Kainos Group plc

Good morning everyone. Richard and I are here in Belfast. It's a lovely autumnal morning here in Belfast and we're delighted to welcome you to the presentation to discuss our six month performance to the end of 3rd September 2025. So thank you very much for making the time. I know we've been communicating quite a lot over the last little while. We had our trading update in September, capital markets event two weeks ago. So thank you for making the time to join us here again this morning. So a couple of quick housekeeping points. The presentation from Rich and I will be roughly 35 minutes. During the presentation, your connection will be muted. At the end of the presentation, FTI will moderate the Q&A session. And we're recording this broadcast and we will publish it to our website either later this evening or tomorrow morning. So again, thank you very much for joining us today. In terms of the structure, you'll be very familiar with this over the last 10 years. I'll give a quick business overview, Richard will dive into our financial performance. I then take the opportunity to talk about each of our divisions in turn, and we'll finish off with our session about looking ahead. We use this slide a lot. Richard used it a couple of weeks ago at the capital markets event, but for us, it really just kind of emphasises a number of key points. So the point number one is that our divisions operate in great markets. Those markets that they operate in are large and they're growing. They're international in terms of the scope and they support us achieving strong margins in those markets. And for us, we're really well established in those markets. So we're really pleased to be in those kind of really substantial markets. The charts, I think, also tell the story of the challenges of last year, fiscal 25. And as you'll know from the results that we published this morning, today's conversation is very much about a return to growth. So we work with some amazing organisations across the world. We're very proud of the work that we do for them and the long-term nature of our relationships as well. So we work with over 1,100 customers from across the globe. And I do mean globe, over half of our customers are based outside the UK. As we do with every update, we add a few more of the new customers to the slide. You will probably need no introduction to Skyscanner or Spotify. The UK Health Security Agency is charged with protecting the UK from infectious diseases and other health threats. We've added Trimble, a 11,000 person technology company based in Colorado. And we've also added in the government of the province of Nova Scotia, where we're doing quite a lot of work as well. In terms of looking at the highlights for the last six months, at the capital markets day two weeks ago we were able to give a clear message about our return to growth and today we can really share the detail behind that message as well so as i look at the last six months i think the team have just delivered an excellent result and to pull out some of the relevant facts our sales booking up 27 to over 220 million that's a record sales period for us and that sales performance has also delivered a record revenue performance at 196 million pounds over the last six months It's also delivered a strong backlog figure as well. That gives us great visibility, not just for H2, but beyond that period of time as well. And for us, again, a clear message from today, we believe the momentum we've established in the first half of this year will follow into the second half as well. So jumping down from the headlines, you know, in terms of that sales performance is across all three divisions, digital services up 13%, workday services up 35%, although it should be known that last year's sales booking and H1 were low. So we should review the bookings in this set of results as also returning to normal. And Workday products recorded a 57% increase in sales. So that is a correct figure. But for us, the more appropriate, more useful figure is to look at the ARR increase, which saw a 19% improvement. This sales performance increased revenue across all three divisions. You can see the kind of changes on the chart on the left-hand side. And later this month, we'll be launching our fifth plot, Pay Transparency. That'll happen next week at the EMEA Rising, which is Workday's European customer event. And we see the launch of Pay Transparency as further support for our 100 million and 200 million ARR targets. had additional costs in h1 richard will talk in more detail about those but national insurance our full year costs for built-in workday and especially the increased use of contractors have all kind of impacted our profit performance in the first half but we're maintaining our profit guidance for the full year so we see a sequential improvement h1 versus h2 we're expecting a strong performance in the history of this year as well And finally, we've increased the dividend in today's announcement. And over the past 12 months, we've returned 58 million pounds in cash to shareholders through two buyback programs. And you will note from this morning's announcement that we are about to undertake a third one following the same parameters. So in terms of results we've shared today for us, we think it's just a really strong set of results, really excellent performance by the team. So each of these charts tells an important story about our business, the durability of our revenues, the balance across sectors and the global nature of our business. On the left is the breakdown of our existing client revenue versus new client revenue. And to have 85% of our revenues coming from existing clients is brilliant because it's really strong visibility and predictability into the future. We're able to generate that level of repeat business, and we think it can be higher, but we can generate that level of repeat business because of the value we deliver to our customers and the excellent customer service that we also are able to achieve. And as we add new customers, we unlock longer-term opportunities there as well. And for those of you not familiar with Net Promoter Score, I just really emphasize a Net Promoter Score of 70 is just simply an excellent result. In the middle, we have the sector of balance, and I think balance really is the correct word to use here. That's a balance across sectors, private, public, and healthcare, but also across the clients as well. We work with over 1,100 customers across our business. And in the chart on the right, we break down revenues across regions. The standard region over the last six months was North America, growing by 19% over that six-month period, and it's now over a third of our revenues. And I have to say, I think it's amazing that over one third of our revenues now come from North America. That North American business is really across all three divisions. So workday services, workday products and digital services. And we expect that trend to continue. And overall, 43% of our revenues now come from outside the UK. And at our current pace, the majority of our revenues will be outside the UK in the next couple of years. The driving force in our business is our people and their energy, their expertise and their experience. So our staff numbers have increased strongly over the past six months, up 9% since the end of last financial year. Of that increase, 119 people joined via Davis Peer, 80 have been recruited as contract staff and 68 have joined as permanent staff. And for us, we've talked about this in our results release earlier, this really underscores the different dynamics of hiring in the current market. Contract staff are available typically in a three or four week period, but it takes up to five months for a permanent member of staff to join the organisation. As you can see, in terms of location, the America's workforce is now the second largest across the group. And in what has been a challenging year for our colleagues, lots of change over the course of the last 12 months, we have to say we're really grateful for the support they continue to show the organisation and our engagement remains high, as demonstrated by our high retention and our favourable scores on internal surveys and on platforms such as Glassdoor. We are very conscious of our responsibilities as an organisation and we have aligned our activities to the United Nations Sustainability Development Goals. We continue to be carbon neutral as an organisation and we're making progress towards our carbon net zero target. We're improving the gender balance within Kainos, increasing 1% over the last year, so it is slow but steady progress. And during the last few months, we've also been recognised as a disability confident leader, the UK's highest level, and placing us in the top 3% of employers across the entire UK. And finally, to highlight our long-standing apprenticeship programme, Earn As You Learn, now in its 12th year, that's really aimed at supporting those young people for whom full-time university education is not the right next step. Well, that's because of affordability, their learning style or other personal circumstances. And it is a testament to the young people on the programme that most of them achieve a first-class honours in computer science through a mix of working in kiosks and part-time study.

Richard. Thanks, Brendan.

If we go on to the first slide, the group income statement, I'll start with digital services and particularly revenue. It's the first time that we've decided to separate out America's revenue within digital services. The rationale behind this is that while it's only about 8% of digital services revenue in H1, it grew by 152% over the comparator period. This was all virtually all organic. We did the acquisition of Davis Peer, but that closed on the 19th of September, so there are about 11 days of Davis Peer revenue in there, so effectively manageable. We expect Davis Peer to contribute about £6 million in H2, and we expect a run rate therefore of approximately 28 million for a full year from the combined America business within digital services, so it's becoming material. Previously, this revenue was classed as either public sector, commercial or healthcare, and it was included within those sectors, and we've restated those as well. All the figures I'll use while discussing this are the restated figures as comparators. Using those restated figures with America's revenue stripped out, public sector was relatively steady, slightly down with a 3% decline. Commercial again, very disappointing, fell further, 39%. This now represents only 6% of digital services revenue and just over 3% of group revenue. Healthcare continued its very strong growth, up 33% over last year in revenue terms. If we move on to gross margin, digital services gross margin fell 2.6% from H1 last year, but was up about 2% sequentially on H2. First thing to point out, obviously, is employers NIC rises that has a major impact on gross margins of virtually every business in the UK. Utilization, however, was up about 6%, and that's part of the growth in the business that Brent referred to earlier. The other factor in gross margins he also alluded to was the fact that we have increased our level of contractors over that period of time. For the group as a whole, that's gone from 51 in September last year to about 139 on 30 September this year. He also mentioned partners as well, which is another factor I'll touch on. We've always used contractors in this part of the cycle. As you know, it's not a preferred model, but it is something that we need to do when we need to ramp up quickly. Although it depresses margins, it's a necessary evil, if I can use that term. In terms of partners, We have had a number of projects, two large projects in particular, where we're required to deliver through the use of partner. Although this depresses margins, in a way it's something of a testament to our growth as a business. Six or seven years ago, we were the junior partner in those relationships. Now we're the lead partner. Direct expenses and digital services increased 22% over H1 last year, about 16% of that related to bonus increase. Obviously, we had a poor year last year and have much better sales this year, and that impacts on bonuses. Contribution for digital services margin fell about 4%. That's a result of what I've talked about before. Partners, contractors, bonuses, all of those things relate to the increased activity in the division. It's always disappointing to see a reduced contribution. It is somewhat typical of this part of the cycle. It's a bit like an Elton John song. Bernie Taupin writes the lyrics. That's a bit equivalent to winning bids. The music comes second. That comes from Elton John. That's equivalent to displacing contractors, managing utilization, promoting junior staff. Now, I'm not saying our delivery managers, operations staff, divisional leaders wear glitzy suits and big glasses, but they do have a track record of good tunes in this area. Moving on to workday services, overall revenue was up 4%. About 2% of that would have been higher in constant currency, so it would have been approximately 6% in constant currency. But a bit under 2% of that growth related to a shift of the implementation revenue for employee document management. New products are always implemented by the products team that allows for fast feedback to the product development team in terms of improvements. But as implementation scales, it needs to move to services business that set up for that scaling. As you would expect, EDM implementation has very poor margins at this point in the product development and upskilling cycle. Overall in Workday services, a growth in revenue from the Americas and from Australia was offset to some extent by a decline in EMEA. Gross margin dropped by about 4% from H1 last year and approximately half of that reduction came from the transfer of EDM implementation. Direct expenses were up only 1% and the overall effect on contribution was the contribution was down about 13% on H1 last year, but was up 28% sequentially on H2. If I move on to Workday products, revenue grew by 14% over H1 last year, but in constant currency, the growth was 19%, which is a more reasonable way to look at the business, given how much of this business is denominated in US dollars. As Brendan mentioned, pay transparency analyzer was launched in the period. It made a negligible contribution to revenue, as you would expect. Gross margins remain stable at about 78%, but that's somewhat flattered by the transfer out of EDM services. So it's the reverse of the workday services impact. And on a like-for-like basis, the fall was approximately 2%. I've always said that I'm happy to sacrifice gross margins for new product introductions, and that's what's happened this year. Direct expenses increased by 23% over the same period last year. The biggest element of the increase was 2.6 million for built-on workday payments. because Built on Workday was signed at the end of July last year, so there was two months in that comparative period, six months now, that represented about 16% of the 23% increase. We continue to invest in product development. As I never failed to remind you, we continue to expense product development to the P&L. Contribution for Workday products was 28%. I will note that if we had fully capitalized product development and depreciated over, say, five years, contribution would have been about 4% higher. In terms of central overheads, we include finance income and depreciation in this slide alongside central overheads. Central overheads and depreciation increased about 8%, but finance income fell substantially. It fell about 30%, two elements. One, lower interest rates in the market, and second, share buybacks reduced cash balances. The effective tax rate increased slightly, and that's because a greater proportion of our business now comes from the United States. If I move on to the balance sheet and cash flow. So fixed assets increased largely due to expenditure on the Belfast office, which we now call One Bank More. For H1, this was about 2 million of expenditure. For H2, the forecast is about 8 million as construction ramps up. For next year, the estimate's closer to 20 million for the full year. Goodwill and intangibles increased as a result of the Davis Peer acquisition. The structure of this deal was similar to previous deals. 30% of the cost of this was paid in KNOS shares. 30% is also held back for staff staying with KNOS over three years. We want to integrate this business. We don't want to create perverse incentives. And although IFRS say that that 30% has to be expensed, and therefore that's what we will do, to me, it is part of the cost of buying what we think is a great business. In terms of lock-in days, what we call trade debtors and WIPP combined, that increased to 67 days from 57 days this time last year. That was a tough comp. Mid-60s is fairly typical in our business. Other liabilities rose as a result of higher trade creditors. That's partially to do with having higher levels of contractors, higher bonus accrual. And we've been required by IFRS to accrue 9.4 million for share buyback not completed at the 30th of September. Moving on to the cash flow, our cash conversion was 48%, which is well down on last year at 75%. Cash conversion is always lower in H1. We typically do target around 75% in H1. There are three reasons for it being well below that target. One, we took a P&L charge for restructuring in March last year. We paid that cash in April and May, so it's in the H1 cash figures. That has an impact of about 13% on the cash conversion figure. Second factor is the return to growth requires more working capital. At a guess, that's probably about another 5% impact on the cash conversion figure. The final factor, we just did a bad job on cash collection. We need to improve that at year end. But cash collection is always difficult when people are focusing on sales growth. To be honest, if I had to choose, I would focus on the sales growth. If we move on to the To slide down on capital allocation strategy and talking broadly about this and the principles we apply, the first thing we want to do is be able to grow the business organically. Both services and products are cash generative and we've always been able to grow the products business from cash flow. The bigger constraint has always been staff and we would be happily prepared to invest cash if necessary and opportunities were available. We've done targeted acquisitions such as Davis Peer. We would consider that again if we find something as good as Davis Peer, but those sorts of things come up rarely and we will always be disciplined about acquisition execution. We think we need somewhere about 20 to 25 million as a cushion for working capital shocks and we're clearly well, well above that. We've always had a progressive dividend. other than in the early days of COVID, but we intend to maintain that dividend growth this year. Within these principles, we've identified again the ability to return value to shareholders. We review the return on capital calculation every six months, and clearly that calculation is a bit different at a share price of £9.30. rather than one of £7.30, we are going to renew our share buyback for another six months. And we're happy to be able to return cash to shareholders in lots of different forms.