Final Results

Diagonal PLC 20 February 2003 20 FEBRUARY 2003 DIAGONAL PLC ACQUISITION AND PRELIMINARY RESULTS ANNOUNCEMENT FOR THE 52 WEEKS ENDED 29 NOVEMBER 2002 Key highlights include: • Acquisition of Partners for Change, a change management consultancy, for a maximum cash consideration of £2.7 million • Strategy of small focused acquisitions to enhance consulting capability being implemented 2002 2001 Turnover £63.6 million £82.2 million Profit before Tax* £5.8 million £7.5 million Adjusted Diluted Earnings per share* 4.45p 5.92p Final Dividend per share 1.20p 1.20p Cash £14.4 million £10.2 million *All figures are before amortisation and impairment of goodwill of £8m • Gross margins increased by three percentage points • Increased cash generation and strong financial position • SAP revenues stable in difficult markets • Support revenues now 30% of Secure Networks revenue Enquiries: Graham Creswick, Chief Executive Tel: +44 (0) 1252 733 711 Steve Fleming, Finance Director Ian Seaton, Bankside Consultants Limited Tel: +44 (0) 20 7444 4157 Notes to Editors Diagonal PLC provides a broad range of IT consulting services. The Consulting Division is one of the UK's leading implementers of SAP systems and has been awarded SAP Partner of Excellence on each occasion it has been presented. It also specialises in Enterprise Application Integration and e-commerce skills. The Secure Networks Division provides network and remote access security and consultancy. CHAIRMAN'S STATEMENT The continuing global economic uncertainty experienced by most businesses in 2002 has led to an increased client caution in relation to IT expenditure. As a consequence of this, turnover fell to £64m and pre tax profit (prior to the amortisation and impairment of goodwill of £8m) to £5.8m. This is after the £800,000 of charges referred to in our trading statement in September 2002. However, it is pleasing to note that operational changes we have made across the business have led to an improvement in gross margins in all operating divisions. In addition the Group remains firmly cash generative. There continue to be opportunities to develop our SAP business, and to that end I am particularly pleased to announce the acquisition of Partners for Change. The total consideration payable under the acquisition agreement is a maximum of £2.7m in cash. For the year ended 30 June 2001 (being the latest period for which audited accounts for Partners for Change have been filed) Partners for Change recorded a profit before taxation of £0.3m and as at 30 June 2001 had net assets of £0.3m. Partners for Change is a change management consultancy, established in 1994, with whom we have partnered on a number of projects, including a recent £6m project with a major client. Any significant IT investment requires the resultant business change to be properly managed in order to maximise the return and ensure that the transition to the new systems occurs smoothly. I believe that Partners for Change will enhance and broaden the service we are able to provide to both our existing and potential multi-national clients and I welcome the management, consultants and other staff to Diagonal. A final dividend of 1.2p is recommended by the Directors, making a total for the year of 1.8p per share, in line with 2001. The final dividend will be paid on 25 April 2003 to those shareholders on the register on 7 March 2003. There are few signs of any improvement in market conditions and as a result the current year is likely to prove equally challenging. However, we will continue to focus on maintaining margins and robust cash generation while delivering a quality service to our clients. I should like to thank all members of the management and staff for the outstanding contribution they have made during a demanding year. Mark Samuels Chairman OPERATING AND FINANCIAL REVIEW OPERATING REVIEW GROUP 2002 proved to be an extremely tough year against a backdrop of a continued economic slowdown. In the light of these conditions, faced by all within the IT sector, we have focused on maintaining margins and cash generation. Consolidated Group revenue was £63.6 million, compared with £82.2m in 2001, representing a fall of 23%. Gross profit has fallen to £20.0m (2001: £23.6m). The operational changes reported in September 2002 have already begun to produce benefits in terms of enhanced gross margins across all our operating divisions. The overall gross profit margin percentage has increased by nearly three percentage points to 31.5%. Operating profit of £5.5m (stated before amortisation and impairment of goodwill of £8m) was 23% lower than last year (£7.1m), although overall operating margins have fallen only slightly from 8.7% to 8.6% in 2002. DIAGONAL CONSULTING Diagonal Consulting is engaged in two principal areas: SAP Consulting and Enterprise Application Integration (EAI) Consulting. The legacy Resourcing business produces only a small contribution to Group profits but accounts for almost £9m of the fall in revenue noted below. Diagonal Consulting revenue was £48.2m (2001: £60.7m), a decrease of 20.6%, and represents 76% (2001: 74%) of total Group revenue. Gross profit fell from £16.0m to £13.7m (a decrease of 14.4%) but the operating margin before amortisation of goodwill increased from 8.2% to 8.7%. DIAGONAL SAP CONSULTING FINANCIAL OVERVIEW Diagonal SAP Consulting delivers business systems using one of the world's leading software products. SAP AG described 2002 as the toughest year in their history and experienced its first ever year on year decline in new software licence sales. Importantly, however, SAP continued to gain market share over its competitors. Against this background and a worldwide decline in IT spend, Diagonal SAP Consulting performed well, with revenue of £34.9m (2001: £36.5m); a fall of 4.4%. The forward order book continues to be strong and is ahead of the comparable period last year. Gross profit for the year was £10.4m (2001: £10.5m), and represents an overall gross margin of 29.7% (2001: 28.8%). Operating margin before amortisation of goodwill was stable at 11.1%. The improvement in margins and relative stability of revenues is especially pleasing given the uncertain economic environment and continued competitive pressures. OPERATIONAL OVERVIEW Diagonal SAP Consulting has unrivalled experience and in-depth knowledge to ensure that clients' IT investments are business focused and aligned with corporate strategy. We worked with over 100 clients in 2002, most of whom are longstanding. We are trusted by our clients not just because of our experience and proven ability, but also because we are committed to delivering real value. We aim to exceed all our clients' expectations. In recognition of our standing with clients, we have been awarded the SAP 'Partner of Excellence' award every year since its inception. In 2002, new initiatives included the first SAP Business Warehouse implementation in China, new supply chain functionality across the USA, Asia and Europe, and a Customer Relationship Management Solution from telesales through to field service. Our expertise in both Supply Chain Management and Customer Relationship Management were recognised when SAP asked us to participate in their global 'Ramp Up' Programme involving the provision of technical resource to SAP's own development team. During the year we developed further the global business established in 2001. As well as completing international projects, our offices in Philadelphia, USA and Singapore helped deliver 24-hour worldwide support to major clients such as Huntsman and Boots. The challenge for 2003 is to win and deliver projects originating in those regions. The majority of projects undertaken in 2002 focused on extending divisional and factory-level ERP into supply chain management, human resources, customer relationship management and new regions in support of our global clients. Our larger clients are building global systems and continuing to extract benefits from a software platform which is the result of the world's largest applications development R&D spend. Our global reach, portfolio of services, constant innovation and client track record clearly demonstrate our commitment to our clients. Finally, we are delighted to welcome Colin Burnside back, after a four year secondment to SAP (UK) Limited. Colin was the founder of our SAP Consulting business and has spent the past few years in a variety of executive posts within SAP (UK). His knowledge of the SAP community will help strengthen our relationship with SAP, and enable us to further develop further our services in 2003 and beyond. EAI CONSULTING Financial Overview Revenue for EAI consulting was £5.8m (2001: £8.1m). The slow pace of client and prospective client decision-making and the relatively small number of significant projects being instigated during 2002 were key features. These factors caused us to re-assess delivery capacity in the summer and subsequently, to reduce consultant numbers and restructure the business at a cost of £200,000. These changes have had a positive impact and the business demonstrated improving levels of utilisation and profitability throughout the second half. Despite gross profit falling to £2.3m (2001: £2.8m), this represented a gross margin of 39.6%, an improvement of five percentage points over the previous year. Operating profit before amortisation of goodwill, but after the costs of restructuring, fell to £0.3m (2001: £0.9m). Operational Overview By the end of 2002, we had achieved our stated aim of becoming a Microsoft Gold Partner. We believe that the increased profile that this gives the business within Microsoft will have a tangible benefit in terms of the number and quality of opportunities that will be referred to Diagonal in future years. Specific focus will be given during the year to building upon this achievement. Throughout 2003-2005, Microsoft's '.NET' family of server products will become an increasingly important strategic component of the IT infrastructure deployed throughout a significant proportion of UK businesses. We believe that our ability to offer consulting, development and implementation services around this suite of products will be a source of demand for our skilled staff. In addition, we will continue to offer integration services which build upon both Java and Microsoft technologies in the delivery of portal solutions. Our proven ability to 'XML enable' legacy applications as a means of building interfaces between systems and organisations will be extended into the delivery of Web Services. We believe that clients will increasingly adopt this approach as the de facto standard for the development of Internet-based system interfaces. Whilst there are no obvious signs that the business climate in 2003 will be any easier than that encountered during 2002, the restructuring was undertaken to preserve core technical skills relevant to the company's future strategy. Competencies in both Java and Microsoft technologies were maintained, and management believe the business to be appropriately sized and skilled to achieve its objectives in the face of that climate. DIAGONAL SECURE NETWORKS (DSN) Financial Overview DSN's performance should be reviewed against an economic environment which saw many of our competitors struggle to deliver profitability. Whilst DSN revenue has fallen to £15.4m (2001: £21.4m) the improvement in gross margin to 41.0% (2001: 35.5%) and a 95% client retention rate are both significant. The decision taken in the latter part of 2001 to focus on higher margin work has led to this improvement in margins with support and maintenance revenues increasing by 50% to represent 30% of divisional revenue. DSN generated an operating profit before amortisation of goodwill of £1.3m (2001: £2.1m) and an operating margin of 8.2% (2001: 9.8%). Operational Overview The delivery of ongoing support and maintenance services and the continuing development of information security consultancy under the Claritas brand remain a key focus for the business. Divisional board appointments of both a technical director and a consulting director during the year are intended to ensure that this focus delivers results. We have a significant portfolio of technology products relevant to our marketplace and continue our key partnerships with Check Point, Nokia, RSA and Cisco. Our product review and adoption process ensures that we assess emerging technologies and move them into the core portfolio as market demand develops. To ensure that we retain our position as a leading supplier of contemporary technological solutions, it is our aim to become accredited as a Cisco partner for the provision of IP Telephony solutions. This is an investment that will achieve results in the medium-term rather than the short-term since we anticipate that demand will accelerate during 2004 and 2005. The continued emphasis on high margin business with associated consultancy and project services and the investment in activity such as IP Telephony accreditation will result in the business undertaking larger and more complex projects for its clients. This will lead to a deepening of the relationships with our clients building on the retention rate achieved this year. FINANCIAL REVIEW EARNINGS PER SHARE Basic earnings per share have fallen from 2.26p to a loss per share of 4.56p. The reason for this sharp decrease was the goodwill impairment charge of £5m. This reflects the reduced level of business now arising from the legacy Eurostar Network Systems business which formerly represented some 40% of DSN's business. It now accounts for about 10% of the restructured business' revenues. The £5m charge is in addition to 'normal' amortisation of £3m. Adjusted earnings per share (after taking account of the amortisation of goodwill) have fallen from 5.93p to 4.45p. DIVIDENDS The Board has proposed a final dividend of 1.2p per ordinary share (2001: 1.2p) bringing the total for the year to 1.8p per ordinary share (2001: 1.8p). TREASURY AND CASH FLOWS At 29 November 2002 the Group had net cash of £14.4m (2001: £10.2m). The improvements in cash collection noted last year have been built upon, and Diagonal remains strongly cash generative. At the balance sheet date the number of days of annual sales, represented by trade debtors, were 76 (2001: 86) reflecting the continued improvement in working capital management. It is the Group's policy not to trade in financial instruments. TAX The Group's effective rate of taxation, based on profits before tax and amortisation and impairment of goodwill, is 31.3% (2001: 30.5%). This differs from the standard rate of UK corporation tax due to the disallowance of certain costs. Short term timing differences are provided in full. Graham Creswick Chief Executive CONSOLIDATED PROFIT AND LOSS ACCOUNT 52 weeks ended 29 November 2002 Unaudited Audited 52 weeks ended 52 weeks ended 29 November 2002 30 November 2001 Note £'000s £'000s TURNOVER 1 Continuing operations 63,618 79,481 Discontinued operations - 2,701 Total turnover 63,618 82,182 COST OF SALES (43,594) (58,580) GROSS PROFIT 20,024 23,602 ADMINISTRATIVE EXPENSES Amounts written off goodwill (8,027) (3,210) Other administrative expenses (14,572) (16,490) Total administrative expenses (22,599) (19,700) OPERATING (LOSS)/PROFIT 1 Continuing operations (2,575) 3,925 Discontinued operations - (23) Total operating (loss)/profit (2,575) 3,902 Interest receivable 349 365 Interest payable and similar charges (28) (11) (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (2,254) 4,256 TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES (1,807) (2,278) (LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION (4,061) 1,978 EQUITY DIVIDENDS (1,591) (1,584) RETAINED (LOSS)/PROFIT FOR THE FINANCIAL PERIOD (5,652) 394 (Loss)/earnings per ordinary share 2 (4.56p) 2.26p Adjusted earnings per ordinary share 2 4.45p 5.93p Diluted (loss)/earnings per ordinary share 2 (4.56p) 2.26p Adjusted diluted earnings per ordinary share 2 4.45p 5.92p Equity dividends per ordinary share 1.80p 1.80p CONSOLIDATED BALANCE SHEET 29 November 2002 Unaudited Audited 29 November 30 November 2002 2001 £'000s £'000s Note FIXED ASSETS Intangible assets 18,264 26,062 Tangible assets 2,485 2,508 Investments - own shares 1,404 877 22,153 29,447 CURRENT ASSETS Debtors 17,762 22,234 Cash at bank and in hand 14,417 10,155 32,179 32,389 CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR (12,291) (15,065) NET CURRENT ASSETS 19,888 17,324 TOTAL ASSETS LESS CURRENT LIABILITIES 42,041 46,771 CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (98) (139) NET ASSETS 1 41,943 46,632 CAPITAL AND RESERVES Called up share capital 8,940 8,832 Share premium account 29,496 28,503 Shares to be issued - 138 Other reserves 600 600 Profit and loss account 2,907 8,559 EQUITY SHAREHOLDERS' FUNDS 41,943 46,632 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 52 weeks ended 29 November 2002 Unaudited Audited 52 weeks ended 52 weeks ended 29 November 30 November 2002 2001 £'000s £'000s (Loss)/profit for the financial period (4,061) 1,978 Equity dividends (1,591) (1,584) (5,652) 394 Issue of shares 963 1,487 Shares to be issued - 138 Net (reduction in)/addition to shareholders' funds (4,689) 2,019 Opening shareholders' funds 46,632 44,613 Closing shareholders' funds 41,943 46,632 CONSOLIDATED CASH FLOW STATEMENT 52 weeks ended 29 November 2002 Unaudited Audited 52 weeks ended 52 weeks ended 29 November 30 November Note 2002 2001 £'000s £'000s Net cash inflow from operating activities a 8,233 8,394 Returns on investments and servicing of finance b 321 354 Taxation paid (1,877) (3,745) Capital expenditure and financial investment c (948) (657) Acquisitions and disposals d (228) 881 Equity dividends paid (1,587) (1,401) Cash inflow before financing 3,914 3,826 Financing Issues of ordinary share capital 436 146 Net (repayment)/increase in borrowings e (88) 62 348 208 Increase in net cash in the period f 4,262 4,034 NOTES TO CONSOLIDATED CASH FLOW STATEMENT 52 weeks ended 29 November 2002 Unaudited Audited 52 weeks ended 52 weeks ended 29 November 30 November 2002 2001 £'000s £'000s a. Reconciliation of operating profit to net cash inflow from operating activities Operating (loss)/profit (2,575) 3,902 Amortisation and impairment of goodwill 8,027 3,210 Depreciation 1,010 968 Loss/(profit) on sales of tangible fixed assets 9 (73) Decrease in stock - 333 Decrease in debtors 4,567 426 Decrease in creditors (2,805) (372) Net cash inflow from operating activities 8,233 8,394 b. Returns on investments and servicing of finance Interest received 349 369 Interest element of finance lease payments (28) (15) Net cash inflow from returns on investments and servicing of finance 321 354 c. Capital expenditure and financial investment Purchases of tangible fixed assets (1,023) (1,029) Proceeds of disposals of fixed assets 75 372 Net cash outflow from capital expenditure and financial investment (948) (657) d. Acquisitions and disposals Purchase of subsidiary undertaking (1) (228) (662) Net cash acquired with subsidiary - 143 Sale of subsidiary undertaking - 1,400 Net cash (outflow)/inflow from acquisitions and disposals (228) 881 (1) £228,000 of additional consideration was paid during the year in respect of acquisitions in prior years. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 52 weeks ended 29 November 2002 Unaudited Audited 52 weeks ended 52 weeks ended 29 November 30 November 2002 2001 £'000s £'000s e. Reconciliation of net cash flow to movement in net funds Increase in cash in the period 4,262 4,034 Net repayment/(increase) of lease financing 88 (62) Changes in net funds resulting from cash flows 4,350 3,972 New finance leases (48) (36) Movement in net funds 4,302 3,936 Net funds at 30 November 2001 9,941 6,005 Net funds at 29 November 2002 14,243 9,941 f. Movement in period At 30 Non At 29 November Cash cash November 2001 Flows changes 2002 £'000s £'000s £'000s £'000s Increase in cash 10,155 4,262 - 14,417 Lease financing (214) 88 (48) (174) Movement in net funds 9,941 4,350 (48) 14,243 NOTES TO THE UNAUDITED ACCOUNTS 29 November 2002 1. ANALYSIS OF TURNOVER, OPERATING (LOSS)/PROFIT AND NET ASSETS Analysis by class of business by turnover, operating (loss)/profit and net assets is stated below: Turnover Operating (loss)/profit(1) Net assets (2) 52 weeks 52 weeks 52 weeks 52 weeks ended 29 ended 30 ended 29 ended 30 29 November 30 November November November November November 2002 2001 2002 2001 2002 2001 £'000s £'000s £'000s £'000s £'000s £'000s Class of business Continuing operations Consulting 48,201 58,036 3,846 4,382 23,804 21,155 Secure Networks 15,417 21,445 (6,421) (457) 18,139 25,477 63,618 79,481 (2,575) 3,925 41,943 46,632 Discontinued operations Consulting - 2,701 - (23) - - 63,618 82,182 (2,575) 3,902 41,943 46,632 (1) Operating (loss)/profit is stated after charging amortisation of goodwill (2) All commonly held assets and liabilities of the Group have been allocated to segments (3) The results of the former Resourcing division have been included within the Consulting division from 1 December 2001 and the comparative results have been restated to reflect this. An analysis of the Group's turnover by geographical market by destination is set out below: 52 weeks ended 52 weeks ended 29 November 30 November 2002 2001 £'000s £'000s UK 53,569 71,535 Other European countries 3,684 5,792 Rest of the world 6,365 4,855 63,618 82,182 All of the Group's turnover originates in the United Kingdom. NOTES TO THE UNAUDITED ACCOUNTS 29 November 2002 2. (LOSS)/EARNINGS PER SHARE Earnings per share have been computed in accordance with Financial Reporting Standard 14 'Earnings per Share'. Basic earnings per share is calculated by dividing the loss or profit on ordinary activities after taxation by the weighted average number of Ordinary shares, to be issued and in issue, during the period. Diluted earnings per share is calculated by adjusting the weighted average number of shares on the assumption of conversion of all dilutive potential Ordinary shares. In 2002 there were no dilutive potential Ordinary shares. A reconciliation of the earnings and weighted average number of shares used in the calculation is set out below: 52 weeks ended 52 weeks ended 29 November 30 November 2002 2001 £'000s £'000s (Loss)/profit on ordinary activities after taxation (4,061) 1,978 Amounts written off goodwill 8,027 3,210 _________ _________ Adjusted profits 3,966 5,188 _________ _________ Number Number Weighted average number of shares 89,049,702 87,466,859 Effect of options - 122,693 _________ _________ Total shares 89,049,702 87,589,552 _________ _________ Pence Pence Basic EPS (4.56) 2.26 Amounts written off goodwill 9.01 3.67 _________ _________ Adjusted 4.45 5.93 _________ _________ Diluted EPS (4.56) 2.26 Amounts written off goodwill 9.01 3.66 _________ _________ Adjusted 4.45 5.92 _________ _________ NOTES TO THE UNAUDITED ACCOUNTS 29 November 2002 3. FINANCIAL INFORMATION The financial information set out in the announcement does not constitute the Group's statutory accounts for the 52 weeks ended 29 November 2002 or the 52 weeks ended 30 November 2001. The financial information for the period ended 30 November 2001 is derived from the statutory accounts for that period which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under S237(2) or (3) Companies Act 1985. The statutory accounts for the 52 weeks ended 29 November 2002 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following their publication. This financial information has been prepared on the basis of the accounting policies as stated in the previous year's financial statements, with the exception of Deferred Tax, which has been implemented during the year in accordance with FRS 19. This preliminary announcement was approved by the Board of Directors on 19 February 2003. This information is provided by RNS The company news service from the London Stock Exchange

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