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LOOKING BACK -
A CHALLENGING YEAR
Our interim report was released in September 2015 against the backcloth of SCISYS having advised investors in the previous June that it was experiencing difficulties in one major fixed price development project in its Enterprise Solutions & Defence (ESD) division. We made provisions at that juncture for the anticipated additional costs to complete the project and issued revised market guidance for the then anticipated full year’s trading performance. We also advised that while our markets remained tough, good opportunities existed and we were confident not only of having bottomed-out the problems with this ESD project but also of winning several new projects in the second half of 2015.
As we enter 2016 I am pleased to report that the judgements made in June 2015 were soundly based. The issues with the problem project have been fully resolved and concluded in a manner satisfactory to both the Company and the customer. During the second half of the year we started seeing a healthy recovery in trading with a number of significant contract wins announced at the end of 2015. Our opening year order book stood at £37.2m (2014: £30.3m). This is very healthy and the pipeline of prospects remains encouraging, which bodes well for a sustained recovery.
The trading position that we are now seeing is a testament to many individuals within and outside the Company. The Board is to be credited with scoping the depth of the problem and taking robust action in conjunction with the customer to resolve the outstanding issues. The divisional directors and the executive directors worked hard to keep the project team focused and motivated and the team itself stuck to the task at hand. Our bankers and external shareholders remained supportive during the delicate resolution of this project. My thanks go to all.
There is an underlying resilience in the SCISYS business model. During this period, trading in the Space and Media & Broadcast (M&B) divisions progressed in line with plans measured in constant currency terms; the strength of sterling against the euro however took the shine off the underlying strength of their performance. This had a negative impact on consolidated top line growth and the translation of profits denominated in euros.
2015 saw the first full year of trading for Xibis within the Group: Xibis was acquired in December 2014. Despite the founder Directors leaving the business shortly after acquisition, ahead of their anticipated departure dates, the business performed close to plan and looks well set for profitable growth in 2016. We continue to seek out other acquisition opportunities.
Overall the positive trading in Space and M&B did not compensate for the cost of resolving the problem project within ESD and our results for the full year have suffered accordingly.
Key financials reflect the challenges
In the year ended 31 December 2015 SCISYS posted overall revenues of £36.1m, which were down 11% on last year (2014: £40.4m). Within this figure professional fees were 8% lower at £29.8m (2014: £32.5m). The Group delivered an operating profit of £0.8m, a 75% reduction on the £3.2m in 2014. Basic earnings per share were 1.3p (2014: 7.7p). Cash inflows remained comfortable but cash outflows were higher than in 2014. The Group’s net debt position was £1.0m at the year-end (2014: £0.3m net cash). At 2.2% (2014: 7.9%), our operating margin fell back reflecting the project challenges. The Finance Director’s report provides more detail on the key financial results achieved during 2015.
We appreciate that the dividend is one of the important considerations for investors when acquiring or deciding to continue to hold shares in SCISYS. We nevertheless suspended the interim dividend while assessing the extent of the financial challenge associated with the project problems. We are pleased now however to confirm that the Directors are reinstating dividend payments and are proposing a final dividend of 1.78p per share subject to approval by shareholders at the Annual General Meeting to be held on 9 June 2016. The proposed final dividend will be paid on 15 July 2016 to shareholders on the register at 17 June 2016. The shares will go ex-dividend on 16 June 2016. SCISYS is pleased to continue demonstrating its commitment to a progressive dividend policy.
Governance matching our needs
We believe in robust corporate governance. We have established strong governance frameworks throughout the Group. SCISYS is compliant with the UK Corporate Governance Code where appropriate for a company of its size. Our risk management procedures have been reviewed and tightened as a result of the problem project.
Our people are the key to our success
As always our thanks go to all of our staff within the divisions. Their hard work and ability to deliver the business solutions that our customers need, within tight budgets and timescales, is the key factor to the on-going relationships that SCISYS enjoys with its many and varied long standing customers. Our thanks also goes to all our staff within the Group’s central functions, who provide essential services and valued support to the divisions and who have made an important contribution to these results.
LOOKING TO THE FUTURE
Strategy focused on revenue growth and margin improvement
Notwithstanding the challenges of 2015 and an exceptional set of results which do not do SCISYS justice in respect of its current run rate or its prospects, the key elements of the Group’s strategy remain unchanged. We continue to focus on revenue growth, margin improvement, management and control of risk and succession planning.
Our order book at the beginning of 2016 is substantially ahead of where it was at the start of 2015 and we continue to see a number of good opportunities both in the UK and on mainland Europe that we are confident that we can convert into contract wins.
Organic growth continues to prove more difficult to achieve than anticipated when we set out our long term goals. Nevertheless we remain focused on maximising opportunities in our existing markets and targeting sales of our intellectual property in adjacent markets.
We also continue to look to grow through acquisition, whether as bolt-on acquisitions to our existing businesses or, like Xibis, as new members of the Group.
The business foundations are firm – our year-end cash position is healthy, the balance sheet is strong and the Group’s robust and focused organisation keeps senior managers close to its operations.
We are seeing an encouraging start to 2016 and anticipate a healthy first half. However, the volatile sterling/euro exchange rate remains a factor and may dilute overall performance. Nevertheless we currently anticipate that we will return to the levels of profit and margin that investors have experienced in the recent past.
Dr. Mike Love,