0A7N Keysight Technologies Inc

SPIRENT COMMUNICATIONS PLC

Results for the six months ended 30 June 2024

Challenging conditions remain

Innovative new product releases and diversification strategy progress

 

$ million	First half 2024	First half 2023	Change (%)
Orderbook1	284.2	303.4	-6
Order intake2	188.8	239.4	-21
Revenue	197.3	223.9	-12
Gross margin (%)	70.0	71.9	-3
Adjusted operating profit3	5.0	11.6	-57
Adjusted profit before tax3	6.8	14.8	-54
Adjusted basic earnings per share4 (cents)	1.05	2.10	-50
Reported operating (loss)/profit	(9.3)	1.6	-681
Reported (loss)/profit before tax	(7.5)	4.8	-256
Reported basic earnings per share (cents)	(1.17)	0.87	-234
Closing cash	131.0	148.2	-12

 

Commenting on today's announcement, Eric Updyke, Chief Executive Officer, said:

 

"Performance in the period has been impacted by the ongoing industry-wide slowdown, coupled with some customer hesitancy following the recently announced offer by Keysight Technologies Inc. ("Keysight"). In the second quarter we experienced delays to contract placements as customers digested the information. There have been no order cancellations.

 

"We have continued to focus on delivering our product roadmaps to serve our customer needs so that we can fully support them as they advance their own R&D investments and plans, which we expect to roll out as the broader sector recovers. In addition, we have focused on retaining our critical talent, which is a vital part of our people strategy at this time of transition. In the first half of the year, operating costs benefited from the restructuring and cost saving initiatives that were delivered during 2023 and early 2024.

 

"Our diversified portfolio of solutions and services, combined with our robust operating model, means we continue to focus on delivering innovative solutions into new customer segments, whilst also positioning our business for recovery in our more traditional segments. New logo wins for our financial services segment in particular remain very promising and many product releases in the first half are ensuring that we retain our technology leadership positions.

 

"Whilst at an early stage, our diversification strategy is continuing to advance and deliver results, and in the first half we secured more contract wins for Financial Services assurance, automation and test. Whilst smaller in value, they represent important progress as we develop a growing pipeline in this segment. To underpin growth into 2025, our new Positioning product (PNT X) was released in April and, in the period, we also introduced new Wi-Fi 7 products.

 

"We were pleased to announce the release of our new Data Centre AI Testing solution in July. In the first half, we trialled the solution with ten customers and have already had two commercial wins. The need to be able to test the performance of Ethernet network fabric in an AI data centre is mission critical for customers and will drive new business for Spirent. This innovative solution won the prestigious grand prize at the Interop Tokyo 2024.

 

"We expect challenging market conditions to continue in the second half of 2024, which we anticipate will be reflected in our near-term performance.

 

"Looking forward, beyond the current year, our confidence in 5G as an enduring growth driver remains intact. While initial 5G Standalone (SA) launches have remained sluggish due to the complexity associated with deploying and operating a cloud-native core network, acceleration is anticipated in 2025 as demand-side drivers increase, especially from enterprises for private 5G.

 

"Core network spending, including cloud capabilities and associated high-speed Ethernet (HSE) IP core upgrades, is also poised to increase through at least 2027 as investment cycles move beyond 5G New Radio coverage, the long tail of global service providers progressively upgrade, and 5G Advanced becomes standardised. This will enable a wealth of new capabilities for direct-to-device satellite connectivity, eXtended Reality (XR) and AI, well positioned to capitalise on through our leadership in HSE test, and core network test and assurance.

 

"Our market leading products and solutions will promote market opportunities as they open up."

 

Details of the recommended cash offer for Spirent by Keysight

On 28 March 2024, the Boards of Keysight and Spirent announced that they had reached agreement on the terms of a recommended cash offer for the entire issued ordinary share capital of Spirent (the "Transaction"). It is intended that the Transaction will be implemented by means of a scheme of arrangement under Part 26 of the Companies Act 2006 (the "Scheme"). On 25 April 2024, Spirent published a shareholder circular to convene the Court Meeting and the General Meeting, to approve the Scheme. On 22 May 2024, the resolutions proposed at the Court Meeting and General Meeting in connection with the Transaction were duly passed.

 

Keysight and Spirent continue to engage and work constructively with the relevant regulatory authorities in order to satisfy all necessary regulatory conditions (per Clause 3.3.1 of the Co-operation Agreement entered into between Keysight and Spirent) in relation to the Transaction as promptly as practicable (and in any event, prior to the long stop date (being 29 September 2025)). Keysight and Spirent continue to expect the Scheme to become effective during the first half of Keysight's next fiscal year, being 1 November 2024 to 30 April 2025.

 

Outlook

The challenging market conditions witnessed in the first half are expected to continue in the second half, and we expect this will be reflected in our near-term performance. Looking forward, our confidence in 5G as an enduring growth driver remains intact and acceleration is anticipated in 2025 as demand-side drivers increase.

 

Notes

1.     Orderbook is an alternative performance measure as defined in the appendix on page 27.

2.     Order intake represents commitments from customers in the period to purchase goods and/or services that will ultimately result in recognised revenue.

3.     Adjusted operating profit is before acquired intangible asset amortisation, share-based payment and other adjusting items totalling $14.3 million (first half 2023: $10.0 million).

4.     Adjusted basic earnings per share is based on adjusted earnings as set out in note 6.

 

- ends -

 

Enquiries

 

Eric Updyke, Chief Executive Officer		Spirent Communications plc		+44 (0)1293 767676 E: investor.relations@spirent.com
Paula Bell, Chief Financial & Operations Officer
James Melville-Ross/ Humza Vanderman/Leah Dudley		DGA Group		+44 (0)20 7664 5095 E: spirent@dgagroup.com

 

About Spirent Communications plc

Spirent Communications plc (LSE: SPT) is the leading global provider of automated test and assurance solutions for networks, cybersecurity and positioning. The Company provides innovative products, services and managed solutions that address the test, assurance and automation challenges of a new generation of technologies, including 5G, SD-WAN, Cloud, autonomous vehicles and beyond. From the lab to the real world, Spirent helps companies deliver on their promise to their customers of a new generation of connected devices and technologies. Further information about Spirent Communications plc can be found at https://corporate.spirent.com/.

 

Spirent Communications plc Ordinary Shares are traded on the London Stock Exchange (ticker: SPT;
LEI: 213800HKCUNWP1916L38). The Company operates a Level 1 American Depositary Receipt (ADR) programme with each ADR representing four Spirent Communications plc Ordinary Shares. The ADRs trade in the US over-the-counter (OTC) market under the symbol SPMYY and the CUSIP number is 84856M209. Spirent ADRs are quoted on the Pink OTC Markets electronic quotation service which can be found at https://www.otcmarkets.com/marketplaces/otc-pink.

 

Spirent and the Spirent logo are trademarks or registered trademarks of Spirent Communications plc. All other trademarks or registered trademarks mentioned herein are held by their respective companies. All rights reserved.

 

Cautionary statement regarding forward-looking statements

This document may contain forward-looking statements which are made in good faith and are based on current expectations or beliefs, as well as assumptions about future events. You can sometimes, but not always, identify these statements by the use of a date in the future or such words as "will", "anticipate", "estimate", "expect", "project", "intend", "plan", "should", "may", "assume" and other similar words. By their nature, forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. You should not place undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to factors that could cause our actual results to differ materially from those expressed or implied by these statements. The Company undertakes no obligation to update any forward-looking statements contained in this document, whether as a result of new information, future events or otherwise.

 

Operating and financial review

 

Group financial performance

The industry-wide slowdown continued during 2024 especially in the telecommunications sector, where customer spending continued to be constrained. This coupled with customer hesitancy resulting from the recent announcement of the offer for the Group by Keysight. contributed to the impact of the Group's performance in the first half of the year. We continue to engage closely with our customers to understand their needs.

 

These factors impacted our first half order intake and revenue, as many customers continued to display caution in their investment decisions, including delayed deployments of 5G standalone (with a 5G core network), and the impact on spending in China.

 

The reduction in revenue from $223.9 million to $197.3 million had an adverse impact on the operating profit; though this has been partly mitigated through careful cost control and by the cost savings initiatives implemented in previous years.

 

Effective supply chain management and effective customer pricing resulted in a robust gross margin being maintained at 70 per cent (first half 2023: 72 per cent). Adjusted operating profit was $5.0 million in the first half of 2024 (first half 2023: $11.6 million). Reported operating loss was $9.3 million in the first half of 2024 (first half 2023: $1.6 million profit).

 

Other adjusting items were $8.4 million (first half 2023: $4.6 million) which comprise mainly of advisor costs of $7.1 million (first half 2023: nil) relating to the acquisition of Spirent, the remainder being restructuring and strategic evaluation costs of $0.9 million (first half 2023: $4.6 million). Adjusting items are further detailed on page 7.

 

The effective tax rate decreased from 14.7 per cent to 11.2 per cent mainly driven by the mix of profit generation by region.

 

Our approach to strong financial management and focus on our balance sheet remains in place. Cash closed at $131.0 million (first half 2023: $148.2 million).

 

Given the recommended cash offer from Keysight, the Board does not recommend a dividend be proposed for the first half of 2024. 

 

Revenue

$ million	First half 2024	%	First half 2023	%
Revenue by segment
Lifecycle Service Assurance	85.7	43.4	95.6	42.7
Networks & Security	111.6	56.6	128.3	57.3
	197.3	100.0	223.9	100.0
Revenue by geography
Americas	113.4	57.5	126.4	56.5
Asia Pacific	57.0	28.9	74.2	33.1
Europe, Middle East and Africa	26.9	13.6	23.3	10.4
	197.3	100.0	223.9	100.0

 

Overall Group revenue reduced by 12 per cent, with Lifecycle Service Assurance and Networks & Security down 10 per cent and 13 per cent, respectively, compared to the same period last year. Overall Networks & Security revenue declined by $16.7 million over the first half of 2023.

 

Lifecycle Service Assurance revenue reduced by $9.9 million over the first half of 2023 due to the ongoing macroeconomic environment with slower-than-expected deployments of 5G Standalone.

 

However, the division benefited from increasing momentum around our lab and test automation solutions in both our traditional and new end-markets as customers looked to drive efficiencies, implement transformation programs, and prepare for AI. 

 

We also saw stable demand for our Landslide core-network lab test offering and our network assurance offerings, despite the market headwinds in telecoms.

 

We have strong engagement with our Wi-Fi customers around new Wi-Fi 7 technology, closing important product deals with leading device and solution players in the ecosystem, and have continued to increase our focus on strategic partnerships with select global system integrators that play a leadership role in 5G and digital transformation projects for telecoms and enterprise.  

 

Networks & Security revenue was impacted by delays to spending by network operator and network equipment manufacturer customers of our high-speed Ethernet and security test portfolio. This was driven by the current economic environment, as well as softness in China.

 

Notwithstanding the overall market caution, we maintained our 400G and 800G high-speed Ethernet test momentum with strategic wins at chipset vendors, network fabric vendors, and hyperscalers.

 

The team released its next generation test solution for Positioning, Navigation and Timing (PNT X) to help simplify the complex testing of future generations of mission-critical systems for military and commercial sectors and established a strategic relationship with dSPACE, a global leader in the automotive test industry.

 

We continued to see positive progress on our diversification strategy, including into new markets with wins in Financial Services with an increasing pipeline as our new offerings gather wider customer interest.

 

Except for EMEA, revenue was down in all regions including North America. In particular, we experienced softness in China which impacted our High-Speed Ethernet business in the main.

 

Gross margin

$ million	First half 2024	%	First half 2023	%
Lifecycle Service Assurance	61.7	72.0	69.5	72.7
Networks & Security	76.5	68.5	91.5	71.3
	138.2	70.0	161.0	71.9

 

Gross profit reduced to $138.2 million although with continued effective management of supply chain cost increases, the overall gross margin was similar to the prior period.

 

Operating costs

$ million	First half adjusted1 2024	First half reported 2024	First half adjusted1 2023	First half reported 2023
Product development	47.4	47.4	53.2	53.2
Selling and marketing	60.2	60.2	67.7	67.7
Administration1	25.6	39.9	28.5	38.5
Operating costs1	133.2	147.5	149.4	159.4
Lifecycle Service Assurance	55.4	55.8	71.3	72.9
Networks & Security	72.4	72.9	74.3	77.4
Corporate	5.4	18.8	3.8	9.1
Operating costs1	133.2	147.5	149.4	159.4

Note

1.     Before acquired intangible asset amortisation, share-based payment and other adjusting items totalling $14.3 million (first half 2023: $10.0 million).

 

The continued focus on financial management of our cost base, and a number of initiatives implemented in the last 12 months, resulted in adjusted operating costs savings.

 

 

The overall investment in product development decreased period-on-period from $53.2 million to $47.4 million, driven by cost-saving initiatives as we transferred activities to lower-cost regions in 2023. Shared costs which include sales, marketing and all administration functions are allocated to each segment based on a budgeted percentage of revenue methodology. The recent market challenges impacting volatility of our sales volumes by segment, has in turn created some variations to the costs being charged to each segment.

 

Selling and marketing costs decreased by $7.5 million, partly as a result of reduced incentivisation rewards from lower order bookings. 

 

Operating (loss)/profit

$ million	First half 2024	Adjusted operating Margin1,2 (%)	First half 2023	Adjusted operating Margin1,2 (%)
Lifecycle Service Assurance	6.3	7.4	(1.8)	(1.9)
Networks & Security	4.1	3.7	17.2	13.4
Corporate	(5.4)		(3.8)
Adjusted operating profit1	5.0	2.5	11.6	5.2
Adjusting items:
Acquired intangible asset amortisation	(2.7)		(2.4)
Share-based payment	(3.2)		(3.0)
Other adjusting items	(8.4)		(4.6)
Reported operating (loss)/profit	(9.3)		1.6

Notes

1.     Before acquired intangible asset amortisation, share-based payment and other adjusting items totalling $14.3 million (first half 2023: $10.0 million).

2.     Adjusted operating profit as a percentage of revenue in the period.

 

Adjusted operating profit was $5.0 million (first half 2023: $11.6 million) and the reported loss was $9.3 million (first half 2023: $1.6 million profit) impacted by reduced revenue and negative operating leverage.

 

Acquired intangible asset amortisation

The acquired intangible asset amortisation charge of $2.7 million (first half 2023: $2.4 million) was broadly flat, and includes the amortisation of the intangible assets recognised on the acquisition of the NetScout business carve-out in September 2023.

 

Other adjusting items

$ million	First half 2024	First half 2023
Restructuring	0.9	4.6
Acquisition related costs	7.5	-
	8.4	4.6

 

Restructuring

$ million	First half 2024	First half 2023
R&D engineering plan	-	0.4
Finance transformation	0.2	-
Organisational restructure	0.5	4.2
Facilities downsize	0.2	-
	0.9	4.6

 

Restructuring

We concluded our R&D engineering site plan to relocate activities from North America to lower cost regions for our High-Speed Ethernet business in 2023. No further significant costs are expected in 2024.

 

In 2023, to embed standardised global finance processes, we moved certain accounting activities from North America to the UK, incurring $1.1 million of costs including $0.5 million consultancy. In 2024, we moved into the next phase of the initiative, incorporating the review of key global process and/or control enhancements, incurring further consultancy costs.

 

In 2022, the Group embarked on a strategic evaluation of its operating model. This reached substantial completion in early 2024. The half year 2023 costs relate to this initiative.

 

Strategic actions were taken to review the cost base and facility footprint in the second half of 2023. The 2024 amounts relate to moving, relocating and downsizing costs directly attributable to this project.

 

Acquisition related costs

In March 2024, Keysight announced its intention to purchase Spirent. Therefore, the costs of $7.1 million recognised for the first half of 2024 relates mainly to professional advisory charges due to this acquisition. We expect further deal related charges, the majority of which are expected to be incurred when the deal is closed.

 

On 8 September 2023, the Group completed the asset purchase of a small Test Lab Automation business carve-out from NetScout Inc. Retention costs of c.$0.4 million were incurred during 2024.

 

The total cash outflow in respect of other adjusting items is reported within cash flows from operating activities in the consolidated cash flow statement.

 

Finance income and costs

Finance income in the first half of 2024 was earned from bank interest of $2.0 million (first half 2023: $3.2 million) and $0.2 million (first half 2023: $0.4 million) of interest income in relation to the UK defined benefit pension plans.

 

Finance costs in the first half were $0.4 million (first half 2023: $0.4 million), being interest on lease liabilities. 

 

Tax

The reported tax credit for the Group for the first half of 2024 was $0.8 million (first half 2023: tax credit $0.4 million). The adjusted tax charge, excluding the tax credit on the adjusting items of $1.6 million, was $0.8 million (first half 2023: $2.2 million), resulting in an effective tax rate of 11.2 per cent of adjusted pre-tax profit. This compared with an effective tax rate of 14.7 per cent for the first half of 2023. As expected, for the full year 2024 the effective tax rate will be in the region of 10-12 per cent.

 

Earnings per share

Adjusted basic earnings per share fell 50 per cent to 1.05 cents, reflecting the trading performance in the first half of 2024. There were 573.7 million weighted average shares in issue (first half 2023: 598.7 million). Reported basic (loss)/earnings per share was (1.17) cents compared with 0.87 cents for the first half of 2024. See note 6 on page 21 for the calculation of earnings per share.

 

Financing and cash flow

Free cash flow from operations increased by $27.0 million to $31.1 million in the first half of 2024 compared to the first half of 2023, driven by the decrease in trade receivables and a reduction in

tax paid. Cash flow from operations is detailed in note 9 on page 24. An explanation on free cash flow as an alternative performance measure can be found on page 28.

 

Free cash flow is set out below:

$ million	First half 2024	First half 2023
Cash flow from operations	32.8	16.2
Tax paid	(2.7)	(8.3)
Net cash inflow from operating activities	30.1	7.9
Interest received	2.2	3.6
Net capital expenditure	(3.6)	(3.3)
Capitalised development costs	(1.9)	-
Payment of lease liabilities, principal and interest	(3.4)	(4.4)
Lease payments received from finance leases	0.2	0.3
Acquisition related other adjusting items (note 4)	7.5	-
Free cash flow	31.1	4.1

 

Net capital expenditure of $3.6 million was flat over the same period last year and was predominantly incurred on leasehold improvements and demonstration and test equipment.

 

Cash and cash equivalents closed at $131.0 million at 30 June 2024, compared with $108.1 million at 31 December 2023. There continues to be no bank debt.   

 

Balance sheet and dividend

The consolidated balance sheet is set out on page 13.

 

Net assets decreased by $0.9 million to $374.9 million at 30 June 2024, from $375.8 million at 31 December 2023, largely as a result of the operating performance in the period.

 

Overall, the decrease in total assets of $15.4 million from 31 December 2023 is mainly attributable to the decrease in trade receivables of circa $30 million, resulting from reduced revenue; offset by the increase in cash of circa $20 million. Total liabilities decreased by $14.5 million to $193.5 million at 30 June 2024, primarily due to a decrease in trade and other payables of $16.1 million.

 

Net assets remained flat at $374.9 million as at 30 June 2024 compared to 30 June 2023 ($371.5 million).

 

The decrease in total assets from 30 June 2023 is mainly attributable to the decrease in trade receivables of circa $21 million. Total liabilities decreased by $35.0 million to $193.5 million primarily due to the settlement of the liability held at 30 June 2023 in relation to the Share Buyback Programme of $35.6 million which completed on 24 August 2023 (note 12).

 

Cash at 30 June 2024 was $131.0 million ($148.2 million) and the Company has no bank debt.

 

The Board continues to regularly review the Company's balance sheet in light of current and expected trading performance and cash generation, working capital requirements and expected investments, and principal risks and uncertainties.

 

Principal risks and uncertainties

The principal risks and uncertainties facing the Group for the remainder of the year are unchanged from those reported in the Annual Report 2023. The uncertainties arising from the macroeconomic backdrop and inflationary pressures are covered by existing risks and these continue to be closely monitored.

 

The Group's principal risks and uncertainties at 31 December 2023 were detailed on pages 55 to 60 of the Annual Report 2023 and related to the following areas: macroeconomic change; technology change; business continuity; customer dependence/customer investment plans; competition, acquisitions; and employee skill base. A copy of the Annual Report 2023 is available on the Company's website at https://corporate.spirent.com/.

 

 

Condensed consolidated income statement

 

		First half 2024			First half 2023
$ million	Notes	Adjusted	Adjusting items1	Reported	Adjusted	Adjusting items1	Reported
Revenue	3	197.3	-	197.3	223.9	-	223.9
Cost of sales		(59.1)	-	(59.1)	(62.9)	-	(62.9)
Gross profit		138.2	-	138.2	161.0	-	161.0
Product development	3	(47.4)	-	(47.4)	(53.2)	-	(53.2)
Selling and marketing		(60.2)	-	(60.2)	(67.7)	-	(67.7)
Administration		(25.6)	(14.3)	(39.9)	(28.5)	(10.0)	(38.5)
Operating profit/(loss)		5.0	(14.3)	(9.3)	11.6	(10.0)	1.6
Adjusting items:
Acquired intangible asset amortisation		-	(2.7)	(2.7)	-	(2.4)	(2.4)
Share-based payment		-	(3.2)	(3.2)	-	(3.0)	(3.0)
Other adjusting items	4	-	(8.4)	(8.4)	-	(4.6)	(4.6)
			(14.3)	(14.3)	-	(10.0)	(10.0)
Finance income		2.2	-	2.2	3.6	-	3.6
Finance costs		(0.4)	-	(0.4)	(0.4)	-	(0.4)
Profit/(loss) before tax		6.8	(14.3)	(7.5)	14.8	(10.0)	4.8
Tax	5	(0.8)	1.6	0.8	(2.2)	2.6	0.4
Profit/(loss) for the period attributable to owners of the parent Company		6.0	(12.7)	(6.7)	12.6	(7.4)	5.2
Earnings per share (cents)	6
Basic		1.05		(1.17)	2.10		0.87
Diluted		1.04		(1.17)	2.10		0.87

Note

1.     Adjusting items comprise amortisation of acquired intangible assets, share-based payment, other adjusting items, tax on adjusting items and any over/under provision in respect of prior year tax. 

 

The performance of the Group is assessed using a variety of non-GAAP alternative performance measures which are presented to provide additional financial information that is regularly reviewed by management. Adjusting items are identified and excluded by virtue of their size, nature or incidence as they do not reflect management's evaluation of the underlying trading performance of the Group. The alternative performance measures are presented in the appendix. The reported GAAP measures give the complete measure of financial performance.

 

 

Condensed consolidated statement of comprehensive income

 

$ million	Note	First half 2024	First half 2023
(Loss)/Profit for the period attributable to owners of the parent Company		(6.7)	5.2
Other comprehensive income
Items that may subsequently be reclassified to profit or loss:
-   Exchange differences on retranslation of foreign operations		(1.1)	2.5
-   Re-measurement of the net defined benefit pension asset	8	3.0	(0.3)
		1.9	2.2
Items that will not subsequently be reclassified to profit or loss:
-   Re-measurement of the net defined benefit pension asset	8	-	(0.4)
		-	(0.4)
Other comprehensive income		1.9	1.8
Total comprehensive (loss)/income for the period attributable to owners of the parent Company		(4.8)	7.0