Synectics Regulatory News (SNX)

Synectics plc

("the Company" or "the Group")

Trading Update and Board Changes

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, provides the following update on trading and certain Board changes.

Synectics has been experiencing continued delays both in the award of large expected contracts and from the extension by customers of delivery periods for contracts already won. These issues are primarily affecting the Oil & Gas market sector. In particular, the major oil and gas companies and their prime contractors have progressed energy development projects globally more slowly in the second half of 2014 than originally planned by them, and therefore the timing of demand for sub-systems such as those supplied by Synectics has been disrupted. Until recent months Synectics' sales into projects in this sector, characterised by long gestation periods and a high degree of revenue visibility, were delivered consistently in line with management's plans. This historical record of consistency led to a degree of confidence in forecasts for Oil & Gas sector revenues in the current year that in the event has been unjustified.

The Company believes that these most recent delays and market disruptions in the Oil & Gas sector are a result of a combination of falling global energy prices, a worsening of the political situation in the Middle East and reduced confidence in long term investment planning in the sector generally.

In addition, trading in the Group's UK security integration activities in the fourth quarter of FY 2014 is now likely to be below the Board's previous expectations. This shortfall is also mainly due to the lengthening of procurement cycles for larger projects, in this case mostly within the UK public sector.

As a result of these negative impacts, Synectics now anticipates that underlying profit for the second half of the financial year ending 30 November 2014 will be significantly below market expectations of £5.0 million, though still positive. The Company therefore expects to incur an underlying loss for the full financial year, though smaller than that already reported for the first half. The Board will not be recommending payment of a final dividend for the year.

Although the customer-imposed delays on existing contracts have resulted in continuing high working capital requirements, the Group continues to trade within its banking facilities.

Over the five years from 2009 to 2013 Synectics grew its underlying profits from £1.5 million to £7.1 million, a compound growth rate of 47% per year, and in the process established itself as an important player with unique technology offerings in several attractive high end sectors of the global electronic surveillance market. To enable Synectics to service and manage further growth, the Group made significant investments in facilities, people and new products during 2013 and early 2014. This increased cost base has exacerbated the impact on the Group's profits of reduced current revenues.

The Board believes that the Group's strategy remains wholly valid and that further growth will resume soon in the areas currently affected by the factors referred to above. There is absolute clarity on what Synectics does and high confidence in the growing success of our core software-based surveillance systems, an important new generation of which was recently released. Nevertheless, the results now expected for 2014 are unacceptable and action is therefore being taken to re-align the Group's cost base with current revenue levels. This action will result in restructuring costs of an estimated £750,000 to be incurred or provided within the current financial year.

Outside of the Oil & Gas and UK Public Sector markets, trading in other market sectors remains positive. Sales in the global gaming surveillance sector, where Synectics has established a market leadership position, remain buoyant. The exceptionally large and complex system installed in 2013 for a Far East customer continues to perform well, generating significant ongoing support income. Further expansions to this system are anticipated in 2015. An initial contract has been won in Macau, the world's largest gaming centre, and Synectics has established a presence there to service further anticipated expansion of this contract and other business in that state.

An important initial sale of the new Synergy 3 command and control software platform has been made by Synectics' German subsidiary for the regional control centre for all stations in the North Bavaria rail system, again with major expansion opportunities to other regions. Other early sales of Synergy 3 include a North Sea oil complex, a large casino in North America that has upgraded from our previous technology, and a commercial banking customer in the UK.

Initial outline budgets for the 2015 financial year suggest that trading in the Oil & Gas sector will be somewhat stronger in the first half compared with the current year, though not back to more normal levels until the second half. Results in the UK integration activities will be much improved on 2014. Paradoxically, the buoyant gaming sector of Synectics' systems business is likely to have a much weaker than normal first half in 2015, followed by a strong second half, with the timing of these results dictated by the schedules of our Far East customers. Though not absolutely certain, there is a good degree of visibility of future likely orders within the gaming sector.

From these business sector budgets, the Board's current expectations for consolidated underlying results in the year ending 30 November 2015 are for a small loss in the first half, but a return to solid profits in the second half and for the year as a whole.

Chief Executive John Shepherd, who has recently turned 60, will retire during the first half of the Company's 2015 financial year and the Board will implement its existing senior executive succession plans. At that time, Paul Webb will be appointed Group Chief Executive. Mr Webb, aged 48, will be appointed a Director of the Company as soon as formalities are completed.

Mr Webb is currently Managing Director of Synectics' Systems Division. He joined the Group in 2004. Since that time he has overseen the rapid growth of the Group's industrial systems activities and, more latterly, the consolidation of all of Synectics' proprietary technology systems activities into a single operation. He has deep experience of the core areas of Synectics' technology that are the focus of the Group's future growth. Over the next few months, the Board and John Shepherd will ensure an orderly and well-supported transition of the CEO role to Paul.

David Coghlan, Chairman of Synectics, commented:

"In the Board's view, and I'm sure that of other shareholders, a third profits warning in a year for Synectics is unacceptable, even after five years of solid profits growth. Some of the factors behind this poor performance have been outside the Company's control, but others were not. Action is being taken to ensure future profitability is not dependent on the timing of revenue recovery in certain sectors. Despite this, Synectics remains a fundamentally strong and confident business.

"John Shepherd has led the management of the Group through a period of considerable success since his arrival in 2008 and will be leaving Synectics well positioned for future growth. I am very grateful for all his good work over that time. Paul Webb will be a worthy replacement and I look forward to working with him in his new role."

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