Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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May 29, 2024

Into the UK Election: Man the Compass

With UK LSE reporting season ebbing, we look westward, eastward and to all compass points to ascertain the health of our companies and end markets. That said, the main news is the UK Election (now a fixed way point) which was greeted positively by the investment community. To wit: Tech sector TSR (+11.4% YTD) and Techmark index (+12.4% YTD) both navigating better on the news. What happens in purdah and wash-up is of secondary importance as we think more about events after the election and the approach of the new administration. At this juncture we do not get an impression that an incoming Labour government will have a radical style similar to the Conservative/Liberal government of 2010 (the last time we had a regime change following a long-standing government). That administration created the ERG (Efficiency Reform Group, reporting to the Cabinet office) which forced new T&Cs on core government suppliers. This does not feel realistic and for now investors in the strategic suppliers can breathe easily, but we have a long run to the 4th July. The news of the election has been a net positive swabbing away the uncertainty, and while there will be some contract hiatus this is expected, and to some extent ‘priced in’. Indeed, shares in companies like Bytes (62% of GII is Public Sector, where there will be little interest in buying the latest Microsoft software upgrade in the short term) did not weaken on the news. The tech industry forum, Tech UK has a useful website where it sets out its ‘wishlist’ for the parties (see here) which we will refer to up to election day. From the results file we have looked at Nvidia, Endava, Xero and Workday as we read the sector tea leaves.

In brief:

  • Nvidia Q1 results (22 May) remind us of our folly in encouraging investors to look wider at GenAI adoption. Q1 results featured a blistering set of KPIs (see our Nvidia dashboard – below) although investors might as well just dwell on the Rule of 40 result – and think ‘golly’. The forthcoming Ten-for-one stock split (effective 7 June) is likely to rally the shares further, despite the theory. We remembered our IaaS viewpoint as we read  Jensen Huang, Founder & CEO state: “companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center — AI factories — to produce a new commodity: artificial intelligence”. Despite Nvidia continuing to deliver superb KPIs we still see a wider opportunity in GenAI and in the GenAI (other) bricks and mortar companies, but for now Nvidia seems untouchable despite industry moves to compete.
  • Endava Q3 results (23 May) reported in line but the mix of KPIs veered more negative than positive with a sharply deteriorating revenue. Of note: Q3 revenue, £174.4m, down 14.3%, -11.8% c/c Y/Y, with Loss before tax £0.5m reversing the PBT £30.4m Y/Y, Adj PBT £15.5m, vs £43.4m Y/Y. Endava is UK headquartered but is an offshore & near shore supplier (c45% of FTEs). The Q3 numbers were in line with the operating deterioration, but we take some encouragement from CEO John Cotterall saying that “the overall demand environment remains challenging but stable and we are seeing signs of increasing discretionary spending. Client behaviour is stabilising but sales cycles remain elongated”. We show the Endava report card, our undated IT Professional Services cohort dashboard and (oh, why not) our revenue/head/geography model (see below).
  • We have yet to hear from UK Public Sector IT Professional Service companies, chiefly Made Tech and TPXimpact, but we expect messages of; (i) welcome the election timing, (ii) continuing to work through multi-year contracts, (iii) new contracts will have a natural ‘pause’ but the business of government continues as does the wider ‘modernisation’ agenda etc. Shares to recover on the calming news.
  • Workday Q1 results (23 May) saw shares sink -12% afterhours in the now familiar mix of numbers in line/guidance disappointment. That said, this cohort remains one of the most expensive of those monitored. Of Note:
    1. Workday entered the US security market for the first time. Hopefully this becomes a door-opener for both the wider 5i’s community and to get Kainos pulled along in its wake.
    2. The recovery in profit, led the recovery in cash with operating cash US$372m, vs US$277m Y/Y and Free cash US$291m, vs US$218m Y/Y.
    3. Gross revenue retention remains stuck at 95% – we struggle to understand why it is stays so low.
  • Xero finals (22 May) similarly came with some disappointment. FY revenue NZ$1,713.77m, NZ$1,399.88m Y/Y with Net income, NZ$174.64m, vs a net loss NZ$113.53m Y/Y. The KPIs remain very impressive (see below), but there is some drift and in truth some semblance of mean revision. That said we would like Sage to think about Xero’s excellent transparency.

The data

Nvidia: Selected KPIs – hello hockey stick

IT Professional Services dashboard

Endava: Latest report card

Source: Company data, Analyst (George O’Connor)

IT Professional Services Revenue/FTE/region (US$’000)

Note: Exchange rates as 28 May. Source: Company data, Analyst (George O’Connor)

Financial Apps companies – FY1 P/E over time (x)

Xero: KPIs over time (x)

Source: Company data, Analyst (George O’Connor)

Updated Valuation heatmap

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