Description

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.   

Catalyst

The sale of the MRP business and the US IPO of KX will lead to a positive rerating of the shares.