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

Thank you for standing by, and welcome to the FINEOS First Half FY '22 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Kelly, Chief Executive Officer. Please go ahead.

Thank you, and welcome to our results presentation today. My name is Michael Kelly, and I'm joined here by our CFO, Tom Wall. So I'll move into the presentation, and I'll start on Slide 3, which has been already made available through the ASX. So hopefully, you have a copy. For the half, we had a total revenue of EUR 65.4 million, which is 24.4% growth on the corresponding half last year. But importantly, we were very pleased with our subscription revenue growth of EUR 25.2 million, which was 40% up on the previous corresponding half last year. And indeed, services revenue continued to grow to 39.5% -- or EUR 39.5 million, which is an 18.3% growth in the corresponding half. Overall gross profit was EUR 42.5 million, a margin of 65%, and that was 25% up upon the previous corresponding half in the previous FY '21. EBITDA was EUR 6.5 million, 9.9% margin that again was up against the FY '21 first half of EUR 3.2 million. And then annual recurring revenue, again, which is an important highlight is now we're only at EUR 51.8 million as of the 31st of last year. So again, a big jump on the previous results. We also, as you know, acquired Spraoi in the last financial year, and we've begun to enhance our FINEOS insight. So we've launched a product around our FINEOS Insight and FINEOS Engage components of our FINEOS platform. And we did win a client as well in the first half around smart connectors for our APIs. So we're very, very pleased with that. North America's revenue continues to power ahead, and that's now 80% of our total revenues, up from 70% the previous year. And we also raised EUR 46 million at the end of last year, which again was an important raise in terms of giving us the investment to continue on with our journey and give us the flexibility to move the business to become that true SaaS and -- global platform for life accident and health. Our employee retention rate is still above 90%, which in today's time, I think it's a very, very good result, given the talk of great resignation and so on. And we also increased our headcount by 5% up to just almost 1,100 people as of the end of the last half. And then in FY '22, our subscription revenue, we continue to hold our projections on that. We have a healthy growth rate here, and it is the most important statistic that we're watching the company in terms of our product growth revenues. But we are expecting to be at the lower range of the EUR 125 million to EUR 130 million that we gave at the start of the year in terms of projection, and that's mainly around the services side. So if I turn to Slide 5 and see the performance of the business in terms of the first half of '22. And all of our numbers are up. So quite pleased in terms of the overall results, gross profit of EUR 42.5 million, again, being EBITDA margin and so on is up. So things are trending in the right direction for us, and Tom will cover that off in his presentation later on. So I'll turn to Slide 6. So overall, as I said, a 24% increase in our revenues. And as you look back to the first half of 2020, you can see the continuous growth of our -- both our services and our software revenues, so that we have arrived at the EUR 65.4. In terms of the growth itself, very much cross-selling and upselling to existing clients. And we would have flagged this at the very start of the year in that we can see ourselves growing and expanding our business with existing customers. And we do have over 60 clients globally, and we have some of the biggest names in the world as well as customers. So we're in these long-term relationships where we're continuously able to sell and cross-sell our platform. And in terms of organic growth, and that's without the acquisitions, our total revenue growth on the organic side was 22.3%, up on the first half of the corresponding last year with subscription of almost 40% on that corresponding and services up 16%. So again, the underlying core FINEOS business based on the FINEOS platform is growing very healthily and pleased with that as well. I'll move to Slide 7 now. So you can see the breakdown of revenues by region. And the APAC region hasn't really moved in terms of carriers in the market do more in terms of core systems transformation, but we do expect that that will kick off, and we do see that the market is coming back in terms of core systems renewal and so on. The revenue growth in North America, however, has continued to grow. And really, as we transition our own business from an old model of on-premise and initial license fees and annual license fees, it's very, very pleasing to see that the vast majority of our revenues are now SaaS subscriptions in terms of licenses. And indeed, our strategy of cross-selling and upselling is really paying off as well in terms of our existing clients and opting more and more of our platform, which again, is what we predicted over the past 2 or 3 years since we went public. New customer win as well, we've had some customer wins there -- a recent customer win. But again, it's a small customer. And pleasingly as well, it's actually based on one of the acquisitions, the Spraoi product was what led us to that client. And of course, when we win a client, we have that client hopefully forever with a lot of opportunity to cross-sell and up-sell. I'll turn to Slide 8. Research and Development is down on the previous half, but it's up on the corresponding first half of last year. And we continue to see a rise in Research and Development from the FINEOS side. And there were a couple of things that we stopped investing in because we finished the jobs, what we have been scaling into this half. So we do expect that Research and Development will continue to rise. And that's an important point for us to make as we continue to integrate our acquisitions and indeed invest in our organic platform as well that we've built over the years. Over the past 5 or 6 years since FY '15, we have invested over EUR 170 million in the FINEOS platform, the organic platform, and that's without the acquisitions, and it's an important point to make. So a huge amount of [indiscernible] into this platform because this platform is very much a long-term platform built for carriers for many, many years to come. And therefore, we must put the effort in on the research and keep the product at the speed with the market and the change and so on. I'll move to Slide 9. And that gives you some color around the number of customers in terms of the top 10 and the tenure as well as the percentage of revenue that we've taken from them in FY '22 first half and the previous year in comparison. So as you can see, Client 1 there has only been with us 3 years and represents 24% of our revenues. But what we find is that the various Tier 1 Clients that we work with they turn on and off the gas in terms of what we do on services as they grow the product and as they need the product across their operations. So that will continue to change. But pleasingly, as well on this page, you can see the tenure of some of our long-term customers and the fact that they're still spending with us and doing work with us after 20 years working alongside us. So that's a really pleasing statistic as well. I'll move along to Slide 10. And in Slide 10, you can see the employees by function. So again, as I already stressed, R&D site being the biggest part of FINEOS followed by the product consulting, we have increased our sales and marketing team, and we'll continue to do that. But we need to have the right platform, which is purpose-built for the industry that we address is the key component of winning in the longer term and I'm a firm believer of that and I can see it as we move sales through the different cycles and clients come on board. So employees by region, and again, EMEA is where our headquarters is and where we do a lot of research and development in the various countries. But we do have a big North American, an APAC contingent, particularly in Australia and also obviously in the states. The average utilization has been 90%. So it's up in the prior period, but the retention rates remain high and not only the retention rates, but the tenure of our staff as well as a very important statistic that we watch because people who stay with us in the long term, they really do understand the clients and they understand the platform. And it's very, very important for us to keep that knowledge internally within FINEOS. So we've done a lot of work around employee engagement, employee retention. And we now have the lockdown completed, I suppose, and a lot of the restrictions removed, certainly in the Northern Hemisphere and Ireland, most of the restrictions have gone and the lasted and will be gone by the end of the month and the same thing with the states. But we have an employee base now who have a remote first requirement. We were already remote first in the states for many years. But certainly, we're seeing that in our head office and in our various EMEA countries and indeed in the Asia Pac market, people want to work from home first, but they do want some connection with people in the office. And indeed, we want to bring the name as well from time to time. So a good, happy workforce well engaged, but we never go back to everybody being in the head office 5 days a week. So with that, I'm going to hand over to Tom Wall, and he is going to present the detail on the financials.

Just starting off at Slide 12. I suppose the main observation firstly, is it's been a good level of activity over the first 6 months of the year. And considering the context of FINEOS March '20 moved totally remote over a period of time and all staff have been working remotely to continue the growth within that backdrop and retained gross profit margins has been very strong. As we said, the total revenue grew by 24%. And from an overall perspective, just to reiterate some of the key points Michael has raised. From an overall software revenue perspective, the growth of 35.6% has been very strong for us. From an overall services perspective, in line with our strategy, the focus has always been on the subscription side. And from an overall investment perspective, R&D is obviously a key point for us. And as Michael alluded to, when you look at the previous slide on R&D, H1 is usually a bit lower than H2 from an investment perspective. So we expect to see more investment in H2 on the R&D perspective. The other big part to call out is the majority of the activity has been with existing customers, which shows the cross sell and the activity levels that we have across the business. With the actual performances on the numbers themselves, so one of the things to call out is that from the business model, cost of sales, contractor costs, they increased by EUR3.4 million, which is something which has been managed by us to give us flexibility for additional resources. And also the hosting costs would have increased, which is in line from an overall additional customers' usage, environments and that's 3 buckets, and that will be used from that perspective. The other part of the call out would be around the amortization rate. And that's just an output of the additional investments that we're doing in the R&D and the capitalized the acquisitions from an overall perspective, we will still have a shorter amortization period for the likes of Limelight when they came through. The other main part, I suppose, from this perspective is that the environment from -- we see from the announcement from the good performance overall. And given the marketplace and the activity level, it's strong. Moving on to Slide 13 on the operating expenses. Again, calling out the -- one of the things that would have happened for H1, as Michael had called out, there are some specific projects that have been closed out successfully as part of the overall integration and the milestones from an overall business perspective and deliverables, which means that the H2 element of the R&D will increase, even though it was a small increase of 3.7% headcount due to some timing differences from the start of the period to the end of the period. The sales and marketing element would have been increased as well as mainly contributing for the integration of the acquisition last May, which would have been Spraoi. And the product consultant delivery costs, they would have increased in line with the increase in revenue. So the 18.3% uplift -- and the -- from that perspective, the delivery costs would be the elements that wouldn't be contract-related. -- contractor costs will go in directly to the cost of goods sold. The team [indiscernible] stands out is the cloud operations. The elements are low substantially around headcount, but also the focus is on automation to resource investment in technology to ensure that the processes that we can really make going forward, and we minimize the touch points and the labor-intensive elements of that to the substantial progress on that. But as we would have reiterated in the previous upgrades, we continue to invest in the cloud ops to get to a critical mass to allow us to support all the products and all the product lines. And that means that we will have North American support teams as well as EMEA and then as well as APAC to cover those bases. The other element of the call out is obviously with the G&A cost, we would have had previously the investment fees charges that we've gone through there. And from an overall perspective, with facilities and headcount, as was called out, the hybrid means we still have office space, but that is under review from an overall perspective to maximize the benefits. And we would have given up some spaces as well during that period over the 2 years from that perspective as well. Going on to Slide 14. One of the big callouts in here, obviously, which is key, is around the cash element and the strong cash balance that we have there, which facilitates us from a go-forward point of view to continue the investment, both in R&D and in sales, marketing and other parts of the business. One of the things to call out as well is that from a timing perspective, we have a substantial amount of renewals in the start of H2, which will be historical from a January perspective. And over 50% of the renewals would take place in January. So we would see the cash position strengthens in January for the period through and then it normally tapers off a little bit for the end of the calendar year. And one of the things we would have with regards to the trade receivables, the reduce late up 43% since June '21. The main reason that there would have been some projects, milestones, and time lines in there, which meant that the cash came in after that point tolerate the June '21 period. This development expenditure, which we called out as well, recapitalized amount was close to EUR12 million. And as already referred to the amortization rates will continue to increase in line with the level of activity we have and then what we've capitalized from an R&D perspective. Deferred revenue from a time of a renewals perspective, there's also an element to call out. The deferred revenue tends to run down at the end of the calendar year. And then as I said before, the renewals have kicked in from January will then uplift that from an overall trading perspective. And then we're talking about the provisions for deferred tax liabilities. So from an overall perspective, we would have inherited some losses in North America. And from an overall structure point of view, the deferral of taxes and that is to move that around to make sure we maximize the benefits across the business. On Slide 15, from an overall cash point of view, we still have timing differences at the end of each period. And obviously, when we look at the 4C for the last period, that showed a strong tax receipt for the period over EUR 33 million and the timing we would have regarding some projects and contractors who we would use next the timing of this and one of the big reasons for the 70% movement in the actual change in the activity deals. The intangible assets was EUR 11.9 million and contract costs, again reflecting [Technical Difficulty]. And then the financing activities would relate to the funding that we got in September last year and then the SPP in October last year. From an overall perspective, the cash that's come in gives us good visibility over what we're spending and H1 is strong cash wise from a collection perspective. They are the key points, Michael, from the update. I'll pass it back to you.

Okay. Thanks, Tom, for that. So look, I'll finish up in terms of looking at the outlook. Obviously, we've come through a period of COVID and difficult markets in terms of 0 interest rates or negative interest rates in some countries. And that has a certain amount of challenges for the insurance market and particularly our market and higher level claims and so on. So what we've witnessed over the past couple of years is a dynamic whereby carriers are continually trying to save money and continually watching their budgets. But at the same time, they have to move forward and transform their business to become digital corporations. And they don't have a choice in that, but they've been under heavy pressure over the past couple of years to really conserve capital and cash and in some cases, to jettison and change businesses and so on. So I'm hoping that the next year or 2, obviously is going to come out of that. And we're certainly seeing the signs of that in terms of carriers and the green shoots moving forward with, as I said, the restrictions being removed in the Northern Hemisphere. So we're looking forward now to continued growth. And we are actually guiding at the lower range of the EUR 125 million to EUR 130 million that we would have done in the forecast -- or sorry, in the guidance last time we spoke to you. But the important part of this is that this growth strategy that we have is very much based on subscription growth rates and indeed becoming that SaaS industry platform for group and individual life accident and health. And so therefore, we're going to reaffirm our commitment to that in the second half. We see the services side as well as something which is helping us to build partnerships with third-party SIs. So we have been giving away quite a bit of services revenue around our customers. And we're going to continue to do that on the basis that we want to build SI relationships, which will be global and will help us to find new business and work with our clients to deliver faster and transform their business because we're building a reservoir of muscle and resource that we'll get behind FINEOS as we start to grow and see this platform growing out. We have got some really great news in terms of the New York Life full system now up and running, having eliminated 7 -- sorry, 6 legacy systems. Their full book is running on the FINEOS admin suite. So they were never willing to be a big cheerleader until we got the full portfolio over to FINEOS and what you'll see in the next few weeks is a case study coming out from New York Life. And I do believe that's going to help us on our sales pipeline in terms of future growth. We will continue the research and development because we're totally committed to the full end-to-end platform. We still have acquisitions to integrated FINEOS as well. And so there is work to be done. And as Tom mentioned, we were grateful and really pleased to raise that capital that we did a few months ago after our last results. I'll turn to Slide 18, then to finish up. The FINEOS platform is very much around core digital and data. And where we are today, as I've mentioned, is we've finished out a lot of the platform at New York Life. We've also been able to build out the member level functionality on the platform, which allows us to move into the voluntary benefits space. So we're doing that with New York Life, and we've got our full options and integrated disability and absence working on New York Life. So that platform is coming to fruition. And indeed, FINEOS Engage and FINEOS Insight have been accelerated by our Spraoi acquisition. So all in all, we're in a good place. As I said, a difficult market over the past couple of years, and we're hoping things will continue to improve now in the next year or 2. So that kind of covers what I wanted to tell you in terms of the outlook, and we're happy to take questions now. Thank you.

[Operator Instructions] The first question comes from Garry Sherriff from RBC.

I've got a few questions. First one, just in relation to large carriers and their behavior. My understanding is that they typically do get budgets in December. If that is the case, what's been the outcome from a new work perspective? If you could give us some detail on that would be great. And anything in relation to potential deal sizes will be beneficial.

I'm happy to take that question, Tom. So yes, the carriers tend to do budgets at the back end of the calendar year in most cases, by the financial year's calendar. What we've noticed in the back end of last year, carriers still knuckling down and tightening budgets and focusing their spends on specific aspects. Thankfully, in that sense, our own clients have really knuckled down on us in terms of the integrated disability in absent management product in the North American market, which has been gone gangbusters for us, but also on the full admin as well with the new life guys. So our carriers continue to put those budgets together and to move forward. A number of carriers we've noticed in the North American market who have moved on adopting policy of main systems from various other industries over the past 5 years or so are starting to slow down on those investments. And in some cases, we've seen some projects stopped. So I'm hoping that that's a signal that an opportunity for us to maybe reengage with some of those clients and so if we can obviously sell our purpose-built admin suite into those customers. But often when those projects are canceled, there's a period of remarks and there's a period of doing nothing because there's usually a change in leadership and so on. So that's the environment we work in. It's very much a slow environment in terms of decision-making. But as I said, I believe we're doing the right things, and we are getting the notice now in terms of having the only porters built admin suite for the employee benefits market in North America.

I'd say as well, in terms of ANZ and our existing clients down under, what we've seen is slowness, both in the past couple of years with the M&A and also looking around cloud. But we're actually seeing that softening. So we're pretty positive about the outlook as we move through this year in terms of what carriers going to be doing in your market because we do believe that they are coming to kind of investment cycles now, which we're moving forward into a much more transformative position with our own claims and legacy back ends.

That's a good segue actually into the next question on the amount of revenue that we derive from on-prem customers. Have you got any sense of what portion of those on-prem customers have signaled to you their intent to move to your cloud suite?

Yes. I think it's a question of when rather than if, Garry. And I think you'll see our on-prem related revenue. I can't give it away too much. But obviously, if you look at the ANZ revenues that we've carved out, that's on-prem revenue in the main, except for partners life. We were the first customer who went live sorry who bought the system in the cloud, in the region, and they're just about to go live as well on the system. So again, that's another confidence boost to what a carrier is to look to the partners like us. But I think if you look at our ANZ, you'll still see -- you'll see that is mainly on-premise -- almost all on-premise revenue. So the opportunity is there to move the market. And as I said, we have a number of carriers who are looking at this now. and who do see the inevitability that they cannot stay on on-premise software that we loved 5, 6 years ago. And if they do want to know if they become more agile, they need to move to the cloud.

Understood. In terms of services revenue being lumpy, I'm just trying to get a sense, what's the minimum expectations for services revenue in FY '23? I mean I guess what I'm trying to ask is, is there a portion of services revenue that you have already budgeted to be completed with some of your existing customers in calendar year '23 [indiscernible] can we just get a sense on what that is?

Yes, yes, sure. We walk into the year and a year with a good view of what we can take in terms of services and projects and stuff we're doing with clients because we know what their plan is with us. So we can gauge that pretty well. In terms of the services go, we are trying to change from this and become much more of a product than a SaaS revenue business. And really, that's the premise we set out to raise all our money on the IPO and continuous acquisitions that we've made is to push that agenda. And that really means that services become less important to us. They are obviously important in terms of making sure we implement well and that our clients get the best practice and so on from us. But as we grow the product platform revenues, we're expecting that we're going to have much more services, and we're not going to be able to do it. So we're going through this funny phase, I suppose, where we're giving away services to some big SIs on the basis that they have the appetite for and they really want it, but also on the basis, but they would be moss for us in terms of future implementation work. So that's the kind of challenge on the services side. It's -- we could get plenty of services. But we're not interested in just services for service's sake. It has to move us on a strategic agenda. And therefore, we have to take those things into account.

And so I guess just clarifying what are the minimum expectations, I guess, for services revenue in '23?

Well, that's where we're already guiding at the lower end in terms of what we said on the number, and that's really tied to the services revenues. We're not taking as much of the services as we were thinking we might take at the start of the year. So we gave you the guidance there in terms of the lower range or the lower end of that range.

I was looking for 23 minimums. But that's fine. Last question...

I'm sorry. I misunderstood. Sorry.

Yes, yes. No, I understand the FY '22, that's clear. Just looking forward for FY '23. What should be the minimum base expectation from a services revenue perspective?

Look, it's -- if I look at our numbers, our growth rates, we're really putting the emphasis on the subscriptions in FY '23, but we should see a 10% growth rate on services anyway. But yes, we could grow faster, Garry. Really, you have to be more agile on that number, around that percentage as we see the software subscriptions opportunities and the SI opportunities as well. So yes, we would see around the 10% plus but it could be a good bit higher. I don't know yet.

Yes, yes, no trouble. But that's the last question, just the events going on between Russia and Ukraine. Are there any customers who might be impacted? I don't know if you've got sites in those countries? Or are there any second-order impacts that you may foresee from some of those events which are currently underway?

No, thankfully, I think there's less than 1% of the Irish economy, which is connected to Russia in terms of import exports. We're not connected to it at all in terms of the European market. Obviously, North America has nothing to do with it and neither is like our ANZ or APAC customers. But we have got one competitor who has a big head office in that country. So it's a very unfortunate circumstances of what's going on in the world. But yes, thankfully, no, there's obviously going to be global requestion around sanctions and stuff like that. So we'll see how it goes.

And I suppose Garry if you look at the percentages that we have, we set about 80% of the activity is North American based. So you can see from the revenue splits from an overall perspective, there wasn't any direct impact on that.

The next question comes from Tim Lawson from Macquarie.

Just in terms of the external systems, integral revenue, can you give us a feel for how much if you've sort of given up that if you'd looked at yourself what that might have meant to your service revenue?

Well, I think when we were looking at the start to the year, Tim, we were looking at that range -- that was a decent brand. We've always tried to be conservative in terms of the customers. So -- we've given away quite a bit. I haven't actually -- I don't have a way of counting that in terms of -- we don't particularly watch it, but we could have earned more money by not giving away some of the ESI money. And we've kind of tempered the product consulting team hiring and so on, and we've been doing training at very low rates as well with some SIs just to get them on board. So it's a bit of pain, but hopefully, the gain will come in the next 2 to 3 years.

Just with the flagged increase in R&D in the second half, can you talk how much that is quiet led and your expectations to drive future revenue?

Which increase, I missed your first?

The R&D, Research and Development in the second half.

Yes. Look, the Research and Development that we're doing is a combination of work on the new acquisitions, some opportunity, particularly around the Spraoi side to build out some machine learning and new models and also API connectors and so on. We've also got regulatory compliance and that we're continuing to build out the suite for. So we've had new states in the U.S. come on board in terms of paid leave and mandatory paid leave. And the kind of team in the U.S. market is moving towards mandatory paid leave on a national level, I think, really. And also flexible benefits and flexible work, which is amazing for the states to come a long way in the U.S. in the past 30 years. So a lot of the research and development is related to that, the change up in the marketplace. There's still work to be done on the admin suite around the voluntary benefit space, but largely the group end of the system and the IDA or the integrated disability and assets management piece were largely complete on the core. So it's still -- it's really around milking the asset and making it go faster, more automation, more investment in cloud, more investment in tooling. There's a platform element of this as well that was quite substantial.

You can see you sort of flagged an increase in R&D headcount. But if you look at for the last sort of 3 halves, the headcount ex the professional services is really effectively unchanged. So the increase in R&D headcount, what sort of scale is that likely to be?

Tom, maybe you can answer that question.

Yes. From a scale perspective, some of the things that we found in there, Tim, for H1 was that when we closed out some of the projects, we would have moved some of the external contractors on that. I'm trying to think the overall sale is probably about a 5% to 10% increase in the HC side.

In the R&D?

Yes. Again, it's a range because one of the variables that we have on here look no different than any other company is around recruitment and getting the resources up to speed. So as Michael alluded to there, we have the projects earmarked over what we want to invest on like the registry, the new acquisition. But the actual R&D spend there is going to be driven by the ability to get the resources and get folks on board along with the Indian investments that we do and that was called out earlier, we're intending to head there as well during that period. But a simple mechanic there is a 3-month notice period for getting folks on board in India just from an overall logistical perspective. So we will see an increase. But obviously, as Michael called out, the new acquisitions and regulatory stock is what we're focusing on.

Does that India investment allow you to offset some wage pressures that otherwise would impact gross profit margins [indiscernible]?

Look, it's part of the overall strategy to make sure that we have the right resources, but also the keep the margins because we've managed to keep around to 64%, 65% gross profit margins. And the intent will be to utilize more of what we've been -- we took over from Spraoi from the actual center in India. So yes, the intent would be to try to reduce the cost base on that.

And also to build out the workforce for the Asia Pac market, Tim, because we find that the rates in Asia for services is much lower than what we get in North America and other places. And therefore, we do need the Indian team to grow to support that in the future. So there's a lot of good reasons for us to proactively grow our team in India. And we mentioned that in the slide presentation as well that we're proactively growing that team.

We can see that the IRR as a percentage of sort of annualized revenue is increasing through time. But can you specifically talk about the large #1 client that's now 24% of revenue? I mean how much of that is recurring versus services in nature?

That they have a big recurring revenue in that overall number. And it's probably about 20%, 25% of our overall number is recurring. And then the -- those guys, in particular, asked us, could we come in and help them to move a few things very quickly for the market. They were already live with our platform, but they decided to go all in and their legacy systems weren't capable of certain support items in the regulatory compliance side. So we move quickly into services, expanding our services team with them. We expect that to drop off in the second half because that client is really convinced that the product and what we're doing in research and development is the way that they want to stay with us and grow with us. So the R&D is really key in terms of changing the dynamic completely with these big carriers from what they used to do, which was big, big IT projects building customized systems to much more of an industry platform. So we do have a big recurring license on both that client, and we'll continue to grow the licenses and cross-sell with that client.

And just with the services revenue slowing a little bit. How do you manage the GP margin and EBITDA margin given utilizations at the moment over 90%?

Would you repeat that, Tim?

With your flagging, the services revenue growth is slowing. How do you manage the gross profit and EBITDA margin, particularly considering you've got 90% utilization in that professional services part?

I suppose the simple answer on here is we also have contractors that allow us to flex that from an overall perspective. So from a staff point of view that if the revenues are coming down, we have the flexibility about reducing the contract development from an overall perspective. And I think as we've flagged before, when we put contractors cost through, there isn't the same overhead with regards to training sick time benefits. So from a margin point of view, we will be using our own style for that one. That's what the flex goes through on that. And obviously, it changes as we ramp up and obviously with the Indian discussions we're having, the intent will be trying to use some of those folks as well.

And just last question for me, just on the potential from existing clients. You sort of -- that #1 client is obviously growing very significantly. The ability for other clients, existing clients to come through as I assume the services revenue from that fast-growing client might moderate. So what's the outlook for the -- the next big client in the program?

Well, the bigger clients are tending to push us in terms of helping them to get away from legacy systems. So as we collapse legacy into our platform, our services revenue goes up and down accordingly. So we're just doing this in cycles too. That particular science, as I said, is going to decrease the headcount with us over the year because the program comes to an end in terms of not the program, but this particular aspect comes to an end, which I think is around August. So we'll take it on the team. But we manage stuff, and we place people in other places and so on. So we've never got enough resources of our own, which is why we call in the SIs, it's swings and roundabouts, but it's really -- this is -- for me, this -- we're in a long-term business in a long-term play with a big strategy. And so these ups and downs are kind of issues on the services side are minor in comparison to the bigger picture of the subscription revenue on the platform revenue is growing.

The next question comes from Siraj Ahmed from Citi.

I'll just start on the subscription side. Your -- the guidance of 30% growth sort of implies 24 mid-20s percentage growth in the second half. So how do you think about this in '23 and '24, given you are looking for 30% sort of growth over the medium term?

Yes, Siraj, that's a good question. And well, I think when you look at where we are, we've come through a period where, as I said in my presentation, the market has been very, very slow in the past year or 2. Hence, we're seeing cards just very, very narrowly focused on 1 or 2 things, and that's it. The days of the multiple projects and big spends certainly in our industry are certainly tapered back for the moment. But if you look at our numbers and the expectations that we have for FY '23, we fully expect that in FY '23, that we're going to be doing more cloud upgrades, particularly in our region. And that's going to give us quite a good outcome in terms of our growth of our subscriptions and indeed our services if we take all the services. And we do see the ANZ market, particularly as we would have thought they would have moved quicker. But it's nothing to do with us, really it's to do with the market dynamics that are upright. COVID is lagging in real markets, where in the Northern Hemisphere has moved on, and we're just living with it, but also the fact that the M&A happens in Europe, particularly in Australia. carriers are kind of just focused in on cost cutting and reorganizing and so on. But we do see that coming now in terms of the growth around the subscription and replatforming and so on. So we'll see more of that as kind of the baseline. And then because our New York Life system is up and running now and they are coming out to market in terms of giving us case studies and speaking out for us. I think you'll see us now starting to address the admin space. And then, of course, IDOM, we're already market leaders in the integrated disability and options management market. And I think, again, we'll see carriers coming forward on that, too. So overall, I'm pretty optimistic about FY '23, except for the fact that, obviously, there's a global issue around us all in terms of what's going on in Russia and Ukraine. But apart from that, I've no control of the global economics and global issues, but everything else from our perspective, we're moving in the right direction. Our goal really is to make it as easy as possible for carriers to adopt our platform and also to make it easy to keep them upgrade us and keep them in sharing with where we're going on the R&D side. So I think we're doing that now with big carriers in the U.S., but we'll spread that operational model across all our carriers over the next 2 to 3 years. And we really will change how carriers actually adopt core systems in the employee benefits and the life accident and health market.

Got it. And maybe this one is for Tom. Just on this switch to partners and the lower services revenue. How should we think about gross margins and the fact that gross margins are negatively impacted by the services work, right? So now that it's going to partners, how do we think about gross margins over the next year or so?

We've already had that impact in the FY '22 numbers Siraj. So with the SIs and what's in the -- the -- I think the element overall is it depends how much we would put through the SIs. And at this point in time, there are still discussions to be had. I think if you went back to Tim's earlier question, just around how much we would have given away to SIs. Some of those revenues they may put through the loan books with direct relationships with the customers, if there's an element on that. And then from an overall margin point of view, we can use the Indian operations more for ourselves and the offshore piece, that should keep the margins very much on track. From the overall perspective, the FY '22, we've already had that impact of using SIs in the -- I think that's probably something we have to go through to see exactly how much we put through. And obviously, there's negotiations to be done on the rates plus the regions that they provide staff on.

And then, Tom, would you be able to quantify the dollar value of the investment that you make in the second half? I mean, OpEx was EUR 36 million. How should we think about OpEx in the second half and about EBITDA margins overall?

I think the part that we're saying here is that the second half of the year, we're going to be investing more in R&D with the caveat that we get the resources through. But from an overall perspective, we're still working through on that, Siraj.

Maybe last question Michael, sorry...

No, go ahead.

Last question, Michael, just on competition, are you seeing the competition tight or intensify? If you could touch on that a bit?

Yes, it is a very competitive market, particularly in North America. And it is -- we are seeing competitors particularly in the selling and the marketing and so on. So you have various admin barriers coming in from different industries. And so that's the challenge in terms of our competition. But -- yes, they're not doing well in terms of – we’re not seeing a huge amount of deals either from their side, but we will always have competitors. But it's a tight market at the moment. And yes, we do see competitors in the marketplace. And we've obviously got respectful of what they're doing as well. But what I would say, Siraj, is there's nobody in the market that has the full suite on a platform like ours. No one has purpose built a suite for this industry. They are adopting different systems. So they may go so far in terms of implementations and so on. But It's going to be interesting to watch to see because they go along the way, which is what we've done with New York Life.

The next question is from Jules Cooper from Shaw and Partners.

Just a couple of questions. You've talked about New York Life finally being able to go out and prepare a case study and [indiscernible] for you. Can we practice how -- I mean, I imagine it's a pretty small world. Everyone would know each other within these big carriers, they probably know how things are going. But does it -- what makes a big difference about when you get a case study to potentially closing the next deal? Like is it to review it as something that is a huge milestone for you guys? Or is it like -- is it just a nice to have or it doesn't really change the cadence of the...

No, no. It's -- yes, look, Jules good to hear from you, but it's really important because we're in a market where there's a risk averseness. They take place from advisers from different angles, consultants and analysts and so on. They rarely go into due diligence themselves, they tend to take advice. And so therefore, you're at the mercy of advisers who may not have the full picture. The really important thing about this case study in about New York Life is not only [indiscernible] with an end-to-end system that's purpose-built for their industry that includes options management, which is the biggest thing to hit the industry on the group side in the past like 20 years. But it includes that so they can actually have that integrated into the suite. But most importantly, with New York Life is that they implemented since 2019, and they've converted and eliminated 6 legacy systems. Now that hasn't been done by anybody else. So New York Life have been very canny about what they did with us and kept us quiet, but they are now coming to the market with case study. And I think if you watch my LinkedIn, you'll start to see the chair leading and so on from that perspective. So I think we're basically 100% dedicated to our space, and that gives us agility and it gives us focus to develop this industry platform. And I know from my own experience, I spent all my career in this industry. trying to make another platform work for a specific industry is always going to be very difficult. It's even more difficult when you have a bunch of clients in the other industry that P&C or pensions who are pulling at you to do R&D and to do things for their industry around compliance when you have a contingent in the protection and the employee benefit space, also pulling at you to make R&D investments in that space. So I think it's going to be really important to New York Life case study. And we purpose built this system over 7 years. And with our investors backing, we've been able to accelerate. So I'm very excited about it, Jules.

That's clear. We should give it [indiscernible]. I suppose one of the things that we've been trying to reconcile is we view as a market leader both today and into the future. but we like to see the validation around new customer wins and particularly the cross-sell of the admin suite which you've talked about. So you got to look at the Guidewire and that was their story and that's sort of certainly be successful. Now like there has been lost in a couple of years, but should we have expected more new logos, and I know you've been very busy with existing, but also the opportunity that was maybe missed around new logos and then elsewhere? Or is it having an end of the market where you're just not playing on that strong the mid-market. I'm just sort of -- its hard to reconcile, I suppose. And I'm just interested in what you're seeing in the market and how you can give us the comfort that -- that as we look in that return on the EUR170 million, it's coming out as planned?

Look, it's a great question. That's something that keeps me awake quite a bit as well. But look, I'll give you my readout. You did see that we came in -- when we IPO-ed, we came in with 9 deals on the claim side. We had a number of big IDOM deals and so on. We had to deliver on that. And we have a lot of work to do around delivering out the IDOM platform for the monstrous customers that we sold into. So these are giants and these are big, big multimillion subscription contracts as well. So heads down and a lot of delivery to do on that, plus our cloud platform and so on. On the admin side, I've given you the New York Life story, so we weren't referenceable I've told you right from the New York Life perspective, but we do have that over the line now and we're the only ones with a big converted portfolio. Equally, though Jules, in terms of the market that we've been watching and the condition of the market, if I look at North America, COVID has absolutely huge -- had a huge impact on the market. For the first year, people were just cutting costs, trying to go remote and these legacy systems they will -- they had in the back office had to be conditioned to make them available to start of upside. So they've put a lot of effort into that. There has been some admin deals from these newcomers into the marketplace. So that was a distortion as well, but we weren't in the admin space. And then -- we are now coming out of the COVID. We're now coming into a scenario where we do believe cloud is inevitable to have to move, and we have carriers lined up. We are seeing as well on the admin suite side, a pipeline nicely developing. And indeed, we are seeing some of the early signs now that those admin projects that were talked 4 or 5 years ago are starting to come to an end. And we have -- I can give you 2 or 3 examples [indiscernible] of cancelation of admin projects. And as I said in my presentation, that the -- it's not as if we just cancel and jump to the next guys like us, they cancel, they go through a complete change and that could be a year or 2 before we come back out and brush off the winds and look again. And these -- with that type of scenario with these carriers, they are upset ultra risk adverse, which is why I have focused on pushing the R&D button so much so that the product is easy to sell and easy to implement. So that takes that risk out of the funnel. So look, we're on the journey. And thankfully, as I said, we've been backed by the investment market, and we've been able to do the R&D. But all I'd say is that we're showing the results of that in our subscription revenues. So I'm very confident about the future.

There are no further questions at this time. I'll now hand back to Mr. Kelly for closing remarks.

Thank you. Well, thank you, everybody, for listening today. I hope we've been able to give you a good color in terms of where we are, very pleased with the half year, and very optimistic about the future as well. So we'll be around for further questioning and so on with the various partners we have investment houses and so on. So look forward to future discussions in the next week or 2.

That does conclude our conference for today. Thank you for participating. You may now disconnect.