What Kainos Group (KNOS) Said on Its H1 Earnings Call

Key Points

• Kainos reported strong first-half growth: Group sales rose 27% and adjusted profit increased 30%. Contracted backlog climbed 26% to £853 million, with two U.K. government contracts worth £196 million awaiting signature that could take backlog above £1 billion.
• Digital Services was the main growth engine, with revenue up 57%, led by healthcare, public-sector and defense work. Rapid expansion increased reliance on contractors and partners, which management said accounted for virtually all of the division’s gross-margin decline.
• Workday Products continued to expand: Revenue rose 22% and annual recurring revenue grew 24%, with management expecting ARR to pass £100 million within weeks. AI and data-related revenue increased 40% to £29 million, though customers have yet to move many AI pilots into large-scale programs.

Kainos Group LON: KNOS reported 37% revenue growth for the first half of fiscal 2027, led by a surge in its Digital Services business, while increased use of contractors weighed on margins.

Adjusted profit rose 30%, or £9.7 million, and group sales increased 27%. Contracted backlog reached £853 million, up 26%, giving the technology services company visibility over the next several years, management said.

Two additional U.K. government contracts, valued at a combined £196 million, were in the signing process and were not included in the reported figures. Management said signing the contracts should push group backlog above £1 billion.

Digital Services Drives Growth

Digital Services revenue grew 57%, with gains across government, healthcare, defense and Canada. The division’s bookings rose 44% to £297 million under a revised calculation method, while backlog increased 31% to £600 million.

CFO Richard McCann said healthcare revenue grew 85%, public-sector revenue increased 55%, and defense grew 44%. The commercial sector continued to contract, although it returned to a positive contribution.

The company said its new total contract value approach gives a fuller picture of larger, longer contracts. The change affects Digital Services bookings and backlog, but not revenue recognition. Under the previous method, divisional bookings would have risen 71% and backlog 26%.

The two contracts awaiting signature comprise a £111 million Home Office award and an £85 million Foreign, Commonwealth and Development Office award. Management said both were expected to be signed within weeks.

Rapid growth also required more outside workers. Digital Services contractor numbers rose to 316 from 139 a year earlier. McCann said revenue delivered by contractors and partners increased to £49 million from £15 million.

McCann said the use of contractors and partners accounted for virtually all of the decline in Digital Services gross margin. More than 60% of the growth in their use related to capacity needs, he said, adding that the company would seek to replace outside workers with its own staff as growth moderates.

Workday Products Nears Subscription Milestone

Workday Services revenue rose 9%, with growth of 10% in the Americas and 8% in EMEA, which includes Australia. Sales in the division increased 1% against a prior-year comparison of 35% growth.

Kainos secured 13 high-value Workday Services deals in the first half, compared with seven in the same period a year earlier. Management said it remained focused on more complex deployments and expected to exceed the 21 high-value deals secured during the previous full year.

Workday Products revenue rose 22%, while annual recurring revenue increased 24%. Management said the division was on course to pass £100 million in annual recurring revenue within weeks and was targeting £200 million by the end of 2030.

Growth was led by Smart Test, Smart Audit and Employee Document Management. Management said changes to European legislative timelines had slowed uptake of Pay Transparency Analyzer, although it believed the delays had extended the duration of the opportunity. Research and development spending rose 33% and continued to be expensed in the year incurred.

Margins and AI Spending in Focus

Group gross profit increased 23%, or £21.6 million, but gross margin declined. McCann said the growing share of revenue from lower-margin Digital Services and the division’s increased use of contractors and partners were the main pressures.

Slower growth in direct expenses and central costs offset the operational gross-margin impacts, McCann said. Adjusted profit margin nevertheless fell by 0.8%, which he attributed to lower interest income as cash balances declined following share buybacks, office construction and dividend payments.

First-half cash conversion was 62%. McCann said conversion is typically lower in the first half because of the timing of bonus payments and that full-year conversion was expected to be slightly below the previous year because of working-capital needs associated with growth.

AI and data-related revenue rose 40% to £29 million. Management said customers continued to run pilots and proofs of concept, but relatively few had launched significant AI programs, citing concerns including security, cost and vendor lock-in. Kainos also launched Actonomy, an early-stage business designed to help customers move AI pilots into production.

About Kainos Group (LON:KNOS)

Kainos Group plc engages in the provision of digital technology services in the United Kingdom, Ireland, North America, Central Europe, and internationally. It operates through three segments: Digital Services, Workday Services, and Workday Products. The Digital Services segment develops and supports custom digital service platforms for transforming service delivery in public, commercial, and healthcare sectors. The Workday Services segment provides consulting, project management, integration, and post deployment services for Workday's software suite, which includes cloud-based software for human capital management, and financial management, and adaptive planning.

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