Kainos sales team is delivering

Digital transformation in the UK is continuing amidst the wider economic turmoil. In the last month, IT service provides Bytes Technology (BYIT) and Softcat (SCT) reported strong top line growth. Now it is the turn of Kainos (KNOS), which reported impressive growth from both public and commercial customers and a strong backlog of work.

For IT businesses, good sales team are as important as the product and Kainos’ spending on its sales machine is paying off, judging by the results. Investment in sales and marketing more than doubled from £1.9mn to £4.8mn, with most of the focus on the expansion of the international business which grew 53 per cent to £61mn.

Digital services grew revenue 17 per cent to £110.5mn. Public, which makes up most of digital services revenue, grew 21 per cent to £62.3mn, while commercial revenue rose 51 per cent to £18.7mn. Healthcare revenue declined 2 per cent because an ongoing merger between NHS X and NHS Digital put other IT projects on hold.

The other portion of Kainos’ business is installing Workday and selling its own software to complement the Workday product. Workday service revenue rose 44 per cent, while Workday product was up 45 per cent. Backlogs of work also increased 136 per cent and 37 per cent, respectively, which points to strong revenue growth in the coming year.

The increased investment in marketing, plus salary inflation has pushed down gross margins from 47.4 per cent to 46.6 per cent. However, given the strong top-line growth, this slip isn’t too concerning.

The Factset consensus forward PE of 36.3 is expensive but digitisation is a focus of both the public and private sectors and therefore unlikely to slow. Given Kainos’ momentum, we think this price is justified. Hold.   

Last IC View: Hold, 1,266p, 23 Mar 2022