Eurotech: Roberto Siagri – letter to shareholders

Dear Shareholders,

2007 commenced with the completion in January of the acquisition of the US corporation Applied Data Systems Inc (ADS), specialists in low-consumption miniaturised computers. This also brought with it a 65% equity interest in the Chinese company Vantron Technology Ltd, active in software development and hardware design for mobile and multimedia, which today has over 45 graduate engineers. The ADS acquisition was a major step forward for the Group in terms of both sales and human resources, as well as creating a more marked focus on low-consumption mobile platforms.

At that point, we found ourselves with the Group’s centre of gravity tangibly skewed towards America. This suggested to us that, in our journey towards achievement of our “tipping point”, i.e., of our critical mass, it was time to look towards the East.

And so it was that, de facto, completion of the ADS acquisition paved the way for the subsequent acquisition of 65% of the Advanet Group – one of the leading companies in the Japanese embedded PC market, with sales of circa JPY 5.5 billion (over €33 million) and a 20% EBITDA margin. Advanet was the ideal choice: besides enabling us to enter the Japanese market, which is undoubtedly an important door for expansion in Asia, it did not feature any overlaps with the Group’s products and matched the profitability profile sought by us.

With the Advanet acquisition, the Group’s NanoPC offering has been completed by the addition of boards and systems based on the cPCI and VME standards, with both x86 and PowerPC processors. Moreover, as had already happened with the previous acquisitions, the Group is enhanced by an industrially and financially sound company, which we will integrate gradually via growing exploitation of Group synergies.

Thanks to these acquisitions, in 2008 we will be able to present ourselves to the market with a miniaturised PC offering comprising all the most important electrical and mechanical standards (PC/104, PC/104plus, cPCI, cPCI Express, VME, EPIC, EBX, COM Express, and PMC). Furthermore, we will also be able to offer different types of computing architecture (x86, ARM, and PowerPC). All customers sensitive to the quality, reliability and innovation which distinguish our solutions should therefore be able to find in our new offering the best response to their needs in terms of price, performance and consumption.

As regards innovation, during 2007 we once again demonstrated our ability to translate ideas and technologies into cutting-edge solutions. Using an FPGA-based flexible computing platform, we constructed Janus, the world’s most powerful computer in its segment as well as the smallest and lowest-consuming one. Janus is, in fact, the first supercomputer capable of achieving the astounding number of 8 PetaOps – 8 million billion operations per second – consuming just 10 kW and occupying a volume of just 2 cubic metres. We have thus transformed the scientific project featuring Eurotech’s co-operation with a pool of Italian and Spanish universities and research centres into a tangible reality.

A strategic lever that we will apply with special attention in 2008 will be worldwide consolidation of the Eurotech brand. Already in 2007 we saw the first move in this initiative as our UK company, Arcom, changed its name and Eurotech Ltd was born.

Following the important acquisitions made in the last two years, in 2008 the key event in the Eurotech Group’s integration process will be the merger of the US subsidiaries Applied Data Systems and Arcom to become one company – Eurotech Inc.

Eurotech Inc will be the starting point for the creation of a truly integrated group, capable of satisfying its customers with a substantial offering of innovative products and solutions together with quality services. Intentionally created to become the Eurotech Group’s premier sales channel for all products going to the American market, Eurotech Inc will sell all Group products: from boards to embedded systems and from sensors to HPCs (high-performance computers).

We expect this operation, commencing in April and completing in August, to start having a positive effect on Group profitability during the course of the year, thanks to greater operating efficiency and to the economies of scale achievable between the two companies.

I would now like to comment briefly on the business and financial results of the year that has just ended.

2007 ended with consolidated sales revenues of €76.54 million against an initial forecast of about €100 million. Apart from the natural variability typical of the dynamics of the market in which we operate, the difference versus the sales targets initially set for 2007 was mainly due to delays in the award of some projects in the USA, which caused lower than forecast revenues during the year for both Arcom and ADS. Secondly, the weight of US companies – accounting for approximately 60% of 2007 consolidated sales revenues – meant that, at the time of consolidation, Group results were hit by no mean extent by the ongoing depreciation of the US dollar against the euro, a trend that continued throughout 2007. From a business standpoint, the US companies of the Eurotech Group did not feel the effects of this US dollar trend, as all their costs are in US currency.

From a 2008 perspective, Advanet’s entry into the Eurotech Group gives us an almost ideal balance between business in US dollars, euro, and JPY. In future, the effects on consolidated accounts of one currency’s weakness versus others should be attenuated.

In 2007, Gross Profit Margin was 49.8%, substantially stable against 50.2% in 2006 and in line with initial targets, which set it at around 50%. This threshold permits an ideal balance in the cost structure and assures that we can continue investing in research and development.

Group EBITDA in 2007 was instead much lower than expected, stopping at a margin of 2.5%. This is the indicator most heavily affected by lower revenues. The latter in fact meant a heavier impact both of operating costs, prevalently fixed in nature, and, in particular, of the extra costs for integration of companies acquired, relating to the creation of a more extensive international organisation. These costs have served to lay the foundation for better exploitation of group synergies. They should therefore produce visible effects during 2008 in terms of EBITDA improvement.

Given the new scale achieved, we will have the possibility of increasing the outright value of R&D investments without this increasing their incidence as a percentage of revenues. We will therefore combine effectiveness and efficiency, exploiting the positive effects of the consolidated sales growth achieved thus far.

In summary, 2007 was a year when the Group worked hard to create the conditions for better exploitation of inter-group synergies, in terms of both increased organisational efficiency and acceleration of cross-selling and thus of organic growth. In other words, we have accumulated potential that has not yet expressed itself and should therefore be able do so during 2008.

Let us end by taking a look at the future awaiting us in the next few years.

Since the end of the 20th century, we have been witnessing the revolution driven by the new digital information and communication technologies. This is an irreversible revolution that will also lead to profound changes both in society and in individuals. A simple figure to give an idea of the phenomenon: some estimates indicate that, by the end of 2010, the number of devices connected to the Internet will grow to as many as 15 billion, but that only 5% of them will be PCs and servers, because third-generation mobile telephones will surge to take command.

The computer is becoming increasingly integrated with man. From the desktop personal computer, we have moved to increasingly portable computers (mobile telephones and PDAs) to progress today to wearable computers and so-called smart-dust networks (networks of miniaturised sensors) able to make our surroundings “intelligent”.

We thus have interconnection on one hand and integration in our surroundings and daily life on the other. This is the dominant paradigm, called “ubiquitous computing” or “pervasive computing”. This will open up major opportunities and we, thanks to our R&D investments in the last few years, are ready to take advantage of them. We are, in fact, steadily transforming Eurotech, following the new computing paradigms, from an embedded-computer company into a pervasive-computer company, aiming to be the leading company in the professional sector for pervasive computers.

Our family of wearable computers, which immediately achieved major international recognition for its innovative content, started to demonstrate its marketplace potential towards the end of 2007.
Our wireless connectivity platforms have been installed in trains and buses in the USA to give commuters constant and ubiquitous Internet access.
We have the technology and skills to gather the real world’s data and put them online: from inboard parameters of moving vehicles to the operating data of plant installations; and from the environmental conditions of specific monitored areas to information on individuals’ physiological parameters.
We are working on equipping the uniforms of first-aid and emergency rescue teams. Our sensors will pick up important physiological parameters of the rescuer and – co-ordinated by a special-purpose version of our wearable computer Zypad – communicate them to the operations HQ, which will therefore have the psychophysical conditions of the men in action under its control.

We believe that pervasive computers will be increasingly present in Eurotech’s future, i.e., distributed computing devices and platforms ready to be connected with Web infrastructures and to exploit their full potential. In the not so distant future, when everything will virtually become a computer, our NanoPCs will connect to our HPCs to form the Pervasive Grid.

We see a future with a wealth of opportunities and great growth potential and it is for these new challenges that we have equipped ourselves well.

28th March 2008
Roberto Siagri
Chairman and CEO