Spirent Communications plc Well positioned for future growth

Spirent Communications plc (LON:SPT) Full year results for the year ended 31 December 2018.

Strong profitable growth

· Order intake and revenue from ongoing businesses both up 6 per cent year-on-year reflecting positive momentum across all business segments.

· In particular, we benefitted from US Government expenditure for Positioning GPS simulators (circa $10 million special project not expected to repeat) and demand for 400G high-speed Ethernet, which was strong in the second half of the year.

· Cost initiatives offsetting inflation, resulting in a broadly flat cost base. Going forward, we will continue to invest to support our growth agenda, particularly in R&D, whilst retaining an efficient cost base.

· Strong profit performance, with adjusted operating profit from continuing businesses up 34 per cent to $77.1 million and adjusted operating margin up from 13.0 per cent to 16.2 per cent.

· Effective tax rate reduced to 15.4 per cent driven by US tax reform and management initiatives.

· Adjusted basic EPS up 44 per cent to 10.86 cents.

· Strengthened sales and marketing effectiveness, implemented key account management and account-based marketing and refreshed Spirent brand.

· Exceptional items comprised $4.0 million for Guaranteed Minimum Pension (GMP) equalisation and $9.1 million provision for French import duty relating to an ongoing dispute dating back to 2011.

· Cash closed at $121.6 million, after payment of $54.8 million of ordinary and special dividends during the year.

· 10 per cent increase to full year dividend, up 14 per cent in sterling. Final dividend of 2.73 cents per share to be paid in May 2019, resulting in a total ordinary dividend for the full year of 4.49 cents per share.

Operational highlights

· Strategy is delivering on Spirent’s potential across all operating segments.

· Networks & Security delivered strong growth with Lifecycle Service Assurance building scale.

· Connected Devices benefitted from cost management actions whilst revenue from ongoing businesses has stabilised.

· 5G development is gathering pace with positive impact on portfolio performance across all segments.

Networks & Security

· Revenue up 9 per cent drove operating margin improvement.

· Multiple strategic wins in high-speed Ethernet and record Positioning performance drives strong result.

· Revenue from our high-speed Ethernet business grew; we won multiple strategic deals to validate our market and product leadership in 400G.

· Our Positioning business secured record sales driven by US military spend, including circa $10 million related to a specific project which is not anticipated to repeat in 2019.

· Application Security growth in order intake was more than 20 per cent, with 25 new customers and increased subscription sales which builds deferred revenue. Application Security expanded the functionality of its flagship product (CyberFlood) and won more consulting business.

Lifecycle Service Assurance

· We focused our investment on laying the foundations for future growth in our Lifecycle Service Assurance business, delivering an increase in revenue of 3 per cent.

· We expanded our deployment of Spirent VisionWorks with our key tier 1 mobile operator customers in North America. We received new orders for VisionWorks from all existing customers and added three new major customers.

· We saw significant demand for our 10G and 100G probes driven by network rollouts of 100G and 10G Ethernet to support increased traffic for mobile backhaul and business services and to prepare for expected mobile traffic growth with 5G.

· We were awarded the Leading Lights Award for Outstanding Test and Measurement Vendor for our innovative Lifecycle Service Assurance strategy.

· 5G drove demand for our Landslide mobile infrastructure test system, for which we now have more than ten 5G customers, including five tier 1 mobile service providers, multiple infrastructure providers and a leading university.

Connected Devices

· Strong profit growth, revenue from ongoing businesses stabilised with previous cost management actions underpinning improved operating margin.

· Our Service Experience business grew on the back of new frequency band and service rollouts in the US and EMEA.

· We have developed a key partnership with National Instruments to launch new 5G device test products in the second half of 2019.

· We won significant 5G channel emulation deals throughout 2018 for testing new, complex 5G RF technologies.

· We demonstrated the world’s first 5G Over-the-Air Massive MIMO Beamforming Radio Frequency (RF) Test Bed with the China Academy of Information and Communication Technology and Huawei.

Summary and outlook

In early 2017, we set out a strategy to focus on the parts of our technology portfolio best matched to growth trends, allowing us to leverage from our expertise and strong customer relationships. We continue to demonstrate proof points of the execution of this strategy, resulting in material growth to revenue and earnings.

In 2018, as expected, the demand for 400G high-speed Ethernet was strong in the second half of the year. We benefitted from strong demand from the US Government for our Positioning simulation products, and we expanded our footprint for both security and Lifecycle Service Assurance solutions.

We have a strong technology platform in our chosen areas of focus. 5G is an important driver bringing the next technology upcycle and we are well placed to support our customers’ 5G needs across our whole portfolio as they begin to rollout their next phase of infrastructure investments.

The Board is confident that the Group will continue to see steady profitable growth in 2019, leveraging our technology platform to meet demand whilst adopting a balanced approach to driving efficiency and investment to support growth agendas. Therefore, we expect the cost base, as a percentage of revenue, to remain broadly constant looking forward.

Eric Hutchinson, Chief Executive Officer, commented:

“We are delighted to see our previously communicated strategy in action, delivering on Spirent’s potential as we continue to maintain market leadership in our major revenue streams and continue to develop solutions to match new growth drivers such as 5G.

“We remain well positioned for future growth, enabling our customers to accelerate time to market and increase their service quality at lower operating costs and we are confident for further progress in the year ahead.”