2018 Annual Meeting: Chairman’s Address & Trading Outlook

24 October 2018
2018 Annual Meeting: Chairman’s Address
FY2018 Financial Result
FY2018 saw a reported net profit after tax of $1.33 million a 1.7% increase from the prior financial
year. Revenue was up 13.7% to $22.7 million for the year. While much of this growth was from
lower margin outsourced services and postage revenue, Software and Technology revenue grew
19.5% and now represents over a quarter of the Company’s revenue. Revenues in the UK and
Europe are continuing to ramp up and gained 34% to $4.0 million.
The 1.7% rise in reported net profit was constrained by two acquisitions late in the financial year.
These incurred acquisition costs and one, DigitalToPrint (“DTP”), is losing money. The net profit
growth of SDL’s core business, excluding the effect of these acquisitions, was around 19%.
Solution Dynamics’ net cash on hand dropped slightly, from $2.08 million the prior year to $1.96
million at balance date. This net cash balance is after SDL paid just over $0.7 million for the two
acquisitions in the year. Shareholders should keep in mind that much of our printing and related
equipment is financed under operating leases and consequently the Company carries more financial
leverage than is apparent from the balance sheet.
The switch from print to electronic communications accelerated during the FY2018, up from a
historic rate of around 5% each year, to 8.6%. The Company has historically gained some market
share, normally more than sufficient to offset this erosion, however, this is proving increasingly
difficult, partly because of limited resources and our increased focus on international sales.
Shareholders should expect this decline in domestic mail volumes to worsen in FY2019.
Solution Dynamics' FY2018 dividends totalled 7.5 cents per share (fully imputed), up 0.75 cents or
about 11% on the prior year. The Board reiterates its policy to pay dividends of around 70-75% of
earnings, subject to no abnormal internal requirements for unusual capital expenditure items or
acquisitions, as well as being able to fully impute any dividend.
Strategy
The Company’s strategy is predominantly based around building the Software and Technology
business internationally. This is where much of the management effort and the Managing Director’s
time are now spent. It is proving successful, although the difficulties of developing sales channels
and selling into large organisations on the other side of the world should not be underestimated.
Sales cycles for software to large enterprise customers are typically long. We have added further
sales and support resources in the UK and, with the acquisition of DTP, have now opened a
beachhead in the US. We expect further progress in the current financial year, although gains are
likely to be sporadic and lumpy and we are incurring up-front costs ahead of expected revenue
gains.
New Zealand mail volumes are expected to be negatively affected by NZ Post’s decision to materially
hike mail prices from 1 July 2018. Other material changes to the Access Partner agreement will also
have an impact on the already very slim margins for the resale of postage services. This is likely to
see faster volume erosion over the coming year and is likely to result in industry consolidation. SDL

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is examining industry change opportunities and will look to engage in transactions if there is
potential to improve the Company’s strategic position and increase shareholder value.
Acquisitions
The Company made two acquisitions during FY2018. The first was Scantech, which provides
document scanning services domestically, and also has developed software to manage the scanning
process workflow. We think the workflow software has broader applications and are already
pitching this to clients in the UK, where we do expect to see some take up, especially given the
European GDPR privacy rules that require companies to keep track of information and documents
they hold about individuals.
The second is DTP, where the purchase price is effectively the combination of the upfront payment
plus the need to fund what we expect to be short term losses. The attraction of this business was its
Jupiter software platform, which gives the ability to manage and globally distribute print across a
network over 300 printers in more than 60 countries. SDL was aware of existing demand for this
functionality from existing UK clients and a solid pipeline of prospects has already been achieved.
FY2019 Outlook
In terms of Solution Dynamics’ outlook for FY2019, we have previously provided guidance for an
expected decline in reported net profit of 5-10%. This includes losses from DTP and the accounting
requirement to begin amortising much of the purchase price of the acquisitions made in FY2018.
The amortisation charge alone is around $0.2 million after tax and is driven by the fact that much of
the acquisition cost is represented by intangible assets.
Trading for the early part of FY2019 has positives and negatives. On the downside, DTP revenue and
losses are running at a much worse level than we had forecast and this had dragged year-to-date
results well below our budget. In combination with some additional costs, this means SDL’s first half
result will be significantly lower than the prior year. As an additional negative, the Company has lost
a couple of medium sized accounts. It is unusual for SDL to lose customers, so some explanation is in
order. In both cases, the business was with larger corporate customers and SDL was providing only a
small component of their overall print needs. Both tendered their entire print business, the bulk of
which was offset print in each case. SDL was not capable of tendering for the entirety of the
business and partnering opportunities were not available; these changes will have an impact in the
second half of the year.
On the positive side of the ledger, mail volumes are thus far holding at a steady rate of erosion
rather than the more rapid drop off we expected from NZ Post’s price changes, although it would be
naive to expect that faster volume decline will not eventuate at some stage. While DTP results are
worse than expected, the pipeline of sales prospects for DTP’s Jupiter platform and international
distributed print is proving to be much larger and more probable than expected. There are four large
prospects in the northern hemisphere, with whom we are in various stages of negotiations, although
these are complex sales and there is no certainty any contracts will be won. Each of these prospects
would be material additions to SDL’s revenue and earnings on an annualised basis, although the
potential contribution in the second half of the current financial year is difficult to assess.

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The net of these factors is that the Directors are maintaining current full year guidance with an
expectation that some new business, coupled with a review of domestic costs, will offset the higher
DTP losses and second half customer loss. However, we caution that there is the potential for
greater volatility than usual around eventual results versus our guidance.

For further information, please contact:
John McMahon Nelson Siva
Chairman Managing Director
+61-(0)410-411 806 +64-(0)21-415 027