Chief Executive's Review

SCISYS ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

 

Chief Executive’s Review

 

2017: a step change for SCISYS towards its medium-term strategic objectives

In last year’s report I expressed my confidence based on the progress achieved in 2016 that we would be able to continue our sustainable, resilient and balanced growth in 2017.

I am delighted to confirm that we have ended the period with record revenues of £57.2m (up 25%), an adjusted operating profit of £4.6m (up 44%) and adjusted operating margin of 8%. This is a step change in our performance and it brings us closer to our medium-term objectives of £60m in revenues and a double-digit margin. Two major elements have contributed to this improved performance:

• Annova, the Munich-based newsroom solutions specialist, has contributed its first full year to the Group’s results.

• The other divisions have contributed a very healthy 9% organic revenue growth during 2017, based on a strong second half year, which is in line with our expectations expressed in September 2017.

Across all of our divisions we have seen major new contract wins, which in aggregate have lifted our order book to more than £91.3m – another record achieved in 2017. The sales success story was epitomised late in 2017 by the notable win by our Space division, which secured a contract worth €18m to deliver the complete ground-control infrastructure for the German Heinrich Hertz mission.

Of this total order book value, £36.5m is for delivery in 2018. This underpins our optimistic outlook for the year ahead and strongly reinforces the confidence that our medium-term objectives are within reach.

 

Enterprise Solutions & Defence (ESD)

The ESD division delivered a strong second half, with its contribution up by 35% and revenues up by 9% on the first six months and thus making up for a slower first half. The division achieved robust overall results that were just short of its excellent accomplishment in 2016. It delivered full-year revenues of £16.5m and a contribution of £4.2m, equating to a margin of 25% for the division.

ESD has spent significant effort during the year preparing for further growth, including recruiting additional sales effort and new staff. These initiatives have begun bearing fruit, with the order intake exceeding £8m during the fourth quarter of 2017. 

To maximise its potential for future growth the division has started to reorganise its internal structure to serve three focal units targeting specific sectors: Defence, Security and Maritime; Government and Emergency Services; and Commercial.

All three business units have benefited from their respective healthy mix of recurring revenues and repeat business based on long-standing customer relationships, as well as new business wins in established or adjacent application domains. Contract types across ESD range from fixed-price contracts, managed budget contracts and time & materials-based contracts. During 2017, the division experienced a move towards a larger proportion of time & materials-based contracts (60%, compared with 47% in 2016), frequently delivering services at customer sites. This trend is expected to continue as clients increasingly move towards an agile project methodology.

Activities in the Defence, Security and Maritime unit were dominated by ongoing projects for electronic architectures for vehicles and vessels, bespoke development of business systems and long-term on-site time & materials contracts in the intelligence sector. In all of these realms, new opportunities evolved during the year through both new and established customer relationships. Some of these occurred in late 2017, including: an extension of a research programme for the Royal Navy’s Maritime Air Defence Command; a new strategic project in the maritime defence area; and a newly established engagement with another major prime contractor for a large defence software and electronics programme.

The Government and Emergency Services business unit continued its frequently recurring long-term business with customers such as London’s Metropolitan Police (the Met), The Coal Authority and the Environment Agency. Testament to these proven relationships, the Met awarded one of seven places on its Solution Provider Framework to our ESD division. In addition, the unit extended its reach by winning initial contracts with Defra, Public Health England and both parts of the newly re-organised Forestry Commission.

The Commercial business unit is well established and maintains a core of blue-chip clients, including Vodafone, UK Power Networks, Siemens, Arqiva and Transport for London. During 2017 the unit renewed its focus on the transport and logistics sector. This saw a significant increase in its business with Siemens and the team secured initial contracts with Angel Trains and Govia Thameslink Railway.

For some of these activities, ESD has benefited from joining forces with Xibis, a separate SCISYS PLC subsidiary based in Leicester, as illustrated by the joint delivery of an award-winning charting app to Imray.

On the technology and innovation front, significant effort has gone into reusable software platforms, including MACSYS for maritime applications and Cartosys for OpenGIS-based solutions. The sales team has positioned ESD on major framework contracts, which boosts the division’s opportunities going forward. Divisional management and their growing teams are settling into the new structure providing well-grounded optimism for 2018 and beyond.

 

Media & Broadcast (M&B)

In 2017 our M&B division once again delivered a strong performance, with revenues of £8.7m (up 9%) and a contribution of £2.6m (up 4%). With a margin of 30%, its more product-biased business model delivers a level of profitability ahead of the Group average. Much of the success was secured during an impressive upturn in the second half year, which was predicted and in line with the outlook given in our interim results (revenues and contribution up 46% and 162% respectively on the first half year, with margin up to 37% from 21%).

During 2017 the M&B division relied on its strong recurring revenues from maintenance contracts and repeat business from its long-established customer base in Germany and the UK. This provided a sound foundation for its strong performance.

In line with its growth objectives, the division also focused on opportunities in new territories. This led to an initial win for a radio pilot project with the Malaysian public broadcaster RTM. The ongoing project with the South African Broadcasting Corporation (SABC) successfully concluded the proof-of-concept phase and moved into deployment despite experiencing some delays to roll-out due to organisational changes at SABC later in the year. The M&B division won its first client in France with commercial broadcaster RTL. This contract was signed in April and the first programme, RTL Fun Radio, successfully went live in November, followed swiftly by RTL2.

The M&B team has worked to position the division for the medium-term future by further advancing its product innovation. The recent cloud-based products dira! More and dira! Scotty both went live in customer environments in 2017. dira! Medox is a cloud-friendly, SaaS-ready multimedia asset management solution. It was first presented to the public at the IBC convention in Amsterdam in September 2017 as the first member of the next major product generation called dira! Dimension, with positive feedback.

The joining of forces with Annova has started to bear fruit. At the BBC, the software integration of Annova’s OpenMedia installation and dira! is underway. The German broadcaster MDR, which chose OpenMedia in August 2017 and has been a M&B customer since 1995, bought additional dira! licences late in the year ahead of the planned tight integration of both systems. Annova’s relationship with the RTL group goes back over 10 years – as an OpenMedia customer – and RTL is now operating both SCISYS products after an order for dira!.

The M&B division is settling in at its new premises in Dortmund and has built a strong starting position for 2018. It is preparing for future success by making the investments needed to maintain its leading product offering and to prepare and exploit further synergies with Annova.

 

Annova

2017 is the first year of Annova’s contribution to the Group’s results. Its overall performance has been robust and closely aligned with our expectations at the time of its acquisition, although this did not reach the levels anticipated by the vendors’ forecasts on which a significant proportion of contingent consideration was dependent. As a result the deferred consideration expected to be paid for Annova has reduced from €3.9m to €2.0m.

In June, Annova secured its first contract in North America with Corus Entertainment, which is Canada’s largest media-content company. Corus is using Annova’s OpenMedia newsroom product for its extensive Global News operation. The initial project phase successfully concluded in November and subsequent deliveries of this multi-year, multi-phase programme are already being discussed with the customer.

In August, Annova met an important commercial milestone in its flagship project with the BBC by concluding the implementation phase of the project and starting the subsequent transition phase. By the end of the year, OpenMedia was deployed in the BBC’s major news operations centres in Salford and the West Midlands.

Also in August, German public broadcaster MDR joined Annova’s customer portfolio as a new OpenMedia client when it signed a multi-million contract to, over time, replace the existing newsroom system across its entire operation. It is worth reiterating that MDR has been a key dira! customer of our M&B division since 1995.

Annova’s innovative new NewsBoard product for editorial cross-media planning – complementing OpenMedia – was successfully sold to ARD-Aktuell, the national news programme of the influential German public broadcaster ARD. This project win was particularly important because it positions NewsBoard as a bellwether system for other public broadcasters. The German public broadcaster Radio Bremen became a new customer for Annova and its OpenMedia product in late 2017, adding to the impressive list of important new contracts that it managed to secure during the year.

Measures have been taken to continuously improve Annova’s internal disciplines and governance regime in accordance with the demanding internal standards at SCISYS. This process will continue in 2018 and beyond.

Initial steps have been taken to bring Annova and M&B closer together. This involves cooperation on a regular basis between respective divisional management as well as day-to-day synergies, such as cross-selling and co-selling activities, joint trade shows, product and innovation as well as product delivery and support.

The divisions will gradually intensify these joint activities. This will complement Annova’s growth initiatives, which centre on continued product innovation and an even stronger focus on securing new international business. Overall, Annova’s outlook looks very strong, with revenues from secured orders and recurring revenues from ongoing maintenance contracts amounting to three quarters of its 2018 revenue target.

 

Space

Our Space division has delivered a truly stellar performance in 2017. Revenues grew year-on-year by 18% to £23.5m and the contribution grew by 17% to £4.9m. The division’s order book more than doubled to £34.1m compared to the previous year. This is due in large part to the €18m contract win with OHB for the German Heinrich Hertz mission (see page 14).

A variety of additional elements have also contributed to the division’s outstanding performance. Ongoing projects with institutional European space customers delivered results ahead of 2017 expectations in different application domains, including:

• Scientific missions such as the European ExoMars mission to Mars. On this programme, SCISYS is responsible for the rover vehicle visual localisation flight software and the ExoMars Mission Management System software, which controls the numerous instruments on board the rover and manages the rover’s operations on the ground. SCISYS is a subcontractor to Airbus Defence and Space and Thales (Italy) on these projects, respectively, which have an aggregate value of €5.4m.

• Earth-observation missions. In one example, SCISYS has a €3.3m contract with Airbus to deliver central software and hardware for the Payload Operations Centre for the French–German climate satellite mission, MERLIN. Secondly, SCISYS signed a €1.9m contract with GMV (Spain) early in 2017 to deliver the mission-control system for the second generation of EUMETSAT’s Polar System.

The recurring revenues from EU-funded Galileo projects and from the operations-support business to the European Space Agency have delivered strong results during the year. This accomplishment is particularly impressive because it was made in the climate of Brexit uncertainty surrounding EU-funded Space programmes.

SCISYS is, and will continue to be, a pan European group and as noted in the Chairman’s Statement, the Board is exploring a wide range of Brexit contingency plans. Participating conditions apply to certain EU-funded work, such as the Galileo satellite-navigation programme, which require that the participant be EU based (and that the ultimate controlling company of any participant be an EU-based company) or require appropriate waivers to be obtained, for it to participate in the programme. While we could plan our Galileo activities to be carried out by our German subsidiary, which clearly satisfies the requirement of being an EU based company, SCISYS PLC, which is the ultimate holding company, will not automatically satisfy this test upon Brexit taking effect.

Detailed contingency plans are being prepared to affect a group restructure, so that the ultimate parent company of the SCISYS Group is re-domiciled and based in the EU following Brexit. The overarching objective of these plans is to protect shareholder value. The conclusion of the current negotiations between the UK Government and the EU in respect of the Brexit transition arrangements is expected to be known by late summer 2018. At that juncture the Board, if necessary to protect its continued participation in the Galileo programme, will seek the necessary formal shareholder resolution(s) for the group restructure, as part of this restructuring procedure. It has every confidence that all necessary approvals will be forthcoming and thereby eliminate any risk to its continued participation in EU-funded programmes. The Board also intends to arrange early shareholder consultation and seek support for pursuing this strategy ahead of the SCISYS AGM in June 2018. Other options that are being actively considered include obtaining appropriate waivers and security ring-fencing arrangements.

The above well-established revenue streams were complemented by further new business wins, as the growth initiatives pursued by the Space division increasingly bears fruit.

Based on our proprietary PLENITER software suite for the planning, implementation, control and operation of complete satellite missions, the division has secured an €18m contract with OHB System AG to deliver the ground station control and communications infrastructure for the German national satellite-communications mission, Heinrich Hertz. This is significant because it positions SCISYS as the sole supplier of a complete ground segment for a satellite mission and this raises our profile further as a supplier of related technologies.  

The division’s initiatives into the commercial, so-called “New Space”, sub-sector progressed well, as evidenced by the continuation of a PLENITER-based project with US-based WorldVu Satellites LLP (trading as OneWeb). Late in 2017, SCISYS added to this momentum with a contract from Sky and Space Global UK to deliver a simulator for its Pearls Constellation mission. This mission will operate approximately 200 autonomous communication nanosatellites in carefully selected orbits by 2020, giving equatorial coverage of the Earth to create an affordable global communication network and deliver voice, data and instant messaging to more than 3 billion people who are currently without mobile coverage.

The Space team has grown by 32 staff to a total of 200 at year’s end. The successes of 2017 mean that the division is well positioned for sustained organic growth in the medium term.

 

Xibis

Xibis, our SCISYS PLC subsidiary for mobile apps and website development based in Leicester with a 17-strong team, has performed broadly in line with expectations, often working in collaboration with the ESD division. With effect from 1 January 2018, Xibis will be reported as a business unit within the ESD division rather than as a stand-alone entity.

On track for further growth

At SCISYS we believe in the opportunities for innovative software systems to benefit our customers’ operations. We are dedicated to achieving our customers’ goals by creating and delivering quality software solutions. Our overarching commitment is to run a resilient, well balanced business that promotes sustained commercial success.

Our strategy has always been to invest in innovation and acquisition for long-term growth. The 2017 financial year has delivered in this respect and facilitated a step change in financial performance that provides a platform for SCISYS’ continued success.

We have strengthened our position in established niches and have moved into adjacent markets on the back of our expert know-how, versatile skills and our commitment to innovation. Our sales people have opened up new territories and started to explore new sectors. We are continuously investing in our proprietary products and reusable software platforms.

Integration between Annova and M&B has already brought immediate successes. For 2018 we expect that Annova will benefit from the major contract wins secured during the second half of 2017 and will increasingly meet SCISYS’ high internal process and governance standards. As the integration activities continue we are confident that additional synergies will evolve and strengthen SCISYS’ profile further in the growing segment of system automation and control solutions for the media and broadcast industry.

SCISYS is a people business and much of our success is attributable to our exceptional team. A significant number of both highly talented graduates and more experienced staff have recently been welcomed into the fold. During 2017, our staff headcount grew by 28% across the Group -- 8% across the UK, 16% in Germany (not including Annova) and 52% including Annova.

It is a fundamental strength of our business that we maintain an emphasis on our core corporate values of mutual trust, respect and openness. This is hugely important for fostering and evolving our corporate culture in line with our values, as well as for our strategic objectives as the business continues to grow. This applies equally to the envisaged integration of Annova, on which we will keep working during 2018. We are pleased that the sound cultural fit with SCISYS that we were expecting at the outset of 2017 has proved correct.

 

Solid foundation and firm trajectory

Our record order book of £91.3m, in combination with a strong and growing stream of recurring revenues, is testimony to the robustness of our business model. We anticipate that organic revenue growth will continue in 2018 and beyond. Progressing from this solid foundation, we will take all required measures – including additional central requirements (e.g. for cyber security and business continuity) – to ensure the high level of sustainability that we owe our shareholders, customers and staff.

 

Once again my sincere thanks go to our shareholders, our customers, our management, staff and all other stakeholders, who have strongly supported SCISYS in 2017. The Group has continued to make excellent progress during the year and we are confident in our ability to deliver further progress in 2018: expanding the business in a sustainable, resilient, balanced way for the benefit of our shareholders, customers and staff. l

 

Klaus M. Heidrich

Chief Executive