FD Technologies falls back into loss

The market did not react well to FD Technologies’ (FDP) half-year results, and it is easy to see why. The company reported macro headwinds, a 3 per cent dip in sales, and a loss before tax of £4.5mn for the six months to 31 August. To make matters worse, it also downgraded its full-year forecasts. Adjusted Ebitda is now expected to be £24mn-£26mn, compared with previous guidance of £38mn-£40mn, while revenue is only expected to reach £285mn-£295mn, compared with previous guidance of £315mn-£325mn.

Understanding what went wrong is complicated by the fact that FD Technologies is made up of three distinct businesses: First Derivative, MRP and KX. 

First Derivative, a consultancy serving the financial services sector, is the biggest segment and struggled with “increased spending caution” in the period. Adjusted Ebitda fell by 10 per cent to £9.4mn as a result. 

Meanwhile, MRP is a marketing platform which uses data analytics to help clients find high-value leads, and has been causing problems for a number of years. The latest period was no different: the business reported an adjusted loss of £0.2mn, which management blamed on constrained customer budgets. 

The main point of interest, however, is software business KX. KX has been described as the “jewel” of the group, and has the ability to analyse huge quantities of data very quickly – something which could be crucial to the development of AI. 

Some fund managers are very excited by KX’s potential, and believe the division could be successfully spun off from the main group. Management has also hinted at a split, saying it is one of the “logical conclusions” of a structural review announced today, and that US investors have greater knowledge of software businesses. 

The latest results certainly suggest that KX is making decent progress. Revenue is up by 12 per cent year-on-year at £37.7mn and adjusted Ebitda is up by 23 per cent at £4.8mn. 

The business is clearly at a delicate stage of growth, however, and rising research and development costs are sucking in large amounts of cash and weighing on profitability. Analysts at Peel Hunt have also questioned whether management’s full-year target of 35 per cent annual recurring revenue (ARR) growth is realistic, given KX only achieved ARR growth of 15 per cent in the first half. 

We agree that management’s near-term guidance looks overly bullish and think that all three segments of the group could be in for a rocky six months. We ultimately remain optimistic about the long-term potential of KX, however, given its flurry of strategic partnerships with Big Tech. For investors comfortable with high levels of risk, therefore, FD Technologies remains an unusual opportunity in the UK tech space. Buy