Kainos : Interim results, management presentation

Welcome

(Speaker: Brendan Mooney, CEO)

Good morning, everyone, and welcome to the presentation of the results for the six months ended the 30th September 2022.

Housekeeping

So before Richard and I start the presentation, just a couple of very quick housekeeping points. So our presentation, it will take about 35 minutes. You know during that time your connection will be muted. So please feel free to ask questions using the Q&A or chat functionality that's there in Teams. And so we are recording this broadcast. We'll be using Teams to generate a transcript of the call, and after we do a quick edit for clarity, we'll post that onto our website this evening.

Introduction

So let's kick off in terms of the presentation.

So we've taken the opportunity to refresh our slide deck this time around and that's to add more detail around our Workday Products, but also to retire some of the information that's less relevant or less useful today. So in addition to updating the slide deck, I took the opportunity over the course of the past week to reread Julian Yates' IPO documentation from back in June of 2015. Anyway, Julian's on the call. So Julian, you can relax, it still reads very well.

But I thought that, you know, with a little bit of indulgence from yourselves that it might be useful to look at some of the information we shared back in 2015 and now reflect back on what we see today.

Business Overview

Whenever we use this slide, I guess the first thing that always strikes me about the slide is that we've got three divisions that are performing really well: strong growth, strong margins, and kind of widening opportunities for the business. And just to focus on that point about widening opportunities. So again, across our entire business, we operate in incredibly durable, kind of resilient and kind of high growth markets.

So jumping back to 2015, we defined the digital transformation market in the UK as being £128 million per year. Today that figure has grown to £2.4 billion. For Workday Services, we described the market opportunity back in 2015 as £30 million per year. Now, it's a £1 billion+ per year opportunity for us. And our Workday Products was so early in its own evolution that we couldn't put an estimate on it. And today we size that opportunity for us at just over £400 million.

So as we enter what is now technically the second decade of digital transformation, we believe that the markets for Digital Services, for our Workday Services and for our Products business really are significant. We're going to continue to show high growth and our forecast is that the market opportunity will double in size over the next five years.

Expertise at a global scale

In terms of our customers, we are just so proud of the work that we do with the customers, and very proud of the customers that we work with as well. Our customer cohort today is almost 800 different ambitious organisations. That includes some really well-known brands and I've featured 30 of them here on this slide. I'm sorry we were only able to cram 30 in as well, but an absolutely fabulous, kind of increasingly global customer cohort.

Highlights

So really to turn to our performance in the last six months. So it's been, from an internal perspective, a really pleasing period of time. We have once again delivered very strong growth. That's both at a group level, but also at an individual divisional level as well. And hopefully we've captured that accurately for you in the graphic on the left-hand side of the screen.

So I've mentioned already on the call, you know, that kind of long-term demand being very strong. But we're also seeing that same strength in the near term as well, you know. And to try and give a sense of what that statement means; if I think about the last six months, we have declined/withdrawn from or no-bid on over 20 Workday opportunities in North America, Workday Services opportunities in North America. We have declined 10 Workday Services opportunities in Europe as well and we're seeing that same kind of pattern repeat across our Digital Services business. So to me, just to repeat that point, we see a very strong demand environment in the near term.

I have to say, you know, we're just delighted to have achieved Workday Phase One partner status in the US. It's been an ambition for us as an organisation for, I guess, almost five years. So I have to say well done to the team on achieving this particular milestone. I believe I'm right in saying that we are the only US Phase One partner that's not headquartered in the US. In terms of that Phase One partner status, we are [clarification edit: not] really seeing that impact in this set of results. Our North American revenue is up 100% compared to this time last year.

And as we previewed back in May, we are investing heavily in our Workday Products as we make that progress towards our stated £100 million ARR target by 2026. So our ARR at the end of September is already £44 million and we should exit this year over halfway towards that target.

And you know, to take a moment really to talk about the international opportunity again. So today in these results over one third of our revenues are generated by international markets. So in contrast, back at IPO in 2015, it was 6% of our revenues were international. To express that in monetary terms, at IPO we were generating £3 million of international business; in the current year, we will exceed £130 million of revenue internationally. That's just brilliant progress by the team.

So one aspect of this increased international activity is increased exposure to foreign exchange fluctuations. So this is most evident in our adjusted profit performance where our profits would have been £5.8 million lower if reported in constant currency. So that £5.8 million figure balances rather neatly with the £1.5 million impact of lost revenue from the two additional UK bank holidays we had this reporting period, and the additional £4.2 million of investment that we're making into our Workday Products. So we've detailed the foreign exchange impacts fully in the interim statement and they're included at the bottom of each of the relevant slides in this particular presentation.

Looking across our other KPIs, we've strong bookings, excellent backlog, the cash balance nearing £100 million and we're looking forward to getting interest on our deposits for the first time since we became a public company. And finally, the powerhouse in our business is our people. We continue to retain and attract talented colleagues as we near almost 3000 employees.

Our People

So really, continuing on that theme of our people and how their energy and expertise and experience drive our business. Again, to be clear, you know our established delivery model is hybrid. So we have colleagues working from home and from our offices, occasionally from client office as well. We're taking the view that office attendance is optional. And in terms of the levels of attendance it does vary from office to office, and the day of the week. So it's typically about 20% with the Tuesday through Thursday period busier than Monday and Friday.

So rather than the mandating office attendance, we're looking at ways to create opportunities for our colleagues to attend our offices, so typically around celebration type events. But we're also very focused on meeting the needs of certain groups. So those colleagues who are starting out in their career and who will benefit most from being in the same physical location as others are obviously getting a lot of our attention.

Our staff numbers are up 20%. So we're now just short of 3,000 people in Kainos who have grown across all the regions, but most significantly, as you can see there, in the American region.

And the flip side of high demand for digital transformation that we provide to our customers is that there's also increased demand for digital skills. So our observation from all of our recruitment activity is that the skills market is catching up with demand, but there's still a skills gap there.

So against that backdrop, our staff retention has decreased to 86%, so from 89% this time last year. But we also reported 86% retention back in May as well. So for us, it continues to be a focus area for us to make sure that we're creating the environment for our colleagues to choose to stay at Kainos and to develop their careers.

And in terms of recruitment, you know the market does remain competitive, but there are still plenty of candidates out there looking to change jobs. In the past six months, we've received over 16,000 applications for jobs, and offered over 450 roles. So those levels very much consistent with previous years as well.

Our Customers

So we have a fabulous set of customers, I've mentioned that already on the call, and we work with them over a long period of time. In fact, our longest standing customer did their first project with us back in 1988. So each of these charts, I think tells the important story about our business.

Although I have borrowed the term net revenue retention from the world of SAAS and applied it to our mainly project-based revenues. So our net review attention for the period is 125%, you know and this high level of revenue retention like, to me, is a great way to describe the value we deliver to our customers and also the excellent customer satisfaction figures we have as well. To put it in context, we have had a net revenue retention of greater than 100% for the past 12 years. So it means that we get to forecast our business very accurately. We can predict what our customers are planning to do with a great degree of detail.

Moving to the chart in the middle, about the type of coverage that we have. So almost 50% of our revenues are now generated from Commercial Sector clients. So harking back to Julian's note again in 2015 at IPO, Commercial clients represented 25% of our revenues. And again, to convert that to monetary terms, back in 2015, it was £15 million worth of business from commercial clients. That's a forecast £175 million for the current year. So just again, another great achievement by the team.

And the final chart, I've mentioned this already about our increase in our international revenue, but I think it does bear repeating. We have a third of our revenues now generated internationally, compared to 6% or £3 million back in IPO. Again this year, we're forecast to exceed £130 million in international revenue.

Our responsibilities

So we've aligned our activities, our responsibilities around the United Nations Sustainable Development Goals. So in terms of climate action, we continue to be carbon neutral and we remain on track to be carbon net zero by 2025. So we also recognise that we're a carbon light business. So, part of our activity is about helping our colleagues, our customers and our suppliers embrace their own carbon light future. So for instance, our UK salary sacrifice electric vehicle scheme has proven very popular with our colleagues with over sorry, with almost 100 people transferring to electric vehicles. And the launch of our carbon calculator helps customers understand how they can reduce their environmental impact as well as reduce their cost by moving the infrastructure from on-premises into the cloud.

We know that the technology sector in the UK has a significant gender imbalance issue, so our plan focuses on three elements: First, to retain and develop the talents of women already working in Kainos; second is to become the destination employer for talented women in the sector, and third to inspire more young women into the sector. So we're pleased with our progress over the past year, but there's clearly much more to do.

Our Earn As You Learn programme is entering its 10th year. So this program, for those not familiar with it, is aimed at young people for whom a move to full time university education is not the right next step for them. So perhaps that's to do with their learning style, or the expense of university, or just a personal choice that they're making. So under our scheme, the young person joins us as a full time employee, and then works four days a week in Kainos, and attends university that final day to study computer science. So that creates, I think for them, a great blend of working with world class practitioners alongside the rigor of academic learning. So this is an incredibly popular program. And as you can see from the results of the 2022 cohort, incredibly successful. It's a testament to the structure of the program, but especially to the young people on it, that over 80% of the participants that graduated this year are doing so with their first class honours in computer science.

Divisional Performance: Digital Services

So in Digital Services, we've had a really strong performance. We've a 17% increase in revenue, the lower bookings figure and hence the lower backlog figure really a timing consideration. in H1 of last year we signed £54 million worth of contracts that are only due for renewal in H2 of this year. So our expectation is we'll see another strong performance from Digital Services [clarification edit: this year].