2023 Chief Executive review

Introduction

The following provides the 2023 fiscal year ("FY23") review of sales and marketing, operations and the research and development ("R&D") undertaken by the Group's operational subsidiary Zytronic Displays Ltd ("ZDL"), drawing appropriate comparisons as necessary against the prior 2022 fiscal year ("FY22").

FY23 has been hampered by continued operational headwinds, tempered by an improvement in addressable opportunities as a consequence of a return towards normality post COVID-19 of the critical lead generation processes and marketing efforts for business development and the ongoing innovations around the projected capacitance ("PCAP") touch sensing technology by the R&D department.

A number of factors have had an influence on the revenue generation performance of ZDL over the course of FY23, the largest being the unpredicted turmoil that occurred with the customers in the Gaming market, coupled with an overstocking generated in FY22 in the Vending market, which are covered in more detail in this review.

On 4 May 2023, the Group issued an FY23 trading update, which explained the effects anticipated to occur by the year end as a consequence of the above, setting an expected revenue generation range of between £8.0m and £8.8m. The year concluded with reported revenues of £8.6m, a reduction of 30% against the £12.3m reported for FY22 but, in the circumstances, satisfactorily towards the top end of those revised expectations.

Markets

Of the major five key contributory markets, all have shown decline in FY23 compared to FY22, the largest being the £2.3m revenue reduction from the Gaming market. This resulted in Gaming being the second highest revenue generating market, and the Vending market becoming the highest revenue generating market in FY23.

The table below shows the revenues for each of the differentiating markets, and the lesser combined markets, referenced as Other.

Sales of products to the Vending market in FY23 have shown a circa £1.0m or 28% decline, compared to FY22. In FY23 sales were made to 36 independent customers, compared to 47 in FY22. The largest two contributors in FY22, whose combined revenues accounted for £1.5m of sales, both declined in FY23 by a combined total of £1.1m, with the largest accounting for 76% of the reduction. The decline in this instance was associated with the US-based, independently branded fountain drinks dispenser customer, which, due to fears of electronic component shortages in FY22 overstocked at that point and therefore reduced its demand in FY23.

On a positive note, an increase was observed in FY23 sales of £0.9m to 21 of the 36 customers supplied, with the value-add reseller ("VAR") channel partners in Italy and Spain, the latter particularly in its sales to commercial electric vehicle charging station customers, accounting for a combined £0.3m of the increase.

The majority of sales revenues from the Gaming market, as a component supplier, were attributable to three main display integrator customers all based in South Korea. The supplied design solutions to these customers, were then used by them to provide an integrated interactive display module to a number of slot machine original equipment manufacturers ("OEM") for use within a wide range of cabinet designs.

The 49% decline in FY23 Gaming market revenues to £2.4m was attributable to several contributory factors, the most notable being the total demise of the Aruze gaming group ("AGG").  In February 2023 AGG's casino sales entity Aruze Gaming America Inc. ("AGA") filed for a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the State of Nevada.

The subsequent effect of the Chapter 11 filing on ZDL was an inability to recover trade receivables from the AGG affiliate Aruze Philippines Manufacturing Inc. ("APMI"), the slot cabinet assembler of AGG and one of its sub-tier suppliers, and work in progress and finished goods stock for orders placed by the same sub-tier supplier, which subsequently became undeliverable. The year was then further affected by a lack of ongoing demand that would have been expected and deliverable during the second half period. Details of the financial impairments and actions taken are covered in more detail in the Financial review.

The business assets of AGA were sold by way of auction in July 2023, the slot operations, including land-based assets and online gaming, being bought by Play Synergy (in October 2023 re-branded as Aruze Gaming Global), an Empire Technological Group company, and the interactive table game assets being bought by Interblock USA.  AGA was then officially wound up on 18 August 2023, which resulted in the total demise of AGG.

However, as indicated, other factors also contributed to the decline observed in the Gaming revenues for FY23, including the COVID-19 effects of "chip" and other electronic component shortages during FY22, which forced significant controller redesigns.

For one display integrator customer, and one design, which was reducing in volume as it moved towards end-of-life ("EOL"), the controller redesign meant the end OEM had to seek new extensive regulatory approvals, and thereby allowed its approved secondary source supplier to replace ZDL as primary supplier. The effect of both the loss of primary supply and reducing total volumes led to a reduction in comparable FY23 revenues of approximately £1.2m. 

Sales of product solutions to the Industrial market, which are generally associated with machine control interfaces and informational kiosks, were 26% lower in FY23 over the £1.6m reported in FY22.  The largest program decline coming from a USA customer, where the product is used in control dials for industrial boilers.  Regionally, EMEA exhibited the largest monetary decline of £0.3m, which was relatively spread across most western European countries other than Spain, which exhibited a modest £0.1m increase. In a similar fashion to that of Vending, there are numerous individual customers that make up the sales generators in that market, being 49 in both FY23 and FY22. Of the FY23 49 customers, 34 were repeat customers from FY22, accounting for 94% of the total FY23 sales.

Product sales to the Financial market, historically dominated by two ATM customers, their affiliated group companies, sub-tier suppliers and products, have, as indicated in the FY22 review, achieved a maintenance level of revenue generation, as the products supplied are low volumes of old version new builds and in-field replacement spares. FY23 sales were 96% of the £1.2m in FY22, with sales into one ATM entity up by £0.2m at £1.0m, whilst sales to the other were down by £0.2m at £0.2m.

Sales of products to the Signage market in FY23, which comprises informational systems, wayfinders, street furniture, and tables, etc. achieved 90% of the £0.6m sales reported in FY22, with the largest individual regional declines experienced in Germany and France. Signage, is also a market where there are numerous customers, having made sales to 22 individual entities during FY23, 17 being FY22 repeat customers, with eight of these being channel partner VARs.

Sales of products to the combined Other general category in FY23, comprising of smaller individual markets such as Healthcare, Home Automation, Industrial Telematics, Military, etc. achieved an increase of 3% on the FY22 £0.6m revenues. This was generated from trading with 38 customers (FY22: 38), 23 of which we had also traded with in FY22 across those markets.  The increase in revenues came from sales to the UK, offset by a near equal decline in sales to Germany.

In total across all markets, 43,500 touch sensor units were supplied in FY23, compared to 60,000 units in FY22.  The Group observed a 19% reduction in small (≤14.9") touch sensors sold to 14,000 units, a 24% reduction in medium (≥15.0" ≤29.9") touch sensors sold to 22,500 units and, due in the main to the problems in the Gaming and Vending markets, a 47% reduction in large (≥30") touch sensors sold to 7,000 units. As a consequence of the significant drop in large, supplied sensors, the PCAP units supplied under the trademark MPCT™ halved to 9,500 units, whilst curved units supplied reduced by 32% to 4,500 units. The latter two trends had a particular effect on gross margin, as they carry premium pricing compared to PCT™ flat PCAP sensors.

Export sales of £7.9m reduced as a percentage in FY23 to 92% (FY22: £11.7m, 95%), with an 8% decline in EMEA invoiced sales to £3.4m, a 44% decline in the Americas to £1.4m, a 44% decline in APAC to £3.1m and a 10% improvement in the UK to £0.7m.

Operations

With the reduced productive workload over the year, manning levels were under significant operational scrutiny, particularly over the second half period. As stated in prior years' annual reports, the multi-skilling and retention of skilled operatives is key to productivity and efficiencies within the business. It was for this reason that when a reduced workload became evident as the Group was entering the second half of FY23, ZDL's operational management took the decision to reduce the working week and the manufacturing scheduling was flexed to align with demand and, in an attempt to retain the skills, a furlough scheme to pay up to 70% of normal basic pay for non-worked time for affected operatives was introduced.

However, as the scheme ran longer than management first anticipated and to align with a return to normal 5-day manufacturing practices at the start of the new 2024 fiscal year ("FY24"), a restructuring and permanent reduction in the number of direct labour employees was considered, which resulted in a 14-person reduction to 48 persons during September 2023. Of the 14 persons affected by the redundancy process, ten accepted voluntary redundancy. 

Marketing

As indicated in the opening paragraph of this review, FY23, has proven to be the first year post the problematic periods associated with COVID-19, where near-normal business prospecting activities around sales and marketing are considered to have resumed, other than the human factor change to working from home permanently or as hybrid, which has made face-to-face lead generation meetings, other than at tradeshows particularly in western Europe and the USA, more difficult than they were pre-COVID-19.

Over the FY23 period, with a return of the increasing calendar of tradeshow events and pre-pandemic and international attendance levels, which started with the Global Gaming Expo in October 2022, ZDL has attended as either exhibitors (in collaboration with regional channel partners in several instances) or as attendees at a number of significant market related tradeshows, in the USA, Spain, the UK, Germany, Taiwan, Japan, Italy and China. The Group continues to see this as a primary strategy in the return to growth of the existing organic business, which will continue to be driven in FY24, as due to the global nature of ZDL sales revenues, a tradeshow provides a unique opportunity to address a wide range of existing and new customers in a geographical region in a compact time period.

At the annual Integrated Systems Europe ("ISE") expo in February, ZDL won the Best of ISE 2023 award for the Most Creative Touchscreen Control System Interface for our demonstration unit where we integrated a curved version of our multi-touch PCAP sensor product and ZXY500 controller electronics on a new to market Samsung 49" Odyssey Neo G9 gaming monitor.

Unfortunately, the previously recruited marketing specialist (as mentioned in the FY22 annual report) resigned from the business in March 2023, as did the Sales and Marketing Director, in July 2023.  At the start of FY24, Zytronic has internally appointed a new Sales Director, to drive global business development. The changes provided the opportunity to re-examine the marketing processes in place and make, where deemed appropriate, changes and improvements for FY24. The first improvement has been the commissioning of a new Zytronic website, in which the Group will now combine the previous disparate trading (www.zytronic.co.uk) and investment (www.zytronicplc.com) websites into one addressable entity, reducing the technology focus to one more aligned with market applications. It is expected that this process will conclude with the new website launch circa April 2024.

In combination with this, the Group will also look to change the way it addresses trade PR to reinforce its markets and associated applications knowledge and expertise, and its digital PR in combination with the new website design to focus on the key business-to-business social media outlets of LinkedIn and YouTube.

Opportunities log

A key monitored metric in the effectiveness and responsiveness of ZDL's prospecting activities is the movements in and additions to the Opportunities Log, which is presently through a Microsoft Dynamics CRM system, which will transition as part of the move to a new  integrated Epicor enterprise resource planning ("ERP") system during FY24, to log and monitor leads and opportunities generated from a combination of tradeshow participation, direct business development, indirect channel partner engagement and application directed marketing campaigns.

As it is a dynamic system, inevitably opportunities move from "Open" to "Closed" on a near-daily basis. A Closed opportunity is either "won", as it has moved from the CRM system to productive purchase order(s) (not sampling orders), or "lost", being the point at which the potential customer has confirmed either it has lost its opportunity or it no longer has interest in pursuing a ZDL solution, which can be for reasons of price, specification, capability, or opportunity duplication through multiple prospective customers who were pursuing the same end customer. Over the ten-year period between FY13 and FY23, the volume win rate of Closed opportunities is at a 34% average.

A snapshot of the CRM system is taken at each month end, to interrogate, evaluate and report upon the respective month-on-month movements.  It is each business development manager's responsibility to ensure their individual and regional opportunities are accurately maintained as additions and changes occur. Consequently, with the recent appointment of a new Sales Director, they are undertaking a line-by-line review to identify any discrepancies that may exist in the Open opportunities, that should have resulted in them being Closed earlier.

To illustrate the end-of-month volume and value of Open opportunities, which are the critical fuel for new future revenue generation, as new opportunities add, which for won opportunities has an historical average maturation period of two years, the graph below is presented.

The graph illustrates the dynamic changes in the levels of Open opportunities at month ends, in both the total quantity and the total unsensitised customer projected lifetime value ("CPLV"), over the five-year time frame from the start of FY19, through to the conclusion of FY23.

As the period covers the COVID-19 pandemic and its aftermath, the graph illustrates what became an inability to add new opportunities to the log whilst existing opportunities moved from Open to Closed, as the numerous global lockdown protocols initiated from circa January 2020, and new global business prospecting activities became increasingly difficult. The result was a lagged decline for nearly two-years, before exhibiting an improvement, as business development and tradeshow activities in particular started ZDL on its road to recovery.

However, although the volume of Open opportunities has shown an improvement to pre-pandemic levels, the recovery in CPLV of those opportunities lags somewhat behind a full recovery, due in the main to post-pandemic pricing pressures emanating from Asian-based competitors.

As of 30 September 2023, there were 564 Open opportunities in the CRM system, with a CPLV of £68.6m (30 September 2022: 484 and £59.0m), the following table provides a split of these Open opportunities across the reportable markets.

Research and development

In combination with the increased sales and marketing activities, ZDL's R&D team, was also able to look at more market and application specific product innovations over the course of FY23, as the concerns over, and support needed for, the well documented global issues in electronic components, began to subside as expected.

Major R&D projects, which have been worked on over the course of the year, have been:

·      full product designs for shelving and retail tables incorporating embedded wireless inductive phone charging and localised spotlight illumination in powered wireless, fully transparent floating designs, utilising ElectroglaZ™ panels;

·      designs and developments for touch integrated round and square LCD monitors, and their utilisation in full interactive table design solutions;

·      improvements to our touch controller data processing and Artificial Intelligence ("AI") algorithms that allows for improved touch sensing functionality and interfacing with other PCAP sensing methodologies and materials, which they continue to actively evaluate as a potential ZDL supplied alternative; and

·      advancements in the incorporation of mechanical devices, such as buttons, joysticks and rotary dials, as floating elements within the visible area of a touch display structure, whilst maintaining full touch interactivity around these devices, enabling designers with the ability to realise hybrid solutions on a single product entity.

As the work undertaken with ZDL's technology solutions in the PCAP environment, is novel, ZDL continues to ensure adequate and appropriate IP protection is valid and in place, through the filing of patents, not only in the UK, but in other applicable international jurisdictions.

Over the course of FY23, granted patent protection has occurred in the USA (filed on 22 April 2021, granted on 25 October 2022 as US11,481,057), in Japan (filed on 9 May 2018, granted on 26 June 2023 as JP7302824) and in South Korea (filed on 9 May 2018, granted on 13 July 2023 as KR10-2556872), under the Display Arrangement Patent Family (P031248). This now takes the number of ZDL national and international granted patents to 15, across ten patent families, with a further ten patents pending, from four of the patent families, with priority dates ranging from May 2017 through to October 2021.

In FY24, work will continue on new button format integrations with the PCAP technology including new sensor configurations, which is seen as particularly pertinent to the Gaming, Industrial and Healthcare markets, as well as improved AI algorithms in support of this.  As electronic capabilities are ever advancing, R&D will also begin a scoping exercise to review design concepts for a new evolution of a ZDL Application Specific Integrated Chip ("ASIC"), to incorporate improved design and greater functionality over the existing ZXY500 Series ASIC, whose initial release was in 2018.

I would finally like to conclude the review, by thanking all employees of ZDL, who have contributed to the Group over the course of a difficult FY23 trading period.

Mark Cambridge

Chief Executive  

8 January 2024