Company Announcements

The information contained within this announcement is deemed by the Company to constitute inside information pursuant to Article 7 of EU Regulation 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 as amended.

 

13 March 2024

Nexteq plc

("Nexteq" or the "Group")

 

Audited Final Results

 

Nexteq (AIM: NXQ), a leading technology solutions provider to customers in selected industrial markets, is pleased to announce its audited full year results for the 12 months ended 31 December 2023.

 

		Year ended 31 December 2023		Year ended 31 December 2022		Change
	Group Revenue	$114.3m		$119.9m		(5%)
	Quixant Revenue	$69.2m		$74.1m		(6%)
	Densitron Revenue	$45.1m		$45.8m		(2%)
	Gross margin	36.3%		32.2%		410 bps
	Adjusted profit before tax1	$14.7m		$10.2m		45%
	Group profit before tax	$12.9m		$8.8m		47%
	Adjusted diluted earnings per share1	18.09c		17.79c		2%
	Diluted earnings per share	16.02c		16.16c		(1%)
	Operating cashflow	$19.8m		$0.8m		2,375%
	Net cash	$27.9m		$12.9m		116%

 

¹For details on adjusted measures refer to note 1 and note 5 of the condensed consolidated financial statements.

 

 

FINANCIAL HIGHLIGHTS:

·	Materially improved profitability and cash generation through focus on higher margin products.
·	Group revenues down 5% against a record prior year:
	o  Quixant revenues down 6%, with growth in board volumes offset by lower monitor sales.
	o Densitron revenues broadly in line with 2022, with the Broadcast Technology sector growing 12%, tempered by softer demand in other industrial sectors.
·	Gross margin improved by 410bps to 36.3%, returning to historic, pre-Covid levels, benefitting from a focus on higher quality revenues and easing of supply chains.
·	Adjusted profit before tax grew 45% to $14.7m (2022: $10.2m), a margin of 12.9% (2022: 8.5%).  Reported profit before tax grew 47% to $12.9m (2022: $8.8m) a margin of 11.3% (2022: 7.3%).
·	Net cash increased 116% to a record $27.9m, reflecting improved cash generation from trading and positive working capital movement as overall stock levels reduced.
·	Dividend of 3.3p per share proposed (2022: 3.0p per share) reflecting confidence in growth and strong cash generation.

 

OPERATIONAL HIGHLIGHTS:

 

·	Healthy demand tempered by customer de-stocking, with volume growth in strategic Gaming and Broadcast sectors.
·	Rebrand to Nexteq to reflect evolution as a diversified industrial technology partner.
·	Refreshed Quixant product range, with all products now harnessing Intel processors, unlocking new market and customer opportunities.
·	New customer wins providing platform to grow engagement and lifetime value.
·	Broadcast sector delivering double-digit growth with positive progression of pipeline of sales opportunities.
·	Diversified manufacturing exposure with production in 2nd manufacturing facility in Malaysia, complementing the Group's existing facility in Taiwan.

 

CURRENT TRADING AND OUTLOOK:

 

·	The Group entered 2024 with confirmed order book covering five months of revenue.
·	Strong balance sheet with net cash position and good operational liquidity; supported by good cash generation, positioning the Group for future organic and acquisitive growth.
·	The Board is confident in meeting market expectations for 2024 revenues with the typical second half weighting.

 

 

Jon Jayal, Chief Executive Officer of Nexteq plc, commented:

 

"The Group delivered an excellent financial performance in 2023, with profit levels and cash generation significantly above prior year and approaching historic highs. This performance comes despite macroeconomic uncertainty and customers seeking to moderate inventories, prompted by a higher cost of capital. We have remained focused on our customer proposition and long-term growth strategy, delivering higher value products to the market.

 

While the softer customer demand seen in 2023 has, as expected, persisted in the first months of 2024, particularly in the industrial markets served by Densitron's core display components, the quality of the opportunity remains strong in our strategic focus markets.

 

We have established a more robust operating platform through our diversified manufacturing, and our product portfolio is increasingly unlocking new customer and market opportunities going forward. With these stronger foundations and unified vision under the Nexteq brand in mind, the Board remains confident in the medium-term organic growth prospects. Furthermore, the Group's balance sheet provides a strong platform for earnings enhancing acquisitions."  

 

Investor Presentation

Nexteq is hosting an online presentation open to all investors on Friday 15 March at 10.00am GMT. Anyone wishing to connect should register here: https://www.investormeetcompany.com/nexteq-plc/register-investor.

¹ The current range of forecasts for the year ended 31 December 2024 is revenue of between $114.8m and $115.9m with a consensus of $115.4m and adjusted profit before tax of $14.6m.

 

Nexteq plc Jon Jayal, Chief Executive Officer Johan Olivier, Chief Financial Officer	Tel: +44 (0)1223 892 696
Nominated Adviser and Broker: Cavendish Capital Markets Ltd Matt Goode / Simon Hicks / Teddy Whiley (Corporate Finance) Tim Redfern / Harriet Ward (ECM)	Tel: +44 (0) 20 7220 0500
Joint Broker: Canaccord Genuity Limited Simon Bridges / Andrew Potts	Tel: +44 (0) 20 7523 8000
Financial PR: Alma Strategic Communications Hilary Buchanan / Kieran Breheny	Tel: +44 (0)20 3405 0205

 

 

About Nexteq

Nexteq (AIM: NXQ) is a strategic technology solutions provider to customers in selected industrial markets. Its innovative technology enables the manufacturers of global electronic equipment to outsource the design, development and supply of non-core aspects of their product offering. By outsourcing elements of their technology stack to Nexteq, customers can focus their product development effort on the most critical drivers of their business' success.

Our solutions are delivered through a global sales team and leverage the Group's electronic hardware, software, display and mechanical engineering expertise. Our Taiwan operation is at the heart of Asian supply networks and facilitates cost effective manufacturing and strategic supply chain management.

The Group operates in six countries and services over 500 customers across 47 countries.

Nexteq operates two distinct brands: Quixant, a specialised computer platforms provider, and Densitron, leaders in human machine interface technology, each with dedicated sales, account management and product innovation teams. Founded in 2005, and later floating on the London Stock Exchange's AIM stock market as Quixant plc, the Group rebranded to Nexteq in 2023.

Further information on Nexteq and its divisions can be found at www.nexteqplc.com.

 

CHAIR'S STATEMENT

Group Results Overview

I am pleased to report on a year of meaningful progress as the Group continues its evolution as a high value technology partner across multiple selected industrial markets. While navigating a challenging and evolving economic environment, we stayed the course, executing our growth strategy. As a result, the Group delivered a resilient revenue performance against a record prior year, significant improvement to profitability, and encouraging operational and strategic progress. I would like to thank all colleagues for their ongoing commitment, perseverance and adaptability during the year.

Higher interest rates and inflation led to weakened demand for many of our customers' end products, leading to lower order intake and customers pushing shipments out into 2024. Despite these headwinds, the Group delivered a resilient sales performance with Group revenues down 5%, Densitron revenues broadly in line with 2022 and Quixant revenues down 6%.

 

Significant progress was made in the operational performance of the business, particularly in managing supply chains and driving the shift towards higher value products. This allowed for materially improved profitability, with adjusted profit before tax up 45% to $14.7m (2022: $10.2m) and statutory profit before tax up 47% to $12.9m (2022: $8.8m).

 

The Group's capital-light model generates strong cash flows, which management looks to reinvest into accelerating the strategy and delivering further value for Shareholders. The year saw an easing in the acute component shortages experienced in the prior two years and restoration of a better supply and demand equilibrium. This allowed for the unwind of stock balances and improved cash generation, with $19.8m cash generated from operating activities.

 

I am pleased to report that we commenced our first mass production run in Malaysia in the fourth quarter of 2023, complementing our Taiwanese manufacturing capability and in line with our strategic decision to diversify our manufacturing exposure.  This was an incredible effort by our manufacturing operations team to ramp up from initiation through yield testing to production in nine months. We plan to increase our Malaysian manufacturing output in 2024, with finished goods manufacturing dual sourced between Taiwan and Malaysia.  

 

Nexteq rebrand supports Group diversification

A significant milestone in the Group's growth journey was marked during the year with the rebrand to Nexteq. This reflects the evolution of the business from a niche, specialist hardware provider servicing a single end market, to a technology solutions partner with broad industrial exposure in multiple carefully selected vertical markets with strong growth prospects

 

Progression of sustainability agenda

The Board has a commitment to long-term, sustainable value creation.  During the past year, we've worked on broadening our sustainable business strategy, implementing measurable goals and targets, and aligning to the UN Sustainable Development Goals (SDGs).  We have focused on around five of the UNSDGs which we believe are most appropriate and practical for the Group to support in its sustainability activities.

 

As part of our support of the Climate Action UN SDG, we have also committed to achieving Net Zero emissions by 2050 and the organisation was Carbon Neutral in 2023.

 

Clear strategic vision

The Board completed its annual strategy review in July 2023, which confirmed that the medium-term plan remains appropriate and robust. The Group's strategy is focused on sustainable long-term growth, through both organic and acquisitive means. We believe that organic growth can be achieved by:

-	New markets: Identification and analysis of market sectors, focusing on those that do not currently benefit from dominant deep specialist solution outsource providers and are undergoing a technology evolution;
-	Customer acquisition: Building new customer partnerships in its chosen target market segments, further diversifying the Group's revenue base;
-	Product innovation: Focused R&D to move up the value chain, including within the software stack; and
-	Land-and-expand: Increase share of customer wallet by providing additional outsource solutions to become a fully integrated technology partner.

Alongside organic growth, selected acquisitions are a key factor in the Group's strategy; to complement and accelerate its growth strategy.  The Board is investigating opportunities in selected other industrial PC markets which leverage our experience and capabilities already deployed in the gaming sector.

 

Capital allocation prioritising capital growth

 

The Group's cash generative business model and strong balance sheet with good liquidity allow it to invest in the business to drive organic growth and take advantage of acquisition opportunities. With net cash of $27.9m and negligible debt, we are well positioned to take advantage of opportunities. Priorities for capital allocation are:

 

·	Maintain a strong balance sheet with good liquidity;
·	Investment in acquisitions to progress the Group's ongoing growth and diversification agenda;
·	Maintain a progressive dividend payment, growing in line with earnings growth; and
·	Any excess cash not required for investment in the medium-term growth of the business, will be available for distribution to Shareholders, including by means of a limited share buyback programme.

The Board considers it appropriate to recommend a moderate increase in the full year dividend to 3.3p per share (2022: 3.0p per share).

 

Francis Small
Chair

 

CHIEF EXECUTIVE'S REPORT

 

Key messages

-	Profitability enhancements driven by successful execution of strategic focus on higher value products.
-	Normalisation of order book with easing supply chain lead times.
-	New business development gathered pace in 2023 as Gaming manufacturers reignited product development with new business wins supporting organic growth in 2024.
-	Excellent cash generation in 2023 leading to record net cash position.
-	Range of organic growth and acquisition opportunities to significantly enhance the Group's financial scale in the medium term.

Year in summary

 

The Group continued to make good strategic progress in the year despite some challenging macroeconomic conditions. Following the buoyant post pandemic industrial market demand in 2021/2022, coupled with unprecedented supply shortages, we entered 2023 with significant order backlog and revenue visibility. The normalisation of order intake, first reported in September 2023 with the 2023 interim results, continued in the second half of the year. This is a result of customers reducing inventory levels because of easing of supply chain pressures, together with wider economic uncertainty. The Group enters 2024 with good visibility of demand with the order book representing a more typical five months' revenue cover, compared to seven months' revenue cover at the start of 2023.

 

It is particularly pleasing in this environment to be reporting 45% growth in adjusted profit before tax to $14.7m (2022: $10.2m), with a corresponding 47% growth in statutory profit before tax to $12.9m (2022: $8.8m).  As noted above, Group revenues in the year were down 5% to $114.3m (2022: $119.9m) against a record prior year. Initiatives taken to improve the quality of revenue through focusing on higher value products and a stable operating expense base delivered an adjusted profit before tax margin of 12.9% (2022:8.5%).  It is a key objective for the business to deliver mid-teen adjusted profit before tax margins in the medium term and it is pleasing to report the positive progress towards this objective in the last year.  In conjunction with the easing in supply chains we started to unwind our working capital tied up in inventory supporting 142% adjusted operating cash conversion to leave us with a record year-end net cash balance of $27.9m. 

 

Growth strategy - the outsource partner of choice in selected markets

Nexteq is founded on the principle that selected industrial markets are inadequately supported by more generalist computer and human machine interface technology companies.  As a result, original equipment manufacturers in these markets are required to develop aspects of their products that are non-core or non-differentiating to meet the specific and bespoke needs of the market.  This makes their businesses less efficient and reduces focus on their core competencies. 

 

The Board believes that by building domain knowledge in these markets, focusing research and development to innovate and supply optimised solutions that cater for technical and operational characteristics required and deploying global expert sales teams into each of them, we can become the preferred outsource provider.  This enables our customers to outmanoeuvre their competition and grow market share. 

 

Our global team encompasses a powerful combination of computer hardware, software, display and mechanical engineering expertise that, together with a diversified Asian manufacturing base, enables us to engineer and supply well-matched solutions to meet market needs. 

 

The business was founded in 2005, operating in the casino gaming sector by designing and supplying optimised computer platforms to electronic gaming machine manufacturers.  Our customers' machines installed in casinos and other gaming venues globally combine optimised hardware and software elements to address the specialist needs of this highly regulated market. By outsourcing their computer platform to Quixant, manufacturers can focus their R&D on the game design, which has the greatest impact on their commercial success. They are also able to bring new products to market quicker.

 

Our strategy has been to leverage engineering capability and business philosophy across a diversifying customer base, product offering and vertical markets.  We acquired Densitron, a supplier of display and human machine interface components to a wide range of industrial markets.  Through Densitron we have identified the broadcast market as a second focus sector in which equipment manufacturers are seeking to replace outdated mechanical control with graphical touch technology.  To support this agenda, we have developed unique solutions that modernise human machine interaction (HMI) and control of broadcast equipment.  We delivered our fourth consecutive year of double-digit revenue growth in the broadcast sector with $8.4m recognised in the year (2022: $7.5m).

 

The Group's growth strategy is defined as follows:

-	Identification and analysis of market sectors that do not currently benefit from dominant deep specialist solution outsource providers and are undergoing a technology evolution.
-	Building new customer partnerships in its chosen target market segments, further diversifying the Group's revenue base.
-	Focused R&D to move up the value chain, including within the software stack.
-	Increase share of customer wallet by providing additional outsource solutions to become a fully integrated technology partner.
-	Undertake acquisitions to complement and accelerate its organic growth and diversification strategy.

 

Business Review: Quixant

 

Quixant is Nexteq's brand that supplies outsourced solutions to the casino gaming and slot machine market, representing 61% of the Group total revenue.

 

Growth in computer platform volumes tempered by reduced monitor sales

Continuing a strong performance in 2022, we grew computer platform volumes by 5% to 54.5k in 2023 with particularly healthy demand for the cost-effective IQ and mid-range IQON products.  While the margins achieved are consistent across all our products the average selling price of IQ and IQON products are lower which led to platform revenues in line with 2022. Against this growth in computer platform sales, we saw a decline in monitor sales partly driven by cessation of sales to the Aruze Group following their US entity filing for Chapter 11 bankruptcy in February 2023.  Overall gaming sector revenues were down 6% year on year to $69.2m (2022: $74.1m) albeit with product mix driving higher gross margins.  Gaming monitors typically carry a lower gross margin than computer platforms because they carry less bespoke intellectual property.

 

 

Refreshed product range

 

2021 and 2022 saw extraordinary disruption in electronic supply chains with high volatility in pricing, extended supply lead times and unexpected component end-of-life notices.  Maintaining supply through this period was a major challenge for the business and engineering teams across the Group were heavily occupied with re-designing existing product and validating new components to replace those that were unavailable. 

 

Component markets in 2023 were substantially more stable than previous years, and greater confidence returned in supply availability and reliability.  While there remain some challenges and we cannot be complacent, we were able to resume focus on new product development.  In 2022, we started the process of migrating our newest products from AMD to Intel processor technology.  Graphic processing capability is critical for the high-resolution video slots that the computer platforms power and traditionally AMD offered better performance embedded graphics than Intel.  In recent years Intel has significantly improved its graphics processing performance, likely partly driven by their recognition of the importance of GPU Compute in artificial intelligence.  This has benefited their embedded processor parts and enabled them to offer significantly more compelling processors with longer supply lifetimes. 

 

With the roll out of IQ 2 and IQON 2 in 2024 to join the already launched QMAX-3, all our latest products now harness Intel processors. 

 

Combined with Quixant's Software Hub, a value-add library of support software libraries, tools and drivers, the new hardware product launches give us a complete portfolio to all price points, which we can market with confidence in long-term availability and price competitiveness for the first time since the pandemic.

 

New business development gathered pace in 2023 as manufacturers reignited new product development rather than focusing on maintaining supply of existing product.  With our refreshed product suite, we are well positioned to drive the conversion of new business.

 

Growth in new markets augmenting flat demand from established jurisdictions

 

The US Gaming market continued to see strong player spend with the American Gaming Association reporting US slot machine gross gaming revenues growing by 3.3% year on year to $32.4bn.  The tribal gaming market, which covers casinos that are located on reservation land, represents the other major source of US gaming.  The National Indian Gaming Commission reported gross gaming revenues in 2022 of $40.9bn, 4.9% growth year on year.

 

The market replacement cycle, however, has seen stagnant growth in the year and the major manufacturers have been trading places in market share with Aristocrat and Light & Wonder leading the pack.  This competitive environment has led some of the majors to enter atypical US markets for them such as Historical Horse Racing and the Route Markets seeking growth.  This presents a risk for some of our larger customers as they have historically been strong in these segments.  It also, however, presents an opportunity for us because it is increasing the emphasis on content creation to be competitive which plays into our outsource proposition.

 

Our two largest customers, Everi Holdings (Everi) and Ainsworth Game Technology (AGT) made important new product launches at the Global Gaming Expo (G2E) 2023, held in Las Vegas in October 2023.  Both launched several new cabinets, which has put them in a competitive position, and introduced new 'hold and spin' games at the show - a type of bonus game that is dominating player appetite at the moment.

 

While European market revenues recovered from pandemic lows in 2020, the replacement cycle has continued to lag pre-pandemic levels and sentiment generally remains weak.  Exceptions to this are Bulgaria and Romania where we have seen elevated activity, with the latter supported by legislative changes. 

 

Latin America represents a significant growth opportunity as markets regulate and evolve.  We continue to follow developments in Brazil closely, where in December 2023 the government enacted a law regulating 'fixed-odds betting'. The law allows companies to run fixed-odds betting operations in relation to sports events and online games. This has resulted in many companies competing for licences to manage lottery and sports betting locations. Significant challenges remain around import logistics of any gaming product in the country and whether legislation to approve gaming will ever be passed remains to be seen but there are tailwinds in what would be a substantial market.  Despite the optimism around Brazil, we are aware of the political uncertainty that exists in many LATAM countries and therefore are cautious about relying on new market growth in the region.

 

Across all jurisdictions 'omnichannel gaming' is increasing in popularity and importance.  Players expect a seamless experience between bricks-and-mortar venues and virtual online gaming.  This is driving major investment from traditional land-based manufacturers into online, but also a tide of online game developers looking to bring out land-based machines with their content.  The latter is exciting for us because our turnkey product offerings allow them to realise their ambitions without designing or manufacturing hardware.

 

Business Review: Densitron

 

Densitron is Nexteq's brand that supplies industrial display components and bespoke human machine interface (HMI) solutions to selected industrial markets outside gaming, representing 40% of the Group total revenue.

 

Significant margin enhancement in 2023 after a record 2022

In 2022, we delivered record revenues in Densitron since acquisition in 2015.  Despite challenging macro conditions in many industrial markets driving weaker than anticipated demand, overall Densitron delivered another strong revenue performance of $45.1m, broadly in line with the prior year (2022: $45.8m). 

 

Initiatives introduced over the last few years to improve profitability yielded results in 2023 as Densitron delivered several percentage points improvements in gross margin.  Combined with revenues remaining at historical highs, this meant Densitron delivered a materially increased adjusted profit before tax contribution in the year. 

 

Double-digit broadcast sector growth

 

Broadcast sector revenues were up 12% to $8.4m (2022: $7.5m), the fourth consecutive year in which we have achieved double-digit growth.  This is despite the broadcast market seeing similar macro headwinds to many other industrial markets.  Importantly, the higher value product propositions supplied to the Broadcast sector are at higher gross margins than other Densitron sectors which is partly responsible for the better margin performance in 2023.

 

Broadcast is a strategic market for the Group in which we seek to modernise the control of technology which typically resides in Production Control Rooms ("PCRs"). We believe that there are around 220,000 PCRs worldwide which results in an equipment spend every year of $880m of which we believe our realistic total addressable market is $220m.  These PCRs are found in broadcast corporation studios, corporate broadcast theatres, outside broadcast trucks and houses of worship and are the venue in which the broadcast operations are directed, and composition of the outgoing programme takes place. 

 

Densitron has three offerings for the Broadcast sector:

 

1)	Finished Products - These products incorporate the best of our display, touch and computing technology to provide plug and play solutions to broadcast HMI and control problems.  These are supplied not only to broadcast equipment manufacturers but also to the end broadcast corporations such as the BBC.
2)	HMI Modular Solutions - We can supply any element of our HMI technology as a sub-assembly to broadcast manufacturers for incorporation into their equipment.  This gives them access to newer interface technology, helps them get to market faster and reduces their engineering workload.
3)	Original Design Manufacturer Plus (ODM+) Services - Broadcast manufacturers can outsource their entire product design and development to Densitron and in developing this product Densitron will incorporate our patented technologies where appropriate. This allows the broadcast manufacturers to either reduce costs or invest in engineering, manufacturing and supply chain capacity in other projects.

 

As our product portfolio matures and gains greater traction across the industry, we are increasingly seeing customers adopting more standardised variants.  This is expected behaviour and supports the R&D effort expended in developing the product portfolio. 

 

During the year we expanded the range of our Tactila tactile objects and commenced work on smaller rotaries which, while technically difficult to accomplish, expands the application into more broadcast equipment and applications. This helped drive new business activity in the second half of 2023. Our patented button technology will be adopted by Ross Video. These buttons are overlaid onto a display to enable the user to enjoy the benefits of a touchscreen but with the tactility of a mechanical button.  We also secured an order for our Tactila rotaries to be applied to a market-leading piece of broadcast hardware by Wohler.

 

Display Component book delivering record margins

 

While 2023 saw a slight downturn in revenue amid wider weakness in the industrial equipment demand, margin gains more than offset this from a profit perspective.  We believe this new margin level can be sustained going forward with the value proposition we now offer customers.

 

We are recognised as a trusted supplier to a loyal customer base and have worked successfully during the year to secure new business wins to support future revenue growth.  The second largest sector in the Nexteq Group by revenue is the medical market and we have a longstanding book of customers which require high service levels, need to work with trusted supply partners and tend to buy the same display for up to a decade so present a very attractive customer base for the display component business to grow from within.  Having exhibited at the Medica trade show in 2023 we are exploring growth opportunities in this market.

 

 

Expanded manufacturing footprint for efficiency and resilience

 

All our manufacturing takes place in Asia with most components sourced from China and Taiwan. Historically, all our finished goods are manufactured by Taiwan-based subcontractors.

 

Considering continuing geopolitical tensions in the region, we made the decision at the end of 2022 to explore manufacturing options elsewhere and I am pleased to report that we commenced the first mass production run of the IQON 2 gaming platform in Malaysia in Q4 2023.  This was an incredible effort by our manufacturing operations team to ramp from initiation through yield testing to production in just nine months. Going forward, finished goods manufacturing will be dual sourced between Taiwan and Malaysia for Quixant and Densitron finished goods.  

 

We also signed a manufacturing partnership with ELAS, a respected gaming cabinet manufacturer based on Bosnia and Herzegovina.  They will enable us to efficiently supply our Quantum cabinet products to the European market alongside our other manufacturing partners in North America.

 

Current Trading and Outlook

 

In the first months of 2024 we have seen a continuation of the slower order intake across our end markets as customers continue to focus on managing working capital tied up in inventory. We expect these conditions to persist in the near term but improve into the second half of the year. The Group enjoys a healthy order backlog providing good revenue visibility and remains confident in meeting market expectations for 2024 revenues, with asecond half weighting. The Board continues to have confidence in the Group's organic growth opportunities in the medium term.

 

Driving further operational efficiency and profitability remain key priorities for the Group, and we expect to make further improvements in the current year. With the normalisation of supply chains, we expect cash conversion to remain at high levels, further improving our net cash position. The strength of our balance sheet and accumulated cash balance also positions us well to undertake acquisitions to earnings growth.

 

 

Jon Jayal

Chief Executive Officer

 

 

 

 

 

Financial Review

 

Improved profitability and cash generation

 

Statutory Results

Group Revenue was $114.3m, 5% lower than the $119.9m delivered in 2022. Gross profit was $41.5m (2022: $38.6m), an increase of 8% over the prior year, with gross margins at 36.3% (2022: 32.2%). Operating expenses were $29.1m (2022: $29.6m), resulting in operating profit of $12.4m (2022: $8.9m). Net finance income was $0.5m (2022: Net finance cost of $0.1m), resulting in profit before tax of $12.9m (2022: $8.8m) and an income tax expense of $2.0m (2022: tax credit of $2.2m), equivalent to an effective tax rate of 15.6% (2022: -24.8%). Basic earnings per share (EPS) were 16.39cents (2022: 16.53cents), a decrease of 1%. Diluted EPS were 16.02cents (2022: 16.16cents), a decrease of 1%.

 

Revenue

Quixant revenues were $69.2m, a decrease of 6% on the prior year (2022: $74.1m). Unit sales increased to 54,513 platforms delivered in the year, up 5% on the prior year (2022: 52,044). Demand for our cost effective and mid-range products were particularly high in 2023, resulting in a slightly lower average selling price resulting in platform revenues in line with the prior year. The decrease in overall Quixant revenues was largely due to product mix, as the Group delivered fewer monitors than in 2022.

 

Densitron delivered another strong revenue performance with $45.1m, broadly in line with the prior year (2022: $45.8m). The strong demand for Densitron products seen in 2022 continued through 2023, across all its subsectors. The broadcast sector in particular had another strong year with revenues of $8.4m, up 12% on the $7.5m delivered in 2022.

 

Gross profit and gross profit margin

The Group generated gross profit during the year of $41.5m (2022: $38.6m) representing a gross margin of 36.3% (2022: 32.2%). Gross margins continued their recovery from the lower levels seen in 2021 and 2022, which was a result of component price inflation from global supply chain shortages and higher freight charges.

 

Adjusted operating expenses

Adjusted operating expenses decreased by 4% to $27.3m (2022: $28.3m). For the first year since the outbreak of COVID-19 in 2020, operations were not impacted by pandemic related restrictions. This resulted in travel and marketing spend returning to normal levels, increasing $0.6m to $2.6m (2022: $2.0m). In addition to this the Group has also invested in headcount, with average employees increasing from 228 in 2022 to 238 in 2023 as the Group grew its engineering, supply chain and sales teams to support the growing demand across both Quixant and Densitron. This resulted in payroll costs increasing by $1.5m to $21.7m (2022: $20.2m).

 

During the year, Group expenditure on research and development reduced to $4.6m (2022: $4.8m). These costs relate to investment activities principally undertaken in Taiwan, Italy, the UK and Slovenia. Of these costs, $1.8m were capitalised (2022: $1.8m) as the Group continues to focus on developing new products, with amortisation for the year on total capitalised development costs of $1.4m (2022: $1.1m).  During the year the Group abandoned in progress development projects with a carrying value of $1.0m (2022: $0.5m). This was following internal review where it was determined that the projects no longer met the criteria to capitalise product development cost as set out in IAS38.

 

Offsetting these increases were lower impairment of trade receivables, with no impairment loss recorded in the current year compared to $0.9m in 2022 when the Group recognised an impairment loss related to Aruze. The Group also recognised exchange rate gains of $0.6m, compared to an exchange rate loss of $1.6m in 2022. The Group benefited from less volatile foreign exchange markets, particularly the US Dollar exchange rate to Pound Sterling and the Taiwan Dollar. In addition, management took measures to have natural hedges in place to limit the impact of foreign exchange fluctuations.

 

Adjusted operating expenses also benefited from a $0.4m R&D tax credit. The Group has received R&D tax credits for many years due to its product development efforts as part of the SME R&D tax credit scheme which is recognised as a credit in tax expense. In 2023 the Group qualified for the large company Research and Development Expenditure Credit (RDEC) regime due to the size of the Company's balance sheet. Under the RDEC scheme the tax credits should be recognised within operating expenses. Apart from the change in accounting treatment of the tax credits there are no changes in the timing or amount of tax credits the Group expects to receive.

 

Valuation of Aruze related assets

As disclosed in the 2022 Annual Report, the Group, through its Quixant brand, had active contracts in place with Aruze Philippines Manufacturing Inc. ('APMI'), for the supply of display products and gaming boards. On 1 February 2023 Aruze Gaming America, Inc ('AGA'), a US based affiliate of APMI, filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the State of Nevada. As at the date of these financial statements, the Chapter 11 proceedings are still ongoing. AGA's operations and assets have been sold as part of the proceedings and AGA also closed its Las Vegas operations.  APMI filed for voluntary liquidation on 22 August 2023 and a liquidation order was issued by the Philippine courts. As at the date of these financial statements the liquidation proceedings were still ongoing.

 

There remains uncertainty over the recoverability of balances related to APMI and Nexteq management evaluated their carrying value as at the balance sheet date.

 

As at 31 December 2023, APMI owed $1.0m to the Group from the sale of goods (2022: $0.7m). The amounts were impaired in full as at 31 December 2022 and due to the uncertainty referenced above remain fully impaired at 31 December 2023.  The Group continues to take steps to recover these balances.

 

Inventory, consisting of raw materials with a book value of $1.7m (2022: $2.2m) and finished goods with a book value of $0.6m (2022: $1.1m) originally earmarked for use by APMI was included in the Nexteq Group's balance sheet as at 31 December 2023. The raw materials can be used to manufacture products sold to the Group's existing or new customers, and the finished goods can be used in the Group's turnkey cabinet offering. Management expects to fully recover the net book value of $2.3m and considers that no provision against it was required as at 31 December 2023.

 

The Group balance sheet also previously included capitalised development costs with a book value of $0.4m related to the development of products for APMI's future use. Management assessed the commercial opportunities for these products and determined that it was not probable that these would generate future economic benefits for other customers. As a result, development of these products was ceased. An impairment charge of the full book value of $0.4m was recorded within operating expenses.

Net finance income/(expense)

The Group recognised Net finance income of $0.5m (2022: Net finance expense of $0.1m). Finance income increased to $0.6m (2022: $0.0m) as the Group took advantage of higher interest rates coupled with the higher cash balances the Group had during the year. Finance expense of $0.1m (2022: $0.1m) principally related to leases.

 

Adjusted Profit Before Tax

Adjusted profit before tax increased by 45% to $14.7m (2022: $10.2m). The adjustments to statutory profit before tax of $1.9m (2022: $1.4m) consisted of:

 

·	Share-based payments charge of $1.0m (2022: $0.6m). During the year the Group granted further Long-term Incentive Plan (LTIP) shares to employees. The LTIP awards vest in three years providing continuous employment during the period, and attainment of performance conditions relating to earnings per share (EPS).
·	Amortisation of acquired intangibles charge of $0.6m (2022: $0.8m). This charge relates to intangible assets recognised in the acquisition of Densitron and IDS.
·	Restructuring charges of $0.3m (2022: nil). The restructuring charges relate to a restructuring programme completed in December 2023 to improve the efficiency of the Group's operations. We took the difficult but necessary decision to reduce our workforce by 10%, reducing the Group's annual staff costs by $1.2m. The effect of this reduction will only be fully reflected in 2024 due to the timing of when the programme was completed.

 

Taxation

The Group recognised a corporation tax charge of $2.0m in the year, compared to a credit of $2.2m in 2022. The tax charge consists of a current tax charge of $2.3m (2022: $0.5m) and $0.3m credit relating to the movement in deferred tax assets and liabilities in the current year (2022: credit of $2.7m). The 2022 tax credit included a $1.8m credit in relation to the recognition of a deferred tax asset for tax losses that were considered recognisable due to the Group having enhanced visibility over their availability and utilisation.

 

The effective tax rate on statutory profit before tax increased to 15.6% (2022: -24.8%). The Group had higher than previously expected tax relief from the research and development efforts and a greater mix of patented product sales increasing patent box claims in the UK. Going forward we expect the effective tax rate to be approximately 16% - 19%, depending on the regional mix of profits and product mix sold.

Earnings per share

Basic EPS decreased by 1% to 16.39c per share (2022: 16.53c per share). Adjusted diluted earnings per share increased by 2% to 18.09c per share (2022: 17.79c per share).

 

Balance Sheet

Non-current assets decreased to $24.3m as at 31 December 2023 (31 December 2022: $26.2m) mainly due to amortisation and impairment of intangible assets. Included in non-current assets are goodwill of $7.7m (31 December 2022: $7.7m) and acquisition related intangible assets of $0.5m (2022: $1.0m) allocated to cash generating units (CGUs). The annual impairment review indicated that no impairment of goodwill is necessary at 31 December 2023 or 31 December 2022. The impairment reviews did indicate that the estimated recoverable amounts of the Densitron US and Densitron Europe CGUs are sensitive to a reasonably possible change in key assumptions. The change in key assumptions could cause the carrying amount of the CGUs to exceed the recoverable amount, which would lead to an impairment.

 

Current assets increased to $78.6m at 31 December 2023 (31 December 2022: $69.7m) mainly due to a significant increase in cash and cash equivalents from $13.5m at the start of the year to $28.4m at 31 December 2023. This was offset by a decrease in inventory to $24.3m (31 December 2022: $32.2m), as the Group consumed the strategic stock purchased during 2021 and 2022.

 

Cash Flow

The Group generated $19.8m cash from operating activities in the year (2022: $0.8m). Adjusted operating cash flow, which excludes tax payments, was $21.0m (2022: $2.5m) which represented 142% of adjusted profit before tax (2022: 25%). This was ahead of the Group's 2023 cash conversion KPI target due to reduced working capital, as the Group consumed strategic stock balances.

 

The Group capitalised $1.8m of development costs (2022: $1.8m), which reflects the continued development of new products as the Group expands its product portfolio.

 

The Group finished 2023 with net cash of $27.9m (2022: $12.9m), comprising cash and cash equivalents of $28.4m (2022: $13.5m) and gross debt of $0.5m (2022: $0.6m). The debt relates to a mortgage over the Group's offices in Taiwan.

 

Dividend

The Board proposes a dividend for the year ended 31 December 2023 of 3.3p per share (2022: 3.0p per share). This dividend will be payable on 23 August 2024 to all shareholders on the register on 26 July 2024. The corresponding ex-dividend date is 25 July 2024.

 

Foreign exchange

The Group reports its results in US Dollars as this is the principal currency in which it trades with customers, with approximately 91% (2022: 91%) of our revenues denominated in US Dollars.

 

The Group's reported results are impacted by US Dollar movements against currencies in the territories in which it operates, principally Pounds Sterling, Euros and Taiwan Dollars. The following are the average and closing rates for the current and prior year:

		Average rate
Income statement		2023	2022
USD/GBP		1.24	1.24
USD/Euro		1.08	1.05
USD/TWD		0.032	0.034
		Closing rate
Balance sheet		2023	2022
USD/GBP		1.27	1.20
USD/Euro		1.11	1.07
USD/TWD		0.033	0.033

 

As most of the Group's revenues are denominated in US Dollars, the impact of foreign exchange movements on reported revenues was minimal in 2023 and 2022. The impact on foreign exchange movement on profit before tax is mostly due to operating expenses incurred in Pound Sterling and Taiwan Dollars.

 

The average US Dollar exchange rate against currencies in the territories in which the Group operates for 2023 were very similar to 2022 levels, resulting in a negligible impact on adjusted operating expenses, when compared to 2022 average rates. The Group recognised translational foreign exchange rate gains of $0.6m in 2023, compared with losses of $1.6m in the prior year, a positive $2.2m impact year over year. Combining the impact of these foreign exchange elements resulted in a net positive foreign exchange rate impact of $2.2m on adjusted profit before tax for 2023 when compared to 2022.

 

Alternative performance measures (APMs)

 

Throughout these financial statements, alternative performance measures (APMs) are used to describe the Group's performance. These are not recognised under UK-adopted international accounting standards or other generally accepted accounting principles (GAAP). When reviewing Nexteq's performance, the Board and Management team focus on adjusted results in addition to statutory results.

 

APMs are non-GAAP measures and provide supplementary information to assist with the understanding of the Group's financial results and with evaluation of operating performance for the periods presented in these financial statements. APM's, however, are not a measure of financial performance under IFRS and should not be considered a substitute for measures determined in accordance with IFRS. APMs have been provided for the following reasons:

 

1)	to present users of these financial statements with a clear view of what we consider to be the results of our underlying operations, enabling consistent comparisons over time and making it easier for users of the report to identify trends;
2)	to provide additional information to users of these financial statements about our financial performance or financial position; and
3)	to show the performance measures that are linked to remuneration for the Executive Directors.

 

The following APMs appear in these financial statements.

 

	Reason for use	Reconciliation
Adjusted profit before tax	1,3	Note 1
Adjusted profit after tax	1,2	Note 1
Adjusted operating expenses	1,2	Note 1
Adjusted operating cash flow	1,2	Note 1
Adjusted diluted EPS	1,2	Note 5

 

 

 

Johan Olivier
Chief Financial Officer

 

 

 

 

 

CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME

For the years ended 31 December 2023 and 2022

		2023	2022
	Note	$'000	$'000
Revenue	3	114,349	119,873
Cost of sales		(72,828)	(81,319)
Gross profit		41,521	38,554
Operating expenses		(29,091)	(29,622)
Operating profit		12,430	8,932
Finance income		585	-
Finance expense		(106)	(131)
Profit before tax		12,909	8,801
Taxation	4	(2,012)	2,185
Profit for the year		10,897	10,986
Other comprehensive income/(expense) for the year, net of income tax
Items that are or may be reclassified subsequently to profit or loss: Foreign currency translation differences		723	(1,644)
Total comprehensive income for the year		11,620	9,342
Basic earnings per share	5	$0.1639	$ 0.1653
Diluted earnings per share	5	$0.1602	$ 0.1616

 

The Italian subsidiary, Quixant Italia srl, is 99% owned by the Group. The comprehensive income and equity attributable to the non-controlling interests in this subsidiary are not material.

 

The consolidated statement of profit and loss and other comprehensive income has been prepared on the basis that all operations are continuing operations.

 

 

 

 

CONSOLIDATED AND COMPANY BALANCE SHEETS

As at 31 December 2023 and 2022

		Group			Company
		2023 $'000	2022 $'000		2023 $'000	2022 $'000
Non-current assets
Property, plant and equipment		5,478	5,668		3,649	3,750
Intangible assets		14,243	15,533		408	652
Right-of-use assets		1,558	1,694		667	745
Investment property		−	−		−	-
Investments in Group companies and associated undertakings		−	−		9,586	9,244
Deferred tax assets		2,951	2,636		2,637	2,389
Trade and other receivables		54	712		−	-
		24,284	26,243		16,947	16,780
Current assets		24,338			16,180
Inventories			32,169			22,717
Trade and other receivables		25,828	24,047		9,889	10,917
Cash and cash equivalents		28,406	13,508		24,857	9,042
		78,572	69,724		50,926	42,676
Total assets		102,856	95,967		67,873	59,456
Current liabilities		(91)			(91)
Loans and borrowings			(90)			(90)
Trade and other payables		(16,763)	(20,437)		(26,583)	(15,176)
Tax payable		(1,247)	(530)		(421)	(274)
Lease liabilities		(569)	(562)		(296)	(329)
		(18,670)	(21,619)		(27,391)	(15,869)
Non-current liabilities		(382)			(382)
Loans and borrowings			(473)			(473)
Provisions		(351)	(350)		−	-
Deferred tax liabilities		−	(40)		−	-
Lease liabilities		(1,107)	(1,271)		(364)	(441)
		(1,840)	(2,134)		(746)	(914)
Total liabilities		(20,510)	(23,753)		(28,137)	(16,783)
Net assets		82,346	72,214		39,736	42,673
Equity attributable to equity holders of the parent		106			106
Share capital			106			106
Share premium		6,747	6,708		6,747	6,708
Share-based payments reserve		1,905	895		1,905	895
Retained earnings		74,398	66,038		30,464	35,085
Translation reserve		(810)	(1,533)		514	(121)
Total equity		82,346	72,214		39,736	42,673

 

The Company's loss for the year was $2.1m (2022: loss of $0.6m).

 

These financial statements were approved and authorised for issue by the Board of Directors on 12 March 2024 and were signed on behalf of the Board by:

 

 

Jon Jayal

Chief Executive Officer

 

 

Company registered number: 04316977

 

 

 

 

CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEARS ENDED 31 DECEMBER 2023 and 2022

 

GROUP

	Share Capital	Share Premium	Translation Reserve	Share-Based Payments	Retained Earnings	Total Equity
	$'000	$'000	$'000	$'000	$'000	$'000
Balance at 1 January 2022	106	6,708	111	212	56,940	64,077
Total comprehensive income for the year
Profit for the year	-	-	-	-	10,986	10,986
Other comprehensive expense	-	-	(1,644)	-	-	(1,644)
Total comprehensive (expense)/income for the year	-	-	(1,644)	-	10,986	9,342
Transactions with owners, recorded directly in equity
Share-based payment expense	-	-	-	618	-	618
Deferred tax on share-based payment expense	-	-	-	65	-	65
Dividend paid	-	-	-	-	(1,888)	(1,888)
Total contributions by and distributions to owners	-	-	-	683	(1,888)	(1,205)
Balance at 31 December 2022	106	6,708	(1,533)	895	66,038	72,214

 

	Share Capital	Share Premium	Translation Reserve	Share-Based Payments	Retained Earnings	Total Equity
	$'000	$'000	$'000	$'000	$'000	$'000
Balance at 1 January 2023	106	6,708	(1,533)	895	66,038	72,214
Total comprehensive income for the year	-	-	-	-	10,897	10,897
Profit for the year
Other comprehensive income	-	-	723	-	-	723
Total comprehensive income for the year	-	-	723	-	10,897	11,620
Transactions with owners, recorded directly in equity	-	-	-	962	-	962
Share-based payment expense
Deferred tax on share-based payment expense	-	-	-	48	-	48
Dividend paid	-	-	-	-	(2,537)	(2,537)
Exercise of share options	-	39	-	-	-	39
Total contributions by and distributions to owners	-	39	-	1,010	(2,537)	(1,488)
Balance at 31 December 2023	106	6,747	(810)	1,905	74,398	82,346

 

 

 

 

 

CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEARS ENDED 31 DECEMBER 2023 and 2022

 

COMPANY

	Share	Share	Translation	Share-Based	Retained	Total Parent
	Capital	Premium	Reserve	Payments	Earnings	Equity
	$'000	$'000	$'000	$'000	$'000	$'000
Balance at 1 January 2022	106	6,708	1,049	212	37,533	45,608
Total comprehensive loss for the year
Loss for the year	-	-	-	-	(560)	(560)
Other comprehensive expense	-	-	(1,170)	-	-	(1,170)
Total comprehensive expense for the year	-	-	(1,170)	-	(560)	(1,730)
Transactions with owners, recorded directly in equity
Share-based payment expense	-	-	-	618	-	618
Deferred tax on share-based payment expense	-	-	-	65	-	65
Dividend paid	-	-	-	-	(1,888)	(1,888)
Total contributions by and distributions to owners	-	-	-	683	(1,888)	(1,205)
Balance at 31 December 2022	106	6,708	(121)	895	35,085	42,673

 

	Share	Share	Translation	Share-Based	Retained	Total Parent
	Capital	Premium	Reserve	Payments	Earnings	Equity
	$'000	$'000	$'000	$'000	$'000	$'000
Balance at 1 January 2023	106	6,708	(121)	895	35,085	42,673
Total comprehensive loss for the year	-	-	-	-	(2,084)	(2,084)
Loss for the year
Other comprehensive income	-	-	635	-	-	635
Total comprehensive expense for the year	-	-	635	-	(2,084)	(1,449)
Transactions with owners, recorded directly in equity	-	-	-	962	-	962
Share-based payment expense
Deferred tax on share-based payment expense	-	-	-	48	-	48
Dividend paid	-	-	-	-	(2,537)	(2,537)
Exercise of share options	-	39	-	-	-	39
Total contributions by and distributions to owners	-	39	-	1,010	(2,537)	(1,488)
Balance at 31 December 2023	106	6,747	514	1,905	30,464	39,736

 

 

 

 

 

CONSOLIDATED AND COMPANY CASH FLOW STATEMENTS

FOR THE YEARS ENDED 31 DECEMBER 2023 and 2022

		Group					Company
		2023	2022		2023			2022
		$'000	$'000		$'000			$'000
Cash flows from operating activities		10,897			(2,084)
Profit/(Loss) for the year			10,986					(560)
Adjustments for:		2,764			701
Depreciation and amortisation			2,652					687
Loss on disposal of property, plant and equipment		14	5		-			4
Impairment losses on intangible assets		967	509		-			-
Depreciation of leased assets		638	660		360			413
Increase in provision for doubtful debts		136	722		-			-
Movement in provisions		7	43		-			-
R&D tax credit		(382)	-		-			-
Taxation charge/(credit)		2,012	(2,185)		413			(1,776)
Finance income		(585)	-		(563)			-
Finance expense		106	131		47			86
Exchange rate losses/(gains)		120	(403)		124			(371)
Share-based payment expenses		962	618		676			499
Operating cash flows before movement in working capital		17,656	13,738		(326)			(1,018)
(Increase)/Decrease in trade and other receivables		(1,283)	(2,017)		1,016			16,940
Decrease/(Increase) in inventories		8,573	(4,633)		7,176			(2,980)
(Decrease)/Increase in trade and other payables		(3,888)	(4,439)		(3,448)			(6,774)
		21,058	2,649		4,418			6,168
Interest paid		(3)	(42)		−			(41)
Lease liability interest paid		(92)	(89)		(35)			(45)
Tax paid		(1,208)	(1,716)		(522)			(648)
Net cash from operating activities		19,755	802		3,861			5,434
Cash flows from investing activities
Addition of development costs		(1,839)	(1,817)		-			-
Purchase of property, plant and equipment		(262)	(545)		(219)			(407)
Addition of externally purchased intangible assets		(135)	(418)		(135)			(108)
Interest received		461	−	-	440
Net cash used in investing activities		(1,775)	(2,780)		86			(515)
Cash flows from financing activities		(926)			(926)
Repayment of borrowings			(6,922)					(6,922)
Proceeds from loans		842	6,842		15,553			6,842
Mortgage interest paid		(11)	-		(11)			-
Payment of lease liabilities principal		(624)	(546)		(358)			(405)
Exercise of share options		39	-		39			-
Dividends paid		(2,537)	(1,888)		(2,537)			(1,888)
Net cash used in financing activities		(3,217)	(2,514)		11,760			(2,373)
Net increase/(decrease) in cash and cash equivalents		14,763	(4,492)		15,707			2,546
Cash and cash equivalents at 1 January		13,508	18,347		9,042			6,604
Foreign exchange rate movements		135	(347)		108			(108)
Cash and cash equivalents at 31 December		28,406	13,508		24,857			9,042

 

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  General information

The financial information set out above and below, does not constitute the company's statutory accounts for the years ended 31 December 2023 or 2022 but is derived from those accounts. Statutory accounts for 2022 have been delivered to the registrar of Companies, and those for 2023 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of UK-adopted international accounting standards and as applied in accordance with the provisions of the Companies Act 2006, this announcement does not itself contain sufficient information to comply with UK-adopted international accounting standards. The Company expects to publish full Financial Statements that comply with UK-adopted international accounting standards during March 2024.

 

Going concern

The Group's operational and financially robust position is supported by: 

-	Increased profitability with profit before tax of $12.9m, 47% higher than 2022 ($8.8m).
-	Improved cash generation, leading to a net cash balance of $27.9m at 31 December 2023 (31 December 2022: $12.9m).
-	Good order book at 31 December 2023 covering five months of forecasted 2024 revenues (31 December 2022: seven months of forecasted 2023 revenues).

In undertaking a going concern assessment, the Directors have reviewed financial projections for a period of at least twelve months from the date of this report (the assessment period). Management prepared a base case scenario based on the approved budget for 2024 and forecasts for the first three months of 2025. Management also prepared a severe but plausible downside scenario, using the following key assumptions:

-	A 25% reduction in 2024 and 2025 Quixant revenues to replicate the impact that a downturn similar to that experienced in 2019 would have on the Group's revenues.
-	Supply chain disruptions similar to that experienced in 2021 and 2022 leading to increased levels of working capital.

In this scenario, the Group continues to have sufficient cash reserves and working capital to continue operating as a going concern through the review period.

 

While the Directors' have no reason to believe that customer revenues and receipts will decline to the point that the Group no longer has sufficient resources to fund its operations, should this occur, the Group would look to take out additional funding facilities, as well as making further reductions in controllable costs. There would also be an opportunity to sell certain property and inventory assets to accelerate cash generation and/or mitigate risk.

 

Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of these financial statements and, therefore, have prepared these financial statements on a going concern basis.

 

Use of judgements and estimates

The preparation of financial information in conformity with UK-adopted international accounting standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group accounting policies. The areas involving a higher degree of judgement and estimation relate to the recoverable amount of goodwill in the Densitron US CGU, valuation of Quixant CGU inventory, capitalisation of development costs and valuation of Aruze debtors, inventory and capitalised development costs. Estimates and underlying assumptions are reviewed on an annual basis. Revisions to estimates are recognised prospectively.

 

Significant estimates

Recoverability of goodwill and acquisition-related intangibles in the Densitron US and Densitron Europe CGUs

The estimated recoverable amounts of the Densitron US and Densitron Europe CGUs have been determined based on the higher of the value-in-use calculations and fair value less costs to sell. These calculations require the use of estimates and assumptions that are subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. Reasonably possible changes to the assumptions in the future may lead to material adjustments to the carrying value of the CGUs.

 

Inventory valuation in the Quixant CGU

Inventories, which comprise goods held for resale, are stated at the lower of cost and net realisable value, on a weighted average cost basis. The estimated recoverable amount of the inventory balance in the Quixant CGU and the Parent Company is subjective, due to the inherent uncertainty involved in forecasting of future sales. Provisions are made to write down any slow-moving or obsolete inventory to net realisable value.

 

As at 31 December 2023, the Nexteq Group balance sheet and Parent company balance sheets included inventory of $19.1m (2022: $26.0m) and $14.7m (2022: $22.7m) respectively. The provision against slow-moving and obsolete inventory for the Nexteq Group as at 31 December 2023 is $2.6m (2022: $2.1m) and in the Parent company is $2.3m (2022: $1.5m). A difference of 3.7% in the provision as a percentage of gross inventory would give rise to a difference of +/- $1.0m in gross margin. The choice of a 3.7% change for the determination of sensitivity represents the change to the level of provisioning for the prior year.

 

Other important judgements

Valuation of Aruze debtors, inventory and capitalised development costs

As disclosed in the 2022 Annual Report, the Group, through its Quixant brand, had active contracts in place with Aruze Philippines Manufacturing Inc. ('APMI'), for the supply of display products and gaming boards. On 1 February 2023 Aruze Gaming America, Inc ('AGA'), a US-based affiliate of APMI, filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the State of Nevada. As at the date of these financial statements, the Chapter 11 proceedings are still ongoing. AGA's operations and assets have been sold as part of the proceedings and AGA also closed its Las Vegas operations. APMI filed for voluntary liquidation on 22 August 2023 and a liquidation order was issued by the Philippine courts. As at the date of these financial statements the liquidation proceedings were still ongoing.

 

There remains uncertainty over the recoverability of balances related to APMI and Nexteq management evaluated their carrying value as at the balance sheet date.

 

As at 31 December 2023, APMI owed $1.0m to the Group from the sale of goods (2022: $0.7m). The amounts were impaired in full as at 31 December 2022 and due to the uncertainty referenced above remain fully impaired at 31 December 2023. The Group continues to take steps to recover these balances.

 

Inventory, consisting of raw materials with a book value of $1.7m (2022: $2.2m) and finished goods with a book value of $0.6m (2022: $1.1m) originally earmarked for use by APMI was included in the Nexteq Group's balance sheet as at 31 December 2023. The raw materials can be used to manufacture products sold to the Group's existing or new customers, and the finished goods can be used in the Group's turnkey cabinet offering. Management expects to fully recover the net book value of $2.3m and considers that no provision against it was required as at 31 December 2023.

 

The Group balance sheet also previously included capitalised development costs with a book value of $0.4m related to the development of products for APMI's future use. Management assessed the commercial opportunities for these products and determined that it was not probable that these would generate future economic benefits for other customers. As a result, development of these products was ceased. An impairment charge of the full book value of $0.4m was recorded within operating expenses.

 

Reconciliation of adjusted performance measures

The Group uses certain alternative performance measures to evaluate performance and as a method to provide Shareholders with clear and consistent reporting. The Directors consider that these represent a more consistent measure of performance by removing items of income or expense which are considered significant by virtue of their size, nature or incidence or which have a distortive effect on current year earnings and are relevant to an understanding of the Group's financial performance. These measures include Adjusted Profit before tax, Adjusted Profit after tax, Adjusted Operating expenses and Adjusted Operating cash flow. See below for analysis of the adjusting items in reaching adjusted performance measures.

 

Adjusted Profit before tax

	2023	2022
	$000	$000
Profit before tax	12,909	8,801
Adjustments:
Amortisation of customer relationships, technology and order backlog1	582	751
Share-based payments expense2	962	618
Restructuring charges3	293	-
Adjusted Profit before tax	14,746	10,170
Adjusted Profit before tax % (Adjusted Profit before tax/Revenue)	12.9%	8.5%

 

1.	The amortisation of customer relationships, technology and order backlog has been excluded as it is not a cash expense to the Group.
2.	Share-based payments expense has been excluded as it is not a cash-based expense.
3.	Restructuring charges relates to leaver costs incurred in headcount reduction actions taken in December 2023.

 

Adjusted Profit after tax

	2023	2022
	$000	$000
Profit after tax	10,897	10,986
Adjustments:
Amortisation of customer relationships, technology and order backlog1	582	751
Share-based payments expense2	962	618
Restructuring charges3	293	-
Non-recurring tax benefits4	(432)	(260)
Adjusted Profit after tax	12,302	12,095

 

4.	Tax on adjusted items relating to amortisation of customer relationships, technology and order backlog of $0.6m (2022: $0.8m), share based payment expense of $1.0m (2022: $0.6m) and restructuring charges of $0.3m (2022: $Nil).

 

Adjusted Operating expenses

	2023	2022
	$000	$000
Operating expenses	(29,091)	(29,622)
Adjustments:
Amortisation of customer relationships, technology and order backlog1	582	751
Share-based payments expense2	962	618
Restructuring charges3	293	-
Adjusted Operating expenses	(27,254)	(28,253)

 

Adjusted Operating cash flow

	2023	2022
	$000	$000
Net cash from operating activities	19,755	802
Add back:
Tax paid	1,208	1,716
Adjusted Operating cash flow	20,963	2,518
Adjusted Operating Cash conversion % (Adjusted operating cash flow/Adjusted profit before tax)	142%	25%

2. Business and geographical segments

 

The Chief Operating Decision Maker (CODM) in the organisation is an executive management committee comprising the Board of Directors. The segmental information is presented in a consistent format with management information. The Group assesses the performance of the segments based on a measure of revenue and operating profit. The segmental split of the balance sheet is not reviewed by the CODM, and they do not look at assets/liabilities of each division separately but combined as a group. Therefore, this split for assets has not been included.

 

The operating segments applicable to the Group are as follows:

·	Quixant - Design development and manufacturing of gaming platforms and display solutions for the casino gaming and slot machine industry.
·	Densitron - Sale of electronic display products to global industrial markets. IDS is included in the Densitron reporting segment due to the nature of IDS business the products that are sold and the market that the business operates in are all consistent with that segment.

Reconciliation of segment results to profit after tax:

 

	2023	2022
	$000	$000
Quixant	17,165	17,348
Densitron	7,538	5,165
Segment results	24,703	22,513
Corporate cost	(12,273)	(13,581)
Operating profit	12,430	8,932
Net finance income/(expense)	479	(131)
Profit before tax	12,909	8,801
Taxation	(2,012)	2,185
Profit after tax	10,897	10,986

 

		Year to 31 December 2023						Year to 31 December 2022
		$000		$000		$000		$000		$000		$000
		Quixant		Densitron		Total1		Quixant		Densitron		Total1
Other information
Depreciation of owned assets		93		8		101		92		5		97
Amortisation of intangible assets		1,020		337		1,357		804		291		1,095
Impairment of intangible assets		489		478		967		194		315		509
		1,602		823		2,425		1,090		611		1,701

¹ _{Depreciation and amortisation of $977k (2022: $1,611k) were not allocated to segments as these are considered corporate costs.}

 

3. Analysis of turnover

		2023		2023		2023			2022		2022		2022
		$000		$000		$000			$000		$000		$000
		Quixant		Densitron1		Total			Quixant		Densitron		Total
By primary geographical market
Asia		2,911		9,311		12,222			3,306		10,353		13,659
Australia		6,067		79		6,146			4,958		66		5,024
UK		4,733		4,370		9,103			4,373		3,474		7,847
Europe excl. UK		10,777		15,668		26,445			12,483		13,067		25,550
North America		44,380		14,404		58,784			48,123		16,162		64,285
Rest of World		405		1,244		1,649			839		2,669		3,508
		69,273		45,076		114,349			74,082		45,791		119,873

 

_{1 2023 Densitron Revenue from products splits into Densitron $43.5m (2022: $44.7m) and IDS $1.6m (2022: $1.1m). IDS revenue included revenue of $0.4m (2022: $0.5m) recognised throughout the performance period.}

 

The above analysis includes sales to individual countries in excess of 10% of total turnover of:

 

	2023	2022
	$000	$000
USA	56,069	61,019

 

Two customers (2022: two customers) individually accounted for more than 10% of Group revenues in 2023, with revenues of $19.4m (2022: $22.5m) and $14.8m (2022: $17.9m), respectively. These revenues are attributable to the Quixant segment.

 

4. Taxation

 

Recognised in the profit and loss account

	2023	2022
	$000	$000
Current tax expense	382
UK corporation tax		-
Foreign tax	1,801	1,483
Adjustments for prior years	136	(934)
Current tax expense	2,319	549
Deferred tax	120
Origination and reversal of temporary differences		(2,262)
Adjustments for prior years	(427)	(599)
Change in deferred tax rate to 25%	-	127
Deferred tax	(307)	(2,734)
Total tax expense / (credit) in the income statement	2,012	(2,185)

 

Reconciliation of effective tax rate                                           

	2023	2022
	$000	$000
Profit for the year	10,897	10,986
Total taxation expense / (credit)	2,012	(2,185)
Profit excluding taxation	12,909	8,801
Tax using the UK corporation tax rate of 23.52% (2022: 19%)	3,036	1,672
Non-deductible expenses	239	246
Fixed asset differences	47	7
Enhanced research and development relief1	-	(399)
Patent box tax relief	(1,531)	(897)
Foreign tax expensed	513	392
Change in deferred tax rate to 25%	14	(64)
Effect of tax rates in foreign jurisdictions	124	273
Recognition of previously unrecognised tax losses2	10	(1,815)
Deferred tax credited directly to equity	48	65
Change to estimates related to prior years3	(291)	(1,533)
Other	(197)	(132)
Total taxation expense / (credit) in statement of profit and loss	2,012	(2,185)

 

1    In 2023 the Group breached the SME thresholds for the UK R&D tax credits regime for the second year in a row, meaning the Group claimed the R&D tax benefit under the large company RDEC regime, resulting in a credit of $382k within Profit before tax (2022: $nil).

2    In 2022, management recognised the tax effect of $9.6m of previously unrecognised tax losses in Nexteq plc and Nexteq UK Limited because management considered it probable that future UK taxable profits would be available against which such losses can be utilised. The availability of future taxable profits was based on the Group's budget for 2023 and forecasts for 2024 and 2025. These forecasts have been updated for the Group's 2024 budget and forecast through to 2028, and management still considers it probable that future UK taxable profits would be available against which such losses can be utilised.

3    The 2022 tax provision included an adjustment for enhanced research and development relief relating to 2020 and movement on the final deferred tax balances included within tax returns submitted during 2022. The 2023 tax provision included an adjusted for patent box and enhanced research and development relief claims relating to the tax returns submitted for 2022.

 

 

 

 

Deferred tax credit arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly (credited) or debited to equity:

	2023	2022
	$000	$000
Deferred tax asset - share-based payments	(48)	(65)
Total	(48)	(65)

 

Factors that may affect future tax charges.

 

An increase in the UK corporation tax rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. This has increased the company's future current tax charge accordingly. The deferred tax asset at 31 December 2023 has been calculated based on these rates, reflecting the expected timing of reversal of the related temporary differences.

 

5. Earnings per ordinary share (EPS)

	2023	2022
	$000	$000
Earnings
Earnings for the purposes of basic and diluted EPS being net profit attributable to equity shareholders	10,897	10,986

 

Number of shares	Number	Number
Weighted average number of ordinary shares for the purpose of basic EPS	66,501,570	66,450,060
Effect of dilutive potential ordinary shares:	1,519,943
Share options		1,531,052
Weighted number of ordinary shares for the purpose of diluted EPS	68,021,513	67,981,112
Basic earnings per share	$0.1639	$0.1653
Diluted earnings per share	$0.1602	$0.1616

 

Calculation of adjusted diluted earnings per share:	$000	$000
Earnings
Earnings for the purposes of basic and diluted EPS being net profit attributable to equity shareholders	10,897	10,986
Adjustments
Amortisation of customer relationships, technology and order backlog	582	751
Share-based payments expense	962	618
Restructuring charges	293	-
	12,734	12,355
Tax effect of adjustments	(432)	(260)
Adjusted earnings	12,302	12,095
Adjusted basic earnings per share	$0.1850	$0.18200
Adjusted diluted earnings per share	$0.1809	$0.17790

 

6. Post balance sheet events

 

There were no material post balance sheet events that were required to be disclosed.