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

Good morning or good evening to everyone listening today. On behalf of the Board of Directors for FINEOS Corporation Holdings plc, I would like to welcome you to our Annual General Meeting for 2022. My name is Anne O'Driscoll, and I am the Chairman of this company, and I'm pleased to chair the special meeting today. It is now just past 8 a.m. GMT, the nominated time for the meeting. I have been informed that a quorum is present, and so I am pleased to declare the meeting open. In terms of the meeting, I will introduce the members of the Board to you before I provide a short update on the business. The Board aren't actually visible to everybody at the moment because this is a virtual meeting, but they are here. So I'll introduce the Board, provide a short update, and this will be followed by a more in-depth discussion of the company's performance presented by our Founder and CEO, Michael Kelly, who's sitting here beside me. We will then progress to the formal business of the meeting, where the resolutions presented in the Notice of Meeting will be put to shareholders for your consideration. We will allow time for questions regarding resolutions before proceeding to vote on the resolutions. Now before I introduce to the directors present today, on your behalf, I would like especially to thank the Board for their wonderful efforts and contributions to the company, 2 in particular, who are stepping down today. We have all benefited from their tremendous insights on strategic guidance. I would also like to extend our thanks to Michael Kelly and his dedicated and talented management team and staff for their ongoing commitment to contributions to the company as well as their successful execution of the many strategic milestones achieved over the past year. So the directors present in this virtual meeting include Michael Kelly, Chief Executive Officer and Founder, who's sitting beside me as I said; Dave Hollander, who's joined us at a very early hour from Philadelphia in the U.S.; Gilles Biscay from -- joined us from France; and Martin Fahy, who has joined us -- he is our Chair of our Audit & Risk Committee at the moment as well but outgoing. Martin has joined us from Australia. So as we announced in October to facilitate an orderly Board rotation, Mr. Biscay and Dr. Fahy will retire from the Board following the meeting. I would like to personally thank both Gilles and Martin for their valuable contribution and service to FINEOS over the many years they were associated with the business. After nearly 8 years of various FINEOS Group Boards, Gilles has witnessed tremendous change with in FINEOS. While Martin, who joined at the time of the company's listing, provided valuable support in advance of our IPO and transition to operating as a listed entity. I'd like to thank both for their contributions to FINEOS. Also retired from the Board this year was our CFO and Executive Director, Tom Wall. After 19 years of service with FINEOS, Tom stepped down from both roles on 30 September 2022. His duties and responsibilities as CFO have passed to Susan O'Connor and other members of the team. Susan joined the company on the 5th of July 2022. The Board would like to thank Tom in this public forum for his service to the company and wishes him the best for the future. We also announced in October the proposed appointment of William J. Mullaney to the Board as an independent nonexecutive director. Mr. Mullaney is a highly experienced U.S. insurance executive who has extensive leadership experience and will, if elected today, bring FINEOS valuable insight on strong relationships in the U.S. insurance industry. He has a successful career track record of growing profitable businesses and driving revenue and earnings growth in highly competitive and change-intensive environments. If approved by the shareholders today, we would expect Bill to commence with the company on the 1st of January. Financial update. So then turning to the financials. I'm pleased to stand before you or positioned in due to the moment, sit before you as Chairman, knowing that FINEOS continues to maintain its very high standards of strong financial position since listing in August '19. Total revenue in the year to June '22 was EUR 127.2 million, up 17.5% in the year and importantly, achieved guidance of EUR 125 million to EUR 130 million. North America was a standout region for FINEOS in the past 12 months with revenue now accounting for -- U.S. revenue now accounting for 79.4% of total revenue, up from 45% in FY '19. It is a credit to the FINEOS team and products that we have been able to achieve such strong growth, which has been underpinned by both cross-selling and upselling to our existing customer base. As you will remember, during the '21 financial year, we also made 2 acquisitions, Limelight in August 2020 and Spraoi in May 2021. I'm pleased to announce that by the end of June '22, Spraoi had been successfully integrated into FINEOS, while the investment in Limelight's product range is ongoing. We remain confident that these businesses will demonstrate further sales success with new customers and cross-sells in 2023 from the acquisition. We are grateful for the ongoing support of our shareholders and are very excited about our company's strong future. We remain extremely confident in the FINEOS strategy, products and people and remain committed to our clients as we expand our platform and demonstrate its potential to both existing and new clients in 2023 and beyond. So I'm now going to hand over to Michael.

Thank you, Anne, and welcome, everybody, joining us on this webcast today. As our Chairman mentioned in her address, I will provide you with an overview of some key financial and operational highlights of our 2022 financial year. I will then pass back to Anne for the formal business of the meeting. Turning to Slide 4 of the presentation. I'm delighted to report that FINEOS has achieved record financial results in FY '22. Total revenue for the group increased 17.5% from our prior year to EUR 127.2 million, achieving our previously disclosed guidance range for FY '22 of between EUR 125 million and EUR 130 million. It was within this context that our high-margin software subscription revenue jumped 34.2% to $53.8 million, demonstrating continued strong demand from our clients for our FINEOS platform. Services revenue grew by 7.4% to EUR 71.4 million in FY '22. This was a solid result despite some existing and potential clients delaying software investment funding because of the COVID-19. In FY '22, we maintained our strong margins at gross profit levels of 65.3% and achieved earnings before interest, taxes, depreciation and amortization of EUR 6.7 million, which was up EUR 1.5 million or 28.8% from the prior year. As at the 30th of June 2022, the company carried no debt and had cash reserves of EUR 44.3 million, up from EUR 14 million the prior year. In the first quarter of FY '22, FINEOS undertook an equity capital raise, which continues to underpin the company's strong financial position and provides strategic flexibility as we pursue our medium- to long-term growth opportunities. Slide 5 reflects some of the operational highlights from the fiscal year. In May 2022, New York Life Group Benefit Services released an industry-first groundbreaking core software case study in the group insurance industry. This explains how, in partnership with FINEOS, they have migrated and consolidated their business from multiple legacy systems onto the FINEOS AdminSuite on the FINEOS platform. This digital transformation case study was a very important milestone for FINEOS, which I will talk about later in this update. Another highlight for the year was our ability to achieve revenue growth by executing our strategy to upgrade our clients from their on-premises FINEOS Claims systems to our cloud-based FINEOS platform. Apart from securing these clients for the long term, this gives us the follow-on opportunity for continued cross-sales of our FINEOS product suite and related services. We enjoy long-term valued customer relationships, and throughout our 60-strong global client base, we expect to see continued demand for additional product on the FINEOS platform. In the Southern Hemisphere, we also expect to see movement towards cloud upgrades during the year -- the calendar year 2023 and beyond. Our people head count, including contractors, remained relatively stable in FY '22, increasing by less than 1% to 1,075 people as of the 30th of June. These numbers are expected to reduce slightly in FY '23 as we more efficiently use our talent across geographies and implement further automation efficiencies. Meanwhile, FINEOS experienced a strong employee retention rate of 88%, which we believe was a very good result during the fiscal year given the pent-up demand as the global workforce emerged from COVID-19. During FY '22, we completed the integrations of the 2 acquisitions made during FY '21, Limelight and Spraoi. Spraoi's machine learning products bolster our FINEOS Insight and FINEOS Engage capabilities. We expect a growing pipeline of cross-sales opportunities with embedded -- as we embed this technology into the FINEOS platform. Investment in our FINEOS New Business & Underwriting product is continuing at pace and is aligned with our sales pipeline and current customer deployments. These acquisitions have also opened up opportunities for FINEOS to draw on new talent, and we have [ appointed ] several of their leaders to fill open positions in our organization. Turning to Slide 6 provides a picture of our revenue growth and mix over the past few years. At the end of FY '22, our annual recurring software revenue was EUR 56.4 million and during the financial year, our overall subscriptions revenue grew by 34.2%, which was ahead of our guidance for the year. As you can see, we are continually growing our software SaaS revenues at a faster pace than our professional services revenues. Software revenues have moved from 37.1% of our total revenues in FY '19 to 43.9% of our total revenues at the end of FY '22. This positive trend towards software SaaS revenue growth reflects the more -- the move from the old on-premise services-dominated revenue model to the software SaaS product revenue model, and we expect this trend to continue. Slide 7 displays the revenue split across our main operating regions and how that mix is also changing. As you are hopefully aware, our -- over the past number of years, we have focused our investment strategy on growing our total revenue from only 45% in FY -- sorry, growing our total North American -- sorry, we have focused our strategy on growing our North American region. This is clearly paying dividends as revenue from this region has risen to 79.4% of our total revenue from only 45% in FY '19. North America continues to be our most attractive region and leads the way in cloud upgrades and FINEOS platform implementations. I've included on Slide 8 further details of our groundbreaking case study, which would -- with one of the largest North American insurers, New York Life Group Benefit Services, formerly Cigna Group Benefits. This case study can be found on our website at www.FINEOS.com and explains how they have used FINEOS AdminSuite on the FINEOS platform to transform their business, enabling the retirement of 6 core legacy systems so that FINEOS now supports the entire $4.1 billion policy portfolio for their 9 million clients. This milestone achievement gives FINEOS a unique and powerful position in the employee benefits market with no other vendor able to claim a complete transformation reference client on a full end-to-end modern purpose-built platform for employee benefits. It has been clear for some time now that insurance carriers in group insurance will have to move away from in-house legacy core systems, and we believe FINEOS is uniquely positioned to take advantage of this opportunity. FINEOS is the leading pure-play end-to-end insurance software core platform provider for employee benefits in the life, accident and health insurance industry, and pleasingly, we continue to serve over 60 carriers across North America, APAC and EMEA. Slide 9 covers some of the initiatives and objectives we are focused on regarding our people and ESG. FINEOS has long recognized the value of inspiring innovation and collaboration as part of our culture, so we can retain and attract talent. We are very proud this year to present our inaugural Environment, Social and Governance, ESG report as part of our annual report. I will leave it to you to read the detail, but as FINEOS is a software services company, our carbon footprint is naturally low and whenever possible, we limit our environmental impact. FINEOS employees enjoy a working-from-home model with occasional visits to the office when required. This has enabled us to reduce our travel footprint, and we have embraced several energy- and water-saving practices to ensure we are taking care of our environment and fostering a positive people-centric, responsible and collaborative culture. Receiving industry recognition for our company, market, customer and people achievements has been very, very satisfying, as you can see on Slide 10. We value this recognition and see it as a way to measure and benchmark our company progress against our peers and other industry peers. In summary, turning to Slide 11. We remain confident and well positioned operationally and financially to execute on our growth strategy into FY '23 and beyond. In quarter 1 of FY '23, we signed a contract with New Ireland Assurance for FINEOS Claims on the FINEOS platform. This was a competitive selection and a great win in our home market. Furthermore, we continued our singular investment to research and develop our FINEOS platform as the leading pure-play core software vendor in the employee benefits market. We now have a wonderful reference case study for our FINEOS AdminSuite on the FINEOS platform from New York Life Group Benefit Services. The employee benefits market in North America represents over $200 billion in premium income and many of the insurers in this market still rely heavily on the outdated mainframe core systems. And we believe there is a significant growth opportunity ahead of us. Our strategy continues to be to grow in North America and use our leadership in this market to expand to become overall global market leader in employee benefits. We will also continue to increase our SaaS subscriptions revenue. So it becomes the dominant revenue in our mix, delivering maximum value to you, our security shareholders. In terms of the outlook for the rest of the financial year, we are on track for our guidance range on subscription growth in the 20% range. We are continuing to see cautious decision-making around spending. What we are tracking to deliver within the lower half of the overall revenue guidance range of between EUR 135 million -- EUR 1 million -- to EUR 140 million. In addition, we remain focused on reaching a free cash flow position during FY '24. As an aside for our Australian investors, FINEOS is currently not enjoying the benefit from a stronger U.S. dollar as the Euro to U.S. exchange rate has not moved significantly since when we provided our guidance. So in conclusion, and on behalf of my fellow directors, I would like to thank all our clients, partners and security holders in FINEOS. I would also like to acknowledge and thank our people for their contribution and continued focus and dedication. The many positive steps forward this year could not have happened without our great team. We look forward to sharing our progress with you as we continue our journey and execute on our mission to become the global market leader of core systems for group and individual life, accident and health on a single technology platform. I will now pass back to Anne to commence the formal business of today's meeting. Thank you.

Thanks, Michael. Okay. So turning to Slide 12, we'll now progress to the formal business of today's meeting. I've been informed that the Notice of Meeting was sent to all registered security holders within the notice period required. I now table a copy of the Notice of Meeting, and we'll take the notice convening the meeting as read. And there are some rather lengthy formal legal resolutions in there, and I would say to everyone to see if I've proceeded to read those in detail. So we will move forward as taking them as read. During the meeting, I will put various resolutions of the meeting, and where appropriate, I'll provide an opportunity for discussion. There will be an opportunity for questions on each resolution. I will endeavor to give all security holders who wish to pose a question or make a comment a reasonable opportunity to do so through the portal moderator. I ask that you keep your questions related to the matter at hand as succinct as possible. Voting on the meeting will be decided on the poll, which I'll now declare open. This means that each shareholder present in person or by proxy has one vote for each share they hold. There is technically only one shareholder chest depository nominees, and I hold a proxy for that shareholder and have a poll card ready for that. The poll will be taken at the end of the meeting and the results announced to the ASX shortly after the close of the meeting. I've been advised that all proxies received have been checked, and I declare valid for voting at this meeting. The number of proxy votes received for each resolution will be displayed on the screen before the vote is taken to each of them. These figures will be as at the closing time for receipt of proxies, which was 8 a.m. GMT on Monday, the 12th of December 2022. So the first item, the voting exclusions that apply to certain resolutions being put to today's meeting were outlined in the Notice of Meeting. The first item of notified business is to receive and consider the financial report, the directors' report and the auditors' report to the company for the year ended 30th of June, 2022. There is no formal resolution required to this item, but I invite questions and comments. Are there any questions online? No?

No.

Okay. Just give a moment. People are getting used to the process. Okay. Given there are no questions at the moment, if somebody has had some difficulty getting in, we can ask -- we can take your question later, if needed to be. Related to the accounts is the audit. So are there any questions of the auditor relevant to the conduct of the audit, the preparation and content of the auditors' report, the accounting policies adopted by the company concerning the preparation of the financial statements or the independence of the auditor concerning the conduct of the audit?

Nothing.

Okay. Still no questions. In that case, we will move on to item 2, which is -- actually does require votes. The item 2 relates to the auditor remuneration. And I put to the resolution to the company that the company's Board of Directors be authorized to fix the remuneration of the auditors. And now I open this item for discussion and note, of course, that the proxies received are on screen. And you could see that it is the resolution and will pass, but we are open to take any questions of which there are still none. Okay. So the voting proxy statistics are shown on screen. As advised, voting on this item will be via a poll at the end of the meeting. So we will move on, in that case, to item 3, which is my reelection. And as such, it seems inappropriate that I chair this part of the meeting. So I'm going to hand over to Michael to go through this resolution.

Thanks, Anne. I now put the resolution to the meeting that Ms. Anne O'Driscoll, being a director who is retiring by rotation in accordance with Article 104 of the Company's Articles and Listing Rule 14.5 and being eligible, offers herself for reelection to be reelected as a director of the company. I now open this item for discussion. Are there any questions?

No.

Forever hold your silence.

Okay. Thank you very much, and thank you to those who voted in favor of my reelection, which, based on the proxies received, will be successful. So I will look forward to continuing to serve you. So then the next one is item 3.2, which is the election of Mr. William Mullaney. And I now put that resolution to the meeting that in accordance with the Article 107 of the Articles, Mr. William Mullaney being eligible, offers himself for election as a director of the company effective 1 January 2023. I'll now open this item for discussion. And I would say that Bill offered to join us for the meeting today, but the virtual format of it wasn't conducive to him presenting and it is about 3:00 a.m. where he lives. So -- but he did offer to attend and look forward to serving with the company. No questions, is it?

Okay.

Okay. Well, thank you very much, and we look forward to Bill joining us on the Board on the 1st of January.

Great.

So thank you for that. Then we move on to the item 4 on the agenda, which is the amendment of the 2019 Equity Incentive Plan. And there is a lot of explanation on this item included in the Notice of Meeting. And -- but we will not be going through that in detail, unless questions come through. So I'll now put the resolution to the meeting that approval is given for the amendment of the company's Equity Incentive Plan as outlined in the explanatory notes and the issue of securities under the company's 2019 Equity Incentive Plan, as so amended. I'll now open this item to the discussion. Okay. So far, no questions coming through on that item either. We did test the platform. We know the question works. So it's not a question of people not being able to get through. And voting proxy statistics on the resolution now shown on the screen. Again, you can see that, that resolution will successfully pass. And as advised, voting on this item will be via a poll at the end of the meeting. So then we move on to item 5.1. So these are a suite of related items in item 5. So 5.1 related to the authorization of the directors to issue a lot securities until the next AGM. This item is, as noted in our notes to the AGM is related to the capacity to just issue shares of any for sort without returning to the shareholders as a whole. The suite of resolutions, as noted in our explanation notes aims to put the company on a similar footing to companies that are actually domiciled in Australia at -- on listed in Australia and like ourselves, domiciled in Ireland that listed in Australia. So the next resolution 5.1 is set out in the notice of the meeting, given the length, I do not propose to read it in full. But happy to take questions on Resolution 5.1 at this time. Still no questions. Okay. Now we'll turn to what the voting of that will be by poll at the end of the meeting, and we'll turn to Resolution 5.2, which is approval to Disapply Pre-emption Rights. And if you thought the last resolution as long, you haven't seen this one. So the next item business relates to the approval to Disapply Pre-emption Rights under the company's Articles of Association to harmonize with the 15% issuance capacity allowed for by the ASX rules. I took the resolution, as I say, which is set out in the notice of meeting -- to the meeting. Given the length of the resolution, I do not propose to read it in full, but happy to take questions. And again, the statistics on the poll proxies received are included on the screen. There is very few votes against it, and it will pass based on those proxies received and the pool being taken at the end of the meeting. And there are no questions on that either.

No.

Okay. So we have now reached the voting point in the meeting. So I'll now conduct a resolution on the polls. I have, as I said, a polling cards, which I have just signed. And that hasn't received anything else to consider that those polls or proxies are valid and as such and providing that to Company Secretary in Ireland and have centered to the Company Secretary in Australia. [Voting]

So I'll now declare the poll closed. The results of the poll will be announced on the ASX platform when available. And I thank you very much for attending the meeting. It concludes the formalities of the meeting. I declare the meeting closed. And again, I would like to thank my directors -- my fellow directors, including those outgoing, and welcome Bill coming in and thank Michael and his management team to the diligence and commitment to this business. I'd also like to thank security holders old and new for your continued support and for your time and interest today. Thank you very much.

Thank you.