Kainos : Interim Results

RNS Number : 4048I Kainos Group plc 26 November 2018

26 NOVEMBER 2018

KAINOS GROUP PLC

("Kainos" or the "Group")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

Kainos Group plc (LSE: KNOS), a leading UK-based provider of IT, consul!ng and so"ware solu!ons announces its results for the six months ended 30 September 2018.

FINANCIAL HIGHLIGHTS

H1 2019 H1 2018 Change

Revenue	£67.2m	£41.4m	62%
Adjusted pre-tax profit1	£10.1m	£7.1m	42%
Profit before tax	£8.7m	£6.8m	28%
Cash	£38.8m	£27.3m	42%
Sales orders	£90.2m	£63.4m	42%
SaaS sales orders	£6.4m	£5.3m	21%
Backlog2	£125.6m	£97.1m	29%
Adjusted diluted earnings per share1	6.6p	4.9p	35%
Diluted earnings per share	5.7p	4.6p	24%
Proposed interim dividend	2.8p	2.0p	40%
OPERATIONAL HIGHLIGHTS

• · Performance in line with upgraded market expectations, with on-going momentum.

  • - Revenue growth of 62% to £67.2 million (H1 2018: £41.4 million).

  • - Adjusted pre-tax profit increased 42% to £10.1m (H1 2018: £7.1 million).

  • - Sales orders up 42% to £90.2 million (H1 2018: £63.4m million).

  • - Contracted backlog growth of 29% to £125.6 million (H1 2018: £97.1 million).

• · Revenue diversification continues, across a series of sectors.

  • - Commercial revenues up 30% to £17.6 million (H1 2018: £13.6 million).

  • - International revenues up 28% to £12.8 million (H1 2018: £10.0 million).

  • - Healthcare revenues up 67% to £11.0 million (H1 2018: £6.6 million).

  • - SaaS and software-related revenues up 13% to £9.9 million (H1 2018: £8.7 million).

• · Very strong growth in Digital Services driven by new and existing customer demand.

  • - Revenue growth of 75% to £57.3 million (H1 2018: £32.7 million).

  • - Significant on-going engagements in UK government's digital transformation programme.

  • - Further strengthening of posi!on within Europe as leading bou!que Workday partner, with 33 new deals signed (H1 2018: 16); building presence in North America.

• · Digital Platforms showing progress against key milestones.

  • - Revenue growth of 13% to £9.9 million (H1 2018: £8.7 million).

  • - 139 customers on Kainos Smart (H1 2018: 103).

  • - Research and development expenditure of £2.2 million expensed (H1 2018: £2.6 million).

• · A total of 1,324 people in Kainos (H1 2018: 1,019) up 30%, with on-going recruitment activity.

• · Customer approval of Group services rated as 'good' or better by 90% of customers.3

• · Highly cash generative, strong underlying cash conversion and period-end cash of £38.8 million.

1 Adjusted measures are based on reported statutory profit numbers excluding the effect of share-based payments and related costs. Reconcilia!ons

between the reported and adjusted measures are included in the Financial Review.

• 2 The value of contracted revenue that has yet to be recognised.

• 3 Data collected from regular feedback surveys conducted with sub-set of Kainos customers over the course of the period.

Brendan Mooney, CEO, commented:

"An excep!onally strong six month performance means that we are well on the way to achieving a ninth consecu!ve year of growth - in terms of our people, customers, revenue and adjusted pre-tax profit.

Our Digital Services division con!nues to experience strong momentum, fuelled by demand from exis!ng and new customers, both locally and internationally.

We con!nue to deliver major transforma!on programmes across UK government and for our commercial clients, where demand in the UK has resulted in the opening of new office locations in Birmingham and London.

To support the con!nued expansion with our Workday-related business, in Europe we con!nue to grow from our recently established offices in Frankfurt and Copenhagen, alongside our exis!ng offices in Amsterdam and Gdansk. In North America we continue to expand our presence in Boston and Atlanta and we will open an office in Toronto in theNorth America we continue to expand our presence in Boston and Atlanta and we will open an office in Toronto in the next few weeks.

Our Digital Platforms division continues to make progress against key milestones. Smart, our market-leading Software as a Service (SaaS) plaIorm for automated tes!ng of the Workday suite con!nues to add global brands as customers, with over 130 interna!onal organisa!ons now on the plaIorm. In Evolve we con!nue to help our NHS customers maximise their use of Evolve, against a backdrop of a challenging funding environment for Acute Trusts.

We remain focused on providing exceptional careers for our staff and exceptional digital products and services for our customers. The Group's pipeline of prospects con!nues to strengthen across all divisions and the Board believes that the Group is well-positioned for growth both in the short-term and in the coming years."

Ends

For further information, please contact

Kainos	via FTI Consulting LLP
Brendan Mooney, Chief Executive Officer
Richard McCann, Chief Financial Officer
Investec Bank plc	[phone]
Andrew Pinder / Patrick Robb
Canaccord Genuity	[phone]
Simon Bridges / Emma Gabriel
FTI Consulting LLP	[phone]
Matt Dixon / Harry Staight
About Kainos

Kainos Group plc is a UK-headquartered provider of Digital Services and Digital Platforms.

The Group's Digital Services include full lifecycle development and support of customised Digital Services for government and commercial customers. Kainos is also the leading bou!que partner for Workday, Inc. ('Workday') in Europe, responsible for implemen!ng Workday's innova!ve So"ware-as-a-Service (SaaS) plaIorm for enterprise customers.

The Group's Digital PlaIorms comprise specialised digital products in the mobile healthcare and automated tes!ng arenas. Smart is an automated tes!ng plaIorm for Workday customers; Evolve Electronic Medical Records ('EMR') is the market leading product for the digitisation of patient notes in the Acute sector of the NHS.

Kainos has over 1,300 people across eleven offices in Europe and the US, working interchangeably across its Services and Platforms businesses.

Kainos is listed on the London Stock Exchange (LSE: KNOS).

For further information, please visitwww.kainos.com.

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

DIVISIONAL REVIEW

Digital Services

The Digital Services division comprises two areas of activity:

· Digital Transforma!on: the delivery of customised online digital solu!ons, principally for central government, regional government and local government departments and agencies ("UK government") and for commercial sector organisa!ons. The solu!ons provided are highly cost-effec!ve and make public services more accessible and easier to use for the citizen and customer.

·

Workday Implementa!on: the provision of consul!ng, project management, integra!on and post deployment services for Workday's Enterprise Resource Planning (ERP) so"ware suite, which includes cloud-based so"ware for Human Capital Management (HCM) and Financial Management that enables enterprises to organise their staff efficiently and to support financial reporting requirements.

Digital Services revenue for the six months ended 30 September 2018 grew by 75% to £57.3 million (H1 2018: £32.7 million), with revenue from customers in commercial sectors accoun!ng for £12.9 million (H1 2018: £10.2 million), an increase of 27%. Sales orders in Digital Services increased by 50% to £82.4 million (H1 2018: £54.9 million) and backlog for the division increased by 58% to £90.3 million (H1 2018: £57.3 million).

Digital Services - Digital Transformation

Brexit con!nues to generate uncertainty within the wider UK economy. Despite this, Kainos' assessment of the associated impact in the government IT landscape remains consistent with previous guidance - there is no nega!ve impact to the programmes with which Kainos is involved.

Within central government, Kainos is delivering a combina!on of exis!ng and new programmes across sixteen major departments and agencies, with the Department for Interna!onal Development added as a new customer in the past repor!ng period. In devolved government Kainos con!nues to be successful in projects in Scotland and Wales; whilst the absence of poli!cal ins!tu!ons in Northern Ireland con!nues to defer most procurement ac!vity in this market during the period.

Progress con!nues in client acquisi!on in the commercial sector, where we have added 4 new clients. The partnership with NHS Digital con!nues to expand, with Kainos delivering significant elements of NHS Online and the NHS App, both of which entered private beta in October 2018.

Looking forward, the Group remains op!mis!c about the future of digi!sa!on in the UK public sector, and is confident that it is well posi!oned to maintain a central role in the public sector's transforma!on. Equally, a developing reputa!on in the commercial sector and opportuni!es within NHS Digital are expected to generate further long term growth for the Group.

Digital Services - Workday Implementation

Kainos first engaged with Workday in 2010 and is now one of the most experienced par!cipants in Workday's partner ecosystem. Kainos remains the only bou!que Workday partner headquartered in the UK and one of only 33 partners globally accredited to implement Workday's innovative SaaS platform.

Within Europe, Kainos con!nues to consolidate its posi!on as the leading bou!que partner, signing 33 new clients in the period (H1 2018: 16). This leadership posi!on is a result of highly capable consul!ng staff and high sa!sfac!on levels within the Kainos customer base, but is also aided by consolida!on within the partner ecosystem, with boutique suppliers Appirio (2016), DayNine (2016) and Ataraxis (2018) all having been acquired by larger partners.

Kainos has continued its international expansion with notable developments in the period including the appointment of Kainos as a Workday partner in Canada and, post period end, achieving preferred supplier status for a significant US customer. In Europe, strong growth con!nues within the Nordic markets of Denmark, Sweden, Norway and Finland (Copenhagen office opened 2017) and DACH markets of Germany, Austria and Switzerland (Frankfurt office opened 2017). This is in addi!on to the Amsterdam office (opened 2015, covering Belgium, Netherlands and Luxembourg). Kainos now has 34 clients for Workday services in mainland Europe (H1 2018: 17).

The UK Public Sector is an important new market for Workday and Kainos has been instrumental in securing new customers. Of the seven deals signed by Workday, Kainos are undertaking the implementa!on with six customers and Workday are delivering the remaining project, supported by Kainos consultants. Kainos customers include Crown Commercial Service, the Office for Students and Innovate UK.

In addi!on to the delivery of Workday for new customers, Kainos is increasingly involved in suppor!ng the opera!on of customers that are already live on the Workday plaIorm. This annuity-style revenue stream, described as Post Deployment Services, accounts for £4.0 million (H1 2018: £1.7 million) and has 68 customers (H1 2018: 23 customers).

The number of accredited Workday consultants in the Group's Digital Services division has increased by 44% to 197 people (H1 2018: 137 people), with further recruitment underway.

Looking forward, growth prospects remain very strong, driven by geographic expansion, increased penetra!on within the UK Public Sector and the further development of our Post Deployment Services offering. These prospects are, in turn, underpinned by very strong annual revenue growth at Workday Inc. ("Workday"), reported as 28% in their most recent US filings.

Digital Platforms

The Group Digital Platforms division comprises the following platforms:

· Smart Automated Tes ng (Smart): Smart is a proprietary so"ware tool that allows Workday customers to automa!cally verify their Workday configura!on both during implementa!on and in live opera!on. Smart is the only automated tes!ng plaIorm specifically designed for the Workday product suite. Smart is a cloud-based SaaS solution licensed on a subscription basis to customers.

·

The Evolve Healthcare Por#olio comprises Evolve Electronic Medical Record (Evolve EMR), a proprietary so"ware product that removes paper from the care process by digi!sing NHS pa!ent records, thereby enabling efficient healthcare and Evolve Integrated Care (Evolve IC), a mobile-op!mised integrated care plaIorm, designed to automate common care pathways for healthcare delivery organisations.

Evolve EMR can be consumed either on-premise or in a hosted environment, with perpetual and subscrip!on licensing options. Evolve IC is a cloud-based SaaS solution licensed on a subscription basis.

In aggregate, Digital PlaIorms revenue for the six months ended 30 September 2018 increased by 13% to £9.9 million (H1 2018: £8.7 million). Sales orders for Digital PlaIorms decreased 8% to £7.8 million (H1 2017: £8.4 million), aMributable to reduced demand for Evolve as a result of con!nued funding challenges within the NHS. Sales orders for the Group's SaaS platforms increased by 21% to £6.4 million (H1 2018: £5.3 million).

Within Smart, revenue for the period increased by 43% to £5.2 million (H1 2018: £3.6 million), of which £4.3 million relates to SaaS subscrip!ons (H1 2018: £3.0 million). New sales bookings for the period amounted to £7.3 million (H1 2018: £5.7 million), an increase of 27%. The Annual Recurring Revenue (ARR) for Smart at period end was £9.2 million (H1 2018: £6.3 million); backlog for Smart is £15.6 million (H1 2018: £13.7 million).

The on-going funding constraints within the NHS con!nue to impact Evolve revenues. Despite a stable maintenance revenue stream, there has been an 8% reduc!on in revenue to £4.7 million (H1 2018: £5.1 million). Sales orders for the period amounted to £0.5 million (H1 2018: £2.7 million), sugges!ng no material increase in revenues in the short-term.

As noted in the annual report, the commercial arrangement with Evolve IC and Telehealth provider InTouch Health concluded on 31 March 2018. InTouch Health terminated their commercial rela!onship with Kainos in order to develop their own internal solution. Kainos has since referred this matter to US legal counsel.

Digital Platforms - Smart

Smart is now used by 139 customers globally to automa!cally verify their Workday configura!ons (H1 2018: 103). Kainos has four Smart modules: HCM, Security, Financials and Payroll. Over 90% of customers have purchased a subscrip!on for both HCM and Security, with 31 customers subscribed to Financials (which is in line with the wider adop!on of Workday Financials) and 20 customers who have a Payroll subscrip!on. The reloca!on of a number of the sales team to the US has resulted in a stronger sales performance.

Workday have announced Workday Cloud Platform (WCP), their Platform as a Service (PaaS) offering. Kainos has been part of the early adopter programme since 2017 with an an!cipated General Availability in late 2019. While s!ll at an early stage, WCP featured heavily in the recent Workday user conference and WCP may offer a new future growth opportunity - such as addi!onal IP development for Kainos or specialised development services to other Workday customers and partners.

Looking forward, con!nued strong growth for Smart will be powered by increased penetra!on of Smart in the Workday customer base, by expansion of the Workday customer base itself and by the development and adop!on of new Smart modules, of which Payroll is the most recent example.

Digital Platforms - Evolve

Evolve EMR con!nues to be a leading supplier to the NHS, and is now deployed at enterprise scale across 35 HealthEvolve EMR con!nues to be a leading supplier to the NHS, and is now deployed at enterprise scale across 35 Health Trusts (approximately 110 hospitals), managing over 1.5 billion images with 35 million pa!ents registered on the system.

The dominant feature of the UK NHS market is that of restricted funding, which has significantly reduced procurement ac!vity across the sector. Near-term, there are areas of interest in exis!ng clients migra!ng to Cloud EMR and early indications of modest increases in procurement activity in the UK and Ireland markets.

Looking forward, the Group believes that the opportunity for Evolve EMR growth remains undiminished in the longer term, with over 90 Health Trusts in England s!ll to address their considerable paper challenge, represen!ng an available market of c. £200 million. Near-term, expectations are for a continued, subdued market.

OUR PEOPLE

Kainos believes that the future success of the organisa!on is dependent upon the capability of the people working in the Group. The People Development Plan focuses on the key objectives of development, retention and recruitment.

The Group has 1,324 people working in Kainos (H1 2018: 1,019) an increase of 30%, of which 11% are contractors (H1 2018: 5%). Attrition has increased to 14% during the period (H1 2018: 12%).

Kainos con!nues to aMract strong interest in key recruitment markets, with 9,282 applicants in the period ended 30 September 2018 (H1 2018: 2,4034). A total of 1,857 interviews were conducted (H1 2018: 1,093) with 244 people joining Kainos (H1 2018: 181), representing 2.6% of the initial applicants (H1 2018: 7.5%).

The Kainos Digital Academy and associated programmes are central to the continued development of staff. During the six month reporting period, 3,322 training days were completed.

Employee wellbeing is a key priority and Kainos strives to be an excellent employer, the success of which is reflected in holding Sunday Times Top 100 Employer status con!nuously since 2012, an accredita!on that is en!rely based upon employee feedback.

Kainos con!nues to provide a comprehensive range of benefits to support financial security, such as Private Medical Insurance, Contributory Pension plan, Life Insurance and Income Protec!on. Kainos also provide a comprehensive health cash plan, Healthshield which offers support with dental and op!cal costs, access to 24/7 counselling, health assessments and a range of complementary therapies to assist staff and their families' health and wellbeing.

The Group operates a Share Incen!ve Plan for all staff and a total of 1.8 million free shares have been distributed to staff. In addi!on, the Group created SAYE schemes in July 2015 and July 2018, which awarded a further 2.3 million options to staff.

The Group promotes awareness of digital technologies amongst school students. Over the past four years, Kainos has helped train 280 teachers in technical skills and their outreach programmes have directly benefiMed the lives of over 4,000 young people in the UK and Ireland, catering for students from a range of socio-economic backgrounds and with female student participation in a number of programmes reaching 40%.

SUMMARY AND OUTLOOK

The directors believe that the Group's sales performance and consequent increase in contracted backlog underpin near-term performance.

Over the longer term, Kainos remains well placed to deliver further growth. The Group's Digital Services division continues to benefit from the UK government's digitisation programmes, and from the strong and sustained growth of Workday.

In the Group's Digital PlaIorms division, Smart remains in a commanding posi!on as the leading automated tes!ng product for Workday globally, and while constrained NHS funding is expected to limit the growth of Evolve in the near-term, the directors remain confident that it is well posi!oned to capitalise on its lead in the NHS marketplace in the long term.

In summary, the Group sees con!nued stability and growth opportuni!es for its Digital Services division and is encouraged by the strong posi!on of its Digital PlaIorm SaaS offerings globally. Going forward, the Group will remain focused on providing exceptional careers for staff and exceptional digital products and services for its customers.

4 Comparatives have been adjusted to remove contractors

FINANCIAL REVIEW

Kainos achieved revenue of £67.2 million (H1 2018: £41.4 million), represen!ng an increase of 62%. Digital Services revenue grew 75% to £57.3 million (H1 2018: £32.7 million) which was driven by growth in both Digital Transforma!on and Workday Services. Digital PlaIorm revenue has increased by 13% to £9.9 million (H1 2018: £8.7 million) which is aMributable to growth in Smart and par!ally offset by a decline in Evolve, which now represents 7% of Group revenue.

Overall gross margin was 46% (H1 2018: 49%). Digital Services margin decreased to 44% (H1 2018: 47%), whilst Digital PlaIorms gross margin increased to 59% (H1 2018: 54%). The reduc!on in Digital Services gross margin was mostly due to increasing the number of contractors and revenue delivered through partners, as well as the geographic expansion within Workday Services.

Opera!ng expenses excluding share-based payments for H1 2018 increased by 59% to £20.8 million (H1 2018: £13.1 million). This increase is in line with revenue growth and relates to the geographic expansion and salesinvestment within the Digital Services division. Investment in product development has decreased to £2.2 million (H1 2018: £2.6 million) due to a reduc!on in staff involved in Evolve product development which was par!ally offset by a growth in Smart product development. All product development was expensed in the period. Research and Development Expenditure Credit (RDEC) grants recognised in the period totalled £0.9 million (H1 2018: £0.9 million).

The share-based payment expense incurred in the period was £1.3 million (H1 2018: £0.3 million). This increase relates mainly to social security costs associated with vesting of share awards.

Adjusted pre-tax profit increased by 42% to £10.1 million (H1 2018: £7.1 million). Profit before tax increased by 28% to £8.7 million (H1 2018: £6.8 million). The adjusted profit measures can be reconciled to the reported statutory numbers as follows:

Profit before tax

Share-based payments and related costs Adjusted profit before tax

Profit after tax

Share-based payments and related costs (net of associated taxes)

Adjusted profit after tax

6 months	6 months	12 months
to 30 Sep 2018	to 30 Sep	to 31 Mar
unaudited	2017	2018
unaudited	audited
£'000	£'000
6,810	14,251
320	1,096
7,130	15,347
5,484	11,666
320	910
5,804	12,576

£'000

8,722 1,330 10,052

6,960 1,104

8,064

The effec!ve tax rate for the six months ended 30 September 2018 was 20.2% (H1 2018: 19.5%) and is in line with expectations.

The Group con!nues to have a robust statement of financial posi!on with £38.8 million of cash (H1 2018: £27.3 million), no debt and net assets of £45.8 million (H1 2018: £36.2 million). Cash conversion, calculated by taking cash generated by opera!ons over EBITDA, con!nued to be strong at 93% (H1 2018: 63%). The combined underlying trade debtor and accrued income totalled £28.8 million (H1 2018: £20.4 million). The increase of 41% is in line with expectations given revenue growth.

Dividend

An interim dividend of 2.8 pence per share has been declared for the six months to 30 September 2018. This will be paid on 28 December 2018 to shareholders on the register at the close of business on 7 December 2018, with an ex-dividend date of 6 December 2018.

RISKS

There are a number of poten!al risks and uncertain!es which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from forecast and historic results. The directors do not consider that the principal risks and uncertain!es have changed since the publica!on of the Group's Annual Results on 29 May 2018. These are described in more detail on pages 11 - 16 of the Annual Report (available on the Group's websitewww.kainos.com).