TIDMQXT
RNS Number : 1289I
Quixant PLC
31 March 2020
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)
-- Adjusted(1) 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
2019 2018
$m $m
Gaming platforms 46.6 62.5
Gaming monitors 9.6 15.1
Densitron 36.2 37.5
-----
Total 92.3 115.2
-----
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
2019 2018
<1k pcs 7,330 8,869
1k -
5k pcs 15,276 5,579
>5k pcs 18,082 46,632
-------
Total 40,688 61,080
-------
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
2019 2018
Cost Effective 9,134 17,013
Mid-Range 10,195 9,938
High-End 20,993 34,091
Ultimate 367 38
-------
Total 40,689 61,080
-------
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(R)
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.
For further information please contact:
Quixant plc Tel: +44 (0)1223 892
696
Jon Jayal, Chief Executive Officer
Guy Millward, Chief Financial
Officer
Nominated Adviser and Broker:
finnCap Ltd Tel: +44(0)20 7220
0500
Matt Goode / Simon Hicks (Corporate
Finance)
Alice Lane (Corporate Broking)
Financial PR: Tel: +44 (0) 20 3405
0205
Alma PR
John Coles / Hilary Buchanan /
Kieran Breheny
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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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