KX Focus And Cloud Partnerships Will Shape Future Success

Key Takeaways

• The divestment strategy and focus on KX aim to enhance growth through strategic partnerships and targeted market segments, potentially boosting revenue and profitability.
  
• Reducing cash burn and prioritizing profitability, alongside efficient resource use and shareholder capital returns, could improve margins and attract further investment.
  
• Divesting First Derivative and focusing on KX while relying on strategic partnerships increases risks to future revenue, earnings, and market share amidst strong competition.

Catalysts

Provides software and consulting services in the United Kingdom and internationally.

• The divestment of the First Derivative business and the shift to focus solely on the KX business is expected to create a high-growth software company, enhancing revenue and profitability due to a more targeted strategy and a strong balance sheet.
  
• The strategic partnerships with major cloud providers like AWS and Microsoft, and the development of new market segments such as aerospace, defense, and high-tech manufacturing, are anticipated to drive significant ARR growth, impacting future revenue positively.
  
• KX's differentiated value proposition and its focus on high-performance decision-making using complete and real-time data could increase customer acquisition and retention, thereby improving net margins through efficient resource utilization and reduced customer churn.
  
• The return of £120 million in capital to shareholders signals a positive outlook, potentially boosting investor confidence and attracting further investment, which could indirectly support earnings growth.
  
• The continued focus on reducing cash burn and pursuing profitability targets, complemented by investments in sales and marketing productivity, is expected to enhance overall operating leverage, resulting in improved future earnings.

FD Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FD Technologies's revenue will decrease by 20.2% annually over the next 3 years.
• Analysts are not forecasting that FD Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate FD Technologies's profit margin will increase from -9.3% to the average GB Software industry of 8.3% in 3 years.
• If FD Technologies's profit margin were to converge on the industry average, you could expect earnings to reach £10.1 million (and earnings per share of £0.46) by about April 2028, up from £-22.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.9x on those 2028 earnings, up from -17.5x today. This future PE is greater than the current PE for the GB Software industry at 26.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

FD Technologies Future Earnings Per Share Growth

Risks

• The divestment of the First Derivative business and focus on KX could lead to risks if market conditions for the remaining business are not as favorable, potentially impacting future revenue growth.
  
• KX’s move away from perpetual licenses and a reduction in focus on services could limit revenue streams, putting pressure on recurring revenue to perform well consistently to maintain net margins.
  
• Reliance on strategic partnerships, such as those with AWS and Microsoft, may pose a risk if these relationships become strained or if competitors offer better integration options, impacting future earnings potential and growth.
  
• High levels of existing customer revenue (60-70%) relative to new customer acquisition (30-40%) may indicate challenges in expanding the customer base, which can limit sustainable long-term revenue growth.
  
• The industry competition, particularly from new entrants like vector database companies positioning themselves for unstructured data, could lead to pressures on KX margins and market share, impacting profitability.

Valuation

• The analysts have a consensus price target of £22.282 for FD Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £29.0, and the most bearish reporting a price target of just £18.19.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £122.2 million, earnings will come to £10.1 million, and it would be trading on a PE ratio of 61.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of £17.74, the analyst price target of £22.28 is 20.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.