2021 | 2022 | ||||||
Price: | 2,155.00 | EPS | .30 | 1.16 | |||
Shares Out. (in M): | 28 | P/E | 0 | 0 | |||
Market Cap (in $M): | 615 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 10 | EBIT | 33 | 60 | |||
TEV (in $M): | 625 | TEV/EBIT | 19 | 10 |
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FD Technologies (FDP.LN) is a London-based holding company with three separate businesses which is being significantly undervalued by the market because of its holding company structure and because of a predictably ugly SaaS transformation at its key technology business. Its businesses all share an underlying analytics technology but could otherwise be sold or IPOed to engender a more understandable business and a higher valuation.
KX is the underlying streaming data analytics technology and forms one of FD’s three divisions. It is the world’s fastest data analytics technology and enables streaming decision making in real-time to its customers. It provides the ability to ingest, store, process, and analyze historic and time series data to make analytics, insights, and visualizations instantly available. The platform provides the full lifecycle of data services, including query processing, tiering, migration, archiving, data protection, and scaling. Data can come from real-time business events and high-volume sources including sensors, clickstreams, RFID, GPS systems, social networking sites, and mobile devices.
KX’s original use case was in capital markets dealing with real-time data feeds and decisions that had to be made instantly based on that data. Common bank use cases include analytics, compliance, fraud management, risk management, and trading. More recently management has focused its sales efforts on other verticals including manufacturing, pharmaceuticals, automotive, energy & utilities, telco, and online gaming. It is suitable for any application with massive data sets that need to act in real-time. This business unit is making the often-ugly transition from perpetual license to a SaaS business model. Current gross margins are at 75% and should increase as the business scales. In the first half of 2021, 41 KX subscription deals were signed compared to only 14 in the prior year period. As these deals are recognized on an annual or multi-year basis, reported revenue declined during the period. The important part is that KX is on track to meet its 25% ARR (Annual Recurring Revenue) growth goal for the end of 2021, and it has ramped up the sales effort to drive incremental revenue in 2022 and beyond. As existing customers shift from maintenance payments on historical KX perpetual purchases to SaaS deals, there is a 1.5x to 2x revenue uplift. This phenomenon will help augment revenue growth over time, as well.
KX also has a new product that should invigorate sales going forward. Historically its technology has been used on-premise with data residing at the customer’s offices. Recently the company has released KX Insights, which is a cloud-based version of the technology. This is very important as many customers are moving their data to the cloud and need to analyze it there. Six customers have already signed up for the new product and many more are in the pipeline. Another benefit of KX Insights is its broad set of application programming interfaces (APIs) that allow it to connect to SQL and Python technologies, for example, which will speed its adoption over time.
Valuations for comparable SaaS database technologies are enormous. Couchbase (BASE) trades at 12x calendar 2022 revenue and the even more expensive MongoDB (MDB) trades at 35x 2022 revenue. Applying a Couchbase multiple to KX 2022E revenue of 80m pounds would result in a 960m pound valuation which is 56% upside to FDP’s current valuation not even taking into account its two other businesses. Doing the same exercise with MongoDB’s 35x multiple would result in a 2,800m pound valuation for FDP or 366% upside from current levels, again giving no value to its other two businesses.
First Derivative was FD’s original business, and it is a consulting business for its financial institution customer base. Using KX as an underlying technology, its consultants do long-term stints at banks to help them solve their difficult problems. The company has the largest, fully dedicated capital markets consulting team in the world. 20 of the world’s top 20 banks work with First Derivative right now. The company is a beneficiary of the trend toward digital transformation at enterprises, with its team of technology and data driven professionals driving meaningful change at these big banks.
The company’s goal at the beginning of 2021 was for First Derivative to grow 10% this year and into the future. The business grew 18% in the first half and the company said that there is no reason this pace of growth cannot continue and have the subsidiary beat its targets for the year. This business did 28% gross margins in the first half which is an improvement over the 24% margins the year before on improved utilization rates for its consultants. Valuation for this subsidiary can be derived from a comp such as Accenture which trades at 4x 2022 revenue. Applying this multiple to First Derivative revenue of 172m pounds in 2022 results in a 660m pound value, roughly where the entire holding company trades today.
Finally, FD’s last business, MRP, uses KX for predictive analytics and intelligence as a marketing platform. The company has just released a new version of its Prelytix platform which is easier to use and will let the company scale more efficiently. This platform is used for account-based marketing (ABM) to let its customers make decisions in real-time to better capture new customers across a variety of media. This business is on track to meet its 20% revenue growth guidance for the year. It is a 40% gross margin business which can grow as it scales. Apply a 4x sales multiple to 2022 revenue of 61m pounds results in a 245m pound valuation for this segment.
A sum-of the parts valuation (in pounds) results in 960 (using the BASE multiple)+660+245=1.865 billion pounds total divided by 28.1 million shares or 6,637p per share, or a triple from current 2,155p levels. Using the MongoDB multiple for KX, the resulting valuation is 2,800+660+245=3.705 billion pounds or 13,185p per share or a 6 bagger from here.
So what will catalyze a rerating of FD? Management has indicated that MRP is not core to the overall business and could be sold at some point. They are also considering a US IPO of KX where it would likely garner a much closer valuation to BASE or MDB than it does in its present form. I think also next year as KX comes out of its SaaS transition its revenue growth will more closely match its ARR growth and will force the market to take notice of it.
The sale of the MRP business and the US IPO of KX will lead to a positive rerating of the shares.
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7 | |
Thank you for your writeup cobia.
We are long FD Technologies and believe the shares could be worth as much as GBP60.00 in 2 years if management hits their targets for KX systems (composed of vector database, Kdb). We believe the company will sell the irrelevant MRP business inside of a year and that within 18 months the company will likely to be split into two businesses - KX Systems (likely to be renamed) and FD Consulting (likely to be sold to a strategic or private equity) Management's long-term incentive plan (at the high end) is tied to hitting GBP200 million of KX ARR in Fiscal (February) 2026 (effectively calendar 2025); this implies a 45% CAGR from GBP$65 million in Fiscal 2023. As management demonstrates continued progress on ARR growth, I believe FDP LN stock will be forced to re-rate higher. Kdb has enjoyed a strong position in the financial services vertical (algorithmic trading shops, virtually all of the investment banks, commercial banks, etc.) where the company has performed quite well despite being very slow to embrace the cloud. Over the past two years, KX has pivoted to a cloud first approach to business and has formed strategic partnerships with Microsoft Azure, AWS, and Snowflake. Until now, no competitors been able to fully replicate the combination of speed and cost advantage that kdb offers, and this has led to the aforementioned partnerships which are just now beginning to ramp. Non-financial services new bookings mix is approaching 50%. On today's conference call hosted by JP Morgan for KX (Kdb parent) CEO Ashok Reddy, we were surprised to hear Mr. Reddy mention that use cases are rapidly broadening beyond financial services such that non-financial services new bookings mix is approaching 50%. Use cases include applications for aerospace/defense, smart metering (for whole countries Finland and Poland), healthcare and life sciences, semiconductors, manufacturing, energy, and telco. Sustained progress in non financial services verticals would be key to validating the potential for KX to be a much bigger business. We have spoken to a number of existing customers who are quite bullish on the growth opportunity in front of KX. In our opinion, the biggest challenge for the company is the successful execution on its transition from a historical services-based organization to a more saleable product-focused company, something KX CEO Reddy and the FD board are focused on. Given high revenue per customer, we expect KX long-term operating margins will reach well in excess of 30% with gross margins substantially in excess of 80%. If we value the FD consulting business (GBP187 million at 10% EBITDA margins) at 10x EBITDA and the MRP marketing business at .5x revenue, we are creating KX for only 4.4x current calendar year SaaS revenue and 1.6x the management's high end target for calendar 2025 (F26) KX ARR. If the company hits this target for KX and holding our valuation for MRP and FD Consulting constant, there is 200% upside in the shares at a 7.5x target ARR multiple. The company has an accomplished software oriented board and we believe the set up is quite asymmetric at current levels. | |
6 | |
KX ARR grew 25% last fiscal year and is guided to grow 35-40% this year. First Derivative growth came in ahead of plan at 24%. | |
5 | |
Important partnership with Microsoft Azure reported this morning. Rare native integration with Azure and joint marketing and product development going forward. Microsoft wants access to FDP's capital markets customer base and this partnership gets them there. | |
3 | |
Cobia - Many thanks for an intriguing write-up. With regards to your comments that: (1) Management has indicated that MRP is not core to the overall business and could be sold at some point. (2) They are also considering a US IPO of KX where it would likely garner a much closer valuation to BASE or MDB than it does in its present form. Where/when were these comments made? Where there any more details or specifics provided? Have these sentiments been repeated? Thanks.
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2 | |
I met with the CEO over the summer and he seems like a reasonable guy who can execute his strategy. I think the company has a plan to reduce the holding company discount which, if successful, could be a big driver for the stock. | |
1 | |
Hi Cobia, thanks for a very interesting write up. Would you mind sharing your thoughts about management, mainly in terms of capital allocation and aligment with shareholders? Share count dilution has been quite significant... |
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