Synectics plc

('Synectics or the 'Group' or the 'Company')

Final Results for the year ended 30 November 2018

Synectics plc (AIM: SNX), a leader in the design, integration, control and management of advanced surveillance technology and networked security systems, reports its audited final results for the year ended 30 November 2018.

Headlines

¹Underlying profit represents profit before tax and non-underlying items (which comprise UK mobile systems restructuring costs and stock write-down, and amortisation of acquired intangibles). 

² Underlying earnings per share are based on profit after tax but before non-underlying items.

^*Restated. See note 3

Commenting on the results, Paul Webb, Chief Executive of Synectics plc, said:

"A strong performance in the Gaming sector offset by weak performance in the UK bus market produced a satisfactory result overall.

The pipeline of identified new business that the Group expects to win and deliver in 2019 is strong, and we expect to benefit from growing momentum in certain market sectors.

We are laying the foundations for an ambitious growth strategy that we believe will take the Company to new levels over the coming years."

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Chairman's Statement

Overview

In last year's final results I set out the Board's expectation that underlying results in the 2017/18 financial year would show reasonable growth in profit from business operations being offset by a significant increase in expenditure on technology development. That turned out indeed to be the case. With those two factors combined, underlying profits for the year to 30 November 2018 at £2.9 million were slightly down on the prior year as reported (2017: £3.0 million), though slightly up on a constant currency basis.

Within the various market sectors Synectics serves, results from the gaming surveillance markets in Asia and the United States were very strong. It was particularly pleasing that Synectics continued to demonstrate the benefits of its growing leadership position in this most demanding of high-end surveillance applications. The Group also made excellent progress in sensitive and high profile infrastructure sites in the UK, where demand for specialist technical security capability continues to grow in the face of an expanding array of threats.

As previously announced, results for the year from the Group's global oil & gas and, especially, the UK on-bus sectors were below expectations, as those markets remain difficult. In the latter case, the Group's mobile surveillance business also suffered from the loss of a large contract renewal from a UK bus operator and a second customer taking its service work in-house. Management implemented a restructuring of the Group's activities in the UK on-bus area which, together with a re-assessment of related stock carrying values, resulted in a significant, mostly non-cash, non-underlying charge, partly in 2017/18 and partly on a restated basis in the prior years' accounts, as described below.

The additional investment in the Group's technology development programme proceeded as planned across the year, notably in adapting our core software architecture to benefit from growth opportunities in Cloud-based applications. Synectics' strong balance sheet and cash generation allow the Company to position itself to take full advantage of this and other emerging technology capabilities as we apply them to our established markets.

Overall, in 2017/18 Synectics made progress towards achieving its main strategic goals. We are looking now towards accelerated growth in revenues and more consistent delivery of returns across the sectors in which we operate.

Results

For the year to 30 November 2018, Synectics' consolidated revenue was £71.2 million (2017: £70.1 million). Underlying profit before tax was £2.9 million (2017: £3.0 million). On a constant currency basis³, revenue for the year ended 30 November 2018 was £72.3 million and underlying profit before tax was £3.1 million.

After charging £0.7 million for non-underlying costs for the financial year within the mobile systems business area, as described in the Business Review below, profit before tax was £2.1 million (2017: £2.5 million*).  The total non-underlying costs recorded in the mobile systems business was approximately £2.0 million, as announced on 29 November, 2018. The additional £1.3 million was required by accounting standards to be shown as a restatement of the previous years' results. Further details on the restatement and non-underlying costs are set out in Notes 3 and 4 below.

Underlying diluted earnings per share were 12.6p (2017: 15.2p) and diluted earnings per share were 9.1p (2017: 12.4p*). These numbers reflect a higher effective corporation tax rate for the year of 26% (2017: 15%) due primarily to an increased proportion of business in the US, combined with a re-measurement of deferred tax balances in the US as a result of US tax reform.

The Group's balance sheet continued to strengthen, with net cash at 30 November 2018 of £8.1 million (2017: £3.8 million). The last of the Group's bank borrowings were repaid during the year. This cash positon was somewhat flattered by favourable working capital flows around the year end. The consolidated firm order book at 30 November 2018 was £21.0 million (2017: £24.4 million), with the decline reflecting primarily lower outstanding orders for on-bus surveillance systems and the timing of large contracts in other sectors.

³ using average exchange rates for the year ended 30 November 2017.

^*Restated. See note 3

Dividend

Based on the Group's strong cash position, and our confidence in future financial results, the Board is recommending payment of an increased final dividend of 3.5p per share (2017: 3.0p), payable on 7 May 2019 to shareholders on the register as at close of business on 5 April 2019. If approved by shareholders at the Company's Annual General Meeting to be held on 25 April 2019, this will bring the total dividend payable for the year to 4.7p per share (2017: 4.0p).

Business Review

Synectics' business is to provide integrated electronic surveillance systems and services to specialist high-end markets.  Our systems are based on core proprietary technology, in particular systems integration and command and control software.  This technology is adapted for the specific needs of our target customer sectors, and provides fundamental differentiation from mainstream suppliers in the wider electronic security market.

Systems Division

Synectics' Systems division provides specialist electronic surveillance systems, based on its own proprietary technology, to global end customers with large-scale highly complex security requirements, particularly for gaming, oil & gas operations, transport & infrastructure, and high security & public space applications.

Revenue                                    £48.9 million (2017: £46.1 million)

Underlying gross margin           37.6% (2017: 39.8%)

Gross margin                             36.6% (2017: 38.6%*)

Underlying operating profit⁴       £3.8 million (2017: £4.2 million)

Operating profit                           £3.1 million (2017: £3.7 million*)

Underlying operating margin⁴     7.7% (2017: 9.2%)

Operating margin                        6.3% (2017: 8.0%*)

⁴ after research & development expenditure, but before non-underlying items and Group central costs.

^*Restated. See note 3

Gaming

Synectics' gaming activities generated record revenue in 2018. The market for gaming surveillance generally continued its recent strength but, for the first time in several years, new orders for Synectics from the North American market outstripped those from Asia. Although for security reasons the majority do not wish to be specifically named, the Group is now proud to have as customers across those two regions most of the major casino operators that dominate the industry.

During the year, Synectics delivered substantial new systems and upgrades in Macau, Singapore, the Philippines, Korea, Canada, Las Vegas and other casino locations in the United States, as well as sales to several major cruise lines for ship-board gaming.  Much of this was repeat business for established customers, in either existing or new locations.

Gaming premises operate in sensitive regulatory environments, where quality and performance standards for surveillance technology are extremely demanding, and where failure can be not only costly, but potentially threatening to a customer's business itself.  They are also environments where surveillance technology can be adapted and developed to bring meaningful business benefits as well as satisfying security requirements.  These characteristics continue to play to Synectics' strengths in reliability, technical innovation and dedicated customer support.

The global market for casino-based gaming continues to grow, especially for integrated resorts that combine casinos with other attractions, such as theme parks.  Barriers to entry for general security industry competitors are quite considerable, so this remains an attractive market for Synectics.

Oil & Gas

Although the global oil and gas prices have now recovered to a level that supports exploration and infrastructure investment, the price shock of 2014 - 2016 is still having an impact on current capital expenditure in the industry. This particularly applies to large scale new development projects that take years to bring to fruition. Delays to specific projects that Synectics was expecting to receive orders for in 2017/18 meant that revenue and profit contribution from our oil & gas activities were below the Board's expectations, despite increased bid activity and optimism in the market. At this stage in the recovery, we are seeing more smaller orders and fewer of the larger orders that usually underpin our business in this area.

Synectics made sales in this sector during 2017/18 for installation in almost all of the oil and gas producing regions globally. Systems were delivered for new projects in Qatar, Mozambique, Azerbaijan and the Gulf of Mexico, as well as for new marine vessels being built in Asia. Upgrades and service contracts were won for many existing installations in the Middle East, Asia and elsewhere.

Transport & Infrastructure

Sophisticated surveillance systems in transport & infrastructure are well suited to early adoption of new technology approaches to address the clear needs of those responsible not only for public safety and high security sites, but also for the efficient operation of ever busier transport systems. The market is growing and is an area of increasing focus for the Group.

Synectics' presence in protecting the UK's national and public infrastructure was further strengthened during the year. We won important new installation and upgrade sales for Synergy systems from customers such as London Olympic Park, a major London sports stadium, high security prisons, several "safe city" systems across the UK, a nationwide utility network, Leeds hospital, a high security government agency and our initial Synergy installation at Heathrow airport.

Internationally, Synectics secured a substantial three-year renewal of its long standing contract with BVG in Berlin (operator of one of Europe's largest urban rapid-transit systems), an initial Synergy software order from Deutsche Bahn, on-train systems for the Munich public transport operator and

a major upgrade of the Synergy system at Jurong Shipyard in Singapore.

Our UK mobile systems business had a tough year, with its main end-market experiencing a further significant decline in new bus registrations, combined with a large bus operator customer choosing not to renew its fleet service contract on terms acceptable to Synectics, and a second customer taking its service work in-house. As a result, revenue from the sector in the financial year ended 30 November 2018 was 16% lower than in the prior year. Management responded to these events by restructuring the sector's activities around a lower overhead cost base. In addition, a re-evaluation of stock values in that area led to a significant one-off write-down. The combined impact of these costs resulted in a non-underlying £2 million charge, of which £0.7 million has been recorded in 2017/18, with the remaining £1.3 million required to be brought to account via a restatement of non-underlying costs in prior years.  £1.8 million of the total £2.0 million non-underlying mobile systems charge is non-cash.

On the positive side, the introduction of a Cloud-based video evidence management solution created strong interest among Synectics' on-vehicle customers and agreement to undertake several additional proof-of-concept trials, which are now underway. These followed on from the initial successful trial for a launch customer early in 2018 that resulted in a service that is now deployed.

Following the restructuring, the Board expects that Synectics' mobile systems segment will produce a satisfactory financial return in the 2018/19 year.

Research & Development

Continued investment in our proprietary technology base within the Systems division remains an important priority for the Group.  During the 2018 financial year, Synectics spent a total of £3.1 million on technology development (2017: £2.6 million).  Of this total, £0.5 million was capitalised, and the remainder expensed to the Income Statement. £0.7 million of previously capitalised development costs were amortised in the year.

This planned increase in expenditure in 2018 enabled important work on improving our development methodology, extending the Synergy software platform and further enhancing its cyber security resiliance. This was on top of incremental advances in adding features, incorporating 4K and H.265 video standards, and continual additions to our library of deep integrations with the growing panoply of third party systems.

During 2019, Synectics intends to further re-orientate its development team to incorporate a more formal product management structure that will help to connect our product development even more closely to market needs and to dedicate more of its resources to future product development.

Integration & Managed Services Division

Synectics' Integration & Managed Services ('IMS') division is one of the leading UK providers of design, integration, turnkey supply, monitoring and management of large-scale electronic security systems.  Its main markets are in critical infrastructure, public space and multi-site systems.  Its capabilities include a nationwide network of service engineers, UK government security-cleared personnel and facilities, and an in-house 24-hour monitoring centre and helpdesk.  The IMS division supplies proprietary products and technology from Synectics' Systems division as well as from third parties.

Revenue                                       £24.2 million (2017: £25.1 million)

Gross margin                                22.8% (2017: 22.3%)

Underlying operating profit⁴          £1.0 million (2017: £1.0 million)

Operating profit                             £1.0 million (2017: £1.0 million)

Underlying operating margin⁴       4.0% (2017: 4.0%)

Operating margin                          4.0% (2017: 4.0%)

⁴ before non-underlying items and Group central costs.

Integrated Systems

The IMS division as a whole produced a relatively flat financial performance for 2017/18, though this masks some substantial improvements in the quality of the underlying business.

In particular, the Integrated Systems business area continued to win further high profile strategic customers, a number of them including sales of Synectics' Synergy software. Among notable new business wins in 2018 were a portfolio of six custodial sites for Serco, a leading provider of public sector services, London's Olympic Park, a major London sports stadium, a pan-European network of data centres and substantial additional works for Westminster Abbey, Goldsmith's University and Huntingdonshire Council. Our position as one of the leading accredited high security providers in the UK means that we continue to win significant ongoing work for government agencies, including for one highly visible and prestigious site in London.

Significant strides have been made in recent years to sharpen the strategic focus of this business onto more complex and sensitive high security applications and to improve the quality of management, customer service and business processes. The success of these efforts is borne out in the growing pipeline of expected new business in the area of our strategic objective, increasing margins from a more effective service organisation and in feedback from customers and employees.

The UK market for sophisticated, high quality security systems integration and support is growing.  Technology is advancing at an increasing pace and Synectics' activities in this area are increasingly directed towards customers who need and value expertise and are prepared to invest in a longer term relationship rather than rely on one-off lowest-price tenders.  Having access to the resources of a parent company at the forefront of surveillance technology development is a clear competitive advantage in succeeding with such customers.

Managed Services

The focus of the division's managed services activities continues to be on delivering security and facilities management services for clients with large and complex multi-site estates.  During 2017/18, extensions were won on contracts for three existing clients, including Wolseley and a major high street chain. Importantly, Managed Services was also able to win two new clients, The Fragrance Shop and Aurum, using its new HALO management software and covering both security and FM services.

This business area is well managed and its pipeline of qualified new sales opportunities has grown. We expect a satisfactory performance in the coming year.

People

There were three changes on the Synectics board in the last financial year. Firstly, Dennis Bate retired in April 2018 after 12 years' service as a non-executive director. During that time Dennis consistently provided us with wise and experienced counsel, and on numerous occasions contributed value to the Company through his wide range of contacts, mentoring of our senior managers and understanding of the needs of current and prospective Synectics' customers. On behalf of the Board and shareholders, I would like to pay sincere tribute here for Dennis' many contributions.

On 30 November 2018, Mike Stilwell stood down as Finance Director, having ensured a well-managed and positive handover to his successor. Mike had been an important member of the senior management team at Synectics since joining in 2012 and we wish him well for the future. Simon Beswick joined the Company in September 2018 and was appointed to the board as Finance Director on 30 November 2018. He has already had a positive impact and both the Board and senior management team look forward to working closely with him.

Sincere thanks are also due once again to Synectics' employees at all levels for another year of outstanding commitment and effort on behalf of the Group. For some time now, Synectics has been conducting annual surveys of employees and customers, with the Board paying close attention to the resulting key metrics and trends. It will not surprise anyone that there is a clear positive correlation between rising employee engagement scores and customer satisfaction (as measured by our net promoter score). During 2017/18, employee engagement rose for the third consecutive year and our Group-wide customer satisfaction rating increased substantially from an already good level.

Synectics' success in implementing its strategy depends in large measure on retaining smart, talented employees who are thoroughly engaged in providing short and long term value to our customers. The Group's executive team will continue to be focused on that goal.

Strategy

As the volume of digital data generated by high-end, video-centric surveillance systems continues to grow exponentially, the complexity of extracting actionable intelligence from that data is opening up growing scope for innovation. Rapidly evolving technology platforms, a new generation of customers brought up on intuitive graphical interfaces, emerging self-learning software systems, and increasingly sophisticated cyber threats are all adding to the potential for solving the problems of high end surveillance customers in new and effective ways.

Throughout its 30-year history, Synectics has consistently demonstrated the combination of deep technical capability and practical, expertise-based sales approach needed to benefit from such opportunities. Synectics' heritage and instincts are entrepreneurial, while its long list of high profile reference sites, allied to its reputation for reliability, provides reassurance. We believe these characteristics give the Group a solid base from which to build in an attractive market.

Outlook

The Board considers that any potential outcome of the Brexit situation is likely to have only a limited impact on the Group, due to the nature of our customer and supply base. However, we have taken modest and appropriate measures to increase the buffer in our EU-based supply chain and to ensure we have workable alternatives where necessary.   

The technology and market environments in which the Group operates are evolving at an increasing pace. The Board intends to continue, and most likely accelerate, the level of investment in development of next generation Synergy software platforms to take full advantage of the opportunities emerging in the Group's specialist sectors of the market. In that regard, both our cash resources and unleveraged balance sheet are important assets.

To succeed as planned, the Group also needs to strengthen its management structures and systems. A number of new managers have joined the senior team in recent months, and we are actively recruiting several more, particularly on the sales front. We have also initiated a thorough review of the different systems currently used by the Group which we expect to result in implementation of a new, more unified set of systems across the Group, enabling efficiencies, improved customer service and a more scalable organisation.

The pipeline of identified new business that the Group expects to win and deliver in 2019 is strong, and we expect to benefit from growing momentum in certain market sectors that did less well in 2018. Overall, the Board is confident that Synectics will make good progress against both its financial and strategic goals in the current financial year.

David Coghlan

Chairman

26 February 2019

Consolidated Income Statement

For the year ended 30 November 2018

Consolidated Statement of Comprehensive Income

For the year ended 30 November 2018

Consolidated Statement of Financial Position

As at 30 November 2018

Consolidated Statement of Changes in Equity

For the year ended 30 November 2018

Consolidated Cash Flow Statement

For the year ended 30 November 2018

Notes

1        Basis of preparation

The information contained within this announcement has been extracted from the audited financial statements which have been prepared in accordance with IFRS as endorsed by the European Union ('adopted IFRS'), and with those parts of the Companies Act 2006 applicable to companies reporting under adopted IFRS.  They have been prepared using the historical cost convention except where the measurement of balances at fair value is required.

2        Segmental analysis

¹ Underlying operating profit represents operating profit before non-underlying items (UK mobile systems restructuring costs and stock write-down, and amortisation of acquired intangibles).

3        Restatement of primary statements for the year ended 30 November 2017

Due to the continued pressure on the UK on-vehicle sector, caused by a further significant decline in new bus registrations, combined with the lost renewal of a long-term installation and support contract with a major customer, management has performed a review of the business and its cost base.  This review flagged some inappropriate procedures within this business, resulting in the reassessment of the value of the stock used in on-vehicle activities and their accounting treatment.  The re-evaluation of stock has led to a significant one-off write-down and management has determined that an element of the write-down should have been included in the results of previous years. 

It was determined by the Board of Directors that adjustments should be made to restate the results for the year ended 30 November 2017 to reflect the actual position and performance of the Group for that year.  A third Statement of Financial Position has also been presented, at 30 November 2016, in order to reflect to the restated opening position.

The adjustments to the financial statements for the year ended 30 November 2017 are as follows:

1.     Non-underlying write-down of inventory relating to UK on-vehicle of £549,000

2.     Non-underlying tax credit in relation to the write-down of inventory of £98,000

The adjustments to the financial statements for the years ending on or before 30 November 2016 are as follows:

1.     Non-underlying write-down of inventory relating to UK on-vehicle of £732,000

Extract from restated Consolidated income statement for the year ended 30 November 2017:

Extract from restated Consolidated statement of financial position for the year ended 30 November 2016:

3       Restatement of primary statements for the year ended 30 November 2017 continued

Extract from restated Consolidated statement of financial position for the year ended 30 November 2017:

4        Non-underlying items

The restructuring costs incurred during the year relate to restructuring in the UK mobile systems business (see note 3). In  2018 £0.5 million relates to the write-down of stock (2017: £0.5 million (restated)) and £0.2 million (2017: £nil) relates to the severance costs incurred from the review of the cost base of this business.  

5        Taxation

5        Taxation continued

Further analysed as tax relating to:

Reconciliation of tax charge for the year

The corporation tax assessed for the year differs from the standard rate of corporation tax in the UK of 19% (2017: 19.33%).  The differences are explained below:

The Group's tax rate is sensitive to a geographic mix of profits and reflects a combination of higher rates in the US and lower rates in Singapore and Macau.  The Group's effective tax rate in 2018 has been impacted by the change in tax rates in the US, due to the significant US tax reform, tax losses not recognised in relation to legal entities which have suffered a tax loss and the truing up of tax provisions booked in previous years.  Over the medium term, the effective tax rate is expected to decrease as the business continues to be profitable going forward.

Deferred tax assets of £0.5 million (2017: £0.3 million) have been recognised in relation to legal entities which suffered a tax loss in the preceding periods.  The assets are recognised based upon future taxable profit forecasts for the entities concerned.

The Group has further tax losses which may be available to be carried forward for offset against the future taxable profits of certain Group companies amounting to approximately £5.0 million (2017: £4.8 million).  No deferred tax asset (2017: £nil) in respect of these losses has been recognised at the year end as the Group does not currently anticipate being able to offset these against future profits.

6        Dividends

The Directors recommend the payment of a final dividend of 3.5p per share (2017: 3.0p per share), totalling around £597,000.  Subject to shareholders' approval at the Company's Annual General Meeting to be held on 25 April 2019, this is expected to be paid on 7 May 2019 to shareholders on the register as at close of business on 5 April.  An interim dividend of 1.2p per share was paid during 2018 (2017: 1.0p per share). 

7        Earnings per share
 

8        Cash and cash equivalents

The fair value of cash and cash equivalents approximates to their book value.

Cash at bank earns interest at the daily bank base rate.

9        Provisions

Provisions have been analysed between current and non-current as follows:

10      Company information

Full Financial Statements

The auditors have issued an unqualified opinion on the full financial statements for the year ended 30 November 2018 which will be made available to shareholders and delivered to the Registrar of Companies in due course.  The financial information for 2018 and 2017 does not comprise statutory financial statements.  Statutory financial statements for the year ended 30 November 2017, on which the auditors gave an unqualified opinion, have been delivered to the Registrar of Companies.  Further copies of these results, and the full financial statements when published, will be available on the Company website at www.synecticsplc.com and at the Company's registered office: Synectics plc, Studley Point, 88 Birmingham Road, Studley, Warwickshire, B80 7AS.

Forward-looking statements

This report may contain certain statements about the future outlook for Synectics plc.  Although the Directors believe their expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.