Chief Executive's Review
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Chief Executive's Overview
A CHALLENGING YEAR BEHIND US
– BACK ON TRACK AGAIN DURING
THE SECOND HALF
Getting back on track during the second half of the year was our highest priority so as to demonstrate that the business was fundamentally strong and could recover quickly from an isolated failure. We were always confident that the project setback happened in isolation. We resolved it swiftly and delivered a strong performance across all parts of the business during the second half of the year.
Having conducted a thorough review of project controls we concluded that they were both appropriate and operating effectively. However, we have implemented enhanced risk-management procedures during the sales process to ensure that potential exposures in the future can be identified and mitigated at an early stage.
DUE TO LONG-TERM CUSTOMER
The Board is confident of the underlying strength of SCISYS – first and foremost because of our long-term customer relationships, which remain the solid foundation of our business across all divisions. Major wins from our long-term clients across our divisions have demonstrated the resilience in our business model.
The business delivered a very solid performance during the second half of the year, which further substantiates the earlier signs of recovery. Revenues and divisional contribution were up on the second half of 2014, even by double-digit percentages at constant currency.
Most positively we have been able to build a very healthy year-end order book, which is 23% better than the previous year, particularly because of major wins by our Enterprise Solutions & Defence and our Space divisions.
Enterprise Solutions & Defence (ESD)
The significant issues around the single failed project overshadowed the strong underlying performance of the division. The divisional contribution has been impacted massively and is down to £1.7m (2014: £3.2m). Revenues fell to £12.2m (2014: £13.5m) mainly because resources were committed to working on the problem project and could not therefore be utilised on other profit-making opportunities.
During the second half of the year many of the long-term sales efforts of ESD – particularly in the defence, security and maritime sectors – came to fruition and added significantly to the division’s profile and track record in this area.
A major contract was won under the Imagery Exploitation Programme (IEP), providing improved situational awareness and analysis for enhanced intelligence-gathering capabilities across the nation’s armed forces, further positioning ESD as an expert in command & control solutions and smart integration.
The team won a multi-year research programme with the Defence Science and Technology Laboratory (DSTL) to investigate an optimised future operations room in support of the Maritime Air Defence Command, further substantiating SCISYS’ reputation as a specialist solution provider in the maritime sector.
Another multi-million pound project was secured with the UK Ministry of Defence (MoD) to deliver software and services to support defence supply-chain operations and movements for the design and delivery of the Customs Compliance Management Information System (CCMIS) application and the provision of on-going hosting and support services. This is further proof of SCISYS’ expertise in providing sophisticated business systems.
A large framework contract has been agreed in the security sector that started to bear fruit late in 2015.
Media & Broadcast
For 2015 we expected the Media & Broadcast (M&B) division to perform below its results in 2014 because of the anticipated adverse timing of larger project opportunities. For the first half of 2015 we had to report a revenue drop of £0.9m compared with the first half of 2014 at constant currency (£1.3m at the actual exchange rate).
The division turned round the decline during the second half of the year. At constant currency full-year revenues were down £0.7m on 2014 (actual exchange rate: £1.7m). During this period the division again delivered a healthy margin of 32% with a contribution of £2.0m (constant currency: £2.2m).
The division has continued its efforts to establish growth potential. Sales activities progressed with the existing client base and with potential customers in Germany, the UK and internationally. The awarding of the second exclusive large-scale framework by the BBC was a major step in securing future revenues from its UK-based activities.
The scope of SCISYS’ dira! product was extended further particularly around mobile computing capabilities and multimedia-based functionality. Feedback from domestic and international customers confirms that our product is evolving in the right direction. The Radio Digital Archive (RDA) project won under the BBC framework agreement partly relies on these new technologies and provides on-line search and retrieval functionality for archived content to journalists so that it can be re-used quickly and easily in future programmes.
Our Space division performed resiliently, ending the year with £4.0m contribution at constant currency, in line with 2014. However the division suffered the most from the anticipated adverse euro/pound exchange rate, with revenues at £16.4m (2014: £18.6m) and divisional contribution at £3.3m (2014: £4.0m). Almost all of our Space revenues are euro denominated so the impact on divisional contribution was even bigger in proportion because operating costs for UK-based operations are borne in pounds. Only parts of the downside were recovered by the currency-hedging contracts that we had in place.
SCISYS’ ongoing involvement in long-term programmes remains the foundation of its fundamentally strong performance. Examples include the European satellite-navigation system Galileo, where our Space division takes responsibility for a large proportion of the ground-segment software, as well as the European Space Agency (ESA) and its rover mission to Mars, where SCISYS experts are in charge of developing the rover visual localisation flight software, to name just a couple. As in the past decades, operations-support activities for ESA’s Space Operations Centre in Darmstadt (Germany) have added a robust revenue stream.
SCISYS recently secured another multi-year project worth more than €5m under a programme of the European Union to maintain and enhance the Galileo Ground Mission Segment (GMS), which is the heart of the Galileo satellite-navigation system. Working closely with our long-term partner Thales Alenia Space France, this project is testament to the sustainability of the business going forward.
At the same time, the division is pursuing a variety of initiatives that in the future are meant to complement its traditional revenue streams. The proprietary PLENITER product suite will serve the commercial space market better, and SCISYS’ expertise in earth observation and robotics and autonomy will be taken to adjacent sectors.
We acquired Xibis as our fourth division late in 2014, with revenues in the range of £1m. During the first half of the year the founders decided to leave the company to pursue their non-business interests. We were able to replace the management from within the Xibis team but this change still had an impact on the performance during the first half, which delivered revenues of just £0.4m, accompanied by a small loss during the period.
In the second half of the year the new management team stabilised the business and returned the financial performance to planned levels, securing landmark contracts with new customers and working successfully with our ESD division to win joint projects.
RECRUITING FOR FUTURE
Our employees remain core to our future business success. During 2015 we saw a healthy growth in team size in our British and German operations and we have been able to attract talented graduates as well as experienced team members across the business. I am pleased to report that recruitment continues and we will focus on further improving SCISYS’ reputation as a good place to work.
STRENGTHENING OUR POSITION
AS A NICHE SPECIALIST
During the year our sales teams successfully generated an order book which is more than 20% ahead of its value at the end of 2014. We saw encouraging major wins during the second half of 2015 and we expect significant opportunities to materialise during the first half of 2016 across all our divisions; some of which have already materialised.
Our main strategic objectives remain largely unchanged: growing revenues, profit and operating margin are the focal areas for the medium-term future. Further strengthening our position as niche specialists in the respective sectors addressed by our largely autonomous divisions is one central means to improve our market position. Our recent successes particularly in the defence & security sector show that this approach is bearing fruit.
Other growth initiatives still aim at extending the sales regions beyond current boundaries and exploiting existing capabilities in adjacent sub-sectors, based on our own product offerings wherever possible. We are reasonably optimistic of converting some of these future opportunities into tangible business in 2016.
We will continue to monitor currency fluctuations and potential deferrals as imminent risks to our organic growth projections. At the same time we will complement our organic growth strategy by pursuing opportunities for further acquisitions, carefully considering market price and cultural fit.
Our team across the SCISYS group, our shareholders, customers and other stakeholders have firmly supported SCISYS during tough times in 2015. My sincere thanks go to all of them. For 2016 we are increasingly confident of performing in line with current market guidance. We expect to take benefit from the recovery and re-strengthened position by the end of 2015, which will help to progress our growth strategy further.