FD Technologies planning more investment as it swings to first-half loss

FD Technologies shares were tumbling on Tuesday morning after the company swung to a first-half loss due to a decline in revenue.

The AIM-traded firm said revenue fell 3% year-on-year in the six months ended 31 August to £142.5m, and whole gross profit saw a 1% decrease to £59.4m.

It swung to a loss before tax of £4.5m from a £1.1m profit a year earlier, while reported diluted losses per share came in at 22.2p, compared to 2.9p earnings per share in 2022.

Net debt slightly decreased to £7.2m from £7.4m in the prior year.

Regarding adjusted metrics, FD Technologies reported a 12% decrease in adjusted EBITDA to £14m, while adjusted diluted losses per share were 4.3p, contrasting with 14.2p earnings per share a year earlier.

The company highlighted strategic progress despite the financial challenges, especially within its subsidiary KX.

It said KX performed in line with expectations, achieving a 15% increase in annual recurring revenue (ARR) to £69.3m while recurring revenue also increased by 23%.

The firm said it was confident in delivering its 2024 financial year target for ARR growth, aiming for at least 35%.

Additionally, KX expanded its cloud service provider (CSP) pipeline significantly in the period, working with go-to-market teams to introduce managed applications on Microsoft Azure, AWS KX managed service, and self-managed options on Azure, AWS, and the Google Cloud platforms.

The shift from selling solutions to software products resulted in shorter sales cycles and scalability, driving growth in new product sales, with a projected compound annual growth rate (CAGR) exceeding 60% from the 2022 to 2024 financial years.

KDB.AI, a vector database for real-time contextual artificial intelligence (AI), was launched and received positive feedback, building a solid pipeline.

The company also announced several strategic partnerships with industry giants like AWS, Google, Snowflake, McLaren Applied, SRC, and EIPGRID, enhancing its real-time predictive analytics and AI market position.

First Derivative’s revenue declined by 1% due to increased spending caution among customers, but the board said measures to improve efficiency mitigated the impact on adjusted EBITDA.

Market conditions remained challenging, with the firm expecting the second half to mirror the first half in revenue and margin.

However, it maintained that First Derivative could achieve 10% to 15% annual revenue growth through the economic cycle with an adjusted EBITDA margin of 15% by the 2026 financial year.

MRP revenue stabilised in the first quarter and grew in the second, compared to the fourth quarter of the 2023 financial year, in line with expectations.

The company reiterated its 2024 guidance for improved adjusted EBITDA over 2023.

To accelerate growth, FD Technologies said it was planning to invest an additional £9m to £10m in KX in the current financial year, primarily to maximise revenue from the CSP pipeline and invest in product engineering and go-to-market efforts.

It said its goal was to achieve £180m of KX ARR in 2026, representing a compound annual growth rate of 45% from the next year.

The company added that it aimed to reach free-cash EBITDA breakeven by 2026 and achieve a margin of 20% to 25% by the 2028 financial year, with the investment funded from group cash flows supported by debt facilities.

“We have continued to drive strategic progress across the group in the first half, with KX highlights including the launch of KDB.AI and strong progress with our global partners,” said chief executive officer Seamus Keating.

“We delivered a resilient performance in First Derivative and MRP despite weaker customer demand in their respective markets and will continue to manage these businesses to protect margins while ensuring they are well-positioned to grow as demand improves.

“In May 2021 we set out plans for additional investment in KX accompanied by ambitious targets that called for rapid acceleration in annual recurring revenue.”

Keating said that having exceeded those targets in each of the past two years, the firm stated in May its belief that additional investment in KX could further accelerate annual growth rates to 45% plus.

“The breadth and scale of opportunities within KX, resulting in rapid growth in our pipeline, has convinced the board that now is the right time to make this additional investment in both product and go-to-market.

“This investment is a statement of confidence in the prospects for KX and is accompanied by targets that would create significant value for shareholders.”

At 1017 BST, shares in FD Technologies were down 36.73% at 820p.

Reporting by Josh White for Sharecast.com.