Final Results - Pre-tax Profit Up 14%

Diagonal PLC 22 February 2000 DIAGONAL PLC, the IT consulting group announces record profits for the full year ended 28 November 1999. Highlights for the year, before goodwill, include: * Group turnover up 3% to £72.4 million (£70.2 million) * SAP Consulting turnover up 27% to £30.6 million (£24.0 million) * Profit before tax up 14% to £8.4 million (£7.4 million) * Retained profit up 22% to £4.9 million (£4.0 million) * Earnings per share up 25% to 7.9 pence (6.3 pence) * Dividends per share up 25% to 1.5 pence (1.2 pence) * Shareholders funds up 42% to £19.7 million (£13.9 million) Commenting on the results, MARK SAMUELS, Chairman said: 'In what can only be described as a uniquely difficult trading period for IT Service companies, I am particularly pleased to report our seventh successive year of increased profits. Turnover attributable to our consulting activities rose from 44 per cent. to 56 per cent. of Group revenue, pushing up profit margins by a full percentage point to 11.4 per cent. This margin will continue to improve as we accelerate the process of change. The Directors are recommending a final dividend of 1.0p per share making a total of 1.5p for the full year, in line with the growth in earnings'. Mark Samuels Chairman CHAIRMAN'S STATEMENT I am very pleased to report our results for the year ended 28 November 1999. Although sales were disappointing in the period leading up to the millennium, we did manage a small increase of 3 per cent. in turnover to £72.4 million. Excluding goodwill amortisation, profit before tax rose by 14 per cent. to £8.43 million and adjusted earnings per share increased by 25 per cent. to 7.9p. Our consultancy operations continued to perform well, leading to a further increase in operating profit margin for the full year from 10.4 per cent to 11.4 per cent. A final dividend of 1.0p per share is recommended by the Directors, making a total payment for the year of 1.5p, an increase over the previous year of 25 per cent. The final dividend will be paid on 28 April 2000 to those shareholders on the register on 10 March 2000. Our SAP consultancies once again led the way with combined turnover growth of 27 per cent. to £30.6 million. As expected, SAP Support achieved the highest growth rate, increasing turnover by 64 per cent. to £12 million. In all we gained 42 new clients during the year and expect this momentum to continue. Projects also performed well, increasing revenue to £6.5 million, an increase of 20 per cent. Our agency businesses all suffered a decline in revenue, although a good level of profitability was maintained by applying strict margin disciplines and effective cost control. Just before the mid-year we began the process of building a new revenue stream, under the banner of Diagonal Solutions, with the acquisition of MFT Computer Systems. MFT specialises in document management and information retrieval. Immediately after our year-end we completed the purchase of the second member of this new group, Eurostar Network Systems, a highly respected product-led networking consultancy. CenturyCom, a young but fast growing internet security company, became the third member on 6 January 2000. There have been a number of Board changes during the year to reflect the future shape of the group management structure. Vic Tuffield became a Non-executive Director in September and was replaced by Graham Creswick as Finance Director. Bryan Churcher, also a founder Director, retired at the year end. Christine Chittock, Managing Director of SAP Consulting, was appointed to the Board in July and David Beresford, previously Managing Director of SAP Support, joined the Board in December 1999 with specific responsibility for Diagonal Solutions, our new group of product-led consultancies. As we now know, the widespread caution which prevailed in the industry in the second half-year proved unnecessarily pessimistic and we are already witnessing a return to normality. Our first quarter, which included December, will be affected but sales activity is now picking up quickly and we expect to be fully back on track in the second half-year. The last word must be reserved for the staff who have all performed with professional enthusiasm. My sincere thanks go to all of them. Mark Samuels Chairman FOR FURTHER INFORMATION MARK SAMUELS CHAIRMAN 01252 733711 GRAHAM CRESWICK FINANCE DIRECTOR 01252 733711 RICHARD POLLEN POLLEN ASSOCIATES 01428 608860 OPERATIONAL REVIEW 1999 has been a uniquely different year with widespread caution spreading through the industry as the year end approached. We now know that the fears associated with the recognition of the year 2000 by computer systems around the world proved excessively pessimistic. Along with many other businesses, we experienced a drop in sales from the mid-year onwards and it became necessary to forfeit contract agency sales to avoid under-utilisation of permanently employed consultants. This capability has always been a great strength of the Diagonal Group, which has helped to increase the percentage of turnover attributable to the consulting activities from 44 per cent. to 56 per cent. DIAGONAL CONSULTANCY SAP Implementation New implementations remained the biggest source of revenue despite the reduction in the sale of new software licenses by SAP UK in the second half of the year. Revenue increased by 11 per cent. to £18.6 million assisted by demand for new from our existing client base. Business-to-business e-commerce solutions were provided to a number of clients during the year. For the fourth time in succession Diagonal were declared the winners of the SAP UK Partner Excellence Award at the SAP User Conference held in December. SAP Support The Support Division of SAP Consulting continued to grow, with an ever expanding client list. Revenue increased by 64% to £12 million, once again leading the way in the percentage growth table. There was a satisfying increase in the number of new clients gained during the year from other SAP Logo Partners, confirming both the quality and service levels of the Division. Projects 1999 proved to be another good year for the Projects Division, increasing turnover by 20 per cent. to £6.5 million. IBM, on behalf of ASDA, remained the biggest client and significant progress was made at World Duty Free and MBNA. The Division provides a variety of services from project development to applications support. MFT Computer Systems MFT specialises in document management and information retrieval and was acquired by the Group just before the mid-year. Their impressive client list includes HM Treasury, Inland Revenue, The Prison Service, Customs and Excise and many other important Government agencies. Their private clients include Cadogen Estates, Pfizer and Tennants. Performance in the first seven months within the Group has been outstanding, with inter-company initiatives running at a high level. AGENCY BUSINESSES All of the agency businesses suffered from the slowdown in activity during the second half year. The merger of Marshall-Wilkins and Sequelogic at the beginning of the year has been very successful in containing overhead costs and the benefits should become more obvious in the next trading period. Turnover at MAPP, our largest agency, reduced by 11 per cent. to £12.75 million. The gross margin for the year was virtually unchanged from the previous year as a result of strict margin disciplines and the avoidance of poor quality business. Similarly, both Strand and Conos reduced turnover during the year but maintained gross profit margins to within one percentage point of the previous year. Mark Samuels Chairman FINANCIAL REVIEW FINANCIAL RESULTS Despite the somewhat difficult trading conditions in the second half of the year, the Group recorded a very sound financial performance for 1999. Though turnover increased by 3.1 per cent., both operating profit and profit before tax excluding goodwill amortisation, showed significant improvement over 1998, increasing by 13 per cent. and 14 per cent. respectively. Given the Group's stated aim of a continuing shift towards higher margin, consultancy based business and a resultant improvement in operating profit margins, it is satisfying to note that the latter reached 11.4 per cent. compared with 10.4 per cent. in 1998. (Both figures stated before goodwill amortisation.) MFT Computer Systems Limited (MFT), which was acquired on 29 April 1999, recorded a strong contribution in its first seven months as a member of the Group. The growth in revenues generated by the Group's own staff continued during 1999 and this trend was accentuated by the softening of the contract market which persisted for most of the year. A breakdown of the turnover, comparing 1999 with the previous year, is given below: 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s Growth Rate Own staff 33,097 25,806 28 per cent. Contractors 37,417 43,484 (14) per cent. Other 1,862 889 109 per cent. -------- ---------- ------------- 72,376 70,179 3 per cent. -------- ---------- ------------- Other turnover related primarily to permanent placement fees and product sales. CASH FLOW Cash generation remained strong throughout 1999 and the cash element of the acquisition of MFT in April was covered by the Group's own resources. At the year end, there were closing net cash balances slightly in excess of £4.7 million (1998: £5.1 million). Average daily cash balances were £4.9 million in the first half and £4.3 million in the second half. The average for the full financial year was £4.6 million. Since the year end, the acquisitions of Eurostar Network Systems was completed in December 1999 and that of CenturyCom Limited in January 2000. The cash element of the two transactions and associated payments for restrictive covenants absorbed £6.8 million and has resulted in some limited use of the Group's overdraft facilities. The average daily balance in the weeks since the start of the new calendar year has been £1.8 million overdrawn and is on an improving trend given the continuing generation of cash from our trading activities. The Group's overdraft facility was re-negotiated in December 1999 and now stands at £5 million. As part of the negotiations, the Group secured a considerable improvement in the rates of interest charged when the facility is utilised. INTEREST Net interest income improved to £177,000 against a 1998 figure of £97,000. As noted above, cash balances were utilised as part of the consideration for the businesses acquired in the early part of the current year. TAXATION Overall, the Group's effective tax rate was 25.1 per cent. The charge benefited considerably as a result of our decision to pre-fund a qualifying employee share trust. This resulted in an allowable deduction from taxable profit, amounting to £1.68 million and a consequent reduction in the tax charge of almost £511,000. It is anticipated that further pre-funding will be made to cover employee share options maturing in future years, but the quantum of the relief will be less than that achieved for 1999. If the effects of the pre-funding and the add-back of goodwill amortisation are ignored, then the effective rate on trading profits and interest was 29.6 per cent. which compares to 31.3 per cent. for 1998. Graham Creswick Finance Director CONSOLIDATED PROFIT AND LOSS ACCOUNT 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 Continuing Acquisition Total Operations £'000s £'000s £'000s £'000s TURNOVER 69,919 2,457 72,376 70,179 COST OF SALES (51,982) (810) (52,792) (53,146) -------- ------ -------- -------- GROSS PROFIT 17,937 1,647 19,584 17,033 ADMINISTRATIVE EXPENSES Amount written off goodwill (97) (144) (241) (97) Other administrative expenses (10,579) (757) (11,336) (9,719) -------- ------ -------- -------- Total administrative expenses (10,676) (901) (11,577) (9,816) -------- ------ -------- -------- OPERATING PROFIT 7,261 746 8,007 7,217 Interest receivable 251 172 Interest payable and similar charges (74) (75) -------- -------- PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 8,184 7,314 TAX ON PROFIT ON ORDINARY ACTIVITIES (2,056) (2,319) -------- -------- PROFIT ON ORDINARY ACTIVITIES AFTER TAX 6,128 4,995 DIVIDENDS (1,226) (965) -------- -------- RETAINED PROFIT FOR THE FINANCIAL PERIOD 4,902 4,030 ======== ======= Earnings per Ordinary Share 7.60p 6.21p Adjusted earnings per Ordinary Share 7.90p 6.33p Diluted earnings per Ordinary Share 7.52p 6.16p Adjusted diluted earnings per Ordinary Share 7.82p 6.28p ===== ===== Dividends per Ordinary Share 1.50p 1.20p Earnings per share and dividends per share have been restated for 1998 due to the effect of the bonus issue. There are no recognised gains or losses other than the profit for the current and preceding financial periods. Accordingly, no statement of total recognised gains and losses is given. CONSOLIDATED BALANCE SHEET 28 November 1999 28 November 29 November 1999 1998 £'000s £'000s FIXED ASSETS Intangible assets 5,642 979 Tangible assets 4,109 3,911 ------- ------ 9,751 4,890 CURRENT ASSETS Debtors 19,220 18,810 Cash at bank and in hand 4,792 5,467 ------ ------ 24,012 24,277 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR (13,215) (14,264) -------- -------- NET CURRENT ASSETS 10,797 10,013 ------ ------ TOTAL ASSETS LESS CURRENT LIABILITIES 20,548 14,903 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (708) (841) PROVISIONS FOR LIABILITIES AND CHARGES (140) (184) ------- ------- 19,700 13,878 ======= ======= CAPITAL AND RESERVES Called up share capital 8,137 2,011 Share premium account 4,279 7,802 Other reserves 600 600 Profit and loss account 6,684 3,465 ------ ------- EQUITY SHAREHOLDERS' FUNDS 19,700 13,878 ====== ======= RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 52 weeks ended 28 November 1999 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s Profit for the financial period 6,128 4,995 Dividends (1,226) (965) ------- ------ 4,902 4,030 Issues of shares 2,673 - Expenses of issues (70) - Funding of qualifying employee shareholding trust (1,683) - Goodwill arising on acquisitions written off to reserves - (218) ------- ------ Net additions to shareholders' funds 5,822 3,812 Opening shareholders' funds 13,878 10,066 ------- ------ Closing shareholders' funds 19,700 13,878 ======= ====== CONSOLIDATED CASH FLOW STATEMENT 52 weeks ended 28 November 1999 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s Net cash inflow from operating activities 8,674 7,464 Returns on investments and servicing of finance 178 71 Taxation paid (3,397) (1,204) Capital expenditure and financial investment (685) (926) Acquisitions and disposals (2,977) 325 Equity dividends paid (1,088) (643) ------- ------- Cash inflow before financing 705 5,087 ------- ------- Financing Issues of Ordinary share capital 10 - Expenses of issues (70) - Net repayment of borrowings (984) (769) ------- ------- (1,044) (769) ------- ------- (Decrease)/increase in net cash in the period (339) 4,318 ======= ====== 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s a. Reconciliation of operating profit to net cash flow from operating activities Operating profit 8,007 7,217 Amortisation of goodwill 241 97 Depreciation 1,410 1,176 Loss on sale of tangible assets 22 18 Decrease/(increases) in debtors 281 (5,008) (Decrease)/increase in creditors (1,205) 3,977 Decrease in provisions (82) (13) ------- ------- Net cash inflow from operating activities 8,674 7,464 ======= ======= b. Returns on investments and servicing of finance Interest received 253 168 Interest paid (1) (22) Interest element of finance lease payments (74) (75) ------- ------- Net cash inflow from returns on investments and servicing of finance 178 71 ======= ====== c. Capital expenditure and financial investment Purchases of tangible fixed assets (1,004) (1,209) Proceeds of disposals of fixed assets 319 283 ------- ------- Net cash outflow from capital expenditure and financial investment (685) (926) ======= ======= d. Acquisitions and disposals Acquisition of Sequelogic Limited - 325 Acquisition of MFT Cash cost of acquisition (4,087) - Less: Net cash acquired 1,110 - ------- ------- Net cash (outflow)/inflow from acquisition (2,977) 325 ======= ======= e. Reconciliation of net cash flow to movement in net funds Decrease in cash in the period (339) Cash outflow from lease financing 984 ------- Changes in net funds resulting from cash flows 645 New finance leases (901) ------- Movement in net funds (256) Net funds at 29 November 1998 3,406 ------- Net funds at 28 November 1999 3,150 ======= f. Movement in period At 29 Lease At 28 November Cash inception November 1998 flows Acquisition £'000s 1999 £'000s £'000s £'000s £'000s Cash 5,467 (1,785) 1,110 - 4,792 Overdrafts (394) 336 - - (58) ------- ------ (Decrease)/increase in net cash (1,449) 1,110 Finance leases (1,667) 984 - (901) (1,584) ------- ------- ------ ------ ------- Total 3,406 (465) 1,110 (901) 3,150 1. TURNOVER In the opinion of the Directors, the Group does not carry on substantially different classes of business and its turnover is solely derived from the provision of information technology consulting and related services. An analysis of the Group's turnover by operating unit (after eliminating inter-company revenues) is, however, set out below: 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s SAP Consulting 30,592 24,057 Projects 6,447 5,363 Consulting Services 706 - Information Systems - 1,177 MFT 2,457 - MAPP 12,748 14,322 Marshall-Wilkins 7,639 10,347 Strand Computer Systems 7,347 9,087 Conos Resource 4,440 5,826 ------ ------ 72,376 70,179 ====== ====== Marshall-Wilkins and Sequelogic have been combined for commercial reasons in 1999 and the comparatives combined from the previous period. An analysis of the Group's turnover by geographical market by destination is set out below. 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s UK 63,324 59,542 Other European countries 9,628 9,104 Rest of the world 424 1,533 ------ ------ 72,376 70,179 ======= ====== All of the Group's turnover originates in the United Kingdom. 2. EARNINGS PER SHARE Earnings per share have been computed in accordance with Financial Reporting Standard 14 'Earnings per Share' and have been adjusted to reflect the effect of the bonus issue that took place on 6 May 1999. Earnings per share in respect of prior periods have been appropriately restated. Basic earnings per share is calculated by dividing the Profit on Ordinary Activities after Tax by the weighted average number of Ordinary shares in issue during the period. Diluted earnings per share take account of the dilutive potential Ordinary shares, which arise under the employees' Save-As-You-Earn Share Option Scheme, where the exercise price is less than the average market price of the Company's Ordinary shares during the relevant period. A reconciliation of the earnings and weighted average number of shares used in the calculation is set out below. (as restated) 52 weeks ended 52 weeks ended 28 November 29 November 1999 1998 £'000s £'000s Profit on ordinary activities after tax 6,128 4,995 Amount written off goodwill 241 97 ----- ----- Adjusted profits 6,369 5,092 ===== ===== Number Number Weighted averaged number of shares in issue 80,651,523 80,431,600 Effect of options 799,862 703,772 ---------- ---------- Total shares 81,451,385 81,135,372 ========== ========== Pence Pence Basic EPS Unadjusted 7.60 6.21 Goodwill 0.30 0.12 ----- ----- Adjusted 7.90 6.33 ===== ===== Diluted EPS Unadjusted 7.52 6.16 Goodwill 0.30 0.12 ----- ----- Adjusted 7.82 6.28 ===== ===== 3. ACQUISITIONS MFT Computer Holdings Limited On 29 April 1999 Diagonal PLC acquired MFT Computer Holdings Limited and its 100 per cent. owned subsidiary MFT Computer Systems Limited. The book value and provisional fair value to the Group of the net assets acquired was: £'000s Tangible fixed assets 63 Debtors 439 Net cash 1,110 Creditors (amounts falling due within one year) (1,429) ------- 183 Goodwill 4,904 ------- Total consideration 5,087 ======= Satisfied by Shares allotted 979 Cash 4,087 Other consideration 21 ------ 5,087 ====== In the period since acquisition the MFT Computer Holdings Limited group has contributed £2,457,000 in turnover and £890,000 in operating profit. The (losses)/profits after taxation of the MFT Computer Holdings Limited group in the period prior to acquisition were as follows: (Loss)/ Profit After Tax £'000s Results prior to acquisition 1 April 1999 to 28 April 1999 (39) Year ended 31 March 1999 325 ==== The goodwill arising on this acquisition is to be written off over the estimated useful economic life of 20 years. 4. POST BALANCE SHEET EVENTS On 3 December 1999 Diagonal PLC acquired Eurostar Network Systems Ltd for initial consideration of £6.4 million. This was satisfied by £3.4 million in cash and the balance by issue of new Diagonal PLC Ordinary 10p shares. Deferred consideration of up to £2 million is payable on the basis of meeting certain growth and profitability criteria. The deferred consideration will be satisfied by the issue of new Diagonal PLC Ordinary 10p shares. On 6 January 2000 Diagonal PLC acquired CenturyCom Limited for initial consideration of £4.2 million of which £3 million was paid in cash. Deferred consideration of up to £3.8 million is payable on the basis of meeting growth and profitability criteria. The balance of initial and deferred consideration will be satisfied by the issue of new Diagonal PLC Ordinary 10p shares. 5. FINANCIAL INFORMATION The financial information set out above does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The results for the period to 29 November 1998 and the balance sheet and cashflow statement as at that date have been extracted from the financial statements of DIAGONAL PLC for that period, which have been delivered to the Registrar of Companies and which carry an audit report that is unqualified and includes no matter of adverse comment. Statutory accounts for the period ended 28 November 1999 will be delivered to the Registrar of Companies following their publication.

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