FD Technologies Regulatory News (FDP)

18 May 2021

First Derivatives plc

("FD", the "Company" or the "Group")

Full year results for the year ended 28 February 2021

FD (AIM: FDP.L, Euronext Growth: FDP.I) today announces its results for the year ended 28 February 2021.

Financial Highlights

Business Highlights

Acceleration of growth strategy and change in Group structure

Current trading and outlook

Donna Troy, Chairman of FD, commented: "Following a detailed review by the Board, informed by growing market opportunities resulting from the increasing capabilities of our technology, we have concluded that now is the time for targeted investment that will accelerate our growth and establish KX as a world-leading horizontal technology for real-time streaming analytics. We are excited to announce this acceleration of our strategy and look forward to delivering enhanced value for our customers and shareholders."

Seamus Keating, CEO of FD, commented: "Using streaming analytics to inform and automate operational decisions is one of the most important growth areas in technology today, and KX enables this for our customers. During the past year we have positioned the business to scale rapidly to address this opportunity, by accelerating our technology roadmap, strengthening our leadership, developing our commercial strategy and putting in place enhanced systems and processes to scale the Group. By increasing our investment in the business we unlock the potential for rapid growth and for KX to become a key part of tomorrow's technology ecosystem."

For further information, please contact:

About FD

FD is a group of data-driven businesses that unlock the value of insight, hindsight and foresight to drive organisations forward. The Group comprises KX, the leading technology for real-time continuous intelligence; First Derivative, a provider of technology-led services in capital markets; and MRP, the only enterprise-class, predictive Accounts Based Marketing solution. FD operates from 15 offices across Europe, North America and Asia Pacific, and employs more than 2,500 people worldwide.

For further information, please visit www.firstderivatives.com and www.kx.com 

Results presentation

FD will publish a pre-recorded presentation today at 07.05 BST on its website at https://firstderivatives.com/investor-relations/presentations/. The Group will also host a live results Q&A session for analysts at 09.30 BST today. Further details can be obtained by contacting FTI Consulting.

Business Review

FD comprises three businesses - KX, First Derivative and MRP - that unlock the value of data to drive organisations forward. During the year, the Group delivered a robust financial performance, responding effectively to the challenges resulting from COVID-19. Revenue was flat at £237.9m and, after continuing to invest in line with our growth strategy, adjusted EBITDA of £40.5m was achieved, down 11%. The Board has decided not to recommend a final dividend in light of the investment announced today.

We made good operational progress:

Technology - we prioritised interoperability, ease of use and cloud native capabilities as we seek to build our base of recurring revenue. Most notably, we recently released KX Insights, a cloud-first platform that fully leverages the benefits of cloud architecture natively to deliver fast, scalable real-time data insights without the added burden of infrastructure, complicated upgrades or the need to optimise for different cloud environments. KX Insights has been certified to run natively on all major hyperscale cloud providers including AWS, Azure and Google Cloud. Our roadmap goes beyond this, as we plan to package streaming data analytics workloads into cloud native microservices. Existing customers who move to this new subscription will benefit from faster migrations to the cloud by integrating these new components into their applications.

Furthermore, these components will be combined to create a cloud native horizontal platform, applicable to a wide range of use cases and industries and appealing to a broad community of users. New subscription customers will consume the whole KX Insights platform as an end-to-end application that will seamlessly unify streaming data with the universe of stored data. Key roadmap goals are to reduce deployment times to accelerate 'time to value' and to appeal to as wide a developer community as possible, which will be achieved by abstracting our proprietary programming language away from the end user.

This platform will also support advanced analytics and SQL querying, opening up more use cases to KX and further promoting adoption and ease of use.

Commercial - we made progress with cross-selling and up-selling to existing customers, adding a number of new customers and signing several new partnership agreements across our target markets. In capital markets, we signed deals with major financial institutions including a European bank and a stock exchange in South America for the use of KX; in other target markets notable deals included a major utility in the US for use cases built on the analysis of streaming meter data, an electronics manufacturer for anomaly detection and predictive alerts for yield management and a major telco for revenue assurance and usage querying. We formalised our partner agreements with the hyperscale cloud providers to enable seamless scaling of KX and recently signed an agreement with Databricks for the use of KX as a high-performance solution for its customers.

Scaling the Group - to support our growth plans we invested in our leadership capabilities and systems. At the Group level we added three new Non-Executive Directors, each bringing expertise and experience in scaling world-leading technology companies, and new executive appointments in a Chief Operating Officer and Chief Marketing Officer. At our business units we appointed a Chief Technology Officer and Chief Revenue Officer for KX; in MRP and First Derivative we appointed new leaders.

Progress across these key strategic priorities was a key determining factor in the Board's decision to accelerate its growth strategy.

Investment in growth strategy

During the year the Board conducted a review of the opportunities arising from the evolution of the market for streaming analytics and the market-leading performance capabilities of KX. It was concluded from independent market analysis, as well as our discussions with strategic partners and existing and potential customers, that demand for continuous intelligence was increasing and that KX has a key role to play in enabling performant access to the data that decisions are based on.

During the past year we have seen increasing focus from leading industry analysts such as Gartner and Forrester on the use of real-time streaming analytics to improve business operations and increase efficiency. This coincides with growing demand post COVID-19 for greater automated decision-making based on real-time data as part of digital transformation initiatives. Gartner forecasts that by 2022 most business systems will feature real-time data capabilities and this, together with rapidly growing streaming data volumes, underpins the requirement for performant access to the data through technologies such as KX.

To deliver on this opportunity, the Board has approved additional investment of £16m in the current year, of which £11m represents operating cost. This investment is focused on KX, and will:

Together with this investment the Board has approved a new structure for the Group with three business units, KX, First Derivative and MRP, each with its own distinct commercial proposition, go-to-market strategy, addressable market and target growth rate. Subject to shareholder approval at the forthcoming Annual General Meeting, the Group will be renamed FD Technologies plc. These changes enable clearer commercial focus on the opportunities for each business while our financial reporting will also provide greater insight for stakeholders.

KX - the leading technology for real-time continuous intelligence

Its ultra-high-performance analytics capability enables KX to be the technology that powers continuous intelligence. Our goal is to see widespread adoption of our technology across industries, with complete deployment freedom spanning down to the device level, installed within the customer's operations or operating seamlessly across cloud infrastructures. This power and flexibility, together with the cost of ownership and return on investment benefits, provide the opportunity for KX to become the market-leading technology for real-time streaming analytics.

This opportunity is forecast to be valued at $39bn per annum by 2025, growing at 30% per annum, according to Adroit Market Research, which resonates with our own assessment of the opportunities in our target markets.

To position KX to benefit fully from this growth opportunity, in the current financial year an additional £16m will be invested, comprising:

As part of this reorganisation, all KX services other than pre-sales, implementation and support services revenue will be delivered by and reported within First Derivative. We will also phase out sales of our technology on a perpetual license basis. As a result, KX revenue will predominantly comprise high-margin recurring license revenue which, if we achieve our plans for KX, will be growing at market-leading rates. To enable stakeholders to assess our performance against our targets, we will provide additional non-statutory metrics, including annual recurring revenue and net revenue retention rates.

KX is targeting growth in exit ARR of at least 25% per annum through FY25 and a gross margin of at least 80% by FY25.

First Derivative - technology-led services in capital markets

First Derivative is formed by merging FD's former managed services and consulting business with the KX services capability to form a technology and data services provider in our primary market of FinTech. It has three key offerings:

While not requiring significant further investment, First Derivative will benefit from sharper focus on its target markets where it has the greatest in-depth expertise, and which are areas of key focus for our clients. This approach has already returned the business to growth in H2 2021, despite the impact of COVID-19, and we believe it can return to double digit revenue growth during the current year.

MRP - the only enterprise-class, predictive ABM solution

MRP is at the forefront of Account Based Marketing (ABM), with its Prelytix platform enabling sales and marketing organisations to grow new business by identifying and engaging the most likely buyers of our clients' products and services. Powered by KX to provide deep and timely insights into customer and potential customer behaviour, Prelytix provides a high return on investment and is rated among the leaders in its space by industry analysts such as Forrester and Ovum. Prelytix subscribers are supported by MRP through the provision of engagement services that together drive industry-leading return on investment for our clients.

Our assessment of the current addressable market for MRP is $12 billion per annum in 2022, growing at a rate in excess of 20% per annum.

The Board expects MRP will benefit from recovery in its end markets, which were impacted by COVID-19, and as a result of planned product launches. MRP is targeting growth in platform revenue of at least 20% per annum through FY25 and a 70% gross margin by FY25.

People

Strengthening leadership at the Group and business unit level to support our growth strategy was a key focus during the year. We appointed three Non-Executive Directors, each bringing expertise and experience in scaling world-leading technology companies - Ayman Sayed, CEO of BMC Software; Thomas Seifert, CFO of Cloudflare; and Steve Fisher, former CTO of eBay and who also held senior technology leadership roles at salesforce.com. We also made Group senior executive appointments, including Kathy Schneider, formerly of Sungard and Level 3, as Chief Marketing Officer.

We also made significant additions to the executive teams within our business units, with the recruitment of high calibre individuals including: within KX, Eric Raab, who has a wealth of CTO experience gained at high-growth technology companies including Information Builders and Yodle, as Chief Technology Officer and Alan Coad, formerly leading enterprise sales at Google Cloud and Pivotal, as Chief Revenue Officer; at MRP, Scott Matthews, who has a track record building successful SaaS companies including Crowdtwist, as Chief Executive Officer; and at First Derivative, David Collins, formerly of GFT and Capco, as Managing Director. All have previous experience in high growth enterprise technology companies.

We also appointed Ryan Preston as CFO in January 2021, succeeding Graham Ferguson who wished to devote more time to his other interests including supporting the development of Northern Ireland-based SMEs. Ryan was formerly the Group's Deputy CFO.

The Group employs more than 2,500 people, up from more than 2,400 at the same time last year. While we initially paused recruitment in response to COVID-19, we resumed hiring to keep pace with growing demand, and during the year added 424 new employees. Attrition rates were at the lower end of the typical range.

The past year has placed unprecedented demands on employees, who have demonstrated great commitment and flexibility to support our clients and each other. The Board thanks them for their efforts and continued engagement.

COVID-19

The pandemic was a significant factor throughout our financial year, impacting both our operations and the business environment. Operationally, our priorities were the safety and health of our employees and supporting the mission-critical activities of our clients. The effectiveness of our planning and the measures we introduced enabled us to transition seamlessly to the remote delivery of all the services we provide to clients. We put in place measures that supported our employees' physical and mental well-being and liaised closely with clients to meet their needs effectively and pre-empt any change in requirements.

To safeguard the business we put in place mitigating measures including suspending non-essential travel, deferring executive bonuses and suspending dividend payments. The Group did not utilise any Government financial assistance measures related to COVID-19 and nor did it furlough any employees during the year. To ensure liquidity, in March 2020 we drew down £34.2m from our available finance facility with the funds placed on deposit. Given the Group's strong cash generation in the first half of the year, this was repaid in the second half.

The business impact was felt predominantly in changes in customer behaviour, including a lengthening of sales cycles, particularly in the early months of the pandemic, which resulted in lower growth rates across our businesses and a reduction in adjusted EBITDA. As we emerge from the pandemic, we expect to see an acceleration of digital transformation in general, and continuous intelligence in particular, opening up many new opportunities for KX.

Current trading and outlook

The Board is providing guidance for the current financial year which reflects the improved momentum across our business units, as well as the cost impact of the accelerated growth detailed today.

The Board anticipates that revenue for the current financial year will be in the range £255m to £260m, with adjusted EBITDA in the range £31m - £33m. The factors affecting this guidance include:

The Board considers that the actions announced today position the Group to deliver on exciting growth opportunities in KX while driving profitability in First Derivative and MRP. It has set growth targets that, if achieved, should generate strong returns for investors driven by high levels of recurring software revenue as KX builds on its market-leading position within continuous intelligence.

Financial review

Revenue and Margins

The table below shows the movement in FY21 from the historical analysis of the Group's performance between software & services and managed services & consulting, to the new segmental analysis of KX, First Derivative and MRP. KX comprises the FinTech and Industry segments of software & services, including services revenue from pre-sales, implementation and support. First Derivative comprises the managed services and consulting segment, along with other KX services which represented £28.9m of revenue in FY21, as detailed in the first column in italics below. MarTech revenue, formerly included in software and services, is now reported under MRP, as detailed in the second column in italics. FY20 is reported on the same basis for KX, First Derivative and MRP. In addition we have provided performance metrics for each Business Unit which will further highlight how we are delivering growth.

Group revenue was unchanged at £237.9m (2020: £237.8m), driven by growth in KX balanced by lower revenue in MRP and a flat performance in First Derivative. Group gross profit was also unchanged at £101.0m, representing gross margin of 42%, down marginally from 43% in the prior period. Lower services utilisation in First Derivative and MRP was balanced by margin improvement in KX. As stated in our results and trading updates during the year, we continued to invest in R&D and sales and marketing which resulted in adjusted EBITDA declining by 11% to £40.5m.

KX

KX revenue increased by 4% to £74.3m, driven by growth in recurring license revenue of 10% to £37.7m, with recurring license revenue representing 51% of total revenue (2020: 48%). Pre-sales, implementation and support services revenue increased by 3% to £25.9m, despite investment in our customer success team which resulted in some senior staff being removed from short-term revenue-generating roles to focus on pre-and post-sales engagement with customers. Perpetual license revenue decreased by 10% as we started the transition to focus on recurring revenue, to further increase revenue predictability.

Growth was strongest in our core FinTech market, where recurring revenue increased by 12%. We won a number of new contracts, including a major European bank which made a significant commitment to use KX within its capital markets trading operation and a major Japanese bank which consolidated all its on-premise data into KX on AWS to enable real-time monitoring and alerts. Industry revenue declined by 23% to £9.0m, reflecting a lengthening of sales cycles as potential customers focused on transitioning their existing operations to remote working rather than transformational projects.

Gross profit increased by 10% as a result of the increase in software license revenue in the revenue mix, while adjusted EBITDA fell by 5% principally due to a 31% increase in sales and marketing costs.

We increased our spend on R&D and sales and marketing as a proportion of revenue as we continue to invest to benefit from the growing opportunities for streaming analytics and continuous intelligence.

First Derivative

The table below shows the performance of First Derivative, which incorporates the revenue shown as managed services and consulting with KX services revenue other than pre-sales, implementation and support services revenue, which remains within KX. The KX services revenue within First Derivative principally consists of development work for clients and associated services.

Despite the impact of COVID-19, First Derivative revenue was unchanged from the prior year at £119.4m, reflecting the long-term and mission-critical nature of the services we provide and the strength of client relationships. We transitioned quickly to remote working to deliver our services and, while the pandemic impacted levels of new project work in the short term, we saw a strengthening of demand towards the end of the period, continuing into the current year. The lockdown in December 2020 led to onboarding delays for a number of projects, without which we would have reported growth for the year - these projects are now running and provide confidence that First Derivative will deliver growth in the current year.

To drive predictable growth, First Derivative is seeking to increase the number of managed service contracts it signs, under which it takes responsibility for the delivery of a service typically on a multi-year contract. Recent examples of such deals include a multi-year application support and development contract signed with a major Japanese bank. Across its practices, First Derivative is seeking to take greater responsibility for the delivery of packages of work, which should provide increased value to our clients and translate to increased gross margins for First Derivative over time.

Gross and EBITDA margins held up well as we managed the cost in First Derivative in response to COVID-19 and would have improved on the prior year but for delays to project onboarding towards the end of the financial year as a result of the lockdowns in Europe in late 2020 / early 2021.

MRP

The table below shows the performance of MRP, which previously was included within the Group's software revenue under MarTech.

MRP provides global sales and marketing leaders with an enterprise class predictive Account Based Marketing (ABM) platform and supporting products and services to enable them to identify and engage potential customers earlier and more effectively, driving greater revenue and market share. MRP's Prelytix platform uses KX's data analytics capabilities to deliver predictive analytics derived from billions of data points, enabling clients to dynamically assess their marketplace and to activate a wide range of sales and marketing tactics informed by real-time insights. Our focus is on growing recurring software revenue, which is derived from a combination of subscriptions to MRP's Prelytix platform and data-driven engagement between our clients and their prospects using Prelytix. We also provide marketing products and services to enable clients to engage with prospective customers and to progress them through their sales funnel.

COVID-19 impacted the entire year and all of the geographies in which MRP operates. In H1, some existing clients paused subscription renewals and services spend as a result of macroeconomic uncertainty and their desire to focus on serving existing customers rather than driving new sales. In H2, while customer spending in Europe and the Asia Pacific region improved, North America was weaker than expected, partly driven by cuts in marketing budgets and also by the ongoing impact of COVID-19. Against this backdrop for the year, software revenue held up well, while services revenue experienced a 10% reduction.

Towards the period end and in early FY22 we have seen an encouraging rebound in spending, particularly in North America, with both new customer wins representing significant multi-year commitments and existing customers increasing their spend with MRP. Our development roadmap for MRP includes ongoing upgrades to the Prelytix platform, along with new and enhanced products that provide the potential to accelerate growth and help us achieve our target growth rate in software revenue through to FY25.

Software revenue held up well despite the impact of COVID-19, declining by 4% for the reasons discussed above. Gross and adjusted EBITDA margins declined as we continued to invest to support MRP's growth opportunity.

Adjusted EBITDA

The reconciliation of operating profit to adjusted EBITDA is provided below:

Profit before tax

Adjusted profit before tax decreased by 22% to £20.2m (2020: £25.9m) held back by higher depreciation and software amortisation charges due to the impact of increased R&D in recent years. This was balanced by increased finance income related to the sale of the Group's stake in Quantile Technologies, which is excluded from adjusted profit before tax. Reported profit before tax decreased by 39% to £11.1m (2020: £18.3m) with a major non-operational factor being exchange rate differences which represented a £3.2m charge for the period compared with a £1.0m benefit in the prior year. This was driven by a higher than typical level of dollar balances held, due to lower investments / acquisitions and improved cash collection in the US.

 The reconciliation of adjusted EBITDA to reported profit before tax is provided below.

Earnings per share

Reported profit after tax decreased by 40% to £9.0m (2020: £14.9m) and reported diluted earnings per share decreased by 41% to 32.0p per share (2020: 54.2p). Exchange rate differences accounted for a major part of this decline.

The adjusted profit after tax for the period of £16.6m (2020: £21.3m) represented a decrease of 22%. The calculation of adjusted profit after tax is detailed below:

Balance sheet

Total assets increased by £14.2m with cash and cash equivalents increasing by more than 100% to £55.2m (2020: £26.1m). Loans and borrowings fell to £92.8m (2020: £105.2m) of which £65.1m related to bank loans (2020: £75.5m) and the remainder to lease liabilities.

Cash generation and net debt

The Group generated £46.7m of cash from operating activities before taxes paid (2020: £34.4m) representing 115% conversion of adjusted EBITDA (2020: 75%). The performance during the period benefited from lower growth rates which improved working capital as well as an increased focus on cash collection, while there was an also a benefit from revenue recognised in 2020 where the cash was collected in early 2021. We continue to expect cash generated from operating activities to represent 80-85% of adjusted EBITDA in a year where growth reaches our target levels.

The Group also benefitted from an £11.3m inflow from investments, of which £11.0m represents an inflow from the partial sale of our holding in Quantile Technologies. The investment occurred as part of FD's strategy of assisting companies that were adopting KX in new and innovative ways. This programme has been de-emphasised in recent years and the Group has instead focused its efforts on signing partnership agreements with OEMs, systems integrators and hyperscale cloud providers.

At the period end, net debt was £9.9m (2020: £49.4m). The factors impacting the movement in net debt are summarised in the table below:

Dividend

The Board did not declare an interim dividend due to uncertainty regarding COVID-19. In light of the decision to increase investment in KX, the Board has decided not to recommend the payment of a final dividend for the full year.

Definition of terms

The Group uses the following definitions for its key metrics:

Exit annual recurring revenue (ARR) is the value at the end of the accounting period of the software and subscription recurring revenue to be recognised over the proceeding twelve months.

Net retention rate (NRR): is based on the actual revenues in the quarter annualised forward to 12 months and compared to the annualised revenue from the four quarters prior. The customer cohort is comprised of customers in the quarter that have generated revenue in the prior four quarters.

Adjusted admin expenses is a measure used in internal management reporting which comprises administrative expenses per the statement of comprehensive income of £42.0m (2020: £41.8m) adjusted for depreciation and amortisation of £19.8m (2020: £18.7m), share based payments and related costs of £2.4m (2020: £3.1m), acquisition and non-operational costs of £1.3m (2020: £2.0m) and net of impairment (loss)/gain on trade and other receivables of £0.2m (2020: gain of £0.3m) and other income of £0.1m (2020: £0.2m).

Consolidated statement of comprehensive income

Year ended 28 February 2021

All profits are attributable to the owners of the Company and relate to continuing activities.

Consolidated balance sheet

As at 28 February 2021

Consolidated statement of changes in equity

Year ended 28 February 2021

Consolidated statement of changes in equity

Year ended 29 February 2020

Consolidated cash flow statement

Year ended 28 February 2021 

1. Basis of preparation

The consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as the "Group").

The financial information included in this preliminary announcement does not constitute statutory accounts of the Group for the years ended 28 February 2021 nor 29 February 2020 but is derived from those accounts. Statutory accounts for 2020 have been delivered to the Registrar of Companies and those for 2021 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Both the consolidated financial statements and the Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards ("IFRSs").

No changes in accounting policies

2. Operating and business segments

Information about reportable segments

Geographical location analysis

Disaggregation of revenue

3. Dividends

The dividends recorded in each financial year represent the final dividend of the preceding financial year and the interim dividend of the current financial year.

No final dividend was declared in relation to the comparative period and no interim dividend was declared or paid relating to the current year. In the prior year the 2019 final dividend of 19.30p per share and the 2020 interim dividend of 8.50p per share were paid. The cumulative dividend paid during the year amounted to nil (previous year: 27.80p) per share.

After the respective reporting dates, the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences.

4. a) Earnings per ordinary share

Basic

The calculation of basic earnings per share at 28 February 2021 was based on the profit attributable to ordinary shareholders of £8,997k (2020: £14,893k), and a weighted average number of ordinary shares in issue of 27,505k (2020: 26,628k).

Weighted average number of ordinary shares

Diluted

The calculation of diluted earnings per share at 28 February 2021 was based on the profit attributable to ordinary shareholders of £8,997k (2020: £14,893k ) and a weighted average number of ordinary shares after adjustment for the effects of all dilutive potential ordinary shares of 28,126k (2020: 27,502k).

Weighted average number of ordinary shares (diluted)

At 28 February 2021 120,058 shares (2020: 18,885) were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. The average market value of the Group's shares for the purposes of calculating the dilutive effect of share options was based on quoted market prices for the year during which the options were outstanding.

4. b) Earnings before tax per ordinary share

Earnings before tax per share are based on profit before taxation of £11,147k (2020: £18,250). The number of shares used in this calculation is consistent with note 4(a) above.

Reconciliation from earnings per ordinary share to earnings before tax per ordinary share:

Earnings before tax per share is presented to facilitate pre-tax comparison returns on comparable investments.

4. c) Adjusted earnings after tax per ordinary share

Adjusted earnings after tax per share is based on an adjusted profit after taxation of £16,602k (2020: £21,283k). The adjusted profit after tax has been calculated by adjusting the Profit after tax £8,997k (2020: £14,894k) for the amortisation of acquired intangibles after tax effect of £3,184k (2020: £3,155k), share based payment and related charges after tax effect of £1,911k (2020: £2,526k), acquisition costs after tax effect of £1,102k (2020: £1,635k), share of loss of associate after tax effect of £58k (2020: profit £126k), the loss on foreign currency translation after tax effect of £2,613k (2020: profit £802k), and finance income from sale of investment after tax effect of £1,263k (2020:nil). The number of shares used in this calculation is consistent with note 4(a) above.

5. Property, plant and equipment

Group

6. Intangible assets and goodwill

Group