentiated integrated 
surveillance systems adapted to the needs of our specialist customers. 
 
 
People 
 
 
Last year was particularly difficult for our employees, given the amount of 
change they were asked to implement at the same time as responding to the 
increased pressures of unusually challenging markets. I would again like to pass 
on the Board's sincere thanks for the continuing commitment, creativity and good 
humour of all those who help to make Quadnetics what it is. 
 
 
As part of the process of recognising this commitment from our people, and 
ensuring that future performance is appropriately rewarded, the Board has 
recently put in place a revised share-based long term incentive plan for senior 
managers, and we will be introducing shortly a new all-employee share ownership 
plan. 
 
 
During the year we have had a number of changes among the Company's executive 
Board members. In November John Shepherd was appointed Group Chief Executive. 
John brings with him an impressive track record of achieving growth in 
medium-to-large technology businesses in markets similar to those Quadnetics 
addresses, and the Group is already benefiting from his experience. Glenn 
Robinson, Technical Director, left the Group in March this year. 
 
 
Russ Singleton, founder of Synectics and Chief Executive of Quadnetics from 
2002, has become Strategic Development Director, with the key responsibility for 
technology, products and business development across the Group. Russ has been 
the vital inspiration in the growth and evolution of Quadnetics, and I am 
delighted he has decided to re-focus his unique skills in this way. 
 
 
Strategy 
 
 
At the time of his appointment, the Board asked John Shepherd to lead a thorough 
review of Quadnetics' strategy and objectives. The key conclusions from his 
review have re-affirmed our strategy of focussing on a small number of 
specialist security and surveillance end markets with complex or highly critical 
needs. We continue to believe that the growth potential in building on 
Quadnetics' positions in mobile, extreme environment and high security 
surveillance applications is very substantial. 
 
 
The changes John has introduced are centred on consolidating and further 
integrating the Group's operations, as well as strengthening the senior 
management team. The new structure was formally put in place on 1 June 2009, and 
the operational changes are being implemented progressively across the current 
financial year. We expect the benefits to be measurable in terms of larger 
contract wins, more predictability in sales and increased overall operating 
margins. The newly recruited members of our senior management team, Paul Moonan 
and Graham Jones, come with records of having successfully led and grown larger 
businesses, and we look forward to the added impetus they will bring to 
achieving our objectives. 
 
 
Outlook 
 
 
The general economic background Quadnetics is addressing continues to be 
difficult, particularly in areas involving discretionary capital spending. Our 
gaming, financial services and defence customer sectors remain subject to 
lengthened sales cycles and therefore lower current revenues. Other areas, in 
particular oil & gas and mobile surveillance, continue to hold up well. Overall, 
the firm order book at year end was relatively low at GBP17.2 million (2008: 
GBP22.5 million); the sales pipeline, however, has risen to record levels since 
that date. 
 
 
Synectics new products are continuing to gain sales, and we expect a much 
improved contribution from that area in the financial year just started. The 
actions taken to reduce costs through consolidating similar activities in a 
reduced number of sites will also have a positive impact on margins from 2010 
onwards. The actions initiated so far will, when fully implemented, result in 
annualised cost savings of approximately GBP1.8 million, as well as providing 
tighter operational control. Overheads have been increased in certain areas, 
notably senior operations management and sales resource in faster growing 
geographic regions. 
 
 
The re-organisation and transition towards a more integrated structure initiated 
by our new Chief Executive are continuing and should be completed early in the 
second half of 2009/10. Combined with the still uncertain timing of large orders 
in several business areas, this will inevitably affect results in the short 
term, as costs are being incurred now to position the Group for economic 
recovery and future growth. Results for the first half of this financial year 
are therefore likely to be relatively weak, with again a much stronger second 
half expected. More fundamentally, the Board is confident that the increased 
senior management resources and more integrated organisation now in place give 
the Group the scalability to deliver consistent growth as we build on the strong 
market positions established over the past few years. 
 
 
 
 
 
 
David Coghlan 
Chairman 
 
 
9 September 2009 
 
 
 
 
 
+----------------------------------------------+--------+--+-----------+--+-----------+ 
| Consolidated Income Statement                |        |  |           |  |           | 
| For the year ended 31 May 2009               |        |  |           |  |           | 
+----------------------------------------------+--------+--+-----------+--+-----------+ 
|                                              |  Notes |  |      2009 |  |      2008 | 
+----------------------------------------------+--------+--+-----------+--+-----------+ 
|                                              |        |  |   GBP'000 |  |   GBP'000 | 
+----------------------------------------------+--------+--+-----------+--+-----------+ 

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