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

Hello, everybody, and welcome to Alfa's Full Year Results for 2021. I'm joined by Matthew White, Alfa's Chief Operating Officer; and Duncan Magrath, Alfa's Chief Financial Officer, to take you through some slides that talk about those results today. In terms of agenda, I'm going to start this off with this introduction and some key highlights before Duncan takes us through our financial review. Matthew will then take us through the operational performance of the business during the year before handing back to me for an update on some other areas of the business as well as our sales performance before we summarize and leave some time for questions, answers at the end. So moving into those highlights and an overview of the year. In summary, in 2021, Alfa has continued to do well with the things that we do well. Duncan will touch upon a strong financial performance as part of those strong fundamentals. And Matthew will talk about our delivery. But I do want to touch on another record delivery year, 27 Alfa go lives, which is up from 2020, which in itself was a record year for delivery. Matthew will also touch as we all will, across this presentation on staff recruitment, retention and engagement because it's so important in a tight recruitment market. And we've done really well at recruiting and retaining our staff as well as that engagement during 2021. Matthew will also talk about the progress that we've made with the product. But I'd like to touch upon our geographical expansion quickly as part of that market expansion. One of our customers alone is responsible for Alfa being present in 15 countries. And we've seen lots of new countries lit up green on the Alfa map of the world. A highlight for 2021 has been the improvement in our revenue quality, which continues the theme. The main part of this is further customer diversification and in 2021, our top 5 customers accounted for 37% of our overall revenues. This is down from the half year position of 43%, and that represents a strong declining trend that we'll be looking to continue. It is also underpinned by our cadence of new wins, which I'll touch on later, but 2021 saw us take 7 wins of the late-stage pipeline. And already in 2022, we have had a further win. With those 2 performance aspects are joined by significant strategic progress in all of the areas that are important to us growing revenue faster than we grow head count, and Matthew will talk about all of these in detail. I want to touch particularly on partnership, which is key for that operational gearing, and we've seen a 54% increase in the number of days that we've spent with partners in 2021. We expect that to continue. I'll also address Alfa IT separately. But the great news that I'm sure you've all seen coming out of Alfa iQ in 2022 is our first 2 customers, and we're very, very excited about that. A final and important aspect of our performance for 2021 was continuing the theme of returning capital to shareholders, and we returned GBP 33 million during the year. Looking forward, Duncan will talk to the detail, but our total contracted value is up 18% in the last 12 months. And as I said, we have a strong conversion cadence. That underpins our confidence in our robust target market. And of course, that strong pipeline inside it. Matthew will talk about our plans around recruiting and retaining talent in that market. And we'll also talk about exciting plans to create a smart engineering hub in Portugal, and those plans are well underway. We also continue to innovate and invest in our product. In 2022, we'll see us pivot from some amazing achievements in terms of everything that makes the product more robust and future-proof into much more customer-focused development. We'll also be expanding that partner program that we made such great progress with in 2021. So in summary, we expect that business performance across all of our business and our financial growth to continue into 2022. Turning now to key highlights. Our revenue of GBP 83.2 million was a significant advance on 2020. And at constant currency, that represents a 9% revenue movement. But as Duncan will explain, our underlying performance was stronger still and represents a revenue increase of 17% and an operating profit increase of 46%. I want to touch on the total contracted value, which again, Duncan will touch upon, and that's underpinned by those 7 contracts that were signed during 2020 and the one that we've signed in 2021. But really underpins our confidence in the future and shows significant advance from 2020. We've also seen subscription customers increase, and we will touch on subscription a few times during this presentation from 28 to 31, and its eye-catching progress that as I said in the previous slide, really underpins the quality of our revenue. Headcount growth is really important for Alfa. And again, this is something that Matthew will touch upon. Our headcount growth is not only the growth in our average headcount, which we've been really pleased of the progress we've made since 2020, but also around our staff retention and 87% in a very, very strong recruitment market is something that we're enormously pleased with. And that in itself is underpinned by Alfa's culture, represented by a greater than 70% engagement level across the entire year with ourselves. I'd like to touch on our strategic priorities next. You'll see these successes quite a few times during this presentation and particularly, during Matthew's operational roundup. But I want to position them at this stage so that we can use them throughout the presentation. The first is to strengthen. Alfa's market position is all around differentiation, and we lead with differentiated people, product and delivery. We consider all of those 3 things to be market leader. We'll continue to work on those and expand the gap between us and others. And Alfa iQ comes in as another differentiator, but on the technology side, helping us strengthen our offering to the market. We'll continue to sell. Obviously, that's very important, but we're focusing on cloud-hosted subscription sales. So our sales performance will also be one of the things that increases our revenue quality. And finally, we'll scale, as I spoke about in the previous slide, more people across our geographies as well as our smart hub strategy will see us increase in our capability through '21 and into 2022. Then we simplify, synergize and start. Those are all about doing more with our people, growing revenues faster than our head count, and we've made significant progress in all of these strategic growth accelerators, and Matthew will touch upon. I'd now like to hand over to Duncan for the financial review.

Thanks, Andy. To start with, I will deal with the headlines from the profit and loss account. We have had a strong financial performance in 2021. There are 2 factors which have impacted our overall growth figures over the last year. Firstly, as you know, last year benefited from a 5-year extension to an agreement, which resulted in us booking GBP 5.6 million of license revenue. This obviously had a big impact on last year's revenue and profitability. So I've shown the impact of this separately on revenue. Secondly, currency has been a headwind. So I'll also give you some constant currency figures. Revenue was up 5% in the period or 9% at constant currency. If you exclude the impact of the 5-year contract extension, revenues were up 14% and at constant currency were up 17%. Expenses grew by 6% in the period, which meant that operating profit was up 3% in the year or 10% at constant currency. However, if you adjust for the 5-year contract extension, operating profit was up 46% at constant currency. Effective tax rate of 19%, whilst in line with the U.K. tax rate is significantly higher than the 12% we had in 2020. But you will remember that last year benefited from 2 years' worth of R&D tax credits. The increase in the tax rate caused a drop in EPS, which was 6.5p, down 6% on last year. We are very pleased with the financial performance in 2021, but we are also pleased on how we delivered it, and I will cover this on the next few slides, starting with customer concentration. I summarize on this slide the significant progress we have made over the last 3 years on reducing our customer concentration and this, combined with our growing subscription revenues is improving the quality of our revenue. On the left, you can see that the top 5 customers are down from 61% of our revenue in 2019 to 37% in 2021. Similarly, you can see on the right-hand side that the number of customers where we have revenue in excess of GBP 2 million in the year has doubled over the same period from 7 to 14. This significantly increases our resilience to any one customer, and we believe we can make further progress in 2022. Turning now to the first of our revenue streams, subscription revenues. The subscription revenue stream is the group's recurring revenue, and this increased 30% over last year, with revenues increasing from GBP 18.1 million to GBP 23.5 million. We have talked before about the strong growth we have had in our hosting business, and we now have 12 hosting customers with pure hosting revenue up 74%, and revenue from bundled license maintenance and hosting up 27%. Ongoing maintenance contracts were up to 29% at year-end, up from 27% last year, and we saw a 24% increase in revenues due to the additional customers along with the full year benefit of increased customers that we gained during 2020. Moving on to our second revenue stream, software. The software revenue stream has perpetual license revenue and any revenue from development services, i.e., where the customer is paying us for changes to the software. As I mentioned at the start, last year, we saw the benefit of a 5-year contract extension from an existing customer and where we had to recognize the GBP 5.6 million license element upfront. We do see this as a somewhat unique situation. As part of our business model, we do expect to get at a point-in-time license payments when existing customers go through a licensed band or buy extra modules where there is no development work needed. Whilst we expect these payments, they are difficult to forecast. We have GBP 0.9 million of this type of revenue in the first half of 2021 and this has increased to GBP 2.2 million by the year-end across 6 customers. This included some revenue we originally expected to occur in 2022, happening in December '21. Even after allowing for the GBP 5.6 million license revenue in last year, software revenues were down as anticipated as a lot of our work in 2021 was directed towards upgrading customers from v4 to v5, which although it does not generally trigger any significant new license payments, does generate development work, which was up 38% and is shown here in the software stream. The work on incrementing the upgrades themselves is shown in the services stream. We made further progress in enhancing our software and Matt will cover some of these later. So turning to our final revenue stream services. Services revenue includes all other sources of revenue, principally based on charging clients on a day rate basis for professional services, including implementation work. Total services revenue increased by 13% to GBP 46.1 million at actual exchange rates. There was a reduction in new implementation work, but this was offset by an increase in the v4 to v5 upgrade implementation work. As Matt will cover later, we have continued to have high levels of service and strong delivery whilst continuing to operate remotely, and the additional headcount has helped increase both the services revenues and through development work also as software revenues. There was a reduction in pre-implementation revenues, where last year, we had 2 large clients requiring detailed pre-implementation work, one of which had a partner supporting us with a lot of systems integration work. Excluding the systems integration where partner days increased over last year by 54%. Turning now to expenses. Overall costs increased 6% in the period, largely driven by the increased headcount with average FTEs increasing from 341 last year to 383 this year, an increase of 12%. We reduced the contractor cost to effectively nil as these roles were replaced with permanent headcount where needed. Partner costs were down in the period. But as noted before, there was a large pre-implementation project where the partner was doing systems integration work. And if you strip this out, we did see good growth in partner days. We have a profit share scheme where employees share a pool of money being essentially 10% of the pretax profits. The cost of this increase in the period on the back of higher profits. Hosting costs jumped in the period as we saw a full year impact from customers won last year. This is a good revenue stream for us. And given the automated tools we have introduced can deliver growth with relatively limited increases in headcount. Last year, we had some transactional FX gains. But given the strengthening in sterling this year, we have seen some small losses. Within other costs, we continue to see a low level of travel and conference costs and we will see this move more towards back to normal in 2022. Turning now to cash flow. Another strong cash performance with operating free cash flow conversion matching 2020 at 114%. We saw an increase in contract liabilities, principally due to GBP 3.4 million of deferred software implementation revenues, which will be recognized in future periods. This was somewhat offset by an increase in other working capital, including deferral of contract costs associated with the deferred software implementation revenues. We have net tax payments in the period of GBP 3.8 million, net of the receipt of GBP 1.6 million of prior year R&D tax credits. We also funded our employee benefit trust to the tune of GBP 4.6 million for the trust to acquire shares to satisfy current and future LTIPs, avoiding future dilution of existing shareholders. The biggest item on the cash flow, however, was the payment of GBP 33 million of regular and special dividends in the year. So now on to the balance sheet. The balance sheet remains pretty straightforward. Debtors are well controlled by 26 days. I refer to the reasons for the increase in accrued income and contract liabilities on the cash flow slide. And you can now see 3.4 million of shares at cost remaining in the EBT at the end of the year after satisfying 2021 investings and these are shown netted off equity. Looking now to future revenues and TCV. As you know, we've consistently reported what we call TCV, or total contract value, and the methodology for calculating it remains unchanged. On the graph, I've shown the figures from H1 2019 up to H2 2021, broken down into the previous revenue streams. I have then shown December 2020 TCV again but this time in the new revenue streams. We showed strong growth again in 2021 with good conversion of a late-stage pipeline. And overall, since H1 2019, we have seen excellent annual compound growth of 29%. I've also shown TCV for the next 12-month period, i.e., covering up to 2022. This is up 14% over the period last year with subscription TCV up 20% and software and services TCVs both up 10%. Next, I will cover capital allocation and dividends. As you have seen, the business continues to be very cash generative, and we had cash of GBP 23 million at the end of the year, having paid special dividends of GBP 74 million over the last 2 years. We announced the start of a regular dividend payments with our 2020 results of 1.0p per share, and we are proposing a 10% increase in this to 1.1p per share for 2021 to be approved at the AGM in May. Our cash generation before returns to shareholders has averaged over GBP 20 million per annum over the last 2 years. With this in mind, we announced in January the launch of a share buyback program of up to GBP 18 million over the next 18 months. We will use the shares to fund option schemes and also for cancellation. Next, a brief update on modeling guidance. 2022 effective tax rate will be 20%, but I'll remind you of the increase in U.K. corporate tax rates from 2023 onwards. We also have an additional 1.25% social care tax from April 2022. I anticipate a slight increase in CapEx in 2022 as we fit out new offices in Michigan and Sydney, and potentially do some refurbishment of London as we consolidate down onto 2 floors. You will have your own forecast for currency. So I've given you a sensitivity to use, which is a $0.01 movement in the U.S. dollar will drive a GBP 0.3 million revenue movement and a GBP 0.15 million operating profit movement. And for the euro, the equivalent figures are EUR 0.15 million on revenue and EUR 0.1 million on profit. I will now hand over to Matt for him to give you an operations update.

Thanks, Duncan. I'm hoping that this is becoming familiar rather than repetitive, but it's the same agenda from me as for previous updates, I'll be talking about our software, which includes our hosting products, about our people and about the delivery of our software for our customers. I'm also repeating this first slide, setting out our strategic priorities. . Since I last spoke to you, our documented strategy has not changed, but it has evolved for fans of mnemonics and of sibilance, we've created the 6 S's to improve memorability. And we've also added scale to our documented strategy. Increasing our capacity for developing and delivering our software has been central to everything that we do forever but making this explicit brings improved clarity. And clarifying and communicating our strategy is vital to ensure full engagement and to direct the efforts of our extremely talented team, for example, within our innovation agenda. Hopefully, some of you were either at or have had a chance to review the content from our [indiscernible] where we described our product and its market-leading position in some detail. The industries in which we work are very complex. The software functionality is ahead of anything else in the market, and this is delivered on a leading-edge technology stack, competitors either operate on a legacy technology platform or lack the functionality to compete at scale or both. We released a new version of our software every 4 weeks, and each new version enhances the product through customer-funded development and also through into investments. As a result, it's always difficult to decide which product improvements to highlight, but I've selected 5 from 2021. Business rules provides powerful functionality, allowing our customers to configure their own process decision logic and automation within our persistence. Improvements in 2021 were focused on simplifying the rules editor to guide users. Continuing the theme of simplified complexity, our new configuration management module allows our customers to trial configuration changes and promote them between environments. This provides a simple way to enter new markets by setting up new portfolios within an existing Alfa database. Investment in credit decisioning has improved integration with third-party data providers and increase the efficiency of the decisioning engine. And Alfa iQ has also pushed forward the use of machine learning in this area. Our business intelligence functionality is important both for larger customers who will tend to require integration with a group system and for smaller customers who will want reports out of the box. And we also continue to invest in our user interface, which is key for sales as well as for ongoing user satisfaction. Over the autumn, we reached the key milestone in our SDLC improvement project with a hugely successful delivery of our always green mainline. This project has delivered measurable improvement to the developer experience and to efficiency. Continuous improvement in our development practices enabling delivery for our customers as well as enabling retention of our extremely talented team and software developers goes on. But this improvement effort is now part of business as usual rather than a major investment for us. We also continue to standardize and simplify our deployment model. We're moving towards the use of docker containerization or our hosting products for all customers, and we're standardizing our technology stack across our implementations. Our first Cloud Hosting offering provides a compelling additional service for our customers as well as simplifying the implementation of Alfa Systems. Having built and scaled the product, we've moved into a continuous improvement phase. The direction for the team is to provide the gold standard value proposition that Alfa customers expect and to ensure that we remain lean and the product remains low touch. Recent enhancements to the service have included investment in our self-service customer pool. It's worth noting that we do and still see some sales opportunities for customers who are not ready to see their operational systems hosted in the cloud. And it's important that we remain able to service these on-premise requirements. We're all really excited about new plans for creating a product engineering smart hub. We've spent time over the last 6 months or so assessing many potential locations before deciding on Lisbon, which is a growing tech center and has a good cultural fit with Alfa. The initiative will expand our access to talent. Initially, we're aiming for 6 to 8 new recruits in Portugal. The teams will be seeded remotely with experienced Alfa engineers from our existing London team. And we're also expecting to benefit from the lower costs due to Lisbon salaries and reduced office space provision. The model is designed to be flexible to allow us to expand with the ability to replicate the model in other locations. Despite a tough recruitment market in 2021, as Andy said, we've grown our average headcount by 12%, and we had ambitious plans for the coming year. As I'm sure you're hearing, the recruitment market remains difficult for companies in general, but we have a very strong proposition for new recruits, and we have flexibility to adjust our approach to recruitment when the market changes. So we've had a good start to 2022 with 17 new joiners since the start of the year and 24 for the talented people already lined up to join in the coming months. Retention is key for us. We can expand our capacity faster because we can build on our existing teams. So we're pleased with our 2021 retention. But we're not standing still, ad we have ongoing initiatives to maximize retention of our talented team. As I said, ensuring engagement with our strategy is key. We're proud of the work that we do in our inclusion communities, and we launched our inclusion and diversity charter to assist us in building a strong, diverse team to which everyone can bring the best of themselves. We brought everyone together frequently despite the ongoing challenges of remote working. And we've also managed to have some in-person social events in all of our locations over the last few months. And finally, on retention initiatives, we've laid the foundations in 2021 for important improvements to our learning and development strategy, assisting our people in making the most of the huge opportunities available at Alfa. And for smart working is now underway, which will see hybrid working patterns for most of our teams, and we're really enjoying being back in our offices and spending time together. We are a software and delivery company, and we never forget that all of our efforts come together when we see successful delivery of our software for a customer. We succeed with complex projects where our competitors struggle. And 2021 was a record year for Alfa systems deliveries with 27 go-live events in total. The decreased customer concentration that Andy and Duncan highlighted results from this increased delivery capacity. Alfa Start is important both as a product in its own right for smaller asset finance providers and as a platform for innovation in accelerating our larger implementation projects. And Alfa Start configuration is now the basis for all of our implementations. In 2022, we plan to simplify our Alfa Start data migration tooling, which will give us a unique product in this market. I've moved detailed information about our ongoing new V5 implementations to the appendix to this slide deck. But I pulled out some themes from those projects for today's update. Four new customers went live with Alfa systems in H2 2021. I should mention that when customers do go live, they generally have further ambitions for the software, which require our assistance and which often bring additional software and subscription things. We seldom see work for a customer end abruptly. I wanted to call out OEM B, which holds the record for a number of countries supported on a single Alfa systems implementation. And I should also mention Auto Finance B, with whom we delivered a very significant guideline in the U.S. at the end of September. We have 11 ongoing implementations as well as significant work with a number of other customers. And as I said before in this forum, we're thrilled that so many of our existing customers are committing their future to Alfa v5 and 2 new v5 upgrade projects have started since the last time I spoke to you. A majority of our new implementations use our hosting products and even customers who don't intend to use it in production may still take advantage of Alfa Hosting during implementation as a project accelerator. Nearly all of our EMEA implementations use partners, and with that in mind, my final slide today covers partnering where we've made real progress in 2021, and we have big plans for the future. As a reminder, we work with delivery partners in 2 different capacities. Firstly, system integrators or SI partners, assist our customers in integrating Alfa Systems into their own environments. And secondly, start augmentation partners add capacity to our team. Partners also provide market presence and assistance with sales opportunities. We've moved forward with our partner program with that 54% increase in staff augmentation partner dates in 2021 that Duncan mentioned. We plan to increase our use of partners further during 2022, and we've had a good start to the year on that front. And for the first time, we're now billing implementation partners for some add-on services. We had hoped to begin work with a U.S. implementation partner in Q4 2021. This proved a false start. But since then, we have 3 new potential U.S. partners. The U.S. is a key growth market for us, so we're keen to build on our success with EMEA partner. I wanted to end with a few words about a really important ongoing initiative around partner-led delivery. This is a key opportunity for us to grow revenue faster than headcount. At the moment, Alfa leads every implementation of Alfa systems. But we spent some time during H2 with our partners and with software providers in other markets, understanding how partners could lead delivery projects in the future. A new objective for 2022 is to produce a detailed plan for our journey towards partner-led delivery. We don't yet know the time scales for that journey, and it's likely to be a multiyear project moving first to joint delivery. The asset finance market remains complex and Alfa's delivery track record is a key differentiator for us. So enabling part of their delivery will require careful planning. We will always retain an implementation capability, and we will always lead a significant proportion of our implementations, and we will build quality control into our approach, ensuring that we're maintaining that delivery track record, but the prize is significant. And we intend to spend some time in 2022 planning our approach to partner-led implementation for Alfa Systems. That's all for me, and it's back to Andy.

Thanks, Matthew. I'll pick things up again with the business and the sales update. Let's start with the progress that we've made in ESG. Creating a positive impact and continuing to create a positive impact is very much enshrined in our values, and it's embedded in our culture. And so starting with our culture, we've continued to focus from the half year and ended the year before on nurturing that culture with a part of that focus, a major part of that focus being around health and wellbeing. This is all about looking after each other in these uncertain times, and we will continue that focus to look out to our people and our culture, because the uncertain times, unfortunately are extending. We talked about recruitment and retention, and Matthew covered it in detail, but in note that emphasizing our culture emphasizes our differentiation to those wishing to join the organization, and it's a key retention mechanism. As is our innovation culture and the events and the connections that we've been able to make this year, as Matthew mentioned, those have been both real-world and online, and it's been great to get everybody together in all sorts of ways over 2021. I'd also like to pick up on smart working again. Matthew talked about the mechanisms of smart working and why it's important to us, but it's also important in terms of our culture and again, in terms of retention. We want to make sure that people have the flexibility that they need, but we also want to make sure that people are connected in a way that allows us to be effective and support in the all-important Alfa culture. In 2021, we continued our emphasis on inclusion, diversity and belonging, on supporting and celebrating the broadest range of live experiences that we can. Key to that, and again, as has been mentioned, our employee community groups very much driven by our employees with top-down sponsorship. Those groups cover inclusion, LGBTQ plus, racial equity, environmental impact, parents, the Women's Group and our Social Impact Group. Really important initiatives, key underpins for ESG strategy as well as ensuring that as many facets of diversity as possible are covered. During the year, we've celebrated, we've educated ourselves, and we've communicated about those different lived experiences. And we've also introduced the idea of flexible culture dose. So that people can celebrate what's important to them in their lives. Within the year, we've continued the emphasis on the communities in which we operate and ensuring that we give back to those communities that support the work that we do. That is encapsulated in the fundraising and the voluntary work that we do, but we continue to make sure that we have a positive impact wherever there is Alfa footprint. And finally, around the environment. We're making really tangible progress in 2021, and we'll continue that through to 2022. We put emphasis on greening our business practices. We've taken steps to ensure a responsible approach to the way that we deal with the IT equipment within the business. And in 2021, we're proud to say that we've gone climate positive. And one of the reasons we've been able to do that is our partnership with Ecology that allows us to carbon offset. All of this together has given us the ability to bang our drum a little bit more around ESG and get some really important accreditations, which we know are very important to all stakeholders as well as our investors. Turning then to the market. Auto and Equipment Finance remains a really good place to be. As I mentioned before, our markets and our end markets are very robust and very robust no matter what the climate looks like. We've seen very high demand for subscription as we've touched on a couple of times, and we believe that to be a market trend as we're seeing elsewhere in technology. And as I've also mentioned, we've seen penetration in demand from the wholesale and the broad out lending market, which increases Alfa's opportunity and its addressable market. At the half year, we talked about digitalization and servitization, continuing to drive sales, and there's now renewed focus on legacy replacement. Those old systems that are still very much running a lot of people's asset finance and lending operations. The momentum to get off those legacy systems is not only because they're not fit for purpose, but also because of an emphasis on flexibility and reliability. Customers and prospects are now understanding that a solid modern platform with the flexibility and agility to deal with change is no longer optional, but is an absolute necessity in the change heavy climate that we find ourselves in. And speaking of that, I just want to touch on the conflict in Ukraine at the moment. We're seeing no direct impact and we predict no direct impact from that war. But like other organizations, we are keeping a close eye on the macroeconomic environment and any macroeconomic fallout that we may see from that conflict. But touching on the medium to long term, if there is fall out and if there is a macroeconomic effect as we've said a few times before, asset finance markets do really well during downturns because they have a greater share of the finance necessary for recovery. When compared to other lending products, asset finance is seen as more secure. The secular drivers within our industry for change are still a very valid indeed. All of those push factors around those legacy systems I talked about, regulatory change as well as pull factors such as business efficiency and operational effectiveness. And COVID and remote working has placed a very, very strong microscope across those 4 factors because companies are forced to review their ways of working, which hastens the march towards digital, an area where Alfa as a platform is extremely strong. And as I've said, customers will continue through to the medium- and long-term to need those flexible modern systems to cope with change and also to improve their own businesses. Looking more strategically, we're seeing financial services and the lending industry, in particular, changing. Banking as a Service is becoming a reality from intermediated to direct and hybrid sales in areas where we haven't seen it before, such as automotive. A stronger emphasis on customer journey and indeed on colleague experience, all of this plays to Alfa, our systems and our delivery strength. I said I would touch on Alfa iQ separately. And -- we've had some really exciting progress in 2021 and through into 2022. As a reminder, Alfa iQ is a joint venture between Alfa and Bitfount, which is Blaise Thomson's company. Within the period, Alfa iQ as a stand-alone entity has achieved some important certifications to give people confidence in working with the organization. We've moved to a position where we are actively recruiting data scientists and AI experts directly into Alfa iQ. And we spent the year proving alongside our customers and partners the true value of AI in asset finance and the general lending market. Having proven that, we've now gone forward on a journey towards artificial intelligence with 2 customers, 2 different applications of artificial intelligence and machine learning. One, around improvements to originations, which was mentioned earlier by Matthew in terms of our decision engine, and the real improvements that we can get from moving decision engines from linear and logarithmic regression-based models through to our AI models, a real tangible gain we're seeing from that and workflow optimization using artificial intelligence to ensure that business processes within customers are properly staffed even on demand and in high demand situations as well as taking the right steps to get the best possible outcome for our customers and their customers. Turning then to the late-stage pipeline. In common with Matthew's presentation, I've moved some of the detail down into the appendices to the presentation, but I want to touch on the highlights at a high level, a truly excellent sales performance by Alfa during the period. We went into 2021 with 10 prospects in the late-stage pipeline. Seven of those prospects were converted into wins, and we're working with those organizations. We lost no business from the late-stage pipeline. And actually, we added 5 new prospects into that late-stage pipeline, which let us with 8 in the late-stage pipeline at the end of 2021. Already in 2022, we've converted one of those into a win. We've also added one new prospect, which at the time speaking, leaves us with 8 again. We're really seeing a very good cadence of converting new business from that late-stage pipeline. And as I said before, this provides a huge underpinner for many of the performance aspects of the business during 2021 and going into 2022. And it's very much one of the foundations of the confidence that we have in this calendar year. As usual, I'd like to remind everybody of our growth drivers and our investment case. Our base case is consistent, but it has evolved in some areas. But to remind you, we are strongly positioned in a very large and resilient addressable market with clear structural growth drivers. We're seeing growth in that end user market. But as I said during this presentation, we've also expanded the addressable market by adding wholesale and commercial lending. Our differentiated business model, our people, our product, our culture is exceptionally difficult to replicate. And we don't stand still as Matthew has said, constant innovation delivers and involves leading-edge technology and capabilities, which in turn leads to us embedding strong, sticky long-term customer relationships. And that constant being a strong cash generation and a strong balance sheet is now augmented as we've touched on a few times during this presentation on improved revenue quality and a strong revenue mix. We overlaid that base case with accelerators in the form of subscription at the start, our progress with partnerships and leading-edge technology, which include Alfa iQ. And all of that is equally applicable to our expanding addressable market, as I mentioned. In wholesale and in lending, we've made great gains and expect to see good future gains too. In summary, I'd like to repeat the messages that I used to start our presentation. In terms of 2021's performance and strong fundamentals, we continue to do well the things that we do well, the things that make us Alfa. We've improved revenue quality in a number of key ways, providing a continuously improving financial platform for our future growth. And layered over that platform, we've made progress in all of our key strategic areas. Looking forward, with sustained growth in our total contracted value, which demonstrates a strong pipeline in a robust target market. As you heard from Matthew, we're continuing to recruit and retain talent in a hot market, and we have those exciting plans underway for a smart engineering hub in Portugal; those plans are well underway. And what comes out of those plans, we expect to be extensible and repeatable and a really important part of our future. We continue to innovate and invest in our products, extending the gap between us and competition. And as I said, we pivoted more to customer-focused developments in 2022, which will give us incremental sales opportunities. And in terms of delivering on those opportunities, we've expanded our partner program, and we have plans to continue to expand it through into this calendar year. So we expect to see continuing growth in 2022 in all aspects of our business. We're excited about our opportunity, and we feel we're very strongly stepping into it. Thanks for listening.

[Operator Instructions] We will now take our first question from James Goodman of Barclays.

Firstly, just on the demand outlook. I mean it strikes me, it hasn't been stronger than it currently is. And maybe that's overstating things, but it seems to me that if you had the head count, you could perhaps expand even more rapidly. So I'm wondering to what extent is that true? And what are the implications of that? Are you having to actually manage -- actively manage the sort of customer flow, are you having to stretch any kind of delivery time tables, are you having to turn any unattractive work away. That's the first question. And maybe linked to that, just I guess, whether there's -- whether that's just market backdrop strength or actually just a function of win rate competition sort of falling away? So that's around demand. And then if I could ask separately on the partner-led implementation plans. So I know a lot is not confirmed yet here and we've been heading in this direction for a little while, but it seems to me like a reasonably significant change in your philosophy certainly versus the Alfa that came to market in terms of allowing those partners much more into the ecosystem. So to what extent is that true and how do you ensure that you continue to capture the full share -- of your share of value in the contract given that currently, a lot of the total contract value for you is coming through the services rather than the software prices.

Thanks, James. I'll kick off, and I'm sure that Matthew and Duncan will chip in as and when. Taking the middle part of your question about demand and where it's coming from. I spoke to the fact that the asset finance and lending market is very strong, pretty much whatever the weather. And of course, we have the advantage of being a global player and we've added corporate lending and wholesale to our addressable market, which gives us a big and broad market. The push and pull factors that you, and I think most of the listeners on this call will be very familiar with around legacy replacement regulatory change as well as business expansion and operational efficiency are all still very much there. I think one of the things that is bringing people to market though, perhaps a little bit quicker than I have been in the past is that whereas I think before the effects of COVID, digital was seen as an important nice to have. Agility and flexibility within your systems, we're seeing is important, nice to have. But with the advent of COVID, I think these things now become something of a necessity and we're seeing in our late-stage pipeline a real pattern with people moving away from legacy systems as well as looking to gain some of the more optional and strategic advantages. Yes, it's a good market. And I think you're right to assert that we are doing better in it and winning more than we ever have done. I think that says a lot about our delivery record and our product and the current competitive landscape. We are recruiting on target. We're able to service the demand of the market. And of course, one of the highlights of 2021, which will flow into 2022 is the increased use of a partner resources. And we've seen a really big step-up in the number of partner resources that we've been able to use on our projects, a 54% increase in days in 2021. And that's going to continue, to your point about the profile of partner resources. Yes, absolutely, there will be varying levels of margin that Alfa can achieve on partner resources depending on the geography and the partners that we're working with. But to take you back to your point about very much a rising market, the important thing for Alfa is to try to increase its size irrespective of the level of headcount and partnership is a big part of that. If our market opportunity is as big as we think it is and thus consistent with your narrative, James, then using partners means that we can take on even more customers and deliver even more Alfa going forward.

We will now take our next question from Kai Korschelt from Canaccord.

I had 3 questions that are slightly more specific. So the first one was around just the upgrade demand of v4 to v5. I'm just curious kind of roughly how much of sales was that last year? And how much of your installed base is now on -- on v5? That was the first question. The second one was around salary inflation. I think you've typically talked about sort of mid- to high single-digit percent. I'm just wondering what it is now, I'm assuming double digit, but if you could give perhaps a bit more color and what measures can you take in addition to things like sort of nearshoring to offset that trend? And the third one was on the dividend payout ratio at I think 1.1p seems rather low compared to your overall EPS. So I'm just wondering, given your strong balance sheet, I think you've previously -- as you have a sort of dislike of M&A, so how should we or investors think about the capital allocation strategy?

It's Duncan. I'll pick up the -- a couple of first questions -- the first 2 questions, I think. So your question around v4 to v5 demand, just to give you a flavor, about 14% of our services activity in 2021 was for upgrades, and that will increase slightly, we expect in 2022. So there definitely won't be any drop in v4 to v5 activity in 2022. In terms of how many left on v5 -- left to go on to v5. There are, I believe, three customers too, which are really small that we don't currently have either conversations or active plans to upgrade with. So yes, so hopefully, that answers that question. In relation to the point on salary inflation, yes, you're right, it is obviously a focus for us. I think it's also important to recognize that one of the issues that we can do to counterbalance that is obviously in terms of our model is to keep hiring new people into the organization, and that obviously helps in terms of thinking about the average cost of our cost base, but also key obviously in that is thinking about what we were talking about in terms of Portugal. I don't know, Matt, if you want to add anything on Portugal. I mean, the main thing about Portugal is driven by access to talent rather than cost. But Matt, I don't know if you want to add anything on that?

Portugal is a really exciting initiative for us, I think the whole organization is exciting about it. You're right that the key driver for it is the access to talent. But there is -- we do expect to see a reduction in costs for our people because of the lower salaries in Lisbon, and because of the reduced office space provision. I think that when we get out there, we'll be thrilled at the level of talent that we find, and we're already looking forward to it.

Thanks, Matt. I will use my Chief Exec privileges to just say a couple of other things with respect to the v4 to v5 movement. I think it's been a really positive story for us in 2 ways. The first is that people do have choice. We're very aware of that. And people who have been with us for, in many cases, decades, choosing to continue that journey with us and moving to v5 where they know so well is a massive endorsement for our people and our product and pleases us as a leadership team no end. And secondly, the performance in the software revenue stream, I think, is also a very positive story because those v4 to v5 transitions, as you know, don't attract major license fees. So being able to perform in the way that we had in 2021 within the software segment and the upside that could come out of that in future years as we transition either to more bundled license, maintenance, hosting or more traditional perpetual license sales, I think, is a real opportunity going forward. On capital allocation. Yes, you're right. Thank you for noting the progressive regular dividend and that we've moved that up. Where things are at the moment, I think we still like to keep that ability to be agile in terms of what we do with our capital. Alfa iQ is a good example of investing in a joint venture, and there may be other opportunities to do that. As you rightly stated, we've got no proactive or strategic M&A ambitions as things stand, but you never know. So we would like to keep that optionality in terms of capital allocation, but as we go through and as noted within our market facing communications, if we don't have something to do with it, then of course, we'll look to return it to shareholders.

That's great. Could I just clarify the percentage of service revenues you said that this upgrade work was it 40% or 40% or was it 14%?

14%, 1-4. It will be higher than that in 2022. I think the important point is that the activity is carrying on, particularly through 2022, it will come to an end, there will still be some activity probably in '23, but I suspect depending on where we get with some existing conversations it will likely be at the same level or perhaps slightly lower at that point, and would get the opportunity for software step-up in '23, as Andy said, with new implementations rather than upgrades.

That will conclude our Q&A session today. I would now like to turn the call back to the Alfa team.

Thank you very much, and thank you to everybody for listening. I hope we've said it all within the presentation with the answers to the questions. We're very, very proud of our achievements in 2021, not only what we did actually, but the way that we did it and keeping our culture strong, keeping the team strong and continuing to emphasize our social environmental impact and looking after our culture. Going forward, we see an increasing opportunity in 2022. We're very, very excited about the prospects of the business and look forward to speaking to you all on the road show and the wider group at the half year. And thanks very much for your support and for listening.