In H112, Scisys has edged a step closer to its goal of consistently achieving an operating margin north of 7% (see Scisys: Turned around by Love). In the six months to 30th June 2012, the adjusted operating profit (before share-based payment charged and exceptional costs) increased from £1.2m to £1.3m, representing an adjusted operating margin of 6.6%.
This was against a backdrop of an 11% decline in revenues to £19.6m. There are all sorts of ways you can cut the numbers to determine that underlying trading wasn’t as bad as the top line revenue performance indicates. For a start, low margin hardware sales (resale) declined significantly (as planned) from £3.3m to £1.7m. Take those out of the equation and you are left with ‘professional fees’, which also declined by 4% (to £17.9m). And much of that decline is put down to adverse foreign exchange rates as a major element is earned in Euros. Indeed, management views fluctuating exchange rates as an ongoing cause for concern and have now implemented currency hedging arrangements.
However, the difficult market conditions can’t be ignored. Chairman, Mike Love, blames “timing differences” in the public sector for the 14% decline in ‘Environment’ professional fees revenues and the 16% decline in ‘Government & Defence professional fees revenues. In H111, Scisys benefitted as some clients accelerated spending prior to the austerity measures being put in place, while in H112; the opposite was true as some client deferred spending decisions pending the conclusion of the London 2012 Olympics. This view chimes with our UK public sector SITS market forecasts (see UK Public Sector SITS Market Trends & Forecasts – September 2012). But, the beauty of the Scisys business is that, though it never fires on all cylinders, there are normally one or two divisions that ‘do the business’. This time it was the Media & Broadcast division, which increased profession services revenues by 11% to £4.3m. Looking ahead, the Group order book was up 8% at the beginning of July compared to a year before, and with an experienced management team behind it, we can expect operating margins to continue to edge closer to the Board's target.