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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