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

Thank you for standing by, and welcome to the FINEOS 1H FY '23 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Kelly, CEO. Please go ahead.

Thank you, Melanie, and welcome, everybody, to this half year call results. I'm joined here today by Ian Lynagh. This is Ian's first call as a results call as our CFO. But Ian has been with the company a long time. He's been formerly our Chief Commercial Officer, and he's very familiar with the numbers. So Ian will be on the call to answer some of the detailed questions as well as we go through this results call. So first thing I'd like to turn straight into Page 3 of the presentation. And I'll start off by emphasizing the very strong growth we've had in subscriptions revenue. So EUR 29.9 million for the half, and that's up 18.4% on the corresponding half of the previous year. And annual recurring revenue continues to grow healthily as well at EUR 59.4 million as of the end of the half. And that's up 14.7% on the previous year. And total revenue is EUR 61.5 million for the half, slightly down 6% on the half results in comparison to the previous year. The gross profit was EUR 41.2 million, which is a margin of 66.9%, and slightly down again, 3.2%. And we'll talk about that as we go through this. EBITDA loss is EUR 2.6 million. And again, that's down 139.4%. Obviously, it's a small number, but a big percentage. And the profit margin for the half is 9.9%. Our cash position closed out at EUR 24 million exactly at the end of the half. I do want to emphasize as well that we have no debt on the business. So EUR 24 million cash with no debt. I'll move on to the next slide, Slide 4. And I guess, probably a change in the profile and something we want to talk to you about as well is that we had one large client during the half, a new agreement with us in terms of how we move forward together. This is a customer that went -- had gone live with our product and has been scaling our product. And rather than having us develop custom services for software that they needed outside of our cloud system, they basically had a change of heart and they can see the advantage of us having a strategic collaboration to develop their software needs in our product. This is very much a strategic step forward for FINEOS, and that it allows us to address a segment of the market for our IDAM product, which we haven't been addressing to date. And again, I will explain more as we go through the results call. Ultimately, what this means, though, is that we do take a drop in our services in that last half and as we go forward. So we've changed our guidance, but that's compensated by the very positive impact we should see in terms of product investment and in build of future subscriptions revenue. I also want to emphasize the fact that we still have a very large cross-sell opportunity with FINEOS, with over 60 carriers using FINEOS today. And also that North America is still a very important market in terms of how we're driving our strategy forward. That market, I want to emphasize the growth rate in that market has almost doubled over the past 3 years or 4 years since our IPO. During the year, we were -- at the half year, we were very busy and we continue to be busy with upgrades and moving our clients to the latest version of our SaaS platform. So lots of activity in terms of existing customers staying with us on the platform. Our head count was 1,063, and that's forecasted to slightly reduce as we move forward. But I suppose most of all, we want to emphasize the fact that the employee benefits market is still a very large market that has no leader in that market in the vendor space. And that's very much the target and the goal that we're aiming for as a business. And in total, we see a target or a total addressable market of about USD 2 billion in terms of available revenues for vendors in this space. So quite a large addressable market. And again, we'll explain more about that as we go through. If I turn to Slide 5, again, I want to emphasize the growth in our subscriptions revenue. So year-on-year, half year-on-year, we continued to grow our subscriptions. And in the last half, it was EUR 29.9 million. And that's up 18.4% with continuous kind of strong demand from our client base to scale on our products and indeed to buy additional products from FINEOS as part of our platform. So we still are seeing good appetite from our existing clients to move forward in a very structured way with FINEOS, and to adopt our platform and obviously take advantage of the research and development that we've been doing over the past few years. North America adoption is particularly strong. And on Slide 6, we've carved out the cloud revenues in the region. And the growth rate, as you can see there, has been very, very strong. North America for us is very much a dominant SaaS market for us, and most of our clients are using FINEOS as a SaaS platform today. And really to emphasize that, since our IPO, like we have multiplied that SaaS number by 10x in the past 4 years, so in terms of our growth. And North America continues to be the biggest market for us to address. Although we obviously want to address customers in different markets, particularly in the ANZ region, where we have quite a market leadership on the claims side, we want those customers to move to the SaaS platform. If I move to Slide 7, again, most of the research and development we've been doing in terms of our platform for employee benefits has been focused on the North American market. And we believe rightly so given the growth rates we received and also the size of the revenue impact on the business in terms of it being almost 80% of our revenues. Also, I want to emphasize here that North America would be ahead on the technology side in terms of SaaS and cyber, and other really important things in terms of changing the business model. They're much further ahead than any of the other regions that we address. So we continue to see the advantage of investing in North America in terms of our client base there and that dragging other regions alone. So we are seeing that pay off as a strategy, keeping that North American centricity in terms of the growth rate. I have mentioned already about the large customer that we have, who basically -- we want to change the model, and we're moving into a different type of relationship with them and a much more strategic relationship. So that will emphasize -- that will impact our services growth in the future, but also the impact of subscriptions growth. In terms of -- Slide 8, we just pulled out some numbers here on the R&D side and just showing you what was capitalized and what was expensed on the book. But R&D still continues to be a high percentage of our overall revenues. And that is just a byproduct of the fact that there is huge appetite to scale away from legacy systems onto the FINEOS platform and therefore, our platform, having to replace legacy type systems needs to be very functional. And carriers want us to accelerate in this space to support them. But I am very happy to say that we've got very healthy usage on our product and good growth rates in terms of that scale. So a very solid situation for FINEOS as I see it. I want to turn then to Slide 9 to finish off this section of the presentation. And just really to emphasize the kind of people side of the operation. We're still very, very busy, but our utilization on the product consulting side is down slightly on the half year and it's at 86%. But retention is still very, very high in FINEOS. And obviously, things have changed a lot in the last couple of quarters, where the technology market now is different than it would have been, say, at the midpoint of last year when this half year started. So we would have gone into the half year with salary increases and things like that, given the massive demand that there was for technology people, but we now see a different climate in terms of the technology landscape and particularly a lot of the larger type vendors are reducing head count. So the market has loosened up. But we and FINEOS have a strategy, which I've talked about before around scaling in our lower-cost regions and taking the pressures off FINEOS on the cost side in that direction. And so India has been a really good growth situation for us. And indeed, really good retention, particularly in the lower-cost regions where retention rates tend to be less favorable. We're still doing very, very well in terms of our Indian operation and indeed, some of the other low-cost regions that we operate in. We continue to work -- as a workforce, we continue to work on a remote basis. And we put a lot of emphasis into the people side of our business in terms of making sure we keep people engaged and getting the productivity out of them. But we're finding that this remote-first model is working very well for FINEOS and indeed, it's better in terms of the older model that we used to have in the office. And also you can see, again, that the biggest region where we have people is actually outside North America. It's in the EMEA region, and then obviously followed by North America, EMEA and Asia Pac. So that concludes this section of the presentation from my side. I'm going to hand over to Ian, and he will just go through the next few slides with you to more detailed side. So over to you, Ian.

Thank you, Michael, and hello, everybody. As Michael said a few moments ago, I've been with the company now for over 20 years. And last 10 years operated as our Chief Commercial Officer, where I worked very closely with CMO into CMO office. And that allows me to hit the ground running very quickly in terms of taking up the reins as the CFO of FINEOS. I'll move now on to Slide 11. Mike has also already spoken to the subscription fee increase. This is mainly driven by a combination of upsell to our existing clients, which is very positive and also a new client that we gained during the half year. So we're monitoring that figure very, very closely in terms of our continued growth and keeping the emphasis on the software development that needs to occur behind that to encourage our customers to continue to use that product set. The drop in services is directly attributed to the customer shift that Michael mentioned there. However, the positivity on that, once again, as emphasized by Michael is that, as that customer scales the usage of our system over a number of years, we will see from them alone, increased subscription yields in terms of that particular product set. And the R&D that we're investing within that is also applicable to a wider customer base. So we're very positive about the positive impact in terms of that. Consequently, what's also happened is that our cost of sales has decreased. And really, that's directly attributed to the reduction in the services income that have occurred. However, what we've also seen is that to offset that at the level of increase in terms of our infrastructure cost, which is predominantly AWS. And that's a positive sign and so far it's related to that increased client activity, more clients, existing clients doing more and demanding more of the infrastructure. However, we did record a loss -- EBITDA loss, and that really is attributed to the contingent that we make in R&D. And the positive factor that the investment we are making in R&D right now is we're doing it for current client needs. We are putting into the product in terms of investments being used straight away, thus making it referenceable straight away. So we know it has direct market applicability. It's not just exploratory type R&D. It has that direct flexibility right now. I'm going to move on now to the next slide, Slide 12. And our operating expenses have gone up. And times have changed since its -- beginning of our fiscal year in July of last year. We had to, at that point in time, operate in a very competitive market in terms of salary increase needs. So it's driving that increase predominantly across the board is a combination of salary increases. Also, we have approximately 25% of our workforce based in the US, and the foreign exchange rate has moved against us by approximately 12% during that half year period. So that's also had an impact in terms of the costs that we're seeing there. And as a company now, we're working very hard in terms of how we're going to manage that cost moving forward. Michael has mentioned there, the fact that we're growing our Indian base. Over 10% of our workforce is currently based out of India. And we also have flexibility in terms of our overall workforce so far, as 20% of that is based on third parties. So that continue to be an area of focus for us as we move forward and plan into the next fiscal year. Moving on to Slide 13. In terms of the balance sheet, I suppose the key things we will talk about in terms of the balance sheet really is that the operating expenses, as you can see is up, partly that's due to some deferred subscription fee invoicing that we do at the tail end of last fiscal year, with the revenues came into this year. We've also seen higher R&D investments, which both Mike and I have referenced at the moment. So that's there as a standout. And that's the main points I want to make about is the bullets there as well, which you can look at. If we look, therefore, at the cash flow, the cash situation is, if you look at it, again, it's predominantly related to the continued investment in R&D, in terms of the change in the cash levels in the bank. And also the acquisition we made of [ Spraoi ]. We have an earn-out payment to make in the first quarter of this fiscal. So that also contributed to that figure that you're seeing. We invoiced predominantly subscription fees for our customers in the month of January and effective from the month of January. So we expect to see cash flow intake during this quarter increased over the last quarter as well. With that, I'll hand back over to you, Michael.

Thanks, Ian. So just moving into the last section of this presentation in terms of talking about the outlook for the business. We have a very positive situation as we've outlined there in terms of the demand for our product, the demand for this enterprise system, particularly on our integrated disability and absence product, which is part of our full admin suite. Our clients are scaling quite rapidly on the product, and that has put a certain amount of demand [ strain ] on our R&D and so on, but we see all of that as very positive. We also have a very strong pipeline of new business, and that is with existing and new customers as well. Unfortunately, we have kind of witnessed a slowdown in decision-making. And that's just a byproduct of the environment we're in. But we still see we have a solid situation in terms of pipeline and we took the precautionary view of changing our guidance as a result of that. So we continue to scale the platform, and as I said, to eliminate legacy systems, which is a very different proposition than just building a platform to take over for a new business because you are basically taking the full load of these carriers, which, in terms of their size, we're talking about billions and billions of payments. And so that's all moving across to FINEOS. which makes our platform extremely strong. We continue to invest in the R&D. As I said, we're promoting FINEOS now as the only quote-to-claim purpose-built and proven platform for employee benefits in the North American market and indeed, globally. We're also working hard to strengthen our ties with systems integrators. So I've mentioned this over the past couple of years as part of our strategy to grow our subscriptions and indeed, to reduce the services percentage -- overall percentage of our total revenues. And we have been working with SIs. So we continue to do that and building good relationships with our partners there. And then, overall, we're looking at our cost base and continually looking to reduce our cost base. We have made some cost savings and so on in the past quarter or so. And as we go through this half, we'll continue to pull in on our cost base, looking for areas and strategies that drive down cost and allow us to continue to grow healthily moving into the next FY. I suppose, last but not least, really from our perspective, our business is built on our people and the culture of engagement and collaboration. And we'll continue to focus on that with our teams. And as Ian says, 20% of our workforce is actually contract. So in terms of the ups and downs and the reduction of the services stuff, we can -- we go to our contract base first, and we're able to turn that off quite quickly. So it's not a question that FINEOS has had to reduce head count or so on and make redundancies and things like that. We very much have a nice flexible workforce. Equally, as our pipeline begins to turn, we can quickly put our hand on that top of contractor relationships that we can grow our team as well. So we've built a good model in terms of our workforce. And the future growth strategy and the outlook. As I've said, we've taken the precaution to change our guidance for the year, given the impact of the services numbers and that particular client who is moving into a strategic relationship with us. So we're guiding EUR 124 million to EUR 128 million. Apologies that we can't get this exact, but this is a long-term large enterprise software business. And although it's a very solid business in terms of what we book every year, there are margins then on the fringes in terms of when decisions are made and that can have an impact on our revenues quarter-by-quarter. The business has a large cross-sell opportunity. I've emphasized that in the presentation. And more and more now, we're starting to see clients who upgraded into the claims environment, starting to look at other products within the FINEOS suite, which is great. Our ongoing growth in subscriptions has -- in terms of the growth in subscriptions converting and indeed, the sales pipeline converting leads us to predict that next year in the second half, we will move into a positive cash flow, and that will take us on into FY '25 positive cash flow as things stand the way we're seeing today. The FINEOS platform is already the leading pure-play core platform for employee benefits in North America. And our New York Life case study, which was published last May last year, has really improved our market reputation and indeed, the activity and interest in our platform. And New York Life continues to be a great partner with FINEOS and indeed, has continued to reference for us with existing and new customers. So that achievement is something which no other vendor has achieved or got close to that's operating in our space. So I think, again, this will stand to us as we move forward. And the last point I'll make, again, I made this in the first slide, is that the total addressable market that we see is a USD 2 billion income addressable market. And again, no one vendor leads this marketplace, and it's the only thing that we focus on, and we are very, very intent on becoming the #1 vendor and continue to lead the market in this space. So with that, I want to thank all of our staff and our Board and the members of FINEOS for another strong half performance. And we are open for questions with the audience. So thank you very much for listening.

[Operator Instructions] Your first question comes from Siraj Ahmed with Citi.

A few questions I'll ask. Just the first one. Just in terms of the shift from services to subscription to only one client, can you help us because it seems like what they're doing is they're giving you a commitment and they'll take a subscription contract over some time. And so you build the functionality and [ that stuff ] getting built. But just wondering about the cash flow impact here. Are they willing to pay upfront the cash component as well?

Yes. The deal is a combination of cash payments through this half of the year, and it only starts, I think, in February. It's taken us about 3 months to agree all of this. And indeed, that's why we changed our guidance for the half year because we didn't see this coming in terms of the rapidness of it. But at the same time, we've agreed a very good deal with these guys. So the way that the deal was structured is that they will pay us money as we go through the next 20 months or so in terms of building out functional capability into our product to address the upper end of the integrated disability and absence market. And I'm talking about employers with above 100,000 staff. And then as we have done -- as we're doing that, they're going to be migrating more and more of the book to our systems. And therefore, they will increase the subscriptions. So we're looking at a situation -- a scaling situation over the next 2 years to 3 years, Siraj, which elongates the cash coming in. I mean it comes in much faster if it's just services, but it starts now, and it continues on into -- for the next 3 years or so. The initial 20 months is very much cash coming in to support the R&D and then the next 3 years, they'll start to scale beyond where they are today, which is actually -- they're already well scaled and in production today. So it's a significant cash injection.

Got it. So essentially, it's cash flow neutral for the first 2 years is what you're saying in some ways from your expenses to cash coming in perspective?

Sorry, I didn't hear that.

Are you saying -- just confirming that's cash flow neutral for the first 2 years from your....

Yes. For the first -- yes, what it does is it does elongate the cash coming in because it's coming in over a longer period for the work because the product takes a bit longer to develop over say, custom software services. What product does mean is that we end up in a stronger position. So there will be a positive impact on cash, but it wouldn't be as positive as the big services number that we would have had in our number for this year. And therefore, we've taken that cautious approach to change the guidance. On the other hand as well, I think that the other part of the equation is obviously our new business pipeline. And we also see a positive situation in that for our next FY, and that will help then to increase our cash flow and bring us into that cash flow positivity. So it's a combination of issues there that will bring us back into cash flow positivity in the second half.

Got it. And my second question is just in terms of cash burn and getting to the free cash flow position. In the EUR 24 million in cash right now, the cash burn was a bit high in the first half. How do we think about the profile of getting to cash flow breakeven because it seems like you will -- you could get to the low double digit sort of figure into the cash balance, which seems a bit low. So can you help us understand how you think about getting to that free cash flow position?

Yes. This year and particularly that last half has probably been a heavy year in terms of cash burn, in terms of changing up things. And as Ian mentioned also, there was a payment to one of the acquisitions we made. So we see this half as improving completely in terms of the previous half. We also see that our cost base on some of the areas that we've been spending, and we will pull in spend and so on. And next year, we will not have as big a rise in cost base. I touched upon the point about salary increases and stuff like that. The climate has changed. The cost has changed. So we continue to work on getting more value for our dollars in terms of our spend. And therefore, as revenue increases, we will be holding the cost base as much as possible to where it is this year and increase in the revenue. And that's how we see the cash flow positivity coming in, in the second half and into FY '25.

Your next question comes from Shaun Ler with Morningstar.

I've just got 3 questions. Maybe to start with the first one, please. Michael, could you please educate us in greater detail, how does your earnings actually get better from year 3? Because on the revenue side, client growth is weak. Growth in revenues per customer is slowing. We've heard about the slowdown in digital, making for a very long period now. On expenses, all of your expenses might grew as a percentage of revenue over the past 12 months despite past mentions that some of the stock driving. So with that said, could you please outline what expenses are going to need scale? What do not scale? When are they expected to happen? And why should we be really confident that you can still deliver free cash flows in FY '24, please?

Yes. Look, I -- what I mentioned there was that we're holding on to the spending side in terms of things like R&D. We see our cloud ops spend -- spending still are reducing slightly and overall spend in terms of expenses next year, we will be very close in terms of our cost base of this year. Therefore, with the strong pipeline and indeed with customers continuing to scale on our product, our subscriptions should grow, and that is the most important number for us as a software vendor. This year, they're at a 50-50 level now in terms of that last quarter with our services in terms of percentage. We see our subscriptions growing. And that's a more margin-rich element of our business and much more sustainable in the long term. And therefore, we have a pipeline which we're converting over the next few months and into next year, which is quite strong. And that revenue growth in combination with the holding of our expenses should bring us into that positive cash flow situation in the second half of next year and therefore, after that then into the FY '25. So that's as much as I can say about it, Shaun. But we're running this business on the basis of making sure that we look after our customers first. We've had a tremendous success with our product in the North American market with an insatiable appetite from very large carriers who have legacy systems they've developed over the past 30 years, 40 years, 50 years and who have to move those systems over to FINEOS in order to get the return on investment. And what we have seen over the past 2 years to 3 years in terms of the market, COVID, and the various economic situations, inflation and so on, is that whilst the carriers are starting to become healthy in North America and positive earnings and so on, we're hearing in the last few months. And you will also find that they've changed and that they're putting much more emphasis on return on investment. So that puts extra pressure on us, as Ian said earlier, to invest in the R&D to keep our programs running and to keep a very positive situation with our customer base. And so that's what drives FINEOS. We're in a long-term game here. And this is enterprise software replacing legacy type systems, which, again, when I look at the competitive environment that we're in, we don't see that as much of what we see our competitors focused on going live with elements of their systems and so long with customers. So that's what's driven FINEOS. It's largely down to the success of the adoption of the product. And unfortunately -- well, fortunately, we put our money behind it. But unfortunately, like we do have to be careful around guidance and so on as we move forward. And we can't always predict the customer appetite at the time when we're talking to you.

So building on from this point, Michael, you talked a lot about cross-sell and expanded usage that has gone on for many years. Can we get some new hot data that actually shows that this has happened in FINEOS? Because just looking at every numbers actually don't tell us a lot. Could you perhaps give an indication, any at all, on the number of product holdings per customer or the percentage revenue contribution from software customers as you have did historically? But sometimes you have stopped showing that. So any data on that would be helpful, please.

Yes, Shaun. The last few weeks have been pretty intense for us. Ian has stepped into the role of CFO, and he is working on that type of thing. Ian and I will be in Australia in a month's time, and we're going to do a roadshow with investors, and we're looking forward to speaking to our investor community. So we'll take that forward that point from you and put some focus on that for the trip in a month's time. So look forward to meeting you then and talking about that.

All right. Maybe just moving on to my last question. Can you, Michael, kind of elaborate further on your thinking behind FINEOS', I guess, high expense growth in the current climate? I mean, tech companies are cutting costs and investors want profitability, not growth. So am I right to give the creditors an indication that competition is actually increasing from other operators, which you just have to invest [ in today's ] growth? Because, I mean, historically, FINEOS has said that it has very little direct competition. So if you are investing [ source already ], then there's a limited direct competition. It just seems contradictory to me. So could you please elaborate on that?

Yes. Look, I think what we've been dealing with in terms of the new business side is an environment of caution and slow decision-making and more emphasis on return on investment and so on. So we're dealing with the community of insurance carriers, who are making very big decisions to replace systems that they've had in place for many, many years. And they're starting to become more, I suppose, wise around how they make those decisions and getting contracts and so on, ready with vendors like ourselves. We are kind of singularly focused on this marketplace. As I mentioned, and I touched on the New York Life case study has given us great credibility in the marketplace. And we're hoping to kind of ease that decision process and speed that up, But we have gone through unprecedented time, Shaun. And we continue to invest heavily in our platform and stay with our conviction that there's an opportunity for FINEOS, which is very large and long term. So unfortunately, like I can't go into any more detail than that, but we definitely see ourselves in a growth situation. And I suppose, we can't apologize for that, really. I think if you compare FINEOS as well with, say, vendors in the P&C space, who operate in a different market, which is probably a bit more mature as well in terms of decision makers and indeed, the profile of that market is a bit different and that there is market leadership and proven systems in the marketplace. You'll still find that the vendors on that side are making large losses. But yet, their multiples and investor appetite for them has continued to grow. And it's just the nature and profile of our business versus a typical SaaS software business. We're not in that space. We're very much enterprise. We're very much long term, and we are talking about relationships that we've won for years and years in terms of the software usage. So that's -- it's just a different end of the spectrum that we operate in.

[Operator Instructions] Your next question comes from Jules Cooper with Shaw and Partners.

My apologies. I jumped on a little bit late, so I might have missed this. But if we go back 7 years or 8 years, you had a customer that decided to work with you as a development partner on the FINEOS platform. You've now got that case study with that partner. And you've seen sort of over time that when you engage with a partner like this, good things happen and they really embraced the technology. This partner that you're talking about now, is -- can we think of that as maybe the second example of a customer of yours that is going sort of down that development partnership route? Therefore, in your mind, is this like a major step forward in terms of getting that validation around the FINEOS platform may be over several years? Are we starting the journey here on day 1 sort of week 1 on what could be a very positive story?

Absolutely, Jules. And I think the New York Life case study is there, and we continue to enjoy really good relationship with New York Life. As I said, we continue to do new things with those guys, particularly around the data side is where we're doing a lot of work with them now in terms of research. In terms of the other big clients, we have a very healthy relationship with our large clients, and they are the ones that really want to get off the old legacy. This particular customer, I would say that this client was doing kind of stuff that was different from the way we work with other clients. And with other clients coming through, it would be a good testament similarly to New York Life in terms of case studies and support and so on. But this particular client was doing something different. And over the past 12 months, they're kind of confident in realization. Through talking to SIs as well, by the way, we knew what FINEOS was doing elsewhere. And the learning that they picked up and indeed the collaboration that we've enjoyed together has kind of brought them around and said, okay, yes, we actually don't see any huge competitive advantage by having all this stuff outside. We wanted in the product. So we want to actually partner up. So the answer is yes. We will grow a long-term relationship with this large carrier multinational. And we're hoping for great things with these guys as well.

Excellent. Well, I know that's very good clarity. And just going to the earlier question around the cash flow and the cash balance, really hard sometimes to work out what the working capital flows for the business because it can be lumpy. Is there any sort of sense you can give us for what cash generation you might expect, even when in a range or something in the second half or like a closing cash balance or something for FY '23? Where do you think it may land?

Yes. Look, as you know, Jules, the second half of our year is always cash flow positive or a much better situation in the way that things flow. We got a lot of cash in, as Ian mentioned earlier, in the first quarter of the calendar year, which we're in today. By the way, the cycles work on our subscriptions. So we expect to have a positive situation. I can't go into numbers in any great detail. But -- and we expect it to be a positive outcome. And then the second -- the first half of our next FY will go back into cash burn, but it won't be as dramatic as it has been in this half we're just reporting on. So we'll be pulling back, as I've said to Shaun earlier on, on the cost base in terms of holding that and making sure then that we deliver on the revenues in terms of the sales and just sustaining of this particular contract that we're going into with this customer. We've changed the profile from the services side. So yes, I mean, we burned a fair bit of cash in the first half, but we expect the situation to improve in the second half and into next year. So our sales -- our pipeline has moved out, as we've said, and we still see a good strong healthy pipeline. And yes, as we start to convert that, we're going to see a more healthy situation going forward.

Your next question comes from Brendon Kelly with Alceon.

I'm just hoping you can help us give us a bit more color on the pipeline and the composition of that just to understand where some of these R&D investments are targeted?

Yes. So by far the most, I suppose, prolific product we have on the marketplace is our claims product. It's hands down market leader in its space. It's been in this for a long time. So during the COVID period, we didn't see an awful lot of activity or action on the claims side. As you saw, New Ireland did closed a claims deal still with us. So we are seeing a healthy claims pipeline. We're also seeing the absence product as well being best of breed in the space we operate in. And we're seeing a pipeline on the absence side as well. And then we're seeing the opportunity to cross-sell our admin. So that's our policy on building product. Similar to what we've done with the New York Life guys, we're seeing carriers now going -- that's very interesting. We want to look at that because, as I said, the carriers first wanted to do their upgrades to the cloud. They wanted to scale their business and stuff like that. And so they're in positions, at least some of them are, where their policy and billing comes into play, and they're starting to look at that. And then on the new business side as well, there's some action on the policy and billing side, the AdminSuite in total. We're having good conversations as well on that region. And so, overall, I think most of the action is in North America by the vast majority, I should say, really North America. We still see ANZ as a market, which has to convert to SaaS cloud, but there are so many positives in terms of that market converting over the next 12 months or so. We do see and we're having great conversations with clients, but it's going a bit slower than we would have thought. And some of the clients have gone into heavy M&A processes, which are just helping. No, I understand in terms of their situation, they are trying to reduce the kind of friction before they move forward, make sure that their organizations and the particular systems we're going to be knocking out first are the correct ones. So there's activity there as well and certainly into the next FY.

Your next question comes from [ Liv McGowan with System Capital ].

I guess I've got 2 quick ones. First one is just on the pipeline. And obviously, you've sort of kept quite a bit of the workforce going because of that pipeline and the positivity you see around that. I guess, and sort of, I guess, the positive cash flow is also related to that in the second half of '24. Just your view on how much of it is discretionary versus non-discretionary, things where people are sufficiently down the track where you have a lot of confidence versus things where the timeframes could continue to get extended? I mean, do you have enough of that sort of non-discretionary pipeline spend where you can allocate your workforce around that and get yourself to a positive cash flow position based on things that are advanced. So that's the first one I will ask. Second one I will ask later.

Yes. I think we do. We feel that we're not into a slash-and-burn situation with our staff. They're all very busy. And if we did have to go to cost cutting, which I think some of the earlier questions were alluding to, we have a contractor base of 20%, and that's the first place we would go. And that would be a very easy turnoff. So if we need to -- I mean, any kind of drastic situation, we can easily turn off costs, and that's another way to get to our free cash flow position. But we have to be mindful of that, as you say, there's a pipeline of work there from existing clients who want to buy stuff off us and healthy discussion we are having there, but also new as well. And therefore, we're quite happy to keep the workforce going on the basis that we still are chipping away at this pipeline. So comfort levels are reasonable. And look, I can't predict the future in terms of the environment. But certainly, in terms of the discussions we're having with our pipeline, we're in a good situation. And to be quite honest, I thought we might have closed a couple of more deals in the past quarter or 2, but that didn't happen, but that hasn't gone away. There was one deal that definitely did go away, and it was due to the government changing their mind on an income protection scheme that we're going to introduce. But that's fine. They canceled that and therefore, our program didn't go ahead. But that's the only situation I saw out there. All the rest of the situations are carriers who are in the long term in their mind and looking to change legacy into modern systems like ours. So there are big decisions for them. The other thing I'd say as well as is that there's been a lot of confusion in the marketplace that we operate in over the past 5 years to 6 years, new vendors moving in. Digital transformation is a big word. So [indiscernible] is not fully understanding, but there's a big difference between a core systems replacement program and building portals and infrastructure around digital automation. So we're starting to see carriers understand the difference and therefore, making considered decisions around the core, which is the biggest spend they'll make in the next few years. And as I said, they're seeing the positivity in terms of our customers scaling on our product.

Got it. And then maybe just a quick second one on price. I guess, given the fact that the sort of pipeline becomes a little bit more longer term and challenged and you do have a big R&D program to support for innovation. Just your thoughts on price increases and whether they've historically been, I guess, sufficient whether they -- you need to scale up in a higher inflationary environment, your scope to actually do that? Because I guess price hasn't been a big feature up till now from what we could see.

Yes. Good question. So as part of holding our cost base, we don't see the inflationary side on our cost base. We see our cost base holding. And as I said, and Ian alluded to as well, we did salary increases midyear last year in a very different environment, but the environment has changed rapidly. So as far as the cost base, we don't see a big inflationary impact. On the sales side, we do have inflation or CPI indexation in our contracts, on a lot of our contracts, not them all, but a lot of them. And so we will have an opportunity to crank up our licenses with customers who are using our product on the SaaS side. And then, indeed, we're continually looking at how we price our suite. And I've mentioned a couple of years ago, we were pricing on the basis of premium income rather than users. And we're also pricing our absence product and number of lives on the product as well. So we continue to look at that just to get a better price profile. The fact that we've continued the R&D and we've got proven software allows us to be a little bit richer on the price as well in terms of coming into deals unless it's aggressively competitive or whatever and the customer -- or else the customer didn't have the money initially, but we will look to maximize the price as this product has been more and more proven in the marketplace.

Your next question comes from Jacob Loi with Citi.

Yes. Great. So I was just wondering -- so from the earnings downgrade that you mentioned earlier, so how much was from the subscription and how much was from the client?

A lot of the impact of the earnings downgrade is very much from the services side and this one client, because we kind of -- and we've explained this to investors before. We tend to hedge deals against each other as we move through the FY and as we do our forecasting and so on. We've got a double impact on this one with this particular change, which is the right thing to do for us in terms of accepting the reduction in services for the better outcome in the next 2 years to 3 years. But then with the impact of the sales pipeline, we've got a double bubble hit there. So things have moved out to the right as in they've shifted out. If you don't close that deal, you can't start charging your subscription and services, and therefore, it has an immediate impact on your number in the quarter or in the half. And that's basically how we've been -- how we -- why we've changed the guidance and how we've been impacted.

Yes. Sure. That makes sense. And maybe just another one, maybe 3. And so when does this change occur with this large client? Are you able to share how much of that impact was, I guess, captured in services revenue and/or on the software side? And what was the total OpEx impact of that?

Yes. Jacob, the impact, as Michael said there is predominantly on the services side. This particular client is already paying us a substantial subscription fee. Hasn't been impacted at all. Effectively, what they're doing is they're converting from augmenting our product with customer around the periphery, which historically they deem to give them competitive advantage because nobody else has it. They think they had a just decision if they decided that what they want to do is invest into product, get the ROI out of product. So instead, they're investing in services within the product. And so the impact is on services. But once that product has been enriched, then what we expect to see happen is that the subscription fee will increase quite significantly over a multiyear period because they will apply more users to it than they had originally anticipated.

Great.

I think it's also worth emphasizing that we -- with this client becoming strategic, and I kind of alluded it to Jules earlier in terms of his question with this customer, we do see a roadmap then of the rest of our platform and opportunity around cross-sell and upsell with this particular customer. But like this, like I said, I've emphasized, our clients are kind of going, we could buy your whole product tomorrow, but that's kind of not good for us unless we get the ROI. And so you've got to earn the right to sell us, cross-sell the next components. So let's get this part scaled and right. And that's the emphasis that we've heard loud and clear, and that's what we're operating on in terms of making sure that their customers are happy.

Thank you. That's all the time we have for our question-and-answer session. I'll now hand back to Mr. Kelly for some closing remarks.

Thanks, Melanie. Yes. So firstly, I'd say well done, Ian, in terms of joining me on the call, and thanks very much for the support throughout the last few weeks in terms of the preparation for this call and all the other things we're doing. And I'd like to just reemphasize the importance of the way that we work with large clients where we're really building out long-term profitable relationships on a win-win basis. So we're actually delighted with the way that the profile of our client that I've mentioned on the services side has changed. And I just would like to thank our investors and stay with us, that this is a kind of a medium- to long-term play. And we've definitely proven that FINEOS is able to stand up to the big opportunity that we have ahead of us.

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