SYS Sysgroup Plc

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of the domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018 (as amended) ("UK MAR"). Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

3 December 2024

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

Half year results for the six months ended 30 September 2024

SysGroup plc (AIM:SYS), the technology partner for delivery and management of cloud, data, and security services to power Artificial Intelligence ("AI") and Machine Learning ("ML") transformation, announces its unaudited half year results for the six months ended 30 September 2024 ("H1 FY25" or the "Period").

Operational highlights

·    Successfully raised £11.2m by way of an oversubscribed equity placing, providing a robust financial foundation to support the future strategic plan

·     Invested in technical capabilities to deliver end to end solution across the entire data landscape including full cloud solution across AWS and Azure

·      Developed additional R&D resources, including offshore capabilities in India and Eastern Europe

·    Progressed to AWS Advanced Tier Service Partners status (Level 3) in 6 months following our registration as a partner

·      Invited to present AI transformation project at AWS re:Invent in Las Vegas - 50,000+ attendees

·      Approved as one of only two UK Zscaler Managed Security Service Partners

·      Promoted to CyberArk's Advanced Partner, top tier partner status

·      Won second largest contract in SysGroup's history, totalling £2.2m over three years

·     In November 2024, acquired the trade and assets Crossword Consulting Limited (in administration) (a recognised leader in cybersecurity consulting)

Financial highlights

·    Revenue £10.16m (H1 FY24: £10.96m), includes a strategic shift towards growth-oriented accounts that align with our core service offerings

·      Managed IT Services recurring revenue increased to 86% of total revenue (H1 FY23: 84%)

·      Gross margin 49.6% (H1 FY24: 49.9%)

·      Rebalanced cost base with a net investment of £0.6m in additional resources and capabilities to underpin our new growth strategy

·      Adjusted EBITDA¹ of £0.44m (H1 FY24: £1.57m)

·      Statutory loss before tax of £1.09m (H1 FY24: loss before tax of £1.09m)

·      Net cash² of £4.63m at 30 September 2024 (30 September 2023: net debt² of £(3.43)m)

Outlook

Whilst the Group has made significant advances operationally and the high recurring nature of our revenue provides good visibility into our existing revenue base, the Group remains dependent on a few high-value projects that meaningfully impact the overall results given the Group's current size. As a result of the longer-than-expected sales cycles and the focus on core competencies and account consolidation process, the Board anticipates revenue and adjusted EBITDA for H2 FY25 will be in line with H1 FY25 and therefore performance for the year ending 31 March 2025 will be below current market expectations.

Post the internal transformation the Board believes the Group is strategically well positioned to maximise the opportunities presented in the medium term.

Heejae Chae, Executive Chair, commented:

Notes

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

2.     Net cash / (debt) represents cash balances less bank loans and lease liabilities and excludes contingent consideration.

About us

SysGroup plc is a managed service provider of end-to-end data solutions enabling us to take our customers on their AI data journey.  The Group offers an integrated set of modern technologies that collectively meets our customers end-to-end data needs including connectivity, cloud hosting, delivery, analytics and governance of customer data, as well as a security layer for users and applications.

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

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

Overview & Strategy

Our strategy is to position SysGroup as the partner of choice for SMBs in their AI and digital transformation journey.  A core part of this vision is our Technology Services strategy which focuses on building a modern unified data solution platform.  Our integrated offering encompasses connectivity, cloud hosting, delivery, analytics and governance and a robust security layer for users and applications enabling us to meet the end-to end data needs of our customers.

Revenue in the Period was £10.16m (H1 FY24: £10.96m). Managed IT services now constitutes 86% of our revenues, up from 84% last year, further strengthening our financial stability and visibility. During the Period, we delivered Adjusted EBITDA of £0.44m, while continuing to invest in talent and systems to support our new growth strategy.

The Group's cash balance has improved significantly from £1.94m in March 24 to £9.93m in September 2024, primarily driven by an equity raise of £10.59m (net of transaction costs) in June 2024. This funding has transformed the Group's financial standing, moving us from a net debt position of £(3.37)m in March 24 to a  net cash position of £4.63m. Part of the cash reserves generated from the equity raise were used to settle the final Truststream earn-out payment of £1.79m with the remainder retained for future acquisitions and internal transformation.

Operations

During the period, we continued to make substantial investments in both our internal technology infrastructure and our people.  We successfully developed five technology towers, focusing on, Hosting, Data Protection, Connectivity, Cybersecurity and Analytics including ML and AI.  These pillars are supported by our Support and Monitoring teams, enabling a fully managed service offering.  We have hired the senior leaders who are now driving these forward.  We have also invested in additional R&D resources, including offshore capabilities in India and Eastern Europe to support these teams.

Our expertise is reinforced by the technical accreditations achieved in the period including:

·      AWS Advanced Tier Service Partners status (Level 3) qualifying for fundings and joint sales and marketing

·      Authorisation as one of only two UK Zscaler Managed Security Service Partners

·      Promoted to CyberArk's Advanced Partner, top tier partner status

·      Softcat Specialist Partner status - chosen partner for AI/ML, CyberArk and Zscaler

·      Watchguard Platinum Partner - one of only 2 in the UK

·      AWS Public Sector accredited Partner

GeneSys

Our internal transformation project "GeneSys" is progressing rapidly as we strive to embody our vision of being a first in class AI-led company.  Implementing the benefits of AI will enable us to serve as a live case study of best practices for our customers as well as achieve significant productivity gains.  To date, we have developed and launched New GeneSys UI and multi-tenant AWS infrastructure. We have also developed and provided training on service desk AI tools, including an Information Finder, Log Triage Tool and Customer Portal tool. Success with these tools has been quickly evident and 1st response Service Level Agreement achievements increased from 75% to 94% on the first day of deployment.  AWS have invited us to present our work on this project at multiple events to date in Europe and at their flagship re:Invent in Las Vegas in December which further validates our progress.

Acquisition

We recently announced the acquisition of the trade and assets of Crossword Consulting Limited ("CCL") (in administration), the consulting arm of Crossword Cybersecurity plc (in administration).  Based in London, CCL is a recognised leader in cybersecurity consulting, offering specialised services such as virtual CISO ("vCISO") support and penetration testing to medium and large enterprises.  This acquisition strengthens our capabilities with the addition of 12 seasoned cybersecurity consultants, who will expand SysGroup's customer offerings in cybersecurity and compliance. For the 12 months ending 30 September 2024, CCL delivered unaudited revenues of circa £2.40 million, with more than 75% of revenues recurring. Additionally, CCL brings a diverse client base of customers, including FTSE 100, FTSE 250, and S&P-listed companies, which presents new cross-sell opportunities across multiple sectors.

Results and Trading

In H1 FY25 the Group delivered revenue of £10.16m (H1 FY24: £10.96m) and Adjusted EBITDA of £0.44m (H1 FY24: £1.57m). Managed IT services revenue decreased to £8.77m (H1 FY24: £9.22m), a decline of 5% on the comparative period, reflecting a strategic decision to off-board certain accounts.  Value Added Resale ("VAR") revenue was £1.39m (H1 FY24: £1.74m), a decrease of 20% on the comparative period, driven by customer procurement cycles.  The revenue mix in H1 FY25 is 86% Managed IT services and 14% VAR sales (H1 FY24: 84%:16%).

Gross profit was £5.04m (H1 FY24: £5.47m) with a gross margin of 49.6% (H1 FY24: 49.9%). The Managed IT services margin of 52.5% is consistent with the FY24 margin of 52.4%. The VAR margin has improved versus the prior period (up to 31.7% compared to 16.1% in FY24) as the prior year contained a number of lower margin VAR sales.

Adjusted operating expenses of £4.60m were higher than the same period last year (H1 FY24: £3.90m), as expected due to the investment in the Senior Leadership Team and AI/Machine Learning team. Adjusted operating expenses in H2 FY25 are expected to be lower as we achieve forecast efficiencies in the cost base, excluding the impact of the CCL acquisition.

The consolidated income statement includes £0.40m of exceptional costs (H1 FY24: £1.05m) which relate to restructuring costs, M&A project costs and fair value adjustments on contingent consideration payments. The share-based payments charge has decreased to £nil, with no active share schemes in H1 FY25. New Group incentive plans have been introduced in H2 FY25, as approved by shareholders at the General meeting on 24 June 2024.

Net finance costs of £0.03m have decreased compared to the same period last year (H1 FY24: £0.29m) as in the current period the Group has benefitted from interest income on cash deposits raised, following the £10.59m (net of transaction costs) equity raise in June 24.

The Group delivered a statutory loss before tax of £1.09m (H1 FY24: loss before tax £1.09m).

The taxation credit of £0.28m (H1 FY24: credit of £0.34m) represents the movement on deferred tax in the Period with no corporation tax charge arising on the Group's trading position in H1 FY24.

Adjusted basic earnings per share for H1 FY25 was 0.0p (H1 FY24: 1.7p) and basic loss per share was (1.2)p (H1 FY24: loss per share (1.5)p).

Cashflow & Net Debt

The Group's cash balance has increased significantly from £1.94m at 31 March 2024 to £9.93m at 30 September 2024, driven by the equity raise of £10.59m (net of transaction costs) in June 2024. As a result, the Group has moved to a net cash position of £4.63m (31 March 2024: net debt of (£3.37)m). The cash reserves generated from the equity raise were partially used to settle the final Truststream earn-out payment of £1.79m in the period and will be used to fund future acquisitions and internal transformation.

Cash outflow from operations was £(0.49)m (H1 FY24: inflow of £0.23m) before exceptional cash costs of £(0.53)m (H1 FY24: costs of £(1.01)m) is impacted heavily by working capital movements and is expected to recover in H2 FY25.

Net cash outflows from investing activities of £(0.06)m) are lower than H1 FY24 (outflow of £(0.32)m) due to the benefit of £0.23m of interest income on cash deposits (following the equity raise). The £0.25m of payments to acquire intangible assets relate to the capitalisation of staff costs incurred on internal AI transformation projects.

Net cash inflows from financing activities of £8.50m are driven mainly by the £10.59m equity raise net of the Truststream earn-out payment of £1.79m and RCF interest of £0.23m.

CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME

SIX MONTHS ENDED 30 SEPTEMBER 2024

All the results arise from continuing operations.

CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION

AS AT 30 SEPTEMBER 2024

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY

SIX MONTHS ENDED 30 SEPTEMBER 2024

The following describes the nature and purpose of each reserve within equity:

CONSOLIDATED CONDENSED STATEMENT OF CASHFLOWS

SIX MONTHS ENDED 30 SEPTEMBER 2024

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

SIX MONTHS ENDED 30 SEPTEMBER 2023

1.    ACCOUNTING POLICIES

The accounting policies used in the preparation of the unaudited consolidated condensed financial information for the six months ended 30 September 2024 are prepared in accordance with UK adopted International Financial Reporting Standards ("IFRS") and are consistent with those that will be adopted in the annual statutory financial statements for the year ended 31 March 2025.

While the financial information included has been prepared in accordance with the recognition and measurement criteria, in accordance with UK adopted International Financial Reporting Standards, these consolidated condensed financial statements do not contain sufficient information to comply with IFRSs.

The financial information for the six-month period ended 30 September 2024 and 30 September 2023 does not constitute statutory accounts within the meaning of Section 434(3) of the Companies Act 2006 and is unaudited. The comparative financial information for the year ended 31 March 2024 included within this report does not constitute the full statutory accounts for that period. The statutory Annual Report and Financial Statements for 2024 have been filed with the Registrar of Companies. The Independent Auditor's Report on that Annual Report and Financial Statements for 2023 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

This Interim Report has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The Interim Report should not be relied on by any other party or for any other purpose.

This unaudited interim financial information has been prepared in accordance with the requirement of the AIM Rules for Companies and in accordance with this basis of preparation.

Exceptional items

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 (Note 4) as management believe they should be considered separately to gain an understanding of the underlying profitability of the trading businesses.

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 Group has an operating model with a high level of resilience with 86% of revenue deriving from contracted managed IT services which are business critical supplies to customers. The Group has a gross cash balance of £9.93m and a net cash position of £4.64m at 30 September 2024. The Group has undrawn RCF facilities available of £3.2m which can be used for working capital and acquisitions, and an unutilised overdraft facility of £0.5m. The Group is forecasting to generate healthy operational cashflows and achieve the bank loan covenants for the full period of the forecast to March 2026.  

The Directors have reviewed the Group's financial forecasts and taken into account the current UK economic outlook. The projected trading forecasts and resultant cashflows, together with the confirmed loan and overdraft 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 they continue to adopt the going concern basis of accounting in preparing the financial statements.

2.    SEGMENTAL REPORTING

The chief operating decision maker for the Group is the Board of Directors and 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 is for sales of IT hardware and licences  procured from supplier partners.

The monthly management accounts reported to the Board of Directors are reviewed at a consolidated level and the Board review the results of the operating segments at a revenue and gross profit level since the Group's management and operational structure operate as unified 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, and all revenue is earned from external customers. The business segments' gross profit is reconciled to profit before taxation as per the consolidated income statement. The Group's overheads are managed centrally by the Board and consequently there is no reconciliation to profit before tax at a segmental level.

3.    EARNINGS PER SHARE

3.    EARNINGS PER SHARE (continued)

The tax adjustments relate to current and deferred tax on the amortisation of intangible assets, exceptional items and share based payments.

4.    EXCEPTIONAL ITEMS

The integration and restructuring costs in the period relate to employee exit costs and professional service fees incurred when restructuring the Group's workforce. In the prior year, the integration and restructuring costs relate to the settlement of the former CEO's contractual terms and costs associated with the restructuring of the Senior Leadership Team. These costs are considered material and non-recurring and have therefore been classified as exceptional.

The M&A projects expenditure relate to costs associated with the evaluation of potential acquisition targets. This is considered material and has therefore been classified as exceptional.

The supplier charges in dispute are subject to ongoing action for which the company is pursuing recovery. These costs are considered non-recurring and exceptional and are therefore classified as exceptional.

All of the items above, based upon the judgment of the management team, meet the definition of an exceptional item as defined within the Group's accounting policies.

5.    FINANCE COSTS

6.    ALTERNATIVE PERFORMANCE MEASURES

6.    ALTERNATIVE PERFORMANCE MEASURES (continued)

7.    INTANGIBLE ASSETS

8.    TRADE AND OTHER RECEIVABLES

9.    TRADE AND OTHER PAYABLES

10.  BANK LOAN

The Group has an £8.0m revolving credit facility with Santander of which £4.75m is drawn down at 30 September 2024. The banking facility has a term of five years to April 2027, an interest rate of Base Rate +3.25% margin on drawn funds and covenants that are tested quarterly relating to total net debt to adjusted EBITDA leverage and minimum liquidity.

11.  CONTINGENT CONSIDERATION

The Group acquired Truststream Security Solutions Limited in April 2022 and the agreement included a two year earn-out mechanism with contingent consideration payable up to £3.08m following the first and second anniversaries of the transaction. The earn-out was 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 final earn-out payment of £1,794k was made in H1 FY25. The excess above the £1,751k recorded on 31 March 24 is shown within exceptional costs (note 4).

12.  SHARE CAPITAL

On 26 June 2024 34,019,007 shares were allotted with a nominal value of £0.01 following an equity raise with a subscription price of £0.33 per share. The total cash raised was £11,226,272. Transaction costs of £637,052 were incurred, leaving net proceeds of £10,589,220.

13.  AVAILABILITY OF INTERIM REPORT

Copies of this report are available on the Company's website at http://www.sysgroup.com.