Business Strategy & Model

SCISYS ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

 

Business Strategy
& Model

 

At SCISYS, we strive to create premium value for our customers based on our excellence in a variety of niche markets. We have demonstrated this fundamental capability for more than three decades, flexibly responding to the ever-changing market demands in a fast-moving software industry with our well-balanced portfolio of solutions, services and products.

Based on this foundation, we continue to aspire to grow our commercial success in a balanced and resilient way, providing systems and services that form an indispensable part of our customers’ value generation, helping us to establish and maintain long-term relationships.

Trusted relationships with all our stakeholders are essential to progress our vision. Honesty, transparency and respect are the core of our corporate values. Our corporate culture focuses on commitment and flexibility and we strongly rely on our excellent staff, who help us innovate in line with customer and market needs, frequently as thought leaders.

 

OUR BUSINESS MODEL

Our value proposition

The depth and breadth of our knowledge and experience ensures that customers with complex issues can rely on us. That is often why they come to us. Our business model shows how we seek to deliver sustainable value to our shareholders by achieving top-line sales, profit and margin growth. Viewed from the perspective of staff, healthy growth delivers career opportunities and the upholding of SCISYS’ values and culture. For customers, this inspires confidence in the long-term prospects of the Group.

SCISYS combines and applies leading-edge knowledge and technology to solve complex problems by delivering reliable, robust solutions. In many cases, this requires a deep understanding of the wider context of how the software is being operated and the expert ability to connect it to the real world. This is a valuable capability that generates important know-how that we can exploit in similar or other fields. We believe our markets have scope for continued growth and that our skills and products will continue to be valued in them.

Our projects are usually critical to our customers’ operational success so our record of strong delivery performance is important to them. Value is achieved because the vast majority of our client relationships are long-term and on-going. All of these factors result in an ability to  win contracts when bidding against larger companies.

 

Key markets, segments & relationships

The market-facing divisions within the SCISYS Group drive their businesses with a high degree of autonomy, positioning themselves as experts and recognised thought leaders in their respective markets. Each one of our divisions focuses on a variety of vertical markets, in which they have been active for many years. They therefore excel using their specialised, in-depth sector-specific domain knowledge and their proven technical and programmatic capabilities.

The majority of our customers in any of these sectors are blue-chip organisations. Many of them are in the public sector, such as the European Space Agency, major public broadcasters and Government ministries and institutions, although work with commercial customers is increasing.

Long-term relationships with our customers and business partners are fundamental to our business, and we manage to maintain these relationships over many years, if not decades. We engage with business partners on various levels. Large system integrators act as our prime contractors, particularly in the space and defence sectors where they rely on us as a specialised subcontractor. Wherever needed, we complement our own capabilities by involving specialist subcontractors, premium suppliers of standard hardware and software products and reputed research institutes. Local agents also support our sales team in certain international markets.

Our diversity is what gives us a high level of resilience against changing market trends and we also benefit from sharing divisional expertise internally to innovate with customers. Please refer to pages 21 to 28 for a more detailed description of the focal markets that SCISYS currently serves.

 

Our revenue streams & outcomes

Our activities span the entire software lifecycle: engaging with customers leads to innovative concepts that we translate into high-quality, robust software solutions. We integrate these solutions on a system level in the customer’s environment, where they typically become part of the customer’s core infrastructure. In addition we frequently maintain and support - and even operate - systems for our customers.

As a consequence, the revenue streams for each of our divisions range from fixed-price projects to time & material-based services, as well as multi-year maintenance and support contracts. We increasingly add licence and royalty-based revenues as we progressively create portfolios of re-usable software that allow us to employ our solutions in similar environments or in adjacent markets.

All of our divisions generate a large proportion of recurring revenues that add to the underlying strength and reliability of our business and provide us with a solid basis for future revenue, profit and margin growth.

Being a successful business that excels at generating value for our customers makes us attractive for highly qualified staff, which in turn supports our objective to develop and retain a team that can deliver excellence.

 

Key resources, activities and partners

Our key resources are a team of approximately 500 highly qualified staff, working in 6 offices across the UK and Germany. This committed team provide us with in-depth domain knowledge and superior technical expertise. We achieve this by working to keep and recruit highly motivated, talented and skilled employees.

Strong financial resources complement our team’s excellence. We benefit from our strong balance sheet, a number of substantial freehold properties, long-term relationships with our financial partners and our robust working capital facilities.

 

Re-invest for growth

Our objective is to grow the business on a steady basis. We therefore continue to re-invest in the areas that we see are the main drivers for our business success. We constantly develop our sales team to establish new and to foster existing customer relationships and to expand into untapped regions. Permanent technical innovation, including the development of proprietary software and regular staff development, allows us to maintain our reputation as leading-edge technology experts. We invest in acquisitions to complement our organic growth aspiration; always thoroughly assessing the business benefit and cultural fit.

 

OUR BUSINESS MODEL

Our value proposition

The depth and breadth of our knowledge and experience ensures that customers with complex issues can rely on us. Our business model shows how we seek to deliver sustainable value to our shareholders by achieving top-line sales, profit and margin growth. Viewed from the perspective of staff, healthy growth delivers career opportunities and the upholding of SCISYS’ values and culture. For customers, this inspires confidence in the long-term prospects of the Group.

SCISYS’ solutions empower leading organisations and agencies to achieve their business goals. We combine and apply leading-edge knowledge and technology to solve complex problems by delivering reliable, robust solutions. In many cases, this requires a deep understanding of the wider context of how the software is being operated and the expert ability to connect it to the real world. This is a valuable capability that generates important know-how that we can exploit in similar or other fields. We believe our markets have scope for continued growth and that our skills and products will continue to be valued in them.

Our projects are usually critical to our customers’ operational success so our impeccable record of delivery performance is important to them. Value is achieved because the vast majority of our client relationships are long-term and on-going. All of these factors result in an ability to win contracts when bidding against larger companies.

 

Key markets, segments & relationships

The market-facing divisions within the SCISYS Group drive their businesses with a high degree of autonomy, positioning themselves as experts and recognised thought leaders in their respective markets. Each one of our divisions focuses on a variety of vertical markets, in which they have been active for many years. They excel using their specialised, in-depth sector-specific domain knowledge and their proven technical and programmatic capabilities.

The majority of our customers across all sectors are blue-chip organisations. Many of them are in the public sector, such as the European Space Agency, major public broadcasters, non-government institutions and government departments, although the balance of work with commercial customers is increasing.

Long-term relationships with our customers and business partners are fundamental to our business, and we strive to maintain these relationships over many years, if not decades. Frequently and increasingly we work directly for the end customer but we also engage with business partners on various levels. Large system integrators act as our prime contractors when we work as a sub-contractor, particularly in the space and defence sectors. Wherever needed, we complement our own capabilities by involving specialists, premium suppliers of standard hardware and software products and reputed research institutes. Local agents also support our sales team in certain international markets.

Our diversity is what gives us a high level of resilience against changing market trends and we also benefit from sharing divisional expertise internally to innovate with customers.

 

Our revenue streams & outcomes

Our activities span the entire software lifecycle: engaging with customers leads to innovative concepts that we translate into high-quality, robust software solutions. We integrate these solutions on a system level in the customer’s environment, where they typically become part of the customer’s core infrastructure. In addition we frequently maintain and support – and even operate – systems on behalf of our customers using Cloud and other infrastructure providers.

As a consequence, the revenue streams for each of our divisions range from fixed-price contracts to time & material-based services, as well as multi-year maintenance and support contracts. In general – and particularly with Annova now being part of the Group – we increasingly add licence and royalty-based revenues as we progressively create portfolios of reusable software that allow us to employ our solutions in similar environments or in adjacent markets.

All of our divisions generate a large proportion of recurring revenues that add to the underlying strength and reliability of our business and provide us with a solid basis for future revenue, profit and margin growth.

Being a successful business that excels at generating value for our customers makes us attractive for highly qualified staff, which in turn supports our objective to develop and retain a team that can deliver excellence.

 

Key resources, activities and partners

Our key resource is a team of more than 580 highly qualified staff, working in 7 major offices across the UK and Germany. This committed team provide us with in-depth domain knowledge and superior technical expertise. We achieve this by working to keep and recruit highly motivated, talented and skilled employees. Strong financial resources complement our team’s excellence. We benefit from our strong balance sheet, a number of substantial freehold properties, long-term relationships with our financial partners and our robust working capital facilities.

Re-invest for growth

Our objective is to grow the business on a steady basis. We therefore continue to re-invest in the areas that we see are the main drivers for our business success. We constantly develop our sales team to establish new and to foster existing customer relationships and to expand into untapped regions. Permanent technical innovation, including the development of proprietary software and regular staff development, allows us to maintain our reputation as leading-edge technology experts. We invest in acquisitions to complement our organic growth aspiration; always thoroughly assessing the business benefit and cultural fit.

 

STRATEGIC OBJECTIVES &
KEY PERFORMANCE INDICATORS

Balanced evolution, sustainable growth

Our strategic objective is to grow our business in terms of revenues, operating profit and operating margin so that we deliver sustainable long-term value to our shareholders, our customers and to our entire team. This is done in line with corporate values that are reflected in the SCISYS culture of being committed, honest, customer-focused, respectful and supportive to all of our stakeholders.

The divisions continuously broaden their pipelines of prospective clients, building on the positive reputation gained with existing clients and seeking to extend their business development and sales activities to new territories. They are also moving into adjacent areas by evolving the range of their services and products.

Our strategy for growing SCISYS also incorporates identifying acquisitions that help us to accelerate progress. We continue to select opportunities carefully and aim to acquire companies that expand our customer base, geographical reach or add unique expertise – and, most importantly, are a good cultural fit to ensure successful integration.

 

Progress in 2017

The key objective in 2017 for the Board was to grow the business on a year-on-year basis compared with the strong recovery made during 2016, and reflecting the acquisition of Munich-based ANNOVA Systems GmbH (Annova), which completed on 31 December 2016. Total revenue grew by 25% and the adjusted operating profit was up 44%, compared with 2016.

Taking market expectations  as a guideline these targets were overachieved by 6% for revenue and 2% for adjusted EBITA.

In addition to the year-on-year comparative, the performance delivered in 2017 shows compound growth rates of 7% for revenue and 10% for adjusted EBITA over a 4-year term starting in 2013, compared with 4% and 5% respectively for the period 2012–2016. The results include the step change from the Annova acquisition. The directly comparable compound growth rates on an organic basis are 4% for revenue and 6% for adjusted EBITA.

This highlights the success of our strategic approach of balanced evolution and underpins sustainable growth in a demanding business environment.

As for our overall financial performance, we have been able to make very good progress against our strategic priorities for 2017 across all of our divisions.

Our year-end order-book position has reached a record high for the second consecutive year. It benefited from the Heinrich Hertz contract which added €18m to the order book for the Space division, and was bolstered by Annova’s strong order book. The strength of the order book quantifies the progress we have made with respect to our medium-term aspirations.

We have taken action to implement the complex contract assessment process as mandated by the new IFRS 15 standard which becomes applicable from 1 January 2018. The way we implement this process in SCISYS adds to the continuous measures we take to harmonise contract review and risk management procedures across all divisions. (See pages 32 to 35).

Another priority was to improve utilisation of the Group’s property. We took the initiative to market the Chippenham property assets of the Group more effectively back in 2016 and currently have 3 tenants at Chippenham.

OBJECTIVES GOING FORWARD

In principle, our main strategic objectives for the medium-term remain largely unchanged. We will remain focused on our growth aspiration for operating profit, operating margin, revenues and also our earnings per share. With Annova being part of SCISYS from 2017 onwards, and the healthy growth we are seeing organically, we expect to benefit from the current momentum going forward.


Objective: increased margins
We aim to increase our operating margin to at least 10%.

Objective: top-line growth
We aim for revenues to grow to at least £60m.

Our strategic objectives of £60m revenues and double-digit operating margin in the medium term was reinstated last year. We are now increasingly confident the revenue objective is achievable within a couple of years. We also anticipate our operating profit will grow largely in line with our revenues but we expect to reach the operating margin threshold of 10% somewhat later than our revenue target.

Our expectation also includes a corresponding increase in SCISYS’ EPS. Based on our track record of sustainable cash generation we plan to maintain our progressive dividend strategy.

We note that, due to the nature of our business model, we may experience half-year on half-year or year-on-year variability to a degree and therefore use compound annual growth rates as a better measure of achievement. We also retain the concept of a set of baseline targets that is complemented by a set of more aspirational targets by which we may meet our objectives earlier than assumed for the baseline.

As stated in previous reports these targets can be impacted by exchange-rate movements that are beyond our control and also continued order intake deferrals. Also the transition to the new revenue recognition accounting standard IFRS 15 in 2018 will introduce a revised approach to revenue reporting. Accordingly the exact quantification and timing of targets may be subject to externally induced changes.

Although the acquisition of Annova will continue to attract a significant amount of the Board’s attention during the next years, growth through further acquisition remains a key element of our strategy. Again, the fundamental approach will not change: we will continue to look for opportunities that add value to the business by complementing our current activities.

 

Strategic priorities 2018

For 2018 the Board will be focused on a set of key measures that will help to progress our medium-term strategy:

• The integration of Annova into the SCISYS group so that synergies with our Media & Broadcast division and other parts of our business are explored early on, so that preparations are in place for the post ring-fencing era.

• Further growing the space business, particularly focusing on satellite navigation and a re-use of the newly established PLENITER product suite for satellite
ground-segment solutions.

• Further raising awareness for SCISYS’ expertise in the defence, security and maritime sector, and extending the footprint of our ESD division.

Building on the initiatives started in 2015 as a response to the issues that we experienced we will continue to optimise our risk-management processes so that the inherent business risks are managed. Continued focus will be spent to bring Annova up to speed with the high standards within the SCISYS group. This forms part of our continual improvement approach which also covers succession planning, corporate structure, regular process improvement with respect to cyber security and improved forecasting as focal areas.l