US software giant Workday fuels growth at Kainos

Kainos (KNOS) has reported a mixed set of full-year results. Revenue across the IT services group edged up by 2 per cent to £382mn in the year to 31 March and adjusted profit before tax jumped by 14 per cent to £77.2mn. Margins were boosted by a reduction in the number of contract staff and higher utilisation rates. 

However, there were big discrepancies between the different divisions. The Workday products arm – which provides software that complements the software of US giant Workday (US:WDAY) – was the standout performer. Revenue jumped by 28 per cent to £57.3mn, driven by a surge in bookings, and management said it was on track to achieve £100mn of annual recurring revenue by 2026.

The Workday services business – which helps clients use Workday’s software suite – also had a strong 12 months, with sales up by 6 per cent to £113mn. Kainos remains the only specialist Workday partner headquartered in the UK, but 75 per cent of its projects are now undertaken for clients in Central Europe and North America. Its 13-year partnership with Workday lends it important credibility, and helps fend off potential rivals. 

The sticking point was digital services, where revenue dipped by 5 per cent to £213mn and bookings declined by 4 per cent to £228mn. While demand from public sector clients was robust in the period, commercial sector sales were impacted by reduced customer expenditure, and tumbled by almost a fifth to £30.8mn. Project deferrals, cancellations and cost cutting all hit the business, as did the lack of pandemic-related projects.

Looking ahead, management expects Workday products, Workday services, and the public sector segment of digital services (together, 80 per cent of revenue) to keep delivering growth. However, the commercial segment casts a shadow, with further “modest reductions” in revenue expected. 

The group is also in the midst of boardroom change. Russell Sloan took over as chief executive just months ago, and chair Tom Burnet and senior independent director Andy Malpass are now poised to step down too. 

There is a lot to like in Kainos’s results, and the market was clearly pleased: the shares jumped by 13 per cent after they were published. However, we remain a little wary of the headwinds in the commercial sector and upheaval in the management team. Hold.

Last IC View: Hold, 1,266p, 22 May 2023