FD Technologies investing in recurring revenue

FD Technologies (FDP), formerly known as First Derivatives, is essentially a data-driven consultancy, enabling clients to better utilises their data. Its most unique selling point is its KX platform, cloud based tech that provides real time data analytics. It also has its First Derivative and MRP businesses that provide respective services in capital markets and marketing.

KX is in the process of switching to an annual recurring revenue (ARR) model. The KX go-to-market team increased by 52 per cent which helped it complete a total of 41 KX subscription deals, compared to 14 in the first half of FY 2021. It has set a target of achieving 25 per cent per annum growth in KX ARR. By the end of October, the group was well on the way to meeting the target, though a 43 per cent increase in marketing costs and unfavourable foreign exchange movements fed through to an interim earnings loss. In total, there was a £13.3m increase in costs compared to last year, which if stripped out, would have meant a 31 per cent increase in adjusted cash profit.

Overall KX revenue fell because of lower perpetual licences revenue but broker Investec is now expecting recurring revenue to “accelerate in future periods due to an expansion in deal flow”. As expected with a technology company, it is priced for growth at 76 times forecast earnings. Shareholders are betting that increased subscriptions should boost profits once marketing costs start to fall as a proportion of sales, and there is no reason to imagine why this won't happen in due course. For now, we wait for positive signs on this front.  Hold.

Last IC view: Hold, 3,235p, 27 Oct 2020