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

Hello, everyone, and welcome to Alfa Financial Software's 2024 Full Year Results. As usual, I'm joined by Duncan Magrath, Alfa CFO; and Matthew White, our COO. We'll be following our usual running order with me starting off with the highlights of the year, then Duncan will step through his financial review before Matthew talks about our operational delivery. I'll then close us off with the business and sales update. And then I'll summarize to take us through to Q&A. So here's the year-end review. One thing we've been getting used to is sequential growth in subscription revenue, and 2024 was no different. 18% means it remains our fastest-growing revenue stream. We also saw strong growth in subscription TCV. That was up 14%. And subscription is now more than 1/3 of our revenue base at 34%. And we now have 21 Alfa Cloud customers, up from 16 in 2023. 50% of our live customers are now on Alfa Cloud, all of which shows that we have successfully transitioned to a SaaS model, and we will accelerate from here. We've also seen a record sales year. 8 new customer wins in year is a record, and that has driven record TCV. Our late-stage pipeline has remained strong with 8 prospects, 5 of whom we are working with. And we've continued to diversify our customer base, continuing our progress in making the business more resilient with every passing year. Customer concentration has now reduced to 32%, and we have 21 customers with more than GBP 2 million of revenue. Our largest customer accounted for only 7% of our revenues, and we've achieved all of this while maintaining our investment in product, people and planet. 2024 saw GBP 37.1 million of investment in our product, and we launched Alfa Systems 6, a breakthrough iteration of our platform which extends our market lead and includes 10 new modules driving incremental sales and value for our customers. Our average head count was up 5%, and we continued strong staff retention. It was 96% for the year. Finally, we joined the United Nations Global Compact. All of this progress makes us as confident as we've ever been about our future prospects, and this has led the Board to propose a 1.4p ordinary dividend and declare a 2.4p special dividend. Duncan will dive into our track record in returning capital to shareholders in his section. Revenue was GBP 109.9 million, up from GBP 102 million last year. This means revenue has progressed 9% at constant currency. Operating profit was GBP 34.3 million. That was up 14% on 2023's GBP 30.2 million. Our operating profit margin was 31%, delivering Rule of 40 performance being the addition of revenue growth with operating margin percentage. Based on an EBITDA margin, we achieved Rule of 43 at constant currency. It's worth revisiting that progress in subscription revenue with 18% growth outstripping 2023's 16%. Our record TCV of GBP 221.3 million was up 34% from 2023's GBP 165.3 million. This was driven by an exceptional sales performance. And we ended the year with GBP 20.5 million in cash and a closing head count of 502. Based on all of these achievements, we believe that 2024 was a breakthrough year that we will look back on as an inflection in our performance and the culmination of our strategic plans, providing a strong platform for our future success. We achieved landmark contract wins in all our markets with a record 8 customer wins. Those wins boosted our TCV to a record level of GBP 221 million. Subscription revenues are now over 1/3 of our total revenues, and we have now expanded our cloud footprint to cover 50% of our customers, growing subscription revenues to be more than 1/3 of our revenue mix and moving to a SaaS-only sales strategy. We launched Alfa Systems 6, a breakthrough iteration of our Alfa platform with 10 new modules. We grew our U.S. operation to over 100 colleagues, and we grew overall Alfa head count to over 500 colleagues. Finally, we increased our total dividend by 10%. I will now hand over to Duncan.

Thanks, Andy. 2024 was an excellent year of financial performance. Revenue was up 8% at actual rates or 9% at constant currency. The quality of the revenue continues to improve, which I will cover later. Cost of sales increased slower than revenue, up 2%, with a greater level of investment in 2024. Operating profit was up 14% at an improved margin of 31%. The effective tax rate of 24.9% was higher than last year, and this was on the back of the increase in the U.K. corporation tax rate and the change to the R&D tax credit. Diluted EPS was up 8% at 8.56p per share. Overall, a really pleasing performance. And given our confidence in the future prospects for the business, the Board has proposed an ordinary dividend of 1.4p per share and declared a special dividend of GBP 2.4p per share. This is a total dividend of 3.8p, which is up 15% on the dividends declared and proposed this time last year. Along with a special dividend of 4.2p paid earlier in the year, total dividends are 8.0p for the year, up 10% on last year. In our Q4 trading update, we announced that we will be renaming our revenue streams. There is no change to how we recognize or allocate revenues. This is simply renaming the revenue streams to better represent the underlying nature of the revenues, which have changed as we have transitioned to a SaaS model. We develop software and deliver that software to our clients, and these 2 activities then drive the increase in our subscription revenues. Our strategy is to deliver more Alfas to customers that will then grow our subscription revenues. So we have renamed software to Software Engineering. Historically, this revenue stream generated a lot of revenues from perpetual license sales, but this is now a small proportion of these revenues. Now the vast majority of this revenue is from chargeable development work performed by our software engineering team. Hence, we are calling this Software Engineering from now on. Note that our software engineering teams not only generate revenues in their own right, but sometimes they are developing software, which increases our addressable market as well, so a double benefit. We've renamed services to Delivery to make it clear that this is all about delivery of software and projects to clients. The name subscription revenue remains unchanged. These are any revenues that we bill on a recurring basis, either monthly or annually. As noted above, our strategy is to drive up these recurring revenues, and I will talk more about this on the next slide. This graphic is to illustrate how the individual revenue streams from a typical medium-to-large project evolve over time. Smaller projects would have a similar profile, but over a much shorter period of time. And Alfa Start project is the shortest implementation we do. And in that case, there will be no Software Engineering revenues as they are out-of-the-box projects with no software development. One key thing to note when looking at this graph is that our pricing for subscription is not based on the number of users using the system, but it's based on the volume of contracts, i.e. assets in a customer's portfolio. The higher the volume of assets that they are financing, the higher our subscription revenues. As customers grow, our revenues grow and the quicker they can get live, the quicker we can see the increase in our subscription revenues. We are, therefore, keen to get our customers live on Alfa Systems as quickly as possible. So let me take you through the life of a contract with the x-axis representing time starting on the left and working to the right, with the y-axis representing size of revenues. As you know, we often start working with customers before a contract is signed, and this will be recognized in Delivery revenues. We may have some sandbox environments, and so we may generate some small subscription revenues. Once contracts are signed, then we scale up our delivery teams, hence the increase in Delivery revenues. Once the initial planning and design phases have been completed, we will have approved designs from the customers for enhancements to the software that they wish us to develop. We will charge for these developments on a time and materials basis. Hence, as we develop the enhancements, we start generating Software Engineering revenues. These revenues will normally drop off some time before go-live to allow for the testing phase. Post go-live Subscription revenues ramp up as the customer adds more assets onto the system to be financed. Initial loads may be a small portfolio with further portfolios of assets loaded onto the system later. Some customers may put new business only onto the system and run off old portfolios on their old system. And in this case, the ramp-up can be similar to the life of the underlying assets, say, 3 to 4 years. It is also important to remember this when considering our TCV. This, you'll remember, it's calculated based on the next 3-year subscription revenues. So at the point of signing, this can be a relatively low number, but will build over time as we get closer to the full run rate. I covered this growth in TCV at the half year presentation and have included the slide from that presentation in the appendix to this deck. This is very much a simplified diagram as different customers will take different approaches to adding assets onto the system. In some cases, there are multi-country rollouts with their own delivery teams and with their own software development requirements, for instance, adapting to local country legislative requirements. In reality, therefore, the actual picture is often more complicated than this. Despite this, the key points I would like you to take away from this slide are: firstly, our revenue streams have different profiles during an implementation and post go-live; secondly, our Subscription revenues will build over time as assets are added on to the system, and it can be a number of years before full run rate subscription revenues for big projects are achieved; thirdly, initial subscription TCV when we win a contract will be relatively low, but will subsequently grow as the project gets closer to go-live. This slide shows all the customers that are either on V5 or Alfa Systems 6 or in the process or discussions to move on to Alfa Systems 6. I showed this slide at the half year and have updated for the recent wins. The key takeaways are stickiness and acceleration. First is stickiness. There have only been 2 customers who did not continue with Alfa V5, and these were not lost to competition as the customer in both cases, exited the asset finance market. Secondly, acceleration. The last 15 customers have been added in the last 2 years, the previous 15 took 4 years. I would also point out that you can see 11 customers in the pink that are not yet live. And as mentioned on the previous slide, the full impact of these customers on our subscription revenues will, in some cases, be a few years away yet. Turning now to TCV. 2024 really was a standout year for our revenue and commercial teams, which is demonstrated by the 34% increase in TCV. We have continued to see steady growth in the subscription TCV, but the signing of the full contract packs in the second half of last year has secured a lot of work for our software engineering and delivery teams, which, as you can see, is a huge underpin for our 2025 revenues, shown in the next 12 months TCV. We expect to work through the TCV during 2025. However, we are still confident that we will convert the late-stage pipeline, and the timing of these contract wins will determine the actual level of TCV at any point in time. Turning to Subscription revenues. We continued the sequential growth in Subscription revenues in 2024 with each quarter growing on the previous quarter. For the year as a whole, that delivered 18% growth in revenues, and this is now up to 34% of overall revenues. We have seen a 14% growth in subscription TCV, and this was driven both by new customers and from the existing customer base. As noted earlier, the subscription TCV will grow from new customers up to and post go-live as assets are added on to the system. We expect growth in Subscription revenues in the future from new customers as they ramp up as well as growth from existing customers, including incremental sales of new modules and Alfa Cloud. Turning to Software Engineering revenues. As predicted, we had a much stronger second half for the software development and so finished the year up 12% on last year. You will see we had a drag of GBP 1.1 million from the drop in the customized license as we transition to SaaS, and now this accounts for less than 20% of Software Engineering revenues. Customized license revenues from perpetual license sales will decline over time with our SaaS-only sales strategy. Given the startup of new projects, our chargeable development work was directed towards new customer projects starting up particularly in the second half. Those new projects have committed to the new development work, and you can see this in the increase in TCV, which is up 38% overall, but with particularly strong growth in the next 12 months figures, up over 50%. Turning to our final revenue stream, Delivery. We have been through a transition of completing some existing projects and with new projects starting to ramp up. As you know, we increased recruitment in the second half of 2024 to cope with the increased demand. Overall revenues were up 1% on the previous year, but you can see a significant increase in TCV, which has more than doubled overall and nearly doubled for the next 12 months. So we are expecting a busy 2025 for our delivery teams. Turning now to expenses. There was an overall increase of 5% in operating expenses. A 7% increase in total salary costs was partly offset by an increase in the amount of time spent on investment, which was capitalized. The other key movement to note is the reduction in other income, which is due to a reduction in the recognition of R&D expense claims. Turning to cash flow. Cash conversion of 89% was as expected with the accelerated collections at the end of 2023, impacting 2024 cash conversion, along with the higher capital expenditure for the intangible asset capitalization I referred to on the previous slide. Dividends increased GBP 2.4 million in the year to GBP 22.1 million, and there was a net cash outflow of GBP 1.3 million for a cash balance of GBP 20.5 million at the year-end. Now some words on capital allocation. Alfa remains a highly cash-generative business. As we have transitioned to a SaaS model, this has reduced the upfront license payments we received under the perpetual license model, but is making the cash flow much smoother. We have a strong track record of returning excess cash to shareholders through dividends, although I'm not sure that we always get the credit we deserve for this. You can see from the left-hand graph that we have paid a cumulative GBP 141 million in dividends since 2020 and that we pay a relatively low ordinary dividend, but top this up with special dividends to distribute the excess cash. We like the optionality this gives us, and this continues to be our policy. On the right-hand graph, I've shown what this dividend steam means in terms of a dividend yield in each of those years due to the dividends paid in the year and the average share price for that year. You can see that for the last 3 years, we've delivered a good dividend yield alongside the share price growth. There are no immediate investment requirements for our current excess cash, and so we have declared a special dividend of 2.4p per share and proposed an ordinary dividend of 1.4p per share to give a total dividend of 3.8p per share, up 15% on this time last year. Next, a brief update on modeling guidance. The growing subscription revenues and the high levels of next 12-month TCV means we expect to continue to see mid-teens growth in subscription revenues and overall double-digit revenue growth for the business as a whole. We believe in continuing to invest in our products to maintain our market leadership and so expect capitalized investment at similar levels as 2024. Note that this will feed through into increased amortization over the next few years. As noted before, we remain a highly cash-generative business and expect cash conversion to average around 90% to 100%. For 2025, we expect to be between 80% and 90% cash conversion principally due to the unwind of advanced cash on 2 projects. We expect the 2025 effective tax rate to be around 25%. I've shown the gross currency sensitivities, but note that we have circa 80% of our U.S. dollar cash flows hedged. Also note, whilst this means our profit is largely protected, the revenue will vary depending on exchange rates as we don't hedge account. We just mark-to-market the hedges through the P&L. I will now hand over to Matt, who will outline the significant strategic progress we made in 2024.

Thanks, Duncan. It's been a while since we outlined the full strategic hierarchy for this audience. So we thought it would be helpful for me to start with a few words on who we are, what we're doing and why. Alfa is a software and delivery company. We exist to deliver our leading-edge technology. With our smart, diverse team, we are making our customers future ready. The market for asset finance software is huge with an annual spend of $3.4 billion in 2022. We are the leading player in that market, and yet our market share is small. So our focus is on growing into that market opportunity. Our vision is to grow our company and to grow our impact faster than our head count whilst retaining our underlying culture. Key to achieving this is delivering more concurrent implementations of our world-class product more efficiently. We're retaining our small company feel, but increasingly, we have a big company impact. Our strategy for this long-term sustainable growth is built on our 4 Ss: strengthening, maintaining and improving the best things about our company; selling to new customers; scaling our organization; and simplifying each delivery so that we can deliver more. In 2024, we strengthened our key differentiators, our product, our people and our delivery. And our product is our first differentiator. Investment in our class-leading Alfa Systems product increased again in 2024 to GBP 37 million, up from GBP 35 million in 2023. The investment is both functional and technical. Functional investment work increases our product capability and our addressable market, and more on that later. Technical investment has included making the use of the latest technology, including, of course, AI. Highlights of that technical investment in 2024 included Thea, our large language model chatbot assistant for implementation. We also launched proof-of-concept intelligent document processing integration, and we've enhanced our data pipeline technology for external integration and reporting. The launch of Alfa Systems 6 or AS6 has provided a showcase for 15 years of development in Alfa Systems V5. This has given us a fantastic platform for reaching new customers and for infusing existing customers. And Alfa Systems 6 modules also open up incremental sales opportunities. It's really important to be clear that functional and technical investment at Alfa is ongoing, and this level of investment will be maintained in 2025. Investment is key in maintaining our differentiated product. We are building for the long term here. Our refreshed development model, which I talked about last year has brought improved product ownership, which has enabled smaller, more targeted investment as well as those larger strategic items. And finally, we've refreshed our module set to simplify and provide more clarity with a view to incremental sales. Our awesome team is our second differentiator. We attract fantastic people to join our team, and they stay with us for the long term as they gain skills and experience and can add more and more to this special company that we are building together. Our engagement score remains really high at 82%, and our retention remains really high as well at 96%. In 2024, we delivered a full refresh of our induction approach, adding flexibility for our different recruitment routes and for our different regions as well as reducing the time required to get new people into their first roles. And we've continued to invest in our learning and development with hundreds of new pieces of learning content available for delivery in short on-demand courses. For 2025, we're planning a refresh of our talent management and development, which will be led by our new talent manager. And our delivery track record is our third and perhaps our most important differentiator. Safeguarding this as we continue to grow and to deliver for our customers is another key part of our culture. 2023 saw more new customer go-lives than any year in Alfa's history. And 2024 saw us start significant project work with 6 new major customer projects. This level of transition to new work, which followed that huge year of delivery in 2023 is unprecedented. Andrew will say more about our pipeline and the fantastic pipeline of conversion that we achieved in 2024 later. Accelerated conversion of that pipeline is enabled by those 3 key differentiators. And as we continue to develop our product and to deliver for new customers, our people gain an experience. So all 3 differentiators are further strengthened. That virtuous cycle underpins our ongoing success, and the result is the fast growth in subscription revenue that we are achieving. In order to deliver the projects that we've sold, we've scaled our head count. Average head count grew by 5% in 2024, and the team is now more than 500 people strong. We're continuing our review of our global footprint with a view to creating a further smart hub alongside our Lisbon development team. 2024 has also seen us scale our addressable market with product investment in commercial finance and U.S. auto originations in particular. Last year, I said we were planning internal development in both of these areas. Over the last 12 months, we have sold our evolving credit module for commercial finance to an existing customer, and we're now working towards capability for stand-alone commercial finance sales. And we've sold our first U.S. auto originations project with a major implementation project in progress with a large U.S. captive. For 2025, the market expansion focus continues with U.S. auto originations and commercial finance, but we're also adding auto fleet functionality to Alfa Systems 6. Fleet functionality will allow us to do more for existing customers, and we'll also add new prospects to the market that we can address. Simplifying the implementation of our products so that we can deliver more Alfas more efficiently is a hugely important part of our strategy. This will also open up sales opportunities and allow us to lean into subscription fees. We've enhanced our migration suite to ease the transition to Alfa Systems for new customers and for additional portfolios within existing customers. One of our customers use the tool to migrate a portfolio of 850 trucks in a 2-month time scale without our assistance. This demonstrates capability for customers to increase their usage of the system and thereby increase volume-based subscription fees. We've invested further in our automated testing to simplify upgrades, and we are increasingly encouraging customers to share long-term support co-branches, simplifying our maintenance effort. We've made progress towards partner-led delivery in 2 key areas. Firstly, we've completed the program of enabling investment for partner-led delivery of our UK Equipment Start product. Our next UK Equipment Start project will be an MVP for partner-led delivery. And secondly, 2024 saw a complete implementation, including a data migration, which was completed in less than 9 months by our people following our US Auto Start methodology. This has allowed us to do much of the work required to develop a US Auto Start product for partner-led delivery. Again, we're now looking for the right customer to implement this. And the next step after that will be to train partners so as to enable partner-led delivery here. So we're way off our first US Auto Start partner-led project, but we're making real progress. And our analysis suggests that there's a significant market here. So we're starting to get out and to talk to potential customers. We're now implementing Alfa Systems 6. As we said, for our existing Alfa V5 customers and for the day-to-day across our world as a whole, AS6 is just 1 4-week time box of development away from Alfa Systems V5. There's no replatforming. There's no major upgrade required. But our software and delivery in 2025 is a world away from 2010 when we launched V5. Because our strategy is based around the aggregation of gains, it can be hard to appreciate the scale of progress within that strategy. So we thought it would be helpful to provide a high-level overview of some of the key progress. The transition illustrated on this slide is outlined really well in a discussion with our CTO, Andrew Flegg, a video and transcript of which you can find on the Investor Relations section of our website, and there's a handy link on this slide as well. And the outcome of this is strategic progress. We're able to deliver business value for our customers more quickly. And as Duncan said, we've doubled our speed of customer acquisition. The most recent 15 new customers took 2 years to acquire. The previous 15 customers took 4 years. So the set of results we're presenting today is not only a reflection of sales success, they're the output from fundamental strategic change achieved incrementally, allowing us to grow into our market opportunity. And we're not stopping here. The investment in maximizing our opportunity will continue. And Andrew is going to outline fantastic sales progress within that opportunity next.

Thank you, Matthew. As I've mentioned, 2024 was a record sales year. We had 8 new customer wins, 6 of these came in H2. And this included some significant wins, which allowed us to access more of our addressable market, increasing our ability to grow. The sales success has boosted our TCV to a record level of GBP 221 million, and our pipeline is also looking healthy. We now have 8 prospects in our late-stage pipeline. We are a preferred supplier with 5 and working under letter of engagement with 6 of them. 6 of these late-stage pipeline additions are projected to have annual subscription revenues over GBP 2 million when they get to full run rate, further underpinning our SaaS transition. Our successful transition to SaaS has been a theme of this presentation. And this slide shows how our SaaS footprint continues to grow. More than half of all our customers are on Alfa Cloud and exactly 50% of live, V5, AS6 customers are on our cloud with a live total contract volume of GBP 1.5 million. Duncan has already explained how revenues for SaaS customers ramp up over time. So we're yet to see the full positive revenue impact of our newer customers. So the outlook for Alfa continues to be extremely positive. Our pipeline is showing continued strong demand. New customer wins are driving growth in Delivery and Software Engineering revenue streams, and we are seeing continued ramp-up in subscriptions. We continue to invest in our product to maintain our competitive advantage and to drive future growth, and we'll continue to see mid-teens growth in subscription revenue, and we expect double-digit growth for 2025 overall. So in summary, sequential growth in subscription revenue, which was again our fastest-growing revenue stream. We saw strong growth in subscription TCV, up 14%, and Subscription is now more than 1/3 of our total revenue base at 34%. We now have 21 Alfa Cloud customers, up from 16 in 2023. 50% of our live customers are now on Alfa Cloud, all of which shows that we've successfully transitioned to a SaaS model, and we will accelerate from here. We have seen a record sales year. 8 new customer wins in the year is a record and has driven record TCV. Our late-stage pipeline has remained strong with 8 prospects, 5 of whom we are working with under letters of engagement. And we have continued to diversify our customer base, continuing our progress in making the business more resilient. Again, customer concentration has now reduced to 32%. We have 21 customers with more than GBP 2 million of revenue. Our largest customer accounts for only 7% of our revenues. And we are proud to have achieved all of this while maintaining our investment in product, people and planet. 2024 saw GBP 37.1 million of investment in our product, and we launched Alfa Systems 6. Alfa Systems 6 is a breakthrough iteration of our platform, which extends our market lead and includes 10 new modules, driving incremental sales and delivering value to our customers. Our average head count was up 5%, and we continued our strong staff retention at 96% for the year. And we joined the United Nations Global Compact. All of this progress makes us as confident as we've ever been about the future of our business and our prospects. And this has led the Board to propose a 1.4p ordinary dividend and declare a 2.4p special dividend. Thank you for listening.

[Operator Instructions] Today's first question is coming from Gautam Pillai, calling from Peel Hunt.

Congratulations on a great 2024. I have a couple of questions. Firstly, on the -- thank you for explaining the revenue model in a lot of detail. Can you give an indication of what is the level of recurring revenues you are seeing in the model currently? Is it just a Subscription revenues? Or is there an element of recurring in the Software Engineering revenues as well? That's my first question. And also on the Software Engineering revenue model, the way to think about it, is it that there is a bit of custom-driven development for each customer as you kind of develop a project for them? And that -- those kind of licenses you're selling get converted into subscriptions as a project ramp? Is that the way to think about it? That's on the revenue model. Secondly, can you comment on your current exposure to the different sectors? What is the exposure to auto right now? And what percentage of the revenues or the business is European autos? The reason for asking is we have seen a lot of software companies talking cautiously about the European auto landscape. Is there any impact from those to Alfa Systems? And my last question on U.S., very encouraging to see significant traction in the U.S. geography and auto sector. But given the current U.S. administration kind of tariffs and so on, is there any impact of that to Alfa?

Yes. I'll perhaps deal with the recurring revenues and then I'll touch briefly on the numbers around the sector exposure, and then I'll hand over to Andy perhaps to talk about the macro picture. That's very traditional. I'll do numbers, Andy can do voice over. So in terms of the recurring revenues not actually on the presentation, but in the appendix to the slides, which is on our website, we've repeated the -- Slide 41. We've repeated the analysis that we've done previously, showing what sort of recurring revenues. And the total recurring revenues, you're quite right, is higher than simply just the subscription revenue. So 34% of our revenues are subscription, which are recurring, but also 10% of our revenues in software come from existing clients and 35% of our overall revenues in Delivery come from existing clients. So that's where the 79% in total comes from. They're not contracted in terms of recurring in that sense, but we know that often clients have a budget that they set aside each year to continue to develop Alfa to put more modules on to grow their use of the product. And so we very much do see a recurring level. It wouldn't be ARR under other people's definitions, but it's definitely a high level of recurring revenues that we get. And then that links into your question around software, very much so I think where we're now selling modules for everybody. Generally, a new module sale would be on a subscription-only basis even for perpetual customers who may have bought a perpetual license for the main product previously. We'd very much be selling incremental sales in software on a subscription basis. I think that covers your question. In terms of sector exposure, 59% of our overall revenues are automotive and 33% of our total revenues are U.S. automotive. But I'll hand over to Andy to talk about what that means in the context of the market.

Yes. Thanks, Duncan. I've sort of given in conversations that we've had before the trail around the asset finance market and its secular characteristics. And it's important in this context. And if we take the word exposure out and talk about our opportunity in auto, in general, and you started with European, our opportunity, of course, is within the world of finance from an auto perspective. And the secular characteristics of auto are just the same as everything else and as much as there are very big portfolios out there. They're subject to regulatory change, they're subject to infosec pressures. They're subject to pressures of competition in general. And it's a long game because there are these big portfolios out there. So from our perspective, we continue to see and of course, that's evidenced by the strength of our pipeline, strong demand actually from all of the sectors that we serve. To turn in particular to the interesting things that are going on in terms of the way the U.S. faces off against its trading partners, we think, and that's backed up by a lot of thought leadership in the U.S. market, both auto and equipment, that the way this is likely to pan out is that supply chains might be affected, which means that there's a decent chance that the purchase price of a lot of these assets will go up. And where we've seen a high purchase price in other areas that we serve, like, for instance, with electric vehicles and other electrically powered assets, we see that asset finance takes a bigger share of purchase in that market. The other point to make is that if the new -- the purchase price rather goes up, you will also see the residual value price go up, and residual values are a big assumption in the profitability mix of an asset finance company. So that does happen. Actually, you'll find that a corollary of trade wars is that the organizations that we serve directly, the finance arms of the OEM will actually make more money going forward. So I guess the way to paint it is that it's a big and complicated picture that our end market tends to remain robust and a little bit countercyclical, if that makes sense.

We'll now move to Harvey Robinson of Panmure Gordon.

Panmure Liberum, but it doesn't matter. Quick couple -- 2 questions this time actually rather than 4 from before. Just on -- obviously, you gave us a lot of detail around how subscriptions come through. You've been very clear that the big wins you had last year haven't come through to subs yet. And you've obviously printed 18% growth in subscription revenue, you're talking mid-teens. Could you -- as these bigger contracts feed through and the slides are really helpful, doesn't -- what does that do to subscription growth? Does it -- is there a bump up from the numbers we're seeing now? Or does it mean it's stronger for longer? So that's question one. And then second question really is coming back to Matt's point on market share. As you rightly point out, 4% share for leading tech player in software is quite modest. If you were to look at share in a different way and say, of the recent business out there, say, the last 12, 18 months, what would your share have been of that? That would be my 2 questions.

Thanks, Harvey. Perhaps I'll deal with the first one, and Andy deal with the second one. So in terms of subscription revenues, I think your summary is right. Stronger for longer is probably the right way to think about it. I think, at the moment, we're getting good growth in our subscription revenues from effectively the growth in Alfa Cloud. Some of that is from new customers, but a lot of that is also coming from existing Alfa customers that we're converting on to Alfa Cloud. So that's driving a lot of the current subscription revenue growth, and that also obviously drives some costs associated with that in terms of hosting. And over time, you're right, the big contracts that we have just signed up will come through in subscription revenues, particularly around the license and maintenance post go-live, per the slide that I've just shown. And then that will drive that revenue growth. But I think we're comfortable that we see sort of mid-teens subscription growth for the next few years. Beyond that, let's see where we get to. But I think the point I made to Gautam on the previous question, if we start getting extra module sales with existing customers on a subscription basis, then that will also layer in as well. So I think we're very comfortable with that level of subscription growth for -- stronger for longer, I think, is a good phrase.

Yes, I like stronger for longer. And it's probably a good excuse to just know the thing that we're trying to make strongly, which I think the people on this call know very well, now our transition to SaaS is complete, and that is now our model that, that doesn't introduce the kind of churn that you might associate with other SaaS products. So in essence, Alfa is 0 churn SaaS as is evidenced by the retention slide that -- and acquisition slide that Duncan put up. So stronger for longer is a phrase that we might nick from you there, Harvey. To your second point on market share, yes, you're absolutely right, that 4% share of the total spend is pretty modest. We have to, of course, note that we're in the business of enterprise software. So all of that $3.5 billion spend is not accessible at any one time. There will be a subset of that, that is going out for business at any given point. From a new business perspective, though, your overriding point is very well made. I think we always try to avoid specific guidance in terms of win rate. But in our core markets, in U.S. auto, in particular, right now, we are getting an incredibly high win rate. We're seeing more competition in the European markets and indeed in U.S. equipment, but our win rate in our target markets will be way in excess of that 4%, definitely throw another digit strongly into the mix.

Okay. Can I just -- I'll try the win rate question in a different way this time as you spotted it. Just to come back, just a final follow-up on the sort of subs point. Obviously, gross margin is a bit better this period, but obviously, there's some mix effects there. But again, through time, as you get to more of the license and maintenance part of that subscription, that bumps gross quite a bit, I believe, or even more importantly, drop-through. Could you just run us through what that means for midterm gross margin guidance? Because clearly, obviously, I think people are probably saying a pretty similar lower than the current year in the near term. But longer term, we should be more optimistic. Could you just walk us through those moving parts, please? That's the final question.

Yes. I think from a gross margin perspective, there are -- in the short term, there are various levers that are acting on that. We are expecting a slightly lower gross margin in 2025 than '24. And that covers a number of cost areas. In terms of mix of costs, we've got currency effects. We've got growth in the U.S. where costs are slightly different to the U.K. We've also got the increase in the hosting costs. And we've also got the impact of how much is capitalized in any 1 year, depending on where we're directing our investment efforts. For the subscription, though, you're absolutely right, longer term should be help the gross margin, should improve the gross margin. In the short term, the hosting -- additional hosting costs, I don't think will mean that the gross margin will move very much. I'm expecting it to be 3 or 4 years away before we start having a material positive impact on our gross margin from the layering of the additional license and maintenance fees. I think once you start getting out that far, then making predictions around gross margins is tricky. But from everything that we can see, we should be able to improve gross margins out at that sort of time frame, but not dramatically in the short term.

Sorry, I've got one thought on -- just one final question for your point here. Are your hosting costs in dollars?

They are, yes. I mean we're happy with that because we're long dollars effectively, but yes...

Yes, like for natural hedge.

[Operator Instructions] We'll now move to Sven Merkt of Barclays.

2024 was clear where your investments in the business were very visible with the launch of Alfa 6 and the very strong pipeline conversion. As you continue to invest into growth, can you give us a bit more color on your investment priorities for the coming years? And then secondly, given all the innovation you put out there, can you comment a bit more on how customer discussions have evolved since we spoke to last time and what impact you're seeing there on the early stage of the pipeline? And then finally, just maybe a follow-up question on the strong win rate. Given the strong wins, can you just comment how your competitors are reacting? Have you've seen there any kind of meaningful change in the competitive environment?

Thanks, Sven. Yes, you're right. The investment in the product will continue in 2025. 3 key focuses I'd pull out. One is continuing investment in U.S. auto originations. Second is that continuing investment in commercial finance where we're looking to create a minimum saleable product. We have a product already that we can -- that can be used by existing customers for their commercial finance books, and we had a sale of that during 2024, but something that we can actually think about selling to the stand-alone market is a goal for 2025. The third focus that we're adding for 2025 is auto fleet functionality. And that's really important to us because it opens up opportunities within existing customers, but also it increases the market that we can access within auto finance generally. So yes, you're right. That product investment will continue during 2025, and we're very excited about it.

And maybe I'll pick up the continued questions around the win rate and the competitive reaction. I mean I think we said it at this forum before that you never want to move into a position of hubris, which is why Matthew's answer to that, keep on moving forward, keep on expanding the gap, making our product better, moving into new markets and increasing our opportunity is important. I think in terms of the competitive reaction, it has been sort of interesting. And I think I might reframe the question a little bit, Sven, and talk about why it's quite difficult for our competitors to react to what we're doing. So if I take Matthew's excellent answer around our expansion of originations into U.S. auto and indeed, we're calling it total originations because it's applicable to our global markets. We're able to do that because we have that single product strategy. So as we're building in originations and indeed, fleet management techniques as well as the commercial loans functionality that we have and that goes on top of wholesale that we built relatively recently, which is continuing to expand our footprint within the markets that we serve. All of that goes into Alfa and all of that is built on that single product, single workflow, single backbone, single SaaS deployment model. And of course, I could go on. And it's all coherent. It all works and it hangs together and is deployed relatively simply and our customers can take ownership of it. And I guess I won't resort into being sort of snippy about it. But if you look across our competitors, their approach to moving into new markets is generally to try to integrate new software products. And then you end up with something that doesn't hang together quite as well. So I think our competitors are going to struggle, frankly, a little bit to come up with something that's upgradable, something that can be owned by the customers, something that can be deployed simply within a SaaS model. Of course, everybody is capable of changing tech, and everybody is capable of writing code to an extent. I'd like to think that we do it very well. But there's no doubt that we've got a window of opportunity here in which we are extremely competitive, and we fully aim to press that [ home ].

[Operator Instructions] It does not appear that we have any further questions. Mr. Denton, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Thank you. It only leaves it for me to thank the 3 of you for your questions and everybody who continues to show interest in our continued progress. We're obviously already well into 2025, and we're looking forward to what hopefully will be another excellent year of progress. Thanks for giving us your time this morning.