SSY.L Regulatory News (SSY)

SCISYS PLC

(SSY: AIM)

Unaudited Preliminary Results for the year ended 31 December 2017

SCISYS PLC ("SCISYS", the "Company" or the "Group"), the supplier of bespoke software systems, IT-based solutions and support services to the Media & Broadcast, Space, Government, Defence and Commercial sectors, is pleased to announce its unaudited Preliminary Results for the 12 months to 31 December 2017.

RESULTS HIGHLIGHTS

· Revenues up 25% to £57.2m (2016: £45.7m), including professional fees 28% higher at £48.0m (2016: £37.6m)

· Adjusted operating profit up 44% at £4.6m (2016: £3.2m)

· Adjusted operating margin increased to 8% (2016: 7%)

· Adjusted basic EPS up 9% at 10.0p (2016: 9.2p)

· Statutory operating profit increased to £4.7m (2016: £2.8m) and basic EPS increased to 11.5p (2016: 7.6p)

· Net debt reduced to £5.9m (2016: £10.2m)

· Significant contract wins achieved in all divisions, including €18m ground station infrastructure award for the German Heinrich Hertz satellite-communications mission

· Year-end order book 41% higher at £91.3m (2016: £64.6m)

· First-time contributor to results, Annova, achieves a critical milestone on its flagship BBC newsroom computer system contract and extends its customer base with N American win

· Full year dividend per share up 10% to 2.16p (2016: 1.96p)

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

"Our optimism and guidance for 2017 was well placed with the Group delivering a strong overall performance and entering 2018 with a record order book. Buoyant operational cash flows resulted in a substantial reduction in net debt and underpinned a healthy uplift in the recommended final dividend. Going into 2018 the outlook continues to be very encouraging"

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

Investor lunch programme

SCISYS will be holding Investor Lunches for Private Client Investment Managers and Private Investors in London on 29 June 2018 and Bristol on 5 July 2018. Those wishing to attend should contact Tom Cooper on tom.cooper@walbrookpr.com or 020 7933 8780 or 0797 122 1972 for further details.

For further information please contact:

 About SCISYS:

Employing around 580 staff, SCISYS group is a leading developer of information and communications technology services, e-business, web and mobile applications, editorial newsroom and advanced technology solutions.

The Company operates in a broad spectrum of market sectors, including media & broadcast, space, government & defence and commerce. SCISYS clients are predominantly blue-chip and public-sector organisations.

Customers include the Environment Agency, the Ministry of Defence, Airbus Defence & Space, Arqiva, Vodafone, the European Space Agency, Eumetsat, the BBC, RNLI, Pets at Home, Siemens and the National Trust. The Company has UK offices in Chippenham, Bristol, Leicester and Reading and German offices in Bochum, Dortmund, Darmstadt and Munich.

This announcement has been released by Natasha Laird, Company Secretary, on behalf of the Company.

CHAIRMAN'S STATEMENT

EARLIER OPTIMISM JUSTIFIED

In my report for 2016, I advised that, given the strength of our then current order book and short-term pipeline, we anticipated that the growth we were seeing would continue into at least the first half of 2017. We also noted that, in keeping with the pattern over previous years, we anticipated that our second half-year financial performance in 2017 would be substantially stronger than the first half.

This was, indeed, the case and I am pleased to report that our optimism and guidance was well placed. The Group delivered a strong overall performance in 2017, with results for full-year revenues and adjusted profits being comfortably in line with guidance. It is also pleasing to report a positive advance on net margins, which is in line with our strategic objectives.

Going into 2018 the outlook continues to be very encouraging.

The positive news flow across the year on new business wins was crowned by the announcement in late October of the award of a €18m contract with OHB System AG to deliver the ground station control and communications infrastructure for Heinrich Hertz, the German national satellite-communications mission. Further contract wins across the Group in the last quarter of 2017 also meant that we entered 2018 with a record order book of £91.3m.

Operational cash flows were very healthy across the year, resulting in further reductions in net debt and underpinning a healthy 10% uplift in the recommended final dividend payment. With the acquisition of the ANNOVA Systems GmbH ("Annova") business our income streams (which are predominantly in £ sterling and €) are well balanced, providing an internal hedge against exchange-rate movements. We do not anticipate any major impact on profitability in 2018 from currency fluctuations or hedging adjustments.

Further detail on the performance of each division is given below. However, it is worth noting the overall healthy organic growth and impressive contract wins that contributed to our strong operating cash flows. Our Space division in particular deserves a specific mention for its extraordinary achievement, with 18% year-on-year growth in revenues and a 17% growth in contribution.

Of strategic note is the performance of our Annova division. A primary focus going into 2017 was the integration of Annova into the Group. We have started a programme to align Annova's internal processes with SCISYS' high standards. Solid, on-going progress can be reported here. Its performance is closely aligned with the Group's expectations at the time of acquisition. Delivery of a key milestone on Annova's BBC newsroom contract was achieved in late summer, with the system now on air in the West Midlands and in Salford. Significant contract wins with MDR, ARD's national news programme in Germany and Corus in Canada have strengthened its geographic footprint. Synergies with our Media & Broadcast (M&B) division resulted in a major new win for M&B with RTL in France, where our dira! system is already on air.  

In addition to winning the Heinrich Hertz project, our Space division has extended its footprint in the Galileo project while our Enterprise Solutions and Defence (ESD) division has seen key wins late in the year with Public Health England, and the Forestry Commission, as well as new work with a major defence prime contractor.

The strength of the order book within both our Space and ESD divisions is resulting in a significant expansion of their teams - with an associated recruitment drive. Similar growth has resulted in the Group opening a new office in Dortmund to house our M&B division.

Strategically we are well positioned and confident in our ability to deliver further progress in 2018.

Contingency planning is in hand to protect the Group from any potential adverse operational consequences resulting from the negotiations between the UK and the EU, in respect of the UK's withdrawal from the EU. We believe that SCISYS is well positioned in the short to medium term and that our ESD division might even gain from the situation. Any impact is likely to be felt by our Space division, albeit that the division has continued to win contracts in this current period of pre-Brexit uncertainty which extend beyond the proposed Brexit date, which is encouraging.

The Board continues to explore a wide range of Brexit options. While we very much welcome the UK government's strong support for the UK's continued participation in EU-funded space programmes (EGNOS, Galileo & Copernicus) and hope to see further clarity on this position during the negotiations for the transition-stage arrangements, we are nevertheless preparing a range of tactical options (including the option of re-domiciling, while retaining our AIM listing and associated UK tax benefits) to mitigate the possible effects of Brexit on our Space business post-March 2019 should negotiations not prove favourable.

Key financials reflect the success

In the year ended 31 December 2017, SCISYS posted overall revenues of £57.2m, which were up 25% on last year (2016: £45.7m). Within this figure, professional fees were 28% higher at £48.0m (2016: £37.6m). The Group delivered an adjusted operating profit of £4.6m (2016: £3.2m), a 44% uplift on 2016. The operating profit was £4.7m (2016: £2.8m). A reconciliation between the adjusted and statutory operating profit measures appears in the Finance Director's Report. Adjusted basic earnings per share were 10.0p (2016: 9.2p); basic earnings per share were 11.5p (2016: 7.6p). Cash generation remained healthy and this resulted in a net inflow of £4.5m (2016: £2.1m). The Group's net-debt position was £5.9m at year's end (2016: £10.2m). At 8% (2016: 7%), our adjusted operating margin has improved. The year-end order book was at a record level at £91.3m (2016: £64.6m).

Our people are the key to our success

As always, our thanks rightly go to all of our staff within the divisions, who actively implement our corporate core values of trust, respect and openness, combined with prudence and balanced growth. Their hard work and ability to deliver the business solutions that our customers need, within tight budgets and timescales, is the key factor to the on-going relationships that SCISYS enjoys with its many and varied long-standing customers. Our thanks also go to all of our staff within the Group's central functions, who provide essential services and valued support to the Group and who have made an important contribution to these results.

Dividend

An interim dividend of 0.59p per share was paid on 9 November 2017. The Directors are now proposing a final dividend of 1.57p per share, subject to approval by shareholders at the Annual General Meeting on 28 June 2018. The proposed final dividend will be paid on 27 July 2018 to shareholders on the register at 6 July 2018. The shares will go ex-dividend on 5 July 2018. This would make the dividend for the full year to 31 December 2017 2.16p per share (2016: 1.96p) and maintains our stated strategy of progressive dividend growth.

Governance matching our needs

We are committed to high standards of corporate governance. We have strong governance frameworks in place throughout the Group in balance with our growth. SCISYS is currently compliant to the extent appropriate for a company of its size with the UK Corporate Governance Code, and is looking to adopt the QCA Corporate Governance Code during the course of 2018.

Looking to the future

The key elements of the Group's strategy remain unchanged. We continue to focus on balanced revenue growth and margin improvement, as well as management/control of risk and succession planning.

Outlook

We are pleased with the healthy organic growth in revenues achieved in 2017. Our strong second-half trading performance, combined with steadily reducing levels of net debt and a record year-end order book provides a solid platform to deliver further progress in 2018 and beyond.

Based on current performance on projects and our order pipeline across the entire Group, the Directors remain fully confident in the prospects of the Group's future organic growth. We will also continue to look for opportunity, where there is a good market, product and cultural fit, to grow through acquisition.

Dr. Mike LoveChairman

CHIEF EXECUTIVE'S REVIEW

2017: a step change in performance towards 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 below).

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 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 re-usable 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 8% across the UK and by 16% in Germany.

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.

Klaus M. Heidrich

Chief Executive

FINANCE DIRECTOR'S REPORT

I am pleased to report that the rally in trading that we predicted in our Interim Report came to fruition in the second half of 2017, lifting the first-half figures to produce an admirable full-year result.

Both revenues and underlying operating profits reached historic highs and strong cash flows have made a significant dent in the net-debt position that peaked in December 2016 with the injection of additional borrowings to fund the ANNOVA Systems GmbH (Annova) acquisition.

Revenues

Total revenues for the year were 25% higher at £57.2m (2016: £45.7m), of which the component relating to professional fees was £48.0m (2016: £37.6m). 48% of total revenue was from Eurozone customers (2016: 49%).

Following a welcome gain in value against the pound in 2016, the euro strengthened again in 2017, which boosted the Group's revenue figures.

Profits

Since 2007 the Board has gauged the underlying performance of business using an adjusted operating profit measure that excludes the costs of the Group's long-term share incentive schemes, exceptional items and any amortisation of intangible assets arising on business acquisition. Internal reporting is exclusively based on adjusted performance measures to facilitate comparison between financial years and publicly available research notes on SCISYS published by financial analysts focuses on these same measures. Adjusted operating profit was up 44% on 2016 at £4.6m (2016: £3.2m), while statutory operating profit was £4.7m (2016: £2.8m). The adjusted and statutory operating profit measures reconcile as follows:

2017 exceptional items totalled £2.1m and reflect the combination of a credit arising from the reassessment of contingent consideration payable under the Annova earnout arrangement and accrued UK Research & Development (R&D) tax credits. These exceptional items are explained in further detail later in this report. By contrast, 2016 exceptional items represented charges of £0.4m for non-capitalisable legal and professional fees relating to the Annova acquisition. 

On the acquisition of Annova on 31 December 2016, IFRS 3 required SCISYS to make fair-value consolidation adjustments to the Annova balance sheet. Intangible assets for fair-value recognition comprised the 2016 year-end order book and the internally developed intellectual property rights in Annova's OpenMedia product. Recognition of these assets in the 2016 consolidated Group balance sheet resulted in non-cash amortisation charges to the 2017 income statement of £2.0m (2016: £nil).

Share-based payment charges were immaterial following the lapse of option awards granted in 2015, owing to the failure to achieve the associated three-year performance criteria.

The Group's results were less adversely impacted by variations in the euro-pound exchange rate than in previous years for two reasons. First, the funding structure for the Annova acquisition and the sterling-based cash flows of its contract with the BBC served to bring the Group's overall currency requirements more into balance, whereas in previous years the Group generated substantial surplus euro income from its German operations and UK-based space market activities. Second, although the currency-hedging contracts taken out in 2016 to convert anticipated surplus euros in 2017 into pounds went significantly out of the money following the EU referendum vote in June 2016, the devaluation was largely reflected in the 2016 accounts.

The Group has not entered into any external currency-hedging contracts for 2018 and beyond. Intra-Group hedging contracts will be used to balance the Group's currency exposures across its subsidiary companies.

While revenues benefited from a stronger euro, the same foreign-exchange rate movement increased the sterling value of our euro-denominated costs in Germany. However, on a constant-currency basis, and excluding exceptional items, Group overheads - representing the costs for provision of shared business services to the divisions - were 4% lower than in 2016 at £8.0m (2016: £8.2m).

EPS

Adjusted basic EPS, calculated on the profit for the year before post-tax exceptional items, share-based payments and amortisation of acquisition-related intangible assets, were 9% higher at 10.0p (2016: 9.2p). Basic EPS were 11.5p (2016: 7.6p).

Cash and debt

The Group closed the year with bank deposits (net of overdrafts) of £8.0m (2016: £6.7m), while Group borrowings amounted to £13.9m (2016: £16.9m). This resulted in net debt of £5.9m (2016: £10.2m).

Cash flow in 2017 was particularly strong for two reasons. First, anomalies in timing of two 2016 year-end receipts reversed in the first half of 2017 and did not recur, boosting bank balances by £1.9m. Second, the first earnout payment to Annova's former owners of £1.7m in September was more than covered by receipt from the BBC of a significant milestone payment in August.

Unutilised working capital facilities at the year-end totalled £4.3m (2016: £4.4m). 

Annova Systems

Annova contributed to Group earnings for the first time in 2017 following completion of its acquisition at the end of 2016. Strategically the acquisition remains highly favourable. The order book is building as sales success expands Annova's geographical footprint and cross-fertilisation of the customer base with our Media & Broadcast division continues to gain momentum.

Pre-acquisition due diligence identified that governance and management controls procedures were not as mature as those in the wider SCISYS Group, so during 2017 the Board conducted a thorough review of Annova's financial disciplines and reporting processes. Annova management's financial forecasts for 2017 proved over-optimistic as we had anticipated because they were flagged as a specific risk area during due diligence. This prompted SCISYS to adopt a purchase consideration structure that placed significant emphasis on performance during the three-year earnout period, 2016 to 2018.

The total purchase price payable for the Annova acquisition is linked both to average profitability and achievement of key commercial milestones in its flagship contract with the BBC. Annova successfully obtained customer acceptance for a critical phase of this project in August, three months earlier than had been provided for in the acquisition balance sheet. This triggered payment of a first earnout instalment of €2.0m in September 2017, of which 10% was satisfied in new SCISYS PLC shares, with the balance paid in cash from existing Group resources.

Annova's over-performance in the first earnout year of 2016 raised expectations in the 2017 Interim Report for the level of contingent consideration that would eventually be payable by SCISYS to Annova's former owners. Since publication of the first half-year results, Annova management has been included in the detailed Group business planning process for 2018-21. Application of planning and forecasting policies consistent with those across the rest of the Group has resulted in scaled-back expectations for Annova in 2018. This led to a reduction in the Group's anticipated liabilities for earnout payments and resulted in an exceptional credit to 2017's Income Statement of £1.6m.

The fair value of remaining contingent consideration for earnout payments included in the consolidated financial statements is £nil (2016: £3.3m). This compares with a contractual cap of £12.9m (2016: £14.6m).

Tax

The effective Group tax rate for the year was 15% (2016: 15%).

SCISYS continues to benefit from the tax-credit system for UK expenditure on R&D in SMEs, receiving credits in the form of cash rebates from HM Revenue & Customs. Up to and including 2016, these were incorporated into the net tax charge. An accounting standard change requires R&D tax credits from 2017 to be treated as deductions from operating expenses. SCISYS anticipates that it will no longer qualify under the SME tax credit scheme in 2018 as it expects to exceed the headcount-eligibility threshold, lifting SCISYS into the scheme for Large Enterprises, where credits are significantly less generous. Accordingly, the above-the-line tax credit of £0.5m in 2017 is treated as an exceptional item.

The 2017 tax charge reflected the benefit of an adjustment to prior-year credits in respect of UK tax. A conservative estimate of £0.5m for receipt of R&D tax credits was included in the 2016 accounts, whereas the amount actually received was £0.7m.

Accounting standards

No material changes in accounting standards have impacted the Group accounts for 2017. The next significant change affecting SCISYS will be in 2018, when IFRS 15: Revenue from contracts with customers will be adopted. Detailed analysis by the SCISYS Board has established that implementation of the new standard will have a negligible impact on the phasing of anticipated operating profits, although reported revenues will be depressed compared with previously applied treatment. The reduction reflects provisions in the standard whereby only the mark-up on third-party costs can be recognised as revenue in situations where SCISYS acts in the capacity of an Agent, simply passing the third-party's goods and services to customers through its books. If IFRS 15 had been applied in 2017, revenues would have been £5.5m lower than reported and operating profits would have been unaffected.

Share options

During the year a total of 0.4m share options were exercised, of which 0.3m were granted in 2008 under the Enterprise Management Incentive scheme for which the exercise window closed at the end of 2017. All 0.3m outstanding options under the 2015 CSOP award lapsed during the year due to the failure to achieve the three-year performance criteria as a consequence of the disappointing results in 2015. Option awards in 2016 and 2017 remain in the money and on track to vest in full.

Order book

Boosted by the October contract award from OHB Systems for the Heinrich Hertz satellite-communications mission ground segment infrastructure, the year-end order book was at a record level, 41% ahead of the prior-year at £91.3m (2016: £64.6m). Of this total, £36.5m (2016: £31.2m) is invoiceable within one year and £51.8m (2016: £38.4m) within two years. The longer-term balance principally reflects Annova's contract with the BBC, which runs to at least 2027. 57% (2016: 34%) of the total order book value was denominated in euros.

Chris Cheetham

Finance Director

Consolidated Income Statement for the year ended 31 December 2017

Consolidated Statement of Comprehensive Income for the year ended 31 December 2017

Consolidated Statement of Changes in Equity

Consolidated Statement of Financial Position as at 31 December 2017

Consolidated Statement of Cash Flows for the year ended 31 December 2017

Information about reportable segments

Information about reportable segments continued

Basic & diluted earnings per share

The calculation of the Group basic and diluted earnings per ordinary share is based on the following data:

Own shares held

"Own shares held" represent the number of shares held in treasury.

Diluted earnings per share

The weighted average number of shares for the calculation of diluted earnings per share is computed using the treasury share method. This takes into account the entitlement of holders of EMI, CSOP and unapproved share options to purchase ordinary shares at an exercise price below the average market price for the year.

Adjusted earnings per share

In order to present a measure of earnings per share that is more representative of the Group's underlying operating performance, earnings are adjusted to be net of the pre-tax costs shown in the highlighted box on the face of the Income Statement. The calculation of the Group basic adjusted earnings and diluted adjusted earnings per ordinary share is based on the following data:

Own shares held

"Own shares held" represent the number of shares held in treasury.

Diluted earnings per share

The weighted average number of shares for the calculation of diluted earnings per share is computed using the treasury share method. This takes into account the entitlement of holders of EMI, CSOP and unapproved share options to purchase ordinary shares at an exercise price below the average market price for the year.