In case you are in any doubt that we live in a regulated society, try this.
There are as many as seventeen different regulatory regimes that apply to the 162,000 farms in this country. On average, each farm is subject to seven or eight of these, covering such aspects as the disposal of waste, water abstraction, the monitoring of nitrate-vulnerable zones and something that applies to pigs and poultry called Integrated Pollution Prevention and Control.
Until recently the Environment Agency had to send a different inspector to a farm for each different regulation. Now, thanks to a software system, a single inspector can check farms for compliance against multiple regulations.
Using a hand held PC he will be able to call up all the necessary information from various databases and also complete and file his report on-line. This system is the result of the sort of complex project requiring an intimate knowledge of the customer’s requirements that is the typical of the work done by Chippenham-based SciSys (LON:SSY).
I visited SciSys last week to find a company that was grappling not only with the complex problems of its customers, but also with a few of its own. It has had some difficulties in the last couple of years, resulting in the departure of chief executive Mark Hampson and an assumption of this role by chairman Dr Mike Love.
Love had been chief executive from 1986 to 2003, and has a 15% shareholding in the business. So he cannot have been too pleased to have seen SciSys plunge into a loss of £1.4m in 2007, the result of costs overrunning the budget on a few contracts.
To some extent this was perhaps due to the changed circumstances of the software industry. Ten years ago software engineers would charge by the hour. Today they are more likely to be asked to quote a fixed price for a job, and must then tailor their costs accordingly. But still SciSys evidently failed to do the latter very effectively, although ironically this seems to have been because in one respect it was being too successful.
‘We are working flat out,’ Love told me. ‘We have no spare capacity, and this has caused problems. We would like to free up some of our staff in order to improve procedures in the business.’
This, I am sure, will gradually happen and in the meantime Love and his new finance director Chris Cheetham have been ensuring that a closer check is taken on the progress of individual contracts.
A return to profit
Last year SciSys billed revenues of £25.6m, but its operating costs were £28.3m. The latter are largely staff costs and so very much under the control of management. The revenues are quite predictable also, so an application of proper management disciplines should enable SciSys to return to profit.
This is the prediction of broker Landsbanki which forecasts a pre-tax profit of £1.1m this year on revenues of £32.5m. Given that SciSys pays a low tax charge this would justify today’s £11m market capitalisation, but Landsbanki’s forecast assumes an operating margin of only around half of the 6-7% level that Love and Cheetham have set as a target.
The most encouraging thing for shareholders is that SciSys remains so busy. This says something about its reputation and the excellent relationships that it has with its clients.
The European Space Agency was SciSys’s first customer back in 1986 and is still the largest. Another important customer is the Environment Agency, while other customers are from the three main areas served by Scisys, namely space and communications, media and broadcasting, and government, the latter including the defence industry.
Love describes the core competence of SciSys as the understanding of complex requirements and the design of software solutions, but following the acquisition last September of the German software company VCS, it now also has a product suite to sell.
VCS was well known to SciSys, the two of them having worked together in the past. Dr Love points to the synergies that exist between the two companies within the space, telecom and defence businesses, but he is also excited by the strong ties that VCS has with broadcasters — in particular the BBC.
It is in the media area that VCS has brought into the group a suite of software products, named ‘dira!’ Last October the BBC commissioned VCS to develop a content management solution to distribute the output of eleven national radio channels via the internet. And last month SciSys announced another contract, this time with the German broadcaster Deutsche Welle to renew its current digital audio production and playout system.
So SciSys now seems to be on the recovery trail and is sufficiently confident in its future to have fended off a bid approach by Microgen in April. At last week’s AGM Dr Love reassured shareholders that Scisys is ‘moving back to the levels of consistent and sustainable financial performance that shareholders have historically expected’ and that ‘half year results will be consistent with market expectations for the full year.’ So it seems that the management is back on top of the business. Tough love, it seems, is restoring SciSys to health.
• This article was written by Tom Bulford for The Penny Sleuth