Kainos Group plc (LON:KNOS), a UK-headquartered IT provider with expertise across three divisions – Digital Services, Workday Services, and Workday Products, has announced its results for the six months ended 30 September 2023 (H1 24).
Financial highlights
| H1 24 | H1 23 | Change | |
| Revenue | £193.2m | £179.8m | +7% |
| Profit before tax | £30.9m | £27.5m | +12% |
| Adjusted pre-tax profit | £37.9m | £34.0m | +11% |
| Cash | £113.0m | £97.1m | +16% |
| Bookings | £201.9m | £221.5m | -9% |
| Product Annual Recurring Revenue (ARR) | £55.4m | £44.2m | +25% |
| Contracted Backlog | £326.9m | £307.9m | +6% |
| Diluted earnings per share | 17.5p | 17.4p | +1% |
| Adjusted diluted earnings per share | 22.1p | 22.0p | <1% |
| Interim dividend per share | 8.2p | 7.8p | +5% |
Operational highlights
Our key business areas continue to deliver strong growth and provide an excellent foundation for future expansion.
· Within Digital Services, strong public sector revenue growth of 17% was offset by the anticipated decrease in healthcare and project scope reductions in some commercial sector engagements, with overall revenues at £109.2 million (H1 23: £110.5 million).
· Our Workday Services division recorded strong revenue growth of 18% (21% ccy), increasing to £57.3 million (H1 23: £48.4 million).
· Workday Products revenues grew 28% (24% organic, 31% ccy) to £26.7 million (H1 23: £20.9 million).
Our underlying business performance demonstrates disciplined execution against the backdrop of macro-economic uncertainty.
· Revenue up 7% (7% organic, 8% ccy) to £193.2 million (H1 23: £179.8 million).
· Adjusted pre-tax profit grew 11% (19% ccy) to £37.9 million (H1 23: £34.0 million), representing an adjusted profit percentage of 20% (H1 23: 19%).
· Overall bookings reduced by 9% to £201.9 million (H1 23: £221.5 million); we note that the comparative period included a 125% increase in Workday Services bookings.
· Contracted backlog growth of 6% to £326.9 million (H1 23: £307.9 million).
· Period-end cash amounted to £113.0 million (H1 23: £97.1 million); with cash conversion at 82% (H1 23: 70%).
After a four-year succession plan, we completed a smooth transition at Board level as Russell Sloan, a Kainos 24-year veteran, takes over as CEO.
· Prior to his appointment to CEO, Russell was the Head of the Digital Services division.
· Rosaleen Blair, who joined the Board in January 2021, has assumed the role of Deputy Chairperson and we are delighted to welcome James Kidd, former Aveva CFO and CEO, to the Board.
· The appointment of Rosaleen and James are part of a planned succession process, with Tom Burnet and Andy Malpass due to complete their term as Non-Executive Directors in September 2024.
In Digital Services, we continue to deliver significant digital transformation programmes across public sector, while there are further reductions in healthcare.
· Strong growth in public sector was offset by anticipated lower revenues in healthcare (H1 24: £20.4 million; H1 23: £29.5 million) and reductions in scope for some commercial sector projects (H1 24: £15.8 million; H1 23: £18.7 million). This resulted in an overall reduction of 1% (1% ccy) in revenues to £109.2 million (H1 23: £110.5 million).
We continue to be the leading pan-European Workday consulting specialist and are a Phase 1 partner in both the US and Canadian markets.
· As noted, we recorded strong revenue growth of 18% (21% ccy) to £57.3 million (H1 23: £48.4 million), of which the majority (77%) are international revenues.
· The acquisition of the Blackline Group in early 2022 included a standalone procurement consulting capability and we have decided to stop providing these services during this financial year; the Workday Strategic Sourcing activity remains unchanged([1]).
Our Workday-related products delivered very strong growth and we remain on track to achieve our target of £100 million ARR by 2026.
· Revenue growth was very strong at 28% (24% organic, 31% ccy), with revenues now £26.7 million (H1 23: £20.9 million) and the associated ARR increased by 25% to £55.4 million (H1 23: £44.2 million).
· In October 2023 we launched our latest product, Employee Document Management (EDM), with nine clients already contracted.
· We continued to invest in our products, increasing research & development expenditure by 48%, to £5.9 million (H1 23: £4.0 million) and sales & marketing spend increased 23% to £5.9 million (H1 23: £4.8 million).
We continue to extend our footprint as a global business; almost 40% of our revenues are now generated internationally.
· Very strong international growth, with revenues up 22% to £74.7 million (H1 23: £61.0 million), and now representing 39% of total revenue.
Commercial sector customers now generate over half our revenues.
· Commercial revenues are up 16% to £99.8 million (H1 23: £86.3 million), representing 51% of total revenue.
· Public sector revenues have increased 15% to £73.0 million (H1 23: £63.3 million) or 38% of total revenue.
· Healthcare revenues, as previously forecast, have reduced by 32% to £20.5 million (H1 23: £30.2 million), which is 11% of total revenue.
The commitment and engagement of our colleagues underpins our business performance as we continue to grow a global, talented team.
· We have 3,139 people (H1 23: 2,920) based across 23 countries, representing an increase of 8%, or 16% when considering the reduction in contractors to 111 (H1 23: 303).
· Our employee retention improved to 92% (H1 23: 86%), and engagement levels remain high, measuring 79% on our internal surveys, and we were again awarded ’50 Best Places To Work in the UK’ by Glassdoor.
Excellent customer service drives customer satisfaction and retention, supporting our revenue growth.
· Our customer approval rating remains high and we recorded a Net Promoter Score of 62 (a score over 50 is viewed as ‘excellent’([2])).
· Existing customer revenue increased by 7% to £182.3 million (H1 23: £169.8 million) which represents a Net Revenue Retention of 107%.
· Customer numbers increased to 892 (H1 23: 779), an increase of 15%.
We are making rapid progress on our announced £10 million investment in Generative AI to further enhance our leadership in Artificial Intelligence.
· Over the past ten years we have established a practice of 190+ Data and AI specialists, delivering projects for clients that include Hello Fresh, the Ministry of Defence and the United Nations.
· We are investing a further £10 million to accelerate the skills of over 1,000 colleagues to ensure that they can responsibly harness Generative AI for the benefit of our customers.
· During 2023 we have been supporting more than 25 clients assess and explore the potential and implications of Generative AI, with two of these projects moving from the exploration phase to deployment in production environments.
We have retained our carbon neutral status for 2023 and we remain on track to achieve carbon net zero by 2025.
· Having made substantive progress on our Scope 1, Scope 2 and business travel-related emissions, our focus has moved to addressing the emissions within our supply chain. Our supplier engagement plan will commence during November.
We are maintaining a positive outlook as our key business segments are positioned for further growth in the near-term
· Notwithstanding the global economic uncertainty, we believe that our key business areas, Workday Products, Workday Services and public sector Digital Services will continue to deliver growth, in both the near term and medium term.
· We do not expect any further significant revenue reductions in the healthcare and commercial sub-sectors of our Digital Services division and that they are likely to return to growth in the near-to-medium term.
· We are well-positioned to deliver strong margin growth through the year as we continue to benefit from our disciplined operational execution.
· We have a growing sense of excitement about some of our smaller, high-growth activities, of which Workday Extend, Automation and Low Code, international growth in Digital Services and, obviously, Data & AI are showing significant promise.
Commenting on the results, CEO Russell Sloan said:
“Our latest results, the first after the recent CEO transition, are the outcome of continued excellent performance where we have again delivered strong growth.
We are grateful for the ongoing support and trust that our customers place in Kainos to deliver their critical projects. Our customer satisfaction levels are high, as is the level of continued business from our customers.
In the last six months, our Digital Services division has been fuelled by public sector clients continuing to invest strongly in digital transformation projects. Meanwhile, there has been strong growth in our Workday Services division where we continue to be the leading Workday partner in Europe and are enjoying a growing status in the US and Canada.
Progress within our Workday Products division continues to gain momentum. In addition to our three established Smart Suite products, we are delighted to have launched our latest product, Employee Document Management, which already has nine international clients signed up. We are confident that we will have further opportunities to develop new, innovative products as we continue to help ambitious clients deploy Workday.
We have a well-diversified business with an increasing focus on our international expansion, where growth continues to be very strong. In addition to the global growth in our Workday divisions, we are now creating opportunities for our Digital Services division to expand internationally, especially into our impressive Workday customer base.
During this period we have maintained our focus on operational excellence while at the same time building for the future, as we have grown our employee base strongly while reducing our usage of third-party contractors.
This is a natural evolution as we rely on the ability, energy, and expertise of our people to drive our success. Our high level of employee engagement, now measured monthly, has resulted in improved retention which is amongst the highest levels we have experienced in the last ten years.
As the result of many years of research, and then deployment of Artificial Intelligence (AI) system, we have built a strong reputation as an AI leader in the UK. The recent surge of interest in, and capabilities of, technologies such as Generative AI, provide ongoing opportunity for us. These range from helping our customers assess and safely explore the benefits and limitations of these new models, to the internal deployment of assistive tools to increase our own productivity.
Despite the ongoing global economic uncertainty, we believe that in the near-term and long-term, our business will sustainably deliver growth. The efficiency and benefits that are derived from our products and services are significant and attract investment within our customers. We are excited that our talented colleagues will continue to drive change at pace and make a positive impact on people’s lives.”
([1]) Further detail, including associated expenses recognised in the period, is contained within the Workday Services review on Page 13.
([2]) During this reporting period we moved from a proprietary, five-point rating system (‘Poor’, ‘Satisfactory’, ‘Good’, ‘Very Good’ or ‘Excellent’) to the established industry measure, Net Promoter Score. Bain & Co, the creators of the metric, held that a score above 0 is good; 20+ is favourable; 50+ is excellent and 80+ is world class.
