FD Technologies LON:FDP, the County Down-based, AIM-listed software and computer services specialising in data and Artificial Intelligence has published its results for the six-months to end-August today (26th November).
As previously reported FD Technologies had something of a stop-start first half of the year, and although progress has been made, especially the turnaround in fortunes of its KX subsidiary, it seems more of the same.
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Management said that over the last six-months the company had performed in line with expectations and had a confident medium-term outlook. As previously reported, FD Technologies acquired KX, a database business, in 2019, and the company reported that revenue for this subsidiary had increased year-on-year by 5% to GBP39.5m.
ARR for KX up 8% y-o-y
KX saw annual recurring revenue (ARR) increase 8% y-o-y to GBP74.6m and annual contract revenue added for the database analytics subsidiary was GBP7.8m, at the upper end of the anticipated range of GBP6m to GBP8m. Last time out ARR for KX saw 12% growth, but was experiencing drag as sales cycles had lengthened as a result of the overall anaemic economic picture.
However, elsewhere in the group the picture was less positive. Group revenue fell 7% to GBP118.2m, with subsidiary First Derivative, FD’s capital markets IT security, financial crime, and compliance consultancy practice, being the main contributor to the group’s overall weaker performance. First Derivative reported revenues of GBP78.8m, down 2% y-o-y. First Revenue’s underperformance was partially-offset by KX’s positive contribution.
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Overall group earnings were down GBP3.7m y-o-y to GBP10.5m, a result of slower sales, especially from First Derivative, and the company’s investment in research and development and new hires to boost KX.
The company is divesting from First Derivative (where FD gets its name from) for GBP230m, and this process should complete next Monday (2nd December), leaving KX as the only operating business of the IT group. GBP54m will be retained by KX, GBP32m will repay debt, and the remaining GBP120m will be returned to shareholders.
Seamus Keating, FD’s chief executive said: “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.”
KX has necessary funding for future growth
With the new funding Keating believes that KX will have the necessary capital for growth, and says that the firm’s pipeline for the second-half of the year and into next year is “healthy” and a mix of expansion and new opportunity in the capital markets, aerospace & defence, and semiconductor manufacturing sectors
He is confident that the board’s expectations of GBP16m to GBP18m annual contract values will be met and investors should expect to see a 11% to 15% growth in ARR, with compound annual growth rate in ARR increase to around 25% with expectations of positive cash EBITDA by FY27.
As previously reported the company has long been a darling of the City, with analysts commenting on FD’s competitive advantages and speed and cost advantages.
Martin O’Sullivan, an analyst for Shore Capital, which has FD Technologies under coverage, is bullish regarding FD’s medium-term prospects, especially with the rising importance of data and AI, and with the imminent First Derivative divestment, he believes that now the group can focus on gaining market share in its target markets and exploit the AI opportunity.
‘A good price’ agreed for First Derivative
He said: “With the divestment of First Derivative essentially done (for a good price), all the attention (and resources) is now shifting to KX, the high-growth software business with a line of sight to GBP100m in ARR, which would have considerable net cash more than GBP160m, in our view).”
“Importantly,” said O’Sullivan. “KX is potentially on the cusp of achieving greater prominence in various industry sectors via Cloud Service Providers, including Microsoft and Amazon Web Services, and direct sales. As we have previously detailed, KX operates at the intersection of several high-growth markets in data and analytics segments: Data Science in AI (USD20bn), Analytics and Business Intelligence Platforms (USD26bn) and Non-Relational Database Management Systems (USD53bn). The market opportunity is large and rapidly growing.”
ShoreCap concludes that at 1,794p, the stock is trading on a post-divestment enterprise value of approximately GBP330m, which is equivalent to exit ARR multiples of 3.9x and 3.4x, respectively, for FY25F and FY26F.
FD Technologies opened trading today at 1,868p, rising to 1,964p within the first two hours of the day’s trading. Over one-year the company’s shares are up 94% and over the year-to-date up 60%. FD Technologies has a market cap of GBP506m.
