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PLASMON PLC 2002 PRELIMINARY RESULTS Plasmon Plc, the Cambridge based data storage solutions company, today announces its 2002 Preliminary Results. Highlights
J Barrie Morgans, Chairman of Plasmon, commented: "While trading in the past year was clearly disappointing, we have made substantial progress in positioning Plasmon for the future with a reduced cost structure and an exciting UDO product roadmap. In the coming year we expect to benefit from these changes and we see opportunities to improve our overall financial performance. Despite the cost of the reorganisation and associated buffer inventory build, our financial position remains strong with gearing of 24% at year end." Enquiries: Plasmon Plc Citigate Dewe Rogerson (01763 261466) (020 7638 9571) Nigel Street (Chief Executive) Martin Jackson / Sara Batchelor Tim Arthur (Finance Director)
CHAIRMAN'S STATEMENT The year to 31 March 2002 has been a challenging period for Plasmon with the tragic events of 11 September exacerbating the general downturn in IT spending following the collapse of the internet boom. Our full year revenues fell 11% to £61.6m compared to £69.1m the previous year. Operating profits before tax, goodwill amortisation, UDO development costs and exceptional costs were £3.7m compared to £5.3m the previous year. The reduction in overall sales reflected particularly difficult trading conditions in the US, where Plasmon brand channel sales decreased 10% year on year. Sales to IBM decreased 44% as Magstar MP tape libraries reached end of life, resulting in an overall reduction of 23% in US revenue. In contrast, our European Channel operations achieved 6% revenue growth in 2001/2 with particularly good growth of 22% in our core 5.25 inch library business following the introduction of the new G-Series range of products. In general, European economic conditions were more favourable than the US and this trend is continuing in the new year. In contrast to our disappointing trading performance, our UDO development programme has progressed extremely well. In July 2001 we successfully raised £10.3m net of expenses to fund this programme and we now have a world-class team of over 80 engineers and scientists working on the project. In July 2001 we received the first prototype drive mechanisms from Asahi Pentax, our Japanese drive partner, and we are now reading and writing data on sample media produced at our facility in the UK. ASIC and firmware development is also well underway and we expect to have form factor drives in late 2002 and be on schedule to deliver the product in August 2003. Total investment in UDO development expenditure, including £2.6m of capital, was on budget at £7.8m and successful delivery of this product remains the number one priority for the Plasmon Group. In October 2001 we moved into our new office building in Melbourn which also incorporates manufacturing space for UDO media. In addition to providing increased space, the new building has significantly improved our overall image compared with the temporary buildings it replaced. Given the poor trading in the US, in mid year we conducted a thorough review of our US business to determine the optimal organisation structure to maximise revenues and operational efficiency. Following completion of the review, we transferred our library manufacturing operations from Minneapolis to Colorado Springs where we have a larger production facility. The transfer was successfully completed in March 2002 and the main Minneapolis facility will finally close at the end of June when the lease expires. Our library engineering team, which is located in a small facility independent of the main factory, will remain in Minneapolis and continue the development of our automation products.
In addition to relocating library production, we also moved the headquarters of our US sales and marketing group from Minneapolis to Denver, which is the centre of the data storage industry. The US reorganisation has been a major undertaking that has been successfully completed at a total cost of £2.9m. All our US manufacturing operations are now consolidated in one facility and we expect to increase our operational efficiency and realise substantial cost savings going forward. While trading in the past year was clearly disappointing, we have made substantial progress in positioning Plasmon for the future with a reduced cost structure and an exciting UDO product roadmap. In the coming year we expect to benefit from these changes and we see opportunities to improve our overall financial performance. Despite the cost of the reorganisation and associated buffer inventory build, our financial position remains strong with gearing of 24% at year end. On behalf of the Board, I would like to thank all our employees, and particularly those involved in the US reorganisation, for all their dedication and hard work over the past year. I would also like to thank our former employees in Minneapolis who were unable to make the transfer to Colorado, for their outstanding contribution to building our US business over the past eight years.
J. Barrie Morgans Chairman
CHIEF EXECUTIVE'S REVIEW 2001/2 proved to be a year of extremes for Plasmon with a disappointing trading performance contrasting with excellent progress on UDO development and successful execution of our US reorganisation programme. The highlight of the year was the establishment of our UDO roadmap and completion of the necessary £10.3m fundraising to enable full-scale product development to commence. UDO represents the cornerstone of our future product strategy and provides Plasmon with an opportunity to achieve a leading position in the high-end optical archive market. The 11% decline in our overall revenues to £61.6m was primarily due to two main factors: the expected £5.1m reduction in Magstar MP tape library sales to IBM and the events of 11 September which had a dramatic effect on our business. Prior to 11 September we expected first half revenues to be broadly similar to the previous year at some £32m. Immediately after the event, some £2-3m of expected revenues were deferred although first half Plasmon channel sales still grew 21% in Europe and 2% in the US. In contrast, full year revenues in Europe ended only 6% ahead while the modest US growth reversed into a full year 10% decline in revenues. While we initially expected deferred revenue to be realised in the second half, many of our key customers in the US financial sector have undertaken significant restructuring programmes since 11 September and their IT expenditure budgets have remained under tight constraint. Plasmon has not been alone in feeling the effect of 11 September and the global storage market in general contracted some 18% in the last year. We believe much of this reduction was due to over capacity purchased at the time of the internet boom that is taking time to work through the system. Longer term the storage market is still forecast to enjoy substantial growth, albeit at a more modest rate than seen in recent years. In line with the overall decline in sales and in particular the decline in our high margin consultancy revenues, our gross margins fell to 36.7% from 38.1% the previous year. We therefore kept our cost base under tight control and operating expenses before UDO development expenditure and exceptional costs fell by £1.8m to £19.6m. At the pre-tax level we achieved an adjusted profit of £3.7m compared to the £5.3m we achieved the previous year. UDO development expense was in line with plan at £5.2m and after goodwill amortisation of £1.2m and exceptional costs of £3.6m, our pre-tax loss was £6.3m for the full year. Following the acquisition of LMS Technical Services in mid 2000, we have continued to expand our Plasmon Service Direct business. During the past year we formed a third party service partnership with Kodak and have taken over the servicing of the majority of 12" installations world-wide. Our service revenues have since increased substantially and we are now extending our service offerings to cover our 5.25 inch and tape product offerings.
US REORGANISATION In August 2001 we reorganised our senior US management team and put both IDE in Minneapolis and LMS in Colorado Springs under a single US President. We also appointed a new Senior Vice President of US Sales and Marketing to drive renewed revenue growth. These actions were taken as a result of the poor sales in the US, particularly in our new LTO products, and the consequent need to reduce costs and maximise revenues. Following a thorough review of our US business, we announced in November 2001 that our Minneapolis facility would close and library manufacturing would transfer to Colorado Springs. In addition, we resolved to open a new sales and marketing office in Denver, which is the centre of the data storage industry and is only a one hour drive from Colorado Springs. The reorganisation has proved to be a huge undertaking but has been largely completed with minimal disruption to our business. We will have recruited over 100 new people in Colorado and reduced our staffing in Minneapolis from over 200 to 20 to give a net reduction in our US staffing of some 85 people. While the total reorganisation cost was slightly in excess of plan at £2.9m, we expect to achieve substantial cost savings going forward and increase our operational efficiency through the close location of all our sales, product development and manufacturing activities. As part of the reorganisation, we built a buffer inventory to cover the period of the physical relocation of manufacturing activities to Colorado and ensure that we maintained product shipments at all costs. This resulted in our year end inventories being unusually high but we expect to return to normal levels by the end of the first quarter of the new fiscal year. We are now back in production in Colorado and have recently passed IBM's quality inspection of the new manufacturing facility. Overall the reorganisation has gone extremely smoothly and its success is a tribute to the detailed planning and hard work of the transition team. We also received excellent support from the outgoing Minneapolis team who remained focused and fully supportive throughout the transition process. UDO DEVELOPMENT Plasmon's core product range is 5.25 inch optical libraries that incorporate drives and media we source on an OEM basis from mainly Japanese suppliers. These drives utilise red lasers with magneto-optic recording technology and the current 9.1GB product represents the maximum capacity the technology can achieve. UDO is the successor to magneto-optic technology and utilises the same physical format for drive and media cartridge, thereby providing compatibility with existing library systems. UDO employs violet lasers and phase change recording technology to provide a quantum leap in storage capacity to 30GB per cartridge. These technologies are also under development for next generation 'Blu-ray' consumer drives that were formally launched in February 2002 by a group of nine leading electronics companies. The UDO roadmap provides three generations of product with 30GB, 60GB and 120GB capacities.
In November 2000, Plasmon and Sony jointly announced UDO technology with an initial capacity of 40GB. This capacity point envisaged the use of 0.85NA objective lenses being developed for Blu-ray products to focus the violet laser to a very fine spot. These lens systems also require active spherical aberration correction and due to their manufacturing complexity will not now be commercially available until 2005/6, the expected time frame for Blu-ray technology introduction. In order to achieve our scheduled late 2003 launch date for UDO, we have adopted a 0.7NA lens system that is commercially available today and does not require active spherical aberration correction. This decision has reduced the capacity of our first generation UDO product to 30GB but has significantly reduced our development risk. We do not propose to adopt the 0.85NA lens technology until our third generation UDO drive due in 2007, by which time Blu-ray drives should be shipping in commercial quantities. As UDO and Blu-ray specifications and time scales have diverged, Sony has decided to concentrate on developing Blu-ray products which will target a much larger consumer market than UDO. This decision leaves Plasmon as the sole developer of UDO technology and gives us an excellent opportunity to achieve a leadership position in high-end optical storage technology. Since the successful UDO fundraising in July 2001, we have pushed ahead with full scale product development and now have over 80 engineers and scientists working on the programme. The drive development team in Colorado Springs is responsible for the electronics and firmware development and Asahi Pentax of Japan is developing the opto-mechanical assembly for the drive. We have developed an excellent relationship with Pentax who is proving to be an outstanding development partner and have delivered each prototype revision on time. We currently have six prototype drives that use large format electronics and expensive discrete components reading and writing data at 30GB capacity. Using the latest software design tools, we have now shrunk these electronics into four ASICs or silicon chips that are specially designed for and unique to our UDO drive. The ASICs are a critical part of the drive design and represent a large part of the overall development budget but they enable volume production costs to be minimised. In mid 2002 we will receive first turn ASICs and second generation drive mechanisms that will enable us to build form factor drives and begin design verification testing in earnest. We have allowed a full year for development testing, debug and reliability testing in our programme and at this stage we are on schedule to deliver our first UDO drives in August 2003. In parallel with the drive development, our media engineering group in Melbourn has been making excellent progress with UDO media development. UDO media utilises established phase change recording technology but a slightly different disk construction to accommodate the high power lens systems required for increased data densities. The new disk construction employs a 0.1mm cover layer to protect the data surface and is exactly the same as Blu-ray technology. Several equipment manufacturers are already developing the necessary process equipment to manufacture the 0.1mm cover layer, enabling us to leverage mainstream Blu-ray technology into our UDO programme.
We are currently constructing the UDO cleanroom in the new building at Melbourn and plan to have a pilot production line operational in late 2002. Initial deliveries of manufacturing equipment are now underway but we are continuing to investigate ways to reduce the overall capital expenditures and minimise the risks of integrating the new manufacturing line. Overall, the UDO development programme is on schedule and the technical hurdles are well quantified and manageable with our existing resources. PRODUCTS AND MARKETS Given the poor economic conditions of the last year and the major downturn in the data storage industry, our core optical business performed reasonably well in 2001/2. The relatively stable performance reflects the high-end archival niche for optical technology and the high level of ongoing revenues from the supply of optical disk consumables. In the past year we further increased recurring revenues in this business by expanding our service offerings in partnership with Kodak who perform the on-site service work. In contrast to the stable optical market, the tape library market is closely tied to the primary market for hard disk storage products which suffered a significant decline last year. This has made the timing of our entry into the LTO tape library market quite challenging, but our revenues are now growing and we expect a meaningful contribution in the coming year. Revenue Breakdown by Product Area
5.25 inch Technology Products based on 5.25 inch optical technology continue to be the largest part of Plasmon's business and remained stable in 2001/2. Growth in Plasmon brand channel sales of 7% reflected an excellent increase of 22% in Europe offset by a disappointing 1% fall in US sales. Sales to IBM, our major OEM customer for the technology, also fell 25% as they are still suffering from the lack of a permanent write once media option in the new 9.1GB drives, forcing them to continue shipping the previous generation of 5.2GB drives. The launch of UDO in late 2003 will provide a highly competitive 30GB permanent write once solution and we are actively promoting our UDO products as the direct successor to 5.2GB permanent WORM technology. During the past year, sales of our new G-Series range of scaleable 5.25 inch libraries grew strongly as they began to replace the existing M-Series products. We will continue to support both product ranges through to the launch of UDO in late 2003, after which point only the G-Series will be available. We are currently undertaking a cost reduction programme on the new products to ensure our solutions remain competitive in the overall storage market and to maximise the attractiveness of UDO solutions. Over the past few years the market for 5.25 inch technology has been in slow decline, particularly for stand alone drives, as the existing magneto-optic roadmap approaches end of life with the 9.1GB drive. In early 2002 we formally launched our UDO product range at trade shows in Europe and the US, thereby providing a clear future roadmap for 5.25 inch optical technology. The response to UDO technology has been excellent and it is now seen as the logical successor to the existing products in the 5.25 inch market. We believe the launch of UDO in 2003 will reverse the slow market decline and provide Plasmon with a leading position in the high end data archive market. 12" Technology Our 12" business is a mature but profitable business and declined some 11% to £23.5m last year with the expected decline in new drive sales being offset by increasing service revenues. Sales of new drives were also affected by some field reliability issues in the early part of the year that took a considerable period of time to isolate. These are now fully resolved but going forward we remain cautious about demand for 12" drives and are therefore keeping investment and costs under tight control. In line with reduced drive shipments, we suffered a decline in sales of 12" media last year although the 12" media business remains a long term annuity and a major contributor to Group profitability. We continue to increase overall yields and are now focusing on cost reduction programmes to maximise the contribution to our media business. CD/DVD Sales of our D-Series CD/DVD libraries increased 8% last year but still represent only 11% of our total library business. We continue to see some erosion of the low end 5.25 inch market by this technology but its performance limitations continue to inhibit wider adoption. Over the past year a new application has begun to emerge for long-term archival of very infrequently accessed data such as medical images. This application requires a low performance solution with the minimum possible cost as offered by DVD consumer technology. In response to demand from our major medical imaging customers such as Siemens Medical and GE Medical, we are designing a very large DVD library with a maximum capacity of some 2,200 disks. The library is based on our new G-Series platform and we expect to begin shipments in early 2003. Consultancy Sales in our optical media consultancy business fell to £3.6m last year from £5.1m the previous year, mainly as a result of the failure of Toolex International NV, which left us with a bad debt of £0.6m. Toolex were the leading manufacturer of CD/DVD production lines and we were half way through a major three year contract to develop a phase change sputter coating system when they filed for bankruptcy. Early in 2001 C3D Inc became a significant new customer of our consultancy business when we conducted a feasibility study on their innovative multi-layer fluorescent disk technology. Both parties envisaged that the initial work would lead to full scale product development with Plasmon establishing a pilot production line in Melbourn. In the difficult economic climate of the past year, C3D failed to raise the required funding and no further consultancy revenues were realised. During the past year we have continued to work closely with Philips Electronics NV on high resolution mastering using our unique plasma etching technology. We are developing this technology for both Blu-ray and UDO mastering and its low noise characteristics appear to offer useful margin in high capacity optical storage systems. Magstar MP Tape During the past year sales of Magstar MP libraries to IBM fell 88% as the technology finally reached end of life. In agreement with IBM we have not transferred the production lines to Colorado Springs and only limited spares revenue will be realised in the coming year. LTO Tape After a disappointingly slow start to our new LTO tape library business, we finally began to make progress towards the end of the fiscal year. Our entry into the LTO tape market has been hampered by a lack of software support for our libraries and our own inexperience in the tape library market. We also suffered from an incomplete product range that we solved through the Exabyte autoloader acquisition in September 2001. During the past year we have recruited a new team of seasoned tape professionals who have begun to establish Plasmon's position in the tape library market. This effort has been helped by our move to the new Denver sales office that is located in the heart of the tape storage industry. We have also properly engaged with the leading application software vendors to ensure that our products are fully compatible and that this is clearly promoted in their marketing collateral. As a new vendor of tape solutions, this latter point is critical to help us make inroads against the established players. In the coming year we expect to make further progress in our LTO tape business and establish a meaningful contribution to our overall revenue and profitability. We are also in discussions with potential OEM customers for our tape products that could result in a significant increase in future revenues. OUTLOOK 2001/2 has been a year of contrasts for Plasmon with excellent progress in technology development and a successful reorganisation programme being offset by a disappointing trading performance. While the reorganisation has been extremely time consuming and costly, it has been completed during a downturn in our industry and leaves us with greater capability in our manufacturing and sales and marketing teams going forward. Our UDO development programme is proceeding well and we are confident of delivering a world class storage solution in late 2003. The launch of Blu-ray has fully endorsed our UDO technology roadmap that is following mainstream developments in high density optical storage. As the only supplier of UDO drives, Plasmon is well positioned to take a leading position in high-end optical archival systems that offers the Group a significant opportunity for long term profitable growth. Despite our markets remaining difficult in the short term, we see considerable opportunities in the coming year to improve our overall financial performance. Consolidated profit and loss account for the year ended 31 March 2002
Consolidated balance sheet at 31 March 2002
Consolidated cash flow statement for the year ended 31 March 2002
Reconciliation of net cash flow to movement in net debt:
Reconciliation of operating profit to net cash (outflow)/inflow from operating activities
Analysis of net debt
Notes to the Financial Information:
Diluted earnings per share have been calculated on the basis of profit on ordinary activities after tax and on 47,002,366 Ordinary Shares (2001: 36,819,948) being the diluted weighted average number of Ordinary Share deemed to have been in issue in the period.
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