22 May 2023

Full year results for the year ended 31 March 2023

Kainos Group plc 'Kainos' or the 'Group'

Kainos Group plc (KNOS), a UK-headquartered IT provider with expertise across three divisions - Digital Services, Workday Services, and Workday Products, is pleased to announce its results for the year ended 31 March 2023.

Financial highlights

Operational highlights

We have recorded our 13th consecutive year of growth across a wide range of key metrics. Our very strong business performance reflects robust underlying market demand, high levels of customer engagement and the ongoing commitment of our colleagues. 

•   Revenue growth of 24% (22% organic) to £374.8 million (2022: £302.6 million).

•   Adjusted pre-tax profit increased by 15% to £67.6 million (2022: £58.8 million) reflecting strong underlying performance and increased investment in Workday Products, where product development and sales & marketing expenditure increased by £9.3 million.

•   Workday Products revenues ARR increased by 40% to £47.9 million (2022: £34.3 million) representing significant progress towards our 2026 target of £100 million ARR.

•   Bookings up 22% to £427.8 million (2022: £349.8 million).

•   Contracted backlog growth of 24% to £322.9 million (2022: £259.7 million).

•   Cash at 31 March 2023 was £108.3 million (2022: £76.6 million), with cash conversion at 104% (2022: 83%).

We continue to grow as a global business with over one-third of revenues generated internationally.

·    Very strong international growth, up 52% to £132.0 million (2022: £87.0 million), and now representing 35% of total revenue.

Commercial sector customers now generate half our revenues.

·    Commercial revenues are up 51% to £186.4 million (2022: £123.8 million), representing 50% of total revenue. 

·    Public sector revenues up 24% to £138.0 million (2022: £111.0 million) or 37% of revenue. 

·    Healthcare revenues, as anticipated, have reduced by 26% to £50.4 million (2022: £67.9 million), which is 13% of total revenue. 

We continue to grow a global, talented and engaged team.

•   We now have 2,990 people (2022: 2,692) based across 22 countries.

•   Our employee retention has increased to 88% (2022: 86%), and engagement levels remain high, measuring 81% on our internal surveys, and we were again awarded '50 Best Places To Work in the UK' by Glassdoor.

Excellent customer service drives customer satisfaction and retention, underpinning revenue growth.

•   Customer approval rating ^([1]) remains high at 99% (2022: 98%).

•   Existing customer revenue increased by 26% to £337.6 million (2022: £267.7 million), which represents a Net Revenue Retention of 126%.

•   Customer numbers increased to 821 (2022: 731), an increase of 12%.

We continue with our ambition to be a responsible organisation.

•   We retained our carbon neutral status in 2023 and remain on track to achieve carbon net zero by 2025.

•   Our gender balance improved, with the proportion of women in Kainos increasing to 34% (2022: 33%), well above the industry average of 22%^([2]) and we remain committed to further improvement.

•   We hosted over 1,800 young people on our outreach programmes, including targeted programmes aimed at improving gender diversity, supporting social mobility and for those students with special educational needs.

In Digital Services, we continue to deliver significant digital transformation programmes across the public sector, commercial sector and healthcare.

•   This extensive project portfolio has driven strong revenue growth of 12%, with Digital Services revenues increasing to £224.4 million (2022: £199.8 million).

•   Customer demand remains strong as digital transformation continues to be a business and political priority.

We continue to be the leading pan-European Workday specialist and during the year we were appointed Workday Phase 1 Prime partner in the US market.

•   Workday Services recorded very strong revenue growth of 49% (41% organic) to £105.7 million (2022: £70.9 million).

•   Our international expansion continues with North America now representing over half of Workday Services revenues at £55.9 million (2022: £30.4 million) an increase of 84%.

⁽¹⁾  Data from all completed customer surveys in the year. There are five possible designations: 'Poor', 'Satisfactory', 'Good', 'Very Good' or 'Excellent'; the rating reflects the percentage of customers that rate our performance 'Good' or better.

⁽²⁾  BCS diversity report 2022: Women in IT.

Our Workday-related products, Smart Test, Smart Audit and Smart Shield delivered very strong growth, and we remain on track to achieve our target of £100 million ARR by 2026.

•   Workday Products revenues grew 40% to £44.7 million (2022: £31.9 million) and ARR increased by 40% to £47.9 million (2022: £34.3 million).

•   We continued to invest in our Workday Products, increasing research & development expenditure by 52%, to £9.1 million (2022: £6.0 million) and sales & marketing spend increased 135% to £10.8 million (2022: £4.6 million).

Commenting on the results, CEO Brendan Mooney said:

"Our latest results, the eighth as a public company, outline another excellent performance as we once again achieved strong growth in terms of people, customers, revenue and profitability.

Our performance as a business is influenced by many factors, but it is our relationships with our customers and the talents of our colleagues that are the key drivers. The strength and depth of both have continued to grow this year and we are grateful for the trust and confidence that our customers continue to place in Kainos and the expertise, experience, and energy of our colleagues, who have been the driving force behind all that we have achieved.

These results describe our performance over the past twelve months. While we draw a sense of satisfaction from the consistency of our performance, representing the thirteenth consecutive year of growth, our attention is firmly fixed on the future.

The digital transformation market continues to grow in importance for organisations operating in government, in healthcare and in the commercial sector.

This importance is translating into continued demand for the work we do for our customers.  Despite the economic uncertainty, there is an urgency for our customers about extending existing projects and starting new projects, as they change the ways they deliver essential services to citizens, patients, customers and employees.

In addition to responding to the needs of our customers we have also been focused on building solid foundations for our business - across the services we offer, the sectors within which we operate and in the regions where we are based.

As a result, our business is becoming increasingly resilient. We work with over 800 organisations, many of whom are international in scale and who operate across a range of industries including healthcare, public sector, banking, insurance, pharmaceuticals and education. From our UK base we have expanded globally, with over one-third of our revenues now generated internationally.

It is all these factors combined - our customers, our people, our consistent performance, the opportunity and the scale and resilience of our business - that underpin the confidence that we have about the future.

Alongside our confidence, we also have a sense of excitement - technology continues to develop at pace and the positive impact it can have on people's lives increases. It is energising to be at the forefront of these developments."

For further information, please contact:

Kainos                                                                                               via FTI Consulting LLP

Brendan Mooney, Chief Executive Officer

Richard McCann, Chief Financial Officer

Investec Bank plc                                                               +44 20 7597 5970

Patrick Robb / Ben Griffiths

FTI Consulting LLP                                                                 +44 20 3727 1000

Matt Dixon / Dwight Burden / Kwaku Aning

About Kainos Group plc

Kainos Group plc is a UK-headquartered IT provider with expertise across three divisions:  Digital Services, Workday Services, and Workday Products.

·    Digital Services develops and supports custom digital service platforms for public sector, commercial, and healthcare customers. Our solutions transform the delivery of these services, ensuring they are secure, accessible, and cost-effective, and provide better outcomes for users.

·    Workday Services specialises in the deployment of Workday, Inc.'s Finance, HR and Planning products to leading organisations across Europe and North America. We are one of Workday's most respected partners, experienced in complex deployment and trusted by our customers to launch, test, expand, and support their Workday systems.

·    Workday Products develops products that complement Workday. Our Smart product suite, including Smart Test (for automated testing), Smart Audit (for compliance monitoring), and Smart Shield (for data masking), are used by more than 350 customers globally to safeguard their Workday systems.

Our people are central to our success. We employ more than 2,900 people in 22 countries across Europe and the Americas.

We are listed on the London Stock Exchange (LSE: KNOS) and you can discover more about us at www.kainos.com.

Definition of terms

We use the following definitions for our key metrics:

Active customer: a customer who has paid us to deliver a product or service within the current financial year. 

Adjusted EBITDA: calculated as being adjusted pre-tax profit excluding interest, tax, depreciation of property, plant and equipment and right-of-use assets, and amortisation of intangible assets. 

Adjusted pre-tax profit: profit before tax excluding the effect of share-based payment expense, acquisition-related expenses including amortisation of acquired intangible assets and post-combination remuneration expense (relating to contingent deferred consideration subject to future service conditions).

Annual Recurring Revenue (ARR): the value at the end of the accounting period of the software and subscription recurring revenue annualised.

Bookings: the total value of sales contracted during the period.

Carbon net zero: any CO₂, released into the atmosphere from a company's entire value chain is reduced as much as possible and the rest is removed.

Carbon neutral: any CO₂ released into the atmosphere from a company's entire value chain activities is balanced by an equivalent amount being removed.

Cash conversion: cash generated from operating activities as a percentage of adjusted EBITDA.

Constant currency (ccy): Excludes the effect of foreign currency exchange rate fluctuations on year-on-year performance by translating the relevant prior year figure at current year average exchange rates. 

Contracted backlog: the value of contracted revenue that has yet to be recognised.

Compound annual growth rate (CAGR): annual growth rate over a specified period of time.

Net revenue retention (NRR): is the percentage of recurring revenue from existing customers we retained over the year. This considers increases or reductions in customer spending and those customers where the engagement has ended; it does not include revenue from new customers. NRR therefore shows how our business could continue to grow solely from our current customer base alone, without acquiring any new ones.

Organic revenue: our revenue excluding revenue from acquisitions completed in the current and comparative reporting periods. 

Software as a service (SaaS): is a software distribution model that delivers application programs over the Internet, with users typically accessing the program through a web browser. Users pay an ongoing subscription to use the software rather than purchasing it once and installing it.

Science Based Targets initiative (SBTi) - partnership between Carbon Disclosure Project (CDP), the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) created to encourage companies to design clearly defined emission reduction plans in line with the Paris Agreement goals.

Kainos at a glance

We are a UK-headquartered IT provider, operating through three specialist business areas: Digital Services, Workday Services and Workday Products.

Purpose

Our purpose is to help our customers with their most challenging projects and, together with our partners, help them build the capability to succeed in the digital age.

Our operating divisions

Digital Services

FY23 revenue: £224.4 million, 60% of Group total, 5-year growth: 18% CAGR.

Our Digital Services division helps our customers to solve their business problems by using technology, enabling them and their users to work smarter, faster and better.

Working collaboratively with customers around the world, our innovative and transformative solutions are secure, accessible, cost-effective, and take a user-first approach. We leverage the benefits of the public cloud and enable customers to utilise their data to drive better decision-making.

In the public sector, we have delivered projects helping more than 60 million citizens, while saving our customers hundreds of millions of pounds.

In the commercial sector, customers trust us to provide digital transformation programmes that evolve their services, deliver efficiencies, increase their capabilities and future-proof their businesses.

In healthcare, we help providers deliver a service that is faster, more cost-effective and patient-centric.

We deliver services to over 160 clients, including Allied Irish Bank, NHS Digital, and the Department for Environment Food and Rural Affairs, and new clients including the London Mayor's Office for Policing and Crime and the NHS Business Services Authority.

Workday Services

FY23 revenue: £105.7 million, 28% of Group total, 5-year growth: 47% CAGR.

In our Workday Services business we provide consulting, project management, integration and post-deployment services for Workday's software suite. We work with clients globally and have an outstanding relationship with Workday, Inc.

With over 300 international clients, we are proud to work with customers such as Kion Group (Germany), Shopify (Canada), Novozymes (Denmark), Kone (Finland), ASOS plc (UK), Takeaway.com (Netherlands) and Match.com (USA).

Workday Products

FY23 revenue: £44.7 million, 12% of Group total, 5-year growth: 41% CAGR.

We have developed three proprietary software tools, Smart Test, Smart Audit and Smart Shield.

Smart Test allows Workday customers to automatically test and verify that their unique Workday configuration is operating effectively, both during implementation and in live operation. Smart Test is the leading automated testing platform specifically designed for Workday.

Smart Audit is our compliance monitoring tool that allows Workday customers to maintain operational controls over their Workday HCM and Financials environments, particularly in the areas of Segregation of Duties, Privileged Access Controls and Personal and Sensitive employee data protection.

Smart Shield is a data masking tool that can easily and seamlessly mask sensitive data without impacting the Workday user experience. It ensures that sensitive data remains controlled when Workday environments are made available to broader internal or external teams, for instance, during support and maintenance activities, or for ongoing internal Workday training and onboarding programmes.

These tools are implemented as cloud-based Software as a Service (SaaS) solutions and customers utilise them on a subscription basis.

Smart Test was launched in 2014 and is now used by over 350 clients, including Webhelp (France), AT&T (USA), State of Oregon (USA), Veolia ES (UK), Werner Enterprises (USA), University of Miami (USA) and Sentara Healthcare (USA).

Smart Audit was launched in 2021 and is now used by over 70 clients, including Booking.com (Netherlands), Metropolitan Museum of Art (USA), Magna International (Canada) and Whole Foods (USA).

Smart Shield was launched in 2022 and is now used by over 40 clients including Ohio State University (USA), Loews Corporation (USA), John Lewis (UK) and Netflix (USA).

FY23 key statistics

People

•   Number of staff and contractors: 2,990 (2022: 2,692).

•   Employee retention: 88% (2022: 86%).

•   People by region: UK & Ireland (71%), Central Europe (16%), Americas (13%).

•   Offices: (14) Antwerp, Atlanta, Belfast, Birmingham, Buenos Aires, Copenhagen, Derry, Dublin, Gdansk, Hamburg, Indianapolis, London, Paris, and Toronto.

Customers

•   Active customers: 821 (2022: 731).

•   Customers who rated our service as good or better: 99% (2022: 98%).

•   Revenue from existing customers: 90% (2022: 88%).

Financial

•   Revenue: £374.8 million (2022: £302.6 million).

•   Adjusted pre-tax profit: £67.6 million (2022: £58.8 million).

•   Bookings: £427.8 million (2022: £349.8 million).

•   Contracted sales backlog: £322.9 million (2022: £259.7 million).

•   Revenue by sector:

·    Commercial sector: 50% (2022: 41%),

·    Public sector: 37% (2022: 37%), and

·    Healthcare: 13% (2022: 22%).

•   Revenue by region:

·    UK & Ireland; 65% (2022: 71%),

·    North America: 25% (2022: 19%),

·    Central Europe: 9% (2022: 9%), and

·    Rest of World: 1% (2022: 1%).

Chief Executive Officer's statement

Consistency in a turbulent environment 

This is our eighth annual report as a public company. On review of our previous seven reports, it is obvious that we have recycled many of the adjectives that we have used to describe our business performance - with 'consistency' amongst the most reused terms.

Those same seven reports also describe an economic environment that has been subject to significant volatility. From localised events such as Brexit to global impacts from the pandemic, organisations have needed to respond urgently to rapidly changing circumstances.

That theme of turbulence is repeated in this report. The ebb of the pandemic has been followed by war in Ukraine, the energy crisis, inflation, interest rate rises, recession fears and, more recently, concerns about the global banking sector.

Despite the volatility seen throughout the year, our execution has remained consistent, and we have again recorded strong growth and robust financial performance, alongside pleasing customer satisfaction and employee engagement levels.

An excellent business performance

The digital transformation market has been growing quickly for over a decade, initially with a focus on the replacement of ageing and inefficient legacy systems. This driver has been augmented by organisations striving for greater agility, to allow them to react quickly to changes, whether accelerating new opportunities or, more typically, responding to challenges. As a result, our customers continue to prioritise their critical digital programmes and we continue to help them deliver these ambitious projects.

This strong demand has resulted in our revenues growing to £374.8 million, a 24% increase, and our adjusted pre-tax profit growing 15% to £67.6 million. Our moderated profit growth is mainly because of increased investment in our Workday Products, both in research and development and in sales and marketing, an increase of £9.3 million, all of which was expensed in the year. 

We continued to add to the talents of our global team, as numbers increased by 11% to 2,990 colleagues. Despite the high demand for digital talent and the global shortage of the same people, our retention increased to 88%, with further improvements in recent weeks as people became increasingly cautious about changing jobs. Our teams are now based in 22 countries.

Our Digital Services division recorded revenue growth of 12% to £224.4 million. We continued to deliver significant programmes in partnership with the UK Government and with leading healthcare and commercial clients. As always, our growth is a result of demand from existing clients, such as Allied Irish Bank, NHS Digital, and the Department for Environment Food and Rural Affairs, and new clients including the Mayor's Office for Policing and the NHS Business Services Authority. 

We are keen to open new opportunities for Digital Services and our investments continue to make progress. Our international engagements in Central Europe and Canada have continued to grow, with our revenues now £9.6 million, from £5.5 million a year ago. Collectively, our Cloud, Data and AI and Intelligent Automation practices now generate £41.9 million, representing an increase of 47% in the past year.

Our Workday Services team continues to help forward-thinking organisations such as Kone, Kion Group and Takeaway.com deploy Workday's innovative Software as a Service (SaaS) platform to support their people and finance requirements. We remain the leading European partner within the Workday ecosystem and in July we were appointed Workday Phase 1 Prime Status Partner for the US market, accelerating our access to the single largest global market for Workday consulting services. 

Over the course of the year our Workday Product revenues grew 40% to £44.7 million. Our products, Smart Test (automated testing), Smart Audit (compliance monitoring) and Smart Shield (data masking) are used by organisations like Netflix, Salesforce and match.com. We believe that there is an opportunity to grow our Workday Product revenues to £100 million by 2026 and as a result we invested further in product development (increased by £3.1 million to £9.1 million) and in our sales & marketing capacity during the year (increased by £6.2 million to £10.8 million).

Being a responsible business

We have maintained our focus on positive climate action. We have been carbon-neutral for the past two years and remain firmly on track to achieve carbon net zero by 2025. Our climate targets have now been certified by SBTi, with our actual Scope 1, 2 and 3 emissions significantly below the corresponding SBTi target. We are increasingly able to record the carbon and cost savings that our solutions deliver to our customers, for instance the United Nations International Organisation for Migration where the carbon saving of 594 tonnes per year, represented a 92% reduction in emission of IOM's IT estate.

Gender diversity remains a challenge within the wider technology sector, where just 22% of roles are undertaken by women. During the year, the proportion of women in Kainos increased from 33% to 34% reflecting focused recruitment campaigns and we recognise that a sustained effort is required to make further improvements.

We seek to inspire the next generation of digital talent and to improve the diversity of the sector. Last year over 1,800 young people participated in our outreach programmes, where we had targeted programmes aimed at improving gender diversity and social mobility for young people and for students with special educational needs. Our digital bursaries will support 60 young people from backgrounds that are traditionally under-represented at university.

Maintaining a confident outlook

The ongoing economic volatility means that the pressure on our customers remains intense. In response they are looking to reduce their costs and increase their organisation's agility. Digital transformation is a key foundation in achieving both these ambitions and the market will continue its growth, especially as organisations redirect their spending from inefficient legacy systems to agile, modern systems. The execution of our strategy has placed us in leading positions within our core markets, which allow us to look confidently to the future.

Our confidence is strengthened with the success of our additional growth initiatives:

Within Digital Services, our international expansion and our Cloud, Data and AI and Intelligent Automation practices already generates revenues in excess of £51 million; together these provide a platform for further growth.

Workday's focus on international expansion creates a strong backdrop for our European growth plans; at the same time our appointment as a Workday Prime Partner in the US market provides accelerated access to the largest Workday services market globally.

With our Workday Products, we can accelerate the adoption of our software across the Workday ecosystem, creating a significant software business.

We can be certain that the economic uncertainty will continue. While it is sensible to be confident about our markets, our customers and our abilities, it is equally sensible to remain vigilant and be responsive to any changes. That too is a sentiment that has been reflected in our previous seven annual reports.

A sense of gratitude

In each of our previous reports, the final words of this statement have focused on thanking our customers and our colleagues; and this year we continue to observe this important tradition.

Our performance as a business is influenced by many factors, but it is our relationships with our customers and the talents of our colleagues that truly shape our future.

The strength and depth of both have continued to grow this year and we are grateful for the trust and confidence that our customers continue to place in Kainos and the expertise, experience, and energy of our colleagues, who have been the driving force behind all that we have achieved.

Brendan Mooney

Chief Executive Officer

Our strategy

We are a growth-orientated business and while we are always confident of growing our market share in subdued markets, we naturally orientate towards higher growth, dynamic markets. It is in these markets where the talents of our people shine the brightest and opportunities for growth are the strongest.

Our ambition is to be a global, independent company operating towards the disruptive end of technology, that will thrive not just today, but for generations. In building for the long-term, we aspire to provide our people with rewarding and fulfilling long-term careers.

As part of this ambition, we believe that we can achieve sustained growth in terms of revenue, adjusted pre-tax profit and cash flow. 

We have, deliberately, developed from a national to an international organisation, both internally and in the customers and markets that we serve. We expect our international presence to continue to expand in terms of locations, people and customers.

It is our preference to grow organically; we will undertake acquisitions only in exceptional circumstances, for instance, where we need to obtain unique skills.

We also look to ensure that we have a well-balanced business, which is not overly reliant on any one customer, market or sector. This occasionally requires us to prioritise smaller, early-stage opportunities ahead of established market growth. We are comfortable with taking this long-term view.

People

The fundamental component of our strategy is our people. Our business is successful because of the talent, skill and motivation of our colleagues as they deliver on commitments to internal and external customers.

We will add to our existing talented workforce by recruiting high calibre people from school, college and industry; we will continue to invest in developing their skills and careers; and we will continue to strive to be a great employer.

Customers

Our business model is based on the conviction that by delivering consistently to our customers we will build long-lasting, mutually beneficial relationships that will see us thrive as a business.

These relationships are built on our reputation for delivery and exemplary customer service. By being responsive to and supportive of our customers' complex and changing business needs, we reinforce the strength of our relationships.

Therefore, our purpose is to help our customers with their most challenging projects and, together with our partners, help them build the capability to succeed in the digital age.

Markets

Digital Services

Our focus is to:

•   continue to grow within the public and healthcare sectors, being engaged in ambitious transformation projects across UK Government and the NHS;

•   repeat our digital transformation success within the UK commercial sector, with a focus on financial services; and

•   expand internationally, focused initially within Germany and Canada where we already have established delivery teams, have built business development expertise and have an existing Workday Services and Products client base.

Workday Services

Our focus is to:

•   continue to grow in our existing, established markets as Workday continues to expand within these markets;

•   gain market share, replacing incumbent providers to existing Workday customers through a reputation for higher service levels; and

•   expand internationally, establishing operations in countries with large and growing numbers of Workday customers.

Workday Products

Our focus is to:

•   increase the number of Workday's customers who use our software;

•   ensure high levels of customer satisfaction driving strong Net Revenue Retention (NRR); and

•   invest in our existing products, and develop additional products within the Workday ecosystem, where our blend of software skills and Workday experience makes us uniquely positioned.

New opportunities

In addition to the investment we make in our Workday Products, our focus also includes:

•   continue to invest in our Cloud (launched 2017), Data and Artificial Intelligence (2019) and Intelligent Automation (2020) practices, further building capability and creating international, high-growth businesses;

•   through our innovation process, identify and promote new ideas that have the potential to become sizeable revenue streams in the future.

Operational review

Our overall performance

The level of digital transformation undertaken by ambitious organisations continues to increase as the industry enters its second decade. Our established track record in guiding and supporting customers to deliver their large-scale digital transformation programmes, as they respond to the changing demands in their organisations, continues to provide the bedrock for our own growth.

Our high levels of activity with our customers have translated into an excellent set of results for our financial year.

Revenue for the year grew by 24% (20% ccy) to £374.8 million (2022: £302.6 million) with adjusted pre-tax profit^([3]) increasing by 15% (increased 4% ccy) to £67.6 million (2022: £58.8 million). Adjusted pre-tax profit would have been c.£6.1 million lower under constant currency exchange rates.

In line with our previous guidance, we have increased investment in our software products, representing a total of £9.3 million. Research & development investment increased to £9.1 million (2022: £6.0 million) and our product-related sales & marketing investment increased to £10.8 million (2022: £4.6 million).

Our sales performance underlines our success in winning business - extensions to existing contracts, additional projects placed by existing customers and winning new customers. Bookings for the year increased by 22% (20% ccy) to £427.8 million (2022: £349.8 million), which resulted in a 24% increase in the contracted backlog to £322.9 million (2022: £259.7 million).

As at 31 March 2023, we had a very strong cash balance of £108.3 million (2022: £76.6 million), representing 104% cash conversion (2022: 83%).

Our people

We are clear that our success is driven by the ability, energy and expertise of the people in Kainos.

Since last year, our headcount has grown by 298 to 2,990 people (2022: 2,692). Of our colleagues, 7% are contractors (2022: 12%). By region, UK & Ireland increased to 2,130 people (+190), Central Europe increased to 465 people (+50) and the Americas increased to 395 people (+58).

Our employee engagement levels remain high. We now utilise Workday Peakon to continuously assess employee engagement and have achieved a rating of 81%. For the second consecutive year, we were awarded '50 Best Places to Work For in the UK' by Glassdoor, the online career community.

During the year, 88% of our colleagues made the choice to stay and develop their career within Kainos (2022: 86%). For much of the year, the global shortage of digital skills created recruitment and retention challenges, however these eased during the last weeks of the financial year.

⁽³⁾ The Financial Review section includes reconciliations between adjusted pre-tax profit and profit before tax numbers.

Our customers

We believe that by delivering consistently to our customers we build long-term relationships. This is a perspective shared by our customers, who continue to have a very positive view of our performance - 99% of respondents to our customer surveys rated our service as 'good' or above (2022: 98%).

Existing customers continue to trust us to deliver their most challenging projects, and this is reflected in our revenues, with 90% of revenues coming from our existing clients (2022: 88%). We have also gained new customers during the year, and we now work with 821 customers (2022: 731). 

From a sector perspective we have a well-diversified business, with 50% of our revenues from commercial clients (2022: 41%), 37% from public sector organisations (2022: 37%), and 13% from healthcare customers (2022: 22%).

Our international client base has also expanded and as a result our international revenues have grown by 52% to £132.0 million (2022: £87.0 million). Regionally, UK & Ireland accounts for 65% of our business (2022: 71%), North America for 25% (2022: 19%), Central Europe for 9% (2022: 9%), with the rest of the world representing 1% (2022: 1%).

Digital Services performance

Our Digital Services division builds solutions that are highly cost-effective and make public-facing services more accessible and easier to use for the citizen, patient and customer.

Revenues grew by 12% (12% ccy) to £224.4 million (2022: £199.8 million). Bookings, at £238.2 million (2022: £215.0 million), represented an increase of 11% (11% ccy) and as a result, contracted backlog increased by 6% to £140.9 million (2022: £132.7 million).

During the year our healthcare revenues decreased as pandemic-related expenditure reduced. With strong opportunities in both the public sector and commercial sector we reallocated a number of teams to projects in these larger sectors.

Overall, public sector now represents 61% of divisional revenues (2022: 54%), healthcare 22% (2022: 33%) and commercial sector 17% (2022: 13%).

Public sector

Our public sector customers have remained committed to their digital transformation programmes and they remain ambitious in the scope of services that they wish to digitise, which is underpinned by a new digital transformation policy which outlines 50 of 75 services to be digitised by 2025. As a result of this commitment, our revenues increased by 26% to £137.0 million (2022: £108.4 million).

Within central government, we continue to consolidate our strong position across key accounts, securing new contracts to deliver digital programmes in Driver and Vehicle Standards Agency and Foreign Commonwealth & Development Office. Beyond our existing accounts, we are also delivering projects with new areas, in Defence (Defence Science & Technology Laboratory - Artificial Intelligence Delivery Partner) and the Mayor's Office for Policing (Cloud Migration Partner).

Commercial sector

In the UK, the commercial sector total expenditure on IT is over three times that of the public sector. While this represents significant opportunity, to increase our likelihood of success, we have initially chosen to focus our activity on financial services customers. 

Like all large organisations post-pandemic, those within banking and insurance are increasing their levels of investment in digital transformation. This, coupled with our growing references in the sector, has driven a rapid increase in activity as we have helped established customers like Nets Group and New Ireland and new customers such as Investment Management Corporation of Ontario (IMCO), Danske Bank and Allied Irish Bank.

Reflecting these higher activity levels, our revenues increased by 51% to £37.8 million (2022: £25.1 million).

Healthcare sector

As flagged in our November update, our healthcare revenues reduced during the year to £49.7 million (2022: £66.3 million), a reduction of 25%.

The reduction in revenue is largely attributable to the easing of pandemic-related spending, although the merging of our customers NHS Digital and NHS X to form NHS England's new Transformation Directorate has also had an impact. 

More positively, excluding pandemic-related expenditure, our healthcare revenues have been rising steadily, increasing by 85% from £19.4 million in 2019 to current levels. This year, our customers have included the Department for Health and Care Wales, where we delivered their Patient App, Genomics England and Our Future Health.

International expansion outside of UK and Ireland

With the UK as an early adopter of digital transformation, we believe that there is a significant opportunity to replicate our home market success internationally. Our initial focus is primarily on commercial customers in Germany and Switzerland, with organisations such as Hello Fresh and Nets Group and in the commercial and public sector in Canada with IMCO and Government of Canada. 

Our international revenues are reported in the figures in the sectors listed above, but for clarity, international revenues for the division have increased by 75% to £9.6 million (2022: £5.5 million).

Digital Services outlook

We remain extremely positive about the future of digitisation in the UK public sector both immediately and over the long-term. We are confident that based upon our strong reputation and successful track record, we are well positioned to maintain a central role in this transformation drive.

The digitisation pressures and opportunities within the commercial sector are similar, and therefore the growth prospects for us are substantial. Our progress in the past eighteen months provides confidence that we will deliver significant growth in the years ahead.

We are similarly optimistic about the international opportunity, utilising the skills and expertise gained as a leading digital transformation specialist in the UK and focusing on international regions where we already have established delivery teams, sales expertise and a strong Workday client base.

Workday Services performance

Revenue for the year grew by 49% (40% ccy) to £105.7 million (2022: £70.9 million); contracted backlog increased by 42% to £72.8 million (2022: £51.1 million); and bookings increased by 56% (50% ccy) to £121.7 million (2022: £78.2 million).

The number of accredited Workday consultants at Kainos increased by 27% to 808 (2022: 638).

Having first engaged with Workday in 2011, we are now one of their most experienced partners. We are the only specialist Workday partner headquartered in the UK and one of only 49 partners globally accredited to implement Workday's innovative SaaS platform.

From our initial strong base in UK & Ireland, we expanded internationally - into Northern and Central Europe in 2015 and into the North American market in 2018. Within Europe, we are the leading Workday partner - this leadership position is the result of high satisfaction levels within our customer base, coupled with our geographic expansion in the region. Our European customers, including those in the UK & Ireland, generated 47% of total revenue (2022: 57%).

A similar focus on customer success in our North American market has resulted in our appointment, in mid-2022, as a Phase 1 Prime partner for the US market - which remains the largest market globally for Workday services. Our North American customers generated 53% of total revenue (2022: 43%).

In addition to the delivery of Workday for new customers, we are increasingly involved in supporting customers already live on the Workday platform. We describe this annuity-style revenue stream as Post Deployment Services.

Workday Extend

Alongside these typical consulting activities, there is a growing opportunity linked to Workday Extend, Workday's Platform-as-a-Service offering which became generally available to customers in May 2020. Kainos has been part of the Workday Extend early adopter programme since 2017.

Workday Extend allows organisations to build additional, specialised functionality on the Workday platform to further enhance customers' Workday deployment. As experts in Workday Extend, we have helped organisations such as Universal Music Group, Groupon and Cardinal Health build Workday Extend applications specific to their requirements. 

Workday Services outlook

Our strong performance provides further evidence of the strength of the Workday market. With Workday's main competitors, Oracle and SAP, soon to mark 50 years in the ERP market, we believe that Workday's more innovative product suite can continue to gain significant market share for many years to come. This is reflected in Workday Inc's bold target of achieving $10 billion revenue by 2026^([4]), up from c.$6 billion today.

⁽⁴⁾ Workday, Inc.

In addition, we believe that we can outpace this rapid market growth by continuing our international expansion, especially within the US market, and by replacing other Workday partners in engagements where they are underserving their customers.

Workday Products performance

Our Workday Products revenue increased by 40% (26% ccy) to £44.7 million (2022: £31.9 million); the Annual Recurring Revenue was £47.9 million (2022: £34.3 million), an increase of 40% (33% ccy) and backlog increased by 44% to £109.3 million (2022: £75.9 million).

Workday is a comprehensive SaaS platform, but we have identified opportunities to develop our own software products that are complementary to the platform and that enable customers to further increase the benefit that they can realise from their investment in Workday.

In 2014, Kainos launched Smart Test which is used by organisations to automatically verify their Workday configurations. Smart Test is used by over 350 global enterprise customers, including Salesforce, Capital One and Whole Foods.

Our second product, Smart Audit, became generally available in August 2021 and has already been deployed to over 70 customers including Chanel, Arcbest and QBE Insurance. Smart Audit is a compliance monitoring tool that allows Workday customers to maintain operational security controls across their Workday environments. Our pre-built controls focus on safeguarding against Segregation of Duties conflicts, providing robust Privileged Access Controls and protecting Personal and Sensitive employee data.

In August 2022, we launched our third product, Smart Shield, a data-masking tool that can easily and seamlessly mask sensitive data without impacting the Workday user experience. It ensures that sensitive data remains controlled when Workday environments are made available to broader internal or external teams, for instance, during support and maintenance activities, or for ongoing internal Workday training and onboarding programmes. Although just released, Smart Shield is now used by over 40 customers, including Match.com and LKAB.

Workday Extend

In addition to the consulting services opportunity linked to Workday Extend, and described in the previous section, the platform provides us further opportunity to build products that are embedded inside Workday. During 2023 we have developed a new product, Employee Document Management, to help customers manage and simplify the full lifecycle of employee documents. Although not yet generally available, it is gaining traction with Workday customers.

Workday Products outlook

For our existing Workday products, our growth will be powered by the increase in Workday clients and by higher penetration of our products into the Workday client base.

We believe that we are well positioned to identify and develop additional products for the Workday ecosystem. Our growth will initially be determined by the product-market fit of our new products, followed by the penetration into the Workday client base.

Innovation, research and development

Successful businesses continue to challenge themselves and we are keen to improve our existing offerings, develop new business ideas and assess business and technology concepts that are likely to impact our clients in the future.

Including our product investment, our research and development expenditure for the year amounted to £9.1 million (2022: £6.2 million), which was wholly expensed in the year.

Innovation framework

We take the view that our people, who are often deeply engaged with our customers, are best placed to identify interesting problems. To support them, we have developed an innovation framework that is used across Kainos and comprises a body of knowledge, tools, methods and approaches for innovating, and processes to develop opportunities and ideas.

a) Spark & Scale

We create the conditions for our staff to identify interesting problems (finding the Spark) and support the development of ideas from conception through to launch (creating the Scale). This can range from applying cutting-edge technologies to existing customer problems, to identifying and testing a potential partnership or a new business offering.

Our dedicated innovation services team are on hand to explore the idea, developing an informed judgement of its early commercial potential. The Spark & Scale process is typically an investment of up to 20 days, with some external expenditure.

b) Practice Incubator

Through our dedicated incubator, we accelerate the creation of new practices, which focus on bringing new technologies to customers through dedicated, highly skilled practitioners. Proposals for new practices are evaluated by a panel composed of experienced Kainos leaders. If successful, new practices are given a formal investment package, typically composed of development time, specialist recruitment and external expenditure.

For example, our Intelligent Automation practice, graduated from this process and was launched in August 2020. The team, now 32 people, including externally recruited experts, has allowed us to undertake small, focused engagements for existing and new clients. We have every belief that our Intelligent Automation practice will follow the success of our Data and Artificial Intelligence practice, which is now over 120 specialists.

c) Technical and market research

To support innovation activities and strategic decision making across Kainos, we have invested in a team dedicated to technical and market research. The team's activities include providing foresight and research into emerging technologies, interpreting developing trends and identifying market insights.

The team is continuing research into: the advances of machine learning and AI, such as reinforcement learning; sustainability, including green technology and applying sustainable models to our services; fog, edge and distributed systems for the creation of smart environments, devices and places; the ethical use of data and AI; advances and emerging concepts in the development of healthcare technology; and a range of other emerging concepts, including quantum computing and ambient intelligence, with a goal of understanding when they should approach a level of maturity and the impact they will have on our business and clients.

Partnerships

In addition to internally sourced ideas, we nurture relationships with a broad network of partner organisations. We are active in start-up ecosystems, working with entrepreneurial young companies. Our people mentor and support their teams, helping to increase success prospects for their business, and with the aspiration of identifying and developing joint commercial opportunities. 

We also work with academic research partners and leading industry organisations, such as the Turing Institute, Digital Catapult and the Institution of Engineering and Technology as well as working with our strategic partners on further-from-market technology and research.

Close-to-customer innovation

Technology continues to develop at pace, and we look to continuously improve our delivery approach for our customers. These improvements reflect our most recent experience in delivering projects, as well as using the improvements in the platforms from Workday, Microsoft, AWS, UI Path, and other partners. 

Within Digital Services, our continued investment makes us leaders in cloud native software and data engineering, delivering technology, practices and principles that enable our customers to achieve long-term success with digital and data transformation. Through our Digital Advisory Practice, we work on customer innovation, bringing our leading technical expertise and wide network of partners to bear on real-world problems, quickly delivering value for users.

Workday frequently releases software and functionality updates for their platform, and we ensure that these latest developments are reflected in our delivery approach and methodology. We also assess new modules, particularly Workday Extend, which allows customers to add unique functionality to their Workday system.

Financial review

FY23 was another year of excellent financial performance.

In summary, we grew revenue by 24% (20% ccy) to £374.8 million (2022: £302.6 million). Digital Services revenue rose by 12% to £224.4 million (2022: £199.8 million), reflecting increased demand for digital transformation, primarily across the public and commercial sectors. Workday Services revenue grew 49% (40% ccy) to £105.7 million (2022: £70.9 million) driven by growth in North America. Workday Products revenue increased to £44.7 million (2022: £31.9 million), representing growth of 40% (26% ccy) (2022: 32%). The Operating Review provides more information on our revenue performance.

Our overall gross margin was 47.3% (2022: 46.3%). Digital Services' gross margin decreased to 38.1% (2022: 38.7%), mainly due to the two additional UK bank holidays in the period. Workday Services margin remained consistent at 54.2% (2022: 54.3%). Workday Products margin increased to 76.6% (2022: 76.3%).

Operating expenses

Operating expenses increased by 33% to £124.6 million (2022: £93.6 million). The growth in operating expenses is higher than revenue growth due to the increased investment in Workday Products in both sales and product development.

Our investment in product development increased to £9.1 million (2022: £6.0 million), all of which was expensed during the period. We recognised £4.2 million of Research & Development Expenditure Credit (RDEC) income during the year (2022: £3.2 million).

Alternative performance measures

We use underlying results to manage the business and measure performance day-to-day. We believe that 'adjusted profit before tax', 'adjusted EBITDA' and 'adjusted diluted and basic earnings per share' better represent the Group's underlying performance and make it easier to compare the Group's performance between periods.

Our adjusted results exclude the effect of share-based payment expense, acquisition-related expenses, including amortisation of acquired intangible assets, and compensation for post-combination services.

The adjusted profit measures we use are not defined in UK-adopted International Accounting Standards and our definitions may not be comparable with similarly titled performance measures and disclosures in other entities. The adjusted profit measures reconcile to the reported numbers as follows:

Adjusted profit measures

Adjusted EBITDA

Adjusted pre-tax profit increased by 15% to £67.6 million (2022: £58.8 million). Profit before tax increased by 18% to £54.3 million (2022: £46.0 million).

Corporation tax charge

The effective tax rate for the year was 23% (2022: 22%). This is higher than the UK tax rate of 19% as we earn profits in countries with higher corporation tax rates than the UK.

Financial position

We continue to have a strong financial position, with £108.3 million of cash (2022: £76.6 million), no debt and net assets of £129.3 million (2022: £107.7 million). Underlying trade receivables and accrued income balance is similar to last year at £74.5 million (2022: £74.7 million), despite the growth in revenue, due to very strong cash conversion in the period.

Property, plant and equipment decreased to £9.5 million at the year end (2022: £14.9 million). During the year £5.2 million was transferred from property, plant and equipment to investment property, reflecting our agreement to sell part of the site acquired in 2019 for the development of our future headquarters in Belfast. Furthermore, we listed property located in Belfast for sale in February 2023. The carrying value of this property (£0.3 million) has been transferred to assets held for sale within current assets.

Cash flow and cash conversion

Cash conversion, which is cash generated by operating activities as a percentage of adjusted EBITDA, remained strong at 104% (2022: 83%).