CML Microsystems PLC Half-year Report (2424G)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Cml Microsystems Plc	LSE:CML	London	Ordinary Share	GB0001602944	ORD 5P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	355.00	340.00	370.00	355.00	355.00	355.00	320	01:00:00

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Electronic Components, Nec	20.64M	4.81M	0.2978	11.92	57.35M

Cml Microsystems (LSE:CML)
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RNS Number : 2424G

CML Microsystems PLC

24 November 2020

CML Microsystems Plc

("CML" or the "Group")

Half Year Results

CML Microsystems Plc, which designs, manufactures and markets semiconductors, primarily for global communication and solid state storage markets, announces its unaudited results for the six months ended 30 September 2020.

Financial Highlights

 
      --   Group revenues of GBP12.90m (H1 FY20 GBP13.06m) 
      --   Gross profit of GBP9.28m (H1 FY20: GBP9.73m) 
      --   Profit before tax of GBP0.77m (H1 FY20: GBP0.91m) 
      --   Adjusted EBITDA improved to GBP4.42m (H1 FY20: GBP4.36m) 
      --   Basic EPS of 4.74p (H1 FY20: 6.00p) 
      --   Net cash of GBP7.35m (31 March 2020: GBP8.48m) 
      --   Interim dividend maintained at 2.0 per ordinary share 
            (H1 FY20: 2.0p)

Operational Highlights

 
      --   Storage revenues up 25% 
      --   Enhancement to Communications strategy 
      --   Sales opportunity pipeline growth 
      --   Continued high level of R&D investment 
      --   Strong improvement in operating cash flow to GBP5.20m 
            (H1 FY20: GBP3.56m) 
      --   PRFI successfully integrated

Chris Gurry, Group Managing Director of CML Microsystems commented on the results :

"The timing of the resumption to a normalised trading environment remains difficult to predict, although activity within Storage is encouraging and order intake from Communications customers in the last weeks of the half was promising.

The acquisition of PRFI, with its associated capabilities, coupled with enhancements made to the Group's business strategy, highlight an ongoing focus on increasing the size of the available market and improving the return on R&D investment levels. We have a growing world class customer base and our global investment in sales and marketing over recent periods will enable us to take our wider range of highly technical products to a larger audience. As conditions improve, either related to COVID or China/US trade, and ideally both, we are very well placed to benefit."

 
CML Microsystems Plc                      www.cmlmicroplc.com 
 Chris Gurry, Group Managing Director      Tel: +44 (0)1621 875 500 
 Nigel Clark, Group Chairman & Financial 
 Director 
Shore Capital                             Tel: +44(0)20 7408 4090 
 Edward Mansfield 
 James Thomas 
 Fiona Conroy - Corporate Broking 
SP Angel Corporate Finance LLP            Tel: +44(0)203 463 2260 
 Jeff Keating 
Alma PR                                   Tel: +44 (0)20 3405 0205 
 Josh Royston 
 Caroline Forde 
 Robyn Fisher

About CML Microsystems PLC

CML designs and develops semiconductors for the industrial storage and communications markets. The Group utilises a combination of in-house and outsourced manufacturing and has trading operations in Europe, the Far East and USA. CML targets niche markets with strong growth profiles and high barriers to entry. It has secured a diverse, blue chip customer base, including some of the world's leading telecoms equipment providers and industrial product manufacturers.

The spread of its customers and products largely protects the business from the cyclicality usually associated with the semiconductor industry. Growth in its end markets is being driven by factors such as the ever increasing trend towards solid state storage devices in the commercial and industrial sectors, the upgrading of telecoms infrastructure around the world and the growing prevalence of private commercial communications networks for voice and/or data communications linked to the industrial internet of things (IIoT).

The Group is cash-generative, has a net cash position and is dividend paying.

Chairman's Statement

Introduction

The first half of the year has been dominated by the global COVID pandemic. From a business point of view, it has served to create further disruption within some of our end markets, particularly voice-centric radio manufacturers. As a result, it delayed the return to normalised trading conditions following previously notified headwinds related to our industry, as well as the ongoing trade dispute between China and the US.

Against this backdrop, the performance of the business from both a trading and operational standpoint has been encouragingly resilient. This reflects the strong management focus on maximising all aspects within our control and the investments and structural changes implemented over prior periods.

Results and Dividend

The financial performance for the six months to 30 September 2020 highlights the financial discipline of the business. Revenue for the six months decreased slightly to GBP12.90m compared to the prior year (H1 FY20: GBP13.06m), largely as a result of the COVID pandemic. Profit before taxation declined 15% to GBP0.77m (H1 FY20: GBP0.91m), although adjusted EBITDA improved to GBP4.44m (H1 FY20: GBP4.36m), with basic EPS of 4.74p (H1 FY20: 6.0p). Net cash at the period end of GBP7.35m (March 30 2020: GBP8.50m) represented a good result following payment of a dividend (GBP0.34m), a share buyback (GBP1.59m) and continued strong investment in R&D (GBP3.97m). A strong operational cash flow improvement was recorded to GBP5.20m (H1 FY20: GBP3.56m).

The Board is recommending a half year dividend of 2.0p per share (H1 FY20: 2.0p per share) payable on 18 December 2020 to shareholders on the Register on 4 December 2020.

Employees

It is hard to envisage more testing conditions for a workforce to endure. As well as health and wellbeing concerns, our employees have also had to contend with restrictions on travel and other demands which have made their roles more difficult. The professionalism that they have shown is a great credit to them and, on behalf of the Board, I sincerely thank them.

Prospects and Outlook

In recent years, the Group has moved forward with a clear and stable long-term strategic vision, backed by a hardworking team amid a changing and challenging global environment. To complement that, the Board is always on the lookout for beneficial situations which present themselves, such as the acquisition of Plextek RFI Ltd ("PRFI"). The Board continues to explore options to supplement its operational strategy with corporate strategy.

There are exciting business opportunities being pursued and the investment decisions taken in prior years will undoubtedly lead to more arising. With the extended management team executing well on identifying and securing expansion paths, the Board continues to believe that the Group will experience a sustainable return to greater profitability once prevailing headwinds subside.

Nigel Clark

Group Non-Executive Chairman

24 November 2020

Operational and Financial Review

Introduction

As a Board, we are pleased with the progress that has been made, given the difficult trading conditions which have persisted throughout the first half of the year. We have endured significant headwinds for the past two years and therefore concentrated heavily on optimising our business, enhancing our strategic focus and positioning ourselves to take full advantage once a more favourable environment presents itself.

There are many signs which demonstrate we are on the right path, including the growing number of new customer opportunities being addressed and the improvement in sequential period profitability despite a decrease in revenues.

Conditions within Storage have improved over the prior year and both sales and new order intake have been at healthy levels. Communications markets deteriorated against last year's first half, largely driven by a reduction in demand from voice-centric radio manufacturers which was mostly related to the COVID pandemic and exacerbated by the China/US trade dispute. Data driven communications has been less impacted.

The Group's focus on R&D has resulted in a number of newer products now being available and ready for adoption, whilst PRFI has been integrated well despite the acquisition completing in March just prior to the national lockdown.

Financial Review

Total revenues for the opening six-months of the financial year were GBP12.90m, a decline of 1% against the comparable half-year period (H1 FY20: GBP13.06m). On a constant currency basis, revenues were broadly flat with the product mix weighted towards lower margin Storage semiconductors, a reversal of the mix associated with the comparable six month period last year. As a result, gross profit declined 5% to GBP9.28m (H1 FY20: GBP9.73m).

Distribution and administration costs were reduced to GBP8.74m (H1 FY20: GBP9.08m), partially due to the global reorganisation that took place during the previous financial year following an assessment of the Group's resources and capabilities. These lower overall costs also include higher depreciation and amortisation charges, reflecting tight management control of spending through what continued to be challenging times.

Notwithstanding the reduction in expenses, the drop in gross profitability guided profit from operations lower at GBP0.86m (H1 FY20: GBP0.99m). This figure included a contribution of GBP0.32m (H1 FY20: GBP0.34m) from 'other income'; principally commercial property rental receipts, government grants and the sale of specific third party technologies.

At the pre-tax level, the Group recorded a profit of GBP0.77m for the period, being approximately 18% lower than the prior year (H1 FY20: GBP0.91m). That said, on a sequential six-month basis, pre-tax profits were ahead over 65% despite a reduction in revenues. Taxation was GBP0.1m higher leading to diluted earnings per share of 4.73p (H1 FY20: 5.98p). Adjusted EBITDA amounted to GBP4.42m (H1 FY20: GBP4.36m).

Inventories at 30 September 2020 were more normalised at GBP2.77m compared to the start of the financial year (31 March 2020 GBP2.39m) and reflect the need to ensure continuity of supply amidst mixed market conditions.

Net cash balances at 30 September 2020 totalled GBP7.35m (31 March 2020: GBP8.48m) after tight control of working capital following an increase in inventory levels, payment of a GBP0.34m dividend in respect of the previous year (H1 FY20: GBP0.99m) and an ongoing steady level of R&D expenditure at GBP3.97m (H1 FY20: GBP3.90m). In addition, during September 2020, the Company made the final GBP0.1m retention payment relating to the acquisition of PRFI and also conducted a share buy-back of 615,000 ordinary shares of 5p ("Shares") each in the Company at a cost of GBP1.59m (H1 FY20: Nil). These Shares are currently held in treasury.

Strategy Overview

The Group's overall strategy remains unchanged, yet has undoubtedly been enhanced and accelerated through the release to market of our newer products and the acquisition of PRFI in March of this year. The business today addresses two important market areas, namely industrial Communications and industrial Storage, where our proprietary IP along with the quality and reliability of our technology sets us apart from our peers and makes us an integral part of our customers' products. We have developed a strong reputation in each of these markets and continue to supply a growing world class customer base.

Growth in both markets is being driven by the persistent demand for increasing amounts of data to be delivered faster and stored more reliably and securely. We remain committed to generating a diverse revenue stream across a broad range of customers. We are a single-source supplier to our customers, meaning that once designed in, the displacement of our chips would require our customers to undertake a significant element of product redesign.

R&D is a key tenet of our growth strategy. Our focus is on developing products which will lead to design wins with new and existing customers that we believe have the potential to develop into long-term, significant revenue generators. Throughout the difficult trading conditions, we have continued our investment into R&D as we have no doubt that this approach will serve us best in the long run and deliver superior, sustainable returns for our shareholders. PRFI, and the enhanced capabilities and experience they provide, brings a new dynamic. This should deliver advantages in opportunity capture and new product time to market that will enhance the return on investment in future years.

The financial commitment that has been made in prior periods, including sales and marketing resources as well as engineering, positions us well to take our enlarged product set to a greater addressable market.

Communications

Our strategy for the Communications markets has been to invest strongly in R&D to grow customer share and expand the customer base through the introduction of new semiconductor products that build upon our very extensive intellectual property library and widen the addressable market.

Revenues from the sale of semiconductor solutions into voice-centric Communications applications were heavily impacted by the COVID crisis, with all of the leading customers for commercial and industrial radio equipment reporting significant declines in demand. Shipments into wireless public safety customers were particularly affected while the situation across a wide range of data-centric IIoT customers was mixed and continued to be biased towards mission critical applications. Overall, Communications revenues were down 20% to GBP6.17m (H1 FY20: GBP7.68m) and included a lower than normal contribution from a collection of mature wireline communications products.

Whilst first half shipments have been disappointing, the underlying operational progression was pleasing. The product portfolio has expanded over the last three years, with the main additions being semiconductor solutions that operate at the lower end of the radio spectrum and, in particular, "narrowband" applications utilising data rates measured in the tens or low hundreds of kilobits per second. Across the first six months of this financial year, that strategy has been significantly enhanced to include products that operate on microwave and millimetre-wave frequencies, including wide band applications. This enhancement has been achieved through a combination of resource blend and new customer engagements. Progress has been swift with the first products emanating from this enhanced capability scheduled to be launched through the first half of the next calendar year.

The Communications market continues to exhibit a number of growth areas including the transition to higher-capacity digital networks within voice-centric markets and, in data-centric markets, the increasing data throughput and reliability requirements from terrestrial and satellite communications applications. The enhancements made will expand the addressable market to include true 5G applications across a variety of industrial, mission critical and military applications.

Storage

Our strategy within Storage has evolved to the stage where the product range has been expanded to include most major interface standards used within the application areas being targeted, thereby increasing the size of the available market. Furthermore, more recent products enable customers to benefit from bill-of-materials cost efficiencies associated with new flash memory technologies while maintaining the class-leading levels of reliability and durability for which the Group's Hyperstone brand has become globally recognised.

The sale of Storage semiconductors across the opening six-months increased by 25% against the comparable period to GBP6.73m (H1 FY20: GBP5.38m), representing slightly over 50% of Group revenues. This is a continuation of the improving demand seen in the closing months of the prior full financial year. Restrictions associated with US-China trade continued to have an influence but healthy regional demand from telecoms infrastructure customers along with robust sales into industrial applications drove revenues higher.

Released during the prior year, the controller product targeted at the SATA3 interface standard has seen a steady increase in adoption with several customers now moving into production and a number of others at advanced stages of end-product development. A new SD controller has been developed and is expected to be launched to market during the first half of the next calendar year. This product will be another key contributor to growth and builds upon many years of intellectual property development, incorporating advanced functionality for mission critical applications. A selection of mature products manufactured at a silicon foundry in Japan were moved to end-of-life status and the resulting additional new order intake is expected to satisfy the customer base while they transition across to newer products from our portfolio.

The industrial data storage market continues to have several specific areas which represent attractive growth opportunities, playing to the core strengths of the business. These include applications within industrial automation, the telecoms/network infrastructure market and an increasing number of security-conscious sub-markets where the Group's proprietary technology and bespoke programming capabilities offer customers enhanced levels of security compared to competitor products. R&D activities have commenced on new Storage solutions that customers will require in the future and will expand the available market size further still.

Operational Developments

The Group continues to perform well at an operational level and our employees globally have responded to the difficulties presented by the COVID pandemic with great determination and professionalism. We have been able to maintain high levels of business continuity throughout whilst also ensuring the safety and protection of our people.

It has been a pleasure to welcome the team that joined us from PRFI in March. As highlighted earlier, the speed to market of future products emanating from the combined teams should drive a faster return on R&D investment and is scheduled to commence with the launch of initial products expected towards the back end of the current financial year.

Summary & Outlook

The timing of the resumption to a normalised trading environment remains difficult to predict, although activity within Storage is encouraging and order intake from Communications customers in the last weeks of the half was promising.

As market conditions improve, either related to COVID or China/US trade, and ideally both, we are very well placed to benefit. We have a growing world class customer base and a product portfolio enabling a greater total market opportunity. The Company's cost base has remained stable and our global investment in sales and marketing over recent periods will enable us to take the wider range of highly technical products to a growing audience.

Back in June, we stated that the current environment was delaying realisation of the benefits of the hard work taking place behind the scenes. Enhancements made to the Group's business strategy highlight the ongoing focus for increasing the size of the available market and improving the return on R&D investment levels.

The Board maintains its belief that the business will capitalise on the opportunities it sees and deliver the shareholder benefits expected over the medium to longer term.

Chris Gurry

Group Managing Director

24 November 2020

CONDENSED CONSOLIDATED INCOME STATEMENT