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SCISYS PLC

(SSY: AIM)

Unaudited Preliminary Results for the year ended 31 December 2014

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 and Defence and Commercial sectors, is pleased to announce its unaudited Preliminary Results for the twelve months ended 31 December 2014.

FINANCIAL HIGHLIGHTS 

· Operating profit increased by 88% to £3.2m (2013: £1.7m);

· Adjusted operating profit1 increased by 6% to £3.4m (2013: £3.2m);

· Operating margin up to 7.9% (2013: 4.7%);

· Adjusted operating margin2 up to 8.3% (2013: 7.6%);

· Earnings per share increased to 7.7p (2013: 4.6p);

· Adjusted earnings per share3 at 8.2p (2013: 9.3p);

· Net cash as at 31 December 2014 was £0.3m (2013: £2.7m net debt);

· Proposed final dividend up 10% to 1.17p (2013: 1.06p) (subject to shareholder approval at the AGM).

OPERATIONAL HIGHLIGHTS

· Acquisition of Xibis Limited;

· Award of €2m contract by Airbus Space and Defence for SCISYS to deliver the rover vehicle visual localisation flight software (VISLOC) for the European Space Agency's 2018 mission to Mars;

· £3m three year extension of maintenance contract with a major UK public broadcaster;

· Award of contract with a part of Her Majesty's Passport Office, for the support and maintenance of its online registration recording system (RON);

· Extension of the €5m Flight Dynamics contract with the European Space Agency (ESA);

· Extension to the RNLI contract to supply the System and Information Management (SIMS) system on another 12 Shannon lifeboats;

· Award of €1.2m Harwell Robotics and Autonomy Facility (HRAF) contract by ESA;

· Total of €2m worth of new contracts with Norddeutscher Rundfunk (NDR).

For more information visit our website at www.scisys.co.uk

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

"Despite some challenges, we have delivered solid results in 2014. Our order book at the beginning of 2014 was £30m and remained consistent across the year. We continue to see a number of opportunities both in the UK and on mainland Europe which we are confident we can convert into contract wins. 2015 will also see the benefit of a full year's contribution from the recently acquired Xibis."

"Whilst we face headwinds during the current year in the form of the continued strength of Sterling and some concerns around public funding as we approach a General Election in the UK, we believe the continued margin improvement and the Group's cash performance to be indicative of a strong underlying business - the final dividend declared today bears out the Board's confidence in this. We currently project that the second half of the year will be stronger than the first and overall anticipate a flat 2015 compared to 2014. Nevertheless, our longer term strategic aims have not changed; our target remains to achieve double digit margins by the end of 2018 underpinned by top line growth. At this juncture, we see no need to revise these goals."

"SCISYS remains in a good position for the current financial year and beyond."

Investor Lunch Programme

SCISYS will be holding a series of Investor Lunches in London, Bristol, Birmingham and Leeds for Private Client Investment Managers and Private Investors. Those wishing to attend should contact Tom Cooper on tom.cooper@winningtons.co.uk or 020 3176 4722 for further details.

For further information please contact:

About SCISYS:

Employing nearly 450 staff, SCISYS group is a leading developer of Information and Communications Technology services, e-Business, web and mobile applications and advanced technology solutions. The Company operates in a broad spectrum of market sectors including Media & Broadcast, Space, Government and Defence and Commercial sectors. SCISYS clients are predominantly blue chip and public sector organizations. Customers include the Environment Agency, the Ministry of Defence, Airbus Defence & Space, Arqiva, Vodafone, the European Space Agency, Eumetsat, the BBC, RNLI, AON, Halfords, Interflora and the National Trust. The Company has UK offices in Chippenham, Bristol, Leicester and Reading and two offices located in Germany. More information is available at www.scisys.co.uk

CHAIRMAN'S STATEMENT

Looking back - a solid performance

I reported at the half year stage that the outlook for 2014 was solid and that we expected to achieve our expectations for the full year. I am pleased to confirm that we have delivered improved profits, although revenues were lower than we anticipated. It is particularly pleasing to report that our operating profit is now closely aligned to our adjusted operating profit, which is reflected in the improvement in cash generation across the year.

We delivered on expectations despite certain operational challenges which are explained more fully in the Chief Executive's overview.

The increased strength of Sterling against the Euro during the year has hit our top and bottom line results. Adverse movement in the exchange rate has diluted the Euro denominated contribution from our Media & Broadcast and Space divisions, particularly where costs incurred in the Space division's UK arm in Sterling were paid for by European customers in the weaker Euro. This is more fully explained in the Finance Director's report.

Notwithstanding these challenges, SCISYS delivered a creditable performance in 2014, with our Space and Media & Broadcast divisions exceeding target.

The acquisition of Xibis in December is another key component in delivering on our strategy. Xibis operates in new technology areas for us and we look forward to developing its offerings within our existing markets as well as enhancing its prospects in its current market sectors. It is early days in the integration of Xibis into the Group but so far it is bedding in well and already adding value to the Group. We continue to seek out similar acquisition opportunities.

Key financials demonstrate resilience

In the year ended 31 December 2014, SCISYS posted overall revenues of £40.4m, which were down 5% on last year (2013: £42.6m). Within this figure professional fees were at £32.5m (2013: £35.5m). The Group delivered an increased adjusted operating profit of £3.4m, a 6% improvement on 2013. Significantly, operating profit was much improved at £3.2m (2013: £1.7m). Adjusted basic earnings per share were lower at 8.2p (2013: 9.3p) due to a raised effective tax rate, while basic earnings per share were up to 7.7p (2013: 4.6p). The Group's net cash position was £0.3m at the year-end. At 8.3% (2013: 7.6%) our adjusted operating margin showed further improvement on the margin achieved in 2013. The Finance Director's report provides more detail on the key financial results achieved during 2014.

Progressive dividend policy maintained

We are pleased to confirm that the Directors are recommending a final dividend of 1.17p per share, subject to approval by shareholders at the Annual General Meeting to be held on 11 June 2015. When added to the interim dividend of 0.44p per share paid in November 2014, this gives a full year dividend of 1.61p per share, representing an increase of 10% for the year as a whole. The proposed final dividend will be paid on 9 July 2015 to shareholders on the register at 19 June 2015. The shares will go ex-dividend on 18 June 2015. SCISYS continues to demonstrate its commitment to a progressive dividend policy.

Strategic aims unchanged based on strong underlying business

Despite some challenges, we have delivered solid results in 2014. Our order book at the end of 2014 was £30m, consistent with the opening position. We continue to see a number ofopportunities, both in the UK and on mainland Europe that we are confident we can convert into contract wins. 2015 will also see the benefit of a full year's contribution from the recently acquired Xibis.

Organic growth is proving more difficult to achieve than we anticipated when we set out our 2018 year end goals. However, we are refocusing our efforts on maximising opportunities in our existing markets and targeting sales of our software solutions in adjacent markets.

We also continue to look to grow through acquisition and believe that there are good opportunities in the UK and Europe that would prosper under SCISYS ownership, whether as bolt-on acquisitions to our existing businesses or, like Xibis, as new members of the Group.

Our year-end cash position is healthy. The Group has a strong balance sheet and a robust and focused organisation that keeps senior managers close to its operations.

Whilst we face headwinds during the current year in the form of the continued strength of Sterling and some concerns around public funding as we approach a General Election in the UK, we believe the continued margin improvement and the Group's cash performance to be indicative of a strong underlying business - the final dividend declared today bears out the Board's confidence in this. We currently project that the second half of the year will be stronger than the first and overall anticipate a flat 2015 compared to 2014. Nevertheless, our longer term strategic aims have not changed; our target remains to achieve double digit margins by the end of 2018 underpinned by top line growth. At this juncture, we see no need to revise these goals.

SCISYS remains in a good position for the current financial year and beyond.

Dr. Mike Love

Chairman

Chief Executive's overview

Overview

Following a solid performance during the first half, the second half of 2014 was impacted by various adverse effects including the weakness of the Euro, further deferral of contract awards and risks which materialised on a limited number of contracts in our Enterprise Solutions & Defence (ESD) division. All these effects were detrimental to our growth aspiration. This resulted in a 5% fall in the Group's top line against the 2013 position.

Increased operating profit impressively demonstrates the resilience of the business

I am pleased to report that despite these difficulties we maintained our underlying profit and margin in line with expectations at £3.4m, confirming the progressive trend in operating margin which now stands at 8.3%.

The restructuring implemented during 2013 is bearing fruit as intended. The robustness of the business has been substantially increased which is underlined by an increase of 88% in statutory operating profit. Correspondingly, the cash position has improved to £0.3m net cash compared to £2.7m net debt by the end of the previous period.

Thoroughly managing business risks - a permanent task of continuous improvement

Every year presents a variety of management challenges and 2014 was no exception. Firstly, some procedural deficiencies led two projects to absorb a disproportionate level of management attention and resources, which reduced contribution in the ESD division. Secondly, we witnessed a continuation of contract award deferrals for major programmes in the Space, Defence and Media & Broadcast sectors, which contributed to the lack of growth in our top line and order book. Finally, Sterling's strengthening relative to the Euro diluted the Euro-denominated revenues in our Media & Broadcast and Space businesses by over £1m during 2014.

Loyal customers remain the foundation of our sustainable strategy

Again we could rely on our loyal customer base which is crucial for the resilience of our business. More than 40% of our total revenues originated from recurring revenue streams, ranging from maintenance contracts in Media & Broadcast, long term repeat business in the Space sector and long standing application support contracts in UK public and commercial sectors.

In addition, our existing customers continuously involve us in new projects; this has generated three quarters of our total revenue from customers with whom we have been working for at least five years. From a Group perspective it is encouraging to see this business characteristic applying to each division.

R&D investments help build our capabilities to retain customers and support future growth

As a technology business we must keep pace with the latest technical trends. 2014 saw continued investment in innovative projects, adding to our technical knowledge and developing expertise for future exploitation.  This initiative of broadening the uses of our developed technologies through resale is already delivering returns. Prominent examples can be found across all divisions: Media & Broadcast has successfully launched new products which open doors for the next stage of radio. The MACSYS product has helped ESD to win marine centric study work in the defence sector opening up more opportunity in this area. Our Space division has capitalised on its robotics and autonomy capabilities by winning the HRAF and ExoMars VISLOC contracts.

Expanding the business beyond its current boundaries

Our sales team has successfully established a foothold in various new areas, adding to the future prospects. These also contributed to the 2014 numbers although they could not compensate for the overall top-line weakness. International activities in the Middle East and Northern African region for Media & Broadcast were progressing with new wins. Space secured its continued involvement in future programmes like Merlin (Methane Remote Sensing Lidar Mission) and satellite navigation. In the defence sector we have been selected as the integration partner for the Land Open Systems Architecture System Integration Lab (LOSA SIL) which the Ministry of Defence sourced through the G-Cloud procurement framework.

Adding momentum by acquisition and making sure it doesn't fail

In December 2014 we announced the acquisition of Xibis Limited, a Leicester based provider of innovative and high quality web and mobile application development services. Xibis is a small software company operating in various sectors including a significant footprint in retail. Based on its excellent capabilities we expect that Xibis will be able to expand prospects in its current markets and that additional joint opportunities will gradually evolve with SCISYS' existing client base.

While Xibis' contribution to the 2014 numbers is negligible, we are looking forward to the growth potential it will add to the Group's business, and we will conscientiously develop our common activities for a successful joint future.

Divisional Performance

Enterprise Solution & Defence - divisional targets missed as an aftermath of restructuring

We expected that the ESD division would continue to operate in a recovery mode as it had to deal with the aftermath of the significant restructuring in 2013.

Revenue £13.5m (2013: £14.5m)

Contribution value £3.2m (2013: £4.0m)

Contribution margin 24% (2013: 28%)

Management's expectation for the division was to deliver a performance broadly in line with the previous year. However, divisional contribution and - to a lesser extent - divisional revenue targets were missed as the restructuring proved more difficult than anticipated:

· Two problematic projects inherited from previous years were completed at extra cost to regain the customers' confidence. This turn-around was managed successfully and those customers have already let new contracts with SCISYS.

· Divisional management changed the team composition to gain flexibility and respond to changing market needs. Whilst generally yielding positive results, two projects suffered from a lack of continuity, resulting in unrecoverable cost overruns. By committing additional resources to achieve critical project milestones, other potential opportunities had to be sacrificed.

· Some major defence programmes slipped on the timeline and did not contribute to 2014 results as had been anticipated.

The problematic projects in 2014 have now either been completed or are back on schedule to the satisfaction of the customer. Underlying organisational issues which also contributed to the difficulties are under close management scrutiny and are largely already resolved. There is confidence that with its widespread capabilities and customer base the Division is well positioned for future growth.

Positive steps were made as long-standing customer relationships spawned orders that will generate substantial revenue over future years: the RNLI awarded a seven figure contract for another 12 Shannon class lifeboats and support contracts and other recurring revenues amounted to £6m in total, including £1m with commercial customers like Vodafone. Additional progress was made in the defence sector where the first MarCE contract - an innovative study in the marine area - was secured and our expertise in electronic architectures for armoured vehicles will be advanced through the newly won LOSA SIL contract.

Media & Broadcast - solid performance delivered, resisting continued deferrals

At the outset of 2014, expectations and business planning in the Media & Broadcast sector were shaped by customers repeatedly deferring contract award decisions, resulting in fewer than anticipated contract wins. Although this basic pattern persisted throughout the year the Division delivered a solid performance, even slightly ahead of expectations, despite most of its business being Euro denominated. It is a testament to divisional management that margin has been significantly ahead of target.

Revenue £8.1m (2013: £8.1m)

Contribution value £2.5m (2013: £2.4m)

Contribution margin 31% (2013: 29%)

Revenues in the main have come from long term customers like German broadcaster, NDR, which first became a customer back in 1994, and the BBC with whom our relationship started in 2001. Apart from a steady stream of renewals and new beacon projects, like the BBC's Virtual Local Radio, the division generates more than £3m of annual maintenance revenues. A significant proportion of these profits are re-invested in continuously improving and innovating the dira! product portfolio.

Space - robust performance despite Euro weakness

Space has again delivered a robust performance with increased margin ahead of plans. This is particularly encouraging taking into account the Euro weakness which dilutes all the Euro denominated business and is a double hit on the Division's UK contribution because its cost base is in Sterling and its revenues are received in Euro.

Revenue £18.6m (2013: £19.8m)

Contribution value £4.0m (2013: £4.0m)

Contribution margin 22% (2013: 20%)

The long-term programmes continued to deliver a large proportion of our Space division's revenues. These included the operations support activities based from Darmstadt, where multi-million contracts were extended again, continuing a 20 year trend, and with the Rosetta wake-up and Philae comet lander being among the most exciting experiences during the year. The European Galileo satellite navigation programme led to more recurring revenues, as did major European earth observations missions like the Meteosat Third Generation Mission Operation Facility and the Franco-German Merlin mission.

German national programmes were deferred again and had an impact on the top line of our German space business. For UK space operations, we capitalised on our profound experience in the field of robotics and autonomy area by securing the HRAF and ExoMars VISLOC contracts.

Outlook 2015 - reasonable order book but remaining cautious

While 2015 has started with a reasonable order book level we are finding the first half performance to be challenging so remain cautious in our guidance. More contract deferrals have hit revenues. This will be compounded should Sterling continue to strengthen against the Euro. Nevertheless, some important contract renewals have now been secured, and we are hoping to secure other important wins later during H1, particularly in our ESD and Media & Broadcast divisions. We therefore expect trading to be better in the second half.

It is also important that we continue to focus on the longer term goals.

The Space business is well positioned to exploit the Galileo future phases. ESD is keen to exploit its capabilities in Geographic Information Systems (GIS) based defence solutions as they become more important to military capability. Media & Broadcast continues to develop and exploit new capabilities in the dira! OnAir product and has a desire to sell to the southern hemisphere broadcasters.

Our longer term objectives remain to stimulate revenue growth and improve operating margins still further. To do this we need to manage troublesome projects better, seek wider opportunities to exploit our knowhow in adjacent markets and, where appropriate, add further acquisitions to the Group.

2015 will be another significant year for SCISYS, and we will continue to shape the sustainable longer term future of the Company. I want to thank our staff for their continuing excellent performance in challenging circumstances and our customers for their on-going support and commitment. We will continue to use the strength of our technology capabilities and innovative thinking to deliver growth and increased shareholder value.

Klaus Heidrich

Chief Executive

FINANCE DIRECTOR'S REPORT

I am pleased to report that the business followed its most profitable first half performance in recent years with a record high for the second half. Whilst SCISYS' profits are customarily stronger in the latter six months of the year, it is particularly satisfying that 2014's result was achieved in the face of adverse foreign currency movements and some operational challenges. 2014 also saw an improvement in the quality of earnings, with statutory operating profits reaching heights only previously attained at an adjusted level; strong cash flows that reversed 2013's net debt position; and the acquisition of Xibis towards the year end.

Total revenues decreased by 5% to £40.4m (2013: £42.6m) within which the element relating to fees derived from provision of professional services declined by 8% to £32.5m (2013: £35.5m). Over 70% of the revenue reduction resulted from the weakening Euro, which fell 6% in value against Sterling between 2013 and 2014.

The underlying measure of trading performance, adjusted operating profit, which excludes costs of the Group's long term share incentive schemes, exceptional charges and the amortisation of intangible assets arising on business acquisition, rose 6% to £3.4m (2013: £3.2m). The adjusted operating margin lifted to 8.3% (2013: 7.6%), extending management's record of reporting annual margin improvements to seven consecutive years.

As anticipated in the interim report, statutory operating profit was significantly higher than the prior year at £3.2m (2013: £1.7m), an uplift of 88%. Following the operational restructuring of the Group in late 2013, the residual exceptional costs incurred in 2014 were restricted to £0.1m (2013: £1.2m). In addition, the intangible assets created on the acquisition of MakaluMedia in 2012 were fully amortised by the end of 2013 so there was no comparable expense in 2014 (2013: £0.3m). Charges for share based payments arising from SCISYS' share incentive schemes were immaterial in both 2014 and 2013. Consequently, statutory operating profit represented 95% (2013: 53%) of the adjusted operating profit measure for the year.

Profits did not follow the dip in revenues because central overheads were 23% lower in 2014, partly as a result of the previous year's restructuring. Additionally, the gains on foreign currency hedging derivatives, taken out to mitigate the Euro-Sterling exchange rate exposure, offset central costs.

As detailed in the Chief Executive's overview, performance of the separate operating divisions was variable. The Media & Broadcast division delivered a 4% increase in contribution whilst the Space division held its own and both reported improved operating margins. These achievements were all the more impressive given that the divisions operate largely in Euros. The Enterprise Solutions & Defence division suffered a more troubled year, with contribution falling 19% and margins dropping back to 2012 levels as it incurred unrecoverable costs in bringing a few difficult projects under control. However, it is encouraging that the impact of individual problem projects could be mitigated such that the Group's financial results were not materially adversely affected, underlining the resilience of the overall business.

Basic EPS was up 67% at 7.7p (2013: 4.6p). Adjusted basic EPS, calculated on the profit for the year before post-tax exceptional charges, share based payments and amortisation of acquisition-related intangible assets was 8.2p (2013: 9.3p). This fall was linked to an uplifted effective tax rate, as outlined below.

SCISYS PLC acquired 100% of the share capital of Xibis Limited on 12 December 2014, so the transaction had only minimal impact on the Group's trading performance during the year.

The purchase consideration will be phased over a period ending in March 2017. A fixed cash payment of £0.8m was made on completion, with a further £0.6m paid following agreement of the completion net asset position in February 2015. Deferred consideration of £0.2m was paid in March 2015 following confirmation of full year 2014 results. A potential final payment of up to £2.2m, comprising SCISYS PLC shares and cash, is subject to an earnout arrangement related to achievement of profit targets for the two year period ending 31 December 2016 and is payable in March 2017.

Funding for the acquisition came from the Group's existing cash resources, supplemented by a £1.2m term loan from the Group's UK bankers.

The Group ended the year with net cash of £0.3m, which represents a strong turnaround from the 2013 position of £2.7m net debt. Whilst this movement confirms the explanation in last year's report that the 2013 figure was anomalous, it is nonetheless pleasing to return to a cash positive position despite a net outflow of £0.4m on the Xibis acquisition prior to the year end.

The Group closed the year with bank deposits of £5.8m (2013: £2.3m) and unutilised working capital facilities totalled £4.5m (2013: £3.0m). As a result of taking on the acquisition term loan, Group debt rose to £5.5m (2013: £5.0m). 

Sales to the Euro zone comprised 51% (2013: 50%) of SCISYS' revenues and the Euro-Sterling spot rate fluctuated between €1.20/£ and €1.28/£ during the year, averaging €1.25/£ (2013: €1.18/£). SCISYS benefits from a natural currency hedge as Sterling revenues received in Germany from the BBC offset Euro-denominated income from Space division customers in the UK. The Group continues to use foreign currency option derivatives to mitigate potential exposure to exchange losses for the balance of surplus Euro cash receipts.

The effective Group tax rate for the year was 25% (2013: 10%). Tax credits arising from the 2012 MakaluMedia acquisition combined with an over-estimation of anticipated UK Research & Development tax credits artificially lowered the effective tax rate in 2013. Accordingly, the rate in 2014 was inflated when the latter of these effects was unwound. Tax rates in the Group's operating countries vary considerably. German profits are subject to corporation tax at over 30% whereas UK operations (including Xibis) qualify for R&D tax credits. These create an effective negative tax rate for the UK, and rebates from HM Revenue & Customs benefit Group cash flow.

The year-end order book was consistent with the prior year at £30m (2013: £30m), but this is largely due to the increasingly weaker Euro. At constant currency, the closing order book would have been over £1m higher than the opening position.

In 2014 the Group once more demonstrated its ability to withstand the strains of tight trading conditions and deliver further improvements in profitability, the benefits of which were reflected in improved cash flow. The task for 2015 and beyond is to capitalise on this resilience and build revenues to maintain momentum on the bottom line.

Chris Cheetham

Finance Director

Full Financial Statements

The unaudited Preliminary Report has been prepared under the historical cost convention and in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and interpretations in issue at 31 December 2014. The Preliminary Report does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006 and has not been audited. Comparative figures in the Preliminary Report for the year ended 31 December 2013 have been taken from the Group's audited statutory financial statements on which the Group's auditors, KPMG LLP, expressed an unqualified opinion.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2013, as described in those financial statements. New standards or interpretations which came into effect for the current reporting period did not have a material impact on the net assets or results of the Group.

Further copies of these results, and the full financial statements when published, will be available at the Company's registered office: SCISYS PLC, Methuen Park, Chippenham, Wiltshire, SN14 0GB or on the Company website at www.scisys.co.uk.

Consolidated Income Statement for the year ended 31 December 2014

Consolidated Statement of Comprehensive Income for the year ended 31 December 2014

Consolidated Statement of Changes in Equity

Consolidated Statement of Financial Position as at 31 December 2014

Consolidated Statement of Cash Flows for the year ended 31 December 2014