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Chief Executive Officer’s Review

This was a turnaround year for BATM as the Networking and Cyber division achieved increased year-on-year revenue for the first time since 2011 and the Bio-Medical division continued to demonstrate strong growth. The strategy that we had implemented in the Bio-Medical division to establish the Eco-Med unit also began to come to fruition with its newly-launched solutions gaining significant traction during the period and an accrual of a substantial order book for delivery in 2018.

Both divisions gained new customers, secured new contracts and expanded into new territories. New products and technologies have replaced legacy products, and we advanced our sales and marketing strategies in targeting new areas that we had identified as growth markets.

As a result, total Group revenue increased by 18.5% to $107.1m (2016: $90.4m), of which the Bio-Medical division accounted for 54% with the contribution from the Networking and Cyber division being 46%. We also increased our operating profit and returned to generating positive earnings per share.

Now to look at each division in more detail.

 


BIO-MEDICAL DIVISION

The Bio-Medical division achieved significant revenue growth in the Eco-Med and Distribution units, which offset the lower revenues in the Diagnostics unit. However, as a result of the latter, adjusted operating loss for the division was greater than the prior year.

The Distribution unit accounted for 74% of the Bio-Medical division’s revenues in 2017 compared with 68% of revenues in 2016, reflecting an increase in sales of 21.3%. This was due to strong growth in the distribution of diagnostic kits and services.

At the beginning of the year, we acquired the entire issued share capital of Zer Laboratories for a consideration of NIS 2.75m (c. £580,000) payable in cash. Zer Laboratories is the largest private diagnostic laboratory in Israel for clinical tests, mainly providing prenatal screening tests for Down’s syndrome, genetic tests and additional non-invasive prenatal tests (NIPT) performed during IVF and fertility treatments.

During the year, we commenced providing these tests and achieved strong, better-than-expected sales. Towards the end of the year, new molecular biology tests, especially for cancer, were added in cooperation with leading US companies. These tests have received a very good initial response with first sales from several prominent oncologists.

Also during the year, operations commenced at the two new diagnostic and analytic laboratories that we opened in Romania in 2016.

The Eco-Med unit accounted for 13% of the Bio-Medical division’s revenues in 2017 compared with 11% of revenues in 2016, reflecting an increase in revenues of 29.3%. This growth is primarily due to sales of our new, larger solutions, based on our unique patented Integrated Shredder and Steriliser (“ISS”) technology, developed for treating biological waste in the biopharma and agri-business sectors. We are also leveraging the ISS technology to apply to other industries where the solutions have a higher value and greater market potential.

The unit achieved a significant improvement in gross margin to 23.2% (2016: 12.7%) as a result of sales of higher margin agri-waste solutions.

During the year, we launched the world’s first mobile agri-waste treatment solution and were awarded a contract of $2.5m, subsequently extended by $1.1m for a fixed unit. The delivery of the mobile unit has now been completed.

The first large installation of our new solution for treating agricultural waste, which was installed in 2016 at a processing facility of a major poultry farming company, continued to perform very successfully. We are also in the process of providing a second unit at a bovine slaughterhouse facility for the largest and leading food group in Israel, which follows the successful installation and operation of an initial unit in 2016.

We commenced sales of the new ISS 500 that has been adapted for the disposal of medical waste in hospitals. The product is receiving a lot of interest from hospitals because of its automated reloading system, which reduces human exposure to medical waste. During the period, the first systems were delivered to customers in the Middle East and Europe and the first orders for the new solution were received from the US.

The Diagnostics unit represented 13% of the Bio-Medical division’s revenues in 2017 compared with 20% during 2016 reflecting a decrease in revenues to $7.4m (2016: $10.2m). This reduction was primarily due to weakness in China. However, we expanded the geographic sales reach to increase market penetration of our existing products, resulting in the unit entering 2018 with a higher order book than at the same point in the prior year.

We continued to develop our new products for the diagnostics market. In December, we launched a new ELISA instrument, called Personal LAB, with several orders received to date.

Progress also continued to be made by our joint venture company, Ador, established in December 2015 with Gamida for Life group, in its preparations for the production and marketing of a unique rapid-results sample-to-answer multiplexed molecular diagnostics system – that has already been granted several patents in the US – and a selection of reagent kits.

In July 2017, we appointed Dr. David Perry MD as Chief Executive Officer of Adaltis, whose previous experience includes VP Global Clinical and Medical Affairs at Baxter Bioscience. The new role was created within Adaltis as it begins to gear up to take advantage of the advances within its molecular biology business unit, as well as the growing in-vitro diagnostics field.

In particular, we intend to use the Zer Laboratories acquisition – in addition to distributing diagnostic tests of Abbot and other third parties – for launching new, advanced diagnostic DNA-based tests and molecular biology solutions developed by Adaltis.


NETWORKING & CYBER DIVISION

This was a milestone year for the Networking and Cyber division as the significant level of investment in prior years has driven a return to growth. Revenue increased by $10.9m to $49.4m (2016: $38.5m) for 2017, which was largely due to growth in the ICT services and solutions business as well as our success in implementing our strategy to leverage the telecom industry transition from hardware to Network Function Virtualisation and Software-Defined Networking. We achieved an adjusted operating profit for the Networking and Cyber division of $0.9m in 2017 compared with a loss of $2.2m for the prior year. Gross profit margin for the division reduced to 36% (2016: 40%) due to the contribution to revenues from a large government contract that carried a lower gross margin.

During the year, ICT services and solutions gained 47 new client accounts in North America, including blue-chip companies such as Google, TPx Communications, Union Wireless and Alpine Communications. In particular, a Tier 1 cyber security customer launched its new security systems that contain our latest ATCA product 100GE card. The new ATCA 100GE is gaining increasing momentum and interest from various customers.

In addition, the 100GE card is playing a key role in the new aggregation platform, T-Metro 8100 – a next-generation, high-density, standalone 100GE services aggregation platform that was released in H2 2017.

Also during the year, NGSoft, a high-end software development and design business and subsidiary within the Networking and Cyber division, was awarded a framework agreement, valued at up to $35.8m over five years, to provide ICT services and solutions to an agency of a government defence department.

We made significant progress in advancing our SDN/NFV offer.

We established partnerships with a number of leading telecoms organisations, with the respective partners offering joint solutions for network virtualisation. The partnerships include leading providers of central processing unit technology, white box hardware and across a range of virtual network functions.

This included a collaboration with NXP Semiconductors (NASDAQ: NXPI) and Arm Holdings to develop a NFV solution that enabled the first virtualised operating system to support Arm architecture as well as all Intel architecture. We are the only worldwide software vendor to provide NFV functionality to Arm architecture and all Intel platforms.

Our open and agile service delivery platform can meet the growing demand from telecoms operators and managed service providers for solutions that offer increased performance, flexibility and cost savings on their networks, regardless of their hardware or what they may choose to use. During the year, we conducted several successful POCs worldwide, which we expect to translate into significant orders during 2018.

We continued to grow our cyber security business. We received an expansion to a contract that was originally awarded in 2016 for the supply of an ICT solution combined with several cyber elements to a government defence department, which increased in value to $5.2m. We engaged in several POCs in multiple countries, including conducting a successful POC for cyber monitoring and detection systems for a European government customer, the first such European government customer for our cyber solutions.

Post period end, we were awarded a significant contract to supply a cyber communication technology solution to a government defence department, which is worth approximately $4m in 2018. This contract is the fourth such contract awarded to us by a national government and followed a successful deployment of our solution previously. We expect to commence delivery of the contract in Q2 2018 with completion by year-end, and anticipate receiving follow-on orders after the completion of this contract.


Outlook

BATM entered 2018 in a stronger position than at the same point in the prior year with a higher order book in all of our units, particularly in the Networking and Cyber division and the Eco-Med unit. Both divisions are receiving increasing demand for the newly-launched products and solutions, with the Networking and Cyber division having conducted multiple POCs for our SDN/NFV and cyber solutions that we expect to translate to significant orders in 2018.

The Diagnostics unit of the Bio-Medical division is making significant advancements in the development and introduction of new molecular-diagnostics instruments, which we expect to launch in 2018. It is also experiencing a return to growth in sales for existing analytics equipment and reagents as a result of geographic expansion of our sales and marketing efforts. In addition, we expect to be able to leverage the Zer Laboratories acquisition in offering our own diagnostic tests.

As a result, we expect to report year-on-year revenue growth for full year 2018, and the Board remains highly confident in the outlook for the Group and delivering shareholder value. 


Dr. Zvi Marom
Chief Executive Officer
30 April 2018