Kainos : Interim Results - Employees Q&A (Transcript)

Brendan Mooney - CEO

Good morning, everyone. Welcome to the Kainos interim presentation of the trading period ended 30th of September 2021.

I'm going to start the presentation but first three quick housekeeping points.

The presentation from Richard and I, will take about 35 minutes. For the presentation your connection will be muted, so please feel free to ask questions in the chat functionality during the presentation. At the end of the presentation FTI will moderate the Q&A session.

When I launch the presentation, Zoom switches off the camera on my device. Depending on your viewpoint that's either good news or bad news but you're on mute so you can't tell me, either way.

And finally, we are recording this broadcast, and we'll be using Zoom to automatically generate a transcript of the call. We will edit transcript for clarity before publishing on our website. I think the "edit for clarity" is my colleagues' way of telling me that Zoom's AI probably can't handle my soft Irish accent. Please bear with me and I will launch the presentation.

Highlights

In terms of the highlights over the last six months I think these really strong set of results and we have picked out the key figures on the right-hand side.

So, looking at last year we posted, growth of 31%, and we have continued that pace this year with revenue up over 33%. I think that growth reflects strong execution by us also strong demand in the market as well. And we see that demand across all sectors and all regions.

In these results we are delighted to have locked in, strong margin gains though profit growth has lagged revenue a little bit. That lag is very much a function of returning to what we see as being normal utilization levels, the short-term impact of using contract staff and the impact of ongoing salary increases as well. We have had excellent sales closure which of course has driven a great backlog for us as well. Our cash sits at a very strong £80 million.

So, in terms of these results, I think addition to reflecting our performance over the last six months, we think these are the first kind of figures that really demonstrate what the term structural change means or markets. We are seeing really strong growth in terms of digital transformation in our core markets. We're seeing a very clear, move to hybrid being the default delivery model for our clients.

We look at these profit figures and think this is the new benchmark for business.

©KAINOS 2021

1/14

So, in terms of looking at some of the other points on the slide here, over the years we've talked about the need to have a well balanced business. I think these results further demonstrate the progress that we've made.

I particularly call out the growth in commercial sector, which is know the largest sector in the business at just over 42% of revenue. Our global revenues continue to grow very strongly with almost 30% of our revenues come from Central Europe and from North America.

You can see that we've delivered, very strong growth across both of our divisions, Digital Services and the Workday Practice. We are taking the opportunity in this set of results really to highlight the launch of Smart Audit - a compliance monitoring tool for Workday environments, which was released in August, and already has 20 clients using the tool. I will talk more about that later in the presentation, and the pipeline for future products we see in the Workday area.

The final point on this slide, our people. You know how much we prize the talents of our colleagues and their importance to our business. Staff numbers are up over 700 since this time last year, reflective of both strong recruitment but also strong retention.

I know that everyone on this call is familiar with our business careers, Digital Services and Workday Practice. Although our H1 performance is not showing on this chart, as we have just talked about, our H1 results are very much in keeping with our established track record of strong growth in both our business lines.

So we're delighted with our H1 performance, and we're on track for our twelfth consecutive year of growth. That is growth in terms of revenue, adjusted profit and the number of people working in Kainos. We really love that consistency that we demonstrate, year after year.

We have increased our R&D expenditure this year, which is reflecting our increased investment in Smart Audit. As a reminder we expense all of our R&D in year, which in H1 was just over £2.8million.

In terms of the people related aspects to our business, it has been another really busy period for us.

Over the course of the past 12 months staff numbers are up, as I said, over 700 people. About 620 of those joined through recruitment and approximately 90 joined through the acquisitions of Cloudator and Une Consulting. I have to say we're delighted with high quality of a new colleagues, joining both through recruitment, but also through the acquisition as well.

I think, you know, on this slide, we're probably most pleased about the retention levels.

89% of our colleagues have chosen to stay and develop their careers in Kainos which is a really pleasing statistic to reveal. Alongside that really strong retention, we've been, I guess very busy on the recruitment side as well. We have doubled our recruitment capacity over the past year. We normally recruit around 300 people per year. In the past 12 months

©KAINOS 2021

2/14

we've hired over 600. We are still seeing really strong interest in our recruitment markets and over the last six months, 21,000 people applied for a job in Kainos. We still hire most of those directly, over 80% of those who join have joined us directly rather than through an agency.

Most of our recruitment activity is in the experienced market we also believe it is super important for us to be offering careers for those who are starting out in technology as well. So of that 620 people recruited, 149 Join us from school or college.

We have got a heavy reliance on contract staff over the past 12 months; it's up to 13% of our total headcount, although we do expect this to level off in the weeks and months ahead.

We have as you can see, recruited across all of our locations but really, I would call out again, the presence we have in the US. This time two years ago, we were just 47 people in the North American market today it's over 250.

Looking at the wider recruitment market it is clearly a very active recruiting market, and you will have heard that from lots of different tech companies as well. Tech talent in the UK, in Europe, and across the US has lots of options, and are choosing to move around.

That's driving some strong salary increases for both new hires, and those colleagues who are with us already.

We are not quite sure how long this will last, though we do think it is a multi year trend. It's not going to be just this year and next year, but probably for a couple of years beyond that.

So, against that very busy market backdrop we are really pleased with that retention rate. An 89% retention rate is a fabulous rate. We should expect to see a drop a little bit over the next couple of years I think it's foolish for us to think that will be immune from what we're seeing in that wider marketplace. However, we will continue to be really focused on making Kainos a really great place to work.

During H1 we completed the acquisitions of both Cloudator and Une Consulting. I have to say we are delighted to have our colleagues on board, and to be working closely with them.

In the case of the Cloudator acquisition there was a significant effort required in merging our two businesses together. Although Cloudator was just 55 people, they were based in 10 different countries, including four new countries for Kainos. So, Belgium, Czech Republic, Estonia and Norway were all new countries for us to operate within. I have to say, on reflection, it is probably fair to say that we underestimated the effort required to integrate with Cloudator and on the onboarding experience for some of our new colleagues was not as seamless as it should have been. There are lessons learned for us.

©KAINOS 2021

3/14

In terms of offices and travel, we continue to encourage our colleagues to prioritize their wellbeing, which translates into them working from home and having a very much reduced travel schedule.

To give a sense of that attendance at Kainos offices has been gradually increasing over the course of the summer. So today about 17% of our people are in our offices on any given day, although there are clearly regional variations. In terms of travel, this month November, we will have about 140 flights in total. This compares to a typical, 1200 flights a month before the pandemic and that was for a smaller workforce. That is clear evidence that we see the long term engagement model as one of remote delivery.

Our customers

The long-term nature of our client relations are super important to us, and I think both these graphs we've used before, very much kind of demonstrate how these long term relationships underpin our business.

On the left our existing client revenue has grown by 35% over the course of the last 12 months. I know I borrowed the term "net revenue retention" from the world of SaaS, but if you look at that statistic, it is a net revenue retention of 135% for the past 12 months. Or if we are looking at it over the last five years, that is a net revenue retention of 124%.

Then, on the right we share the detail of the various annual customer cohorts. I think the graph is a great insight into how our client relationships develop and deepen over time and how that drives increase business levels for us.

Our customer satisfaction scores, still really high and we're delighted that our customers continue to be very positive, with the quality of service that we deliver for them and the value that we deliver for them as well. As you know, we continue to add new clients every year which, creates the opportunity for us to build future revenue streams.

Business balance

In Kainos we talk a lot about business balance, making sure that our revenue streams are robust and that our revenues are spread across different service lines, different sectors different regions and indeed, different clients. I think the importance of that solid foundation in our revenue really was proven last year through those early months of the pandemic.

The chart on the left really highlights the progress across sectors. We've always had a really strong public sector revenue stream and the focus for us over the past five years has been to keep growing our public sector revenues while growing healthcare and commercial even more quickly.

I have to say I think the team have done a super job in what is a really tricky task to achieve. Five years ago, commercial revenues represented less than 28% of our total business. Today is the largest segment at over 42% of your total revenues.

©KAINOS 2021

4/14

Over that same kind of time period our international revenues have also grown very strongly, so we're on track to exceed £80million in international revenue this year. Again, going back to the time of our IPO in 2015, global revenues for us were less than £1million so to be on track for £80million this year is a fantastic achievement. Also, to me the international revenue stream really highlights that we can grow successfully an international business. I think there's lots of more growth for us to come as well.

Our responsibilities

As we reported back in May we achieved carbon neutrality for 2020. As part of our offsetting activity, we've supported forest preservation, reforestation, wind power programs across Europe, North America, Africa, and South America. We expect to confirm our science-based targets later this year, which is an important milestone in our journey to carbon net zero by 2025.

We continue to work to reduce our upstream and downstream emissions. Among those types of initiatives, we've undertaken the launch of a UK electric vehicle, salary sacrifice scheme. It was timed to coincide with COP26 and launched internally two weeks ago.

Over 200 people attended a series of briefings, and that strong interest has converted to over 30 electric vehicles being ordered in the past week, with more expected in the weeks ahead. Kainos is very much a carbon light business, and our improvements will be driven by many small, incremental steps inside our business, and also in helping our colleagues and customers achieve their own low carbon future.

The past six months have seen an improvement in the gender balance of our recruitment, which increases our overall female representation to just over 33%. We've invested in the Workday VIBE platform to provide us with greater insights into our diversity across Kainos, and to track how our various activities and initiatives improve inclusivity across the company.

We've also moved our Outreach activity online and it is now delivered virtually. Over the course of the last six months 230 young people attended one of our three, weeklong CodeCamps. Over summer, we've had over, 450 young people attend, our three-day work experience program.

Both programs are really geared towards allowing young people to experience what they can expect from a career in digital technology and make a really informed career choice as well. That switch to a virtual format is an important development for us. It allows us to run very focused engagements, very effectively. In the future we'll be able to run targeted programs to support engagement with communities that are underrepresented in the tech sector.

Digital services

Turning to our divisional performance. The team in Digital Services, did an excellent job over the past six months, continuing to perform very strongly. You can see the revenue, bookings and backlog all increasing very strongly.

©KAINOS 2021

5/14