The long and the short of IT
More glow than Graham Norton’s sock drawer: Techs Great Make-Over
The week saw the market turn. There was (another) policy change as China came off the naughty step; the UK Mansion House Compact upgraded the earlier Mansion House Accord initiative meaning more money for early stage tech companies; the UK enjoyed better-than-expected economic growth figures and a (slightly) lower cost of capital; ‘risk’ sprang back to life. TSR and the indices moved better. Spoiling the show, corporate news remained mixed reflecting the (still) uncertain macro where nothing stays still for too long, but with the pockets of growth GTM vertical market positioning remains key. For now let’s all enjoy the upside, and see what tomorrow brings (incidentally, it brings Eurovision).
Latest Tech Universe results span IT Professional Services (Endava, TPXimpact); Data & Analytics (Cyberark); IaaS (Alibaba, Coreweave); IT Infrastructure Services (Bytes); AI-RAG (Experian); Finance & Accounting (Sage, Xero). Read on. Data insights (not navel gazing) inform our evolving views on the tech-economy.
The tech drivers
Mansion House Accord initiative.
Formed by the Pensions and Lifetime Savings Association, the Association of British Insurers and the City of London Corporation, this worthy group has pledged to increase their investment into private British businesses. Tech stands as a beneficiary.
The 17 participants will allocate a minimum of 10% of defined contribution default funds to the private markets, with at least half going to UK firms by 2030. The previous Mansion House Accord was 11 providers pledging 5% of their defined contribution default funds to private equity and venture capital. The signatories hold almost £800m of unlisted equity assets in their defined contribution default funds (c. 0.36% of the total value of those funds). The additional capital dedicated to UK private firms will turbo charge the amount of funding available for startups. Among the niggles about this worthy cause are:
Will pension funds reduce their UK public holdings or overseas ones as they scramble to find the funds?
Will it do anything to address the ongoing de-equitisation at the LSE?
Is forcing institutional investors into this asset class a good use of investee funds and does it clash with funds’ fiduciary duty?
Unsurprisingly, Investment banks are supportive of jam tomorrow initiatives. Research by the New Financial concluded that just 4.4% of UK pension assets are held in domestic equities, which is well below the 10.1% global average. The share of the UK stock market owned by British pensions and insurance companies fell from 39% in 2000. A broadly positive initiative but it is only one element of a bigger jigsaw.
The return to the Index.
Following the latest US tariff policy change, the US market rallied and in turn dragged up indices more globally. A feel-good week.
The index recovery
Note: Priced pre-market 16 May Source: Yahoo Finance Technology Investment Services
Macro data surprised on the upside
UK economic growth data was better than expected following an earlier rate reduction. While the Cost of Capital remains historically high, (and so pressures company valuation) the general inference is that ‘things’ are not as bad as expected, and the direction of travel is more positive. Spoiler Alert: The latest data comes before company results factor in the full effect of NI increases. Anecdotally, private companies that we talk to are changing their staff pyramid, or looking to increase prices.
The 10-year rate here and in the US
Priced 15 May Source: FT (Thank you)
M&A has sprung back into life – where was it hiding?
There has been a flurry of M&A - both real and in discussion. Our list includes actual transactions: FD Technologies and Trakm8, and deals in various stages which include Alphawave, Globaldata, Empresaria and Deliveroo. The undisturbed premium from these transactions (with the exception of Trakm8 - a story of a crushed share price) are in line with prior averages. So PE pays 30% on top of the share price/ Trade pays 45-50%.
UK TSR: Coming off life support
UK Tech TSR is still in negative territory (YTD: -3.94%) but it has improved dramatically, and the trend line remains broadly positive. To date, the recovery has been most pronounced at the larger cap shares (see below), with smaller ones less so thereby mirroring the performance difference between the Russell 1000, (i.e. large companies) vs the Russell 2000 (smaller companies).
UK Tech sector TSR since 2020 (%) - Build back slowly
Source: Company data, Yahoo Finance, Technology Investment Services
UK Tech salary trends
Mirroring the general uncertain environment, UK tech salaries are of the ‘up and down’ variety. Contractor salaries are down sequentially (-0.9%) in May and Y/Y -3%, while Full time roles are +0.1% sequentially and +3.9% Y/Y. This followed the usual April rise in employee layoffs – which at 24,545 was higher than the 22,423 last year.
Tech inputs: Salaries flat - fewer people to pay
Source: Layoffs.fyi, ITJobswatch, Technology Investment Services
Valuation
Mirroring the general positive, valuation crept up but remains low relative to longer term trading patterns. At this juncture, investors will fret about companies not being lifted as the ‘tide comes in’ – these forgotten shares need to be re-visited.
UK Tech Share momentum and valuation overview
Source: Technology Investment Services
Corporate news
Remains mixed here, both in the UK and globally. Outlook statements are guarded, and the enthusiasm of the broader market is yet to be reflected in guidance. But rising share prices create a pixie dust effect and tend to draw in other buyers, who may have been waiting out poor markets. Let’s delve in.
Latest Results review
IT Infrastructure Services
Cohort scenario: We are in the midst of a large ‘cloud’ shift which favours the IaaS cohort. While the hyperscalers seem the obvious ‘winners,’ the IaaS segment includes an array of companies who will gain from vertical market focus, but also in the wider cloud migration, as well as the more ‘classic’ RAS (reliable, available, Secure) corporate requirements. In addition, most modern applications were designed to run on cloud, rather than on-prem systems. While the newsflow tells us that CapEx is on the increase, there is less attention to improving Adj EBITDA margins and recovering FCF margins which feature in the KPI dashboard.
Bytes. A broadly positive set of final results. We note:
The average GP per customer increased from £25k in 2023/24 to £27.6k in 2024/25. With the cost of Windows 11 is £219, Bytes is selling more than SME operating system installs.
Of the £2,099m GII, £2,005 is software reselling and this in turn explains the lack of inventory (at £14m down from £60m last year) at Bytes.
Positively, GII exceeded £2bn for the first time, and was +15.2% Y/Y with 8.9% corporate growth and 18.2% public sector growth. EBIT increased by 17.1%. Existing customers contributed 97% of Gross Profit, unchanged year-on-year and the renewal rate was 109%, similarly unchanged.
Given the lack of new client wins we are surprised at the headcount growth, 17.8% to 1,245, but the firm opened offices in Sunderland and Portsmouth, expanding floorspace in London and, towards the end of the year, the acquisition of two buildings in Leatherhead.
Sam Mudd, CEO reminded of the “challenging macroeconomic environment” as the company responds to the “evolving demands we see in our markets, including cloud computing, cybersecurity, AI and managed services”.
IT Infrastructure Services: KPI Dashboard
Source: Company data, Technology Investment Services
IT Infrastructure Services Valuation overview
Note: Priced pre-market 16 May. Source: Company data, Yahoo Finance, Technology Investment Services
IT Professional Services
Cohort scenario. By now (16/5) firms responsible for 3.4m FTEs from our 3.6m Professional Services firms have reported cal Q1. Contrarily, given the economic backdrop, we see grounds for optimism. The Q1 KPIs suggest that the recovery is slowly on track with revenue, margin and FTE growth - although the early reports are from offshore companies so there might be an underlying share gain story which has yet to properly ‘surface’. Generally, bookings have recovered (this is happening globally) and revenue growth c5% looks achievable as the IT Professional Services cohort slowly emerges from the aftermath of the Covid and immediate post-Covid environment which saw the industry over-hire. Since then, staff attrition dried up impacting profitability. However, more recently attrition has been shuffling upwards, the industry has some pricing power (i.e. inflation clauses) and so revenue growth has been rekindled. In addition, (i) GenAI has given the industry a new secular growth driver and a new twist to Digital Transformation programs, and (ii) the sector will benefit from the increased Defence spend. From the KPI dashboard the industry is slowly starting to rehire and re-train existing staff which in the short-term dents utilisation. Shares in the cohort are cheap reflecting the past two difficult years, rather than the dashboard which is starting to telegraph a recovery.
TPXimpact . A positive update with Q4 trading and the FY outlook in line with revised expectations. Adj EBITDA is expected to be at the top end of the 1-2% year-on-year margin growth range – note consensus is £4.9m. Pleasingly, net debt (excluding lease liabilities) is to c.£8.5m, thereby at the lower end of the target range of 1.5x-2.0x for the year ending March 2025 and comfortably ahead of banking covenants. In addition there were two recent significant contract wins:
£7m two-year contract with the Department for Business and Trade and,
£9m (with an opportunity to extend by 50%), 12-month contract with His Majesty's Prison & Probation Service, delivering digital transformation to enhance public safety and justice services.
CEO Bjorn Conway also reminds of the “challenging trading environment”. On a broad brush basis, the challenges of cal2024 included a General Election, Public Sector spending purdah, departmental restructurings from a new ‘finding their feet’ administration, and the cancellation of some tenders with others delayed. These were all out of the control of the suppliers.
There is now greater stability in the Public Sector, the new administration has found its feet and its efficiency agenda has a technology first approach. These draw a curtain over a difficult 2024. In turn, this will create a better operating environment for the supplier base, and given a modern technology stack and improved operating models.
Endava. A downbeat set of results, with Endava saying that contracts were slow to close with the macro environment impacting the buying and creating pricing pressure (admittedly these are common across the sector). Shares were down 30% on results day. CEO John Cotterell concluded: “the quarter just ended has been challenging. Clients' desire to innovate remains strong; however, they are slow at signing larger contracts in the current uncertain macroeconomic environment. The opportunity pipeline continues to grow but the conversion into revenue is not happening as we would have expected”.
That said, the print saw revenue grow 11.7% Y/Y to £194 (the current cohort rate is 2.8%YTD), PBT, £13.6m, reversed the £0.5m loss last year and operating cash was £18.7m from £3.0m Y/Y with FCF £17.5m vs £2.2m a year ago.
For us, this is a story of a dramatic swing in the end markets that Endava serves: By industry vertical, 19% of revenue was generated from Payments – down from 24% last year. The other verticals saw: 21% from BCM (up from 14% last year); 9% from Insurance (unchanged Y/Y), 18% from TMT (24% last year); 8% from Mobility (10%), 12% from Healthcare (4%), and 13% from Other (15%) Q3 FY2025.
The numbers we track: Endava, TPXimpact
Source: Company data, Technology Investment Services
IT Professional Services KPI Dashboard
Source: Company data, Technology Investment Services
IT Professional Services Valuation Overview
Note: Priced pre-market 16 May. Source: Company data, Yahoo Finance, Technology Investment Services
AI-RAG
Experian. At this juncture we are looking for our RAG cohort to infuse technology automation through their lines of business, build up software assets, expand customer data points and ‘lean’ to technology from ‘physical processes’. The spending bar is low, the cultural bar is much higher in this journey to RAG.
Results from Experian were pleasing as these strategic touchpoints were obvious through-out the FY print. The highlights, on our scorecard, included:
Consumer Services has 200m+ free members, deepening engagement across a widening product ecosystem.
B2B organic revenue grew 6% Y/Y with this performance driven by broad-based strength in analytics, mortgage, alternative data.
Good progress with the cloud programme, with significant new products and Generative Artificial Intelligence (GenAI) features launched.
Financial Services: Success with the Ascend Platform, with product launches including new cash flow analytics and scores, and expanded income and employment data assets. Vertical markets growth was a function of leveraging data and software capabilities, providing more integrated capabilities across products coupled with new product introductions such as AI-driven patient access products in Health.
Consumer Services: Grown the membership base, with higher engagement, and broadened the consumer offers. Our Experian Activate capability has gained further traction, creating a more seamless experience for financial institution clients and Experian members. The consumer membership base now exceeds 200m free members.
Cloud technology transformation: This is progressing well and is on track to deliver “material cost savings from FY27 onwards” when dual-run costs start to fade. Innovation revenue continues to grow as a proportion of our total, and Experian introduced a range of new GenAI tools, which have been embedded in several of product workflows.
Brian Cassin, CEO, commented that while being mindful of the outlook for the broader global economy, we are “confident of another good year of growth in FY26."
The numbers we track: Experian
Source: Company data, Technology Investment Services
AI-RAG KPI Dashboard
Source: Company data, Technology Investment Services
AI-RAG Valuation overview
Note: Priced pre-market 16 May. Source: Company data, Yahoo Finance, Technology Investment Services
IaaS
Cohort scenario: We are in the midst of a large ‘cloud’ shift which favours the IaaS cohort. While the hyperscalers seem the obvious ‘winners,’ the IaaS segment includes an array of companies who will gain from vertical market focus, but also in the wider cloud migration, as well as the more ‘classic’ RAS (reliable, available, Secure) corporate requirements. In addition, most modern applications were designed to run on cloud, rather than on-prem systems. While the newsflow tells us that CapEx is on the increase, there is less attention to improving Adj EBITDA margins and recovering FCF margins which feature in the KPI dashboard.
Alibaba. Group revenue + 7% Y/Y to RMB236,454m (c.US$32,584m), with EBIT RMB28,465m (c.US$3,923m). Our focus is on the revenue from Cloud Intelligence Group was RMB30,127 million (US$4,152m) +18% Y/Y. The AI-related product revenue maintained “triple-digit year-over-year growth for the seventh consecutive quarter”, as the AI product suite saw “broader adoption across a wide range of industry verticals including Internet, retail, manufacturing, and media”.
Coreweave. We welcome Coreweave to our cohort longlist with its maiden set of results following the IPO earlier this year. It raised US$1.4bn. The Q1 numbers were blistering – the highlight, for us, being a Strategic deal with OpenAI, adding US$11.2bn in revenue backlog – and that is the magic of GenAI! Michael Intrator, Co-founder/CEO: "Demand for our platform is robust and accelerating as AI leaders seek the highly performant AI cloud infrastructure required for the most advanced applications. The future runs on CoreWeave." The CapEx/Revenue ratio is ‘off the charts,’ literally, and that may explain the weakness in the share in the wake of the print.
The numbers we track: Alibaba, Coreweave
Source: Company data, Technology Investment Services
Source: Company data, Technology Investment Services
IaaS KPI Dashboard
Source: Company data, Technology Investment Services
IaaS Valuation overview
Note: Priced pre-market 16 May. Source: Company data, Yahoo Finance, Technology Investment Services
Accounting & Financial
Sage. We look at Sage through two lenses;
a UK FYSE100 participant with a strong dividend, and
a global tech company competing with similar peers.
The challenge is that while Sage looks great relative to the UK group, it tends to suffer through the global tech lens. This was obvious this week as Xero posted FY results on the same day as Sage. Xero saw its share price rise 5%, Sage’s fell by a similar amount.
The Sage print featured 9% revenue growth to £1,242m, Underlying operating profit +16% to £288m, making a 140bps improvement to the margin to 23.2%, with Underlying EBITDA +14% Y/Y to £334m and its margin increase by 110 basis points to 26.9%. Statutory EBIT was 18% Y’Y to £255m. As always with Sage (note the benefits of a mature subscription business model) cash delighted with underlying cash conversion of 115%, helping to create £1.2bn of cash and net debt/EBITDA a comfortable 1.5x. On results day the company increased interim dividend by 7% Y/Y to 7.45p and extended its share buyback programme by “up to £200m”. From the KPIs:
ARR +11% Y/Y to £2,454m, with growth across all regions balanced between new and existing customers.
Renewal rate by value was 101%, admittedly down from 102% last year
Cloud native revenue grew 22% to £425m.
Sage re-iterated FY25 guidance (9% or above organic total revenue growth/ Operating margins to “trend upwards”) as CEO Steve Hare commented on the “more volatile and uncertain macroeconomic environment”.
All in – what’s not to love, we may ask? That is where the peer comparison starts to grate – and that is ahead of the valuation debate.
Xero. 23% revenue growth, 22% increase in adjusted EBITDA, FCF NZ$506.7m strong growth in UK where revenue was + 25.4%Y/Y (the best that Sage could manage in its home market was 9% growth). CEO Sukhinder Singh Cassidy said: “We remain excited about the large, untapped opportunity to help SMBs and accountants and bookkeepers globally to digitize”. It wasn’t a flawless execution (US continues to hemorrhage subscribers, CAC is increasing as is churn), but all in, the company looks to be recovering from a number of difficult years.
All in – what’s not to love? The peer comparison only starts to grate when you consider the valuation debate.
The numbers we track: Sage, Xero
Source: Company data, Technology Investment Services
Accounting & Finance KPI Dashboard
Source: Company data, Technology Investment Services
Accounting & Finance: Valuation overview
Note: Priced pre-market 16 May. Source: Company data, Yahoo Finance, Technology Investment Services
End notes & Disclaimer: Please read
All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. This is not investment advice. Opinions contained in this report represent those of the author at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. The author is not liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained herein. The information should not be construed in any manner whatsoever as, personalized advice nor construed by any subscriber or prospective subscriber as a solicitation to effect, or attempt to effect, any transaction in a security. Any logo used in this report is the property of the company to which it relates, is used here strictly for informational and identification purposes only and is not used to imply any ownership or license rights between any such company and Technology Investment Services Ltd. Email addresses and any other personally identifiable information collected in the provision of the newsletter are only used to provide and improve the newsletter.
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My name is George O’Connor. I am a tech investment and IT industry analyst. I explore shareholder value, its drivers, the best exponents, the duffers. The target readers are investors, companies, advisors, stakeholders and YOU. If you like this please subscribe and pass it on to colleagues and friends. That said, if you hate it - do the same. Thanks for dropping by dear investor.