Considering the severe downturn in the global economy, the board is relatively satisfied with the group’s overall performance. Following the strong performance of the first six months, our expectations of a performance in line with the previous financial year in the last six months of the review period simply did not materialise as business in our United Kingdom, European and South African markets recorded a severe slowdown. This was mainly due to external factors such as the strengthening of the Rand, the tender process in South Africa coming to a halt before and after the elections, and the banks’ severe tightening of credit supply for system financing, particularly in the small and medium enterprises (SME) sector. The executive team is, however, confident that the balanced approach we maintained during the period between short-term profit and future growth will pay off when the economic recession abates. All DigiCore divisions were profitable and we did not retrench skilled and scarce staff members. In fact, we employed 18 more R&D engineers to enhance our hardware and software development capacity. Although cost cutting and preserving cash were part of our focus, we rolled out two more Ctrack fitment centres. On the international front, we continued our expansion strategy, establishing and enlarging our subsidiaries in France, Germany and Belgium to create a bigger self-owned distribution network in Europe.
The reduction in turnover for the year from R685 million to R576 million (16%) contributed to a negative effect of 45% on operating profit, reducing it from R204 million to R113 million. As illustrated in previous periods, a marginal increase in sales has a substantial impact on operating profit and the 2009 financial year saw DigiCore experience the reverse of this: a relatively small reduction in sales had a disproportionate effect on operating profit, given the mostly fixed overhead structure. Our challenge thus remains to increase our revenue streams. Our annuity income stream from the South African operations constituted 61% of revenue for the year and we are actively pursuing the growth of this part of our revenue stream. Despite the tough economic climate, gross margins for the group remained stable. The operating profit margin, excluding both foreign exchange revaluations and the profit made on disposal of fixed assets, declined by 6.6% from 27.3% in 2008 to 20.7% in 2009. Particularly pleasing has been the performance of Ctrack SA, comprising mainly of the stolen vehicle recovery (SVR) business in South Africa where we saw sales and net profit increase 22% and 359%, respectively. The volatility of the Rand during the financial year resulted in an unrealised foreign exchange profit in the first six months of R4.8 million and an unrealised foreign exchange loss for the second six months of R9.8 million, with a full-year unrealised loss of R5.0 million. Earnings per share declined by 47% from 68.7 cents to 36.1 cents in 2009. Cash and cash equivalents decreased from R108.4 million (2008) to R47.9 million at the end of June 2009, mainly as a result of working capital requirements rising by R35 million as we built stock for postponed orders while settling creditors on agreed terms. Secure units rentals financed internally to the amount of R23 million during the year (property, plant and equipment) also consumed some cash. However, these assets generated a return of about 18% on funds utilised. Trade debtors reduced by 16% and, due to new control and collection methods introduced, should continue to reduce in the short term.
The increase in R&D capacity has already resulted in the release of a number of unique products such as Stealthguard®; our Mobile Resource Management integrated with Garmin GPS navigation systems; RoadTrack® and fuel tank-level monitoring. We are also very excited by the release of our next generation Ctrack software which has already been released as a beta version to our distributors for internal evaluation and feedback, before the commercial release in October 2009. The software includes a full enterprise-reporting module with key performance indicator (KPI) dashboards, drill-down reporting and a full data warehouse. Ctrack Online is a zero footprint web client that can be used on locked-down desktops, ie no program is downloaded to the operator’s PC. A state-of-the-art integrated fare collection system for mini-bus taxis, fully compliant to requirements set by the Reserve Bank, NDOT and EMVCo for wireless smartcard payments in these taxis is due for roll out before the end of this calendar year. DigiCore partnered with major players in the banking and payment industry to develop a complete end-to-end system. DigiCore developed all the onboard equipment for supply to our operating company. On the Ctrack onboard side, a touch-screen driver terminal is undergoing final testing and an insurance-focused driver-rating module is ready to upgrade our SVR products to rate drivers based on their average driving styles. Collectively, this technology, product partnerships and new ventures position DigiCore at the forefront of the industry and will ensure we provide a Ctrack product range that caters for the general public, right up to sophisticated enterprise solutions for the likes of SAPS, Royal Mail (UK), Ethekwini Metro, GMT, etc.
The fleet management business suffered most when Government spending virtually came to a halt in the second half of the year and credit facilities for commercial business were difficult to access. However, the situation is improving and tender opportunities are increasing again. We have completed some core enterprise-level software development in June that will give us more flexibility with our dashboard type of reporting and integration with third-party software used by our customers. This will allow us to compete with any world-class competitor. The SVR division recorded some growth in the second half as a result of good relationship building, competitive pricing and quality value-added services. We have continued the roll out of our Ctrack ‘Lifestyle’ fitment centres in strategic locations, resulting in greater visibility and ease of access for our growing customer base. These centres, supplemented by our 30 third-party authorised installers nationwide, are well positioned to support our new marketing campaigns. We have added complementary product types to these Ctrack centres such as Lumar window security film, Parrot hands-free kits, Garmin navigation as well as the full Nashua Cellular franchise.
Despite a significantly worse global economic climate than expected at the beginning of the financial year, DigiCore International has continued its strategy of investing in its subsidiary operations to drive organic growth. Firstly, we have successfully concluded the purchase of the final 50% shareholding in DigiCore Deutschland, which now becomes a wholly owned subsidiary. The German market is poised for excellent growth from a very low installed base of GPS fleet management technology. Secondly, we opened our Belgium office which made a profit after its first year of operations and, finally, the opening in January of DigiCore France in Paris, to focus on this key European market and its strong growth potential. These strategic decisions were based on the experience that new DigiCore International operations and management teams take 12 to 18 months to be optimised and will therefore position us well when markets start to improve in 2010. The set-up costs of these operations in Europe resulted in operating expenses for our international operations increasing by 58% year on year. Reflecting the importance of the strategies adopted in geographical, market and product diversification, we recorded pleasing unit export results in Malaysia which grew by 39%, Australia up by 32% and Indonesia which grew by 300%. Although many SMEs are looking inward to manage market challenges, many larger organisations, utilities and corporates are actively looking for solutions from DigiCore to support operational cost reductions and productivity improvements. Trakker Middle East in the UAE has had a tough year. However, the proven ability of our Ctrack product range to reduce costs and generate business efficiencies as well as eliminate wasted journeys and reduce environmental impact, has ensured Ctrack remained an attractive service for all our fleet customers in times of economic uncertainty. Our distributor in Pakistan continued to have a very difficult year, but fortunately the customer base of over 90 000 systems on long-term stolen vehicle recovery insurance-driven contracts enabled the business and nationwide operations to continue.
The 2009 and 2010 calendar years are expected to be difficult years for businesses worldwide. DigiCore operates globally and intends to continue growing its international presence, supported by the introduction of a new product set that should be available globally this year. The executive team is confident that, with our portfolio of new world-class products and software packages now available, we will be well positioned to accelerate sales as soon as global markets improve. This is particularly the case for our SVR division which has already made such inroads in an established market. In conclusion we believe the company remains strongly positioned to resume its growth phase in the global market, given our solid product range and excellent distribution network.
For and on behalf of the board
NA Gasa - Chairman
NH Vlok - Chief Executive Officer
9 September 2009