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PLASMON PLC 2003 PRELIMINARY RESULTS Excellent Progress with UDO Development Programme Plasmon Plc, the Cambridge based data storage solutions company, today announces its 2003 Preliminary Results. Highlights
J Barrie Morgans, Chairman of Plasmon, commented: "We start the year well positioned to complete UDO development and capitalise on its significant potential. Our UDO launch plans are well advanced and we believe the timing is excellent to deliver a performance leading data archival solution at a time of growing compliance regulation. After a period of significant contraction the IT market is also forecast to return to modest growth, which we expect to drive increased revenue and profitability in our core business in the coming year."
Enquiries: Plasmon Plc (01763 261466) Citigate Dewe Rogerson (020 7638 9571) Nigel Street (Chief Executive) Martin Jackson / Sara Batchelor Tim Arthur (Finance Director)
CHAIRMAN'S STATEMENT Following the upheaval of our major US reorganisation last year, 2002/3 has been a period of consolidation and steady progress for the Plasmon Group. Despite poor economic conditions in the US and uncertainty created by the war in Iraq, our full year revenues fell by only 2% to £60.1m compared to £61.6m the previous year. Pre-tax profit before goodwill amortisation, UDO development costs and exceptional costs increased 29% to £4.7m and the retained loss for the full year reduced 41% to £3.4m. Having incurred a loss of £2.4m in the first half, the retained loss in the second half fell to £1.0m as post reorganisation cost savings were realised. Despite the poor trading conditions our channel sales in the US increased by 4% in dollar terms. As expected, sales to IBM decreased a further 35% in 2002/3 resulting in an overall US revenue decline of 3% in local currency terms, translating into a fall of 10% after unfavourable foreign exchange movements. Our US business represented 66% of Group sales in 2002/3 and the level of activity in the US market therefore remains a critical driver of our overall business performance. Having achieved 6% revenue growth last year, our European channel sales grew a further 15% in 2002/3 as we continue to increase market share in our core 5.25 inch library business. In August we secured Siemens as a major new DVD library customer and we expect this relationship to drive further growth in the coming year. European economic conditions were more favourable than the US last year and we also benefited from a stronger European regional presence than many of our US competitors. Our UDO development programme continues to make excellent progress and we successfully demonstrated working UDO drives at the Comdex trade show in Las Vegas in November. The overall cost of the UDO development programme remains broadly in line with our plans and we are on schedule to begin initial shipments in September this year. We are receiving an excellent response from potential OEM customers and expect UDO technology to establish a leading position in professional optical storage solutions. Recent changes in financial compliance regulations are also driving the market requirements for secure data archival solutions like UDO and we look forward to commencing deliveries of this exciting new product in the coming financial year. In June 2002 we raised a further £1.7m net of expenses, by way of a 5% Placing, to support the purchase of capital equipment for UDO at a time when equipment leasing was proving difficult to secure. In February 2003 we further improved our available financial resources with a £7m structured finance facility that provides us with ample liquidity to complete our UDO development and launch plans. Our financial position remains comfortable with gearing of 34% at year end. Although trading in the past year was difficult, we start the new financial year well positioned to complete the UDO development and capitalise on its significant potential. Our UDO launch plans are well advanced and we believe the timing is excellent to deliver a performance leading data archival solution at a time of growing compliance regulation. After a period of significant contraction the IT market is also forecast to return to modest growth, which we expect to drive increased revenue and profitability in our core business in the coming year. On behalf of the Board, I would like to thank all our employees for their dedication and hard work over the past year. J. Barrie Morgans Chairman CHIEF EXECUTIVE'S REVIEW 2002/3 has been another challenging year for Plasmon with difficult economic conditions and the continuing decline in our business with IBM depressing overall revenues from £61.6m to £60.1m. In contrast to the disappointing trading performance, our UDO development programme made excellent progress in 2002/3 and we successfully completed the transfer of our library business from Minneapolis to Colorado Springs. In the first half of 2002/3, the Group returned to modest growth with revenues 3% ahead at £30.1m. As we experienced last year, our European operations performed better than our business in the US where economic conditions remained difficult. In the final quarter of 2002/3 our US business was further impacted by events in the Middle East, and coupled with a 10% movement in the average £:$ exchange rate our overall second half revenues declined 7% from the previous year. Since the cessation of hostilities we are seeing increasing signs of activity in the US, but we remain cautious about the timing of any upturn in business. In contrast, our European business grew 17% in 2002/3 and we expect to make further progress in the coming year. In light of the difficult trading conditions our US reorganisation has proved both timely and extremely necessary. The reorganisation was finally completed in September 2002 when the last library engineers left our Minneapolis engineering operation. These engineers were retained for six months longer than the manufacturing group to complete the new Enterprise DVD library range that we specifically developed for our major medical imaging customers such as Siemens Medical. From a peak of some 314 US employees in 2001, the US reorganisation programme reduced the headcount to 225 by April 2003. In addition, we reduced our European headcount by some 20 employees as part of our overall cost control programme. In 2002/3 our overall product mix remained broadly constant and, in line with the sales shortfall, our gross margins declined slightly to 36.3% from 36.7% the previous year. Following our reorganisation, operating expenses before UDO development expenditure, goodwill amortisation and exceptional costs fell by £2.0m to £16.4m. At the adjusted pre-tax level we achieved a profit of £4.7m compared to the £3.7m we achieved the previous year. At the pre-tax level we significantly reduced our full year loss to £3.4m from £6.3m, after goodwill amortisation of £1.1m and the final £0.5m of US reorganisation costs. UDO development expenditure increased by 24% to £6.5m in 2002/3 as we entered the final development phase of the drive and media. The increased expenditure was slightly ahead of our original expectations and reflected additional costs in reworking ASIC parts and the consequent increase in quick-turn prototype costs to keep the project on schedule. In addition to fully expensed development costs of £6.5m, we invested a further £3.9m in capital equipment in 2002/3 as the UDO media production facility in Melbourn neared completion. Despite maintaining significant levels of investment in 2002/3, our year-end gearing remained comfortable at 34% compared to 24% the previous year. In March 2003 we secured new £7m banking facilities with Venture Finance Plc, the UK structured finance subsidiary of ABN Amro. These new financing arrangements have increased our immediate liquidity by some £3.4m and will provide sufficient funding to complete UDO development and enter volume production.
UDO DEVELOPMENT Ultra Density Optical ('UDO') is the next generation of 5.25 inch drives and media that we are developing to succeed the existing 9.1GB MO products we source from Sony. UDO employs the latest blue laser technology that provides an increased 30GB capacity and a five-fold decrease in incremental storage cost over existing MO systems. Since commencing development in 1999 we have worked closely with HP on the project and expect them to become the major OEM customer for UDO technology. Since the successful demonstration of working drives at Comdex last November, we have continued to make good progress with our UDO development programme and are now reading and writing data reliably in form-factor drives. The final phases of the development are now underway and involve manufacturing increasingly large batches of prototype drives and media to de-bug the system fully and maximise performance and reliability. The UDO drive employs four ASIC chips that have been specifically designed by Plasmon and our development partners. Successful development of these ASICs represented one of the major risks in the UDO programme but three of them are now complete and fully tested. The final Optical Disc Controller (ODC) chip has exhibited some speed limitations during testing but a revised design has now been released to fabrication which should solve the outstanding issues. Our total capital investment in the ASICs will be some £3m but they are critical to achieving the low volume production costs that will allow UDO to compete effectively in the market. Another area of significant risk in the UDO programme was the availability of blue lasers from Nichia, our Japanese supplier. In December 2002 Nichia announced a new agreement to collaborate with Sony on blue laser development for use in Sony's 'Blu-ray' consumer video products. Nichia also informed Plasmon that due to yield problems with their existing laser, they were moving to a revised laser design employing elements of Sony technology. We have now successfully integrated the new lasers into our UDO drives and we are confident that their performance and reliability will comfortably exceed our requirements. The opto-mechanical assembly ('OMA') for the UDO drive is being developed by Pentax, the leading Japanese optical technology company. The hard tooling for the OMA is now complete and we are currently integrating production quality units into our prototype drives. Our working relationship with Pentax continues to be excellent and we have recently despatched one of our Japanese speaking engineers to Japan for 18 months to help transition the OMA to a low cost volume production facility. UDO media development is also making good progress and we now have the majority of the disk manufacturing equipment installed at our facility in Melbourn. The new cleanroom is fully commissioned and when complete the production line will have a total capacity of some 80,000 write-once and rewritable UDO disks per month. Development of the phase change recording layers for UDO media is proceeding well and the specification of the write once disk is now finalised for volume production. This will employ a four layer structure based on phase change technology licenced from Kodak that we also use on our existing 12-inch optical disk products. We are therefore very familiar with the manufacturing process for this material and are confident a high yield process will be achieved. The rewritable phase change disk is in its final testing phase and will employ an eight layer structure to optimise rewrite cycle performance, environmental longevity and manufacturability. In January 2003 we signed a licence agreement with Mitsubishi Chemical Media ('MCM') for their patents and technologies for improving rewrite cycle and cross erase performance in phase change rewritable media. Using MCM's technology we have already exceeded the UDO specification of 10,000 rewrite cycles and with further optimisation, believe that 25,000 cycles may be achievable. MCM are the world's largest optical disk manufacturer and as well as first class technical know-how, they have an excellent quality reputation with the major OEM customers such as HP and IBM. We continue to work closely with HP on their UDO plans and as they move towards UDO endorsement they are pressing MCM to be the second source media manufacturer. Major partners such as HP and MCM will be critical in establishing UDO as the de-facto standard in professional optical storage and we continue to use every effort to secure their endorsement of UDO. Having established the UDO media production facility and commenced trial production runs, we are now working on improvements to the 0.1mm cover layer process to reduce volume production costs. We have recently approved a European supplier of optical grade 0.1mm film that has reduced our material costs by some 75% over Far East suppliers. In addition, we are also working on a new liquid spin coating technique that is now providing excellent uniformity and will dramatically reduce future production costs. The media cartridge is an important component in the overall robustness and reliability of UDO technology and has been an area of intense focus over the last year. We have recently taken delivery of initial samples from the final production tooling and are now working with Dai-Nippon, our Japanese supplier, to move volume production to China to minimise long term cartridge manufacturing costs. Overall, the UDO development programme is progressing well and we are on schedule to make initial product deliveries in September 2003. As expected, UDO's common technology base with consumer Blu-ray products continues to provide technology leverage opportunities and will ensure our long-term manufacturing costs remain competitive.
UDO LAUNCH PLANS In addition to the drive and media development programme, during the past year we have invested considerable time and resources on our UDO launch plans. We successfully recruited new marketing leadership in both the US and Europe and are now adding business development resources specifically focused on UDO to our sales and marketing teams. The launch programme for UDO initially focused on trade shows and started with the first demonstration of working UDO drives at Comdex in November 2002. We also demonstrated the products at the AIIM show in New York and Cebit in Hanover, which is the largest IT trade show in Europe. In addition to the product demonstrations, we also presented a series of seminars that explained UDO technology and its positioning in the overall storage market. We received a considerable level of interest from these initial activities and UDO is now well known in the storage industry. We are now commencing the second phase of our launch activities with a technical conference for third party software vendors to enable them to understand the technology and integrate it into their software applications. We are also planning a series of press and media tours later in the year to generate general awareness of UDO and increase its exposure as we move into initial production shipments. The final element of our UDO launch plan has focused on potential OEM customers and our efforts to educate them and support their integration activities. The overall response to UDO has been excellent and we believe the superior cost-performance benefits of the technology should attract significant OEM endorsement over the coming months. STORAGE MARKET OVERVIEW The storage market continues to be a significant portion of the overall IT market and the revenue declines of the last few years stabilised in 2002/3. Storage technology is now entering a period of significant change that will provide a number of opportunities and challenges for Plasmon in the near future. The drive towards networked storage continues to gather momentum with the goal of eradicating 'islands of information' and making all data available across the enterprise. Networked storage is therefore driving the requirements for storage area networks ('SAN') and network attached storage ('NAS') solutions and the consequent need for Plasmon's optical library solutions to integrate seamlessly into these environments. Another important development in the storage market last year was the arrival of cheap, high performance Serial-ATA hard disk drives. Due to their low cost, these products are now being promoted in disk-to-disk back-up solutions that are challenging the traditional market for back-up using tape libraries. In addition, the low-end tape library market largely moved to a commodity model last year with the large PC brands beginning to promote products directly to the end user, bypassing traditional storage hardware channels. From Plasmon's perspective, the most important development in the storage market has been the recognition of the importance of secure archival storage following the high profile corporate and securities fraud cases in the US last year. There are now growing compliance regulations in most industry sectors to mandate how electronic records must be archived. These regulations are driving strong interest in data archival products such as UDO. These developments have also attracted the attention of traditional hard disk vendors such as EMC and Network Appliance, who are offering Serial-ATA disk based solutions with enhanced software to prevent data deletion as an alternative to traditional write once optical archive solutions. These changes and developments in the storage market are generally very beneficial for Plasmon as we launch our UDO archive solutions in the coming year. However, the downside is in our tape business where we expect revenue growth to remain difficult in a market under severe margin pressure. In addition, the trend towards networked storage solutions will require updating of Plasmon's NAS connectivity offerings to improve the ease of deployment of our UDO products. Product Mix by Value 2001/2 2002/3 5.25 inch 43% 42% 12" 38% 33% CD/DVD 5% 11% Consultancy 6% 7% LTO tape 2% 2% Other 6% 5%
5.25 inch Technology Over the past few years, our sales of 5.25 inch optical libraries to IBM have declined by some 60% as they continue to sell last generation 5.2GB write once solutions and have not adopted the latest 9.1GB technology. In December 2002 we signed a new contract with IBM to provide native support for Plasmon libraries on their iSeries (AS400) server platforms. In the future, this new agreement will enable Plasmon to sell UDO libraries directly to the IBM customer base to replace sales of the previous generation products we currently supply to IBM on an OEM basis. Plasmon brand channel sales of 5.25 inch products continued to grow last year but failed to make up the IBM shortfall. Overall sales of 5.25 inch technology declined some 6% to £24.9m as cheaper DVD solutions increased their market penetration but we also increased our market share in 5.25 inch libraries at the expense of Hewlett Packard. Our strengthening position will serve as an ideal launch point for UDO solutions in 2003 when we expect the increased capacity and fivefold decrease in incremental cost of UDO will drive renewed growth in our core 5.25 inch business. During the past year we continued to migrate customers to our new G-Series range of 5.25 inch libraries and away from the older M-Series products. We now plan to end of life the M-Series at the end of 2003 which is also planned to be the last shipment date for the IBM 3995 variant of the product. In late 2002 our automation engineering team in Colorado Springs commenced development of a new range of entry level G-Series libraries. These products will have capacities from 24 to 180 cartridges and provide market leading features at a lower cost than our existing products. First shipments are scheduled to coincide with initial UDO shipments in September 2003 and we are already seeing strong OEM interest in the cost/performance attributes of the new range. The new products have also been designed to accommodate our next generation NAS hardware internally to provide integrated network storage solutions. The market for 5.25 inch products has been in slow decline in recent years as lower cost DVD solutions have emerged. However, UDO will redress this cost disadvantage and we expect some major OEM's to endorse the technology in 2003, which will lead to renewed growth for 5.25 inch products and the establishment of UDO as the de-facto professional optical storage standard. 12" Technology The 12" business continues to be a major part of Plasmon's total revenue mix but overall sales declined some 17% to £19.6m. The majority of the reduction was in sales of new drives that declined 58% to £1.4m as 12" solutions become prohibitively expensive and customers wait for UDO technology. Sales of 12" media and service declined a more modest 12% in total to £7.5m and £10.1m, respectively. The change in our 12" business was in line with our expectations and the rate of decline should slow as new drive sales cease and the business becomes a media and service annuity. The 12" customer base is firmly wedded to write once optical storage solutions and is showing strong interest in the significant cost advantages of UDO technology. We are now working on upgrade and conversion programmes to migrate these customers to UDO but still expect to enjoy significant revenues from 12" media and service for several more years. CD/DVD In response to demand from our major medical imaging customers such as Siemens Medical and GE Medical, we introduced the Enterprise D-Series library last year with a capacity of up to 2,175 discs. The library is derived from our G-Series 5.25 inch platform and its development was completed ahead of schedule in late 2002 by the outgoing Minneapolis engineering team. The response to the Enterprise D has been excellent and helped CD/DVD sales grow 139% to £6.5m last year. In mid-year we secured Siemens Medical as a major new customer for this product and the medical imaging market in general is adopting DVD technology because of its low cost. The low performance of DVD solutions also matches the infrequent access requirements of the medical imaging market, but the reduced reliability and ease of use of DVD remains a major concern. However, we expect UDO to regain market share in this area as it offers higher performance and reliability at the same price point as DVD based solutions.
Consultancy Our optical media consultancy business had another excellent year in 2002/3 with revenue growth of 9% to £3.9m compared to £3.6m the previous year. During the year we signed significant new agreements with Intel Research to develop high-density phase change storage technology and with Unaxis AG, to develop 0.1mm cover layer technology for volume Blu-ray disc production. Our CD-R and DVD-R consultancy business with Ciba Speciality Chemicals also performed well in 2002/3 and we estimate the Plasmon-Ciba Ultragreen CD-R dye has a 65% share of the world-wide market for CD-R dyes. After a considerable delay due to technical issues, Ciba will finally launch a new DVD-R dye in mid 2003 and we expect this to drive significant future royalty growth as recording video to DVD's becomes a mainstream application. LTO Tape Our LTO tape library business was a major disappointment in 2002/3 with revenues flat at £1.4m. Although we successfully completed our product range with the Exabyte autoloader acquisition and secured the necessary software support, the market has since commodotised with the entry of major PC brands such as Dell with very aggressive pricing. In light of these changes, we are reviewing our overall tape strategy to position our products as part of higher value added solutions and consequently expect to achieve only modest growth for this part of our business. Software and Connectivity Sales of our connectivity solutions, which are included in the relevant major product category, returned to growth last year with revenues increasing 60% to £0.8m. During the year we secured Siemens Medical as a major new customer for our integrated NAS connectivity solution to integrate with the Enterprise DVD libraries they also purchase from Plasmon. We expect this trend for major customers to purchase integrated connectivity and library solutions from one vendor to increase in the future and are already discussing another major opportunity in the medical imaging market. We believe the move to networked storage solutions will continue to be a major trend within the storage market. Late in 2002 we commenced development of a new range of NAS-RAID products that will integrate internally in our new G-Series libraries and will provide industry standard connectivity and performance to optical archive solutions. The new solutions will be based on Serial-ATA RAID and Linux software and will significantly reduce the cost and complexity of deploying UDO technology. Other The majority of this business sector relates to our optical mastering business in Caen which had an excellent year in 2002/3 and grew revenues by 31% to £2.9m. The majority of production is now CD-R and DVD video masters which we supply to most of the major disc manufacturers in the Far East. We are now entering volume production of DVD-R masters and expect this to drive further growth in the coming year. Longer term we plan to manufacture masters for Blu-ray video discs and during the past year we commenced development of these products. Our experience with UDO is proving highly beneficial in this area and should enable Plasmon to become a leading supplier of masters and stampers for consumer disc formats based on blue laser technology. OUTLOOK 2002/3 has been a year of consolidation for Plasmon in which we maintained stable revenues and significantly reduced our cost base at a time of industry and economic downturn. We also made excellent progress with our UDO development programme and we are confident of delivering a world-class product and securing major OEM support for our technology in the coming year. Due to the high profile corporate fraud cases of the past few years, the market for secure archival storage products that provide unalterable records of business transactions and agreements is very strong. We are therefore launching UDO at an ideal time and we believe the inherent cost and performance features of UDO will ensure it is highly competitive in the archival storage market. On this basis we look forward to the future with confidence and expect UDO technology to deliver long-term growth in revenues and profitability for the Plasmon Group. Consolidated profit and loss account for the year ended 31 March 2003
Consolidated balance sheet at 31 March 2003
Consolidated cash flow statement for the year ended 31 March 2003
Reconciliation of net cash flow to movement in net debt:
Reconciliation of operating profit to net cash inflow/(outflow) from operating activities
Analysis of net debt
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