SSY.L Regulatory News (SSY)

21 March 2013

SCISYS PLC

(SSY: AIM)

Preliminary Results for the year ended 31 December 2012

SCISYS PLC ("SCISYS", "the Group" or "the Company"), the supplier of bespoke software systems, IT based solutions and support services to the Media & Broadcast, Space, Government & Defence, and Environment sectors, is pleased to announce its Preliminary Results for the 12 months ended 31 December 2012.

FINANCIAL HIGHLIGHTS  

·; Adjusted operating profit[1] increased by 13% to £2.7m (2011: £2.4m) with adjusted operating margin[2] up to 7% (2011: 6%);

·; Adjusted earnings per share up to 7.1p (2011: 6.8p);

·; Total revenue down by 7% to £39.5m (2011: £42.3m) due to reduction in low margin resale activity and foreign exchange movements;

·; Professional fees revenue of £35.6m (2011: £36.9m), being in line with 2011 in constant currency terms;

·; Net cash as at 31 December 2012 at £1.2m (2011: neutral);

·; Annual dividend increased to 1.32p (2011: 1.21p) (subject to shareholder approval at the AGM).

OPERATIONAL HIGHLIGHTS  

·; Acquisition of earnings enhancing MakaluMedia Internet and Engineering Services GmbH, adding further capacity, reputation and customers to the SCISYS space business;

·; Successful completion of the UK digital television switch over project in time for the Olympics. SCISYS has supplied the monitoring and control system to Arqiva, including equipment in some 1500 transmission sites;

·; Assisted in the launch of Navigation (Galileo for the European Space Agency), Communications (Eutelsat) and Meteorology satellites (MSG and Metop for Eumetsat) as well as working on operations for satellites already in orbit;

·; BBC: The framework contract continues to deliver further SCISYS dira! radio playout and production systems, notably to the new West1 complex. The BBC successfully trialled a dira! cloud approach to delivering local radio at a fraction of the capital cost of onsite deployment. Known as ViLoR, it won the technical innovation award at the 2012 Radio Academy Festival;

·; Operational use of the Coal Authority Inferis mapping and reporting system that is used in 25% of all house purchases in the UK. The system won the AGI Innovation and Achievement in Central Government award from the Association of Geographical Information;

·; Following the purchase of the head office building in 2011, rental income from tenants using unoccupied areas was received in 2012.

Commenting on the results, Mike Love, Chairman of SCISYS PLC said:

"Although the UK public sector market remains constrained, there is some reason to believe that new opportunities are returning in this market. This, along with the strength of the Group's order book and good pipeline of new opportunities that the Group has in its other markets, gives the Board confidence in meeting market expectations for 2013."

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About SCISYS PLC

Employing nearly 440 staff, SCISYS is a leading developer of Information and Communications Technology services, e-Business and advanced technology solutions. The Company operates in a broad spectrum of market sectors including Media Broadcast, Space, Government & Defence, Environment and Applications Management sectors. SCISYS clients are predominantly blue chip and public sector organizations. Customers include Environment Agency, the Ministry of Defence, Astrium, Arqiva, Cable & Wireless Worldwide, the European Space Agency, Eumetsat, the BBC, RNLI, National Trust and Transport for London. The Company has UK offices in Chippenham, Bristol and Reading and three offices located in Germany. More information is available at www.scisys.co.uk.

EXTRACT FROM CHAIRMAN'S STATEMENT

Overview

I am pleased to report that SCISYS is continuing to make good progress towards the strategic goals that it set itself for the current five year period. The diversity of our business has allowed us to deliver a solid and sustained recovery from the period of loss making in 2008 despite difficult trading conditions. These conditions had a marked impact on our Environment division during 2012 but we are at last seeing some early signs of recovery in the markets served by this division. Our Government & Defence and Media Broadcast divisions performed well during the year. Our Application Management and Space divisions had a reasonable year and made solid progress. Overall the Group performed creditably and I would like to thank all those involved.

Key financials

In the year ended 31 December 2012 SCISYS posted overall revenues of £39.5m which were marginally down on last year (2011: £42.3m) due to a reduction in low margin resale activity and foreign exchange movements as reported in the last interim report. Within this figure professional fees were slightly lower at £35.6m (2011: £36.9m). Against this drop SCISYS has delivered an increased adjusted operating profit before tax of £2.7m, a 13% improvement on 2011. Operating Profit remains at £2m. Adjusted basic earnings per share was up to 7.1p (2011:6.8p) while basic earnings per shares was 5.7p (2011:6.1p). Cash inflows have remained healthy and the Company's balance sheet has further strengthened such that there was a net cash position of £1.2m at the year end. At 7% our adjusted operating margin showed further improvement on the margin achieved in 2011 (2011: 6%). Our target date to achieve this was projected to be by year end 2013 so we are pleased to be ahead of schedule. The Finance Director's report provides more detail on the key financial results achieved during 2012.

Dividend

The Directors are proposing a final dividend of 0.92p per share subject to approval by shareholders at the Annual General Meeting to be held on 23 May 2013. When added to the interim dividend of 0.40p per share paid in November 2012 this gives a full year dividend of 1.32p per share. The proposed final dividend will be paid on 11 July 2013 to shareholders on the register at 14 June 2013. The shares will go ex-dividend on 12 June 2013. SCISYS is pleased to continue demonstrating its commitment to a progressive dividend policy.

Changes to the PLC Board

In the middle of the year Ulrich Reimers resigned as a Non-Executive Director. In July 2012 Klaus Meng became an Executive Director taking on the role of Chief Mergers and Acquisitions Officer as well as maintaining his role as Chairman of the Management Board of SCISYS Deutschland GmbH. At the end of the year we announced the appointment of David Coghlan as the new independent Non-Executive Director. His wealth of experience as a chairman and director on the boards of several companies in the UK and US will be very valuable to the rest of the Board.

Outlook

Although the UK public sector market remains constrained, there is some reason to believe that new opportunities are returning in this market. This, along with the strength of the Group's order book and good pipeline of new opportunities that the Group has in its other markets, gives the Board confidence in meeting market expectations for 2013.

The Board's strategy remains to increase shareholder value through operational efficiency improvements, organic growth and through increased acquisition activity. The success of this approach can be clearly seen through the acquisition of MakaluMedia, the improvement in the Operating Margin and our step to buy back our headquarters building in Chippenham, which dramatically reduces our office cost and enables us to derive further revenue through lease agreements on excess space.

We have made a positive start to the year and with further progress expected during 2013 anticipate that our next five year strategic plan due to start in 2014 will be based on solid foundations.

Dr Mike Love

Chairman

EXTRACT FROM CHIEF EXECUTIVE'S STATEMENT

The Group has once again achieved an increase in profitability and has improved the net cash position such that we can proactively consider further acquisitions. This is impressive given the persistent market conditions.

The acquisition of the space market focussed German company MakaluMedia is the most significant event from a shareholder point of view - a direct example of our stated acquisition strategy, further strengthening SCISYS as a "Pan European ICT company".

In terms of the individual business units, our Government & Defence division had an excellent year, and along with our Media Broadcast solutions division, both have counterbalanced the Environment division that is beginning to see the effects of rebuilding as signalled in previous reports. Performance in the Application Management and Space divisions remains solid.

2012 has seen new offerings developed and customers secured, for example the National Trust and the Forestry Commission, as well as those associated with the MakaluMedia acquisition, such as Eutelsat.

We have achieved these results by maintaining focus on the following key areas:

Maintaining strong relationships throughout the supply chain

SCISYS provides premium value ICT services. The improvement in margins in 2012 reflects our strategic approach to focussing on such services. Premium value is found at the core of customer's needs; in services and solutions that are critical to the business meeting its goals and remits. Successfully providing such services requires openness and trust between supplier and customer. It is no accident that 77% of the SCISYS business comes from customers we have had a relationship with for more than 5 years. These mutually respectful relationships are important throughout the entire supply chain with partners, primes, our staff and suppliers who are all fundamental to our continued success:

Some good examples of delivery at the core of our customer's needs in 2012 include:

·; Arqiva: Successful completion of the UK digital television switch over project in time for the Olympics. SCISYS has supplied the monitoring and control system. The final area to switch over was London, where SCISYS Directors were invited to the Crystal Palace switch over event on April 18th;

·; European Galileo satellite navigation system: Including satellite launch support from UK and Germany, and on time deliveries into the mission and ground control segments;

·; Coal Authority Inferis System: Operational use of this complex mapping and geospatial reporting system that is used in 25% of all house purchases in the UK. The Inferis system won the Innovation and Achievement in Central Government award from the Association of Geographical Information;

·; BBC: The framework contract continues to deliver further dira! radio playout and production systems, notably to the new Salford and West1 complexes. Dira! is supporting all of the BBC national radio channels, local radio in Manchester with London on the way, Radio News and World Service. The BBC successfully trialled dira! at local radio station BBC Radio Northampton, using a unique cloud based approach to delivering local radio at a fraction of the capital cost of onsite deployment. Known as ViLoR (Virtualised Local Radio), it won the technical innovation award at the 2012 Radio Academy Festival;

·; European Space: SCISYS Group staff assisted in the launch of Navigation (Galileo for ESA), Communications (Eutelsat) and Meterology satellites (Meteosat Second Generation - MSG and MetOp for Eumetsat) as well as working on operations for satellites already in orbit;

·; Lockheed Martin: SCISYS continues to work closely with this partner; elements of the Future Deployable Geospatial Intelligence programme for the UK Ministry of Defence passed factory acceptance in December 2012 as well as work commencing on the early elements of the Warrior armoured fighting vehicle transformation programme.

2012 also saw significant contract wins, extensions and renewals, securing the flow of revenue into 2013 and beyond, including:

·; Procurement of the "glass cockpit" systems for the second and third vessel in the RNLI Shannon class lifeboat which was recently shown on the BBC's Blue Peter programme;

·; Expansion of the use of our dira! radio playout and archive solutions in Iceland, Sharjah (United Arab Emirates), and in Germany (Norddeutscher Rundfunk - NDR, Westdeutscher Rundfunk - WDR, Mitteldeutscher Rundfunk - MDR and DeutschlandRadio);

·; Project wins for ESA to develop new ways to save spacecraft fuel and change how ground segments are organised;

·; Successful entry into the ESA European Geostationary Navigation Overlay Service (EGNOS) navigation programme and the German national space missions H2Sat and DEOS, the first staff on site supporting the Galileo programme at DLR (the German Space Agency);

·; First pieces of work for the National Trust, Forestry Commission and Environment Agency Wales;

·; New business win at the Environment Agency for Equal, which aims to demonstrate to businesses various methods to evaluate waste-derived products for re-use. The Environment Agency is the lead partner, working with six other partners across the UK and Europe;

·; Selection to be admitted on the latest UK Government G Cloud store for a number of diverse business categories;

·; Contract win in the Camden London Borough Council priming partners from IBM and Entity;

·; Continued work with the Met Office including work on space weather, aviation planning and de-icing service systems.

Managing and Mitigating Risk

Working at the core of customers' business needs offers high value but also has a higher risk profile than providing commoditised and repeatable services, so an important focus in managing SCISYS continues to be the identification, monitoring and mitigation of risk. Some of the key methods we have used to manage and balance risk in 2012 are:

·; Breadth of market and longevity of programmes: Our wide market reach from space to local government continues to reduce exposure to any specific market downturns, many of the programmes we work on have base lines of more than three years with committed funding; for example, the European satellite navigation programme, Galileo, or the Warrior armoured fighting vehicle improvement programme;

·; Balance of business models: We continue to offer alternative models of contractual engagement with our customers. This means adapting our traditional contractual relationships of time and materials (T&M) and fixed price models methods of engagement to include licence fee and other IPR based models as well as long term recurring models based on managed service and maintenance work. This flexibility lends itself to the emerging, more modern, "agile" methods of developing ICT solutions and services and our offerings which are based on the volume of usage of a particular on-line "cloud" service. This year has seen further significant expansion of our offering in T&M engineering services, as well as strengthening our presence through onsite contractors with our space clients in Darmstadt. The acquisition of MakaluMedia will further strengthen this is 2013;

·; Geography: Our balance of work between Germany and the UK reduces exposure to Eurozone issues, including foreign exchange risk, and allows us to exploit the political basis for funding of contracts in the space market;

·; Focus on internal processes: In late 2012 we installed a new project planning and forecasting system that further improves project planning and management information by giving us consistent metrics and a coherent approach to planning across the entire Group.

Adapting to market changes:  The way ICT services are developed, delivered and procured continues to change at pace, especially in the government market. "Agile" methods of development, often based on managed services rather than capital expenditure, and run using external computing resources, "the cloud", are forming the basis of cross government procurement instruments. Agile and cloud are not new to SCISYS, and we are closely following these developments, adapting to changes - for example we are continually developing services on the UK Government's "Cloud store". We must continue to adapt our offerings to be available and visible via these new procurement methods and vehicles for our current and prospective customers.

The economic situation has also changed the focus, tone and pace of procurement in Government, with procurement rather than operational staff under pressure to reduce costs, leading to protracted negotiations and costly cancellations. The environment continues to be a low priority for the Government and the focus on improving regulatory systems has slowed.

Summary of 2012

In summary, 2012 has been a successful year for SCISYS as we continue to deliver on the strategy that has seen our recovery from the difficult trading position of 2007/8 and these continually challenging times. As we come to the end of our current five year strategic plan we believe that the SCISYS business demonstrates the desired strengths in terms of focus, management control and governance, and we look forward to playing a part in setting and delivering on the next strategic period.

Delivering on future potential

We are pleased that SCISYS starts 2013 on a strong footing with an encouraging pipeline of prospects across the business. We continue to adapt the business to the immediate issues presented to us by market changes and customer feedback.

Recently, the term innovation has been linked with smaller companies (SME's), especially in the UK. Innovation is alive and well in larger companies, and it is essential for SCISYS to continue to provide premium value services. We are committed to further developing existing successful premium value niche offerings and to bringing new ones to market. We do this by building on experience and solutions that we develop within funded R&D programmes, for example for the European Space Agency, or directly for customers and making them flexible enough to apply to other customers or domains. We call this "low risk innovation". For instance, the innovative Coal Authority solution, Inferis, is now being considered by other UK businesses outside of government and is attracting interest from coal management bodies internationally.

As a team we have a proven track record of delivering for our clients, even when external conditions are tough. This builds our confidence that 2013 will be another successful year for SCISYS, its customers and its shareholders. We will continue our proactive focus to develop the business by extending into new high value niches, and using our improved cash position to make complementary bolt-on acquisitions which add to our strength and drive both top-line and margins.

David Jones

Chief Executive

EXTRACT FROM FINANCE DIRECTOR'S REPORT

I am pleased to report that SCISYS followed a strong first half year trading performance with an even better second half, resulting in further improvements in profitability and net cash generation compared with 2011. Operating margins rose for the fifth successive annual reporting period and have reached the strategic target level set by the Board in 2009 with a year to spare. The acquisition of MakaluMedia Internet & Engineering Services GmbH in October 2012 was a further highlight.

It is particularly satisfying that profit growth has been maintained despite top line expansion proving challenging during the year. However, although total revenues fell 7% to £39.5m (2011: £42.3m), the majority of the reduction was in the relatively low margin resale of third party hardware, software products and sub-contracted services. Whilst the more strategically important fees derived from professional services delivered directly by the Group were 4% lower at £35.6m (2011: £36.9m), professional fees revenue was unchanged when measured at a constant Euro-Sterling exchange rate.

The underlying measure of trading performance, Adjusted Operating Profit, which excludes costs of the Group's long term share incentive schemes, exceptional costs and the amortisation of intangible assets arising on business acquisition, rose 13% to £2.7m (2011: £2.4m). The Adjusted Operating Profit margin improved to 7% (2011: 6%), attaining the Board's declared objective of achieving 7% by 2013 a year ahead of target.

Statutory operating profit was unchanged at £2.2m (2011: £2.2m). Charges for share based payments arising from SCISYS' share incentive schemes totalled less than £0.1m (2011: £0.1m). The exceptional costs of £0.3m comprise legal and professional fees of £0.1m associated with the MakaluMedia acquisition together with restructuring expenses of £0.2m (2011: £0.1m) incurred in aligning future operating costs with anticipated income. The amortisation charge relating to intangible assets arising on the acquisition of MakaluMedia was minimal in 2012 but will amount to £0.3m in 2013.

Although professional fees revenue fell overall, aggregate contribution from divisions improved by £0.1m (1%) from 2011. However, this apparently balanced picture masks a variety of fortunes at the individual divisional level, emphasising SCISYS' resilience in delivering respectable bottom line growth despite variable market conditions.

The Government & Defence division's significant growth in both fee income and operating margin was the cornerstone of the Group's financial results and compensated for weaker figures elsewhere. Margins also rose in the Media & Broadcast division where an increase in Euro-denominated contribution on flat fee income converted to a Sterling reduction on translation. After withstanding paralysis in public sector spending and reporting a small contribution in 2011, the Environment division repeated the performance in 2012 whilst diversifying its customer base and developing its pipeline of new business prospects. Fee income in the Applications Management division mirrored the prior year's but margins were squeezed in a competitive market. The Space division also suffered a decline in margins, accompanied by professional fees revenue which grew 4% in Euros but shrank in Sterling terms.

Adjusted basic EPS, calculated on the profit for the year before exceptional charges, share based payments and amortisation of acquisition-related intangible assets was up 4% at 7.1p (2011: 6.8p). This result was pleasing as figures for 2011 were favourably distorted by two years' worth of UK tax credits being accounted for in one period. Basic EPS was 5.7p (2011: 6.1p).

100% of the share capital of MakaluMedia was acquired on 31 October 2012 by the Group's German trading subsidiary, SCISYS Deutschland GmbH. The initial purchase price of €2.3m (£1.9m) was subject to adjustment based on the subsequently confirmed completion net asset position. Retrospective adjustments to the MakaluMedia balance sheet lifted the eventual consideration payable by €0.6m to €2.9m (£2.3m) though this increase was reflected in an increased level of assets that were receivable by SCISYS (in cash) shortly after completion and prior to the additional consideration being paid. In effect, therefore, the net cash outlay for the acquisition was unchanged at €1.8m (£1.5m). In the two months post-acquisition, MakaluMedia contributed £0.4m to Group revenues and £0.1m to Group operating profits. 2013 will benefit from a full year's contribution of MakaluMedia.

Whilst the acquisition funding initially came from existing Group cash resources, SCISYS DE took advantage of an attractive German bank lending market to replenish its deposit account with €2.0m (£1.6m) of unsecured debt at a fixed interest rate of less than 2% p.a. over a four to five year repayment term. Earlier in the year a five year term loan of £0.3m at 2.5% p.a. was taken out to fund energy efficiency improvements to the Group's Bochum office.

Despite the outlays for the acquisition and property upgrade work in Germany, the Group's liquidity status improved from an opening neutral net cash/debt position to £1.2m of net cash by the year end. The Group closed the year with bank deposits (comprising cash and cash equivalents less overdrafts) of £6.7m (2011: £3.7m). Unutilised working capital facilities totalled £2.6m (2011: £1.7m). Group debt excluding bank overdrafts was £5.5m (2011: £3.7m).

Sales to the Euro zone comprised 46% of SCISYS' revenues and the foreign exchange markets in 2012 were turbulent. Although the Euro-Sterling spot rate opened the year at €1.19/£ and closed it at €1.22/£, the rate averaged above €1.23/£ during the period and peaked at €1.28/£. SCISYS benefits from a natural currency hedge as Sterling revenues received in Germany from the BBC offset Euro denominated income from Space division customers of the UK. The Group accesses the currency derivatives market to protect the balance of surplus Euro cash receipts against exposure to exchange losses.

2012 saw continued focus on the cost efficiency of operations to maintain overheads in proportion to anticipated revenues. Following the 2011 purchase of its Chippenham headquarters building, SCISYS has further exploited the opportunity to reduce net property costs by letting out surplus office space. Two commercial tenants are now in occupation for lease periods of five and ten years.

The effective Group tax rate for the year was 19%. The rate is maintained at a low level because, whilst corporation tax is payable at over 30% in Germany, UK operations qualify for Research & Development tax credits which result in the Group receiving a cash rebate from HM Revenue & Customs. The comparable Group tax rate in 2011 was only 12% but this was artificially depressed as rebates received covered a two year period.

The Group's pipeline of orders as it enters 2013 is, including MakaluMedia, consistent with the previous year and gives the Board a high degree of confidence in its prospects for the year.

Chris Cheetham

Finance Director

Consolidated Income Statement for the year ended 31 December 2012

Consolidated Statement of Comprehensive Income for the year ended 31 December 2012

Consolidated Statement of Changes in Equity

Consolidated Statement of Changes in Equity (continued)

Consolidated Statement of Financial Position as at 31 December 2012

Consolidated Statement of Cash Flows for the year ended 31 December 2012

Annual report

The financial information set out in this preliminary announcement does not constitute SCISYS' statutory accounts for the years ended 31 December 2012 and 31 December 2011. Statutory accounts for the year ended 31 December 2012 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. Statutory accounts for the year ended 31 December 2011 have been delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) of the Companies Act 2006. This preliminary announcement has been prepared and approved by the Directors in accordance with International Financial Reporting Standards (IFRS) and its interpretations as adopted by the International Accounting Standards Board (IASB) and by the EU (Adopted IFRS).