DRS DATA (DRS)

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These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

DRS DATA (DRS): Losing my vote - Jun 2007

RHPS Recommendation - SELL

DRS’s e-counting system was used in the Scottish elections. DRS has admitted to one technical failure in its counting process but cannot be held responsible for ballot papers that were incorrectly completed. Nonetheless, with local government officers hardly famous for accepting blame, DRS’s reputation may not come through this unscathed and in a project management business this matters. Meanwhile, rival RM Group has extended its e-marking contract with Cambridge Assessment for five

years, and has also reached an agreement to supply e-marking services to the Welsh Joint Examinations Committee. Furthermore, it has signed a managed service contract with DRS’s e-marking client, the Assessment and Qualifications Alliance (AQA), to

provide a range of computer-based test authoring, test delivery and test centre management services. This will allow AQA to increasingly make its GCSE and A Level qualifications available for students to take “on-screen” using an Internet-connected computer. These announcements do not affect DRS’s e-marker contract with AQA, but they do suggest that it is struggling to compete with its larger rivals in the new and technologically challenging world of electronic learning and examination marking. In its AGM statement DRS has said that its turnover this year will top £20m for the first time, but its strategic position seems to have weakened and its best hope now might be to sell out to a larger rival such as RM or Pearson. Whether the controlling Brighton family will see things this way is anyone’s guess, and I am not going to hold on in hope. We sold on 10 May. SELL.

DRS DATA (DRS): Promising Outlook for 2007 - Apr 2007

RHPS Recommendation - BUY

DRS has reported a small profit of £233,000 for 2006, but should do better in 2007 when its e-counting system will be used in the Scottish elections, which are featuring the single transferable vote. This year should also see higher revenues from DRS’s e-marker product and also from Peladon, which has reported a new sales contract with the Kent County Council. A new product, DRS IntelliReg, records pupil attendance at school by reading fingerprints.

DRS DATA (DRS): Big Breakthrough for e-Marker - Feb 2007

RHPS Recommendation - BUY

DRS is to provide the Assessment and Qualifications Alliance with its e-Marker® services for the next four years. DRS has invested a huge amount of time and money, not to mention its reputation, on eMarker so this is a major breakthrough. The contract has a potential value of £25m over the next 4 years, a highly significant sum in relation to DRS’s annual turnover of £12m-13m. This announcement came two days after DRS revealed that it made a small loss in the second half of 2006, attributed to a sales shortfall in its traditional data services division, which sells scanners and conducts elections and surveys. But last year’s acquisition, Peladon, is now in profit and DRS has also committed to paying a final dividend of 0.25p. DRS keeps a low profile, but the AQA deal should be a turning point.

DRS DATA (DRS): Strong interims - Oct 2006

RHPS Recommendation - HOLD

DRS resumed payment of its interim dividend after reporting an increase in first half turnover from £6.3m to £8.9m – despite the fact that revenue from the big AQA electronic marking contract will not be booked until the second half. New acquisition Peladon, which sells software that can read paper documents, has performed well and the product will now be sold to US financial institutions by distributor Sungard. After two or three years spent defining a new strategy, DRS now seems to be moving ahead.

DRS DATA (DRS): Marks nearly 4 million exam papers! - Sep 2006

RHPS Recommendation - BUY

DRS’s e-Marker® has been used to process 50% of this summer’s GCSE exam series. It was used by 6,400 examiners on just under four million scripts, compared to 4,200 examiners and 2.5 million scripts last year. And a number of e-Marker® modules were used throughout this summer’s examination marking project to collect a total of 65 million marks from student answers. The apparent success of the 2006 operation should pave the way for a further roll-out next year, meaning a profitable pay-back of DRS’s investment in its technology.

DRS DATA (DRS): e-Counting for Scotland - Aug 2006

RHPS Recommendation - BUY

The Scottish authorities have approved the use of electronic counting technology for next May’s Parliamentary and Local Authority elections. These will be based on the Single Transferable Vote and DRS will contribute specialised technology that can read and recognise both “X”-marked ballot papers and hand printed characters. The value of the business will depend upon how many of the 32 local authorities sign

up, but this is a breakthrough contract.

DRS DATA (DRS): e-Marker Wows Paris - Jul 2006

RHPS Recommendation - BUY

DRS’s e-Marker® technology has been successfully piloted by Parisian examining board “la maison des examens”, which administers exams for over 400,000 pupils and has 15,000 markers. 1,200 students from 80 schools sat an exam in this pilot project. The completed scripts were then electronically scanned, enabling them to be marked on-screen. This speeds up the process, eliminates the danger of scripta being lsot in  the post and enables examiners to mark papers on-screen at home. DRS arranged for the translation of its e-Marker® software into French and trained the examiners and markers. The scripts were scanned using DocXP software supplied by newly acquired subsidiary Peladon Software Limited. e-Marker® has also been trialled in Australia, so appears to have global potential. BUY

DRS DATA (DRS): Encouraging AGM statement - Jun 2006

RHPS Recommendation - HOLD

At its AGM DRS reported that the integration of newly acquired Peladon has gone well, and the first quarter of the year has seen the completion of the printing job for the Nigerian census and trials for the Scottish local elections. Turnover for the first quarter was £4m, and with the AQA examination marking contract likely to be worth around £4m, 2006 turnover should easily surpass last year’s £12.5m. Spending on the development of software remains high, but overall trading is ahead of the first half of last year.

DRS DATA (DRS): Promising signs for 2007 - May 2006

RHPS Recommendation - HOLD

The contract with examination board AQA for DRS’s e-Marker® product was worth £2m last year, and should be worth £4m this year and £6m in 2007. DRS is also working with the Welsh, Scottish and Northern Irish examinations bodies, and has been asked to conduct trials in Australia and France. The extra work for AQA this year should be enough to return software and services to profit, and there is clearly much further potential. The Print division made an operating profit of £795,000 on sales of £4.5m last year and although it has made a good start to 2006 with the help of the big Nigerian census contract, the outcome for the full year is hard to predict. The Scanning Equipment division made a £1.1m profit on sales of £3.7m last year. DRS’s Optical Mark Reader technology is being taken over by intelligent charate recognition (ICR), and the £2.75m acquisition on Peladon in January was partly to give DRS access to ICR. It also gave Peladon the financial backing that it needed to sell its software licenses into the US financial services market where, thanks to new Sarbanes-Oxley laws, there is a huge requirement to read and store all forms of communication.

DRS’s scanners are used in schools and to count election ballot papers. While it is still cheaper to count conventional elections manually. DRS’s scanners can handle single transferable voting, which is to be used in next year’s Scottish local elections. This could be a very significant contract for DRS. Profits are not easy to predict, but this year should be better than last, and 2007 could be a very strong year. HOLD.

DRS DATA (DRS): Expecting growth in 2006 - Apr 2006

RHPS Recommendation - BUY

In this transition year of 2005, DRS barely broke even on turnover that fell from £14.4m to £12.5m. Revenues were boosted by 2004’s £4m contract from the Greater London Authority election, too. But the prospects now look much brighter, and DRS’s e-Marker® product has been approved by more examination bodies than any competing product. It has just won its first business in Australia, and has good prospects also in Europe.

DRS is well placed to win work in May’s local elections, and in the GLA and London Mayoral elections in 2008. Having bought Peladon, a specialist in the electronic capture of data form paper sources, DRS is now looking for further acquisitions and to boost sales in the US market. Turnover should be comfortably higher this year, and I expect a much better level of profitability. BUY

DRS DATA (DRS): Mar 2006

RHPS Recommendation – HOLD

DRS has been chosen by the Scottish Executive and Scotland Office to trial and evaluate electronic counting technology ahead of elections in May 2007. The significance of this is that the election will for the first time include a Single Transferable Vote, which is complicated to count. DRS is also buying Peladon Corporation, which specialises in the automatic capture and processing of information form printed forms, for £2.7m. HOLD

DRS DATA (DRS): Acquires Peladon - Feb 2006

RHPS Recommendation – HOLD

DRS is paying £2.7m for Peladon Corporation, which specialises in the automatic capture and processing of information form printed forms. This is widely used in the financial industry for capturing the information from invoices or cheques. DRS will gain access to the US market, and it will be able to assist Peladon, which ahs a n office in Hampshire, to expand into the UK.

Meanwhile at the BETT Awards, which recognise innovation in education, DRS’s e-Marker® product was highly commended in the ‘Supporting School Management’ category. DRS has established an outline pricing agreement with its principal customer, the Assessment and Qualifications Alliance (AQA), which trialled e-Marker® last year and intends to use it more widely this summer. The major job to supply census forms for the Nigerian government will be completed this month, and trading in 2005 ‘was in line with market expectations’ – an obscure statement given the absence of any published broker forecasts. HOLD.

DRS DATA (DRS): New contract in Saudi Arabia - Jan 2006

RHPS Recommendation – BUY

DRS is to provide Optical Mark Reading technology to process multiple choice questionnaires for Saudi Arabia’s King Abdul Aziz University. DRS will be providing 10 of its CD360 OMR scanners; software written in Arabic is also to be part of the package. DRS has a low profile, but 2006 should be the year when it starts to make serious money from its e-Marker® product. BUY

DRS DATA (DRS):  And the winner is…- Dec 2005

RHPS Recommendation – BUY

DRS’s e-Marker® electronic examination marking solution has been nominated for an award at the BETT (Education) Awards 2006. Winners will be announced on 11 January 2006. e-Marker® faces only one rival in its category, so has a good chance of taking the prize. BUY

DRS DATA (2005): High hopes for e-Marker - Oct 2005

RHPS Recommendation – HOLD

DRS made a small loss in the first half. Continued development and spending and the uncertain timing of the Nigerian Census may prolong that into the second half. But excluding 2004’s £4m London Electroncis contract, turnover rose from £5.7m to £6.3m. DRS has won a £1.8m contract to supply forms for the 2005 European Development Fund census, and AQA intends to use e-Marker® for all exam papers by 2007. HOLD

DRS DATA (DRS): Drs scores 10/10 IN Summer Exams - Sep 2005

RHPS Recommendation – HOLD

DRS’s main customer, AQA (the Assessment and Qualifications Alliance), collected over 30m marks form more than 2.5m scripts this summer using DRS’s e-Marker® product. AQA described the operation, involving 6,000 examiners and markers, as ‘successful and ahead of the schedule for conventional marking’ and is now ‘looking forward to rolling out the new technology to all examiners.’ e-Marker® allows AQA to conduct enhanced checking and quality control, and security is also increased. For the markers, the process was much quicker, and electronic marking means that there were no instances of them adding up totals incorrectly. AQA said that e-Marker® has given a fivefold increase in the level on information available for the process of awarding grades, and has improved quality assurance. It plans to more than double use of this technology next year. HOLD

DRS DATA (DRS) - £3.8m of new business - Aug 2005

RHPS Recommendation – HOLD

No sooner had I recommended DRS last month than it announced a £1.8m contract to print census questionnaires for the forthcoming National Population Census in Nigeria. It also said that it will book its first significant revenues form its e-Marker® examination and assessment service this summer. This will be for £2m from the Assessment and Qualifications Alliance. The shares have jumped well ahead of my buy limit so, for the time being, HOLD.

DRS DATA (DRS) - Make double your money from the flight to e-marking and bar-coded vote counting - July 2005

RHPS Recommendation – BUY

Every year many millions of school kids, university students and professional workers around the world sit exams in a bid to better themselves. It may be degree-level maths, it may be GCE media studies textual analysis or it may be a Financial Services Authority financial planning certificate. Whatever – all the papers have to be marked.

That’s an awful a lot of ticks and crosses.

It’s also an awful lot of cash paid to the seasonal part-time exam markers who, according to a friend of mine whose prospective wife has just started doing it, can earn about £3 per paper. No wonder one of the three main exam boards has already started using sophisticated electronic marking technology to deal with a sizeable chunk of its workload – and why others are sure to follow.

A cash-rich company as yet unnoticed by the City

Today, I want to tell you all about DRS – one of the main players in the soon to explode business of e-marking. Two things about DRS have always attracted me and still do. The first is that it has always had a cash-rich balance sheet, and the second is that it is virtually unknown in the City. The former has always provided a secure base for the share price, and the latter means that if DRS can put together a winning streak, lots of fund managers will have the thrill of discovering it for the first time.

And I think that DRS is about to start that winning streak, although you would hardly come to that conclusion by reading recent announcements. DRS lost an important customer in 2003 and expects to report an interim loss this September. But you need to look further than that.

The key breakthrough that made DRS a serious investment opportunity

There are three main examination boards in this country. Oxford and Cambridge is one, and another is Edexcel, formerly a customer of DRS, but acquired by Pearson in 2003. The third, which sets and administers GCSE exams for three-quarters of a million students is the Assessment and Qualifications Alliance (‘AQA’).

DRS made a crucial breakthrough in 2003, when AQA chose it to develop e-marking, and since then it has also been chosen to conduct trials for the examination boards of Wales, Scotland and Ireland. There are several other smaller bodies setting professional exams, and in May DRS was appointed by the College of Law, which provides legal courses for post-graduates.

Last summer DRS undertook its first trials for AQA. Using its e-Marker® technology it electronically captured the marks from 150,000 GCSE scripts. Over 300 examiners marked the scripts at home, and then entered the marks directly into their PCs, and transmitted them straight into AQA’s processing system.

The trials were a success, and so this January DRS marked 30,000 scripts for the Foundation and Higher Modern French exam. The papers were scanned and where the answer was a single word or number, these were sent to a bureau (possibly abroad), where they were keyed into a computer, and returned to DRS. The answers – about one million of them – were then automatically marked by computer software.

More complicated answers were also transmitted electronically, but this time to expert markers, who were able to mark them from home. Everything ran smoothly, and as AQA’s chief examiner explained, “We are not dealing with any paperwork, we are not waiting for parcels to arrive and we do not have to go through all of the manual systems. Examiners simply go online where the scripts are waiting and start marking immediately.”

This summer AQA will mark 360,000 scripts in eight GCSE subjects this way. This, together with other electronically marked scripts totalling 2.75m, will represent about 30% of its total summer task, and it has said that it wants to mark 90% of its scripts this way by 2007.

For the Scottish Qualifications Agency (‘SQA’) –  which in 2000 suffered the catastrophe of delivering inaccurate or incomplete results to hundreds of candidates –  DRS will this summer design and print over 70,000 multiple choice papers. After being completed by the candidates these will be couriered back to DRS, where they will be scanned, and the results will then be transferred electronically back to SQA.

Breaking into the growing electronic vote counting market

Sales into the UK education sector have always been the core of DRS’s business. For many years it has supplied optical mark readers and the associated printed forms used by schools and colleges to record attendance. Shortly after DRS floated on the stock market in 1994, the Government cut school funding and forced DRS to develop its business elsewhere. With the need to feed data into computer programmes, its scanners have become much more sophisticated and this year DRS has announced sales of its new PS900 PhotoScribe Image Mark Reader to Mexico, China, and Taiwan, where they will be used to process 800,000 forms for the Taiwan University Entrance Examination.

But it is DRS’s reputation in another field that helped it gain a Queen’s Award for Enterprise in International Trade in 2002. Since completing its first voter registration project in Sierra Leone in 1996, DRS has counted the electoral vote in Hong Kong, Oman, and Bosnia Herzegovina. It has conducted a census in Zambia and an electoral registration in Mali, which involved the printing of 13 million registration forms, delivery to nine different centres, collection and scanning.

Back in this country DRS counted a total of 5.75m barcoded ballot papers in last year’s simultaneous election for the London Mayor, London Assembly

and European Parliament, a job which took two years to plan and required 300 scanners in 14 different counting centres.

This year DRS has worked on council elections in Argyll and Bute, distributing and counting 12,000 ballot papers. It hopes that this will lead to further work north of the border, especially as Scotland intends to introduce the Single Transferable Vote, which is notoriously difficult to count by hand, in 2007.

Now to the numbers, and these are not easy. No research analyst covers DRS, although this is likely to change later in the year after the appointment of broker KBC Peel Hunt. 2003’s loss of the Edexcel business removed about £2m of annual sales. The business is also ‘lumpy’ – the GLA elections accounted for £4m of last year’s total sales of £14.4m, and was all taken in the first half.

Buy now before the City catches on and drives the share price higher

Without this, turnover in the second half of 2004 was £4.68m, some way below the £5.45m of operating costs. But DRS spent £1.54m on research and development last year, a big step up from the £0.53m and £0.79m spent in 2002 and 2003 respectively. I expect to see 2005’s R&D spending at a similar level to 2004, but it should fall away thereafter.

Meanwhile DRS’s revenue will get a big boost from sales of the PS900 scanner and especially from e-Marker®. The AQA contract alone could be worth as much as £2m this year, and over £5m by 2007. So DRS should comfortably return to profit in 2006, by which time City investors will have caught on to the potential of e-marking and will be ready to give the shares a growth rating.

RHPS Verdict: Outside the glare of the City, and under the patient stewardship of the controlling Brighton family, DRS has been investing in the future. I expect that investment to pay off handsomely, so buy now to profit as this shows up in the share price. BUY.

To take advantage of the recommendations RHPS is making today, start your no obligation trial now!

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