Alfa Financial Software Holdings PLC (ALFA) Earnings Call Transcript & Summary

Hello, everybody, and welcome to Alfa's 2020 Full Year Results Presentation. I'm joined by Duncan Magrath, our Chief Financial Officer; and Matthew White, our Chief Operating Officer. We are going to take you through an agenda of some key highlights before Duncan goes into the financial review. We will have an operational update from Matthew, a business and sales update from me before we summarize and you'll have the opportunity to ask some questions after that. So let's begin with some key highlights and an overview from me. From the perspective of 2020, revenue and profit have been significantly ahead of our original expectations and last year and slightly ahead of our most recent update. COVID-19 has been minimally disruptive for our business. We've had a really high performance delivery record continuing through that. We swung into that mode remotely, and Matthew will set out the details of what has, in fact, been a record delivery year. The other thing that we've done really well is that we've supported our customers. And actually, what we've seen is that COVID has shown a spotlight and really highlighted both our delivery capability and the flexibility of our product, which I will get to later. Our culture has also been highlighted within this difficult year for a lot of people. And I'm pleased to say that our culture, if anything, is stronger. We have strong engagement scores across the business and the company feels great at the moment. And on that basis, we are continuing to invest in our people and our product for future growth. This is because we are confident in our strategy. The other thing that gives us confidence is a robust balance sheet position, GBP 37 million of cash on the balance sheet and no debt, and this is after the GBP 44 million payment of the special dividend, which you'll be aware of. So based on that confidence, the strategy and that strength of our balance sheet, we've decided that we will initiate payment of a regular dividend. That's also supported by growing subscription revenues, which had been a real highlight in 2020, and Duncan will come into that. Looking forward, well, again, because of our continuing confidence, we will continue to recruit more people, and we will innovate and invest in our product so that we can continue with the momentum that we talk about during this presentation. The underlying markets that we serve have remained resilient, but the inevitable uncertainties around COVID still exist and contractual cover as we reported at the half year is still relatively short. So that latter point is continuing to drive our mood of cautious optimism. It's what puts the cautious in there. However, we've had good development of our late-stage pipeline. In fact, our late-stage pipeline in my experience has never been stronger, but we need to convert that to signed license contracts. Strong growth in our total contracted value through our maintenance and Cloud Hosting has really bolstered our TCV this year. And we can't expect 2021 revenues to be in line with underlying 2020 revenues. That's at constant currency. But there will be opportunity for growth as contractual cover improves. And of course, that will bring with it some increased costs, but we need those costs to grow the business. Moving into 2020 at a glance. It's a string of metrics that we're really pleased with. In 2020, we've shown progression in every single KPI that we care about in what has been, for many people, including a lot of Alfa employees and customers, a tricky year. I would like to highlight the ongoing implementation projects. That doesn't tell the full story of the number of live implementations that we've delivered this year. And again, Matthew will unpack some of the detail around that. I'd also like to highlight the significant growth in ODS. And that's 2 things. That's partly customers in pre-implementation work with us, which is fantastic and shows growth in our customer base as well as sales momentum. In Matthew's operational roundup he'll give detail of that. But it's also really important in providing bedrock for the business. Growth in customers means that we can continue our layered approach. And again, it's an important factor in continuing that momentum. I'd now like to hand over to Duncan, who will take you through some of the financials.

Great. Thanks very much, Andy. It's exactly a year to the day since I joined Alfa, and it's been to say at least an unusual year. But as I will show you in the next few slides, it's been a very encouraging year for Alfa from a financial perspective. So to start, just running down the profit and loss account. Firstly, as I highlighted in our recent RNS, 2020 benefits from GBP 5.6 million of one-off license income. I've shown this separately with the balance of the revenue described as underlying. Although given there was almost an identical amount of license revenue in 2019, the growth in underlying revenues is very similar to the overall revenue growth at 24%. Whilst the one-off license income is a key part of our business model and shows the strength of our IP, by its nature, we don't include it in our estimates until it is certain. At the moment, we do not anticipate any equivalent sums in 2021. Expenses grew more slowly than revenues, up 8%, resulting in operating profit up 74% at GBP 23.9 million, and profit before tax up 78% at GBP 23.2 million. On the tax line, we benefited from some prior year tax credits, principally 2 years' worth of R&D claims in the year. This meant that our effective tax rate of 12.4% for the year was particularly low and not expected to recur in 2021. EPS at 6.93p was up 98% on last year, boosted by the one-off license income and the low tax rate. Currency had a minimal impact in 2020 with the average U.S. dollar exchange rate the same as 2019. At current exchange rates, this will act as a drag on revenue and profits in 2021. Turning now to the first of our 3 revenue categories, implementation revenues. Implementation revenues is where we show the revenue we generate from implementing Alfa Systems and also where we recognize the license fee income. Revenues increased to GBP 27.3 million in the period. You can see from the table that the bulk of the revenues we generated in 2020 came from existing clients, with revenue from new clients being relatively small. As we discussed elsewhere, getting signed license agreements with our late-stage pipeline to replace the ongoing ones as they finish is key. Revenues in the period from brand-new customers was GBP 0.1 million, which related to an Alfa Start customer, which will go live in 2021. Ongoing revenues of GBP 24.9 million were almost identical to 2019, but underneath there were 2 significant changes. There was an increase in one contract of GBP 5.5 million year-on-year as it started its implementation phase at the end of 2019, and so had a full 12 months in 2020. This was offset by a decline in another project of GBP 7.5 million as it was running 2 phases concurrently, and one phase went live at the start of 2020 with further work being shown in our ODS category. We had one project for a customer that previously had paused in 2018 but restarted in the year, which generated revenues of GBP 1.3 million. Completed projects with revenue of GBP 1.0 million included 1 Alfa Start project and 1 project that started but was then canceled. So in summary, we started 2020 with 6 ongoing implementations, one Alfa Start completed in the first half, but this was replaced in the second half with a second Alfa Start implementation, and we have 1 contract restart with an existing customer. So at the year-end, we had 7 ongoing implementations. Moving now on to our second category of ODS revenues. ODS revenues is where we show ongoing development and services. It includes not only post go-live work for existing customers, including v5 upgrades, but also where we are doing paid for pre-implementation work for customers. Overall, revenues increased from GBP 23.5 million last year to GBP 32.4 million this year. This includes 5 pre-implementation customers with revenues of GBP 3.9 million, up from GBP 2.5 million last year. Of the 5, 1 is not continuing, 1 has moved into implementation and 3 are still in negotiation. Matt will give a brief update on these later. New revenues from customers completing their implementations in the period with follow-on work shown here in ODS accounted for GBP 4 million. Ongoing implementation revenues were up GBP 3.4 million, boosted by several key customers having ongoing ODS specific projects to either upgrade from v4 to v5 or expand the use of Alfa to new geographical regions. And in one case, a migration of a customer on to Cloud Hosting. Finally, clearly, the overall revenue was boosted by the one-off license income of GBP 5.6 million I mentioned at the start. This actually almost exactly matches GBP 5.5 million of one-off license revenues that we received in aggregate in 2019 from this customer and from one other. So overall, underlying revenues grew strongly with a number of customers with revenues more than GBP 0.2 million, increasing from 13% last year to 18% this year. So now turning to our final revenue category, maintenance revenues. The maintenance revenue segment is where we disclose revenue we get from maintenance activities, along with our growing Cloud Hosting business. In total, revenues increased from GBP 14.9 million last year to GBP 19.2 million this year. We saw good growth in our maintenance revenues, which benefited from the addition of new customers, with customers taking maintenance up to 27 in the year. We expect that the base of customers will continue to increase, pushing up revenues. But in some cases, we will see this partially offset by reduced maintenance revenues from some customer migrations from v4 to v5. We saw very strong growth during the year in our Cloud Hosting revenues with 10 customers at the end of 2020, and Matt will cover hosting specifically on a later slide. Revenues will continue to grow in 2021 as we get a full year effect from this growth, and this can be seen on the TCV slide I'll show you in a minute. Customer numbers here covering maintenance and hosting increased from 26% to 30%. Turning now to expenses. The movement in expenses for the full year is very much a continuation of the trends we discussed at the half year, with total headcount and personnel costs increasing in the period as we continue to invest for growth in the business, offset to some extent by a reduction in some costs due to the COVID-19 lockdown. So total expenses increased from GBP 50.8 million to GBP 54.9 million. Average headcount increased from 313 to 341. And this, combined with the full impact of the November '19 pay rises, increased personnel-related expenses to GBP 39.7 million in the period. Overall, we saw a reduction in travel costs of GBP 1.7 million, and we had some other reductions in conferences and marketing costs. So overall, we estimate the favorable cost benefit from COVID was around GBP 2 million, but we expect a large amount to reverse over '21 and into 2022 as we return to normal. We did see an increase in IT costs as a result of higher hosting fees, but this was more than offset by the increase in Cloud Hosting revenues. We expect this trend to continue in 2021. There was also an FX gain of GBP 0.5 million in the period, principally in the first half. At the moment, our policy is not to hedge our currency exposure. We minimize at any point in time the foreign currencies we have by converting into sterling as quickly as possible. So turning to cash flow. We have seen good cash flow in the year with a cash conversion of 114%. Despite the strong revenue finish to 2020, trade and other receivables reduced slightly, and we had an increase in payables due to the increased VAT and sales tax. Contract liabilities, however, reduced as we progressed through software implementations. We had reduced CapEx in the year, both internally developed software, down GBP 0.4 million to GBP 0.7 million, and also from purchased software, also down GBP 0.4 million. We expect CapEx to increase in 2021 as we have more functional product-related investment. Tax paid in the period was down slightly due to lower taxes due in 2019. Cash flow in 2021 will benefit from the R&D tax credits claimed in 2020. Investment in Alfa iQ was GBP 0.4 million. And of course, we paid the special dividend of GBP 44.2 million. So turning to the balance sheet. Balance sheet remains very straightforward. As I just mentioned, there was a small decrease in trade and other receivables, an increase in payables offset by reduced contract liabilities. So even after the payment of the special dividend, we continue to retain a very robust balance sheet with a cash balance of GBP 37 million at year-end. So now looking to future revenues. As you know, we've consistently reported what we call TCV or total contract value, and the calculation remains unchanged. And so you can see that we've had a consistent good growth over the last 3 6-month periods. Implementation revenues are our estimate for our revenue to complete existing ongoing implementations. Some of this is not yet contracted, although it's unusual for a customer to halt an implementation once started. You will see that this has remained at the same level as the half year. Progress in implementations in H2 reduced this amount. But at the end of the year, we signed a contract with Auto Finance Company D, and implementation revenues with this customer started in January '21. Overall, you will see about half of this TCV will turn into revenues in 2021. For ODS revenues, we only include contracted work where we have a signed statement of work. This is up quite strongly since the half year, up from GBP 6.4 million to GBP 12.2 million. An element of this is seasonal, with clients issuing new statements of work as they get budgets for the following year approved. But even so, we are up in the same period last year. All of this will convert into revenue in 2021 as all the statements are work are for less than 12 months. Finally, maintenance, which includes our Cloud Hosting revenues. Here, we had very strong growth, both from increasing the number of clients, but also those taking our Cloud Hosting service. Overall, this has increased to GBP 68.3 million, up 19% from the half year or over 50% from this time last year. You will see this will generate revenues of GBP 22.7 million in 2021, which would be an increase of GBP 3.5 million or 18% on our 2020 revenues, with the majority of that increase coming from Cloud Hosting. So overall, we have strong TCV growth, although with revenues from this TCV of GBP 52.5 million in 2021 you can see we still have at least GBP 20 million of revenues to contract to achieve the same underlying revenues as 2020. One final point to note is that the TCV here is converted at an exchange rate of $1.29, which was the average for 2020 and it also was our rate for the budget for 2021. At current rates, the TCV would reduce by about GBP 4 million. As you've seen, the business continues to be very cash generative. We are confident that we can continue to grow the business naturally without the need for significant M&A. We are conscious that there is still economic uncertainty. So we have looked at a range of downside scenarios, and even in severe downside scenarios, we hold significant cash balances. As you know, we paid a special dividend of 15p per share last year, amounting to a return of capital of GBP 44.2 million. We believe that with our growing maintenance and hosting revenues that now is the time to initiate a regular dividend payment. We are proposing a dividend of 1.0p per share for full year 2020, and we'll look to grow this progressively from here as the business grows. Some modeling considerations. I won't dwell on this slide too long as I picked these items as I went along. So very quickly, 2021 effective tax rate will only get 1 year's worth of R&D tax credits, so it reverts to about 18% effective underlying tax rate. You should look at the 1.0p per dividend as for the whole of 2020. So in using a normal split, it covers an interim of roughly 1/3 of 1p and a final of 2/3 of 1p. CapEx will nudge up in 2021 as we do more functional product investment. You will have your own forecasts for currency, so I have given you a sensitivity to use, which is assuming sterling moves in parallel with the dollar and euro, each 1 cent movement is about GBP 0.25 million impact on revenue and about GBP 0.15 million impact on operating profit per cent. I will now hand over to Matt for him to give you an update on the operations. Thank you.

Thanks, Duncan. I'll start by briefly introducing myself because while I know some of you well and others I've met, some of you won't know me at all. I'm Matt and I look after people, product and delivery at Alfa, so that Andy can focus on sales and on customer relationships as well as on leading. People, product and delivery are our 3 differentiators. And I'm going to go through progress in all 3 of those areas, seamlessly weaving in updates on other aspects of our strategy that we refer to as our growth accelerators. So those paying attention will note 3 differentiators and 4 growth accelerators over the next 10 minutes or so. Now I would usually start with people, but I've got a lot to say about the tech today, so I'll start with our product. The requirements of the asset finance industry are both deep in that the functionality required is complex, and wide in that there are different complexities for each submarket in which we operate. Alfa Systems leads the market with a flexible, fully digitally enabled platform, which provides unrivaled functionality on a leading-edge technology stack, where competitors either lack the functionality required to compete at scale or remain on a legacy technology stack or in some cases, both. And flexibility and digital enablement continue to increase in importance. There will be plenty of asset and auto equipment finance providers using competitor software who couldn't take advantage of government support schemes when COVID hit, or who couldn't apply emergency payment high days at scale or who won't be able to keep up with their customers' demand for digital services. Alfa systems version 5.6 includes some important functional and technical updates, extending our product leadership. For example, we've introduced functionality to support reference interest rates such as SONIA to enable the move away from money market rates like LIBOR. And usage-based billing allows, for example, end customers to be billed only for the distance traveled in leased vehicles. And this keeps us leading edge in our support for an industry-wide trend towards mobility solutions. Our investment in our software development life cycle will complete in 2021, and the modularization initiative will move to BAU during the year. So during 2021, as Duncan said, the focus of our internal investment will move towards functional enhancements aimed at enabling increased sales into our target markets. And this will make our new markets and products team happy, but much of our development will always remain directed by our customers, ensuring that functional improvements are completely aligned with our vision of delivering more Alfas. Alfa Start is one of our growth accelerators, enabling Alfa Systems implementations for smaller asset finance providers. As well as providing some welcome revenue, it prevents entry into our market for smaller competitors and provides a platform for innovation and for staff development. This year, we've launched Alfa Equipment Start in the U.K. and Alfa Auto Start in the U.S., and we've gone live with both. And as Duncan indicated we want to highlight progress during 2020 with our hosting product, which is another of our growth accelerators. At the start of the year, hosting was managed by our solution architecture team as part of 4 ongoing implementation projects. By the end of the year, we had a dedicated hosting team managing a product that's now used by 10 customers. Our high-volume go-live in November was a major milestone for us and a huge success with no significant issues. Simplification is another of our growth accelerators and as well as providing an important and growing source of additional recurring revenue, Alfa Hosting simplifies implementation, including for customers whose live environment won't be hosted by Alfa. Reducing the effort required to implement Alfa improves our margin and enables us to take on more concurrent Alfa implementations. And a simpler product is easier for partners to implement. And so these growth accelerators are complementary. All of this means that Alfa Hosting is now our preferred solution when selling Alfa Systems. On to our people, and we are successful because of our people and so this is a good time to talk about our response to COVID. We moved to remote working early. We went ahead of government advice. We set out our principles for remote working right at the start of the pandemic, and we have stuck to those principles. We've supported each other. We've supported our customers, our suppliers and our wider communities. We've continued to deliver and to make strategic progress. And as a couple of examples of our response, we've supported the carriers in our team through flexibility and through paid leave. And our barristers have become experts on remote working and well-being, and have helped us to learn those lessons and to share the lessons of our COVID experience. Moving on from COVID, we've seen a much improved level of approval in our regular employee surveys, and we've seen improved retention as well. Our team continues to grow, with a 14% increase in headcount during 2020. Remote onboarding has been very successful, and we're getting better at it all the time. One note of caution in this area is that we still see a very competitive recruitment market, particularly for Java developers in London, but also for implementers in Australia and in New Zealand. In the recruitment market, we're competing for the brightest and the best. And while there are compelling reasons to join our team and to remain with Alfa having joined, a strong recruitment market inevitably puts upward pressure on salary costs. And as everyone is, we're working on defining our new post-COVID working practice. In order to provide much needed certainty in what continues to be a difficult time for lots of people, we've told our people that we will not require them to attend any of our offices before September 2021. In the meantime, we're running workshops so that everyone has input into defining the best way for us to deliver for our customers in the future. And delivery is the a third of our differentiators that I'll talk about. We had a fantastic year for delivery with 5 go-lives for new implementations. And we also saw an accelerated pace for ongoing delivery, with 17 go-live events when we include upgrades for existing customers. Delivery partnerships represents the final growth accelerator that I want to talk about, and we've seen increased use of our delivery partners during 2020. As an example of progress in this area, partners currently provide half of the implementation team for what we call in these presentations Retail Bank C, which is a South African bank. For 2021, our focus is expansion of staff augmentation partnerships in the U.S. The next slide gives an update on our customers where we have paid work in advance of signed license contracts. So there's an overlap between this and the late-stage pipeline. We were disappointed not to progress with the Retail Bank B, which would have been a highly strategic implementation for us. We developed very strong relationships on the ground and our delivery was widely praised, but we couldn't reach commercial agreements. And we have contractual but also deliverability red lines that we just can't cross. But we're encouraged, importantly, that commercial progress with other customers confirms that this was a one-off rather than a trend. I won't go through all of these customers, but I will highlight Auto OEM C, which would be our first v5 implementation in Australasia. Australasia is an important market for us, not the least because we have a 24/7 support team based in Sydney. And finally, an update on our customers in implementation. OEM -- Auto OEM B was our one project cancellation as an immediate result of COVID. But again, I won't go through all of these customers. It's a list that's increasing in size, and it doesn't include a number of major upgrades from Alfa v4 to v5, which are being planned in 2021, for which count as ODS and therefore, don't make it on to this slide. I will pick out OEM B, a European multi-country implementation for Equipment Finance, which is now live in an impressive 9 countries. And we're live in Africa for the first time with Retail Bank C. This project, along with a number of others, is notable for its minimum viable product approach with agile delivery. And we're seeing increasing use of this approach among our clients. Our methodology plays very nicely in this context, and we're confident that it's another industry trend where we can lead the market. That's all for me, and I'll hand back to Andy.

Thank you, Matt. I'll carry on with the business and sales update, and I will start with an area of our business and a part of our 2020 performance that we've been extremely proud of. It's written in our values and we aim to create a positive impact in everything that we do. That's not just about our customers, but also in the way that we compose ourselves as we go through our business lines. We continue to do all of the things that I believe make us uniquely Alfa. As much as possible, we have supported them very strongly from leadership from the top down, and we've implemented them bottom up. Starting with the ways that we support our culture, many of which Matthew has already stepped through. But I do want to, again, highlight the focus on health and well-being. We've always done this, but given the pressures of remote working, we have put a major focus on it in the last 12 months, and we will continue to do that as we step through and establish what that next new normal looks like. There's been some conversation already about recruitments and retention. But I would like to pick up on innovation, not just around the technology and the product side of it, but it's also as much about maintaining our culture as innovators. And for both of those reasons, 2020 has seen us continue our strong cadence as an innovator. Turning to inclusion diversity and belonging. Our LGBTQ+ and Women's Community have really grown in impact, and they've been joined in 2020 by the Alfa For Racial Equity community, as well as the [ parish ] community. All of our communities have led with education, celebration and support, and have done an amazing job of creating that impact that we seek to create. As we look to our external communities, the ones that we work in, we have continued to provide funding and to provide resources for them. And in the wider community, we have supported important movements, and we have tried to use our corporate voice as effectively as we possibly can. And in the last 12 months, we've established strong aligned partnerships with the Black British Network, with Stonewall and with the Women's Association. And recently, we've added upReach, which is a terrific group. And to our partnerships to, again, try to make that impact in the communities we're working. From an environmental perspective, Alfa's green team has supported our strong progress on reducing our footprint. Importantly, not just offsetting but changing our behavior as we move towards achieving Carbon Zero, which we will do this year. Stepping to the market overview, thinking first about the short term. Matthew outlined that we have had some effects as a result of COVID. But actually, in general, our projects have remained largely unaffected and are going strongly through into this year or last year to the delivery. Asset finance in general has been more resilient in the U.S., slightly weaker in the U.K. and Europe, but all markets have been affected to some degree or other. But we've seen those underlying markets recovering well in both Europe and the U.S. in Q3 and Q4 and moving with them, demand has also recovered, with the early-stage pipeline rebuilding after a relatively quiet second and third quarter. People are actively looking to replace their systems again. And as we've said throughout this presentation, there is a new change imperative coming with COVID that is pushing people towards making these systems replacement decisions. We have a strong late-stage pipeline. I will talk about it again. Matthew has talked about some aspects of it, but we do require those license commitments for our forecast prospects to grow as we move throughout 2021, which, again, is the thing that puts the word cautious in our cautious optimism. Medium to long term, something you've heard from me and from us before is that asset finance markets do, do well during downturns. They are a more secure form of lending and they tend to secure a greater share of the finance, those changing hands. The secular drivers for change within our markets, all of those push and pull factors that move people towards making investments in enterprise systems are still very valid. And then layering over that this new change imperative that we've talked about. COVID and remote working are forcing companies to review their ways of working, which creates a higher demand for digital. And customers increasingly needing flexible modern systems to cope with these changes, more so with a sharp focus around the need for process and product innovation in order to provide forbearance to customers in order to support government schemes. So COVID has really reinforced all of these secular drivers that are pushing people to make changes in a way that benefits Alfa. So we're terrifically well placed. Moving now then to the well trailed late-stage pipeline, and I want to give an update firstly from when we spoke to you at the end of the first half. The great news is we've signed 4 contracts. Great sales momentum. And if I look down that list of those that we've signed, I can see existing customers and I can also see a real pickup in demand in the U.K. compared to 2019, for instance. Nicely spread across accelerators and also across our key geographical markets. And I will also pick out the real milestone events, which we've allowed ourselves to include on this slide of our first volume hosting go live, which as Matthew has picked out, we're very proud of, has been very successful and is really starting to push our hosting offering into that business as usual category. Moving forward then into the overall late-stage pipeline, again, updated from H1 results. It's big in my experience, as I've said already, it's a record size. Ten contracts still in negotiation. But the fact that we've lost none, I think, really provides and underpin to the strength of our proposition out there in the market. So a number of these have already been touched on the pre-implementation projects, so I won't go over old ground. But I do want to address this slide thematically about some of the things that I think are real highlights. The first one is a really strong showing for partners. There are an awful lot of ticks in the column where we're showing -- where we're hopefully looking to work with a partner on these opportunities. As Matthew said, that's one of our key accelerators, and it's great that we're making this strategic progress. I picked up the U.K., our home market already. And as you can see, there's evidence of that real resurgence in that market on this slide. The other thing that there's strong evidence is of people moving from v4 to v5. And when we released v5, we were always mindful of making it easy and compelling for people to make the upgrade, and it's fantastic to see that the key players within our customer base are making that decision, a real success for us and I speak to colleagues of it. The other thing that's brilliant about the pipeline is Europe. It is another key market for us, strong part of our strategy. And in OEM D and Auto OEM D, we're showing that we're really making good penetration in that market. Again, we're picking up just to make sure everybody is aligned on what we do need to achieve this year, and coming back to Duncan's TCV. Our plans for this year and particularly into '22, require us to convert a good many of these. So that's the thing we're working hard on, making sure that we convert these opportunities into license contracts and gradually increase our opportunity for 2021 and beyond. Quickly moving to Alfa iQ. I told you about this super joint venture at the half year stage, and I'd like to give you an update from that half year stage. We've made some really good progress. We had prioritized our road map of use cases, the areas where we believe we can make a difference, which is driving our development plans. We're developing a really strong late-stage pipeline for Alfa iQ services independently of the main Alfa late-stage pipeline that shows strong engagement and a good demand. And we've got a proof point now for that demand in our first customer engagement, which is already showing really good metrics in terms of return on capital employed increase by deploying our AI techniques over areas of the business. So we really feel we can push on from here. The core Alfa iQ team and the first models will go into production this year, and we have continued to make sure that the industry is well apprised of what AI and machine learning can do for it, which will continue to drive that engagement and demand and continue to push people towards Alfa iQ. We're very excited about what we can achieve with this joint venture in '21 and '22. Moving through our investment case and our growth drivers before I close and we have the opportunity for some Q&A. Alfa is the market leader in a large and resilient addressable market, and we've really shown the resiliency of that market this year. It has clear structural growth drivers, those secular drivers that I spoke to, plus COVID, plus accretive opportunities like hosting. Our differentiated business model is difficult to replicate. If people want to come and compete with us, there is a high cost for entry for them doing that. Enterprise software is naturally sticky. That's part of that messaging around the high cost of entry. But we choose to deploy constant innovation, delivering leading-edge technology. We're making it stickier, embedding those long-term customer relationships. And as Duncan has outlined, strong cash generation and a great balance sheet supports our growth plan organically, hence, the dividend policy announcement. So in summary, we are really pleased with our 2020 performance. We've performed well in every key way we measure our business. We've coped well with the challenges we faced due to our great people and our great technology, our culture has remained strong, if not stronger. We continue to win new work. We've developed that late-stage pipeline to the level that you see today. But as Matt has also outlined, we have continued to deliver projects in that remote delivery mode, and we continue to be a technology leader. And as I've outlined, we have continued to do some of the things that make us different, that make us Alfa, will continue to make an impact. We expect 2021 revenues to be in line with underlying 2020 revenues at constant currency, but there is that opportunity to grow as contractual cover improves, and we step into that TCV that Duncan outlined, but there will be increased costs that come with that opportunity. Looking longer term, we remain very positive about our prospects. And this, along with the cash generative nature of the business, has enabled us to initiate a regular dividend policy that we hope will be progressive going forward. The business is developing momentum. That's the theme for our report, and we absolutely believe in that as well as our future and our strategy. So that's it from us and the set piece part of this presentation. We'll turn it over for some Q&A.

We will move on to our first question from Kai Korschelt of Canaccord.

Yes. It's Canaccord. A couple of questions, if it's all right. On -- one on the balance sheet, I guess, was just around your capital allocation policy going forward. It's obviously good to see the -- in auger of dividend, but you do have a very strong balance sheet still. So I'm just wondering if there's perhaps -- are there any other plans, perhaps M&A or further special dividends, going forward as part of the potential mix? And then I had a question for Duncan. Just on the capitalized developments. It looks like, if I understood your guidance correctly, you're planning to capitalize around GBP 2 million this year, which seems quite a step-up from prior year. So I just wanted to get a sense for what's driving that. And then the third question was briefly on the expected cost growth this year. If you could perhaps let us know roughly how much of that would be salary inflation and how much of that would be headcount growth. That would be useful.

I'll pick up the -- first of your 3 legs and then leave Duncan to comment on the second, if that's okay. In terms of use of the balance sheet, yes, we're obviously delighted to announce a regular dividend, which, as I said, we hope will be progressive. From the perspective of M&A, one of the reasons why we've announced that dividend is that we feel strongly that we're able to step into our strategy and fulfill our plans organically using the strength of that balance sheet. It's great that we have that strength behind us. But of course, and as always, we're obliged to make sure that we make those use -- make use of those funds in the best possible way. No plans for M&A at the moment. But of course, we reserve our right to do something, particularly additive M&A, if something does come along. But again, to reinforce that, no plans for the moment. Duncan, would you like to pick up the software capitalization and expense points, please?

Yes, sure. So yes, Kai, on the software capitalization, we capitalized about GBP 700,000. And the reference I made to GBP 2 million was a rounded figure for all CapEx, not just capitalized software. So we obviously have to look when we go through the year as to -- of our development, how much is required to be capitalized. You actually have to capitalize it if it passes the tests. I see it picking up probably from the GBP 700,000 to somewhere, the other side of GBP 1 million. But the GBP 2 million was a total, including all CapEx. 2020 was a little bit low, not just on the capitalized development, but also other CapEx as well. So hopefully that addresses that question. In terms of the cost growth, I think it's probably worth pointing to things like the headcount growth. So we saw headcount growth from 316 at the end of 2019 through to 360 at the end of 2020. So you've seen that pick up. We'll get the annualization effect coming through into 2021, because obviously, some of those came on later in the year and we are continuing to recruit as well. So at the moment, we are planning on something like north of 10% headcount growth on -- certainly on an average basis. And so the majority of the salary cost increases is -- total increase is coming from headcount growth as opposed to salary costs. I think Matthew, in his talk, just talked a little bit a word of caution. I mean we obviously had, as you know, quite a step-up in salary costs in 2019. In 2020, they were more modest, particularly obviously, at the time, given the environment we were in. There will be pressure going forward. So there will be some salary inflation in that figure as well. But more than half of the growth in the salary costs is going to come from additional heads.

We'll move on to our next question from James Goodman of Barclays.

A couple from me, please. Just firstly, on hosting, quite a lot of detail in the presentation, which was helpful. But just stepping back from that, just wanted to address what is it that's really changed for your customers, why hosting is growing so strongly for you now? What are you replacing here? Is it in-house infrastructure? Is it really a sort of competitive differentiation? And I guess, how do you think about it being a margin opportunity in itself, presumably as you continue to scale and get reduced hosting costs on a unit basis, I presume? Just a little bit more around the outlook for the hosting business and the reasons behind that. The other one was in -- a bit more mechanical, just around the detail on the late-stage pipeline and the bridge to the -- as you very clearly said sort of conservative guidance for the year and hopefully, beyond that. I mean if we look at the value embedded in the late-stage pipeline, I guess, different ways of answering this, but how would you think about numbers of average-sized contracts within that, that you need to sign maybe to be at the level that you've guided to? And maybe asked a different way, what would sort of signing half of them do to the full year outlook? Or even, can you cope with such a large pipeline with your current staff base? [ Say if they're sort of full ] is there sufficient capacity or planned capacity in the business to potentially cope with what you signed there?

Thank you, James. I'll pick up the positioning of hosting and leave it to Duncan to give you the TCV bridge at a high level and then perhaps I'll then pull back to talk a little bit about the late-stage pipeline and the various moving parts around that. James, you asked what's changed around hosting. A general change is that people are a lot more comfortable with the idea of cloud, and I think we were reporting that in 2019. As Matt has said, in 2020, we moved to a Cloud Hosting First approach. Hosting it on -- and the kind from Alfa's perspective, you picked up on it, absolutely, is a competitive differentiator. Based on comparisons with in-house deployments, it's more flexible, it's cheaper and it gives easy access to compute power when people need it. So a good example of that would be there's an increased requirement for compute power when people are doing migrations compared to their steady-state operational requirements. It's a huge competitive differentiator for Alfa because we've become a nonstop shop -- a one-stop shop, rather, for people, the people who are providing your software, the people who are providing the architecture that your software is running on. So we're able to provide for our customers with whom we have a fabulous relationship and who trust us greatly, everything that their ecosystem requires. So as well as helping with our positioning, again, James, as you rightly point out, there is an opportunity for accretive margin. Matthew again pointed to the fact that it's moved into a business as usual industrialized phase within Alfa this year or in 2020, rather. So we would hope that our overall unit cost would go down. But I would also point to the fact that hosting is a relatively new product line for Alfa. So we'll need to see how it settles in and where we go from there. But yes, of course, we have very, very strong expectations of our hosting offering. Duncan, would you mind providing that bridge that James asks also?

Sure. Yes, so if you look at the TCV side, one way perhaps looking at the -- on the slide, we highlight the next 12 months' figures. And if you look at the next 12-months' figures and then sort of compare it with what we've called our underlying 2020 revenues and the GBP 73.3 million, which excludes the one-off license income. You can see for the next 12 months, we've got about 64% of our implementation revenues in the TCV and about 46% of ODS, and actually 118% of maintenance and hosting. So you can see that maintenance and hosting is going to grow. To answer your question and then link it to the late-stage pipeline, which Andy managed to comment on, if you look at the ODS, which is sort of at the lower level, clearly -- we only record statements of work, so they will come through as and when during the year, but also that's where we would record a lot of our v4, v5 upgrades. And so you can see that we've got 3 of those in our late-stage [ end ] pipeline -- sorry, 4, 5, potentially 5 on the late-state pipeline. So that would fairly easily fill in the ODS gap. I think the key problem is on the implementation side, where, as we've talked, we've got 7 ongoing implementations, they're obviously working their way through their programs. And I think, obviously, what's key probably for us in terms of filling in and perhaps beating last year's sort of underlying revenue figures is actually signing some of those new implementation deals that we can see on the list. But Andy, I don't know if you want to talk about the shape of those deals and add to that?

Yes. And James, you asked about the relative sizing, and we've tried on the late-stage pipeline slide. In fact, all of our slides we've continued with the small and medium and large notation that we've used in the past. So hopefully, you can get a feel that there are some opportunities of all sorts of sizes going through that late-stage pipeline. And as I think I picked up, and Matt made a particular point about, the expansion in Australasia. We have some great global coverage. I'm not going to particularize the pipeline in terms of what different wins would do for 2021's performance. Duncan picks up on the point that we have 3 on that pipeline in terms of new implementations that we are working with, [ on statement ] work. There are a number of others that we feel we are very close to. We would need to keep on moving forward and convert those ones that we're working on today as well as those with existing customers that appear in the ODS segment that Duncan pointed to in order to get to that sort of comparable with 2020 underlying. Beyond that, there's opportunity, as we've been very clear at. We are limited by the number of people that we can throw out the projects. We have the capacity to keep the pipeline as it stands running forward and to take advantage of all of these opportunities. But in terms of the bearing it might have on 2021, that will come down to our total capacity, which I would note is greater than the guidance that we're giving in terms of being comparable to 2020's underlyings. So I hope that answers your question, James. John, could we have the next question, please?

[Operator Instructions] And it appears there are no further questions over the audio. I'd like to turn the conference back to Andrew Denton, CEO. Please go ahead.

Thanks very much, John, and thanks for doing a great job of handling those questions for us. I'd just like to close by thanking everybody for coming along today. Thanking Duncan, Matt and the Board of Alfa for its amazing support during 2020 and into this year. And of course, our amazing people and our amazing customers. Looking forward to speaking to many of you again on the roadshow and -- when we give our interims later in the year. But again, thanks for your attention and we'll speak to you soon.