Sysgroup Regulatory News (SYS)

26 June 2023

SysGroup plc

("SysGroup" or the "Company" or the "Group")

Final results for the year ended 31 March 2023

SysGroup plc (AIM:SYS), the multi award-winning technology solutions provider, is pleased to announce its audited final results for the period ended 31 March 2023.

HIGHLIGHTS

Financial

Operational

· Acquisitions of Truststream Security Solutions Limited ("Truststream") and Orchard Computers Limited ("Orchard")

o  Truststream acquired for up to £7.9m, enhancing cyber security offering and adding Edinburgh location

o  Orchard acquired for £1m in cash, strengthening south west operations

o  Business operations and systems integration into SysGroup completed

· New £8.0m revolving credit facility secured with Santander

· Consistently high customer satisfaction levels maintained above our 97% target throughout the 12 month period

Post period-end developments

· New go-to-market strategy launched simplifying our messaging to prospects and customers

· Heejae Chae to join the Company as Executive Chairman with Adam Binks stepping down after nine successful years

1. Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation of intangible assets, exceptional items, and share based payments.

2. Adjusted profit before tax ("Adjusted PBT") is profit before tax after adding back amortisation of intangible assets, exceptional items, and share based payments.

3. Adjusted Basic EPS is profit after tax after adding back amortisation of intangible assets, exceptional items, share based payments and associated tax, divided by the weighted average number of shares in issue.

4. Net (debt)/cash represents cash balances less bank loans and lease liabilities.

5. Adjusted operating expenses are administrative expenses before depreciation, amortisation, exceptional items and share based payments.

Adam Binks, Chief Executive Officer, commented:

"For the final time, I am delighted to report a positive set of results to the market. I am grateful to the entire team for their drive and commitment to helping SysGroup continue on its growth journey. It's been yet another challenging period with many external headwinds, however, we have pushed hard and continued to flourish, demonstrated by the positive organic growth that has been achieved.

Whilst I am sad to be leaving the Group, I am confident that now is the right time for me to step aside as I leave a solid legacy behind that allows the Group to continue to grow.

Finally, the Group has made a good start to the new financial year with the first two months of the period both in line with the Board's expectations which is testament to the hard work of the brilliant team that we have built over the years. I wish the team well for the future and look forward to continuing to watch SysGroup go from strength to strength."

About SysGroup

SysGroup is a multi-award-winning technology solutions provider that creates value through technology transformation. Our mission is to supercharge the UK mid-market and we have built our business around our customers' challenges, enabling them to drive productivity, increase their resilience, mitigate risk and become more sustainable. Our bespoke solutions are at the forefront of technology innovation, combining world-class, green technology infrastructure with cutting-edge expertise and best-in-breed partners.

The Group has offices in Bristol, Edinburgh, Liverpool, London, Manchester and Newport.

For more information, visit http://www.sysgroup.com

Chairman's statement

In my final report as Chairman, I am pleased to report a year of positive revenue growth for SysGroup as it successfully executed on its growth strategy and navigated the challenging sector headwinds. I am incredibly proud to have been Chairman of SysGroup for the last fourteen years which has seen the Group achieve significant change and growth both organically and through M&A.

Trading for the year has been strong with revenue and Adjusted EBITDA both increasing in line with market expectations. It is pleasing to see the strategic acquisitions of Truststream and Orchard already contributing to total Group revenues. Both businesses have proven to be valuable additions to our existing operations, enhancing our service offering, expanding our geographical presence, fostering new client relationships and cross sell opportunities. The teams have been seamlessly integrated into the Group placing us in a stronger position. Moreover, these businesses have brought robust recurring revenue streams, reinforcing our commitment to the Group's buy and build strategy and solidifying our position as a consolidator within a highly fragmented market.

Our people are at the centre of everything we do and I would like to take this opportunity to sincerely thank all of them for their continued diligence and dedication. We have worked hard to create an environment which allows the diverse range of talent within SysGroup to thrive and I believe that this will play a significant part in our continued success. It is the commitment of our people that has consistently propelled our customer satisfaction levels beyond our set targets, and they continue to be at the centre of our growth plans.

On behalf of the Board and the wider team, I would like to extend our thanks to Adam Binks for his dedication and commitment during his time as CEO of SysGroup. Adam has been central to the growth of the Company over the last nine years and I know I speak for all stakeholders by wishing him well for the future.

I would also like to take the opportunity to welcome Heejae Chae to the Board, who will take over from me as Chair.

As the Group continues to invest in its services, execute on its growth strategy and as companies begin to increase investment in technology solutions, we have confidence in the midterm outlook for SysGroup.

Michael Edelson

Chairman

23 June 2023

Chief Executive Officer's Report

Introduction

I am pleased to be able to report, for the final time as Chief Executive, another year of progress for SysGroup, in spite of the continued difficult economic backdrop. The Group met expectations with revenue growth of 47% to £21.6m (FY22: £14.7m) and Adjusted EBITDA1 increased to £3.33m (FY22: £2.82m). The growth in Group revenues was achieved through a combination of 6% organic growth supplemented by the successful acquisitions of Truststream and Orchard (the "Acquisitions"), both in April 2022.

Managed IT services revenues grew by £4.6m to £17.4m, but reduced as a percentage of Group revenues to 80.6% (FY22: 87.1%) with VAR sales more than doubling during the period to £4.2m (FY22: £1.9m). Although the increased proportion of VAR impacts the gross margin, it is a reassuring signal that companies are once again committing to IT spend.

SysGroup's strong track record of cash generation continued, with gross cash of £4.19m at the year-end (FY22: £4.13m), achieved after payment of £5.39m (net of cash acquired) in respect of the initial consideration payable for the Acquisitions. As expected, following the Acquisitions and successful refinancing, the Group has a net debt position of £1.32m excluding contingent consideration (FY22: net cash £2.99m). The balance sheet therefore remains very healthy with an Adjusted EBITDA1 to net debt ratio of 0.4x.

Acquisitions

The Board was pleased to complete two acquisitions early in the financial year, being the first since 2019. Both were strategically important, enhancing our geographical presence as well as complementing our suite of services to meet the market needs.

We acquired Truststream for an initial cash consideration of £4.8m on a cash free, debt free basis, and a maximum earn out consideration of up to £3.075m over a 24 month period. Truststream is a leading provider of professional and managed cyber security services, providing SysGroup with greater expertise and an expanded portfolio to target one of the fastest growing segments of the market. With a strong client base covering both private and public sectors, it covers all aspects of cyber security from analysis and threat detection, through protection architecture and implementation, to incident response and ongoing 24/7 support and training.

Subsequently, the Group acquired Independent Network Solutions Limited, which trades as Orchard Computers, a Bristol based managed IT service provider, for £1.0m in cash. Orchard has been in operation for over 30 years and has built a longstanding and diverse customer base totalling over 120 active clients in 2021, largely in the Southwest of England complementing the Group's operations in South Wales. Orchard represents customers across a broad range of sectors, covering both the private and public sectors. It's managed IT service offering mirrors that of SysGroup, providing high quality consulting services and building tailor made, vendor agnostic solutions, designed specifically to meet individual customer needs, followed by ongoing support.

At the time of the Truststream acquisition, the Company secured a new £8.0m revolving credit facility with Santander to provide additional financial flexibility for the Group. This facility has a term of five years with covenants that will be tested quarterly relating to total net debt to Adjusted EBITDA leverage and minimum liquidity. The Group has drawn down £4.5m against the new facility towards the funding of the Truststream Acquisition.

As a result of the Group's prior year investments in Project Fusion, a project that provided the Group with a single operating platform, the integration of both businesses has been both swift and seamless. The integration of both finance operations, customer relationship management and team members were completed during the first half of the year and we have since completed integration of all technical operations. In line with our strategic focus, both businesses are now trading under the SysGroup brand.

Strategy

During the periods dominated by the COVID pandemic, the Group focused on ensuring that we had the right structure and systems in place to be able to scale our business, both organically and through acquisitions, seamlessly and without friction. The success of this has been demonstrated through the integration of both Truststream and Orchard. We now have a group with a presence throughout the United Kingdom able to serve the mid-market and enterprise customers, all supported by a centralised sales and marketing team.

During the year under review we refined and simplified our go to market strategy. We know that we have the right solutions to meet the demands that businesses currently face and to help them build for the future, which is reflected in our outstanding levels of client retention and customer satisfaction.

The technology transformation journey is more complex than ever before and businesses need to rely on trusted advisors to help them navigate the complexities. SysGroup now operates under a single unified brand and all marketing material and sales collateral centres around how we can help C-suite executives grow their businesses and achieve their corporate ambitions. This includes a revitalised website which is consistent with our values and sales efforts. Rather than looking to engage with them on technical detail, our approach centres around the key issues that they encounter, such as: how better technology can help them to drive productivity and deliver top line growth.; how they can increase resilience through combatting threats, withstanding change and ensuring continuity of their most important assets; how they can mitigate risks to avoid any financial, operational or reputational damage, and; how the power of technology can help them become more sustainable by future proofing operations and accelerating their journey to net zero.

This approach is not only applicable for gaining new clients but also for growing within our existing estate. As a result of our acquisitive nature there is still a significant proportion of our client base that utilise no more than two of our core competencies. As previously stated, we believe there is an opportunity to expand within these customers and while some progress has been made to date, our simplified message will drive this further.

People

I am pleased to report that the initial results of this refined strategy have been encouraging. Organic growth of 6% in a difficult market highlights that we are making progress and the feedback internally is very supportive. The stability and continuity of management and senior leadership teams has created a collaborative culture in which participation and having a voice are encouraged and evident.

Having been in this business for nine years and worked with many of the team throughout that tenure, I am continually impressed by the collective desire to improve as an organisation, to learn new ways to develop our offering and the commitment to provide our customers with the very best levels of service. This is once again demonstrated by our customer satisfaction levels remaining above our 97% target throughout the 12 month period and a trait that I am certain will continue beyond my stewardship.

Summary and Outlook

The Group has delivered a robust performance with revenue and Adjusted EBITDA increasing despite the challenging macroeconomic environment impacting all businesses. We are pleased to report that trading for the first two months of the new financial year are in line with the Board's expectations, and as I look to leave the business, I have confidence that SysGroup has the right platform to succeed in today's technological world as it continues to support business of all sizes find the right solutions to meet their needs.

The foundations created through investment during my time as CEO has placed SysGroup in a strong position to capitalise on the market opportunity as it executes against its growth strategy. The seamless integration of Truststream and Orchard serves to evidence the strength of this position and our ability to bring in complementary businesses which will expand our addressable market, generate new client relationships and be immediately earnings enhancing for the Group.

As we continue to invest in our expanded service offering, while remaining committed to exploring further appropriate M&A opportunities, we have great confidence in the mid-term outlook for the Group.

SysGroup has built a fantastic team and it is clear that all of the right systems and processes are in place to achieve sustainable growth over the coming period and beyond. I would like to take this opportunity to wish every success to the team as they continue to take the Company further on its growth journey.

Adam Binks

Chief Executive Officer

23 June 2023

Chief Financial Officer's Report

Group Statement of Comprehensive Income

The Group delivered revenue of £21.65m (FY22: £14.75m), an increase of 47% on the prior year, Adjusted EBITDA of £3.33m (FY22: £2.82m), an increase of 18% compared to FY22, and a statutory loss before tax of (£0.1m) (FY22: profit before tax of £0.60m) The revenue and Adjusted EBITDA growth has principally come from the acquisitions of Truststream and Orchard which were both acquired in April 2022 and provided a full years' contribution to the Group results, and overall the Group achieved organic revenue growth of 6%.

The two acquisitions have performed well and in line with expectations. Truststream's IT security services have proved to be a strong area of growth with cyber security being a key concern for our mid-market and enterprise level customers. The Orchard business, which provides customers with a broad set of managed IT services, has been integrated into the SysGroup operational structure and it has been pleasing to see new business won during the year whilst their customer churn has remained at relatively low levels. Revenue in the core business has remained broadly level, though we are seeing a stronger pipeline of opportunities.

In common with all companies, we have seen a rise in energy costs and other supplier charges due to the high inflation economy and impact from the geopolitical situation. Our contract terms with customers have largely allowed us to pass price increases onto customers although power consumption across our office footprint has been absorbed into the overhead base.

Managed IT services revenue was £17.44m (FY22: £12.85m), an increase of 36% on the prior year, and VAR revenue was £4.2m (FY22: £1.9m), an increase of 121%. Organic growth was 4% and 14% respectively for managed IT services and VAR revenue. The higher VAR revenue performance has shifted the revenue mix to 81% managed IT services and 19% VAR (FY22: 87%:13%) which is more in line with our target revenue mix model. This shift back had been anticipated following the acquisitions of Truststream and Orchard and we expect a similar revenue mix in the forthcoming year.

Gross profit was £11.10m with a gross margin of 51.3% (FY22: £8.92m and 60.5% respectively). Whilst gross profit has increased with the larger size of the business, the gross margin percentage has reduced as anticipated as a consequence of the acquisitions. Truststream has a higher revenue mix of VAR sales compared to the legacy SysGroup business and both Truststream and Orchard operate at lower gross margins. The gross profit achieved in managed IT services was £10.35m at 59.3% (FY22: £8.51m at 66.2%) with the margin fall due to acquisition dilution and the gross profit achieved in VAR sales was £0.75m at 17.8% (FY22: £0.41m at 21.5%) with the lower gross margin % due to the lower license sale margins in the Truststream business.

Adjusted operating expenses5 of £7.77m were £1.67m above last year (FY22: £6.10m) as the overheads of the acquired businesses have increased the cost base of the Group. The ratio of overheads to revenue is 36% (FY22: 41%) which demonstrates the economies of scale of a larger sized business. Notwithstanding the general incidence of supplier cost increases, overhead costs were managed well throughout the year and we continued to invest into strategic areas of value such as employee training and development as well as the ESG programme. During the year we opened a new office in Edinburgh to provide the Truststream team with a contemporary designed SysGroup branded office space with available room for expansion.

Adjusted EBITDA was £3.33m for the twelve months to 31 March 2023 (FY22: £2.82m) which is an Adjusted EBITDA margin of 15.4% (FY22: 19.1%). The lower margin percentage reflects the change in the revenue and gross margin mix following the acquisitions of Truststream and Orchard. 

The consolidated income statement includes £0.41m of exceptional costs which relate to professional fees for the acquisitions of Truststream and Orchard, and costs associated with the post-acquisition integration and restructuring activities. No further exceptional costs are expected in FY24 in relation to these acquisitions.

Amortisation of intangible assets was £1.74m (FY22: £1.24m) in the year, of which £1.56m (FY22: £1.10m) relates to the amortisation of acquired intangible assets from acquisitions and £0.18m (FY22: £0.14m) relates to the amortisation of software development and licence costs.

Finance costs increased in the year to £0.48m (FY22: £0.13m), mainly from the increase in bank loan interest charges following the £4.5m loan drawdown in April 2022 and the impact of rising bank base rates. Finance costs also include £0.1m of non-cash finance charges for the unwinding of discount on contingent consideration and the amortisation of the loan arrangement fee.

The share-based payments charge of £0.18m for the year (FY22: £0.20m) relates to charges for the share options under the Executive Director LTIP and Employee Management Incentive schemes.

The reconciliation of operating profit to Adjusted EBITDA is shown in the table below. The Directors consider that Adjusted EBITDA is the most appropriate measure to assess the business performance since this reflects the underlying trading performance of the Group. Adjusted EBITDA is not a statutory measure and is calculated differently by each company.

The Group has an adjusted profit before tax of £2.22m (FY22: £2.04m) and a statutory loss before tax of £0.10m (FY22: profit before tax £0.60m). The statutory loss before tax results from having £0.41m of non-recurring exceptional costs, a £0.46m increase in amortisation of acquired intangible assets, and an increase in finance costs. Adjusted basic earnings per share was 3.9p (FY22: 3.6p) and basic earnings per share was 0.0p (FY22: 0.9p).

The table below shows the reconciliation of profit before taxation to Adjusted profit before tax.

Taxation

The Group has a tax credit of £0.10m this year (FY22: £0.15m charge) which principally arises from the deferred tax credit movement in the period. The corporation tax current charge has increased to £0.37m (FY22: £0.03m) as a result of the larger size of the group and the lower value of R&D tax credits claimed this year. The deferred tax movement is a £0.47m credit (FY22: £0.12m charge) due to the increase in amortisation of acquired intangibles recognised in the Consolidated Statement of Comprehensive Income.

The Group's tax charge is expected to increase in FY24 due to the increase in the rate of corporation tax from 19% to 25% on 1 April 2023.

Cashflow & Net Debt

The Group's financial position moved from a net cash position of £2.99m at 31 March 2022 to a net debt position of £1.32m at 31 March 2023, excluding the £2.68m of contingent consideration. The gross cash balance at 31 March 2023 was £4.19m (FY22: £4.13m) and cash conversion remained strong at 103% (FY22: 88%). We consider net (debt)/cash to be a KPI of the business since the level of cash availability and financial indebtedness of the Group is relevant for Board strategic decisions and a key financial measure for the Group's shareholder base and potential investors.

The structural shift in the Group's net (debt)/cash position has arisen from the £1.0m acquisition of Orchard, which was financed entirely from the Group's existing cash balances, and the Truststream acquisition which was funded by £0.85m of the Group's existing cash resources and £4.5m from funds drawn from the new £8.0m revolving credit facility. The £2.68m contingent consideration liability is payable in two tranches based on the EBITDA performance of Truststream in the first twelve months and second twelve month period following acquisition.

Cashflow from operations was £3.02m (FY22: £2.47m) and cash conversion was strong at 103% (FY22: 88%) which compares to the target cash conversion range of 80-90%. Working capital continues to be managed well with debtor days below the target level of 25 days at year end and suppliers routinely paid in our monthly payment runs to agreed terms. All exceptional costs were paid in cash during the year.

The Consolidated Statement of Cashflows reflects the acquisitions of Truststream and Orchard including the amounts paid to acquire the companies and the bank loan drawdown used to part fund them. The company made a repayment of £0.6m on loans during the year. The cash outflow for property, plant and equipment of £0.25m (FY22: £0.62m) includes the expenditure on the Edinburgh office fit-out and the payments to acquire intangible assets includes the capitalisation of software development costs for a new financial system that was implemented in April this year.

New £8.0m Revolving Credit Facility

In April 2022, the Company re-financed its existing term loan facility of £1.75m and its undrawn acquisition revolving credit facility ("RCF") of £3.25m and replaced both with a new £8.0m RCF provided by Santander to provide additional financial flexibility for acquisitions and working capital requirements. The Group drew down £4.5m of RCF funds to finance the acquisition of Truststream.

The new banking facility has a five year term which expires in April 2027 and carries an interest rate of base rate +3.25% on drawn funds and 1.3% on undrawn funds. The bank covenants in the RCF are tested quarterly and calculated on total net debt to Adjusted EBITDA leverage and minimum liquidity. All bank covenants were met during the year with a comfortable level of headroom.

Consolidated Statement of Financial Position

The Group's total net assets of £39.1m at 31 March 2023 represent an increase of £11.5m compared to the prior year (FY22: £27.6m).

Non-current assets of £29.9m (FY22: £21.4m) have increased by £8.5m principally as a result of the additions to goodwill and acquired intangible assets from the Truststream and Orchard acquisitions. Property, Plant & Equipment of £2.0m has increased by £0.5m compared to the prior year which is mainly from new and renewed property leases that are recognised as "right of use" assets.

Working capital was managed well throughout the year. The gross trade debtor balance of £1.71m compares to £1.15m in the previous year despite the increase in size of the Group. The prepayment balance of £3.3m (FY22: £0.9m) and the contract liabilities balance (aka. "deferred income") of £4.0m (FY22; £1.5m), have both increased significantly. This is due to the working capital model of the Truststream business where customers are typically invoiced annually in advance and costs from suppliers are typically received annually in advance. Accordingly, the respective income and costs are deferred on the balance sheet and recognised over the period of the contracts.

Share Option Grants

In June 2022, the Remuneration Committee granted 284,010 performance shares to Adam Binks, Chief Executive Officer, and 170,406 performance shares to Martin Audcent, Chief Financial Officer, in relation the Group's performance in FY22 and under the terms of the 2020 SysGroup Long Term Incentive Plan. Following the year end date, the Remuneration Committee granted 362,709 performance shares to Adam Binks and 204,024 performance shares to Martin Audcent, in relation the Group's performance in FY23 and under the terms of the same plan.

Martin Audcent

Chief Financial Officer

23 June 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2023

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 MARCH 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2023

CONSOLIDATED STATEMENT OF CASHFLOWS

FOR THE YEAR ENDED 31 MARCH 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2023

1. Accounting policies

SysGroup Plc (the 'Company') is a Company incorporated and domiciled in the United Kingdom. The Company's registered office is at Walker House, Exchange Flags, Liverpool, L2 3YL.

Statement of compliance

This consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 March 2022 are an extract of the Company's statutory accounts for the year ended 31 March 2022, prepared in accordance with International Financial Reporting Standards (IFRS), approved by the Board of Directors on 17 June 2022 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2023 will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The Auditors have reported on those accounts; their report was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

The Group and Company financial statements have been prepared in accordance with UK adopted international accounting standards ("endorsed IFRS") and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under endorsed IFRS. While the financial information included in this annual financial results announcement has been prepared in accordance with the recognition and measurement principles of international accounting standards in conformity with the requirements of Companies Act 2006, this announcement does not contain sufficient information to comply with IFRS.

Basis of preparation

The principal accounting policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial liabilities and share based payments which have been valued in accordance with IFRS9 and IFRS2 respectively.

The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting estimates. It also requires Group management to exercise judgement in applying the Group's accounting policies. The areas where significant judgements and estimates have been made in preparing the financial statements and their effect are disclosed in note 2. The financial statements are presented in pounds sterling, rounded to the nearest thousand, unless otherwise stated.

Going concern

The Directors have prepared the financial statements on a going concern basis which assumes that the Group and the Company will continue to meet liabilities as they fall due.

The Directors have reviewed the Base business forecast and a Sensitised version for the period to 30 June 2024 and taken into account the forecasts that support the business viability for the period to 31 March 2025.

In the Base forecast there is significant headroom in the bank covenants as the business continues to operate with a high level of cash conversion and a reducing level of net debt. In the Sensitised forecast, which includes assumptions for a significant decline in revenue and profits, the Group maintains positive gross cash balances, reduce net debt and stays within the bank covenants. The Group has a business model with a high degree of financial resilience since circa 80% of revenue is derived from contracted managed IT services which is a continuous and business critical service supply to customers. This provides a high level of operating cash generation.

At 31 March 2023, the Group had a gross cash balance of £4.19m and a net debt position of £1.3m, excluding contingent consideration of £2.68m. The Group has a £0.5m unused overdraft facility and £3.2m of undrawn headroom in its RCF Loan facility which is available for working capital and acquisitions.

The forecasts, the resultant cashflows, together with the RCF loan facilities, taking account of reasonably possible changes in trading performance, show that the Group can continue to operate within the current facilities available to it.

The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and thus they continue to adopt the going concern basis of accounting in preparing the financial statements.  

Basis of consolidation

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee; exposure to variable returns from the investee; and the ability of the investor to use its power to affect those variable returns. Control is re-assessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

The consolidated financial statements present the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the acquirer's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.

Alternative profit measures

In reporting its results, the Directors have presented various alternative profit measures (APMs) of financial performance, position or cashflows, which are not defined or specified under the requirements of IFRS. On the basis that these measures are not defined by IFRS, they may not be directly comparable with other companies. The key APMs that the group uses include recurring revenue as a percentage of revenue, Adjusted EBITDA, Adjusted PBT, Adjusted EPS and Net cash.

The Group makes certain adjustments to the statutory profit in order to derive many of these APMs. These include exceptional items and share based payments. The group presents as exceptional items on the face of the Statement of Comprehensive Income those material items of income and expense which the Directors consider, because of their size or nature and expected non-recurrence, merit separate presentation to facilitate financial comparison with prior periods and to assess trends in financial performance. Exceptional items are included in Administration expenses in the Consolidated Statement of Comprehensive Income but excluded from Adjusted EBITDA as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses on a consistent basis from year to year.

2. Significant accounting estimates and judgements

The preparation of this financial information requires management to make estimates and judgements that affect the amounts reported for assets and liabilities at the period end date and the amounts reported for revenues and expenses during each period. The nature of the estimation or judgement means that actual outcomes could differ from the estimates and judgements taken in the preparation of the financial statements.

Significant accounting estimates

Impairment of goodwill and other intangibles

The Group tests goodwill for impairment annually and in line with the stated accounting policy. This involves judgement regarding the future development of the business and the estimation of the level of future profitability and cash flows to support the carrying value of goodwill.

An impairment review has been performed at the reporting date taking into account sensitivities around future business performance, covering a range of outcomes and risks over levels of revenue, cost and cash generation. No impairment has been identified.

Valuation of intangible assets acquired in business combinations

Determining the fair value of customer relationships acquired in business combinations requires estimation of the value of the cash flows related to those relationships and a suitable discount rate in order to calculate the present value. In FY23, there was a requirement to assess the valuation of intangible assets acquired for the acquisitions of Truststream Security Services Limited and Orchard Computers Limited.

Contingent consideration

The Group has a contingent consideration liability which is based on the future performance of an acquired company. When valuing the contingent consideration still payable on acquisitions, the Group considers various factors including the performance of the acquired entity since acquisition together with an estimate of the expected future trading performance for the period to the expiry of the earn-out period. Contingent consideration is recognised at, and carried thereafter at, fair value. All changes in fair value (other than measurement period adjustments) are reflected in the income statement.

Significant accounting judgements

Going concern

The Board have approved an Annual Operating Plan for FY24 and a forecast to 31 March 2025, and management have exercised judgement in the preparation of the financial forecasts particularly on the level of future sales, customer contract uplifts and cancellations, and working capital assumptions. The Board have reviewed the Group's financial forecasts and a Sensitised model in order to assess the Group's business viability and to form a judgement on going concern. Having reviewed the forecasts the Board were satisfied that the Group remains a going concern.

Revenue

Management make judgements in determining the appropriate application of revenue recognition policies to the sale of services and products.

Assessment of CGU's and carrying value of intangible assets

A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets and the Board of Directors use their judgement to identify the CGUs of the Group. When SysGroup acquire a company, the newly acquired business is usually allocated its own CGU for the first year and until such time as either the business and assets have been hived up into the main SysGroup trading company or when the systems, finances & management of the business have been successfully integrated, whichever is earlier

The Board have reviewed the Group's CGU's following the acquisition of Truststream Security Services Limited and Orchard Computers Limited in April 2022 and have concluded that Truststream is a separate CGU at 31 March 2023 and Orchard is part of the IT Managed Services CGU.

Useful economic lives of intangible assets

Intangible assets are amortised over their useful economic lives. Useful lives are based on management's estimates of the period over which the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in changes in the carrying values and hence amounts charged to the income statement in particular periods which could be significant. The Group have capitalised system development expenditure in the current year and the intangible asset is being amortised over a five-year useful life which the Directors consider appropriate.

IFR16 - Leases

Management make judgements in their assessment of lease contract agreements to ensure the appropriate lease accounting recognition under IFRS16 - Leases. The main elements of judgement are:

· Determining the inherent rate of interest which applies to each lease or family of leases with similar characteristics;

· Establishing whether or not it is reasonably certain that an extension option will be exercised; and

· Considering whether or not it is reasonably certain that a termination option will not be exercised.

3 Segmental analysis

The chief operating decision maker for the Group is the Board of Directors. The Group reports in two segments:

· Managed IT Services - this segment provides all forms of managed services to customers and includes professional services.

· Value Added Resale (VAR) - this segment provides all forms of VAR sales where the business sells products and licences from supplier partners.

The monthly management accounts reported to the Board of Directors are reviewed at a consolidated level with the operating segments representative of the business model for growth of recurring contract income in Managed IT Services and VAR sales as a complementary business activity. The Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure supports both operational segments as Group functions. In this respect, assets and liabilities are also not reviewed on a segmental basis. All assets are located in the UK. All segments are continuing operations and there are no transactions between segments.

4 Finance expense

5 Exceptional items

The acquisitions cost of £219,000 relates to professional fees and other costs incurred in the acquisitions of Truststream and Independent Network Solutions Limited (trading as Orchard IT). Integration and restructuring costs of £189,000 in relation to employee exit costs and professional fees.

6 Acquisitions

In April 2022, SysGroup plc acquired 100% of the issued share capital in Truststream Security Solutions Limited ("Truststream") and Independent Network Solutions Limited ("INSL", holding company of Orchard Computers Limited).

Truststream Security Solutions Limited

Established in 2011 and based in Edinburgh, Truststream is one of the UK's fastest growing providers of professional and managed cyber security services. Truststream covers all aspects of cyber security from analysis and threat detection, through protection architecture and implementation, to incident response and ongoing 24/7 support and training. The Acquisition further enhances SysGroup's service offering and is complementary to the Group's core expertise and key areas of focus. In addition, the Acquisition enables the Group to further strengthen its UK presence by opening up Scotland as an attractive hub for the Group.

SysGroup acquired Truststream on 4 April 2023 for £4.8m initial cash consideration on a cash-free debt-free basis with an earn-out payable following the first and second anniversaries of the transaction of up to £3.075m. A payment of £0.53m was paid in respect of the cash and debt balances. The earn-out is subject to the achievement of certain maintainable EBITDA performance targets in the first and second 12 month periods following the completion of the acquisition.

The Truststream acquisition was mainly funded from a new £8.0m revolving credit facility ("RCF") which was signed with Santander on 4 April 2023. SysGroup utilised £4.5m of funds from the RCF to finance the acquisition.

Independent Network Solutions Limited

INSL is the holding company of Orchard Computers Limited ("Orchard") which is a business based in Bristol. Orchard has been in operation for over 30 years and has built a loyal customer base largely in the South West of England and across a broad range of sectors, covering both the private and public sectors. Its managed IT service offering mirrors that of SysGroup, providing high quality consulting services and building tailor made, vendor agnostic solutions, designed specifically to meet individual customer needs, followed by ongoing support.

SysGroup acquired INSL on 26 April 2023 for £1.0m cash consideration on a cash-free debt-free basis. There is no contingent or deferred consideration for this acquisition. The cash consideration was funded from the Group's existing cash balances.

The Directors have considered the intangible assets acquired with the two acquisitions and have recognized intangible assets for customer relationships which have been calculated using a discounted cashflow method, based on the estimated level of profit to be generated from the customer bases acquired. A post tax discount rate of 9.40% was used in the valuations and the customer relationships are being amortised over an estimated useful life of 7 years for Truststream and 10 years for Orchard. The goodwill arising on both acquisitions are attributable to the technical skills of the workforce and cross-selling opportunities achievable from combining the acquired customer bases and trade with the existing Group.

The goodwill and intangible assets of Truststream have been allocated to a new CGU named "Truststream" and the goodwill and intangible assets of Orchard have been allocated to the CGU "IT Managed Services." The Company incurred £218,000 of professional fees and other acquisition costs in relation to the two acquisitions. These costs are included as Exceptional costs in the Group's consolidated statement of comprehensive income.

Truststream contributed £4.9m to Group revenue and £0.3m profit before tax for the twelve month period to 31 March 2023. Orchard was acquired on 26 April 2022 under a lock box mechanism which fixed the financial returns to the Group from 1 April 2022. Orchard contributed £1.8m to Group revenue and £0.1m profit before tax for the twelve month period to 31 March 2023 .

7 Earnings per share

8 Taxation

9 Intangible assets

10 Trade and other receivables

11 Trade and other payables

The contingent consideration is stated at its discounted fair value. The consideration is expected to be paid in two tranches in H1 FY24 and H1 FY25, following the completion of the Year 1 and Year 2 earn-out periods and subject to the terms of the earn-out mechanism.

12 Provisions

The provision is for the estimated aggregate cost of returning the Group's offices to their original condition on

the expiry and exit of the property leases. Currently the leases extend to between 2026 and 2028.

13 Loans and borrowings

In April 2022, SysGroup plc re-financed its existing term loan facility of £1.75m and its undrawn acquisition revolving credit facility of £3.25m and replaced both with a new £8.0m revolving credit facility with Santander to provide additional financial flexibility for the Group. The new banking facility has a term of five years, an interest rate of Base Rate +3.25% margin on drawn funds and covenants that will be tested quarterly relating to total net debt to Adjusted EBITDA leverage and minimum liquidity. The Group drew down £4.5m of RCF funds for the Truststream acquisition in April 2022.

Certain statements included or incorporated by reference within this announcement may constitute "forward-looking statements" in respect of the Group's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words and words of similar meaning as "anticipates", "aims", "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets", "goal" or "estimates". By their nature, forward looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. No responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast. This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in the Company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser. Statements in this announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this announcement shall be governed by English law. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.