Introduction

I hope that shareholders will agree that we have met the commitments we made in 2009. The actions taken in 2009 and the initial impact they have had on our results are evidence of the progress we have made. We have created significant positive operating leverage in our business model. This is a direct consequence of the hard work of everyone within the organisation and I would like to thank them all for their endeavours during this challenging time.

Market overview

Psion classifies its markets into two categories: supply chain logistics (SCL) to automate information in warehousing, factories, retailing and ports; and wide area mobile (WAM) networks serving national and regional field staff. In both of these market categories, our products and services provide real-time, accurate data and are essential for enhanced productivity and competitiveness in today’s world.

The SCL market is well established while the WAM market is more diverse and has a faster growth potential. Although there have been delays in customer projects throughout 2009 as a result of the economic downturn, opportunities seem now to be more widespread. Over the second half of 2009, sales activity across the market segments we serve has been modestly improving.

Inevitably, the global economic downturn affected business capital expenditure substantially and has caused a contraction of up to 30% in some of our market segments; the warehousing and distribution centre segment has been severely impacted. VDC Research Group expects this segment to return to more consistent performance in 2010 with moderate annual growth of around 3% through 2013. They also signal growth between 2010 and 2013 with a CAGR of 4-5% in the mobile computing market. (Source: VDC Research Group, Inc., Enterprise Mobility Solutions, 2009 Market Intelligence Service: Sixth Edition – Mobile Device Offering Report).

Our own customer and channel research has shown us that vendors have been struggling to work out how to offer choice and customisation to the marketplace in a cost effective manner. When offered, lead times and profitability have been compromised. Customers have therefore bought what the vendors offer, not always what they would most like and neither vendors nor customers have been fully satisfied. In summary, there is a massive array of needs and applications that are not being fully addressed in the rugged mobile computing market. We see this as a major opportunity and are equipping ourselves to address it.

Financial and Operating Performance

We entered 2009 facing harsh trading conditions with reduced demand and aggressive discounting activity. However, during the year, we announced a number of major deals with clients including RWE npower, NBN, PJH, Dusseldorf Airport and E.ON. These give a sense of the broad range of applications for our products: Psion is delivering new mobile capabilities to the metering field force of RWE npower and E.ON; international book distributor NBN and PJH, a European supplier of bathrooms, kitchens and appliances to the home improvement market, are using the Workabout Pro to streamline warehousing and logistics processes; and the ground handling operation at Dusseldorf Airport is using Ikôn mobile computers to aid data capture and documentation in the process of moving passengers around the airport and between the terminals and aircraft.

In targeting around three quarters product sales through our channels, partnerships are, obviously, key to our success. In 2009 we announced a distribution agreement with Ingram Micro Inc. (NYSE: IM), the world’s largest technology distributor. The benefits of Ingram Micro’s Data Capture/POS Division supporting, marketing and reselling our products are already being felt.

Since the year end, we have also signed a contract with BT Global Services, for the IT and networking services giant to resell Psion’s products as part of its own offer to clients. BT Global Services will initially sell Psion’s rugged mobile computers to customers in the UK, Germany and France, but it is expected that the contract will extend to other markets in the future. The agreement with BT opens up our addressable market to thousands more users, so it represents the potential for a significant boost to future orders.

The slight improvement in sales activity and order intake reported with the first half results has carried over into the second half. We were particularly pleased to win new orders in Europe and North America. Order books in Q4 2009 were at the highest level since we began to see the effects of the downturn in November 2008, and continue at satisfactory levels in Q1 2010.

Meanwhile, cost reduction and control activities met our previously stated goals without impacting our ability to meet revenue targets. We have been able to accelerate product refresh programmes and further begin to invest in widening our addressable market. Exchange rate movements had an adverse impact on our operating expenses, as analysed in the Operational Review. However, the company is now making tangible progress towards its previously stated goal of achieving a 10% adjusted operating margin.

Change Programme

We have taken wide-ranging actions in 2009 to drive improved operating performance. The Change Programme begun in 2008 has delivered the targeted annualised cost savings of £46m, of which £35m relate to operating expenses and £11m relate to overheads charged to cost of sales. Inventory has fallen by 35% in 2009, largely by greatly improved processes, and trade receivables have been reduced by 26% over the same period despite the back-end spike in shipments in 2009, reflecting a reduction in average debtor days from 78 to 69.

As a result of the Change Programme, the Group’s organisational and legal structure has been simplified, inventory has been reduced and our working relationships with resellers continue to be strengthened. We remain confident that the actions we have taken in the last twelve months provide a solid base from which we can grow the business profitably and generate cash over the medium term.

Reported results for the year reflect the £1.8m of project expenses of the previously announced reorganisation of our European legal structure. The new structure better reflects our revised operating model and will contribute to the annualised cost savings delivered by our Change Programme. A much lower charge will be incurred in 2010 as the project completes.

I would highlight that more extensive detail on many of the above actions is provided in the Operational Review. In this report, I will focus on market dynamics and the strategy we are implementing to deliver profitable future growth.

Having taken significant costs out of the business, we have reinvested some of the savings in continued product innovation and widening our addressable markets. We have made solid progress in optimising marketing activity and our distribution channel arrangements. Moreover, we have delivered operating cash generation at higher than expected levels.

The end result is that we have repositioned Psion to be more competitive. This has been achieved through extensive actions to improve our operating structure, improve decision-making and enhance our working culture. In short, we have become easier to
do business with and should be more profitable.

While continuing to address operating culture and improve margins, we will leverage the new product development and increase the pace of new product launches. The first example of this, the Workabout Pro3, was launched in March 2010 and you will see a number of exciting new announcements during the year. The Group has enhanced its research and development process during 2009, designing a new modular technology platform, around which new products are customised. We have said we want to work more through our partners – distributors, resellers and systems integrators and allow them to create their own hardware, or software applications.

Investing in the future: Open Source Mobility

Following the successful completion of the Change Programme, we have to take the next steps. This means accelerating the refresh of Psion’s major products by approximately two years. It also means developing new products to address market opportunities offering attractive, profitable growth opportunities.

There is a significant opportunity for Psion to better meet customer and partner requirements, provide better value for money for customers of rugged mobile applications and so gain market share. A proportion of features and applications in traditional, “off the shelf” products are redundant, therefore challenging suppliers to meet customer price points profitably. We recognised early in 2009 that we could create significant opportunity through a strategy that would provide products much more closely tailored to customer requirements. We believe we can do this cost effectively and therefore offer better choice and value in turn.

Working on this strategy throughout the year, reinvesting some of the savings we made from our Change Programme, we are now in a position to bring our unique blend of modularity and an open business model that we call ‘Open Source Mobility’ (OSM) to market.

Modularity has been successfully implemented in a number of other industries, with Scania, the Swedish automotive manufacturer an acknowledged leader in its adoption. Modularity in our architecture will enable us to reduce the level of redundant technology that has traditionally been built into monolithic product designs, thus reducing the cost of product to our customers. The modular architecture further enables us to extend the useful life of the product in the field as we can replace defective or obsolescent modules, rather than having to scrap the whole product. This creates a significantly reduced total cost of ownership for our customers, improving the returns achievable on their investments. We derive benefit from economies of scale in our supply chain, and our customers obtain greater customisation and value from our products. Modularity provides an attractive opportunity to offer an enhanced choice of services, and an extended set of contractual arrangements, potentially including the offer of “platform as a service”. In short, we believe that modularity will deliver a solid opportunity in its own right for profitable growth.

We also believe we can further extend that opportunity for profitable growth through adoption of an open business model. The whole premise of open business models is to better meet customer expectations by harnessing the collective ingenuity of our own innovation, our partners’, our customers’ and other market participants. By adopting an open business model, we create the opportunity to radically increase the research and development resources applied to better meeting customers’ specific requirements. 2010 will see us launching a new set of tools and techniques on the internet, using a number of technologies which are collectively known as ‘Web 2.0’. We will thereby be able to extend our market reach and collaboration through our own online Communities, as well as via Twitter, Facebook and the like. This will create opportunities for our partners to grow profitably by increasing the services they can offer to their customers. We will be able to target market segments that were previously beyond our collective reach, either because they were deemed to be too small, or because we were previously unable to compete effectively with larger market participants.

In summary, we believe that OSM will reduce our customers total cost of ownership, create the best possible fit with customer requirements, create new business opportunities for our partners and should enhance our ability to improve the returns generated by Psion.

Management

We enter 2010 with a settled management team that has proven itself in difficult circumstances. Alongside Fraser Park CFO, and myself, the team comprises:

• Ron Caines, President Sales and Service
• Constance Crosby, VP and General Counsel
• Mike Doyle, Chief Technology Officer
• Nick Eades, Chief Marketing Officer
• Rob Gayson, VP Operations and Quality
• Maija Michell, VP Human Resources
• Dan Pearce, VP Finance

I echo John Hawkins commendation and thanks to David Potter and Andy Clegg. Both David and Andy left with the thanks of everyone at Psion and our very best wishes for the future.

Conclusion

Your company has entered 2010 in good heart and in good shape. We have taken extensive and aggressive action to drive improved operating performance, and improve our competitiveness. I am confident that we will see continued progress through 2010. We remain committed to delivering better financial performance for our shareholders.