recurring revenues from annual support
contracts; ASP and bureau services; volume-based licence upgrades;
and revenues from implementation, consultancy, education and
training services. As a result of the acquisition of Digiquant in
September Intec is now developing a third line of business — the
management and billing of next-generation services. In addition,
Intec derived a small proportion (approximately 4%) of revenues
from hardware and historical business in non-OSS communications
products and services. We do not expect these non-core areas to
make a significant contribution in future periods.
Revenues from the majority of software licence contracts and
ASP/bureau services are based on the volume of traffic processed
by our software for each customer. In 2003 licences represented
23% of turnover at £11.6 million (2002: 33% at £15.5 million).
The decrease is attributable to three factors — generally more
difficult trading conditions in the telecoms market; downward
pricing pressure on contract values from competitors; and the
extension of the sales cycle in closing significant deals in the first
half of the year. A number of deals that were expected to be
closed earlier in the year were subsequently closed during the
fourth quarter and this has resulted in a satisfactory result for
licence revenues. Revenues from professional services amounted
to a total of £11.6 million (2002: £8.7 million) or 23% of
turnover. This revenue stream has grown by 33% in 2003, due
to implementation projects resulting from contracts signed in late
2002 and through 2003 but also from an increasing requirement
from our growing customer base to provide additional after-sales
services such as mediation scripting. Margins on professional
services have shown reasonable resilience in the current climate.
Recurring revenues come from annual fees for maintenance
and support, from volume-based licence upgrades, and from
ASP/bureau services. Similar support and upgrade policies exist
across all key product lines although some differences are evident
in acquired businesses. We are currently working with customers
to align these contracts into a standard form.
Total recurring revenues grew substantially, due to our larger
customer base, over the 2002 figure of £19.7 million to £25.3
million or 50% of turnover. Turnover from ASP and bureau
services, which are included in recurring revenues, grew from £2.8
million in 2002 to £3.5 million in 2003 as a result of a growing
contribution from US InterconnecT CABS bureau operations.
Looking at regional revenue performance EMEA was the largest
contributor at £21.2 million or 43% of turnover (2002: £16.9
million or 37% of turnover). The acquisition of the Ericsson
Settler business and further penetration throughout all of
Continental and Eastern Europe have contributed to this result.
North America at £15.5 million (2002: £21.1 million) or 31% of
turnover is some way down on 2002. This change is due in part
to large contracts in the region signed in the previous period as
well as the foreign exchange effect of the weakened dollar.
However, new business was also generally hard to contract in
this region as a result of operator budget pressures. Turnover in
the Asia-Pacific region grew 20% to £6.6 million (2002: £5.5
million), a very satisfactory result given the generally high levels
of pricing pressure in these low labour cost markets, where
indigenous suppliers can appear very cost-effective. CALA
continues to be a successful market for us, with revenue up 70%
to £6.8 million (2002: £4.0 million), despite the economic and
political difficulties in parts of the region. The acquired Ericsson
Settler business also made a good contribution in CALA.
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Margin and Costs
A major factor which has a significant impact both on revenue
and costs is the weakened dollar. Around a third of the Group’s
total costs are incurred in North America and movements in
average exchange rates during the period have reduced reported
costs by approximately £1.2 million. With an estimated reduction
in reported revenues of £1.6 million the net impact at the EBITDA
level is estimated to be a reduction of £0.4m.
Gross margin has improved to 70% (2002: 67%) primarily due
to a reduction in payments to third parties for implementation
services compared to 2002 where projects in the US were
delivered using some external resources. In addition, whilst
overall new licence sales are lower than 2002, volume upgrade
licences, which have increased by just over £1.5 million, coupled
with year on year increases in other recurring revenues,
contribute directly to the increase in margin.
Distribution costs of £8.8 million compare very favourably to last
year’s costs of £9.9 million, given the increase in sales revenue.
A quarter of the 12% decrease is due to foreign exchange while
the remainder is attributable to the full year benefit of resource
redeployment initiatives carried out in the EMEA region in 2002,
and further rationalisation throughout the Group’s third party
distribution channels. The decreases are offset by a minimal
increase due to acquisitions.
Development costs of £10.1 million have increased by £2.0
million. The increase of 25% is attributable in part (17%) to
acquisitions, with £1.4m of this increase from the InterconnecT
Settler development function in Sweden. In part, the increase
relates to employee incentive costs offset by savings generated
from the rationalisation of development functions in the UK and
Asia. The remaining increase is from continuing investment in
core product areas; in functionality and support capability to
service our increased customer base; rationalisation of multiple
acquired products into single, next-generation platforms; and
from expanding our product portfolio.
Other administrative expenses of £11.4 million compare well to
prior year expenses of £12.1 million (£12.9 million including the
exceptional Poland debtor provision of £0.8 million incurred in
2002). The decrease is attributable to the welcome absence of
non-recurring expenditure incurred in 2002 associated with the
legal costs of the BT litigation which was successfully concluded
at the beginning of the fiscal year, and a foreign exchange loss
in our CALA region. Net of provisions, underlying administrative
expenses have reduced from the prior year.
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Earnings
Earnings performance in 2003 has been a focus area for the
Company. Through a combination of modestly higher revenues
and careful cost management Intec has been able to deliver
EBITDA before exceptional items of £7.2 million (2002: £3.7
million) and positive operating cash inflow of £8.5 million (2002:
inflow £2.8 million). Adjusted earnings per share were 2.17p
per ordinary share (2002: 0.46p). As announced in our trading
update, we expected adjusted profit before tax to be
approximately £5.0 million and are pleased to report actual
adjusted profit before tax of £5.4 million compared to £2.2
million in 2002.
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Exceptional Items
As reported last year in 2002 our Polish associate failed to meet
its obligations to Intec. Whilst there is now no exposure on the
outstanding amounts due, legal proceedings instituted in 2002
continue as we seek to recover these amounts and we continue
to hold provisions against the trading exposure of £0.8 million.
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Taxation
The major trading companies in the US have not incurred
corporate tax liabilities. The US operations have substantial
ongoing tax benefits arising from goodwill allowances which will
continue to reduce tax charges against profits in future periods.
In addition there are significant losses brought forward in the US.
However, we have incurred a £0.5 million charge (2002: £nil) in
the UK and suffered corporate taxation in a number of our
overseas trading subsidiaries and branches amounting to £0.5
million (2002: £0.7 million), offset by a tax credit of £0.1 million
(2002: £0.3 million charge) in respect of previous years. The
remainder of the tax charge is in respect of withholding tax,
which is deducted at source in certain jurisdictions and which we
cannot recover, amounting to £0.4 million (2002: £0.6 million).
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Cash Flows and Financial Position
We are pleased to report a positive operating cash inflow of £8.5
million compared to a cash inflow of £2.8 million in 2002. Intec
has been operating cash flow positive for the last seven quarters.
Overall our cash resources increased by £2.0 million from £13.3
million at the start of the year to £15.3 million at 30 September
2003, after funding current and prior year acquisitions with cash
of £3.5 million.
Cost savings from rationalisation of prior period acquisitions,
distribution channels and development centres have all
contributed to the positive cash inflows generated during the
year. We have also continued to focus additional effort on
improving our trade debtors collections, and we achieved a
significant improvement in the annualised debtor-days ratio
of 92 days compared to 105 days at 30 September 2002,
amounting to a 13% reduction.
Our cash and cash equivalents of £15.3 million are more than
sufficient to meet the Group’s current operating requirements.
A significant proportion of our liquid funds is invested in a cash
plus fund to spread risk and improve yields.
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Acquisitions
Intec has a well-developed strategy and process for business
expansion through both organic development and carefullyevaluated
and managed acquisitions. The following progress
review considers acquisitions made during the 2003 financial
year.
Ericsson ‘Settler’ Business
In November 2002 Intec announced the intended acquisition
of Ericsson’s ‘Settler’ business unit, its major competitor in the
interconnect billing market. The acquisition completed on 18
December 2002.
The total consideration was funded from the Group’s cash
resources and amounted to US$5.1 million (£3.1 million including
acquisition costs of £0.1 million). The acquisition contributed
£2.0 million to revenue and has been earnings enhancing,
generating new license revenues, related services work and
recurring revenues for support & maintenance.
Digiquant A/S
On 17 September 2003, Intec acquired Danish company
Digiquant A/S. The consideration for the entire share capital has
been satisfied through the issue of approximately 15.96 million
new Intec shares worth €9.545 million (£6.7 million) and in
addition a €1 million loan (£0.7 million) was repaid post
acquisition.
The acquisition contributed £0.5 million to revenue and returned
a small loss in the post acquisition period after goodwill
amortisation. Digiquant currently has 128 staff based primarily
in Denmark, Atlanta, USA, Italy, Singapore, Australia and the UK
and an integration plan is underway and will continue through
the next financial year.
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Foreign Currency and Treasury
Intec normally invoices its customers in Sterling, US dollars
or Euros, which balances the risk of exposing the Group to
significant foreign currency gains and losses. The Group has a net
cash position and so is only exposed to interest rate movements
on its cash and cash investments. The Group’s policy is currently
not to hedge either foreign exchange or interest rate exposures.
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Future Outlook
Intec intends to continue its policy of sound financial
management based on continuous improvement of operating
performance, with tight control of expenditure, close attention to
product business case-based investment, and careful utilisation of
cash and other resources. We believe that our sound, transparent
finances are a key benefit in doing business in today’s economic
climate and we will continue to operate best practice accounting
and risk management policies.
John Arbuthnott FCMA
Finance Director
24 November 2003
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Financial Director’s Review
