Spirent’s strategy focuses on medium to long-term growth and therefore its achievement cannot just be measured by looking at performance in 2017 compared to the prior year; trends over a number of years must also be considered. Key performance indicators relate to continuing operations6 only.
The ratio of orders booked to revenue billed is a measure of the visibility of future revenues at current levels of activity and provides an indication of the underlying trend in Spirent’s future revenue stream.
The reduction in book to bill ratio to 98, from 103 in 2016, reflected decline in orders in the Americas, and continued headwinds in the wireless device test market.
The book to bill ratio is an indicator of whether future activity levels are rising or slowing, and therefore how effective we have been in the execution of our strategy.
Spirent monitors growth in revenue as this shows how successful Spirent has been in expanding its markets and growing its customer base.
Flat revenue performance, following a 4 per cent decline in 2016, reflecting strong Application Security and Positioning product line performance, offset by declines in core high-speed Ethernet performance test products in the Americas, and continuing headwinds in the wireless device test market.
Revenue demonstrates the effectiveness of our strategy: our success in expanding our markets both organically and through acquisition; maintaining technology leadership; and our strong relationships with our customers, all of which ensure that we continue to win and maintain business.
Adjusted operating profit is the measure used to evaluate the overall performance of the Group as well as each of the operating segments.
Adjusted operating profit increased by 27 per cent to $58.9 million from $46.5 million in 2016 as as result of focused cost management across the business.
Adjusted operating profit indicates our financial strength and our ability to invest in the business for future growth.
Adjusted operating margin is a measure of the Group’s overall profitability. Spirent operates in markets which have high operating returns and strives to achieve best in class operating returns compared with its peers.
Adjusted operating margin increased to 13.0 per cent from 10.2 per cent in 2016, driven in the main by a reduced cost structure.
Adjusted operating margin is a measure of how successful we are in our overall strategy and demonstrates our ability to improve margin through efficient operations whilst being mindful of the need to invest for the future.
Long-term growth in adjusted basic EPS is a fundamental driver to increasing shareholder value.
Spirent’s aim is to achieve growth in adjusted basic EPS. Part of the Executive Directors’ remuneration is dependent on achieving EPS targets. In 2017, adjusted basic EPS grew by 43 per cent as a result of the increase in adjusted earnings.
Adjusted basic earnings per share is a measure of how successful we are in our strategy and ultimately how Spirent increases value for its shareholders.
To maintain its competitive position, Spirent must invest at suitable levels to support future organic growth initiatives in line with the strategic objectives, whilst driving improved productivity and effectiveness.
In 2017, product development spend reduced to 22.6 per cent of revenue from 24.4 per cent in 2016 as a result of efficiency savings.
It is critical that Spirent’s product development investment keeps pace with the speed of change in technology, and that it is directed at the right key technology areas; it enables us to expand our markets and to maintain our technology leadership position.
Spirent’s success is dependent on its talented employees and retaining them is extremely important. Voluntary employee turnover compared to the industry average is the measure used to assess how well the Group has performed.
Staff turnover has returned to 2015 levels and continues to remain below the industry average. For 2017, the global industry average was 13.3 per cent.
We cannot avoid the fact that some of our employees will move on but we can avoid a skills shortage by appropriately managing, recognising and rewarding our people. Voluntary employee turnover is a measure of how successful Spirent is in its strategy of retaining and investing in its people.
Free cash flow is a measure of the quality of Spirent's earnings. The aim is to achieve a high conversion of earnings into cash.
Free cash flow in 2017 benefited from the operating profit result and a strong working capital performance. Free cash flow conversion for 2017 was 122 per cent of adjusted earnings (2016 80 per cent).
Having strong free cash flow reflects Spirent's ability to generate funds for future investment. It gives us financial strength and flexibility and the ability to pay sustainable dividends to our shareholders.