Interim Results

FD Technologies plc

26^th November 2024

Results for the six months ended 31 August 2024 ("H1 FY25")

H1 performance in line with expectations

Confident in KX FY25 and medium-term outlook

£120m to be returned to shareholders

Financial highlights

-      KX revenue increased 5% to £39.5m, with annual recurring revenue ("ARR") up 8% reported, or 10% at constant currency, to £74.6m (H1 FY24: £69.3m)

-      KX annual contract value ("ACV") added at £7.4m (H1 FY24: £6.9m), in line with the expected range of £6-8m.

-      Net revenue retention ("NRR") of 110% reported (H1 FY24: 112%), or 112% at constant currency.

-      First Derivative revenue of £78.8m (H1 FY24: £89.1m) declined by 2% compared to H2 FY24, reflecting a resilient performance against anticipated ongoing challenging market conditions.

-      Group revenue declined 7% to £118.2m (H1 FY24: £126.8m), reflecting the 12% decline in revenue from First Derivative partially offset by the robust growth in KX.

-      Group adjusted EBITDA was £10.5m (H1 FY24: £14.2m), reflecting the revenue performance and increased investment in R&D, go-to-market and people to support our growth ambitions for KX.

Strategic highlights

-      Divestment of First Derivative for £230m is expected to complete on 2 December.

-      KX will become the Group's sole continuing operation, retaining approximately £54m of the £205m net divestment proceeds, and, after the repayment of £32m of debt outstanding at the completion date, a balance of around £120m cash will be returned to shareholders.

-      The Board will provide additional details regarding the mechanism by which the capital will be returned to shareholders following completion of the transaction. We expect this to be a tender offer, supplemented by a special dividend depending on the take up of the tender.

-      Consequently, KX will have the necessary funding to achieve financial stability and to invest in growth and profitability, driving accelerating constant currency ARR growth and achieving positive cash EBITDA in FY27.

Outlook

Our pipeline is strong for the second half and into next year, with a healthy mix of expansion and new opportunities across Capital Markets, Aerospace & Defence, and Semiconductor Manufacturing.

Consequently, the Board remains confident in its FY25 outlook for KX of £16-18 million ACV added, with 11-15% growth in ARR¹. Looking ahead, we expect our compound annual growth rate² in ARR to accelerate to c.25% and to achieve positive cash EBITDA by FY27.

Seamus Keating, CEO, commented:

"We have made significant strategic and operational progress in the first half, with the divestment of First Derivative and strong execution in KX. Following the completion of the sale of First Derivative, we expect to return cash to shareholders, in line with our disciplined approach to capital allocation, and KX will be a pure-play, high-growth software business; fully funded and well-positioned to capitalise on the significant and growing global market opportunity."

¹ Growth in ARR is stated net of churn. As previously flagged, in the current year we expect churn of 8-10% reducing in FY26 and beyond.

² Growth rates are at constant currency.

Financial summary

For further information, please contact:

About KX

KX is on a mission to make AI a commercial reality for the many by addressing data challenges that impede deployment at scale. By simultaneously ingesting and analysing high volumes of historical and real-time data, KX's AI-ready analytical database enables organizations to unlock the full value of their data to accelerate innovation and make faster, more confident decisions.

KX is the world's most performant, cost-effective and energy-efficient analytical database, delivering advanced data algorithms, insights and analytics at unmatched scale and speed.  KX is trusted by the world's top investment banks, Aerospace and Defence, high-tech manufacturing and health and life sciences organizations and operates across North America, Europe, and Asia Pacific.

Results presentation

A presentation for analysts will be held at 9.30am today, following which a recording of the presentation will be available on the Group's website.

Business Review

Further strategic progress

We have continued to drive strong strategic progress across the Group in the first half, particularly with respect to our strategy to maximise shareholder value by separating the Group's three businesses.

Firstly, the all-share merger of MRP and CONTENTgine created pharosIQ, a leading B2B demand generation services provider, of which the Group continues to own 49% as an associate investment. The business has seen a significant improvement in bookings during our fiscal Q3 and is expected to become profitable this year.

Secondly, the proposed sale of First Derivative to EPAM is on track to complete on 2 December, following our announcement on 14 November that all closing conditions had been satisfied. EPAM is a global professional services company and will provide First Derivative a platform with the scale and resources to support its growth ambitions. We also anticipate potential synergies for KX through a further strengthening of the partnership between the First Derivative Business and KX.

Finally, the continuing Group will solely consist of the KX business, which provides a robust, scalable, and efficient database and analytics engine, ideal for time-oriented data and AI use cases, and trusted by many of the world's top enterprises.

KX is funded and positioned for success

KX will retain £54m from the proceeds of the sale of First Derivative, comprising:

1.    c.£30-35m to achieve financial stability, with sufficient capital to support the business until it reaches positive cash EBITDA in FY27, in line with guidance.

2.    c.£20m to invest in growth and profitability, driving accelerating constant currency ARR growth.

Consequently, KX is now a pure-play, high-growth software business, fully funded and well-positioned to execute against its strategy to capitalise on the significant and growing global market opportunity. For KX to deliver sustainable growth, management priorities include investing in an efficient and effective go-to-market strategy, focused on repeatable use cases in established markets and leveraging partners to target new verticals.

With the successful execution of this strategy, KX constant currency ARR is expected to accelerate to c.25% CAGR, with the business achieving positive cash EBITDA in FY27.

Return of excess cash

KX will become the Group's sole continuing operation, retaining approximately £54m of the £205m net divestment proceeds, and, after the repayment of £32m of debt outstanding at the completion date, a balance of around £120m cash will be returned to shareholders. The Board will provide additional details regarding the mechanism by which the capital will be returned to shareholders following completion of the transaction. We expect this to be a tender offer, supplemented by a special dividend depending on the take up of the tender.

KX Empowering Smarter, Faster Decision-Making with Data and AI

In the first half of the year, we strengthened KX's position as the high-performance analytical database for the AI era. Our customers' competitive advantage depends on leveraging ever-growing amounts of data to make better, faster decisions. In today's digital landscape, organizations are moving from static, code-based systems to dynamic, learning models where data itself drives innovation and competitiveness.

However, the latency, complexity, and costs of traditional technology solutions can hinder innovation, especially when deploying at scale. Through our investments in AI, KX's offering has been expanded to uniquely enable the simultaneous ingestion and analysis of structured and unstructured time-based data at extreme scale and in real time.

At the heart of our approach is the concept of the 'AI Factory'. This framework integrates data collection, pipelines, analytics, and algorithm development into a seamless process that automates and optimizes decision-making. This empowers our customers to uncover relationships, patterns, and behaviours that other technologies cannot deliver as effectively or cost-efficiently, forming the technology platform for them to deploy better and more automated decision-making as part of their own AI Factory.

Together with partners such as NVIDIA and leading cloud service providers (AWS and Microsoft), we are working on solving some of our customers' highest-value challenges, cementing KX as a critical part of the AI Factory for state-of-the-art data management, model development, experimentation, and deployment.

KX delivered a strong performance against a focused strategy

KX delivered a robust commercial performance in the first half of the year, generating an incremental £7.4 million in Annual Contract Value (ACV), in line with our guidance range of £6-8 million. Our strategic focus on delivering advanced data and analytics capabilities into high-growth sectors is yielding significant wins across our core verticals.

We continue to see strong interest and adoption of our KX Insights products and are expanding our user base through tools that support algorithm development and deployment, such as PyKX, SQL, and Dashboards. Momentum is building for our new AI capabilities among both existing customers and new users trialing our offerings.

Our partnerships and ecosystem expansion are key to our strategy:

·      Cloud Service Providers: Achieved wins with AWS FinSpace and Microsoft-enabling customers to deploy KX solutions seamlessly on leading cloud platforms.

·      Ecosystem Expansion: Launched accelerators with ICE, Databricks, and Snowflake to broaden our market reach and launched initiatives with NVIDIA to support customers in building their advanced AI capabilities.

·      Strategic Partnerships: Collaborated with industry leaders to enhance our offerings, including securing significant new logos at global semiconductor companies through our partnerships with Applied Materials and Synopsys.

Confidence in the outlook for KX

Our pipeline is strong for the second half and into next year, with a healthy mix of expansion and new opportunities across Capital Markets, Aerospace & Defence, and Semiconductor Manufacturing.

Consequently, the Board remains confident in its FY25 outlook for KX of £16-18 million ACV added, with 11-15% growth in ARR¹. Looking ahead, we expect our compound annual growth² rate in ARR to accelerate to c.25% and to achieve positive cash EBITDA by FY27.

¹ Growth in ARR is stated net of churn. As previously flagged, in the current year we expect churn of 8-10% reducing in FY26 and beyond.

² Growth rates are at constant currency

First Derivative - a resilient H1 performance

During H1, as anticipated the First Derivative business faced a challenging trading environment with ongoing macroeconomic uncertainties and continued cautious spending trends among capital markets consulting customers. First Derivative revenue was £78.8m in H1 (H1 FY24: £89.1m), a 2% decline on the result reported for H2 FY24 of £80.6m and reflecting a resilient performance against a difficult market backdrop.

Sustainability

We strive to ensure that sustainability is at the centre of decision-making processes. Our sustainability strategy has three pillars: People, the Environment, and Communities. We intend to progress further in these core focus areas during the fiscal year.

We shall continue to empower our people to succeed by further developing our culture of learning and development. We plan to roll out talent programmes across our organisation, identifying and fostering our top talent. We also plan to introduce leadership training programmes to ensure a holistic approach to developing both our future and current leaders. We continue to embed an inclusive culture by supporting our networks.

Principal risks and uncertainties

The principal risks and uncertainties relating to the Group's operations for the next six months are considered to remain consistent with those disclosed in the Group's Annual Report and Accounts 2024. Please refer to pages 23 to 28 thereof which can be found at www.fdtechnologies.com/investor-relations/news-results/results-centre/.

Financial review

Revenue and margins

The table below shows an analysis of Group performance by business contribution.

* FY24 has been restated excluding discontinued operations (MRP)

Group revenue declined 7%, 6% at constant currency, to £118.2m (H1 FY24: £126.8m). Within the sales mix, KX revenue rose 5% to £39.5m, whilst revenue from the First Derivative business declined by 12% to £78.8m, reflecting the anticipated ongoing challenging market conditions.

The gross profit margin increased to 44% (H1 FY24: 41%), with a 5ppt improvement at KX partly offset by a 2ppt decline at First Derivative. We achieved an adjusted EBITDA of £10.5m in the first half of the year (H1 FY24: £14.2m).

For the first half of the year, First Derivative has been reported as a continuing operation, but for the full year, post the transaction completing, we shall report the business as a discontinued operation.

KX

* Revenue from perpetual license sales relates to continuing customer engagements established prior to our decision in 2021 to focus exclusively on subscription sales for new customers, and now represents less than 1% of KX revenue.

KX revenue increased 5% to £39.5m, with recurring revenue booked in the period up 13% to £37.2m, whilst ARR was up 8% to £74.6m. Services revenue continued to decline, to £2.0m in the period, demonstrating that our software is increasingly efficient to implement but also reflecting our increased focus on selling software rather than consulting services.

Annual contract value added was £7.4m (H1 FY24: £6.9m), in line with the guidance range of £6-8m discussed at the time of our annual results in May. This result reflected our success in expanding within existing accounts and adding new logos in key new verticals.

Financial services revenue was £30.4m (H1 FY24: £29.9m), with recurring revenue in the vertical increasing 7% to £28.8m. We continue to see good adoption of KDB Insights by existing and new financial services customers, who find its performance, ease of use, rapid time to value, and native integration with important developer languages, such as Python and SQL, highly attractive. We had several new customer wins in H1 in our focused market segments including wins with strategic partners.

The growth in our Industry segment revenue was encouraging, with revenue increasing by 17% to £9.1m and recurring revenue up by 41% to £8.4m. This growth was principally driven by deals in Aerospace and Defence and semiconductor manufacturing.

Annual recurring revenue (ARR) increased by 8% to £74.6m (H1 FY24: £69.3m), with net revenue retention (NRR) of 110% (H1 FY24: 112%), or 112% at constant currency.  ARR is converted at the exchange rate prevailing at the end of the period, whereas NRR is converted based on the average rate for the period.

In line with our strategy, we continued to prioritise our investments in R&D and go-to-market.

First Derivative

First Derivative revenues declined 12% to £78.8m (H1 FY24: £89.1m), reflecting the anticipated ongoing challenging market conditions with customer caution and the lengthened sales cycles we reported in the previous period continuing.

Through a continued focus on cost control, we successfully mitigated some of the impact of the revenue decline on the First Derivative gross margin and adjusted EBITDA margin, which was also of benefit to the overall Group performance.

Group performance

Adjusted EBITDA

The table below provides a reconciliation of operating loss to adjusted EBITDA. Notably, we incurred £4.5m in restructuring and non-operational costs in the period primarily relating to the organisational restructure and the divestment of the FD division (£2.8m), as well as restructuring within the KX division (£1.7m). The decline in share-based payment costs reflected options lapsing. The increase in depreciation and amortisation reflects the expected flow of previously capitalised R&D expenditure.

*FY24 has been restated excluding discontinued operations (MRP)

Loss before tax

The adjusted loss before tax was £3.1m (H1 FY24: profit £3.4m), principally reflecting the lower adjusted EBITDA and the increase in software amortisation costs flowing through from previous years' investment in R&D.

The Group reported a loss before tax of £11.1m (H1 FY24: £1.6m). In addition to those factors that influenced the adjusted EBITDA, outlined above, this result was also affected by the inclusion of the share of loss of associate related to MRP. In H1 we continued to make progress with aligning capitalised R&D costs and amortisation of software development costs, with amortisation now c80% of capitalised R&D costs (H1 FY24: 52%).

The reconciliation of adjusted EBITDA to reported loss before tax from continuing operations is provided below.

* Reported loss before tax has been restated excluding loss before tax from discontinued operations of £3.7m (H1 FY24: £2.9m)  

(Loss)/earnings per share

The table below provides a reconciliation of the calculation of the adjusted loss after tax of £2.3m, which compares with an adjusted profit of £1.2m in H1 FY24. As a result, the adjusted diluted loss per share for the period is 8.1 pence compared to the adjusted diluted earnings per share of 4.4 pence in H1 FY24.

Cash generation and net debt (excluding lease liabilities)

The Group generated £12.2m of cash from operating activities, representing an 116% conversion of adjusted EBITDA (H1 FY24: 57%). We continue to focus on efficient cash collection and overall working capital management.

At the end of the period, we had a net debt position of £19.8m. We summarise the factors impacting the movement in net debt (excluding lease liabilities) in the table below. For the period, these included an improvement in cash collection, lower capitalised intangible assets, a loss from disposal of associate and a higher debt interest charge.

Our banking facility comprises a £130m revolving credit facility, with an interest rate payable of SONIA/SOFR plus a margin range of 1.85% to 2.85%.

Definition of terms

The Group uses the following definitions for its key metrics:

Annual recurring revenue (ARR): the value at the end of the accounting period of recurring software revenue to be recognised in the next twelve months. 

Gross annual recurring revenue (Gross ARR): ARR excluding churn. 

Annual contract value (ACV): the sum of the value of each customer contract signed during the year divided by the number of years in each contract.

Net revenue retention rate (NRR): is based on the actual revenues in the quarter annualised forward to twelve months and compared to the revenue from the four quarters prior. The customer cohort is comprised of customers in the quarter that have generated revenue in the prior four quarters.

Adjusted admin expenses: is a measure used in internal management reporting which comprises administrative expenses per the statement of comprehensive income of £35.0m (H1 FY24: £28.3m) adjusted for depreciation and amortisation of £11.5m (H1 FY24: £9.0m), share based payments and related costs of £0.8m (H1 FY24: £1.5m), restructure and non-operational costs of £4.9m (H1 FY24: £2.1m), impairment loss on trade and other receivables £0.5m (H1 FY23: £0.6m) and other income £0.2m (H1 FY23: £0.0m).

Consolidated statement of comprehensive income (unaudited)

Six months ended 31 August

* The comparative figures have been restated to reflect the classification of MRP business as a discontinued operation. The respective notes have also been restated on this basis. Further detail can be found in note 15.

Consolidated balance sheet (unaudited)