74Software (74SW) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Axway 2020 Full Year Results Virtual Conference. Axway speakers today are Patrick Donovan, Chief Executive Officer; and Roland Royer, Chief Customer Officer. Arthur Carli, Head of Investor Relations will introduce the meeting and moderate the Q&A session following the presentation. [Operator Instructions] Thank you again for joining. The presentation is about to start.

Hello, everyone. Welcome to Axway 2020 Full Year Results Conference. My name is Arthur Carli, and I'm in charge of Investor Relations for the group. As you will discover in a few seconds, due to travel restrictions, Patrick Donovan and Roland Royer will be connected today from Axway HQ in Phoenix, Arizona. Their presentation should last about 40 minutes, and I will be back with you right after for our traditional Q&A session. As usual, I would like to point out that this presentation contains forward-looking statements and that all documents related to Axway results announcements are available on our website, investors.axway.com. With that, I hand over to our CEO, Patrick Donovan. Patrick, can you hear us well?

Yes, I can, Arthur. Thanks for the introduction. As Arthur mentioned, unfortunately, Roland and I could not make it to Paris for the analyst conference and are with you virtually from our new headquarters here in Phoenix, Arizona. We look forward to the next time we could be with you in person, but for today, we'll be with you virtually. And before we jump into our 2020 full year results for the employees on the line, I just want to say a quick thank you, as 2020 and rolling into 2021 has been quite a difficult year. And I've been amazed every day with our employees' ability to move to a remote situation and handle everything thrown at them this year and starting in 2021 as well. And hopefully, we could go back to a normal situation for them. So today, on the agenda, I'll start out, updating you all on the last 3 years' transformation and our success in accomplishing our goals in our new business model. Then Roland will join and talk about the hyper focus we have on our customers, not only for the last 3 years, but going forward and what we do. And then I'll cover the 2020 financials that we just launched the press release a few hours ago. And I'll give you some 2021 targets and future ambitions, guidance as well as opening it up at the end with our [ current ] Q&A session. So let's go ahead and jump in. So real quickly, before we get into details, Axway celebrated a very important milestone. This January Axway celebrated 20 years of operations. Initially, we were a subsidiary of the Sopra Group until our IPO in 2011. Over all of those years, we've been very happy to be able to serve our customers well and provide them an enormous amount of value. And we look forward to doing it for the next 20 years as well. So that's why we took on this ambitious transformation 3 years ago because as you can see, we started maturing and flattening the revenue curve. We had to update our business model, our visions and do a lot of work internally, so we could get back to growth and get back to margin and serve our customers well for the coming future. So let's dive into what we've done over the last 3 years and the success we've had in this transformation. So in 2018, we started a 3-year journey where we wanted to do things like upgrade our product offering. We wanted to redefine our offering vision getting closer to our customers and moving to a more recurrent revenue model, a subscription model. This required us to do a lot of internal things, not only invest in our products but to strengthen our management teams, our leadership teams, our go-to-market teams. We needed to improve our employee engagement to be aligned with the vision and the strategy of the company because these employees have to increase the closeness with our customers because a subscription model is one which customer proximity is key. We also needed to improve our brand, our overall awareness. We've been doing a lot of great things within Axway, but we weren't very loud about that. So we've been taking on that task as well. So in 2018, we launched the hybrid integration platform vision, and rebranded it to Axway. We set forth some ambitions, we called them, all around employee engagement, customer satisfactions and financial targets and leadership in the hybrid integration platform space. And I'm happy to report that over these last 3 years, we've been successful in meeting all these ambitions, and we've really set the foundation for the next coming years. So a key part of this transformation was to invest quite a bit in our product and our go-to-market activities. We had to like I said, change some of the leadership, change some of the momentum to really come out of this 3-year period ready to attack the market. This investment was made while we were also going to a subscription business model and changing the way we contracted to engage with our customers. So a good pressure, quite a bit of pressure on our profits. So as you all experienced and saw with us, in 2019, we had a low point, and we were projecting to come out of it in 2020 until clearly COVID hit. But I'm pleased to share that even with COVID and the crisis, we were able to react quite quickly, still meet our main objectives. And we were able to grow our top line organically 0.5% to EUR 297 million. We had about a EUR 4 million currency impact or else we would have been above the figure for last year as well in total growth. We were able to deliver an improving profit giving back above the 10% line, so we finished at 10.4% or EUR 31 million, up 19% from last year. And we also were able to really accelerate and move forward with our subscription business model, as you could see in our subscription revenue growth, our ACV growth and our strong signature growth. So going a little deeper in the subscription business model, we were pushing to have subscription revenue versus our traditional license revenue. And as we moved forward, we were not only getting this demand from our customer base, but we also took internally a project to be ready to handle this demand and to be closer with the customer. So why I say that? The license model as you remember, was one which you would do a big sales cycle to get the license sale. You would start a service project to help install your software. And then you would move into more of a customer management, customer support model. And then you would only really reengage if there's another sales opportunity or something along the way. Under a subscription model, you have to constantly be engaged with the customers because this contract will come up every 2, 3, 4, 5 years to renew, and they have to see value in that subscription or else they won't renew. And so you're constantly having to be close to your customers, proving the value, proving the value of your technology and your people every day. And we've built the company to do that, and we're starting to see the result of the efforts by the left chart, which is our growing subscription revenue versus license. But more importantly, on the right-hand side, you see a chart which in Red, is a subscription revenue. Blue is a maintenance revenue. So combined, that's what I call our recurrent base of revenue, which has moved from the mid-50% in 2016 all the way to 79% of our revenues in 2020. And we look for that to continue to grow as a base of our revenue as we move into 2021 and beyond. So to do this and accomplish this for our customers, we have to have the team of Axway with us, the employees with us. When we started this journey in 2018, we were really, as you could see on the employee engagement score at below the threshold of 60 that we were targeting, we were down just slightly below 50. And this survey that we utilize having a score of 60 is the target to have all your employees with you understanding your strategy and vision. And the momentum is there to make that journey, your strategy successful. So we took a lot of initiatives within Axway at the leadership team and beyond. In opening up many new communication channels, we started the survey process annually to get the employee feedback. And then more importantly, it's hearing their voice and taking their actions on these concerns because we really wanted to make Axway the place for us to be -- we wanted it to be a place that attracts plus recruits and our employees engaged and with us for the long term. And you can see this effort paid off. Year-over-year, we have increased our employee engagement almost hitting the 60 in 2019, and we far surpassed it this year going up 19% in 2020 to a score of 69. We look to keep that and build on that for the future. This has a knock-on effect of also decreasing your attrition. And so that keeps the mindshare in your company so that your employees have the knowledge of the customers and the technology to be able to move quickly with them. So as CEO of Axway, I believe we, as a public company, have 3 constituents that we're serving every day. Our employees, which I'm happy to share what we've done with our employees over the last 3 years. Our customers, which Roland will cover later in his presentation, which we've made fantastic improvement and hit our vision as well. And our shareholders, which hopefully all of you have seen the nice improvement we've had in the market over the past year. Another key point of our ambitions over a 3- year journey was the vision of our technology, and that was around the hybrid integration platform. So when we started even talking about a platform back in 2015, I believe it was, we had no clear path of how a customer was going to build it, what technologies they'd choose, we'd just -- they would choose, we just had an idea of where they would go. And so we built a platform, and I shared with you in 2018, the hybrid integration platform that we had in mind at the time, which contained our API offering, our MFT offering, our B2B as well as several other core offerings as Axway is all a core part of this platform. So then over the past 3 years, we've been working with our customers, seeing how they built the platform, seeing how the technology has evolved and the analysts have evolved also, how they talked about the platform. So today, as we sit here today, a hybrid integration platform is really an integration platform built on an API management layer, which is at the heart of this platform, connecting their heritage assets either on-prem or in the cloud and adding some value-added services on top, all while doing this in a way to control and govern and provide security around this integration platform so the teams could move faster, get data and use it in very innovative and quick ways to build brilliant consumer experiences. . So this is a long way to say that the platform we envisioned when we started this journey has really taken focus. We have not changed the vision of Axway. We believe customers are going to build and go towards a hybrid integration platform. But with our technology stack in-house, we see the API management layer becoming the absolute core part of this platform with some surrounding assets around it. And technologies like our B2B and MFT offerings, they will be utilized by the platform, and they will be providing data or flows into the platform, but they won't be at its heart. And this is what we see our customers doing and building. So when we say and we will brand very clearly coming out this year, AMPLIFY. AMPLIFY will be at its heart, our API management layer. So over the last years, we've moved from the broad vision to a very focused vision now, which is at its heart, like I said, our API management layer. It's going to be able to be one place where you could see all the APIs that are being exposed by your company in a catalog. And this includes the APIs, not only of our gateway but other gateways that a company may have, as Roland will cover in his presentation, we're seeing all the customers have multiple API solutions. So we're able with our AMPLIFY platform, to utilize all this data, all these APIs in a way that we could bring them together to help our customers gain control, speed, security and to expose those to use them in very new ways. So at its heart, the platform is reliant on API management layer. Our team took enormous effort over the last couple of years, working on the product, our vision, our deliverables and working with the analysts to get them to help understand what we're doing with our technology and where we're trying to take it. And I'm extremely pleased that at the end of 2020, we were able to report leadership in both the Forrester Wave, which was the first time for us, and the Gartner Magic Quadrant for API, full life cycle API management. We were only 1 of 4 vendors to achieve this dual ranking, and this was a huge accomplishment by our team to achieve this over this last several years. So with this AMPLIFY platform, we are ready to open everything for our customers. Over the last 20 years, I've said, we've been able to help our customers move and into great data securely. And now we're ready to take the journey with our customers that open everything and utilizes data flows in a new and beneficial ways. So with that, I will now turn it over to Roland to go deeper into our focus on our customers over these past years and in the future. Roland?

Thank you. Thank you, Patrick, and good afternoon, good morning, everyone. Yes. Today, I will take a few minutes to share with all of you some of the key successes of the year. And to do that, I will use a few indicators illustrating the performance of the transformation of our business and operation from the year -- from last year and the year to come. So let me start first with the customer. And I've been talking about the importance of customers, their experience, their success for years. And you may remember me saying a great technology alone is not enough. And over the last few years, we have been driven several initiatives to improve our customers' overall experience. In 2020, while we moved to fully virtual, we even get closer to our customers, working also with them to improve the product and build the solution that they need and love. And all the efforts to focus on getting closer to the customer, building a fully customer-centric culture across the whole organization, resulted with an NPS score, the Net Promoter Score of 25. The continuous integration of 38 points since the -- since we kicked off the program in the middle of 2017. And I'm extremely proud of the tremendous results, okay, which fully reflects who we are as a company and the essence of our culture. And this 25 mark on Net Promoter Score put us on the top quartile of the B2B software enterprise company in terms of overall NPS score. The NPS is really an indicator of the customer loyalty. And that's why we started to implement that in 2018 -- '17, '18. The trust relationship that we built over the years with our customers, combined with the value of the different solution of our portfolio is clearly reflected in the U.S. business. As you can see on the left, 92% of the signature value of our customer -- have been made on our customer base. And on the right side, you see that the renewal success rates of all the recurrent revenue that Patrick mentioned before also is about 90%. These 2 critical metrics. Really, what we are critical in a year like the one that we had to -- for the success of the year, but these 2 critical metrics put us in a very, very good position for the years ahead of us as we execute in a land and expand model in the subscription world. And talking about deeper on the subscription. We started these transition to subscription a couple of years ago, and we started with creating new offerings with a consumption-based model. And last year, we saw a rapid adoption of this model actually across the globe and across all industries, which was different than what we see in the previous years. And in the B2B world, we need to consider actually the full chain. Our customers are actually increasingly providing services as a subscription to their customers. And by following the same model, we are better meeting our customers' expectation and thus becoming more competitive in the market. We've seen this year, several of our key accounts, transitioning from this [indiscernible] and go to on-premise subscription. And we're also seeing our customers and more and more customers asking us to manage their solution, their MFT or B2B solution as a service in the cloud. What was actually completely impossible to have as a discussion with a bank or financial institution a few years back, is now part of every discussion that we have with them. So in 2020, we actually -- an important milestone in this transition of subscription with 80%, close to 80%, 79% of our signature booking value made on the subscription model. I talked about the focus on customers first. I talked about the transition to the subscription. And also I said, great technology alone is not enough, great technology is still [ table ] stage. And over the last year, we have seen a great success with our AMPLIFY, our API management platform with a signature growth of 30%. 30% being actually the double of the signature growth that we had for the full Axway portfolio. We have seen our customers actually significantly increase the consumption of the platform, either because they were actually deploying and expansion, having better growth and growth of the usage because we are deploying some new services to their customers or either because then we are now deploying and using the APIs and the API platform internally after having use it for external APIs only or vice versa. And we have mentioned here on the slide, we've got 4 APIs -- API AMPLIFY signature above the 1 million mark. Two of them from North America. We are happy to report that we have seen a strong high-growth of the signature of the AMPLIFY in this market. So overall, putting the AMPLIFY, the API platform management really about a quarter of our signature metrics for last year. The last indicator that I would like to share and elaborate on with you is the one with our partners. Okay? As our partners and the collaboration with our partners is critical as we are to scale. And if you see on the left part of the slide, over the last -- since 2018, we've seen an acceleration of us working with partners, and we almost doubled the percentage of our bookings that is related to our partner engagement. We've got partners worldwide, and we've got partners covering the full Axway portfolio. However, you can see that the biggest part of the revenue generated with partners is also on AMPLIFY. One specific success that worth mentioning in the success that we have had with the program that we named API Boost with Sopra Steria in France and in Europe, helping them to modernize their customers' infrastructure in resulting with a nice increase of our combined booking year-over-year by more than 2x ratio. So 2020 will remain in everybody's memory. And from a business perspective, all industry were impacted at a greater or a lesser degree. However, I believe that the biggest impact is yet to come, and it will be concerning how the business is conducted in the future. And according to McKinsey on the slide, you see that companies have actually accelerated their digitization of their customer interaction and supply chain interaction by 3 to 4 years during this period. And we will see then, they will continue to grow significantly the share of digitally enabled product or services in their portfolio. And APIs is at the core of this transformation, at the core of this transformation of this business, with an exponential usage growth of the usage, the volume, the use cases and the customer experience. Significant research said that more than 50% of the enterprise market is now operating multiple API gateways. And you can see on the slide there that IDC is actually even seeing a far higher percentage in Europe. This proliferation [indiscernible] of APIs and the associated gateways, provide a strong opportunity for us in Axway with AMPLIFY, agnostically managing the gateways and form a multiple environment and multiple vendors. As AMPLIFY increase the governance capabilities for the IT department, they also increase the developer productivity through API discovery or API reuse. And as we saw from McKinsey, I know there's -- and Patrick alluded to as well, the dynamics of the Axway market are changing. And as we build our strategy for the next 3 years and beyond, we build these 1 game 2 plays that we are using internally to embrace these change. On our core portfolio, MFT and B2B offering, they are critical for our customers and absolutely critical to Axway. However, while we expect fewer number of new -- net new customers in these areas, we have a strong expectation for our current customers, contribution to our deal flow and our [ tunnel ]. Our AMPLIFY platform, on the other side, the API management related offering represent the new customers' acquisition potential for Axway. And these new customers are extremely critical for us as we've been so effective in retaining and expanding our customers over a long period of time. So as such, we have already proactively adjusted our go-to-market to align with these different needs and momentum. For our core portfolio, we are investing deeply in our key accounts, strengthening the relationship and the alignment between customers' requirement and product roadmap and ensuring that we are their MFT and their B2B provider of choice for the next decade. On the AMPLIFY side, we accelerated our efforts in products, in product management, in marketing, in partners and sales to ensure that we are adding new customers at the rate that match our leadership position. So Axway has been recognized for years as a leader in our market. However, in the past, we have not reached parity in the awareness with some of our competitors. And as such, we changed many of our marketing approaches to match the needs of our buyers' journey and to establish ourselves as a thought leader, in our thought leadership position. This include, first, pivoting our marketing to be far more digital and to develop ourselves as a source of quality insight in areas far beyond the historical technical leadership that we were in. For example, you'll notice on the bottom of this slide, a few logos like the Catalysts, the group that I introduced to you a bit more than a year ago of experienced entrepreneurs or academics working with our customers to working on digital transformation, but also you can see transformative -- Transform it Forward or Mr. Open Banking, 2 podcasts with global leaders about the reality of transformation and the development of the market. All of these efforts and all of these new marketing mission are designated to place Axway into consideration of much more opportunities. So our past growth, and our priority remains clear. It's all about maintaining the trust with our customers, ensuring that we continue to deliver value and innovation to help them getting to their desired business outcome for the next 20 years. And with that in mind, we've organized ourselves. We have developed highly differentiated set of offerings that position us well as we move into the next step of our journey. And with that, thank you, all, and I hand it over to Patrick. Thank you.

Thanks, Roland. I'll go into a quick note on our 2020 financial results that we just announced in our press release today. Going into our income statement. For 2020, we finished revenue at EUR 297 million, which was a growth of 0.5% organically over 2019, taking into account the EUR 4 million foreign currency hit, primarily coming from the Brazilian real and the U.S. dollar's impact in our financial statements. Our cost of sales and gross profit remained stable just above 70% over the 2 periods, and our operating expenses dropped by about EUR 7 million. Our goal over 2020, as we started the year before the COVID impact was to keep R&D and G&A flat, which I'm happy to report here that we did. And to anticipate a growth in our sales and marketing, but that was quite a challenge this year because we were unable to travel. We couldn't run the trade shows and the live events to try to gain the new customers in the way we had in the past. And we also took about EUR 3 million or so hit from the foreign currency from the impact of the cost -- on the cost side of the real and the dollar as well. So our sales and marketing costs had dropped. But we did have some success moving quite quickly to a virtual way to try to engage new customers and prospects. Overall, our profit on activities -- operating activities finished at 10.4% of our revenues, up from the 8.6% in the prior year or EUR 31 million in total. Our net profit finished at EUR 8.5 million or EUR 0.40 a share versus the EUR 5.4 million or EUR 0.25 per share in the prior year. Going a little further into our revenues, our license revenue remained under pressure all year as the customers started preferring and moving quickly to the subscription business model. Our license revenue finished at EUR 26 million, down 51%, which was offset by the strong growth in subscription revenue, finishing 66% over last year at EUR 97 million, which included the upfront portion of these subscription contracts amounting to EUR 44 million within that EUR 97 million. Our maintenance revenue dropped 4.5% to EUR 137 million (sic) [EUR 138 million], which was fairly well expected as we have the traditional attrition of around 8% we get per year in the maintenance space. And then we had drop in the license revenue year-over-year. So mathematically, this would cause the maintenance to drop. And we had some migrations. We started seeing migrations from maintenance accounts to subscription as the customers were engaging us in up-sells, cross-sells or additional needs coming from the platform for the subscription contract model. Services dropped with a heavy hit, as I mentioned in the first half presentation of the COVID, dropping 10.6%, finishing at EUR 36 million a year when we had expected services revenues to be flat or slightly growing for the year. Overall, I'm really pleased to see that, as I shared with you before, our recurrent business revenue model has now taken up 79% of our total revenue growth, up from the 69% in the prior year. As you should see here, license revenue was consistently dropping quarter-over-quarter when compared to the prior year as the move to subscription was happening. And as I mentioned, we had dropped in maintenance 4.5%. But on the opposite side, we had our subscription business quickly accelerate. So as this graph shows in red, we had the new ACV contracts, improving when compared to the prior half, consistently and the revenue also growing consistently as our customers continue to adopt the subscription business model. And in early 2020 -- sorry, maybe at the end of 2019, we started seeing the customers engaging with us as well as to convert from a traditional license and maintenance model into a subscription, which we will continue to see over the many years to come. So with that, our subscription revenue offset the dropping license revenue quarter-over-quarter, our subscription revenue grew nicely every quarter throughout the year consistently. Our signature metric, which is really a measurement, if you remember, when I created this, a measurement to track the sales effectiveness and doing contracts with the customers grew 15% for the year, quite strongly on the back of a strong ACV growth and strong business as Roland covered with our existing customer base. A few words on our balance sheet. Our cash and cash equivalents finished at EUR 16 million with a net debt of EUR 24 million. Our DSOs went up to 95 days as we've added more subscription contracts, which bill annually versus all upfront. And their current deferred revenues finished at EUR 55 million, while our assets and equity were quite stable with last year. Looking at our cash flows. Our free cash flow was relatively flat at negative EUR 0.7 million for the year compared to EUR 0.6 million for the prior year. But you will see our free cash flow now start to improve as these annual subscription billings from the subscription contracts start layering on top of each other and start improving or changing in their working capital requirements, getting back towards, over the long term, the roughly EUR 20 million plus we would do in free cash flow consistently. All of our banking covenants remain quite in line with the covenants within the lines, and we have the full capacity of the line available to us. So looking forward to 2021 and our future ambitions. While we spent the last several months really building a strategy for the next 3 years in the business plan for our next 3 years. This strategy is not a revolution, but really an evolution of the strong foundation that we've built over the past 3 years. And we've invested heavily in our technologies and our product and our product management and R&D teams over the past 3 years to get the portfolio and the offering where it needs to be, to offer our customers the AMPLIFY experience and also continue with our strength in our legacy technologies that provide value every day such as MFT and B2B. So we've done a good amount of product investment. And I've had Roland share a lot of our strategy here today, which is around our go-to-market and really attacking the market with 2 plays. We have 1 game, 1 ambition that's Axway, growing top line revenue, improving margin, but we now are hyper-focused to push growth with the AMPLIFY platform. And we're organizing our sales and go-to-market plays around a strong growing market that should be growing double digits year after year and having to invest in the go-to-market and invest in the product continuously to really find and differentiate ourselves from our competitors, and it's a highly competitive market. And on the other side, we have a fantastic portfolio of products that have already achieved this goal. They're already market leading. They're already differentiated. We've provided strong enterprise level value with our MFT, AI suite, B2B validation authority and many other products. And these, we will run as a very strong business aligning very tightly with our customers, the customer road maps, what they expect from us as a vendor, which is all around security, quality of our products, easy to use, easy to operate. And we will run a very successful profitable business with our core base of assets. So the 2 combined, if we execute strongly and well, will deliver top line revenue growth and improving margin for the years to come. But with that, we have a limited visibility right now as we speak, coming from the COVID crisis. And the ability of our sales teams and our marketing teams to get out and really attack the market, we've learned fantastic things about how to do this virtually, but we still have to get out there and get in front of people. We look forward to hopefully doing that later in the year as the situation improves. But we still don't know if there's going to be a rolling economic impact behind this. So we have limited visibility and the impact to our customers over the next year or 2 of the coronavirus situation. But with that, for 2021, what we currently see is a targeted organic revenue growth between 2% and 4% and the profit on operating activity is between 11% and 13% of our revenue. And for the mid-term ambitions, we'll continue to remain and trying to target over the next 3 to 5 years, a top line revenue of EUR 500 million, which will clearly require some inorganic growth through M&A and some organic growth, obviously. And we want to return the operating margin on business activities to rates above 15% and gradually move towards 20%. All of this to hopefully produce earnings per share for our shareholders of above EUR 1 per share as quick as possible. Over the coming quarters, we have several communication opportunities with you in events. We have the traditional publication of our Q1 revenues in April. We'll have our shareholder meeting at the -- towards the end of May, and we'll come back to you at the end of July with the publication of the first half results. But as we've shared a lot of our strategy here, we will come back and go deeper in it, having their technology teams, our marketing teams and others join me and Roland at a Capital Markets Day that we're looking to schedule at the end of Q2. We're waiting a bit to see if the travel restrictions lift so we could come and do this in Europe and potentially be in person or at least on the same timezone. So we'll be coming back to you shortly with the date of the Capital Markets meeting and look forward to seeing you all there and going deeper into the whole strategy and our whole situation. So with that, I'll ask Arthur to join me and open it up for Q&A. Arthur?

[Operator Instructions] With that, I hand over to Arthur Carli, Head of Investor Relations.

Arthur, are you there?

Arthur, if you're speaking, please unmute your phone locally.

Operator, by any chance, do we have any questions?

Yes, there is a question in the queue. Our first question comes from the line of Antoine Lensel from Kepler Cheuvreux.

And first, well done for the outstanding results. I have 3 questions, if I may. My first question is related to the subscription gross margin. What protects Axway from an increase in the prices of cloud providers? And is additional cost can easily be supported by the customers, first. My second question is on maintenance. With license sales flat to decreasing in 2021, combined with maintenance contract migration, how do you expect the maintenance to evolve in 2021? Is it fair to assume a decrease in the same magnitude than in 2020? And my final question is on M&A. How is the pipeline is looking? What will be the perfect target in terms of size, geography and technology?

Thanks, Antoine. And yes, we'll go ahead and cover the 3 different questions. I'll start maybe first on the subscription gross margin. Yes. We use -- we primarily provide our subscriptions where we manage everything for the customer because we have Axway managed and a customer managed subscription. Customer managed, the main core engine, the customer keeps in their environment or in their cloud services with parts of it in the cloud of Axway. But when we're running the system for our customers, we primarily use AWS or Azure, Microsoft Azure. It is a highly competitive market. You have Google, Microsoft, AWS as your leading providers. And so that competitive nature has really kept the cost structure of these offerings down. If we had growth in one of the different providers, we would be able to lift and shift. There would be quite a bit of work, but we'd be able to move our products to a different cloud provider. But if all of them go up at the same time, we'll have to look at ways to pass those costs on to our customers, in the renewal cycles and renegotiate the contracts. So I would not anticipate at least for the coming future, the cost base to go up significantly in the cloud services. With regards to maintenance, we dropped 4.5% this year. And with the strong subscription signings and a lot of them coming from migrations of current customers, we could continue to see maintenance drop quickly. It will drop probably at a rate approaching 10% or so in 2021. And this will be offset by a recurring portion in their subscription line and as the customers moving from a maintenance relationship to a subscription relationship that's either managed purely by Axway into Axway cloud or in a hybrid mode with the customer managing it. But maintenance will remain under pressure for many years to come, but that will also be replaced when we do lose the maintenance. If it's not an attrition, it will be replaced for a subscription contract that adds additional value to the maintenance we already have. And your final question on M&A targets. We've just started. So as we were coming out of 2020, I'd talked about, we are just getting back into looking at the opportunities in front of us. It was very clear that we set the strategy for the next 3 years in our offering and our portfolio before we go back in the M&A market because these acquisitions either need to serve the AMPLIFY offering and helping us quickly either come to market with some technology pieces we may be missing or a customer base we want to target. Or in the core business, the MFT, B2B and others, we would be looking probably to acquire customer base and consolidate that market. So now that we have the clear targets in mind, we are in the process of just starting to build the pipeline and looking at evaluating the market. As I will caution, M&A is a key part of our strategy. I do expect it to be a very competitive market as we go into it, as we have a lot of money sitting on the sidelines that needs to be spent in M&A. So every deal will have a competition for sure. But I can't give any more guidance at this time on specific targets or industries.

There's another question in the queue. Our next question comes from [ Matthias Durner ] from [indiscernible] Capital.

Yes. Thank you for the presentation. I would have a couple of questions. And if it's okay, I would go one by one. So the first question would be could you give some indication how much would you consider in your subscription line as like seasonally excessive due to these upfront recognitions? Would you say EUR 10 million to EUR 15 million is sort of, let's say, the seasonally excessive recognition in Q4? Or is there any ballpark you can give compared to the other quarters?

So right now, we don't have enough runway and experience in the subscription. We've had about 2 years of strong push. So last year, we did about EUR 14 million of upfront and this year, about EUR 44 million, so quite a strong improvement. We would expect to see that upfront portion also increase next year quite strongly just based on the IFRS accounting rules. Do I see seasonality? Nothing really more than the traditional seasonality of our business model, which we normally have about, what, 40% in Q4?

40% in Q4, yes.

Okay. Okay. Great. And the second question would be on your guidance. I appreciate how you explain also that the migration to -- from maintenance to subscription is, of course, dampening a little bit your growth. But of course, it gives you the opportunity or have that basically customer in the cloud and so on. Is there -- the 2% to 4% growth guidance, would you say it's also conservative? As you explained, you're not quite sure around the economic effects of the pandemic, and I guess, the long-lasting effects. Or is there -- would you say it's -- the 2% to 4% are not conservative in that sense?

I'd say 2% to 4% is what we expect. It's not conservative. We do have some different elements that we're building on. So if you look -- and we'll go into more detail on Capital Markets Day because it's hard to do in the short time we have here today. But with the subscription model, you have a portion of the contract kick in front. But additionally, a portion that's recognized every month is recurrently over the life of the contract. And so as we just started this movement towards a subscription model in 2019 and really picked up momentum in 2020, we're building this waterfall base of the recurrent piece that won't really start to take a strong enough effect until 2023, when it starts layering and giving us a very strong recurrent base that is there in these contracts from 2019, 2020 start to come and renew in 2023, which gives us back the upfront piece, too. So over the coming years, I know we've done a lot of very exciting things in Axway, and we've got leadership in the AMPLIFY, the API management. We've moved to subscription model. But we have to allow time for us to build this baseline of the recurrent to get the revenue growth back up. That's why just a little this year of organic growth, and then we'll see a few points more. In each year, hopefully, we're building this space, where we continue and consistently grow the organic top line revenue.

Okay. Understood. And last one, a technical question. Any guidance on the tax rate for 2021?

Well, effectively, when we're at full production, our tax rate, I've always said, should be in the low 20% as an effective tax rate. As we've invested in our products and put under stress the financials and lowered our profit, lowered our net income, the impact of each country we operate in and their tax rate in our tax status in that country as far as assets valuate -- our deferred tax assets, is different that we've not been able to get back to that low 20% level. But as we start coming out of this, we should start seeing us back in the low 20s for effective tax rate. But for the next year, I'm not sure we'll achieve that. That's about much clarity as I can provide at this time.

Okay. But basically some improvement.

I would hope we get some improvement as we start returning more to the bottom line.

All right. There are no further questions in the queue. So I'll hand you over to Arthur Carli.

Sorry, Patrick, we've experienced a little technical problem here, but it should be fixed. Can you hear me well?

We can hear you well now, Arthur. No, problem.

Great. So I've got a few questions on the chart. And the first one is coming from Derric Marcon at Societe Generale. So what was the growth rate of cloud and the SaaS revenue, excluding upfront subscription license in Q4? How this figure compared to previous quarter?

Q4, I don't remember off the top of my head, For the year, you could take the subscription revenue and back off EUR 44 million in 2020 and EUR 14 million in 2019, and I think you'd end up around 17%, 18% growth for the year.

Okay. One more question from Derric. French revenue significantly accelerated in Q4 2020. Can you give us a bit more of granularity about the different trends you saw there? What are your expectations for France in 2021?

Okay. I can take that one, maybe. The acceleration and the great performance in France was really related also to, as I mentioned, several large customers that came to renewal that we upsell as we did a migration. So that will be more spike in 2020. We will not see the same type of growth in France. There is seasonality on some of our customers like that, that we had in the past. And there was a number of these customers in France, in Q4. So that explains really the overperformance in France compared to the average, I would say, EUR 44 million.

In 2021, we don't have that level of contracts up for renewal in France, but we do have a stable performance expected in France as the level in absolute value from 2020.