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

Thank you for standing by, and welcome to the FINEOS Corporation Holdings plc 1H '24 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 welcome, everybody, to our financial results call for the first half of this year, ending the 30th of June this first half. I'm joined today by Ian Lynagh, our Chief Financial Officer, who'll give this presentation with me. Ian will focus in on the more detail on the numbers side. So to start off, I'm going to turn to Page 3 of the presentation, which we issued early this morning, and just talk through some of the highlights that we've achieved in the first half. First of all, subscription revenue is EUR 34.5 million for the half, up 6.1% on the prior corresponding period last -- in our last financial year. And subscription revenue is now 53.5% of our total revenues. Our ARR by the end of the first half was EUR 68.7 million. And again, that was up 5.2% from 55.3 (sic) [ EUR 65.3 million ] at the 31st of December 2023, so the previous half. Total revenue was EUR 64.4 million, and that was up 1.5% on the prior corresponding period. Gross profit was EUR 47.4 million, and the gross profit margin was 73.6%, up -- gross profit was up 6.5% on the prior corresponding period, and gross profit margin was up from 70.1% on that prior corresponding period. And again, EBITDA of EUR 7.3 million, EBITDA margin of 11.3%. EBITDA margin was up from 7.2% in the prior corresponding period. And lastly, in terms of highlights, our cash position was a healthy EUR 34.2 million as at the 30th of June at the end of the half with free cash flow of EUR 5.1 million, up from EUR 1.9 million at the 30th of June the prior corresponding period last financial year. We continue to kind of knuckle down on this business in terms of growth. And our whole strategy is built around building market leadership in the employee benefit space, particularly in North America. And our pipeline continues to be quite healthy, albeit that deals are -- they take a little bit longer to close, but we do look like we're in a very good position pipeline-wise. And we're delighted to announce the sale of FINEOS -- the FINEOS Platform for Integrated Disability and Absence Management to a new client Voya Financial in North America. And that particular deal was won in an open competitive situation with an incumbent claims vendor who are already in that customer. So, again, that was particularly good. But it did take a bit longer to win because the customer would have spent quite a bit of time looking at FINEOS to make sure they were making the right decision given that they had a vendor in place with a different system. We also announced ACC upgrading to the FINEOS Platform. So that's the New Zealand accident scheme, which runs on FINEOS today on-premise, and that client has moved forward and started a program to migrate to the FINEOS Platform in the cloud, which we're absolutely thrilled with for the ANZ region. It does give us a great positive piece of momentum. And indeed, we had a cloud upgrade migration deal confirmed in Canada as well. The direct-to-employer absence management clients are actually due to go live in this quarter. And in fact, today, I can report that over the weekend, the first employer actually did go live. And so, we now have referenceability with our Absence product in the employer market directly in North America. So, again, a significant milestone there for the company. And as I said, we'll have another one of those employers going live in the next few weeks or so during this half. We've also been focused in heavily of -- those of you who have been following us on building a systems integrator partner program. And we're delighted that we have the likes of PwC, EY and Deloitte in there in our partner program, and we're really starting to see the benefits of that as well coming through. The other big, I suppose, milestone first in terms of a highlight is the AdminSuite projects are on track for go lives in the second half of this year. So the 2 key programs that we're working on with our full AdminSuite is the Guardian Life program, which we began less than a year ago, and that's due to go live in the next few weeks. That's our full AdminSuite policy billing claims and options for absence management, short-term disability, long-term disability. And indeed, we see a future growth trajectory with that client. We also, as you know, have New York Life already live in the cloud for almost 3 years now with the full AdminSuite at $4 billion -- sorry, $4.1 billion group book. New York Life are going into the voluntary benefits area, which is what we originally built the system for. And they're launching as a greenfield into that space on the FINEOS Platform. So, again, that fulfills the original agreement and vision that we both had when we -- when FINEOS built out the AdminSuite with New York Life as our charter customer. And we've also been able to launch a new version of our new business underwriting system, which has been rearchitected and very much developed for the cloud and a SaaS multi-tenant type version. So we were thrilled to do that in June and to showcase that with our customers. So, again, a fair bit of R&D went into that product. As you know, we bought that product 3 years ago from -- when we bought Limelight Health. I'll move on now to Page 5 and the financial performance in terms of just the details there. I've talked about subscription. Services is slightly down, and that's primarily due to a couple of things. SI partners are taking more of the services from us as we grow our business. We still obviously want to grow our services business, but we also had a couple of issues in terms of projects stopping and restarting and stuff like that. That Ian will cover off. Initial license fees are slightly down as well from the prior corresponding period. Gross profit, though, is up 6.5%, and the margin, as I said earlier, is up as well with EBITDA up again also. Moving to Slide 6. Subscription revenue growth continues for FINEOS and indeed, the overall growth of the business continues as well. So subscription revenues are 53.5%. And year-on-year, we've been continuing to grow the overall revenues as well. So they're up 1.5%, but subscription revenues are up 6.1%. And the ARR is EUR 68.7 million, up 5.2% with a slight offset of some churn. And again, we'll talk about that in more detail later, but there was some churn there of EUR 0.8 million of ARR leaving in the half. And services revenue has been down 3.3%, as I've already mentioned, we'll cover a little bit later as well in the detail. I'll move now to Slide 7. So you can see the geographic mix of revenues and indeed, North America being the largest region for FINEOS in terms of our revenues in line with our strategy. And ANZ, there was that little bit of churn, I'd mentioned a bit earlier, which caused kind of a decrease in the ANZ side by 2.9%. As you would know, there has been several mergers and acquisitions in the life industry in ANZ over the past 3 years or so. And so, there is some downside impact of that. There's also upside for us as well as these carriers begin to do their cloud upgrades, but there is revenue that leaves us as well due to that -- due to M&A. The Europe region is down 6% in terms of overall revenues, but that's mainly due to the completion, I should say, successful completion of a large implementation project that we were doing that has increased our services. I'll move now to Slide 8. So our R&D investment is slightly up as we've moved through the half. And again, there's -- we do feel insatiable demand from our -- particularly our large clients who continue to want FINEOS to go faster, to develop out the product so that they can scale and migrate to our platform. So it's quite positive in terms of the demand. And so, at times, we do increase our R&D. But it represents almost 38% of our revenues in the half versus 37% in the previous corresponding half. So the investment is up and we continue to control our cost base in terms of finding ways to reduce our overall spend and increase our gross margins. And therefore, we're seeing the kind of the trends moving [Technical Difficulty] around moving much more towards margin and profitability in this business. And so, we continue to develop and invest in the employer market as well. And as I mentioned earlier, we have our first one just gone live, and our next one will go live very soon. Between that and our AdminSuite, they were the big focuses in terms of R&D. And as I said, I'm pleased to say that everything is moving in the right direction on those and very positively as well. Moving to Slide 9. On the people side, just covering off, again, we continue with a high rate of utilization. Retention is particularly high in terms of employee retention higher than we actually were forecasting for the year. And, I guess, that's a positive thing from a FINEOS perspective in terms of employee engagement and people being really interested in the R&D and the work that we're doing. So we are though running the program of moving our costs towards lower cost regions, and that will continue, and Ian will talk a bit about that as we move into his presentation. So, overall, as I said, we're generally driving the cost down, and we continue to grow the revenues. So I'm going to hand over to Ian now, who will cover off on the financial side. Over to you, Ian.

Thank you, Michael, and thank you for all in attendance today at this results briefing. We're now on to Page 11, and I just want to give a little bit more detail in terms of the income statement. So, as Michael described earlier on, we have seen the subscription revenues grow, primarily driven by upsells, both in terms of scaling, particularly in the IDAM arena, and also, in terms of yet another client move into the cloud. We're getting to a point now where over the next year or 2, the move into the cloud will be almost complete in terms of the existing customer base. So it's good to see that continuing in terms of our progressive path. We also got the new clients in terms of Voya. And what we'll see is a progressive increase of subscription fee for them over the 5-year contract term that we have with them. So as they use the product more so in terms of scaling on the product, then we'll see that going up over time. So we've agreed the first amount where we have the subscription fee coming in from the sign of the contract, and therefore, providing a yield on that right through the project duration period as well. Services is down and partly due to good success, as Michael said, with the SIs. When the SIs work on projects with us, they contract directly with the customer, they will look after things like the project governance, integration, data conversion, overall control of that side of the fence, while FINEOS will concentrate very much on the configuration and maturing out the product more, building out more capabilities for different lines of business. So, as we see that pattern evolve, that's going to be very important. And also, what's happening with our SIs as tentative is that, they are influencing and helping in terms of advocating for FINEOS within the customer base expanse. We're very excited about that initiative, which we started 12, 18 months ago is now starting to bear fruit. But the quid pro quo is, they will take over a level of service revenues as we had forecast as well and communicated to the market. Michael mentioned also that we had a customer that stalled for a period of time. So we had a project in situ. The hierarchy within that organization wanted to reexamine the business plan and the business case in terms of what we're doing and how quickly they wanted to move. And while they were doing that, we had to hold resources in place. And that cost us a little bit more money, which we'll see in the OpEx in the next page in a moment. But it was the right thing to do, and that project has resumed, and they're very happy with us. So we're going full [ custodial ] and we'll make that up in the second half of the year as well. License fees, as you know, basically is a throwback to our on-premise customer base. We don't [ advocate sell ] in terms of the existing customer trying to expand on-premise. The whole selling approach there is moving them to the cloud. But that said, it's mainly a per user-based licensing approach. So when they want more users, they come to us and then we give them more users, and we use the terms in that contract, which gives us that initial license fee, which also gives us a consequential knock-on in terms of an annual license fee as well, but it's a much smaller proportion. So that will continue to occur, but expect those low numbers to continue on to that customer base as fully transitioned across into the cloud. Because of the fact that the service revenues are down, our cost of sales is also down. You can see the detail in the slide there on Slide -- Page 11. It's decreased by EUR 2 million, and mainly that's due to contractor cost. We fully allocated the contractor costs where they're working on projects across the cost of sales. So, as we see different levels of services occurring, and as we've indicated before, we can flex third-party resources out when demand necessitates it. So that's what's happened here. We saw some level of decrease of requirement, so we flexed down our demand in that third-party and then consequently that gave us reduction cost, which is a good thing. We've also seen a reduction in costs of our own people because we've adjusted some of the overall headcount levels. So that's a positive. But we have seen a slight rise in AWS cost. Now, our unit cost with AWS has gone down, but as we expand our footprint with existing customers and new name customers, naturally the cost is coming up. So we've seen a slight rise there. So consequently with that we have a gross profit of EUR 47.4 million, which is up 6.5% on the previous period. And then that gives us a margin then of 70.1%, or, sorry, 73.6%, up from 70.1%. So our initiatives in terms of role movement to lower-cost regions is still carrying on delivering benefits. And likewise, we're putting a lot more focus into driving other efficiencies in the organization through greater automation, et cetera. So we see that journey continuing as we move forward. What this has done in turn then has given us an EBITDA of EUR 7.3 million, which is compared against EUR 4.5 million for the corresponding period. And so, that's moving in the right direction as well with 11.3% margin against that. We move on now to Slide 11, sorry, 12, and we look at the operating expenses that we have there. Overall, what you're seeing is a trend in the right direction. If you look across research and development, we see our costs are down, partly due to a higher capitalization but also we're seeing a level of allocation to cost of sales there as well. And if you remember, we mentioned previously that we have a customer, we now have 2 that are actually contributing directly towards accelerated R&D development. So FINEOS aren't just paying for the entirety of the R&D development ourselves. We have a couple of customers, strategic charter customers, actually assisting in that, where we're accelerating some road map features. And where that's occurring, we're recognizing that in this instance as service revenue. And, of course, then we need to allocate the cost of that against cost of sales, hence, the reason that's put there. We also have seasonality where it's talking about increasing staff costs. That's really around holiday accruals, predominantly, where this side of the world, we're taking our holidays more prominently in the second half of the year rather than the first half. So the accrual provision needs to be put in there to balance it out. So we see that reversed effectively in the second half of the year. Sales and marketing costs are also down and will continue to go down in the second half of this year as well. And that's partly because of very much the focus we're putting into North America. And the fact that our name recognition, not just to Claims as was originally there, but also an Absence and now stretching across to policy and billing, means the amount of effort that we were putting in, particularly in the marketing side, doesn't need to be as intense, doesn't need to be as expensive as it was before. So we pulled back a level of the marketing spend. We've also increased our focus on existing customers, so we have a customer success function in place as well, which we've also mentioned previously. So they're looking at the cross-sell and upsell, and in turn, that cost isn't included here. It's part of our product consulting group and working with SIs, as I mentioned earlier on, they're advocating for us in the marketplace, they're helping us as well. And the more that we work with those SIs and the more of a footprint they build out with FINEOS in terms of resources that are dedicated towards implementing FINEOS, then the more they have an inherent interest in also selling for us and looking for opportunities. So we're looking forward to seeing that base to grow as time goes by. So these are all reasons why sales and marketing costs have gone down, and it's very focused on the market that we're in. I mentioned earlier on that the service revenues can come down and consequently, the cost of sales come down against product consulting. However, what you're seeing here is an operating expense increase, which is kind of against the grain in terms of everything else that you're seeing there. But that really is predominantly due to that customer delay and also the holiday accrual. And the overall pattern we'll see is that, that would balance out over the year. And I would expect that product consulting overall will come down at a lower expense than it was last year because our headcount has reduced and we're continuing the exercise of moving roles to lower cost regions as well. So that's just a little blip at a point in time, not a pattern as we move forward. Cloud operations has also come down in cost as well. Again, looking at how we service our customers, where we service them from. Continuing that focus also increased automation in terms of the approach we've taken. And indeed, we did have other income there last corresponding period of EUR 3.3 million, which was related to a spree out earnout reversal. And that didn't reoccur this year because that earnout position has closed out. So we're in a position now where effectively our operating expense, though, it's showing a slight increase there in theoretical terms, isn't going to perpetuate in that pattern as we move forward. It's definitely moving the right direction in terms of where we want to get to. If we move on now to Slide 13 and we look at the balance sheet. So, as Michael mentioned earlier on, we're in a strong cash position at the end of the half year. We did get some payments ahead of time. So that was good. Our debt situation in terms of debtors is very good. It's always a good indicator if you have problems where you don't get payments, and people use that as a leverage to try and get more out of you. So we've got a very good position in terms of cash collection, and that's reflected in terms of what we're seeing there. We still very much have seasonality in terms of costs and revenues. And predominantly, we see our subscription fees coming in, in January, partly due to historic reasons, partly due to the fact that, that's customers beginning of fiscal years. And as time moves by, when we -- when they buy more from us, they often want to reset it to January. But that said, when we pick up a new customer or go for a major extension with existing customer, the anniversary of that tends to occur at the time that transaction occurs. So a couple of bigger transactions that occur in May and June and that then gave us an increase in trade receivables, as you see there, compared to the corresponding period last year. So that will continue, that kind of pattern, where you'll see some of that happening at different points in the year, but predominantly, the lion's share will still reside in January, as the overall pattern there indicates. Development expenditure has increased, but that's because of the R&D and the capitalization increase, which we referred to earlier on. And the corresponding decrease in OpEx. Deferred revenues is for the reason I mentioned there a moment ago, in terms of the predominant subs fees occurring in January. So in the main, the invoices have obviously gone out for all of them. The cash has been collected. But just from an accounting treatment point of view, we have to defer that revenue. There's no other reason for it. It's purely due to that fact. And trade payable and accruals, the lion's share of that increase of EUR 4.7 million is really just down to the seasonality of holiday accruals, as I mentioned earlier on. And if we move now onto Slide 14. Really, the key thing that I want to point out there is the positive free cash flow position. We gave guidance. In fact, we came in at EUR 5.1 million, which we're very happy about in terms of that position. We're still guiding that we'll have positive free cash flow for FY '25. So this is a movement in the right direction. We will not have it for the entirety of FY '24, but that's just part of the transition journey we're going on as we get back to that optimal status. And that's it from me, Michael.

Okay. Thank you, Ian. So moving along, if we turn to Slide 16, I'll just close out with some remarks in terms of the key priorities this year. As I said earlier, the Guardian AdminSuite implementation has been going extremely well. We'll be going live over the next few weeks on the first version of that system into production, and we'll scale that system through 2025 and beyond. This [ picture ] program is a market-defining program, and that there has been several large-scale failures of admin implementations in the North American benefits market over the past 2 or 3 or 4 years, and vendors from other domains moved into the space and attempted to build out group system for patenting. It's probably the most difficult market when you look at the various domains of agency and life annuities on the individual side, and then you've got the employee benefits [Technical Difficulty]

Ladies and gentlemen, this is the conference operator. Please hold, there is a technical difficulty with the speaker line and the conference will resume shortly. [Audio Gap]

It's Ian Lynagh here, and apologies for the communications problem we're having at the moment. I'm not too sure what's happening with Michael's call, and all the efforts we made to try and get Michael back on, but in the meantime I'll pick up in terms of the key priorities. So, as Michael was convincing to say there, in terms of our key priorities, it's very much heads down on delivery. This year, the Guardian admin system implementation is very important to us. We're expecting to have a soft go live in about a month's time in September with a hard go live for day 1 requirements commencing in January. That's going to be a key milestone for the second customer that are using policy and billing and indeed, Claims and Absence, too. So they are just like New York Life in terms of that pattern, and that's a really important proof point in the marketplace to prove, but this is a product for the market and not just a product for 1 customer. So that really is a paramount importance to us to make that very successful, and it's going extremely well with the customer at the moment. The direct-to-employer market is important too. We very much see that as being part of the employee benefits extended ecosystem customers in terms of our clients' customers have a choice in terms of the Absence piece. They can either self-administer, they can hand over that activity to the insurer to administer that as well, or they can go to third-party administrators. So we're tackling the market where the employer themselves decided to go and self-administer. It's essentially the same product with a few extra capabilities bolted on, which we needed to invest in. So the fact that we have a proof point with 1 go live so far, another emerging is really important, coupled with the fact that we actually have a strong pipeline building there. So we're really excited about that market and learned a lot of lessons in terms of those initial implementations, in terms of expectations, et cetera, the market which we're embedding in our approach as we move forward. We flagged repeatedly before that ANZ it's slower moving in terms of moving to the cloud than the U.S. is. But nevertheless, we're getting greater traction. We have a couple of customers now committed to the cloud, 1 in Australia, 1 in New Zealand, and we have a good pipeline there in terms of interest. We expect that to materialize as we move through into next year. But those reference points locally are really important for the other customers to make that movement, too. And indeed, they're very keen in terms of understanding what's happening to U.S. And quite often we have visits and reference calls taking place across the U.S. with our ANZ-based customers. So that's important to us as well. We're definitely seeing an uptick in new business sales and cross-sales to existing customers. It is a lumpy business, as we've repeatedly said. So deals will come in and flow at different cadence levels, but we're definitely seeing an uptick at the moment. And we will continue, and it's reflected in numbers there again, half year and half year, to continue to strive for operational efficiencies and gain further reductions, cost reductions, that is, so that we can get back to that profitability stage that we all desire to see occur. And we're very conscious as well that what we're not going to do here is, cut to the bone. It's about doing the right types of things. Michael mentioned earlier on, we have a slight uplift in R&D expenditure, but that's to deliver against strong demand in project with customers to allow [Technical Difficulty] scale. It's not a reversal of any decision in terms of containing that cost in terms of our operational approach. We'll continue to do that, but we'll adjust the lever up and down a level to make sure that we don't disappoint our customers, that they were very enthusiastic and importantly as well, become strong advocates for FINEOS as we continue to build out our customer base. They are key part of our selling machinery, it must be said. And therefore, ultimately, the key priority is to be that global leader. We've got a very good position, as we know right now, in terms of the Claims and Absence base. But in terms of moving forward, we want that position to be very much endorsed, also in policy billing as referenced above, so that we can gain that credibility. And the employer market aids that as well. So it's very much heads down, very delivery focused, and gaining new customers and driving those efficiencies are our key priorities as we look to the second half of the year and then roll forward into FY '25. I'm not too sure if Michael is back on the call yet. If not, I'll move on to the outlook and guidance.

Happy for you to continue, Ian. Thanks. I just came on, on my phone.

Okay. All right. So in terms of outlook and guidance for FY '24, we're still reaffirming that the overall revenue expectancy between EUR 130 million and EUR 135 million will be met. However, we're tracking now more towards the lower end. And what's making this happen is that, the philosophy of new deal flow, the level of subscription revenue that we expect to come into the company has come down somewhat, partly also offset by the churn that Michael referenced earlier on. And we're going to talk a bit more about that in terms of road show, we plan for later on this year. So we see a slight dip in the subscription revenue growth as a percentage. Though, overall, we expect a level of growth in the service revenues, and we expect that uptake to take place during the second half of the year. So that guidance reflects both in terms of what's happening right now in terms of the Voya Financial deals and the existing clients deals that we mentioned earlier on in the conversation and the offsets I mentioned a moment ago from the Limelight Health clients. As you know, we've had to rewrite that product as well. That was part of the uplift, too, in terms of our R&D spend. So we have a new product there that's both scalable and robust and very SaaS-orientated in terms of how it can deliver. So we're happy about that. And in terms of the key priorities, as mentioned earlier on, we are on track to successful delivery, where the relationships are very strong with our customers that are scaling and also those customers that are on the policy and billing. We've mentioned Guardian, we've mentioned New York Life with a big probe ahead of them in terms of moving out with the voluntary benefit products. So we're very happy about that. That's going extremely well and it's really important that we have that backdrop, particularly in an environment where a number of other insurers in the marketplace have had less fortunate successes in the market they've seen and instigated project stops, et cetera. So we're motoring ahead, which is very, very, very positive. Naturally, we see the seasonal volatility in cash flows, but we're still for FY '25, as I mentioned earlier on, looking forward to a position of being cash flow positive. But that's dependent on future sales growth and future cost outages. But certainly, that's where we're very focused on achieving that and then continuing that pattern and increasing the level of cash generation thereafter as we move forward. So still very much in mind in terms of what we're trying to achieve. And as said, we're seeing the pace of pipeline conversion continued to be challenging, but we have a number of opportunities out there, and as Michael referenced earlier on as well, we're seeing that we're winning clients. We're actually ousting some of our competitors. So more we can evolve that type of pattern where we become the preeminent well recognized supplier in the marketplace, which is still the journey we're on and not fully at the end, but certainly, we're tracking the right direction, then that's something that we look forward to. And I'll leave it there. And I'll leave it to you, Mike, if you want to have any post remarks before we move on to Q&A.

Yes, thanks, Ian. Apologies for that, everybody. It seems the problem was on my side. But overall, as Ian said, we're tracking the right direction. This is very big in terms of the programs that we're working on are with the largest carriers in North America. So we're doing well in the situations we're in. We're replacing legacy systems, which are 50 years old in some cases. So not the easiest task in the world. But all moving in the positive direction. And as Ian mentioned briefly there, we will be down in November and we'll do an Investor Day and a road show beginning November 11. We're just in the process of planning that now. So we're looking forward to meeting our investors in Australia when we come down. So with that, I think we pass it over for questions now, Melanie.

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

There's 2 questions around the guidance. One, if you take the sort of high single-digit growth in subscriptions, you sort of get an implied revenue around that sort of $69 million mark. You've obviously disclosed the ARR is basically that number currently. So I'm just trying to understand what the sort of implications are that you're telling us for the ARR for the second half, if you would, please. And where should the ARR end for the year?

Ian, do you want to take that?

Sure. Yes. One of the topics we've raised here obviously is churn, and we have a level of churn in the first half of the year. We're expecting still to have some more churn in the second half of the year as we peter out the Limelight impact. We would expect to see the ARR improved hit on where it is at the half year, but it wouldn't be a significant improvement. We also expect the revenues for subscription fees to increase in the second half the year. We have more upsell opportunities which we believe will close. We also have some new name opportunities that will close, but they're at the lower end of the subscription fee scale and even when we have larger deals, sometimes that scales. So we do expect to see an uptick, but not a significant uptick in ARR in the second half of the year. As we've referenced just a couple of times here as well during the road show we intend to conduct in November, we'll be able to provide more light on that.

Okay. And then just a second question. So with the shift to sort of bottom of the revenue guidance range or towards the low end, you've changed slightly the wording in your cash flow commentary. I'm just not sure whether that's just because we've rolled forward, and therefore, it forces a change in the commentary or you've actually sort of pushed out your expectations for positive cash flow.

Yes, we discussed that internally, and what we're trying to very much make sure that it's seen to happen is that, we align ourselves with the fiscal year. So we made that shift in fiscal year, as you know, from the beginning of this year. So we're making the commitment for the fiscal year, FY '25 to just keep on going back and looking at that, that 12-month old period means we're still -- we're trying to track against 2 fiscals we felt. We still feel there. Obviously, there's a challenge in that 12-month period. As I said earlier on, even to achieve it in FY '25, it's subject to revenue growth and further cost outage. But it really was just about realigning with the fiscal years so that we can put away that old pattern as quickly as we can.

Yes. So can I just clarify that the old guidance that had a positive free cash flow in the 12 months 1st of July to 30 June 2025? Are you saying that we'll still be positive? Or are you saying the new wording is suggesting that won't be positive?

We're not tracking that the same way at the moment. It is unlikely that it will be fully positive, Tim, though, in answer to your question. But it wouldn't be far off. But it's not what we're tracking against at the moment.

Okay.

I think the full year in aggregate of the old year, Ian, is positive cash flow, to answer Tim's question there. But, yes, it may be slightly confusing because we've shifted out to the calendar year now, but the full year in aggregate is what we said in that last update, which we're still tracking to for the 30th of June next year.

So you're saying you will be cash flow positive this 12-month to 30 June 2025?

Yes. Overall in that 12 months, yes.

So you'll be negative for half and positive for half, but you'll be overall positive.

Exactly, Tim. Bang on. Yes.

Your next question comes from Siraj Ahmed with Citigroup.

Just clarifying on the subs growth guidance. So there is a pickup in the second half. So that's from -- so is that already in the books? Doesn't sound like it because of ARR. So you do have to have a few more wins to get that guide -- to hit that guide, sorry.

We do. And we're in preferred vendor positions. So, we do expect to close more deals before the half is out, Siraj. As Ian mentioned, there's a bit of churn as well. We mentioned in the previous, in the quarterly update that we lost our very first customer there this year, and that was a 28-year-old client. So that goes back a long time. They had moved off FINEOS and they basically moved out of the insurance industry as well. They were managing their client relationships on FINEOS, or part of our product, and they've moved off. So there's a little bit of churn that we still have to account for, but there are sales in the pipeline that we will be closing in this half.

And just on that, Michael, can you touch on the pipeline? I think Ian is saying it delays, but it's actually a bit more positive. Can you touch on what you're seeing in terms of the pipeline?

The pipeline for our Claims and particularly our Absence product is very, very strong. We're definitely coming through as market leader in the space. So with a healthy pipeline in that space, I mentioned, the Voya deal was won against an incumbent vendor. So are the next deals. So we're in a good situation. The pipeline for AdminSuite is also promising. Whether we get one of those or not before the end of the year, I'm not sure. But it is looking very promising. And I think the Guardian go live is going to be a very, very positive event for FINEOS in the marketplace. A marketplace that has been confused and has been a bit dismayed with some of the big programs that -- on the admin side that haven't gone well. So, the main focus in terms of this half will be very much around the Claims and the Integrated Disability and Absence product with a nice growing pipeline on the employer and on the AdminSuite side as well. And indeed, the new business underwriting as well, we're getting interest in that product now that it's been rewritten and rearchitected as a SaaS product.

Got it. And just on Voya, how big is the contract, Michael, it is one of the larger deals that you have? Just keep trying to simple scope the size of this.

It kind of starts off small to medium and then grows as they come onto the platform. So -- and the reason for that, Siraj, to give you some color on it, is that, they currently outsource their Absence. So there's a kind of a -- we have to implement, and then we have to get their business over to FINEOS. So there's a little bit of a hiatus in the early part of this 5-year contract, but we see a great opportunity with Voya to go further than this particular contract as well within the 5 years, and we see that opportunity across our base as well.

Got it. Just last one. Ian, just on your OpEx guide, can I just confirm if I start with on EUR 40 million, guide sort of imply that second half will be down on that? Is that the way we should think about it?

Sorry, can you repeat that question, Siraj?

So just in terms of the OpEx, the operating expenses for the full year, you're saying it'll be down year-on-year. So does that imply that second half should be down on EUR 40 million you did in the first half?

Correct.

Okay.

So we expect that continuous improvement, yes.

Okay. So you're taking some more cost out in the cost base.

Yes.

Your next question comes from Jules Cooper with Shaw and Partners.

Michael, [Technical Difficulty] free to sort of answer this. I think I heard you mention that the loss of the contracts was around EUR 800,000 in terms of an ARR number. Is that sort of the impact in this period? Or is that sort of the full amount that you expect that those contracts, as they roll off, will total in sum?

Ian, do you want to get that annual amount?

Yes, that's an annual amount, Jules.

Okay. So, we could think of the second, and is that included in the EUR 68.7 million ARR as at the close of the period? So that comes out essentially?

That comes out essentially, Jules. Correct. [indiscernible]. We took that out already.

All right. And then we've got the employer, the 2 sort of big direct-to-employer deals going live in a matter of weeks. And then, I guess, the next big step up, outside of just stuff around the edges and the run of the business. Is the Guardian tracked in sort of January going live? How does the subscription ramp up for that? If you can just remind me?

Yes. So Guardian is going to go live in the next 2 or 3 weeks on a soft go live basis with the view of January 1 and being in the market in [indiscernible]. They're going to take a number of clients that they've got that they want to get across onto FINEOS ASAP. So that work will start straightaway. They'll go live then in January and they'll make a decision around first quarter as to how fast they want to ramp. We've already agreed a day 2 set of research and development and deliveries for Guardian around their -- all of their new business scaling from the 1st of January 2026. Plus we're also discussing the migration of their full portfolio for those lines of business onto our platform. Work on that will start in 2026. So the revenues from Guardian for the next 12 months or so are likely to be healthy on the services side. On the subscriptions, it won't move too much because they're basically, they bought a kind of an empty shell, they're in production, small -- a small number of clients initially. And as we scale through the year, we'll try and accelerate it. So the way that contract is set up is very much as they put their business on the system and they migrate from their legacy that contract starts to really scale. So I think we see the scaling from 2026, '27 onwards.

Got it. Okay. And if I can just sort of keep rolling because that's really good, I suppose, what's going on at Guardian and great to hear that it's on track. The New Zealand deal that was -- you've recently sort of made public. If I recall, in the original implementation for that customer, that was a significant contract and really benefited the numbers both from a services and software side. How do we think about that scale of that customer as they move to the cloud now?

Yes, we've built in the revenues of that customer in our forecast this year. But as we move through to next year and the year after, they will continue to scale on our cloud and the revenues do go up, both on the subscriptions and on the services side. However, we're also looking to see what else we can do for that customer. There are opportunities around the system we already have in place. A number of the large government agencies, the compensation agencies built a lot of software around the front end using typical systems of innovation like Salesforce and other type of systems. And our system was in the background just cranking through the transactions on an on-premise model. I think over the next 2 years or so we're going to see FINEOS' product in the cloud kind of coming back and taking some of the weight off those big IT projects that those guys have built pretty much bespoke. So the one in New Zealand, obviously, ACC will be a good revenue earner and a healthy one for us with some opportunity to cross-sell and upsell. But there's other comp agencies as well in the region that will be watching this one closely.

Yes, and I think, Ian, you mentioned when you were speaking that in the next year or 2 the cloud migration really would be complete. Are you just talking there about the North American customer base or the whole of the ANZ region as well?

Predominantly North America, but we are seeing good traction in the ANZ region as well. So we're looking at the next 2- to 3-year time period overall, I guess. But that said, our existing customers that are on-premise are on versions that are progressively getting older. So the pressure is coming on them to move forward as well, to take advantage of new systems, to take advantage of security and confidentiality that you get in the cloud that you don't necessarily get on-premise to the extent.

Yes, [Technical Difficulty] points there I kind of roll in on. We have -- we're very little in North America in terms of on-premise. We obviously had a claims customer on-premise who are going to take and looking at a cross-sell of more of our product as they moved across from that on-prem to cloud. They still haven't made a decision. So that was one of the reasons why we had to give re-guidance at the start of the year. And that one didn't go ahead. But we're still talking and they haven't done anything yet. They have other things on their mind in terms of acquisitions and stuff like that, but that one's kind of in the waiting. But ANZ is the place where we really kind of suppose we were surprised if, I think back 5 years ago, what we thought was ANZ would convert and migrate much quicker. It hasn't. And so, we're only at the starting phase really in ANZ. With the ACC kicking off, that's a huge customer and a big Rolls Royce name in the accident comp space within the ANZ market. I think the delay in terms of moving to the cloud, we probably talked about this over the last couple of years. There was a lot of M&A on the carrier side in terms of the private sector. There was also a kind of delay with the big cloud platforms coming into the region. And so, data residency was an issue as well that held us up. And then there was some of this big in-house build-type stuff that they did undertake around the front end -- innovation around the front end with systems of innovation. So they built big systems on that front end. So I think the best [Technical Difficulty] the revenues in the region are definitely still to come as we migrate the ANZ base. So we're actually -- we see that as a very promising opportunity for us. And as Ian said in his update, we've had our big clients in ANZ very much referencing our North American clients who are well ahead now in terms of technology shift on the core system side. And that's been going very well.

And, Michael, just the last one, I don't want to sort of dominate this, but if you -- we can obviously see in North America how the subscription revenue has grown strongly as you've migrated that customer base over to cloud versions of Claims and the Absence product. Should we expect the same sort of uplift when we look at that subscription revenue that's in the ANZ region? Fast forward a couple of years, should that all sort of uplift it sort of a similar rate to what we've seen in North America?

I think so, albeit that the ANZ market is way smaller in terms of size, in terms of FINEOS, but definitely I think so the carriers and the accident comp agencies we do have in the region will have to move. The pressure is really on them from several different angles. Apart from the fact of innovation and staying up with the customer experience and cyber and other really strong reasons, they're going to have to upgrade. The carrier side on the life industry has been in a poor situation in terms of the carrier side, there has been a lot of M&A. So some of the churn we're seeing is kind of the trail out of that this year where we would have -- some of our clients were bought out and they've been moving off those systems, albeit to old FINEOS on-prem systems. So we do expect a repricing and a re-upgrade then as soon as we can get them moving to the cloud. The other point to make is that, we've also issued a letter to all the customers over a year ago giving them the advance notice that we -- they have to move off those old versions because they're actually costing us money. And as we move more and more to our SaaS business model and those carriers are basically a bit of a pain for us. So we're going to be charging them at this day on-premise, we'll be charging extra as well for that.

Excellent. All right. And well done on Guardian. That sounds like it's going really well.

Thanks, Jules.

Thank you. There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.