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Keycorp Limited (ASX:KYC) 2010 Annual Report To Shareholders

Keycorp Limited and its controlled entities (the Group) generated a net profit after tax of $5.6m for year ended 30 June 2010. This result is an increase of $5.4m on the prior year after the $9.1m gain on sale of the Group’s Smartcard business is excluded from the prior period comparative figure. The result for the period is driven solely by trading activity rather than corporate transactions.
The profit from continuing operations for the year of $5.6m was a significant improvement from the profit from continuing operations of $0.2m in the prior year. The main driver of this result was the successful completion of the transformation of the business. This process included the sale of non-core businesses and the restructuring of the Group to implement a payments services oriented business model.
Revenues during the year decreased by 10% reflective of the stated business strategy to shift towards a higher margin services based business model. This continuing shift away from lower margin product revenue streams to higher margin services revenue resulted in an increase in margins from 38.5% in the prior year to 41.9% in the current year. The reduction in revenue occurred in product sales which decreased by 26% as well as a result of less EMV upgrade activity in the current period compared to the prior year.
The reduction in EMV upgrade activity was planned for as the EMV industry standard for chip and pin technology reaches maturation. In contrast, services revenues increased year on year by 2.5% despite the impact on reduced activity levels associated with EMV upgrades.
The successful completion of the Group’s restructuring programme in the prior year allowed the Group to benefit from the full year impact of its reduced overhead base, commensurate with a service based business model. Savings of almost $6m were achieved year on year across sales and marketing, administrative and research and development expenses.
Other expenses incurred were of a similar amount to the prior year with the largest element in the current year comprising $2m of costs associated with the expiry and settlement of the six year Westpac contract. Cash generated from operations of $16m was a significant improvement of $13.5m on the $2.5m cashflow in the prior year. This impressive result is reflective of the Group’s profitability and the success of a number of initiatives to improve working capital. Year on year the Group’s net cash position increased by over $19m from a net cash position of $6.1m at 30 June 2009 to $25.3m at 30 June 2010. Greatly assisting the net cash position, was the effect of the expiry of the Westpac contract in late May 2010 which resulted in the repayment of Mezzanine notes of $7.6m and the release of a performance bond of $3m.
Throughout the year, considerable effort and progress was made in the business growth strategy to expand services centred on organic growth and extension of business lines via complementary acquisitions. Specific opportunities were identified and analysed, however, the ability to aggressively pursue acquisitions throughout the year was constrained by the fact that adequate capital specifically in the form of cash only became available just prior to year end when the Westpac contract ceased. This constraint will not be evident in the coming period and as such Keycorp is in a position to aggressively pursue its growth strategy.

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