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In this year’s report I want to explain some of the underlying business drivers that at first glance might not be clear from our reported results. I refer particularly to our sales activities and the effects on near-term reported results of our success in driving longer-term relationships with our customers. Our business generates revenue through three primary sources – selling new licenses, selling upgrades to earlier versions, and having customers take up software assurance contracts. All of these grew in 2006/2007: licence sales grew by 13%, software assurance and maintenance sales grew by 76% and our Altium Designer 6 user base grew by 87%. Just as important is how these financial results are reflected in our financial reports. Software assurance is a contract that gives customers the right to receive all upgrades that we release during the term of the contract. A contract term typically lasts 12 months and we receive payment at the commencement of the contract. We’ve been actively working to increase the number of customers who take up software assurance and through the last 12 months we have seen a significant increase in these sales. This benefits our business by helping to reinforce longer-term relationships with customers and it also leads to greater predictability for our cash flow and sales. For customers, they are able to manage their own budgets and commitments for expenditure more effectively, and can be assured of getting access to our latest technology as soon as it becomes available. Despite booking the sale and receiving the payment at the start of the contract, for accounting purposes we are required to defer the recognition of the revenue associated with sales of software assurance. You can clearly see the positive effect of our success in increasing the number of customers selecting these contracts when you look at the movement in our deferred revenue account on the balance sheet.
We started the year with deferred revenue of $5.3 million, and ended it with $9.1 million. This is $9.1 million of revenue that we will recognize in the 2007/2008 financial year, but for which we have already received the cash. This deferred recognition of revenue manifests itself as the difference between our reported sales ($57.5 million) and our reported revenue ($53.4 million). This is also one of the major reasons why our operating cash flow had a larger increase compared with other measures of performance, such as profit before and after tax, and it feeds directly into our cash balance as at the end of the financial year.
For this reason, we are able to propose a return to shareholders, even though reported profit is in line with last year. This will be in the form of a proposed capital return of 6 cents per share and will be subject to shareholder and regulatory approval at the forthcoming Annual General Meeting. Our cash position is much stronger than our reported profit would suggest and therefore we have a much greater amount of surplus capital to return to you. Last year, we returned 4 cents per share as a dividend.
As a further example, you will note that we took a further amortization charge against our intellectual property (IP) assets held on the balance sheet – whilst at the same time increasing our overall research and development spend by 22% to $10.5 million. The amortization charge – which is non-cash – lowers our profitability and it might appear that our assets are depreciating in value. We believe that the true picture is quite different. Our annual research and development investment lets us execute our product development strategies, and produce new technology that enhances the value of our IP. This is good for our shareholders because we are generating sufficient cash flow to fund product development, which in turn underpins future growth; and we can also make a financial return to our shareholders. We encourage our shareholders and potential investors to look at the underlying cash flows when assessing our business performance. It is these that drive our ability to provide increased returns and fund our continued expansion. These are the two primary cornerstones of our current financial strategy. The year has seen strong growth in sales in each of our three geographic regions. For two years, our growth in the Americas has exceeded 30% in US dollars. Our growth in Europe is accelerating, and Asia continues strongly, driven by growth in each of our major markets in that region. The Chinese market continues to represent a major growth opportunity and we are pleased with our progress in driving sales growth of over 150% in the year. Worldwide, we’ve signed some great new customers, including one of the world’s major toy producers, a leading worldwide aviation company, and major organizations involved in commercial and scientific space operations. 
In summarizing, it’s been an exciting year of continued growth for the business. Our sales performance has helped us to both fund further expansion opportunity and provide shareholders with increased returns. We will continue to pursue avenues to help take us toward delivering the results that our investment strategies of the past years have created for us. 
Darren Charles, |
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