Kainos Group Plc

Good morning everyone and welcome to the Kainos results presentation for the year ended 31st March 2020. I'm joined this morning by Richard McCann. So before I start the presentation, I'm going to launch it on my laptop in a second, just kind of three quick pieces of housekeeping. So the first is that Richard and I are going to take with 35 minutes to go through our most recent results, and then we'll open up the session for Q&A. When I launch my presentation on my laptop, it switches off my camera. I don't know why it does that, but that's what it does. So you'll hear just my voice and see my face as well. And we are recording the broadcast and we will publish the transcript of myself and Richard's presentation to our website here today after it's been edited for clarity. So if you bear with me, let me just launch the presentation. So hopefully that is successfully launched and on your screens. So Back in November, whenever we started talking about our results at the interim update, we moved our vocabulary away from smart as being a singular thing and talked about smart products and our smart portfolio. And this slide really is kind of a development of that conversation. So we really want to highlight the success of digital services and of the workday services part of our business as well, but really to call out the progress that smart products has made, not just in the past 12 months, but over a prolonged period of time. Again, these charts just show great progress of all three parts of the business. And looking at the last 12 months and probably before jumping into the detail of the results, it's probably useful to talk about the overall kind of demand environment that we see across all parts of the business. So really just in short, it's been very strong. So there's been, I guess, no cancelled procurements, kind of few if any deferrals to projects as well. And for us, you know, myself and Richard are obviously very involved in this market, but we think back to pre-pandemic, we would describe the demand as being very strong. We would describe it as being very strong during the pandemic when actually the importance of digital really was emphasised, I think, across our vast markets. And that demand has remained very strong after the pandemic as well. One of the questions I guess we get asked often is how long will this last? Back in 2015 at our IPO, we predicted that the demand environment would be strong for 15 or 20 years and I think seven years later, our answer is still the same, but it is a 15 or 20 year kind of strong growth market. So looking at those results, our revenue is up 28% or 26% organically. That does, I think, really reflect that demand environment alongside our execution. Our profit growth has been moderated as a result of our investments and that kind of expected normalization of costs across the business. I touched on that in a little bit more detail during my presentation. I know Richard will talk about it in his section as well. So as you can see, backlog bookings showing very strong growth. Our cash balance, which is strong, is down 5% from last year, really reflective of the four acquisitions we completed in the year. And you can see across the business areas, really strong performance from Digital Services, Workday Services and Smart, and I'll talk more about that in a few slides time. For us we talk about diversification and stability of our revenue streams and again this results just really talk to to the improvement there as well so we've got a good balance across public commercial and healthcare sectors and again we've seen our international revenues grow to almost 87 million pounds. For us, you know, the people are an important part of the story inside KS. Great to see the organisation growing, both in size, but also in capability as well. Staff numbers just under 2,700 people, up 670 versus last year, and that includes the 153 colleagues who joined us through acquisitions. The charts on the right-hand side of this slide read to me just talking about the consistency over performance. The charts cover the last five years, but really that consistency of performance has been over the last 12 years. Delighted to see this is just continuing a long established trend for us. So as mentioned, our adjusted pre-tax profit has moderated as our costs have normalized through the year. So you can see that through our trading, marketing, our recruitment costs. Again, now all at typical or pre-pandemic levels. Utilization. having spiked during 2021, has returned to more sustainable levels. There are for sure salary inflation pressures there as well, but we continue to use a high number of contract staff. Then finally, we have invested quite strongly, both in the product development point to smart, but also in the sales and marketing capability there as well. Alongside the markets that we work in, it really is the energy of our colleagues, their expertise and experience that kind of drives our business as well. So staff numbers up by a third to just under 2,700 people. And we've grown that headcount across all parts of the business. So in our core markets for UK and Ireland, but now those developing markets of Central Europe and in the Americas. The flip side of increased demand for our digital services is increased demand for digital skills across the world. That's a well-telegraphed shortage at the moment. So for me, the skills market does lag behind that demand market. It'll probably take 12 or 18 months to kind of catch up. So against that demand for digital skills, we are pleased to see our retention is still very high, down obviously from 93% this time last year, 89% back in November, but I think a really strong performance nonetheless. And again, the recruitment market has become more competitive. There is still significant talent in the market there as well. In the past year, we've received 42,000 applications for jobs. So yes, more competitive, but still good pockets with talent right there. And during the year, we welcomed 153 new colleagues from our four acquisitions. I'd have to say the addition of their expertise has been very helpful during the year, given how busy it's been. In terms of the integration of all four, I would I can say it's largely complete, though I do think it is fair to point out that the acquisition of Cloudator with operations in 10 different countries did take longer than I expected and did take more effort than we anticipated as well. In terms of our office-based working, up until March of this year, our guidance to our colleagues was very much to work from home where possible. Since March, we've been encouraging them to I guess, come back into the office to meet up with our colleagues to work in a shared working space as well. And I really would stress the word encourage as opposed to the word mandate. If you look at our peak office usage over the last 12 months, it's kind of about just under 20% of people who are coming into the office on a regular basis. They're often centered around social and collaboration activities. That trend has been moving up slightly over the last few weeks. So we'll be able to see where that kind of plateaus at as well. And just a slide to emphasize the long-term nature of our business. So once again, almost 90% of our business comes from existing clients. I think it really does reflect the value that we deliver to our clients and the high level of satisfaction they have with the work that we do for them. Back in November, I did borrow the term of net revenue retention for the world of SaaS and applied it to our overall business. And to do the same again, if you look at our net revenue retention for last year, that was 150% from clients that placed work for us in fiscal 20. And if you look at the last three years, that net revenue retention has averaged out at 133%. So the fact that our customers stayed with us for many, many years is demonstrated both by the graphs, but also by that kind of follow-on revenue as well. We also want to chart the kind of changing nature of our revenue as well. So how it changes across sector, across region, and really just to emphasise that resilience we have inside our revenue streams, just across service line, sector, region, and indeed across clients. So looking at the charts on the right hand, or the left hand side of the screen, I think we've achieved what we described seven years ago as near perfect balance. We wanted to have 40% of our business in commercial, 40% in public sector, and then the balance, 22% in healthcare. So great to see that kind of balance across the business. And we've always had that international aspiration as well, not just for workday services, but increasingly for digital services as well. And we have grown that international aspect of our business over the last years. For the year just closed out, 87 million of our revenues come from Central Europe or from North America, compared to perhaps one or two million back at the time of IPO. So we have aligned all of our activities in terms of our wider responsibilities around the United Nations Sustainable Development Goals. So in terms of climate action, Cairns is a carbon light business. So we're focused really on lots of small improvements around something that's transformative. This year, those small improvements include the improving energy efficiency of our offices, the further migration to renewable electricity, and a series of employee-focused events from education, through the launch of our UK Salary Sacrifice Out-of-Vehicle Scheme, with many colleagues purchasing cars through that scheme. We're very conscious that the technology sector has a real significant gender imbalance issue, so our plan inside Chaos focuses on three elements. The first is about retaining and developing the women already in Chaos. The second is about being the destination employer for talented women in the sector. And the third is about inspiring more young women to take up a career in digital technology. You can see how we've improved over the past 12 months. So pleased with our progress, but clearly there's much more for us to do. For our outreach programmes, the move from being virtual and being online really has allowed us to expand the regional provision of those programmes, which is super. It's also allowed us to launch programmes to support young women, those from underrepresented communities, and also those students with special educational needs. And we've augmented what we're doing around school careers with that in university. So our bursary programme does support young people, typically young women who are traditionally represented in the university in digital technology courses. So in digital services, there really has been a situation of very much strong demand across the sectors, public health care and in commercial sector as well. That kind of demand has very much outstripped our ability to service that demand. So we've been very selective with the projects and engagements we've taken on over the course of the year. So yes, obviously prioritising the needs of existing clients, but those new engagements have to be very selective quite as well. In terms of those engagements, in the public sector, we're very much focused on, I guess, widening our account base and activities there as well. So we've been appointed to the £300 million Met Police framework. We're currently bidding to join the 1.3 billion MOD DIPS framework as well. And also in defence, we've won engagements with the Atomic Weapons Establishment and with the Defence Science and Technology Lab as well. Outside of defence, we've also been awarded good-sized contracts in both DWP and HMRC, and all of this kind of really broadening out our account base inside public sector. In healthcare, part of our growth has been linked to COVID-19 programmes. That's been the case. Last year, we're seeing a spend on COVID-19 diminish. There's also been quite a lot of broader digital transformation programmes as well. As we look into fiscal 23 for healthcare, I'd have to say that there will be growth, but it's probably slightly more subdued as the merger of both NHSX and NHS Digital, two of our key customers, are merged together to form the transformation directorate within NHS England. And looking at the commercial sector, it's been our fastest growing sector over the past 12 months. And that's a combination of existing clients, increasing their spending and also acquiring new customers as well. And during the course of the year, I think we've started to see repeated success in the areas of insurance, in assurance and in the payments subsectors of financial services. Again, we expect that trend to continue going forward. So we've got a really long track record in public sector, more recently in healthcare, but we thought it'd be useful really on this slide to call out some of the things that we're doing underway to expand the markets that we're currently addressing. So I've already talked about commercial sector on the previous slides, some really strong growth over the course of the year. Inside the company, we have a new business investment process, which allows us to develop and to launch those new ideas that we think have genuine appeal for our customers. So our data and AI practice launched back in 2019. Last year, it generated close to 16 million pounds of revenue, excuse me, and intelligent automation launched in mid 2020. Again, we're seeing good traction, albeit of a different scale than AI. And both those areas we expect to see strong growth in the year ahead. And finally, we believe that there are also opportunities to become a leading digital transformation player across international markets. So we're really focusing in Germany and Switzerland, where we have a very strong kind of workday consulting presence that helps us to penetrate those markets. And in Canada, again, we have a very strong workday presence there as well. In the case of Canada, we're, I guess, quite involved in conversation with the Canadian government about their digital transformation of public services. They're starting that journey, so probably five or six years behind where the UK is at the moment. We will expect to see them invest heavily over the next few years. So I've talked about the new things that we're doing at the moment, kind of our two case studies around our customers, very much drawn from longstanding engagements that we have. So we worked both with the Foreign and Commonwealth Office and the Department for International Development before they were merged together back in 2020 to become the Foreign, Commonwealth and Development Office. So one of our very first engagements was around the emergency travel documents, or what you and I would call an emergency passport, where a citizen is outside the UK and their passport has been lost, damaged or stolen. So that system processes over 3,000 applications every year with the passport being ready in about two days. So our engagement with the FCDO has expanded. We now support 14 different services across their estate, including emergency travel documents, also applications like the Crisis Hub, which is used by FCDO staff to support UK citizens when they're located in crisis areas. That can include natural disasters, but also kind of volatile military situations that have occurred in Afghanistan and in Ukraine. So we provide that service 24 by 7, the UK operates almost 200 clients across the world. And as you can appreciate, some of those services are critical ones. So DVSA is one of our very first of large transformation projects. We were appointed back in 2013 to help and lead on the modernising the MOT service. Our project went live in 2015, allowing the decommissioning of a mainframe and a private network and saved our client almost 160 million pounds in the first phase of the service. So since then DVSA has expanded and improved the MOT service as well as the current improvement activity we're undertaking with DVSA. We've also added new functionality around emissions, around MOT reminders and most recently we've started on the safety recall part of the service as well. Alongside MOT we've partner with DVSA on commercial vehicles and on the driver examiner service and in September of last year, the first phase of the digital theory test which allowed DVSA to exit a 17 year legacy contract. Looking at just DVSA and the expenditure with us over the past almost 10 years, it's about £100 million worth of revenue for us and significant projects for DVSA as well. So Workday Services also had a very strong performance over the past 12 months, recording 45% growth year on year, or 29% growth if you think about that organically. Bookings and backlog, as you can see, also growing very strongly. So it was a busy year just in terms of organic growth in the business. We also completed four acquisitions. So two of those, Blackline and Planalyse, were very much focused around specialised skills in both spend management and in adaptive planning. While Cloudator and Uni Consulting were about capacity and regional coverage. So in terms of where we think the business is at today, I think that mix of strong organic growth and actually a total of seven acquisitions over the past three years, we now have the right mix of skills, the right mix of location of skills as well. So we think in terms of further acquisition, this part of our business is highly unlikely. In terms of the business, about 44% of our revenues come from North America. Just over a quarter come from Central Europe. Then just under require a call from the UK and Ireland. Our consultant numbers have continued to grow very strongly, mainly from hiring and from development. Out of the 638 consultants we have today, about 30 have joined via the acquisitions. So we've said on many occasions that work days are very comprehensive. platform, but we do believe that there are opportunities for us to develop components that complement that platform and allow work-based customers to get better value from their work data planet. So part of a history lesson, we launched SmartTest back in 2013, but we are now building a suite of products. So we launched summer of last year on SmartShield, which is our data privacy tool, launched at the end of the summer of 2022. So that kind of success of SmartTest, but also that widening of the portfolio is really reflected in the performance. So revenue, bookings, backlog, and that all-important ARR, all increasing very strongly. Individually, SmartTest has had its strongest every year, signed 68 new clients in the year. Thinking about the existing client base, the net revenue retention was 109%, again, an excellent KPI. So Smart Audit has done really well as well. It launched in mid 2021. It signed 26 new clients in fiscal 22 and added 60 more in the first few weeks of fiscal 23. So in terms of that kind of progress, it took us, gosh, almost four years to make the same progress with Smart Test as we've done in the last nine months with Smart Audit. And finally, just to finish off with With Workday Xtend, you will recall Workday Xtend is Workday's platform as a service offering that allows customers to build additional specialized functionality on top of their Workday platform. So Xtend has been in development for several years and we've been part of their early adopter program since 2017. So Xtend became available generally in in May of 2020, and that interest has been building steadily. The extended process is both a services and a private opportunity. So from a services perspective in the past 12 months, we've built applications for clients around incentive plans, around ad hoc pay rises, and around family and medical leave. But it's probably the client ideas that are the most exciting for us. We've developed vaccine management, which allows organisations to manage the vaccine status of their employees, return to office, tuition reimbursement, and document management. This is a very fast-moving environment. These applications I've mentioned are much smaller subscriptions than our smart portfolio, and we expect, as we move forward, to see two or three of those types of applications being released each year. During the year, we also took the opportunity to increase our investment in our smart products. So that's first and foremost around our product investment. So really supporting the ongoing development of SmartTest, building out the smart product platform and that early development of SmartShield. So in total, that's 2.4 million of additional product investment during the year. And as you know, we expense all of our R&D to the P&L in the year. Alongside that kind of product investment, naturally we've increased our investment in sales and marketing as well to the tune of 1.3 million as we've built out that sales and demand generation team. We've also taken the opportunity to simplify our sales model. The team is now focused solely on selling product as opposed to a blend of services and product and related to how we address the US market. 75% of the Workday client base is in the US market, therefore it is the biggest opportunity for us. So we've expanded both the team in the US and the team supporting the US activity. Looking forward into fiscal 23, we do expect to see further investments in both the product roadmap and in our sales and marketing capability as well. We think the opportunity is definitely there and we're keen to get after it. Just picking up a couple of the customer stories from the Workday practice. So Autostore are a Norway headquarters manufacturer of tube storage and automation robots that have 20,000 robots working throughout clients in close to 40 countries. So Autostore, we're a very fast growing company, still are a very fast growing company as well, and they pushed Workday to deploy Workday to support their growth. And they asked for recommendation from Workday around the partner they would recommend. And because Autostore were looking for a very quick deployment, they want to get live in four months, Workday recommended ourselves, which is what we did. In four months, we launched the core HCM and advanced compensation modules to support Autostore's growth as an organization. And we're now moving on to the next phase of the project. We're currently deploying time tracking for our store and there's a further four modules identified for future phases. That's very much a pattern we see across pretty much all of our Workday customers. There's that first kind of core HCM deployment and then over several years the deployment of additional modules. Moving to Smart and to Chemours chemical. So Chemours is a spin-out of DuPont chemical. I think four years old at this stage and already six and a half thousand employees and revenues of five billion dollars. So it's a substantial business in its own right. So they were a Workday customer and they originally outsourced their testing to a minor provider, but found it slow, rigid and expensive. It was also really occupying pretty much all the time of their small team of six Workday specialists. So they switched to using SmartTest, which were able to apply for them very quickly. So it has allowed them to increase the test coverage, the quality, the capacity of the testing as well. And at the same time, freeing up those six individuals to focus on higher value tasks inside the organisation. So I'm going to hand over to Richard to cover off the financial performance over the last 12 months. Richard, if you let me know, you'd like me to change the slides and I'll do the needful.

Thanks very much, Brenton. So you just move forward to the group income statement. I suppose CFOs frequently like to talk about the previous year as being a tough comp. I suppose in this case, it's more of an unusual comp where comparing to a year where people could barely leave their homes, where no one traveled further than Portrush, obviously talking about myself, and we did no recruitment in the first half of that year. I'll try to make sense of it, but I'll also at the end look at a comp to a couple of years ago as well. So in terms of digital services, public sector, as Brenton said, it's the largest part of the business unit. It grew about 6%, which was solid performance considering how much is moving within public sector. Brenton mentioned the standout performance, the commercial sector up 60%. If you remember, it had a relatively difficult start to COVID as commercial businesses pulled back investment It bounced back very strongly in the second half of last year. It's really pleasing to see that going right through this year as well, a bit of a smaller base. And healthcare was another outstanding year. It had an amazing FY21 in terms of growth. It's managed to beat that and beat that very well with a further 52% growth. In terms of gross margins, these largely returned to pre-pandemic levels, and we've used the word normalized in a couple of occasions here, particularly around utilization, which had been extremely high and has gone back to more normal levels. and also there's the impact of salary inflation there as well. I suppose might as well cover salary inflation now. I think at half year I said that our business is a bit like ABBA, lots of talented parts to it and I said salary inflation was a bit like their outfits which weren't particularly to my taste. Still not a fan of the outfits but the lapels haven't gotten any wider and the heels aren't getting any higher Hopefully that continues to flatten in the long term. We'll take a long term view of this. We're certainly not going to lead salary inflation. We will try to pay our staff fairly and we will try to pass on salary inflation to customers over time. In terms of the workday practice, services revenue grew 45%, of which 29% was organic. And as Brenton mentioned, product revenue was a healthy 32% growth as well. Gross margin here decreased about 2%. Most of that decline was in services for the same reasons that I've mentioned in relation to digital services, albeit to a slightly lesser extent. Product margin increased very slightly. Again, salary inflation is less of an issue in this area. And OpEx in the workday practice grew in line with revenue and Brenton's touched on the particular investments already in product development and sales and marketing within the product side. Central overheads grew broadly in line with revenue, and that left adjusted pre-tax profit margins returning to more, again, normal levels of. Tax rate increased about 1% due to the impact of non-deductible acquisition costs. Moving on to the balance sheet and cash flow. If you move that ahead, Brenton. First time we see a big increase in goodwill and intangibles to do with the four small acquisitions that Brendan mentioned earlier. Property, plant and equipment also increased a bit more than normal. Partially that's due to the high recruitment during the year, partially due to a bit of spending that had been deferred during COVID. We also refurbished and moved offices during the year, which hopefully won't happen on a regular basis. Looking at accrued income and receivables, we always look at those two together as lock-in days. You can get fluctuations in one or the other just depending on timing of billing and payments and so on. But broadly, we saw... with broadly flat debtors increased. Overall returned pre-pandemic lock-in days of about 71. The 60 last year, again, was lower than usual. In terms of cash flow, I've looked back at the notes from last year, and I described 112% cash conversion as an impossible comp, and so it proved. We had a good solid year of cash conversion, albeit a game of two halves. the overall figure of 83% is broadly in line with the sort of guidance we've been given for years now of about 80% being a reasonable target. The other 15% essentially allows for working capital growth as we grow the business. Overall cash reduced by approximately 4 million to about 77 million. That was largely due to the effect of cash outflows of 17 million related to acquisitions. The last slide, hopefully is the last time I'm going to have to use this slide, what I'm talking about, an underlying performance by comparing to FY20. I described FY21 as unusual. Other adjectives are available for that. And I think looking two years back gives a slightly different better picture in many ways. So over those two years revenue growth just short of 70%, growth in line with revenues and contribution growth slightly ahead of revenue growth which meant that our adjusted pre-tax profits over that more than doubled. I'm a Leeds United fan And on the 1st of April, 2020, if you'd offered me a promotion to the Premier League, two seasons in that league, survival yesterday, even though it went down the last few minutes, I'd happily have taken it. as CFO of Kiemos, which is a much less important position, obviously, on the 1st of April 2020, if you'd offered me 70% growth across all parts of our business, continued cash generation and the outlook that Brendan described, I think I would have taken that as well.

Brendan. Thank you very much. I'd like to finish off the presentation by giving a few about the I'd like to cross the three parts of our business. So when it comes to digital services, I do think we can credibly make a claim to being the UK leader in digital transformation in the public sector. But our ambition is to make the same claim around healthcare and around the commercial sector as well. So as we look at fiscal 23, it's very much about strong growth across commercial and maintain that growth profile in the UK public sector and healthcare. And really just to kind of remind us all of the underlying market dynamic here as well. I mean, if you just look at the UK public sector spending over the last five years, it has been very robust, 22% growth over that period of time. It would be remiss of me not to point out that digital services grew by 28% over that period of time. But we can, we believe, continue to avail of that very strong market growth and, in fact, outpace the market growth as well. The theme of outpacing market growth is also true for Workday services. Again, just to reflect on the market, Workday have been growing very strongly. They are heading towards that 10 billion revenue target. Out there, they've upgraded their forecast this year from last year and seeing an acceleration in their business. So it is a great demand environment to be working in. For us, the priorities for fiscal 23 are very much about maintaining that growth in our well-established markets across UK, Europe, and Canada, and really to kind of build out that scale in the US. So we have significant business in the US already. We're keen to get our phase one partners to this year as well, but it is the biggest market for consulting services in the world. And for Workday Extend, again, it's a small part of the plan for the year ahead, but it's an important part of the plan. We think Workday Extend is a very interesting opportunity, particularly for us in KMS, because it blends our deep knowledge of Workday with our heritage in software engineering. And some of the ideas that we will see and experience across Workday Extend will become ideas for our smart portfolio and how we expand that. I think the team behind Smart Inside Chaos have done just a great job in building a super business. It's already a £34 million ARR business. We believe they're only getting started and that over the next four years, 100 million of SaaS subscriptions is a credible target. So we believe that we can achieve that by the higher adoption of SmartTest across that Workday customer base and well beyond the 300 customers who use SmartTest today. I mentioned already Smart Audit has been officially available only for nine months, having signed up 40 customers in that period of time. It's been able to achieve in nine months where it took us four years to achieve in SmartTest. And obviously having launched Smart Audit last year, very keen that we have the same success with the launch of Smart Shield at the end of summer 2022. And we expect it to be adopted in the same kind of manner as Smart Alert. Again, Workday is a high growth market. When we think about the customer base inside Workday as well, it is growing strongly. It has over 4,000 customers today. It's adding 600 new core customers every year as well. That's a great market to be selling smart products into as well. So that brings us to the end of our presentation. If you bear with me, I'll stop sharing my screen and we will start the Q&A session.