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

Thank you for standing by, and welcome to the FINEOS Corporation Holdings plc FY23X Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Kelly, CEO. Please go ahead.

Thank you, Melanie, and hello, everybody. Welcome to our FY23X update on results. We are moving to a calendar year for reporting, and therefore, this is really a report on the last half of last year, a 6-month financial year. I'm here today with Ian Lynagh, our CFO. And we're going to walk through the presentation that has been sent out and registered on the ASX earlier this morning. So I'll move ahead to Slide 3, please. Overall, the company is moving more towards a product revenues business, where we're driving the kind of valuable subscription revenues up and really focusing in on becoming more and more of a Software-as-a-Service business. And I was very pleased that our subscription revenue has continued to increase during the half -- or the FY last year. It's up 10.5% on the previous half 1 '23. So subscription revenue is now 54% of our overall revenue, and that trend will continue to grow in terms of us becoming a product company. Our annual recurring revenue was EUR 65.3 million at the end of the FY, and it's up 9.9% on the 31st of December 2022. And total revenue for the period was EUR 61.1 million, down 0.6% on half 1 2023. Gross profit was EUR 43.7 million with a gross margin of 71.5%. So gross margin is growing and it's up from 66.9% in half 1 '23, so about 6.3% in total. And EBITDA was EUR 4.9 million, a margin of 8.1%. EBITDA margin is up 4.2% on half 1 '23. And lastly, our cash position at the end of the FY was EUR 28.1 million with no debt on the business. So I'll turn to Slide 4 now and just talk about some of the operational highlights. As you know, we closed a very important deal for our full suite, AdminSuite to Guardian Life in the U.S. last year, and that program is moving along nicely for us. Guardian is a different business to New York Life group benefits in that Guardian is solely focused on the SME employer market in the United States. So we've had some more work to do to AdminSuite to make it more, I suppose, fit for purpose for the SME market as well as the mid-market that we already support at New York Life group benefits. So that program is going very well. And indeed, New York Life have just announced their intention to go into the voluntary benefits market in the second half of this year. This was always part of our original charter and our original deal, that we would support group voluntary and Absence on a single platform to support the way that the employee benefits market has been changing over the past several years, and indeed, seems to be accelerating towards that multiple approach -- multiple type product approach on a single platform. So we're very, very well positioned in that space. And this really proves out the platform at New York Life's move into the voluntary space. They would have had a moratorium on moving into voluntary. Because when they decoupled from Cigna after the sale, there was a moratorium agreed legally that they couldn't enter the voluntary benefits market for a period of time. So all of that is very, very good and pleasing. Also, our APAC clients started to move towards the cloud. And we're now seeing -- they're now seeing the early benefits of those cloud migrations as we started to move during the half, and we'll continue that process into this year and next year hopefully as well. So that is important for these carriers in the region, particularly in Australia and New Zealand, to move away from that legacy world into the FINEOS platform. So again, that was a positive in the half. Securian Canada, which purchased FINEOS -- the FINEOS platform for claims management had to -- had moved off the platform in a 5-month period, which is a record in terms of a carrier moving to the platform and doing business. We spent the last few weeks of that doing training and testing and stuff like that. So it really does prove out that the platform is very fit for purpose in the Canadian market as well as the North American market. And then the success we've been having in the cost outages which we announced last year, we've continued to focus in on those strategies that are making us much more efficient and driving much more cost outage as we go through -- as we went through the year and into this year. And indeed into next year, this will continue as a theme in FINEOS as we become more and more SaaS-like as a business and we gain the multiplier effect and really increase the margins of this business as we move forward. Our total headcount at the end of the half was 1,059. As you know, we've been growing headcount in the lower-cost countries as we needed to invest, and that is part of the cost add strategy as well. We don't envisage headcount growing by very much. If anything, it will probably come back a little bit as we move into this year. And then lastly, we were very grateful to our shareholders in terms of the raise that we had last August, where we raised AUD 40 million. And I personally participated in that to the tune of AUD 5 million to basically get us into a very strong position on the cash side of the business. So those would have been the operational highlights of the half. I'll move now to Slide 5. As you can see, the growth is really focused in around -- or this slide really focuses in on the growth of the Subscriptions revenue. And as I said earlier, Subscriptions were up by 10.5% on H1 '23, and our ARR is up 9.9% on the same period, reflecting that the only problem that we've had, I suppose, in terms of headwind is that we have been kind of up against it on the Limelight side in terms of some customers leaving us. And we had been rewriting that product over that period that we're reporting on and into this period to get us through some challenges with the product itself around architecture. And I'm pleased to say that we're coming towards the end of that. But unfortunately, we did lose some subscriptions revenue and some services from customers that churned on that older version of the product. Services revenue is down 6.9% on the H1 period for '23. But we're coming through a period where we would have had a bubble in services on the previous year half 1 '23, where we had grown our services teams quite rapidly for one large strategic client, who then came around to the decision to -- instead of going for customization, to go for product and to enter into a strategic relationship with us to grow our product, which I'm pleased to say that strategic relationship is going extremely well. But the downside has been that it does kind of put a wrinkle in our numbers when we look back at our services because they're down on the period now that I'm just reporting on when compared to a year previous -- the previous half. The geographic mix of revenues you can see as well, dominated by North America again in FY23X. But we did see some growth particularly in ANZ on the cloud upgrades, and we also saw New Ireland as well revenues grow in the EMEA market. So good to see the growth outside the North American market, but North America continues to dominate our overall revenues and continues to be our primary focus as a business as well. I'll move to Slide 7. And you can see that R&D investment was moderated and slightly decreasing as a percentage of our overall revenues. So we've been kind of leveling off in terms of the R&D spend and the investment. And indeed, within the envelope of spend, we've been moving teams across to different areas of the full platform towards digital and data. So some work going in there. But also, if you recall on our last update, we did announce that we'd be investing in the direct-to-employer market, where we had to bake out some extra features that employers would want with our Absence product. And indeed, we had some R&D work on AdminSuite around the Guardian program as well. So overall, very much a steady state and leveling off as a percentage of revenues. I'll move to Slide 8 now. And again, you can see how our people are broken down by function and by region there. And as you know, the regions that are growing are the non-North American regions, where we're basically going to the lower-cost countries to recruit. And that strategy will continue, where we'll offshore things like cloud operations, support, product consulting and engineering functions as well into the lower-cost region, and in particular India, where we've been growing our footprint there quite well. When we bought Spraoi, which was our second acquisition, we bought a team from India, which were very strong on the engineering and the artificial intelligence front and machine learning. And we've been able to build off that. So that was a really good outcome from that M&A situation that we went into with Spraoi. So we built India up and continue to do so. And our contract resources have gone down slightly as a percentage of overall people as well. But you can see our utilization and our employee retention rates are still very, very good as we keep our people engaged and working tightly with us on our vision and our mission as a business. And to that end, our DEI Embrace program is hugely important to keep FINEOS really focused on staff engagement and maximizing the kind of the benefit of having people working with us and making FINEOS a really good place to work and making it inclusive as well. So you can read all about that in our annual report. But we're driving some really good successes there that are listed out, and you can see our future focus as well. But we've always been an inclusive company. But we really formalized this and we've got our people involved in terms of work groups and so on. And this area is really, really important to us as a leadership and as a team. I'll move to the next slide, which is the -- our focus on ESG and our, more or less, our social conscience. And again, as a business, we focus in on this and really want to be good corporate citizens as a business. And again, we've written extensively about this in our annual report, but we have had some really good achievements. We keep our focus on this. Again, we have focus groups and we have strategy on our ESG, and you can certainly read more about that in our annual report. And on this slide, we just call out some of the key successes on our future focus. So for now, that kind of finishes me in terms of the update, I'm going to hand over to Ian Lynagh, our CFO, to just go through the financials before I come back to you and talk about some of the important strategies moving forward. So over to you, Ian.

Thank you, Michael, and welcome, everybody, to our results conference. So I'll try and give you a bit more insight to the numbers and some of the activities that Michael has referred to during his portion of the discussion. So as said, our subscription fees are up. That's our primary revenue stream. That's just going to generate the most value in the company. So we're very happy to see that happening and we're keeping ongoing focus on that. Yes, the services is somewhat down, the main explanation there being that company that transferred into an R&D strategic relationship with us. But also, we're seeing ongoing desire by customers to have a level of self-service and we've also seen some level of uptake as well with SIs who are provide you more services directly to customers rather than us providing those services to them. With respect to the initial license fees, as I said before, that's very much a legacy from the past. We charge those fees for on-premise customers. That's a diminishing pool and only when they want to add on extra users for some kind of a specific need to have where we see some increment in initial license fees. So none happened in the last half year. Some may happen in the future, but it's going to be more sporadic in terms of that. [indiscernible] has helped us quite significantly as well with respect to decrease in costs. We also referred before to the fact that as we watch the revenues as they move, we have a flexible workforce. It was about 18%, 15%, fluctuates a bit in terms of contracted resources. So one of the levers we pulled in terms of the revenue position was that of contractors. And we have different types of contractors. I think this was a high cost and contractor relationship we had in there. We saw cost outage of EUR 1.7 million in terms of that. Also the relocation of resources to lower-cost regions where appropriate paid off well, and we continue to mature out our usage of the cloud. And half year and half year, we saw a decrease in our spend on our platform, AWS, despite the fact that we use more of it, we had more customer presence in the cloud, but we became smarter in terms of how to utilize that resource. We also recontracted with them based on our spend to get better discounting. So that's part of the dividend we're seeing there and the improvement that we're seeing in gross margins. I'll move on to the next slide now, please. So in terms of -- just talk a little bit more about the operating expense. In the general theme you're seeing there is that the operating expense has improved in so far as we've decreased that cost right across the board. And that's what we're looking at. We're not just looking at what part of the company in terms of how to drive that efficiency, how to get better outcomes. A lot of that was driven by negotiating better deals with third parties such as Amazon AWS, as referenced earlier on, but also the relocation of staff, as we've repeatedly said, to lower-cost regions. But what we're very much focused on now as well as another key strategy in terms of that is having built out our product suite and got it into a more mature situation in the cloud. We're looking at how do we drive more efficiencies? How do we get better automation, smarter ways of doing things? And to Michael's comment earlier on, about cost outage that we announced about a year ago in terms of EUR 10 million, you see that being fairly achieved, but we see it also increasing and moving forward as we progress into the next fiscal year also. So right now, we've seen an improvement in the gross margin and we expect to maintain that, if not improve that as time moves forward. There are some other areas there as well where we've got some efficiencies. The share option charge, quite a lot of share options were distributed to staff, particularly after IPO. They procured out in terms of the cost of the company. So that's given us a benefit there as well. And in terms of the R&D tax credit, we have mature products but we're also doing some R&D work in different regions outside of Ireland. So that's had an impact there as well. Next slide, please. In terms of the cash to bank, it's up on the same period on the previous period, helped obviously by the equity raise. So thank you very much for that. But we do see very much as we move forward the free cash flow. We've reiterated that in terms of being positive for the 6 months, for the 12 months on. And thereafter, so we're very much trending towards getting that back into that right situation where it is positive and back towards a profitability scenario with the company as we continue to drive out these costs and focus on the revenue side of the business. Trade receivables are down. We had some significant license fees towards the tail end of the first half of last year, particularly Guardian, which has been mentioned repeatedly, so that's just the rhythm of the business. And conversely, the same with deferred revenue. As you're aware, the lion's share of our subscription fees are invoiceable December through January. So that's just a timing issue again in terms of what it is, decreased in terms of deferred revenues. So next slide, please. So again, just reiterating the cash situation. We raised the equity for working capital purposes. We're still sticking with that mantra. It's very much around pushing the company through this next period with strong deliveries and successful deliveries taking place with our customers. We've moderated the R&D expenditure. We're continuing to reduce cost elsewhere. So that's helping us quite significantly in terms of keeping the company in a very safe position as we transition across and move those customers into expanded IDAM usage, also Guardian in terms of go live towards the beginning of next year. And that's going to put us in a much healthier position than for ongoing growth as we move forward. And that's it for me. I'll transfer it back to Michael.

Yes. Thanks, Ian. So just in summary in terms of our key priorities moving forward in this new FY, which is a calendar year as I said at the start. Delivering Guardian is absolutely vital for FINEOS in the marketplace. We've seen several cancellations and stoppages of admin system implementations on the group side from various vendors who've come into the market from either property and casualty or pensions. And these have been stopped and after quite a large spend in some cases from the carriers. Indeed, our own Guardian win was as a result of the stop of a program with a P&T type vendor that had been running for 4 years. So it's vital the group market sees a vendor coming through that can actually handle the way this market is so rapidly changing with a purpose-built end-to-end system for their industry. And that's very much where we see ourselves moving forward. So Guardian is extremely important to us. It also brings us down market into the SME market, which is again quite a good piece of the employee benefit market to address. As we know, SMEs make up a huge proportion of overall employment in most countries. And that's where we're heading with Guardian. We also are driving customer success around clients moving away from legacy systems. And again in the employee benefit space, this is a new phenomenon in terms of carriers being able to move away from older rich functional systems to a purpose-built platform like FINEOS. So we start -- we're really proving that out. I mean, you can read our case study on our website from New York Life, but we have several activities going around migration and scaling with carriers today. We want to increase the business in terms of the cross-sell and upsell, but we're very much in a stage particularly with our large carriers of proving out our product and scaling our product. And our larger carriers are absolutely hungry to scale on FINEOS and not to look around at cross-sell opportunities for us until they get off their legacy for the particular products that they bought from FINEOS. And that's just a -- it's a great success in many ways, but it does take their eye off future things with us whilst they're focusing on the success of the programs we're running today. So again, it's very much a confidence builder in terms of FINEOS on our platform. The other area which we entered into in the half was the direct-to-employer market. We very much entered into this with the same Absence product that we run in the carrier space, but we do have to round it out with extra facilities and features that the employers need that carriers would normally have in-house. So we're doing that and that's going well as well. And this gives us an opportunity for revenue at the lower end of the market, and it also gives us a product which we can bring into the small end of the carrier market as well where a more out-of-the-box solution is required. We're also launching the rewritten part -- or the rewritten Limelight product, or as we call it, new business and underwriting. And I suppose lessons learned in terms of looking back. But looking ahead, we have actually invested in the latest technologies on Amazon, native cloud, SaaS-like kind of behaviors of this product, and it very much has given us an opportunity to build out a product component in a very modern way. And this, for us, has been extremely pleasing and we're very excited about bringing this product into the market, and we expect that to happen over the next few months into this year. So yes, I just want to emphasize that. That is an exciting step forward for us as well. We want to continue to drive our clear strategies for operational efficiencies, as Ian says, and deliver out further cost reductions. So cost reductions that we're seeing -- that we've seen over the past 6 or 8 months are delivering better cost reductions in this half way. And that will continue to grow as we operationalize -- or sorry, as we automate -- and we make changes to give us that multiplier effect and that kind of path to better margins. And so that is going to be an ongoing theme in FINEOS. We're really striving for operational excellence as a business. And as Ian also said, we've built out our product functionally over the past 4 or 5, 6 years. There was a hell of a lot of functionality to build, but it's very much coming towards the end of the functional build and really into the automation and the SaaS-like behaviors and into APIs and connectors and data and so on. So we're excited about that as well as we move forward. And last but not least, we are the only end-to-end platform in the North American market from Quote to Claim for group voluntary in Absence, and we are very focused on this as a mission to grow FINEOS into the market leader. We're already market leader by number of clients, by revenues and so on. But we really want to get this whole platform deployed many times in the North American market and really get the benefit of the investment for our shareholders. I'll turn to Slide 18. So as we've mentioned, we have had a kind of a couple of quarters move out. Our pipeline has moved to the right. So we're forecasting a EUR 130 million to EUR 135 million revenue for this calendar year and financial year. But we still expect double-digit growth in terms of the subscription revenues, and we'll continue to focus on growing that valuable subscriptions business as we work with SIs who'll take more of the services as we move forward. But this strategy that we have is really to get this business up into high product revenue as an overall percentage of total revenues. Not saying goodbye to services and those services will go up in value in terms of what they are, but we also are bringing in SIs and they're working alongside with us. So services revenues will remain flat in the FY. Guidance reflects both the continued lengthening of the sales cycle, as I said, and a bit of Limelight churn that we've been experiencing for the past period. We're on track for the successful delivery and replacing legacy systems which, again, as I said, really proves out the functional capabilities, particularly the FINEOS IDAM product, where carriers are very excited about moving across and saying goodbye to their legacy systems. And we continue the strategy of the cost savings. So when -- as I said, when we see cost savings in 1 FY, it usually kind of we bagged that and we take that through to the next FY. And it usually means a better saving as well because we continue to refine that. And we continue to therefore expect positive cash flow in the 6 months to the 30th of June this year and also for the following 12 months in aggregate and we're continuing to be self-funding thereafter. As I said earlier, we raised the AUD 40 million back in August, and we're very pleased that we did. And this business is very viable and looking forward to future growth in margins and in terms of free cash flow and profitability as well into the future. So whilst our pipeline has moved, it does remain very, very strong. So I'll finish the overall formal presentation, and very happy to take questions, Melanie, with Ian from anybody who wants to ask.

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

Just in terms of the revenue guidance and the cash flow guidance, just in terms of the -- if you were to hit the bottom end of the revenue guidance for the calendar year '24, is that still going to be enough to get your positive cash flow guidance? I just wonder how much sort of buffer is there?

I'll take that one, Michael. Just to answer that, Tim is yes, obviously the bottom end of revenue will be tighter. But the answer is still, yes, that, that is achievable. And as mentioned also, we're going to continue with further cost outage type activities as well within the organization.

And just in terms of that cash flow guidance, I mean, what sort of working capital assumptions you're making? Are you assuming any sort of benefit from working capital to hit those cash flow targets?

No, it's just purely on trading. So no.

And then in terms of the sort of -- because you've given us the revenue guidance, but the sort of the degree to which you've already put in place sort of cost/margin improvement initiatives to hit those cash flow targets. What's already done that will annualize through in terms of your cost number?

In terms of the guidance we've given around free cash flow at the moment, the assumption is that the revenues we have here can be met by where we are right now in terms of our cost guidance. As mentioned before, we could always pull a lever with regards to services go up or down. We have third parties that we can look at. In terms of R&D, we've moderated the cost in R&D. Effectively, the lion's share of what we're doing in R&D is to meet current demand. So that's going to be very static as we move into the new year. But we can pull levers with respect to other parts of the organization and we believe that the cost base we have in now is very workable. And as I mentioned a few moments ago, I think we could even improve that somewhat as we gain greater efficiencies, not just redistribution of work to different lower-cost regions where that is appropriate to happen, but also with the further maturing of the product. It's the extra focus on the cloud service itself and how we can do things quicker in a more automated way. So we're still very excited about what we can achieve more in that arena, too.

Yes, I'd say as well, Tim, we're continuing to drop our cost base. So we're coming in off a very good number. We can see it this year. And we're continuing to drive down our cost base. So cost is in our control. And we have a lot of initiatives to drive down cost, and it's around efficiencies, getting better multiplier effect. So we have a lot of road there in terms of how we can operationally improve.

And then just a final question for me, just on the revenue guidance for the December '24 year. Just how much sort of pipeline conversion is assumed in that guidance?

We don't normally give that out, do we? There's a very, very small amount -- yes. There's a very small amount, Tim. I mean, we come through every year and we get increases in subscriptions. We get increases in work. We're basically walking in with a very strong order book every year. So there's a very small to sell type piece, particularly new business sales, very small we put in. So we tend to try and be conservative. And that's the way that the market has been as well in terms of -- we do feel that the carrier market is certainly moving more incrementally at the moment rather than big transformations with the exception of our Guardian with FINEOS, but a lot of things have slowed down. Some of the carriers have made cuts as well. One company cut 5% out of workforce, one of the larger employee benefits carriers there in January. Some of them are doing extremely well. I'm happy to say that they seem to be our ones on the existing kind of migration strategies. They seem to be going well. But we just see more of an incremental market in terms of spend at the moment on the new business side. So we've been conservative.

Your next question comes from Siraj Ahmed with Citigroup.

I will just ask 4 questions. Just first one, Michael, I think you previously mentioned you might look at price increases this year for giving a lot of [indiscernible] just any update on whether you have moved ahead with that?

Yes. We have had some price increases, Siraj. And yes, kind of some of our contracts are kind of limited to indexation according to CPI. And in some cases, that's worked in our favor given the high CPI rates in North America as well as Europe. But yes, has been -- we've taken the opportunity to increase prices wherever we can. And some of our contracts are coming to the end of the 5-year cycle as well. So we'll go into negotiations on those as we move forward, too.

So Michael, can you just help us in that mid- to high teens sort of growth that you have assumed -- sorry, low to mid-teens for subs. How much would -- that would be price? Should we be thinking 5% to 7% something?

A bit less. A bit less, Siraj. It wouldn't be quite the 5%, I'd say.

Okay. And in terms of the second thing on New York Life, the Absence module expansion -- sorry, warranty. Is that in the guidance for calendar year FY '24?

Yes. I mean, what that means for us, Siraj, we have architected and built that into the system. New York Life were absent for a couple of years decoupling from Cigna. They had a lot of IT work to do, the team that we work with, to get off Cigna financial systems like Oracle, move to SAP and that kind of thing. When they came back to us, they were pleasantly surprised to see that the base product have moved as well towards the whole voluntary side, which was the way we were traveling. And they're going to go live with the product at the end of the year for voluntary benefits. There isn't a big upside for us in the subscriptions on that because it's a greenfield. It's a new entry into the market. So they'll start low. But what it does act as is a proving point for the base product and really set the standard. We'll probably end up updating our case study with New York Life in the early part of next year, which they've discussed with us. And that's where the benefit is, really. There is some services work we've to do with them this year, but it's not a big lift for us now to get into that space -- to bring them into that space for the mid-market.

And third one, on APAC -- on ANZ cloud migration, have you -- I know you had success. But any update on the others, Michael? I mean, clearly some updated guidance from...

Yes, absolutely. We have achieved the one [ ART ] or QInsure have gone live with that -- with our cloud upgrade and are really enjoying the benefits of that. And as you know, icare have bought FINEOS as well for part of their claims book, and that will be in the cloud. We have been negotiating with one of our clients -- one of our larger clients in the region. And we pretty much had that deal done and ready to go, which is one of the reasons why pipeline has moved out to the right. They decided that they would wait before presenting our deal to the Board a couple of months because of just the climate in terms of the overall environment around cost cutting and stuff like that. So that has kind of delayed us on pipeline. But that's going to be a significant one we expect in FY '24. Just delayed a little bit, which is very annoying for us, given the guidance we've given out and so on. But that definitely does that. And then there's others as well. One of our bigger clients on the life and health side has been consolidating FINEOS systems after a number of mergers and acquisitions over the past 2 or 3 years and that's all coming to one big system on-premise. So they should be ripe for a cloud upgrade, and the discussion should start later this year, hopefully, with next FY '25 type program. And then there's others as well that are looking for budget. The market still seems to be tight. Money seems to be an issue with some of the life and health carriers. So yes, it's a slow market, but we're moving in the right direction. And these carriers have no choice. They've got to move to the cloud. And it's going to become more and more prevalent in the market. We're going to see more focus from regulators in your market locally around cloud and migrating away from legacy or bespoke type systems that boards are being held accountable for in terms of the customers' data. So I think you're going to see a bit of a push towards that. So we see ourselves benefiting somewhat from that.

And just last one. In terms of Limelight, how much of revenue is left? Just I know you're launching a new product -- upgraded product, but just trying to understand how we should dimension -- is there much revenue left in that business?

Yes. There's not an awful lot of revenue left, unfortunately. So I mean, I'm not going to give out numbers or whatever but it has been disappointing in terms of what happened to that business. And yes, I think we've gone in heavy over the past 12 months or so and rewritten and really kind of took the opportunity to leapfrog ahead of even our own platform in terms of technologies. So we do have a pipeline for that product, which is the good news. And we are excited about that product. We needed that product in terms of being able to go Quote to Claim. So it did fit a part of the jigsaw. And I guess as well that there's quite a good market for that product going in with our AdminSuite policy and billing as well. So that's the way we see things going forward. We're in a positive mood over that particular product.

Your next question comes from Brendon Kelly with Alceon.

With the existing larger clients in the U.S. that are ramping up the usage, just kind to understand if there's any contract or project milestones over the next 6 to 12 months that might see those contract values or the ARR lift materially?

There may well be, I can think of one of them, there may well be. Something that could happen, we're certainly starting to come through the kind of end of the migration that will lead us to talking about what's next. We'll have to run that migration all the way through this year, but we can certainly start the discussions within the next 3 to 6 months. And there's another one of them that has about 20% of their book on FINEOS. They're very, very large and they are really keen to move and migrate everything off their old systems to FINEOS. I was over there 3 weeks ago in New York and spend time with their President for North America and their EVP for Group business. And they want to move off legacy as quickly as possible. We're actually talking to them about how we can accelerate that migration. Because as they migrate, they will crank up on the license fees that we've already sold. And this is the one where we have that strategic deal, where they have the opportunity to pull into FINEOS completely. We've been building our product for the upper end of the employer market in those -- with those guys, and we have an opportunity to double our subscription fees just by getting them off their legacy systems. And indeed, we'll have further opportunities with them into next year and the year after with other lines of business and maybe even other components from FINEOS. So we're also talking to them as well about how we use our AI product, the Spraoi product to clean up some of the data and help them to accelerate into the FINEOS product. And this is something strategically we're looking at because if we can accelerate migrations -- data migrations off legacy into FINEOS, then that can only be good news for FINEOS both from a subscription perspective, but also from an ex project perspective. Like it allows us to move faster and get to the next thing. So these are areas that we're putting our minds to in terms of how we move forward. So the answer to that question is very possibly yes, we should see more upside through this year and further into next year.

Understood. And then just to follow on from that. I mean, you've called out some pretty heavy investment into Limelight and then [indiscernible] machine learning solution and voluntary as well. Just keen to understand just how far along the journey you are in the investment and how market-ready those products are. And secondly, just keen to understand if you've built a pipeline around those solutions.

Yes, yes, absolutely. We've come through quite a good part of the journey in terms of those product solutions. Particularly the Limelight piece, we're going to be launching that in a few weeks' time. We have a study starting with that with one particular prospect in about 6 weeks. We -- so that product is coming through nicely and it will definitely be rolled ready in the second half of this year, hopefully leading to implementations and some go-lives as well. The Spraoi product, we've been working that product now for some time. We have refined that product so that it works with the FINEOS platform. But we've also been working with AWS strategically on the machine learning side. We are based in Dublin headquarters, as you know, and AWS have their EMEA R&D centers in Dublin as well. And so we get to participate in some pretty important and nice machine learning-type R&D activities with them, which we want to bring in to enhance what we're already doing with what we bought at Spraoi. So if you look at our overall R&D levels, given the kind of envelope that we're working with in and the market we're working in, we're in good shape, and we won't be increasing that at a headline in terms of overall spend. But we are redistributing teams and we are working in different areas of the platform as parts come to kind of natural completion. And as I said in the presentation, over the past 5 or 6 years, we've been really building out functionality to make FINEOS easy to onboard and to implement. You can see that coming through with what I mentioned around Securian and indeed Guardian as well, who will go live later this year -- towards the end of the year. And we'll be delivering the first release of their product go-live system in a few weeks' time. So yes, we're really heads down, just focused on the one space. And as I said, it's a very incremental look and market at the moment with carriers kind of a bit shell-shocked from some of the programs that have been canceled over the last few years on the admin side from vendors that have entered in from different domains.

Yes, sure. And just the pipeline on voluntary and also direct-to-employer.

Yes. Like voluntary is a much smaller element of the overall U.S. market, but it is the important piece. It's more profitable for these carriers on the group side and it also moves the equation to more of a defined contribution model, more of a flexible model for the employees. We're also seeing an overlap between voluntary and absence or paid leaves from states, where insurance companies are offering state -- insured paid leaves from the state. And so they're offering new products around Absence, which is really playing into our hand of being able to have that voluntary element in terms of our billing and policy and also the Absence piece. So it's a growing market, it's a trend, and it's something that we really have to support on the same platform as the group system. But it's a small piece of the jigsaw right now, but it's going to grow. As you can see, New York Life moving in, is just going to increase it. But it also gives us an element of the market where some carriers have a voluntary book of business but they don't necessarily do the group piece. They do the accident, critical illness and whatever. So we can go in after that as well. So it does expand our footprint a bit with some of the carriers that are in the multiline place. So overall, it just makes the product more rounded out and opens us up to more opportunities.

Your next question comes from Jacob Loi with Citi.

I just got a couple of few questions, if you don't mind. So is the current -- is the previous guidance that was issued for the EUR 131 million to EUR 135 million for the full year to June '24 still relevant? Or should we now be thinking about the current guidance from today's presentation is the new -- or will supersede that?

Yes, correct. The current guidance will supersede that.

Okay. Yes. So in terms of the new guidance. So currently, where we are EUR 65 million ARR and to get to a low EUR 70 million of sub revenue based on the lower double-digit guidance -- low double-digit growth. And then given that you haven't mentioned as much new business, how do you kind of sort of bridge how you'll get to that low EUR 70 million?

Well, we're continuing the cost outage as we go through this year and that will deliver more opportunity for that free cash flow.

Sorry, in terms of subs revenue.

Sorry, what's your point on subs?

Yes. Sorry. Your ARR, EUR 65 million to EUR 70 million unless I'm misunderstanding. So is that -- so you mentioned this maybe just under 5% full price. Is that implying that -- like you mentioned that in terms of the pipeline, there's not much new business. So how do you sort of aim to bridge that sort of -- [indiscernible] pricing?

Yes. Look, I said it was less than 5%. By the way, the price increases wouldn't have been, I think, Siraj said 5% to 7%. I said it was less. But yes, we've taken a conservative view of our pipeline in terms of when things convert. We're having good conversations today. And we basically -- we're setting our stall out the way with the same guidance that we put out the last FY, the EUR 131 million to EUR 135 million. Just in terms of the climate we're seeing and we're hoping for an uptick. But yes, we have work to do in terms of the business closing. And as you say, we don't have a huge amount of new business in that. We do have deals that we were looking to close from January onwards, last month. They've been delayed a bit. So we've taken -- again, we've kind of taken a conservative view of that as to when they'll close. But we were fully expecting them to close in January and all the indicators going into the last quarter last year were those deals were going to close. So we've had a couple of hiccups in terms on their side, them not being able to pull the trigger on the deals. But we do expect -- like they're still assuring us that they can go ahead and so on. But yes, we've taken a conservative view.

Yes. And just my last one. So how should we sort of think about medium-term margins? So there's been a bit of accretion from this result. But how should we sort of see, I guess, over the medium term?

Yes. Medium term, we expect margins to continue to grow. And this business will become a very profitable business in the next 2 to 3 years. And we'll prove out the complete SaaS model, which will give us that multiplier effect as we get more and more standardized with this model. And as I said and Ian as well made reference, we put a lot of money into functional capability in the last few years. We're now really standardizing and getting the automated benefits for increasing our margins. And then there's other cost strategies as well that we're driving. So margin, we believe, will continue to increase in the medium term. And as I said, profitability as well will come on that. And we're not dissimilar to other vendors who've been moving in the insurance space that are listed. You could look at their results and what they're calling out in terms of the challenges, but also the positives. We wouldn't be too dissimilar from the strategies that they're applying. And they're also forecasting nice margins and growth in margins going forward.

Your next question comes from Siraj Ahmed with Citi.

Michael, can I just follow up Jacob's question just in terms of previous guidance and new guidance. In December at the AGM, you said -- it sounds like you're tracking towards the low end of your June half guidance -- June year end guidance of EUR 131 million to EUR 135 million. So expectation at June half would be at the high EUR 60 million or something, right?

Yes.

That's still -- nothing seems to have changed. I get that some things have slipped, but that's still on track, isn't it?

We're no longer giving guidance on that. But yes, it's -- some of it has slipped and that's what caused us the pain in terms of the revenue -- overall revenue kind of slippage on our guidance. But these are deals that we are -- the people already working with deals that we expected to close. And there's 2 or 3 of those deals at the moment that we're looking at getting closed. So it's just delayed. We've taken a conservative view then for the rest of this year. But yes, there has been some movement to the rise on those deals.

Okay. So should we be thinking your December half is better than June half this year like in terms of revenue? Just trying to understand how to phase it because you have Guardian Life going...

Ian, can you answer that in terms of the June half this year versus...

Yes. We should see an uptick in the June half of this year, Siraj that's the expectancy.

Sorry. So December -- in this calendar year '24, December should be better than June? Or is that the way to think through it?

Yes, this year...

Yes. You're talking about this year, aren't you, in terms of...

Yes, calendar '24.

You're talking about the first half of this year.

I think he's talking about the first half of this year versus the second half of this year in calendar '24. And the answer is yes, we expect revenue to keep growing in the second half as well.

Yes.

Your next question is a webcast question from [ Harry Newman ]. It's positive that FINEOS is on track to achieve positive free cash flow and self-fund moving forward. So it'd be great if you could give us some colors on your approach to capital allocation and how you prioritize investments to ensure long-term growth and sustainability for our company?

Yes, that's a great question. So we have been allocating capital to trying to get to market parity and market leadership around our product and our platform, and we've invested -- as everybody knows, we invested way ahead on the R&D side to get that product ready. As we move forward, we will continue now to apply capital towards more automation and more kind of margin kind of growth in terms of the platform itself, but also digital and data and also kind of rounding out some of the policy billing and the new business platform. So we are changing the complexion of how we allocate our capital but we're not increasing the overall R&D investment profile as we move forward. But as we move forward into next year and the year after as we start to come into that free cash flow profitability situation, we'll start to look at geographic expansion and also increasing our sales and our marketing to kind of reuse and to sell what we already have and to scale the business. So I think we've been putting the focus into the product very much over the past few years. We continue to focus on the product to make sure that we keep it ahead with things like machine learning and automation and so on and making sure the user and the customer experience is really strong on it. But we'll also then be putting and allocating money towards the sales, the marketing and investing in that side of it in future growth. So you'll see the complexion will change. And overall, as I said, we are expecting our product revenues to continue to grow substantially and they will become the largest part of our overall revenue. And our R&D will continue to go down against -- as a percentage against that overall product revenue growth.

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

Okay. Thank you, Melanie, and thanks, everybody, for coming on the call today. As I said, we're very confident in terms of how we want to move forward in this program and we're seeing some really good results. We don't have control over pipeline, unfortunately. We're in a very lumpy business in terms of the type of deals we do and we're dealing with a market that is not quite right yet in terms of recovering from past atrocities, you might say, investments and things like that. So we're hoping that they will see us as the white knight in the core system space within employee benefits as we move forward. And we've built in the direct-to-employer growth opportunity that's there as well. And then I think you're going to see FINEOS continuing to grow and to become much more profitable as a business going forward. So I appreciate everybody calling in today. Ian and I expect that we'll be down at some stage to do a roadshow probably later this year, but we'll be sending out more details of that at some future date. Thank you.

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