Kainos : Full year results, management presentation (transcript)

Welcome

(Speaker: Brendan Mooney, CEO)

Good morning, everyone, you're very welcome. It's just turned 9:31 and I know some people are still joining, but I'm going to be respectful of your time. So you're very welcome to join myself and Richard to give you the latest update. As you can see, I'm joining from home in Belfast, and it may surprise you to hear this, but the big excitement in the Mooney house is not the excellent set of results, which we will talk about for the next hour, but actually a wedding anniversary. So my wife Eileen and I celebrated our 30th wedding anniversary today. Nothing more celebratory in terms of beverages than a cup of coffee this morning, but who knows what this evening might bring.

Housekeeping

So in terms of the presentation, if you just bear with me, let me launch that onto the screen here. That's now appearing on the screen and if it's not, somebody I'm sure will please let me know.

So in terms of some housekeeping at the very start, Richard and I's presentation will take about 35 minutes, during the presentation your connection will be muted, so please feel free to ask questions as you go along in the chat functionality in Teams. At the end of the presentation, FTI will moderate the Q&A session.

We are recording this transcript and this broadcast, and we'll be using Teams to generate the transcript of the call. Looking forward to seeing how it interprets my soft Irish accent over the course of the next 30 minutes. We will edit that transcript for clarity, and we will publish that on our website later today.

Contents

You will recall that we took the opportunity in November to refresh our slide deck and that's about adding more detailed information about Workday Products, and to retire some of the information that we thought wasn't useful or helpful in the past.

Business Overview

In terms of just giving a sense on the business. We always use this slide to start off our presentations and the first thing always strikes me when we use this slide is that we have 3 divisions that are performing really well: so strong growth, strong margins and widening opportunities.

And to focus on that point about widening opportunities, you know, I think it's really important to stress that we operate in both resilient and in high growth markets and we're trying to capture the sense of opportunity in the market size information on the top left of each of these graphs.

So collectively, our three markets represent £4.5 billion of opportunity. And if you compare the figures we're using today with the same figures a year ago, there has been increase of £1.2 billion in opportunity.

There are two factors behind this growth:

First, there is the underlying increase in spending in each of the markets, so that drives expansion. I'm thinking really of increases in government spending, or Workday Inc's impressive growth as well.

There's also expansion as a result of our activities, our move into the police sector in the UK for instance, or our appointment as the Workday Phase One partner in the US.

In our view, these market opportunities are well established; you can trace the origins back to 2011, but there's been real resilience shown over the years. Despite the concerns about the broader economic conditions, we continue to see very strong demand from existing customers, as well as from customers who are new to the market. And that's not just our view, you see that replicated across many of our peers and competitors.

Expertise at a global scale

In terms of our customers, you know we're very proud of the customers that we have and the work that we do for them as well. Our customer cohort is now over 800 ambitious organisations and includes, as you can see, some incredibly well-known brands. So I'm just sorry we can only really squeeze 30 of them onto this slide.

Highlights

And turning to the results and giving you the overview, it's been a really pleasing performance, we've delivered once again very strong growth, both at a group level, but also across each of the divisions, and we've captured that on the left- hand graphic.

Our performance is because of our execution, we've no doubt about that, but there's also high demand in the market. We continue to be capacity constrained. There are more opportunities out there than we have people to do them, but there's

1. great balance of short-term demand and that kind of longer-term growth drivers I talked about on the previous slide.

I have to say we're just delighted to have achieved Workday Phase One partner status in the US. It's been a long-held ambition for us, so well done on the team on achieving this milestone. Strangely, we've been capacity constrained here as well, and they've only really been able to engage with Workday's Net New sales team

since the start of this year and have only secured 2 new customers in that time period. But we would be expecting a higher deal flow through FY24.

As we discussed back in May and in November, we are investing heavily in our Workday products. We believe we can achieve a £100 million ARR by 2026. Our ARR at the end of March was £49 million, and we passed that £50 million midpoint during April. And I think being over halfway to any target is always a very positive milestone, and we pick up the conversation about investments later in this presentation.

And in addition to the strong revenue growth, looking at our KPIs, you know, we've achieved strong profit growth, albeit moderated slightly by our investments, strong bookings, excellent backlog and cash balance at over £100 million.

And finally, the powerhouse in our business is our people. We continue to retain and attract talented colleagues and are at almost 3,000 employees across the business.

Our People

To continue in that theme of our people: it is their energy and expertise and experience drives our business.

So our delivery model remains hybrid. Colleagues work from home, or they work from our offices. Office attendance is optional and does vary across different countries and different times of the week, but it's typically still below 20%. In the past couple of years we've been investing in our offices, we need to support our hybrid working; some more collaboration space, greater flexibility in our office configurations as well.

Rather than mandating office attendance, we are creating opportunities for our colleagues to attend offices, so that could be to do with, you know, collaboration with one of our colleagues or to attend some of the social events we run in the office as well.

And it comes as no surprise here that we continue to focus on employee engagement and during the year, we moved away from our "Sunday Times Best Companies To Work For" annual survey, to Workday Peakon - the employment, sorry the employee engagement platform. So we are surveying our colleagues every four weeks. That allows us to be responsive to the feedback they're giving us. And that focus on engagement and, I guess, a more cautious job changing market as well has seen our retention rate increase to 88%, with further improvement over the last few months.

Our staff numbers are up 11%, so we're now just under 3,000 people in Kainos. And once again growing across all the different regions, but obviously highest growth in the US market.

The trading update we published a few weeks ago did generate some response, some queries about whether or not our slowing headcount growth was indicating some kind of reduced confidence in the future.

So just to be clear, that's definitely not the case.

So we've always had the view inside the company that whenever we get busy, and by busy we mean more than 20% year on year growth, then our performance gets a little ragged and so that typically translates into reduced utilisation, increased use of contractors and other short term behaviours.

Our focus over the last 12 months has been on restoring that operational excellence, and that impacts head count and hiring in three different areas:

First in that core operation aspect. So over the course of the year, we've improved Digital Services utilization by 3% from 78% to 81%, which is roughly the same as adding fifty people to the team. At the same time, we've improved our effective rate by 9%, which obviously doesn't require additional people to deliver the additional revenue.

Second, we've been rebalancing our workforce, so we reduced the number of contractors in Kainos from 318 down to 209. So a reduction of 34%. We've also increased our graduate recruitment, with 250 graduates joining us over the course of the next few weeks. So both these activities improve our cost structures kind of long term.

Thirdly, the recruitment market has cooled, which means we do not need to front- load our hiring as much as we've done in the past. There are less companies in the market for talent, and candidates are being more considerate about their next job offer, and Kainos represents a very good secure next step. That means our time to hire, and our offer acceptance rates have improved, and alongside that higher retention I've talked about, we're seeing kind of less need to hire as quickly as we've done in the past.

Our Customers

So we've got a fabulous set of customers and we work with them over a long period of time. I think I've said before that our longest standing customer did their first project with us back in 1988.

So each of these charts tells an important story about our business.

As before, I've borrowed the term net revenue retention from the world of SAAS and applied it to our mainly project revenues. So our net revenue retention for the period is 126%. And that high level is really down to the value we deliver for our customers,

and the excellent customer satisfaction stats that we have, as you can see there, 99% for the last 12 months.

And again that theme of consistency, we've had a net revenue retention of greater than 100% for the past 13 years. And that's really important to us, as it allows us to forecast our business very accurately. Our customers are not immune to the economic conditions, but their consistent message to us, you know, over the past weeks, months, years has been about increased and continued investment in their projects. And we're now working with over 800 customers, so that's an increasingly broad view we're getting about the markets we operate within.

Thinking about the sector coverage, over 50% of our revenues are now generated from the Commercial sector. So really pleased now with that balance across Commercial, Government and Healthcare.

And I have already mentioned the increase in international revenues, but it does bear repeating, today over one-third of revenues are generated in international markets. That's £132 million in total and has seen growth of 52% in the past year, which is just such a fantastic achievement by the team.

Our responsibilities

We've aligned our activities around the United Nations Sustainable Development Goals.

So in terms of climate action, we continue to be carbon neutral, and remain on track to be carbon net zero by 2025. Our climate targets are now approved by SBTi, and our FY23 emissions are well below the corresponding SBTi target. Indeed, our progress on the climate agenda over the last few years means our FY23 emissions are below FY20 levels, and that's despite our business doubling in size over that same time period. The focus for us in the incoming year is about our supply chain, which represents over 50% of our total emissions.

We've talked many times about how the technology sector has a significant gender imbalance issue. Our improvement plan in Kainos focuses on three areas.

So first, it's about developing and retaining the talents of the fabulous women who are already working in Kainos.

Second, its about becoming the destination employer for talented women in the sector.

And third, it's about inspiring more young women to join the sector.

So we have worked hard on all three areas of the plan over the past year, but in this update, really highlighting work that we've been doing to encourage more young