Synectics plc (SNX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, welcome to the Synectics plc final results investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself, however, the company can review all questions submitted today and we'll publish our responses where it's appropriate to do so on the Investor Meet Company platform. And before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention. I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Synectics plc. Amanda. Good morning.

Thank you. Good morning. I'm Amanda Larnder, CEO of Synectics. And with me, I have Chris Pennington, our Interim Finance Director. We are pleased to be able to present the full year results for Synectics for the year ended 30th of November 2024. So in terms of content today, I'll give a brief overview of the company and the performance review of each of the business units. Chris will then take you through the consolidated results, and then I'll come back on and talk a bit about our strategy and priority to move forward. Next slide. Thank you. So Synectics provides advanced security and surveillance solutions that help protect people, property and assets around the world. We focus on core markets where security and surveillance are critical. And these are often regulated markets where our expertise can really make a difference to the customer. Since the year-end, we have strategically redefined [indiscernible] better aligned with current market dynamics and emerging opportunities. So those of you who've already [indiscernible] in the business, oil and gas assets within the broader energy sector. Gaming within leisure and hospitality, and then we define the remaining markets into 3 sectors or critical infrastructure, public space and transport. And that's to make sure the right focus on these areas. We'll be reporting this way from 2025 onwards. The common market drivers that we tend to see in these sectors include regulatory compliance, growing security threats and technology and digital transformation. We have 2 business units, Synectics Systems, which developed proprietary technology-led solutions to specialist markets globally, and that's predominantly through local systems integrators and channel partners. Second business unit is ocular integration, and that's a U.K.-based security systems integrator delivering solutions to end users. We currently have geographical hubs in the U.K., Germany, North America and Singapore. And we're in the process of setting up a presence in the Middle East, and I'll come back to talk about that a bit more later. Within our solutions, we supply software, hardware and cameras, and I'll give a brief overview of some of our core technology now. So our software is our proprietary synergy command and control platform and extremely important to our customers is the open architecture. So effectively, our software is completely technology-agnostic. We can integrate into pretty much any other technology, be that software, hardware or cameras that the customer may already have. And there's a number of reasons why that's really important to our customers. So we can pull all of their technology and data together to provide them with a simple unified solution through a user-friendly dashboard, instead of having many, many multiple systems, and that enhances safety, it creates operating efficiencies as manual tasks are reduced, and it enables smarter decision-making and response capabilities using real-time data. The modular design allows the platform to be tailored to meet the specific security and operational needs of the customer. So we'll work with them. We'll understand what they need, and then we'll be able to tailor the design to work as the customer needs them. So together, this makes synergy extremely scalable and ultimately having such a flexible system drives cost savings and long-term value for the customer because there's no need for them to rip out legacy systems. If these are working well, we can integrate synergy into those, and there's never expensive customization needed either. In October last year, we launched the first part of our AI suite of tools, which provides live hazard detection, and we'll notify an operator in real time if it detects something and then additionally, is also able to support the operator through the workflow of how to respond to the hazard. So there's currently 12 tools in total. And some examples of these are things like detecting unauthorized access by people or by objects, crowding or loitering, traffic flow management missing PPE and people falling over. And able to answer one of the presubmitted questions, which was, can you explain what the upcoming launch of synergy searches. So that's the next stage in our AI suite of tools. It's a forensic search tool. It's really, really easy to use. I mean it is a natural language queries so just like you would use in ChatGPT, for example. And the tool will search through recorded data and then present back to users extremely quickly what it is that they're searching for. So there's a number of use cases for this, but one example could be searching for a lost person. So you may describe type in the detail of the person that you're looking for, for example, a girl in a red coat with a black hat, black trainers and something they might be holding. And the search will very, very quickly then highlight all the recent collection the areas that you've selected that show somebody matching that description. Again, this saves what can be hours of time of people searching through data and video clips. Our COEX cameras are designed specifically for hazardous and high-risk environment, for example, offshore marine and oil and gas. They can provide exceptional image quality and long-term durability and extreme conditions and our certified for use in explosive atmosphere. COEX also seamlessly integrated with other existing security and control systems, meaning that customers can really maximize their investment on surveillance technology. Our COEX cameras have a built-in AI capabilities. That means they're capable of automatically detecting unauthorized access and monitoring operational safety and we're also currently in the process of developing and improving those further. We have a great list of customers, and customers tend to stay with us for a long time, which really gives us the ability to evolve our solutions whilst we're working with the customers to help solve their challenges. I've shown some of our customers that we are able to name on this slide, the oil and gas customers along the top row, a mixture of some critical infrastructure and public space customers. Then we've got some transport customers, mainly bus and train operators and then leisure and hospitality at the bottom. Moving on to FY '24 highlights. It was a strong year for the I'm really, really pleased with the results from 2024. There was growth in all sectors, record gross margins and results ahead of market expectations, which were upgraded as well at various points across the year. We saw excellent cash generation such that we finished the year with a record cash balance of GBP 9.6 million, boosted by a couple of million from the large casino win that we announced in the year. Market momentum and contract wins were positive in all sectors. And hence, we finished the year with a very robust order book of GBP 38.5 million. We have a progressive dividend policy in line with earnings. And therefore, we recommended a final dividend for the year of 2.5p, which would give an increased total dividend of 4.5p per share. And during the year, we've had some new board members. It's been great to work with Bob Holt and Jon Kemptster, who were appointed as Nonexecutive Chair of the Board and non-executive Director and Chair of the Audit Committee, respectively. I'm also pleased to be able to say that we're at the final stages of the CFO process, and I hope to be able to announce something very, very shortly. Post year-end, the positive momentum has continued into 2025 with order intake continuing across all sectors. We continue to invest in our technology. It's really important to maintain our position as a trusted adviser to our customers, and our continued investment in technology is key to that. And over the last couple of years, the team has done a really great job stabilizing the company following COVID and focusing on achieving good gross margins. Now we're looking forward to how we scale the business. We've been refreshing our strategy to focus on future growth, and I'll talk a bit about that later. I'll move on now to the divisional performance. Synectics Systems. We've seen solid revenue growth in Synectics Systems in FY '24. As you can see from graph, there's been growth in all sectors, particularly gaming, which has increased by 20% year-on-year. We noted this time last year that there had been a delay following COVID, particularly in North America, in the refurbishment of large casinos. However, we are now seeing an increase in both new and upgrade activity in gaming, and we expect this to continue moving forward. In particular, there's also a number of cities around the world that are investing in new large casinos to attract tourism and investment over the next few years. Oil and gas demand can fluctuate in line with the economic conditions and the geopolitical events. We've seen an increase in activity in oil and gas in the last year or two. Given how critical oil and gas assets are to national economies and the increasing focus we're seeing again from the likes of BP, for example, recently announced their plans to significantly increase their oil and gas spend. We do expect demand in this sector to continue. And then public space transport and infrastructure, which was one combined sector for 2024. That has been a challenging sector during recent years and remains so again in 2024. But our revenues increased here by 11% year-on-year. We expect demand in this sector to grow given the recent announcement by the government of our investment in infrastructure. So that's including prisons, including health care, for example, digitalization of the NHS. As always, in critical nail infrastructure, things such as significant investment planned by National Grid to its estate. We're really pleased with strong gross margins that have continued in this business. This is reflective of the high level of operational gearing within the gross margin, but also combined with the set mix of higher-margin gaming sales replacing slightly lower margin oil and gas sales as a proportion of the division's total revenue. I'll pick up and talk about the partner program in the strategy section a little later. The positive contract momentum in the year includes these 2 important case studies that we announced during 2024. The first of those being the major casino upgrade and expansion into one of the most iconic casino resorts in the world. We first installed synergy there just over 10 years ago. There's a major expansion going on in this resort. And it's fantastic that they've chosen to upgrade with us again. it really shows how much they value our solution and our relationship with them. That project has now commenced and is expected to be delivered predominantly during 2025. And the second case study relates to oil and gas. So 2 important contracts to provide advanced security and surveillance solutions for critical oil and gas operations in Qatar and Brazil. In Qatar, Synectics will deliver COEX cameras to [indiscernible] Oil Company as part of the Rio project in Qatar's largest oilfield. And then in Brazil we'll supply security and surveillance solution for a vessel, which will be critical to the vessel security operations. So moving on to Ocular. Synectics Security was rebranded to ocular in November 2024. And this was part of a broader transformation program in this business, which included a refresh of ocular strategy, including ensuring a targeted approach to both its go-to-market as well as the solutions that it provides to customers in those specific markets. So the program was kicked off with an internal promotion of Chris Jepson to Managing Director of Ocular and a new sales director such that we now have a strong leadership team and the team are making good progress so far with this refresh in 2025. Outside of the leadership team, we have and we are still investing in the wider sales and marketing team to ensure we've got the depth and breadth and expertise needed across the sectors. And we saw a strong increase in revenues in Ocular by 17%. That related predominantly to the transport sales impacted by new vehicle registrations and the drive towards zero emission vehicles. And we've said this before, but gross margins in ocular continue to remain high for an integration business, which we're obviously really pleased about. We're trying to focus specifically on those projects where we can add more value and hence, command the higher margins. During 2024, Ocular was awarded GBP 6 million worth of contracts as part of the framework agreement with National Grid. National Grid is also a customer of Synectics Systems, but this is different to the work provided by Synectics Systems and relates -- the work provided by Ocular relates to the upgrades of physical security on National Grid science. And I'll now hand over to Chris to talk through the consolidated results.

Thank you, Amanda. So we'll look now in more detail at the Synectics' Group result for FY '24. And primarily, this will be with comparison to FY '23. However, we wanted to start at the top of this chart, the top this slide by showing 5 charts with a 3-year track record, all showing positive trajectory in terms of revenues, recurring revenues, underlying profits and underlying EPS. In terms of FY '24 itself, we returned a 14% increase in group revenue to GBP 55.8 million. And as Amanda noted, that came from both sides of the business. So Synectics Systems grew by 12% on the top line and Ocular by 17%. And that translated to a GBP 3.9 million increase in gross profit or a 20% uplift, which was both an absolute increase and an increase in the margin itself, growing by 2.2 percentage points to 42.9%. On the guide there, what's the sales mix and in particular, an increased proportion of gaming sales. As an underlying operating profit level, we grew by 57% from GBP 3.1 billion to GBP 4.8 million in the year, and that's prior to around GBP 0.5 million of nonunderlying items. Again, that came with an increase in the margin of 2.4 percentage points to 8.6%. And we've seen effectively a tripling of the EPS over the last 3 years. from 7p to 14p to 21.6p in the full year. Looking now at where the revenues came from and where that movement is at. The first point here is Synectics is a diverse business in terms of the geographies in which we operate and also the end markets that we serve, which provide a range of opportunities at different points in time. The chart on the left shows the revenue split on a geographic basis. But have we seen this on a sector basis, we would have seen growth in oil and gas, a 5% public space transport and infrastructure 11%, gaming 20% and ocular 17%. The movement by geographic basis here reflects the statutory presentation. And in EMEA, we saw an uplift of GBP 3 million driven by oil and gas and conversely, a GBP 1.6 million reduction in the Asia Pacific region, again, principally driven by oil and gas demand. Have we shown here APAC on a 3-year basis, we see a positive increase from GBP 6 million to GBP 12 million to GBP 10.4 million in FY '24. In North America, we returned a strong increase of just over GBP 2 million, growing to 7.1% in this case, driven by the gaming sector. And in ocular, as referred to previously, a 17% update. I'm looking at the right-hand side, Ocular is broadly 40% of the business. with the balance in Synectics Systems and an even split in FY '24 between oil and gas and gaming, with slightly lower revenues coming from the public-based Transport and Infrastructure segment. Moving on, we'll look at the revenue profile on the order book profile and a strong second half of the year. And towards the right-hand side of the slide, we can see that of the group result of GBP 55.8 million. GBP 7.5 million of those came from recurring revenue contracts, which was an increase of just over 6%. And we've shown here as well, GBP 8.7 million coming from what we call repeat revenues. And those are noncontractual, but very much revenues have moved hand-in-hand with those contractually committed recurring revenue streams. So for example, where we have a maintenance contract, we will drive call-out charges as we execute that contract. And those 2 blocks together accounted for 29% of the revenues in FY '24. We closed the year with a record order book of GBP 38.5 million versus GBP 29.2 million in the prior year and with an expectation of around about 90% of that being delivered during FY '25. In terms of the underlying operating profits, we grew from GBP 3.1 billion to GBP 4.8 million. I can see here the first building block in the movement coming from gross profit with a GBP 3.9 million increase referred to previously. In terms of the operating costs, our largest cost within that operating base relates to staff costs, and we grew by GBP 2 million, which was primarily relating to the existing workforce in terms of salary increase, employment tax, bonuses, et cetera, but also investment in new people who joined the business during the course of FY '24. In terms of the overheads, which grew by just over GBP 1 million, that relates to inflationary increases, but also some areas of new investment, and we'd highlight here the investment in the ERP system, which will mark a significant move forward for the business. Other movements here included lower depreciation and amortization and an increase in capitalized spend in the year. And capitalized costs moved from GBP 1 million taken to the balance sheet to $1.2 billion, which is of a total R&D spend of GBP 3.7 million in the year, just referring to one of the questions some we've had on the chat. Moving on to the last slide from me at this point. Net cash grew from GBP 4.6 million to GBP 9.6 million, an increase of GBP 5 million over the course of the year. We had strong operating cash flows of GBP 6.5 million shown prior to nonunderlying items, which are across on the right-hand side of the bridge. Working capital inflows gave a gain in the year of GBP 2.5 million, and those were heavily driven by advanced payments on some large customer contracts. We invested GBP 1.9 million in CapEx in the year. A big chunk of that was GBP 1.2 million on capitalized development spend, but also spend on the ERP system, in this case, capitalized and on other tangible assets. And those items, together with a small amount of cash payment of tax payment gave us strong free cash flows of GBP 7 million in the year versus GBP 2.2 million in the prior year. On the final blocks in the bridge, we can see lease spend, which included some new investment and also dividend spend in the year of GBP 0.8 million and at the bottom right of this slide, we can see the growth in dividends with the proposed increase of 4.5% in FY '24, marking a 50% uplift versus the prior year. In conclusion, FY '24 results included revenue growth, recurring revenue growth, growth in underlying profits. We invested in people and systems, and closed the year with record order book -- we generated strong cash flows, increasing our positive net assets and finished with a robust balance sheet, which included no debt. I'll pass you back to Amanda.

Thanks, Chris. So I'd like to just take a few minutes to share with you how we are refreshing our strategy to move forward to look ahead and to focus on sustainable growth by increasing our market share, leveraging our product innovation and optimizing our operations. So our strategy is being driven by 4 key priorities. So firstly, our market presence, really having a clear focus on our targets markets where we possess the highest level of skill and knowledge and then ensuring that we have the appropriate route to market in those sectors. And I'll move on to talk about market share a little bit more in the next couple of slides. Secondly, developing our partner program to provide a more effective channel to our global markets and specifically looking to become the technology provider of choice with partners that we work with. So during the year, we launched our new program, which provides better support to our partners, so including things such as a portal and training materials, for example. We've created a new role, which we are currently recruiting, which is to lead the partner program, for example, to manage our partner relationships to develop an effective incentivization scheme and to really increase the ability of our partners to be able to promote our solutions effectively. And this will really drive the support of our partners moving forward. The third priority is focusing on customer relationships by providing our highest quality service consistently to all customers, and there are a number of areas of focus on this internally. And then finally, investing in innovation to position ourselves as leaders in technological advancements. So that's both internally and how we work as well as in relation to our solutions and how they meet evolving customer needs. There's 2 initiatives that I'd like to specifically pull out here. Firstly, we mentioned last year that we have started the upgrade of our ERP and CRM system to remove the very old legacy systems that we have in place. This is absolutely crucial for the scalability and efficiency of the business. We need to be able to automate more of our processes and have a system that can provide a real-time view of our performance as well as maintain operational control as we grow. Good progress has been made in Synectics Systems with Ocular now starting to follow, and we expect to have the full group implemented by the end of the year. And then secondly is our subscription pricing model. So core synergy is currently sold on a perpetual licensing model. We're currently in the process of developing our subscription-based pricing for sectors and regions outside of oil and gas, which tends to be more hardware heavy. So this will evolve conducting customer and market research, developing the subscription packaging models, defining our customer migration plan and then estimating the financial impact of the models. I expect this to be completed by the end of Q3 this year, it's in progress at the moment. And therefore, we expect that we'll be able to move to implementation at the back end of this year or the beginning of the next financial year. So there are certain factors that will impact take-up of subscription pricing, and it's currently not particularly commonplace in our markets. So we wouldn't expect this won't be an immediate shift to this type of pricing, and we expect that the impact will be gradual over the next few years. In addition to the core software, we have a number of new products, so some of the AI tools, the transport cloud services and a couple of others that are subscription pricing only. And as sales of these start to take off, I would expect to see more annual recurring revenue generated from these moving forward. Underpinning our strategy, our people and internally, I want to ensure that we foster a positive and engaging culture and one of high performance and integrity. And finally, our refocused strategy. It is an organic strategy. However, if we can advance this or enhance it by M&A, then we would look to consider some specific targeted acquisitions. There are obviously some specific criteria that we'd want to look for. So that would include complementary products, for example, enhancing our existing offering or access to customers or markets as well as some financial considerations, including increasing our recurring revenue. If I look at our market presence now, this is our market presence today. So our focus in North America is gaming. We do a small bit of oil and gas in North America, but we don't really have a particular presence there. Across our hubs in U.K. and Germany. We serve all the market sectors. However, our market share is generally quite low. And then we have a good brand for oil and gas in the Middle East, and we're also well known for gaming and oil and gas in Asia. We have a small market share in growing markets, as illustrated by -- in the graph by the small sort of slightly longer wedges in between the bigger ones. So those smaller wedges highlights Synectics share of each market. We've calculated an estimated serviceable market of about GBP 2.6 billion. And this relates to existing market sectors that our products can currently address and hence, why we're investing in our sales, our marketing and our partner program to increase our market share of these markets. Perhaps unsurprisingly, about half of the available market is in North America. And so we're in early stages of developing relationships there with partners and with contacts to expand our other sectors in this region outside of gaming. And also in Asia, where wide opportunities as well. In addition, we have some potential new market opportunities, which are excluded from the GBP 2.6 billion serviceable market. And we're currently completing competitive market assessments on these. So these are renewables, particularly offshore wind farms where the conditions are similar to those in offshore oil and gas. And also those centers, which have recently been designated as critical national infrastructure by the government. By later in the year, we expect to have more visibility about how viable these markets are for us in the coming years. And the Middle East is set to have substantial investment over the next few years, focusing on luxury tourism, something like GBP 30 billion of investment projected in hospitality alone in this region by 2030. The mega casino resorts that they're looking to build and the infrastructure projects that are planned are core areas for Synectics. So -- we're in the process of setting up a presence in the Middle East. We've received our trading license and we'll be going through product [indiscernible]. So moving on to our FY '25 to summarize those objectives, execute on our growth opportunities in both new and existing markets. Scaled global presence through new partnerships, enhanced sales and marketing initiatives and development of our global subscription model to drive future recurring revenues, leveraging recent product releases to strengthen our customer engagement to enhance revenue growth through those. And finally, to go through our CAPSS certification. So this is something a little bit outside of the normal development spend. It's a certification that's managed by the National Cybersecurity Center and while CAPSS compliance isn't yet legally mandatory for all critical national infrastructure sites, many government and critical infrastructure organizations are starting to require CAPSS certification as part of procurement contracts that's due to growing cyber threats. So we're already seeing the requirement for that in some of our upcoming tenders. So this is something that we see will add significant value to our products. And so then just to summarize, good performance in 2024. We've entered '25 with good momentum with a strong order book and pipeline. Results to date are in line with Board expectations. We have a strong cash position to be able to invest to execute our growth strategy. And we will, of course, continue to invest in our technology, including our AI capabilities. So thank you very much for listening. That concludes the presentation, and now we'll be happy to take any questions.

[Operator Instructions] Amanda, Chris, as you can see there, we have received a number of questions that were both pre-submitted ahead of today's event as well as those that have made their way through and throughout your presentation this morning as well. So firstly, thank you to all of those on the call for taking the time to submit their questions and guys at this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great.

Thank you. So I'll start. So the first question asked, if we could explain the upcoming launch to what synergy searches. So hopefully, I addressed that near the beginning of the presentation in terms of our new forensic search. Second question, Shore Capital show an estimated revenue of GBP 65 million for 2025. Synectics has told us, you have a record order book of GBP 38.5 million. How confident are you hitting this target? And where do you see the remaining revenues coming from. So we are comfortable with the Shore Capital forecast. And our results today in FY '25 are in-line with Board expectations. While our recurring revenues, as Chris showed you, in one of the slides currently account for a smaller portion of revenue. The ratio of order book to forecast is quite usual for us at this time. So we have a book-to-bill in excess of 1. So the remaining of the revenues this year will come through pipeline converted throughout the year. The next question was asking us to provide more details regarding the move to a subscription-based model and the impact of revenue recognition. Hopefully, I answered that, I guess, just to add that in terms of how it impacts revenue recognition. We are working through all of that. So by Q3 this year, we'll be able to provide more guidance on the impact of that going forward. Chris, do you want to take the next one.