Kainos offers diversified growth

But in 2018, the UK ranked fourth in the United Nations’ E-government development index – down from first place in 2016. This is not, seemingly, the moment for Westminster to take its foot off the digital gas pedal. And any ongoing government initiatives should prove lucrative for Kainos (KNOS), a provider of third-party software implementation as well as its own digital platforms, which derives around 60 per cent of its revenues from the public sector.

That said, the company has also been diversifying its revenue streams. While the half-year numbers to September 2018 revealed top-line growth of 62 per cent to £67.2m, £17.6m of this stemmed from commercial customers – representing a 30 per increase year on year. And Kainos is also expanding overseas: international revenues constituted £12.8m of the total, up 28 per cent year on year.

In the respective period, Kainos’s dominant digital services business enjoyed a particularly strong performance, with revenues up by three-quarters to £57.3m. This business comprises two sub-segments: digital transformation and Workday implementation. The former delivers customised digital services for central, regional and local government departments and agencies as well as private-sector organisations. The latter supplies consulting, project management and post-deployment services for customers of  Workday (US:WDAY) – the US-listed provider of cloud-based software for human resources and financial management.

Within digital transformation, Kainos was – at the half-year stage – providing existing and new programmes to 16 major government departments and agencies, and had recently added the Department for International Development as a customer. It had also won four new commercial clients.

Meanwhile, Kainos signed 33 new Workday clients over the six-month period. Moreover, it continued to enlarge its international footprint here – achieving preferred supplier status to a big US customer, while also being appointed as a Workday partner in Canada.  

Workday is also focusing on the UK public sector as a new market. And of the seven deals it has signed here so far, Kainos is implementing six. Its consultants are supporting Workday on the seventh.

The downside of such demand within digital services is that Kainos has had to increase its staff numbers rapidly. Indeed, while total employees rose by 30 per cent, 11 per cent of these were contractors – up from 5 per cent a year earlier. Along with more revenues being delivered through partners, and the geographic expansion within Workday services, this dampened down the gross margin for digital services from 47 per cent to 44 per cent. In turn, the overall group gross margin fell from 49 per cent to 46 per cent.

That was despite Kainos’s other core business – digital platforms – enjoying a five percentage point improvement in its gross margin to 59 per cent. This business is the source of the majority of the group's recurring revenues, which account for just under a fifth of the total. First-half revenues for digital platforms rose by 13 per cent to £9.9m, buoyed by £5.4m in sales from the ‘Smart Automated Testing’ proprietary tool – up 43 per cent. Smart is the only automated testing platform designed specifically for Workday products.

However, revenues from the other segment within digital platforms – Evolve – fell by 8 per cent to £4.7m. Evolve’s portfolio comprises an electronic medical record product, and a mobile-enabled integrated care platform for healthcare organisations. Thus, it has fallen victim to ongoing funding challenges within the NHS.

These challenges meant that sales orders for digital platforms dipped by 8 per cent overall to £7.8m. But, thankfully, digital services picked up the slack – helping group sales orders to reached £90.2m overall, up by a considerable 42 per cent. And Kainos’s backlog – denoting the value of contracted revenue that hasn’t yet been recognised – climbed by nearly a third to £126m.

Such figures offer strong visibility for future reporting periods; somewhat reassuring against a volatile macroeconomic, and market, backdrop. And management still perceives a strong opportunity for Evolve in the longer term – with an addressable market of around £200m.