Spirent Communications plc

Full year results for the year ended 31 December 2022

Strong progress in a difficult environment

 

$ million	2022	2021	Change (%)
Orderbook1	288.1	269.8	+7
Order intake2	625.7	637.0	-2
Revenue	607.5	576.0	+5
Gross margin (%)	72.0	73.7	-1.7pp
Adjusted operating profit3	129.5	118.5	+9
Adjusted operating margin4 (%)	21.3	20.6	+0.7pp
Adjusted profit before tax5	131.4	117.9	+11
Adjusted basic earnings per share6 (cents)	18.86	16.59	+14
Reported operating profit	112.7	104.2	+8
Reported profit before tax	114.6	103.6	+11
Basic earnings per share (cents)	16.46	14.67	+12
Closing cash	209.6	174.8	+20
Dividend per share7 (cents)	7.57	6.76	+12

 

Eric Updyke, Chief Executive Officer, commented:

"2022 saw another year of strategic execution, delivering strong growth in profit before tax for the sixth year in succession.

 

"Once again, we grew our orderbook, improving our visibility and reducing technical cyclicality in our business. We successfully implemented our engineering site strategy to transfer resource to lower cost regions, which contributed to the flat operating cost base compared to 2021. This was delivered despite industry-wide cost inflation, and provides us with an efficient operating structure as we look forward.

 

"We have a strong balance sheet which affords us a high degree of flexibility in growing our business, allows us to continue to innovate, invest in R&D and go-to-market channels whilst also focusing on inorganic opportunities that position us for continued growth.

 

"Since the fourth quarter of 2022 we have seen delays to some of our customers' decision making and whilst we expect a more challenging first half of 2023, our business drivers remain intact, and we are very well placed to deliver for our customers as they invest in technologies such as 5G in order to maintain their own competitive advantages. Spirent operates in markets underpinned by resilient structural growth characteristics and, which together with our broad and deep portfolio and our enhanced customer proximity position us strongly to continue executing on our strategy in the medium and long-term.

 

"I am proud of our world-class team's accomplishments, and I am excited about the opportunities to expand our market leadership and to further enhance our competitiveness, helping our customers keep the promises they have made to their customers."  

 

Financial highlights

·     Orderbook¹ up 7 per cent to $288.1 million, with 30 per cent for delivery beyond the next 12 months which is a record and adds to future revenue visibility.

·     Revenue up 5.5 per cent driven by renewed strength in high-speed Ethernet from market demand and new product launches, offsetting some customer timing impacts in Lifecycle Service Assurance.

·     Rigorous focus on cost control, including disciplined execution of our site strategy, and carefully targeted investment in high growth areas resulted in our cost base remaining flat year-on-year despite inflationary pressure.

·     Adjusted operating profit³ increased by 9 per cent to $129.5 million, with adjusted operating margin⁴ improving to 21.3 per cent, up from 20.6 per cent in 2021.

·     Despite softening in the last quarter of the year, the orderbook¹ increased $18.3 million to $288.1 million providing greater revenue visibility for outer years. Book to bill⁸ across the year was 103 (2021: 111).

·     Strong balance sheet - cash closed at $209.6 million (2021: $174.8 million) after disciplined focus on working capital management.

·     Cash flow from operations increased 24.5 per cent to $140.6 million (2021: $112.9 million).

·     Full year dividend up 12 per cent (24 per cent in Pound Sterling). Final dividend of 4.94 cents per share to be paid in May 2023.

·     Materially reduced balance sheet risk through an insurance buy-in of our main defined benefit scheme pension liabilities which terminates future funding requirements.

 

Operational highlights

·     Secured over 800 5G-related wins and saw growth across our portfolio of 5G live network solutions and services, and our world-leading Wi-Fi test solutions.

·     Continued to deliver for our customers through proactive, aggressive management of our global supply chain in the face of ongoing challenges.

·     Aligned our organisation, tools, and processes to enable us to scale our technology-led services portfolio, which saw another year of double-digit revenue growth as we delivered large-scale services to customers around the world.

·     Applied our innovation and subject matter expertise to key new solutions targeting lab and live markets, for high-speed Ethernet and Open RAN (O-RAN) test and 5G service assurance.

·     Achieved a key milestone in our Sustainability Strategy with the achievement of carbon neutral certification.

 

Lifecycle Service Assurance

·    Despite 5G timing impacts from some customers in the face of macroeconomic uncertainty, our strong orderbook enabled delivery of year-on-year revenue growth.

·    Double-digit orders growth across our 'live' network operational assurance and world-leading Wi-Fi test portfolio.

·    Increasing demand for our Test (TaaS) and Lab (LaaS) as-a-Service offerings, driven primarily by 5G benchmarking and Wi-Fi service offerings.

·    Multi-year subscription and support contract growth at customers where we have an incumbency.

·    We launched Spirent Vantage, an innovative solution that dramatically simplifies and automates 5G service assurance for communications service providers (CSPs).

 

Networks & Security

·    Revenue grew 9 per cent as demand for high-speed Ethernet test continued to expand, especially for 100G speeds. Our industry-first 800G solution gaining traction, and we anticipate broader 800G adoption in 2023 as standards are ratified.

·    Customer penetration diversified beyond our core network equipment manufacturer and service provider base to chipset vendors and hyperscalers.

·    We saw strong orders growth in our application security test markets as we leveraged a refreshed hardware portfolio in the second half of the year, as well as growth in enterprise markets using virtualised and cloud solutions.

·    We made important progress in our cloud resiliency and impairment solution strategy, with wins at key tier-one mobile operators, as we combined our verification solutions with implementation and custom services.

·    Our Positioning business experienced growing success in the space, automotive, PNT chipset and device segments.

 

Summary and outlook

In 2022, Spirent delivered another year of robust revenue growth and a material increase in earnings.

 

The Group's strategy of leveraging our market-leading technology and expertise to address key customer business challenges is working. 5G, which remains in its infancy, along with edge computing, Open RAN and high-speed 800G Ethernet deployments, are structurally important, enduring drivers for Spirent and we continue to benefit across the portfolio from customers utilising our mission-critical solutions and services.

 

Well documented concerns about the global economy have affected all participants across our industry and Spirent has not been immune to these pressures. As previously communicated, we saw some customers exercise caution towards the end of last year in response to broader macroeconomic conditions and this was most notable amongst customers for our 5G lab-based Lifecycle Service Assurance applications. This has continued into the beginning of 2023 and as a result we expect revenue to decline slightly in the full year 2023, and to maintain our gross margin with effective supply chain management.

 

Against this backdrop, the Group has continued to proactively manage our cost base to ensure maximum efficiency, while ensuring we maintain our market-leading positions in products, solutions and services. Looking forward we estimate cost inflation to be broadly 5 per cent in 2023, with initiatives taken to mitigate half that increase.

 

We have proactively engaged with our customers and the feedback reiterates their intention to continue to develop and implement their 5G infrastructure, and we therefore expect momentum to improve in the second half of the year.

 

As increasingly sophisticated, complex technologies are deployed to drive faster, more reliable, more secure networks, demand for comprehensive assurance solutions will continue to grow. The Group's track record in navigating challenging markets, balance sheet strength, rigorous discipline on cost control and the diversified strengths of our portfolio, leave us well positioned to benefit when the current macro headwinds abate. 

 

Notes

1.     Orderbook is an alternative performance measure as defined in the appendix on page 36.

2.     Order intake represents commitments from customers 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 amounting to $16.8 million in total (2021: $14.3 million).

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

5.     Before items set out in note 3.

6.     Adjusted basic earnings per share is based on adjusted earnings as set out in note 6 of Notes to the full year consolidated financial statements.

7.     Dividends are determined in US Dollars and paid in Sterling at the exchange rate prevailing when the dividend is proposed. The final dividend proposed for 2022 of 4.94 cents per Ordinary Share is equivalent to 4.12 pence per Ordinary Share.

8.     Ratio of order intake to revenue recognised in the period.

- 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/ James Styles/Humza Vanderman/ Leah Dudley		Dentons Global Advisors		+44 (0)20 7664 5095 E: spirent@dentonsglobaladvisors.com

 

The Company will host an in-person results presentation for sell-side analysts today at 9.15am for 09.30am UK time at The Link Group, 6th Floor, 65 Gresham Street, London, EC2V 7NQ. A simultaneous webcast of the presentation will be available on the Investors section of the Spirent Communications plc website https://corporate.spirent.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.

 

 

Chief Executive Officer's review

 

2022 was another year of strong strategic execution as we sustained our growth trajectory in the face of current macroeconomic challenges and, in the final quarter, signs of caution in our customers' spending patterns. Despite the disruption caused by inflation, COVID-19 and global conflicts, our world-class team continued to innovate, to deliver for our customers and to win larger deals across the globe.

 

Market overview

Our key market drivers have remained strong, led by 5G and driven by global trends such as work from anywhere, the emergence of the metaverse, the expansion of hyperscalers, and location awareness as a key application enabler. As the only vendor addressing all phases of the technology lifecycle, from end to end, we consolidated our 5G leadership during the year, applying our innovation to test, automate and assure opportunities in labs through to deployment and operation of live networks. We continued to make significant progress in our ambition to address our customers' large and most pressing business concerns, such as cost reduction and energy efficiency, by driving services and solutions growth across our portfolio. We are confident in the enduring nature of our structural growth drivers, despite near-term market conditions, and our customers remain committed to their investment plans particularly in relation to 5G rollouts.

 

Strategy

To realise our ambition to be the global leader and trusted partner for innovative technology test and assurance solutions, 2022 saw us continue to focus on our proven strategic pillars: Customer Centricity, Innovation for Growth and Operational Excellence.

 

1)    Customer Centricity - increasing our share with existing customers, driving solutions-selling and expanding our footprint into new areas.

2)    Innovation for Growth - innovating to extend our thought leadership in key growth trends, growing recurring revenue streams and commencing target M&A.

3)    Operational Excellence - providing the foundation for profitable growth, the right team in place to support our ambition and actively committing to sustainability.

 

Customer Centricity

We continued to make significant progress during 2022 in our ambition to address our customers' larger business problems by driving outcome-based services and solutions across our portfolio. The shift from selling features and functions to selling outcomes and value resulted in larger deal sizes and has enhanced closeness to our customers, helping to cement our importance in customer accounts during a time of increasing macroeconomic uncertainty and caution around capital and operational expenditure.

 

Our role as a trusted partner to our customers drove us forward growing into new segments and markets. We supported over 1,100 customers across more than 50 countries in 2022, including over 260 new customers in 33 countries. Spirent's customer base continues to be highly diversified, with no single customer accounting for more than 9 per cent of total revenue in 2022.

 

At Spirent, we are constantly improving the ways in which we go to market. We continued to strategically expand our successful key account programme. Our partner ecosystem once again delivered good results as we targeted faster-growing segments and regions. Our technology-led services portfolio delivered another year of double-digit growth as we delivered large-scale services to customers around the world. Engagements led by services and solutions are increasing the size of our deals and are enabling us to strategically partner with customers to automate, validate and optimise their networks. This strategic progress led to further growth of our orderbook, which stood at $288.1 million at the end of the year, representing 7 per cent year-on-year growth.

 

Innovation for Growth

To sustain and grow our global leadership in test and assurance it is critical that we make smart investments, both organic and inorganic, that address emerging market and technology opportunities. We invested 18.3 per cent of revenue in research and development in 2022. 5G remains the enduring driver for our business, with over 800 5G-related wins in the period and significant progress in our journey from the lab to deployment and operation of live networks. We brought several key new solutions and services to market in 2022 that clearly showcased our market-leading expertise. We executed well on our product roadmaps, whilst also implementing our site strategy to drive cost efficiency as we transferred R&D roles from higher-cost North American sites to Eastern Europe and India without losing momentum.

 

In the third quarter we announced the introduction of Spirent Vantage, an innovative solution that applies Spirent's industry-leading technology and subject matter expertise to dramatically simplify and automate 5G service assurance for communications service providers (CSPs). With its comprehensive turnkey approach that allows operations teams of any size and skill to understand their network and service performance, Vantage broadens our addressable live market beyond the top-tier CSPs targeted by our existing VisionWorks solution.

 

The Wi-Fi business we acquired as octoScope in 2021 saw strong growth during the period, driven by the widespread adoption of Wi-Fi 6 and 6E, together with our new Test-as-a-Service (TaaS) offering for Wi-Fi equipment. We also launched an industry-first, fully integrated and automated Open RAN (O-RAN) wrap-around test solution to address emerging O-RAN market opportunities.

 

We expanded our leadership in high-speed Ethernet test with the release of the industry's first 800G test platform which saw success with vendors designing, developing and deploying 800G technologies, including a public 800G interoperability demonstration with Nokia. We also announced a new 400G Ethernet test platform and added a 400G capability to our application security performance test solution. Customer demand for lower port speeds such as 100G was also strong, driven by backbone network upgrades in the face of continuing data growth.

 

Our Positioning business delivered the first high-accuracy orbital modelling software solution, specifically targeted at emerging opportunities in the Low Earth Orbit (LEO) segment. I am also proud to note that the Positioning business was honoured with a prestigious Queen's Award for Enterprise in the UK, which recognises excellence in international trade.

 

Operational Excellence

Our commitment to operational excellence and our robust operating model are key differentiators, critical to our continued success in uncertain times. We diligently managed our cost base in 2022 while making the smart investments needed to underpin our future growth. We successfully implemented our engineering site strategy to transfer resource to lower cost regions driving savings for our high-speed Ethernet business. Our world-class supply chain team enabled us to deliver in the face of challenges throughout the year. We were able to compensate from ongoing turbulence in the geopolitical landscape with China through expansion of our customer base and development of new market opportunities in the APAC region.

 

We invested once again in enhancing our go-to-market capabilities, strengthening our inside sales capabilities across all regions and bolstering our solutions and services selling bench strength in regions and in segments we have targeted for growth, including hyperscalers and chipset developers. Our digital marketing transformation strategy continued to deliver results, including growth in our marketing-qualified lead pipeline to feed into our enhanced inside sales organisation.

 

We continue to maintain a strong balance sheet with $209.6 million of cash and no bank debt. As we focus on sustainable, profitable growth, we are improving and organising our business to support our positive momentum. 2022 was a year of increased focus on tools and processes to underpin our growth agenda, and in organisational alignment and resource management to enable us to effectively scale our services delivery capacity globally. We continue to improve our organisational structure to break down barriers across businesses and the services function, better enabling solution selling and focus on innovation around leading-edge technologies. Moving into 2023, we plan to further enhance the leadership team, including the appointment of a Chief Information Officer to spearhead standardisation of processes and systems that enable us to scale, whilst also driving a cost efficiency agenda to ensure we have optimal effectiveness from all parts of our cost base, including our property portfolio.

 

At Spirent we value, invest in and empower our employees. I am proud of the progress we have made with our diversity, equity and inclusion strategy towards a culture where everyone feels welcomed. In 2022, our people completed over 1,500 hours of diversity, equity and inclusion training, and we further expanded the diverse ways in which we attract talent to Spirent, expanding our talent partnerships and launching a global college and university campus recruitment campaign. We also launched a global networking community for our early career talent that offers mentorship, development and networking opportunities.

 

When we revealed a more ambitious Sustainability Strategy in late 2020, we committed to achieving carbon neutral certification in 2022 and I am delighted to report that this goal has now been achieved. We also calculated our total Scope 3 emissions during the year, providing us with a comprehensive view of our carbon emissions across all sources, which will enable us to report more widely against our carbon emission reduction goals going forward. 

 

Capital allocation approach

Our highly effective financial and operational management delivered another year of strong free cash flow and our balance sheet remains strong and working capital remains very efficient. We continue to implement our capital allocation policy along the lines previously stated. We invest in R&D to maintain and expand our leadership positions in the market, and in inorganic investments where we see attractive opportunities that support our strategic growth agenda, whilst still maintaining sensible levels of cash.

 

Business review

 

Spirent operates in two strategic business segments: Lifecycle Service Assurance and Networks & Security. The Group meets the needs and expectations of our customers and capitalises on the business opportunities created as they:

 

•       develop and validate innovative devices, applications, network equipment and networks; and

•       deploy and operate those networks and services.

 

We improve network performance and end user experience in our connected world and help create our smarter future.

 

Lifecycle Service Assurance

 

$ million	2022	2021	Change (%)
Revenue	264.5	261.6	1.1
Adjusted operating profit1	51.0	63.1	(19.2)
Adjusted operating margin2	19.3%	24.1%	(4.8)pp

Notes

1.     Before other adjusting items of $0.9 million charged in 2022 (2021: $0.6 million).

2.     Operating profit before other adjusting items as a percentage of revenue.

 

Performance

Lifecycle Service Assurance revenue increased to $264.5 million (2021: $261.6 million). We saw demand for next-generation automated test and assurance, in combination with new outcome-driven service offerings and growth in our Wi-Fi portfolio. We continued to expand our existing Test-as-a-Service offerings, seeing success with our new Wi-Fi and 5G benchmarking capabilities.

 

However, due to current macroeconomic challenges, we experienced customer purchasing decision delays in the latter part of the year, particularly for our lab-based products. We anticipate these delays to be temporary, since the majority of 5G investment globally is already committed and non-discretionary. The number of operators investing in 5G standalone (SA) with a 5G core network is forecast to double by the end of 2023.

 

This had a direct adverse impact on revenue opportunities in the year and as a result Lifecycle Service Assurance adjusted operating profit decreased to $51.0 million (2021: $63.1 million).

 

Adjusted operating margin decreased to 19.3 per cent, from 24.1 per cent in 2021.

 

Networks & Security

 

$ million	2022	2021	Change (%)
Revenue	343.0	314.4	9.1
Adjusted operating profit1	86.8	63.5	36.7
Adjusted operating margin2	25.3%	20.2%	5.1pp

Notes

1.     Before other adjusting items of $2.1 million charged in 2022 (2021: $1.4 million).

2.     Operating profit before other adjusting items as a percentage of revenue.

 

Performance

Networks & Security revenue increased to $343.0 million (2021: $314.4 million), as we benefited from market demand, share gain and the launch of new solutions in high-speed Ethernet test, while maintaining sales discipline on pricing and attach rates for software and services. Our Application Security business benefited from a refreshed portfolio, and the resulting substantial increase in our solutions' performance allowed us to take share from competition and reinforce our position as a market leader in the second half of the year. Our Positioning business expansion in space and automotive was successful.

 

Networks & Security adjusted operating profit increased to $86.8 million (2021: $63.5 million), reflecting favourable product mix and product development efficiencies, including execution of our site strategy, realised in our Cloud & IP business for 2022, which will better enable us to focus on addressing market expansion opportunities going forward.

 

Adjusted operating margin increased to 25.3 per cent, from 20.2 per cent in 2021.

 

 

Financial review

 

Group overview

Momentum continued in 2022 against a backdrop of global economic challenges, supply chain constraints and cost inflation. Customers continue to invest in 5G-related infrastructure, devices and services, but the final quarter of 2022 saw some delays to customer investment decisions which was as a direct result of customer expenditure scrutiny as macroeconomic challenges prevail. Despite this, our operating model remains robust and we continue to invest in our leading technology portfolio and our people.

 

Orderbook grew 6.8 per cent to $288.1 million compared to $269.8 million in 2021, in spite of some orders being delayed into 2023. This followed orderbook growth of 18.1 per cent in 2021 and resulted in a book to bill ratio of 103 (2021: 111).

 

Revenue grew by 5.5 per cent to $607.5 million driven by strength in high-speed Ethernet demand and new product launches at Networks & Security. There was also growth in revenue at Lifecycle Service Assurance resulting from demand for next-generation automated test and assurance.

 

As we predicted, gross margin was adversely impacted by the increased cost of supply chain costs in the main which we offset with good operating expenditure management.

 

The cost base continues to be managed effectively, with a rigorous focus on cost control and targeted investment in high-growth areas. In the face of inflationary pressures, adjusted operating costs were flat versus 2021. The Group commenced a strategic evaluation to reshape the business to maximise market opportunities by focusing on larger bundled solutions sales and service-led engagements that address our customers' most pressing business challenges.

 

Adjusted operating profit grew 9.3 per cent to $129.5 million, from $118.5 million in 2021. Adjusted operating margin has increased by 0.7 percentage points to 21.3 per cent, from 20.6 per cent last year.

 

Other adjusting items were $3.6 million (2021: $4.5 million) as the R&D engineering plan continued in 2022 and the Group commenced a strategic evaluation of the organisation incurring some employee separation costs.

 

Reported profit before tax was up by $11.0 million to $114.6 million (2021: $103.6 million).

 

The Group's effective tax rate of 12.9 per cent has reduced from 2021 (14.4 per cent) due to an increased US foreign-derived intangible income (FDII) deduction and the recognition of deferred tax assets related to US state tax losses and tax credits. Adjusted basic earnings per share has increased by 13.7 per cent, up from 16.59 cents last year to 18.86 cents for 2022.

 

We secured the majority of defined benefit pension liabilities of $166.4 million (£137.5 million), through insurance buy-in with Pension Insurance Corporation (PIC), removing exposure to future investment, longevity, interest and inflation risks.

 

We retain a strong balance sheet with closing cash of $209.6 million (2021: $174.8 million), following a disciplined focus on working capital management, resulting in a free cash flow of $103.8 million (2021: $91.9 million).

 

As a result of the strong financial performance, we propose a 12 per cent increase to the full year dividend per share, from 6.76 cents to 7.57 cents, and looking forward we maintain our progressive dividend policy ensuring that we sustain dividend cover of 2 to 2.5 times adjusted earnings.

 

The following table shows summary financial performance for the Group:

 

$ million	2022	2021	Change (%)
Orderbook1	288.1	269.8	6.8
Order intake2	625.7	637.0	(1.8)
Revenue	607.5	576.0	5.5
Gross profit	437.1	424.7	2.9
Gross margin (%)	72.0	73.7	(1.7)pp
Adjusted operating costs3	307.6	306.2	0.5
Adjusted operating profit3	129.5	118.5	9.3
Adjusted operating margin4 (%)	21.3	20.6	0.7pp
Reported operating profit	112.7	104.2	8.2
Reported profit before tax	114.6	103.6	10.6
Effective tax rate5 (%)	12.9	14.4	(1.5)pp
Adjusted basic earnings per share6 (cents)	18.86	16.59	13.7
Reported basic earnings per share (cents)	16.46	14.67	12.2
Free cash flow7	103.8	91.9	12.9
Closing cash	209.6	174.8	19.9
Final dividend per share8 (cents)	4.94	4.37	13.0

Notes

1.     Orderbook is an alternative performance measure as defined in the appendix on page 36.

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

3.     Before acquired intangible asset amortisation, share-based payment and other adjusting items amounting to $16.8 million in total (2021: $14.3 million).

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

5.     Effective tax rate is the adjusted tax charge, before tax on adjusting items, expressed as a percentage of adjusted profit before tax.

6.     Adjusted basic earnings per share is based on adjusted earnings as set out in note 6 of Notes to the full year consolidated financial statements.

7.     Cash flow generated from operations, less tax and net capital expenditure, after interest paid and/or received, payment of lease liabilities, finance lease payments received and excluding acquisition related other adjusting items and one-off contributions to the UK pension scheme.

8.     Dividends are determined in US Dollars and paid in Sterling at the exchange rate prevailing when the dividend is proposed. The final dividend proposed for 2022 of 4.94 cents per Ordinary Share is equivalent to 4.12 pence per Ordinary Share.

 

Note on Alternative Performance Measures (APM)

The performance of the Group is assessed using a variety of performance measures, including APMs which are presented to provide users with additional financial information that is regularly reviewed by management. These APMs are not defined under IFRS and therefore may not be directly comparable with similarly identified measures used by other companies.

 

The APMs adopted by the Group are defined in the appendix. The APMs which relate to adjusted income statement lines are presented and reconciled to GAAP measures using a columnar approach on the face of the income statement and can be identified by the prefix 'adjusted' in the commentary. All APMs are clearly identified as such, with explanatory footnotes to the tables of financial information provided, and reconciled to reported GAAP measures in the Financial Review or Notes to the full year consolidated financial statements. The reported GAAP measures give the complete measure of financial performance.

 

Revenue

$ million	2022	% of total	2021	% of total
Revenue by segment
Lifecycle Service Assurance	264.5	43.5	261.6	45.4
Networks & Security	343.0	56.5	314.4	54.6
	607.5	100.0	576.0	100.0
Revenue by geography
Americas	336.3	55.3	324.6	56.4
Asia Pacific	205.8	33.9	185.1	32.1
Europe, Middle East and Africa	65.4	10.8	66.3	11.5
	607.5	100.0	576.0	100.0

 

Group revenue grew by $31.5 million to $607.5 million in 2022, an increase of 5.5 per cent over the prior year.

 

Revenue at Lifecycle Service Assurance was slightly up as demand from the continued global rollout of 5G networks and growth in managed solutions and services was offset by previously communicated customer purchasing deferrals into 2023. We also saw growth in our Wi-Fi portfolio driven by demand for solutions and services enabled by our 2021 octoScope acquisition, and in other services offerings, including live 5G network benchmarking. We experienced further robust growth in the orderbook in 2022 as the value of multi-year deals continued to increase.

 

The Networks & Security operating segment saw growth in revenue of 9.1 per cent on the back of market demand for increased network data capacity, and the release of important new solutions for high-speed Ethernet and application security test, reinforcing our position as market leader in this space. Positioning revenue also delivered progress with some key wins in Asia Pacific.

 

Total Group maintenance and support services revenue increased 12.6 per cent to $185.4 million (2021: $164.7 million).

 

Geographically, we saw growth in revenue in the Americas and Asia Pacific, notably in China and India at Networks & Security. As a percentage of total revenue the regions are similar compared to last year.

 

Gross margin

$ million	2022	%	2021	%
Lifecycle Service Assurance	198.0	74.9	199.0	76.1
Networks & Security	239.1	69.7	225.7	71.8
	437.1	72.0	424.7	73.7

 

Gross margin declined slightly to 72.0 per cent (2021: 73.7 per cent) driven by a rise in the cost of supply chain costs. 

Adjusted operating costs

$ million	2022	2021
Product development	111.3	113.3
Selling and marketing	138.9	140.7
Administration1	57.4	52.2
Adjusted operating costs1	307.6	306.2
Lifecycle Service Assurance	147.0	135.9
Networks & Security	152.3	162.2
Corporate	8.3	8.1
Adjusted operating costs1	307.6	306.2

Notes

1.     Before acquired intangible asset amortisation, share-based payment and other adjusting items amounting to $16.8 million in total (2021: $14.3 million).

 

Despite inflationary pressures, total Group adjusted operating costs of $307.6 million were held level compared to last year. The emphasis remained on strong financial management and a disciplined approach to our investment spend to drive our growth agenda.

 

The overall investment in product development decreased year-on-year from $113.3 million to $111.3 million, representing 18.3 per cent of revenue (2021: 19.6 per cent), driven by cost-saving initiatives as we transferred resource in lower-cost regions. We continued to focus on our high-growth areas and to maintain investment into our market-leading products. During the year, we invested in our Lifecycle Service Assurance solutions for next-generation service assurance and O-RAN.

 

We continued to invest in the sales organisation to support our revenue growth plans. Selling and marketing costs decreased by $1.8 million, from $140.7 million to $138.9 million, resulting from reduced sales commissions following some order softness from the deferral of investments into 2023 by some customers.

 

Administration costs reflect investment into our support functions and infrastructure to sustain our growth agenda, increasing compliance requirements, as well as an inflationary increases.

 

We have continued to invest in our world-class employees, enhancing our family-friendly benefits and working to support employee welfare, which has contributed to an employee retention rate significantly higher than the industry average.

 

Operating profit

$ million	2022	Adjusted operating margin1, 2 %	2021	Adjusted operating margin1, 2 %
Lifecycle Service Assurance	51.0	19.3	63.1	24.1
Networks & Security	86.8	25.3	63.5	20.2
Corporate	(8.3)		(8.1)
Adjusted operating profit1	129.5	21.3	118.5	20.6
Adjusting items charged in arriving at operating profit:
Acquired intangible asset amortisation	(4.7)		(4.2)
Share-based payment	(8.5)		(5.6)
Other adjusting items	(3.6)		(4.5)
Reported operating profit	112.7		104.2

Notes

1.     Before acquired intangible asset amortisation, share-based payment and other adjusting items amounting to $16.8 million in total (2021: $14.3 million).

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

 

Adjusted operating profit increased by $11.0 million or 9.3 per cent to $129.5 million in 2022, compared with $118.5 million in 2021. Adjusted operating margin increased by 0.7 percentage points to 21.3 per cent, from 20.6 per cent in 2021.

 

Reported operating profit was up by $8.5 million or 8.2 per cent to $112.7 million (2021: $104.2 million). Total adjusting items were $16.8 million in 2022, compared to $14.3 million in 2021, mainly due to an increase in the share-based payment expense due to an expansion of employee share schemes.

 

Acquired intangible asset amortisation and share-based payment

The acquired intangible asset amortisation charge has increased slightly over the prior year due to a full year impact of the amortisation of the intangible assets recognised on the acquisition of octoScope from March 2021, with a charge of $4.7 million incurred in 2022 (2021: $4.2 million).

 

Share-based payment has increased to $8.9 million in 2022 (2021: $6.2 million), of which $8.5 million (2021: $5.6 million) has been treated as an adjusting item. The increase reflects the incremental cost associated with new awards and the expansion of employee share schemes.

 

Other adjusting items

Costs of $3.6 million have been charged to other adjusting items in 2022, mainly as a direct result of the continuation of the global R&D engineering facility plan which began in 2021 and will conclude in 2023. Costs amounting to $1.5 million (2021: $1.2 million) were incurred in 2022 comprising retention payments and facility and team set-up costs. The plan has delivered material cost savings particularly for our Networks & Security division.

 

The Group also commenced a strategic evaluation in 2022, which led to employee separation costs of $1.3 million. This programme includes a number of initiatives designed to reshape the business to maximise market opportunities by focusing on solution sales and larger bundled solutions to customers. These include enhancement of the leadership team to include some important new roles such as a Chief Information Officer, a Chief Marketing Officer and development of our sales and marketing organisation whilst driving cost efficiency across the cost base. This programme has anticipated costs of $3-4 million in 2023.

 

Currency impact

The Group's revenue and costs are primarily denominated in US Dollars or US Dollar-linked currencies. Currency exposures arise from trading transactions undertaken by the Group in foreign currencies and on the retranslation of the operating results and net assets of overseas subsidiaries.

 

The Group's income statement includes a foreign exchange gain, included in administration costs, of $0.2 million (2021: $0.8 million loss) arising from transacting in foreign currencies, primarily US Dollars in the United Kingdom, and the translation of foreign currency cash balances.

 

Forward foreign currency exchange contracts are entered into to manage the exposure arising from transacting in currencies other than US Dollars. 

 

Although the most significant currency exposure arises in relation to movements in Pound Sterling against the US Dollar, there are other less significant currency exposures, notably the Euro and Chinese Yuan.

 

Finance income and costs

Interest income of $2.1 million was earned from cash on deposit (2021: $0.3 million) and $0.8 million (2021: $0.3 million) of interest income was recognised in relation to the UK defined benefit pension plans. The growth in bank interest received year-on-year reflects the increase in US Dollar and Sterling interest rates. Surplus funds are held principally in the United Kingdom and United States on short-term or overnight deposits and earn market rates of interest.

 

Finance costs in 2022 were $1.0 million (2021: $1.2 million), relating to interest on lease liabilities (2021: $1.1 million).

 

Tax

The adjusted effective tax rate, being the adjusted tax charge expressed as a percentage of adjusted profit before tax, shown on the face of the consolidated income statement, was 12.9 per cent in 2022, compared with 14.4 per cent in 2021.

 

Spirent's effective tax rate continues to benefit from the United Kingdom Patent Box Scheme, the United States R&D Tax Credit, the US foreign-derived intangible income deduction, and a current year recognition of deferred tax assets in the United States.

 

Going forward it is anticipated that Spirent's effective tax rate will slightly rise over time, due to the geographical mix of profits, and 2023 will likely be around 15 per cent if statutory tax rates do not materially change. As a large proportion of the Group's profit is generated in the United States, the effective tax rate is exposed to changes in US tax legislation. The new administration has indicated its desire to increase corporate tax rates and other countries may also be considering raising their corporate tax rates. The UK corporation tax rate will be increased to 25 per cent, effective from 1 April 2023. As a result, we will be closely monitoring all proposed corporate tax rates and other tax legislative changes for their impact on the Group's effective tax rate.

 

Earnings per share

Adjusted basic earnings per share was up 13.7 per cent to 18.86 cents (2021: 16.59 cents). Basic earnings per share was 16.46 cents (2021: 14.67 cents). There were 607.0 million (2021: 608.2 million) weighted average Ordinary Shares in issue. See note 6 of Notes to the full year consolidated financial statements on page 29 for the calculation of earnings per share.

 

Financing and cash flow

Free cash flow increased year-on-year coming in at $103.8 million, compared to $91.9 million in 2021, resulting in a free cash flow conversion which represented 91 per cent of adjusted earnings (2021: 91 per cent).

 

Higher adjusted operating profit was augmented by effective working capital management resulting in a net working capital outflow of $2.9 million, excluding the impact of movement in provisions; this compares to a working capital outflow of $10.1 million in the prior year.

 

Closing days sales outstanding of 60 remained consistent with the prior year, reflecting continued strong collections, but with lower revenue in the final quarter of 2022 compared to 2021, closing receivables were down resulting in a small cash inflow from receivables. Inventories increased by $14 million (2021: $2 million) in 2022 driven by the business need to hold higher levels of materials in order to navigate supply chain challenges and fulfil customer demand.

 

Free cash flow is set out below:

 

$ million	2022	2021
Cash flow from operations	140.6	112.9
Tax paid	(22.8)	(10.0)
Net cash inflow from operating activities	117.8	102.9
Interest received	1.5	0.4
Net capital expenditure	(8.2)	(9.8)
Payment of lease liabilities, principal and interest	(9.6)	(10.0)
Lease payments received from finance leases	0.6	0.5
Acquisition related other adjusting items (note 4):
-  Direct acquisition transaction costs	0.6	1.9
-  Acquisition related performance payments	(0.1)	0.6
-  Acquisition integration costs	0.3	0.8
One-off employer contribution to UK pension scheme	0.9	4.6
Free cash flow	103.8	91.9

 

Free cash flow includes a net cash outflow in respect of other adjusting items charged in 2021 and 2022 of $2.6 million (2021: $4.0 million in respect of other adjusting items charged in 2020 and 2021).

 

Tax payments made in the year increased to $22.8 million (2021: $10.0 million) due to R&D cost capitalisation rules in the US coming into effect on 1 January 2022. The new rules require that, for tax purposes, product development costs are deferred and unwound over a number of years rather than deducted in the year in which they are incurred. This results in a timing difference only so does not directly impact the Group's effective tax rate.

 

Net capital expenditure of $8.2 million was slightly down on the prior year (2021: $9.8 million). Capital expenditure in the period was predominantly incurred on demonstration and test equipment. The one-off employer contribution to the UK pension scheme in the prior year arose in relation to an agreement to further fund the scheme when we also made a return to shareholders.

 

In 2022, the final dividend for 2021 and an interim dividend for 2022, totalling $39.9 million, were paid. This compared to total dividends of $83.6 million paid in 2021, which also included payment of a special dividend of $45.6 million. In addition, 7.1 million shares were purchased and placed into the Employee Share Ownership Trust at a cost of $22.9 million (2021: 3.9 million shares at a cost of $15.1 million).

 

Following these payments, cash and cash equivalents closed at $209.6 million at 31 December 2022, compared with $174.8 million at 31 December 2021. There continues to be no debt outside of lease liabilities.

 

Defined benefit pension plans

The Group operates two funded defined benefit pension plans in the United Kingdom, both of which are closed to new entrants.

 

As the plans near maturity the Company has sought to protect the balance sheet from further risk of market movements affecting the valuation of pension liabilities. So in October 2022, the Trustees, with the Company's support, purchased a bulk annuity insurance policy from specialist UK insurer Pension Insurance Corporation (PIC), in respect of the largest plan, the Staff Plan. The premium was met from the plan's assets and sufficient assets remain to meet the plan's ongoing costs. This insurance policy funds the plan each month exactly matching the plan's benefit payments to members, removing investment and inflation risk as well as longevity and other demographic risks. Following the purchase of the bulk annuity insurance policy, the Group does not expect to make any further cash contributions to this plan.

 

The accounting valuation of the funded defined benefit pension plans at 31 December 2022 gave rise to a net surplus of $8.0 million, compared with a net surplus of $37.8 million at 31 December 2021. The reduction in net surplus over the year is mainly due to a net actuarial loss of $29.0 million (2021: gain of $13.5 million) arising due to a remeasurement loss on plan assets and the bulk annuity insurance policy purchase, partly offset by contributions paid to the plans in the year of $1.1 million (2021: $6.7 million) and an actuarial gain on the plan obligations arising due to an increase in the discount rate.

 

Additionally, there is a liability for an unfunded plan of $0.5 million (31 December 2021: $0.7 million).

 

The Group also operates a deferred compensation plan for employees in the United States. As at 31 December 2022, the deferred compensation plan deficit amounted to $6.9 million (2021: $6.6 million). The key financial assumptions include a discount rate used to discount plan liabilities of 5.2 per cent (2021: 2.6 per cent) and an expected investment yield of 9.5 per cent (2021: 6.4 per cent).

 

Balance sheet

The consolidated balance sheet is set out on page 22.

 

Overall, net assets have increased by $17.7 million to $465.2 million at 31 December 2022, from $447.5 million at 31 December 2021.

 

Non-current assets have decreased by $30.9 million due to the pension buy-in which has resulted in a reduction in the fair value of defined benefit pension plan assets held in the UK Staff Plan.

 

Cash and cash equivalents have increased by $34.8 million within current assets to $209.6 million (2021: $174.8 million) following the robust trading performance, payment of dividends amounting to $39.9 million (2021: $83.6 million) and purchases of shares to satisfy employee awards of $22.9 million (2021: $15.1 million).

 

Overall, liabilities of $240.1 million are broadly flat at 31 December 2022 (2021: $243.8 million). A year-on-year increase in trade payables of $20.7 million due to timing and a disciplined focus on working capital and supply chain management has been partially offset by reduced accruals in 2022 relating to sales commissions and employee bonuses.

 

Liquidity and dividend policy

The Board's intention is to maintain a cash positive balance sheet over the medium to long term. This should allow the Company to maintain a strong capital position in the face of business risks, trading fluctuations and working capital demands.

 

The strong cash generation of the Group allows continued investment into R&D to maintain our market-leading positions and inorganic investments where opportunities support growth plans. If and when it is considered appropriate, the Company may take on modest gearing to fund inorganic investments.

 

The Board will regularly review the Company's balance sheet in light of current and expected trading performance and cash generation, working capital requirements and expected organic and inorganic investments. To the extent the Company has excess cash, it will consider returning such cash to shareholders. The Board will consider from time to time the appropriate mechanism for returning surplus cash to shareholders.

 

The Board has implemented a progressive dividend policy maintaining cover in the range of 2 to 2.5 times adjusted earnings.

 

Dividend

The Board is recommending the payment of a final dividend for 2022 of 4.94 cents (4.12 pence) per share which, together with the interim dividend of 2.63 cents (2.16 pence) per share paid in September 2022, brings the full year dividend to 7.57 cents (6.28 pence) per share, a dividend cover of 2.5 times adjusted earnings. This is a 12 per cent increase compared to the full year dividend for 2021. In Sterling terms this represents an increase of 24 per cent.