FINEOS Corporation Holdings plc (FCL) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the FINEOS Corporation Holdings plc HY '20 Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Kelly, Founder and Chief Executive Officer. Please go ahead.

Good evening, everybody, and good morning to the people in the Northern Hemisphere that may be listening. I will be announcing today's results here with Tom Wall, our Chief Financial Officer. Tom has been with FINEOS for 17 years, and he and I will be going through this presentation today. So I'll move to the presentation, and I'll start off on the highlights, which is -- which are on Page 6 of the presentation. So as you'll see, our revenues for the first half of this financial year have been EUR 40.4 million, which are up 37% on the same period last year. Our software revenue within that was EUR 13.3 million, and again, that's up 26% compared to the same period last year. And pro forma EBITDA was EUR 8.9 million, up 200% or 207.6% on the same period last year. Pro forma NPAT was EUR 2.4 million, which again is up 119.3% on the same period last year. Our research and development also increased, in line with our prediction to EUR 13.4 million, and again, that was up 17.2% on the same period last year. And lastly, our gross profit margin was 67.7%, which was a pretty good result and slightly behind the same period a year ago. So overall, I think we're very pleased with the set of results and the statistics that I've just gone through, these numbers and statistics we've gone through. If I turn to the next page, Slide 7. As you know, we undertook an IPO on the ASX last August, and that was very successful. We have raised the money to drive the FINEOS growth strategy. And in that sense, we'll continue to hire people, and our numbers finished up at 741 people at the end of the period, 31st of December '19. And we still maintain a very high employee retention rate of over 90%, which again, we focus in -- on culture and employee engagement at FINEOS. So I'm very pleased with the retention levels, given the industry we're in as well, particularly around the technology. The technology market has been quite a tight market for people. We also signed 5 new deals in the first half, so again, executing on the sales strategy, and we would have announced those already to you. The important point, I think, we want to make as well is that our whole strategy has been driven around North America first, as in we're very focused on a lot of the research and development being for North America, our AdminSuite, our cloud investment and, indeed, our Absence management investment as well. So it's good to see that the region now represents 55% of our overall revenues and still growing quite quickly. We've expanded our Dublin research and development center, our head office here in Dublin. We've taken extra office space in the business park we're in. And as you can see on the right-hand side there, we have 91% utilization of our professional services team, really indicating that there is growing demand and our people are really busy. And so as we recruit people, we're trying to reduce that utilization level. But at the moment, it is just over 90%. So if I turn to the next page, Slide 8. This gives a kind of a summary of the statistics I've just gone through. But as you can see, all of the kind of key measures of the business performance are positive. And indeed, our gross profit is up by 34.9%. Gross margin slightly down, as I said, but still a good result in terms of 69.7%, and we'll talk about that later. And the operating expenses are slightly up at 7%. So -- and overall, a very good set of results, and EBITDA there at over 207.6%. I'll move to the next slide, Slide 9. And again, you can see the trends in terms of our growth in revenues and the breakdown of that revenue by services and software. And so the half year results is overall a 37.7% growth rate, with software revenue being 26.5% and the services growth in -- pretty high at 43.9%. So that reflects a significant demand that we're feeling from a lot of our new customers who want to embed FINEOS across their organization as quickly as possible. So this obviously has meant that we've had to hire and train and get more people into our professional services teams. I will mention as well that we've been working with partners and bringing partners in to assist us on these implementations as well. So it's not just us growing our teams, we're actually growing our partnerships as well, which is good news. The revenue increase of EUR 11.1 million really reflects the overall business transition to the subscriptions. So we've talked about this before, but we've moved away from the old ILF/ALF-type model to a standard 5-year subscriptions model. And as we transition the business, we're seeing that the move towards the subscriptions is nicely in a healthy position and growing. In February this year, just a few weeks ago, we announced one large new name customer that we've been working on throughout last year. And we brought it to a conclusion just a few weeks ago, and we would have announced that deal on the ASX. We also just closed the deal for -- to move 1 of our top 10 customers from an on-premise claims system to a -- our cloud platform, and that program will start now in the next few weeks. And what that means is that by revenue terms, 6 of our top 10 carriers are now either in the cloud in production or are moving to our cloud platform this year. So a very kind of significant statistic there in terms of us turning the corner and being a fully cloud-enabled SaaS business. I'll move on to Slide 10. And as you can see, the R&D investment and the capitalization and expensing of that R&D is laid out there for you, EUR 13.4 million invested in the product. We continue to grow that investment, and we continue to see the positive impact it's having on our business as we invest further and further into the product. We have capitalized 56.7% of that, and it -- 30%, 32% (sic) [ 33.2% ] of revenue invested in the R&D versus 38.8% the previous period a year earlier. So as you can see, the percentage of investment to the revenues is decreasing as we grow our revenues, which again is typical of what we expected as a cloud business. So 8.4% growth in the research and development team in the first half. And we are hiring additional product people, both on the product management, product owner and product engineering side. And so far, we've been quite successful in getting good people into the organization. And most of the people we bring in are through referrals and people we know in the market. We're also using partners here as well in terms of bringing in some contractors through third parties. Again, we have had to grow the professional services team rapidly, and we would have been using more contractors in that area than in our product development teams. All our research and development is focused on the FINEOS AdminSuite in the FINEOS Platform. And we only focus on one industry, the life, accident and health industry. So we have this full suite, very clear focus on helping carriers in our industry to migrate from the old legacy systems they use today to our full suite and onto our cloud platform. And we believe that singular industry focus gives us real advantage in the marketplace. So we continue to work with strategic clients on new product and investment. And in particular, we are seeing our larger clients that we've won recently in the last kind of year or so wanting to push the product even further in terms of automation and in terms of capability around the functionality of the product. So this is really good news in that it will help us to advance the product and make the product the market-leading product that we want it to be. And so we continue our focus on the research and development side. And as you can see from the next page, research and development is quite a big piece of the overall headcount within FINEOS. So if you look on Slide 11 and the geographic mix of people, you can see the breakdown or -- sorry, of revenues. You'll see the breakdown between '19 and '20. Again, here, we're showing the growth in the U.S. and Canadian teams in terms of the revenues being 55% of the overall business, which proves that the strategy is actually paying off that we're executing. The other regions are growing as well, but just not by as much. Slide 12. So we have long-standing customer relationships. But I suppose the point here is that we're not reliant on any particular one client for 30%, 40%, 50% of our revenues. Our revenues across clients are spreading, particularly the newer clients that we've signed in the last year or 2. The revenue that we're winning from those customers is growing. And therefore, it takes any risk off some of the long-standing customers we would have who would have had higher revenues. Slide 13 is the breakdown of our teams by function. And as you can see, the professional services is 41%, but our research and development team is at 45% in terms of the team size, which again is quite healthy and strong in terms of the enterprise software that we're developing, and we continue to grow those 2 teams. In a regional sense, again, it's no surprise that EMEA is the biggest region because this is where we develop our software. We have operations in Dublin, Poland, and we've been growing in operation in Madrid and Spain as well, which is on the product development side. But the U.S. is growing quite quickly, and we have been expanding our office in Atlanta, in particular, and expanding our teams and professional services in the U.S. So we'll continue to do that and that area will grow by region, given the -- this percentage of revenues that we've been growing as well in the region. So I'll move on to the growth strategy. And we've been executing our growth strategy, and really, we're looking to become the kind of industry platform for the life, accident and health industry. And we've got kind of 4, kind of pillars there, as you can see from the diagram on 15 -- on the page on Slide 15. We're really looking to grow and upsell to our existing customers. So moving those on-premise customers who us for claims over the last 10 years and moving down to the cloud and then also cross-selling some of the other components that we've developed as part of the FINEOS AdminSuite and, indeed, Insight and Engage as well, which are the 2 add-on products that we want to develop and deliver to these customers. So a nice opportunity to cross-sell and to bring our customers from their old legacy environment into kind of modern cloud platform that FINEOS will host. We're also focused on the winning of new customers, and we had 5 in the half that we're reporting on now. And 1 we've just closed, quite a large Tier 1 client just a few weeks ago. And what we're seeing in the marketplace over the past 12 months or so is very strong demand for the Integrated Disability and Absence products. So combining Absence into the suite that we already have around the claims side. And this is largely driven by regulatory compliance that these carriers are required to have. And in particular, some of the states in the U.S. are bringing out mandatory paid state leaves, which carriers will have to have the adjudication functionality in place for -- by the 1st of the 1st 2021. And this means that there they're under pressure to deliver and they want FINEOS in place by that date. So that's one of the pressure points that's driving the extra demand for us. Also, carriers want to outsource the Absence management for employers. And it's now seen as a competitive differentiator if a carrier has a strong Absence and Claims Management system. And again, they have been quite selfish in terms of pushing and have the system fully implemented and to be able to market that for next year. So quite strong demand in terms of the new name. Also, we're selling the Absence product across existing names. And I think it's up to about 8 or 9 customers who've bought the Absence product to integrate with the Claims product that they would have had in U.S. So Absence Management is a key part of the new wins for the moment. We then would expect to see more demand for policy and billing as the IDAM product settles down. We will see that demand coming just as soon as the clients get out of the pressure cooker that they're under to have the IDAM product implemented for 1/1/'21. And we also have a strategy to expand our sales team to increase our marketing across the whole piece, but also move into geographies as well. So we're looking at the Asia Pacific geography, and we're going to look at the European geography as well. We've just started a -- to look into the French market, but we're only at the embryonic stages there. So again, both by expanding geographically and by expanding the product suite, it gives us a greater footprint in terms of revenue growth and product growth as well with these customers. We're also interested in any M&A opportunities that would make our boat go faster, as to say. So if we see opportunities in the marketplace where something is very, very complementary and could give us a faster accelerator on our own product strategy, then it may make sense for us to look at an acquisition, so that's something as well that we're just pointing out. It's all been indigenous growth so far, but that's something -- an opportunity for the future. And really, where we're going is to become the life, accident and health platform for the carrier market in North America and globally. The next slide is Slide 16. And you can see our market leadership, where we've now got 7 of the top 10 group life and health carriers. The rest of it hasn't changed much since we did the IPO. The following slide is slide 17, which is the FINEOS Platform. Again, this just shows you the area of focus where we're really driving into the research and development side, and this is what we're telling carriers about all the time. On the left side, FINEOS AdminSuite has taken a lot of our research and development at the moment. But over the next few years, we will move across and we'll spend a lot of time on FINEOS Insight. And FINEOS Engage, that's our API-first strategy to build out connectors from our platform to third-party software and even our own portals as well. So all of that is going quite well. But the big focus at the moment is into that FINEOS AdminSuite to move the core platform along. And on Slide -- I think that's Slide 19, you can see on the FINEOS AdminSuite, a lot of focus on the Absence and the integration of the Absence product into the FINEOS suite. So -- and a lot of focus on Massachusetts and Washington state leaves, where we're developing the functionality to support those 2 states. So the full R&D is going into the product at the policy and billing side as well. And policy and billing have been running with our chartered customer for about a year now in production. So that product is really starting to come to fruition in terms of maturity. And indeed, we're now pitching that product into RFPs and bids now with new customers. So we hope to be able to promote and sell that product this year. So I'll hand over to Tom Wall now, who's going to tell you about the financial performance in a little bit more detail.

Thanks a lot, Michael. Good evening, everybody. Thanks for staying on this evening, and good morning, everyone in the current hemisphere, [ really ]. Firstly, it's nice to be able to present a good set of numbers. As you can see, the substantial growth that we're looking from an overall perspective. Also, there's a large amount of scaling up taking place in the business to develop the headcount. So this was one of the lead elements for the material changes in the EUR 11.1 million change year-on-year was related to services revenues and the overall headcount substantially. The 741 headcount that we're at currently, we have budgeted full year about 748. So we're well on track and ahead of that. It's also one of the bigger challenges of our resourcing and [ go-forward and that ] from an overall revenue perspective. So again, just to reiterate some of the key points that Michael has already gone through. So the 37.7% growth is a good metric [ from an overall perspective ]. We're saying that services revenues is much in line with the forecast and what we've already given out in the marketplace, and substantial activity and increase is on the services revenues, which we said is well up by approximately 44%. One of the elements is [ that's on that ], obviously, is that the revenues on the services requires headcount, and that flows through to the cost of sales element, which is the main [ moving ] part on the 44.3%. What we've had from the mix perspective as well is that we've also increased the contracted staff element. The contracted staff element has also flowed through to the margin change, which we had last time for the period ended December, 71.1%. It's now 69.7%. And the main constituent part of that is, when we have contractors engaged on projects, their time is fully billable to the project. So you don't have the overhead elements and downtime to [ even ] out from an FTE perspective. So we're seeing a slight mix in that from an overall perspective, but still very strong margins. The other part on the cost of sales is, obviously, from a contracted point of view that Michael alluded to, we're adding those in different regions. So again, until our footprint settles down, we are adding contractors through partners in North America. And we're also adding contractors [ through ] Spain and different regions. So different cost bases, different models, including Australia and New Zealand as well in there. One of the other elements there from a G&A perspective is there's an FX gain of EUR 1 million, which is done on the revaluations. The revenues were obviously recorded at the [ monthly ] amount from an overall FX perspective. And again, it's a bit of a lottery with regards to how FX is going to run over the next 6 months of the year. But we also have a strong policy that we have a natural hedge for a lot of our staff in the regions. We have probably about 120 staff in the U.S. and 150 in Australia and New Zealand, which means that we have a cost base to [ cycle ] as well as Michael alluded to, with extra premises, overhead facilities and travel. The other element that's on here is from the depreciation and amortization perspective. So in line with the extra investment from an R&D point of view, the half year is about EUR 13.6 million. We've given an indication of about EUR 27 million plus for investment in R&D. And obviously, in that from a mix perspective, we have the elements there that with the -- with Absence or IDAM, we depreciate that and amortize that over 5 years, the same as claims, and policy and billing over 10 years. So we've seen a marked increase in that as we increase the actual cost base and the investments that we have there from an overall perspective. The other metric that Michael had alluded to is R&D as a percentage of revenues has gone down from 38.8% to 33.2%. And we'd envisage going forward to still be a higher level of R&D going forward with the investment in the product given the marketplace and what we need to do. Just going on to Slide 21. So from an overall point of view, the cash at bank that we closed out is EUR 34.7 million. We will have some cyclical changes in there from the H3, which is a period from January through to March 2020. We would have a lot of renewals that we have had from historical elements, which would have renewed from January. So we would expect to see a higher cash balance at the end of March, which is our H3. On trade debtors, the reason for the movement of that have been some timings on billings and collections. And again, it's a positive message. Our DSO has gone up slightly on that, but we will see it picking up a bit to the end of this quarter. And we're also investing, in obviously, from an IFRS point of view in regard to the overall investment in space for both Dublin and Poland, and we're also looking at Atlanta for a new office space there as well. So that will allow us to move from a WeWork office into a permanent residence and capacity for 140, 150 staff based there. The R&D increase is a net increase of EUR 3.4 million on the June '19 numbers. So obviously, that's a net amount in regards to the capitalization and then what we've amortized in that perspective. Creditors, they decreased from June, and that's the timing in regards to invoice payments from an overall perspective. In line with our cyclical billings, the deferred revenue number has come down because as of the end of the year, we've run down most of the revenues at that point and then we start more renewals from January onwards. So the deferred revenue increase would be [ an indication ] there. And then from a cash flow point of view, from an overall point of view, we are still burning cash but not to the same level. A big element of that is used in the investing activities, this is mainly R&D; and then the operational elements. So a strong focus on that, and that's improving substantially as well. So from an overall point of view, the [ finance ] activity showed net cash raised. And then from an IPO point of view, from the cash received, which was EUR 62.9 million, we paid back loans on the European Investment Bank, which was EUR 15 million principal and EUR 1.6 million in interest, and we had IPO costs of EUR 5.9 million. They are the key points on the financials. And just to allude to, there's a reconciliation for the statutory figures [ back ] to pro forma on Slide 27. Thanks a lot. Over to you, Michael.

Thanks, Tom. So moving it along to Page 24, just to kind of summarize and finish up. The progress has been good, and we've obviously overachieved on our financials. We do see the outlook as very positive as well moving forward. And the ASX raise that we did last year was really positive for us and gives us a bit more flexibility in terms of banking decisions around investment and growth, which is really good. It's the first time we really had money to be able to do things like that. We repaid the EIB loan, as Tom said, which takes kind of some weight off us in terms of the 7% interest we were paying on that loan. We're seeing continued demand from the customers. So -- and it's all in the professional services side. We need to help these customers embed the product into their organizations, and these are very big carriers. They have multiple systems. They have complex environments, and they need more help from us. And so we've scaled our teams and trained our teams up, and we're going to increase our guidance now for this year from what we had said, which was EUR 80 million to EUR 82 million up to EUR 84 million to EUR 86 million, and that will all be from the professional services side in terms of the revenues there. We've continued to focus on the sales side. So as you see in the period, we closed 5 new deals. Our pipeline is looking healthy as well in terms of the go-forward. We just closed a large contract a few weeks ago with a Tier 1 carrier, so that's a big multinational out in the States and a very positive move for us. And we've also been pushing customers to move to the cloud as well. The move to the cloud in terms of the work involved comes secondary to new customer implementations. So as we scale the business, the demand has been very much from the new customer side. And therefore, the cloud work will continue to work -- go on in the next year or 2 with a couple of other customers moving up. So we've kind of balanced that in terms of how we're taking customers to the cloud versus new implementations, with the priority to get the new implementations in as the first priority. So more and more, FINEOS is becoming that true SaaS platform that we would have talked about during our roadshow at the IPO last year. And yes, we're still hiring, scaling all of our teams, and we look forward to continued growth. So thanks, everybody, for listening to us. Thanks, indeed, for your investment in FINEOS, and look forward to seeing you next week as well. And I'll hand back over to the operator now.

[Operator Instructions] Your first question comes from Tim Lawson with Macquarie Group.

Just in terms -- I think you partly answered this question slightly at the end. I was just going to ask you about the upgrade to guidance and what was driving that since it was obviously mid sort of December AGM, you sort of mentioned it being the services line. But what's happened in the last sort of 10 to 12 weeks that's made that sort of move so materially?

Tim, it's Michael here. Yes, I think what's happened is that we've kind of solidified plans with customers, the new customers. We have looked deeper into their organization. We've seen that they have other programs running, that they've come back to us and said, look, it would be really good if we could integrate into the, say, analytic programs and other parts of our organization. And they've asked us to scale. So we've been successful in hiring the people and training them. So it's one of those things where we've taken the decision to scale the business. It's a good margin, and it also helps us to build our professional services teams as we grow the software side and the growth around some of the new products as well. So I think it's a good move, and it basically gives us experienced team in place. So yes, it's happened. It has happened quite certainly. The business is under demand, as you can see, 91.1 -- a 91% utilization on our teams. It's crucial for us that we keep our teams kind of motivated. We don't overload them. And so we've been hiring quite quickly. And our own teams, believe it or not, have been helping us to recruit people. So they're as keen as we are to hire and to grow.

And in terms of the guidance, do you have any sort of new contract -- client wins or new agreements with existing clients that you need to hit that guidance? Is there any gap there? Or is it effectively all now done from a pipeline point of view?

Yes. Look, we feel that -- we feel confident enough with the guidance in terms of what we've already achieved and what we can see in our pipeline and the demand in the professional services team. So we feel comfortable around the guidance. There is still some jobs to be done in terms of closing off SOWs and hiring the people as well. But again, we feel that we should give the guidance because we're continually reducing that order fill component, strengthening the book. So we feel it's a fair guidance at this stage, given the position we're in and demand we see.

Yes. In the first half, initial license fee was pretty much what was in the prospectus in terms of numbers. Is that something we should expect just to drop pretty close to 0 going forward?

Well, yes. And look, we're not selling initial license fees and haven't done for the last 3 years. But we do have some trailing initial license fees in our -- the next 2 to 3 years with our charter customer because the deal we did with them 5, 6 years ago was over a 10-year period. There were kind of lumps of ILF. So that will come through. So we don't see it going to 0 just for that reason. But it's -- definitely the emphasis of growth around software is all in the subscriptions. And all the new business is subscriptions, any new product we sell is subscriptions, a little bit of trading stuff, as I said, from the charter customer.

I appreciate your comments on the consultants and the FX. That's helpful. But just generally, for example, the sales and marketing line is a bit lower in this half than it was in the June half. So just trying to work out were there some things in there that have moved -- one-off of reclassifications that might be impacting the expense categorization? Or it's just -- perhaps the way the numbers are moving?

You may want -- yes. Okay, I'll hand that over to Tom.

There's nothing really unusual in there. The sales and marketing is EUR 1.9 million versus EUR 1.5 million. So it's actually up EUR 400,000. So we will have some more people added to those groups. And going forward from there, we will be adding more focus to the sales team going forward.

If anything, Tim, I think we're probably -- in terms of the ambition we put out there for growing sales and marketing, we haven't grown as much as we would have put into the forecast. And therefore, the headcount is down and the expense is down. So that gives a bit more margin on that side in the first half. So we are a little bit behind on the recruitment side of salespeople in the regions.

Okay. I could see the increase versus the first half '19, but it looked like it was down versus second half. So it was just moving around in ways I hadn't thought it would. I thought it would be a bit more growing sort of sequentially as well as versus the PCP because that's helpful in terms of the headcount numbers.

Yes. There's some timing issues [ in our hedge ]. And hiring senior guys in the areas that we want takes a bit of time because we have to get it right. We would also have some second half figures in regard to some of the big events that we would have on the marketing side, which will increase. So there will be some additional spend in the second half of the year.

Yes. And just on the delivery, that's moved around a bit quite as well. But in terms of the utilization, it stayed very good. Just what's happening? Is that just the additional hedge you're bringing on and, ultimately, they improve going forward? I'm just trying to understand why that deliveries versus the June half are up so strongly, while utilization stayed very high.

Well, I think we've got training and education to do on new staff that we hire. So they don't become available to be utilized until 2 to 3 months into the hire, and they're not fully billable. So yes, the utilization of the existing team then would remain high until those people come into the teams. But demand has been growing very rapidly. You can see the number has increased in terms of the revenues. So it's just been a constant -- we haven't been able to alleviate some of the pressures.

The other thing on that, Tim, is when you hire a contract staff, the intention is that is they should be billable all the time. And if there's downtime with that staff, that's not a charge that comes through to us as well, [ even when they're ] busy. So that's what you have to do. So it's a different profile on the contractor side.