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

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

Thank you, Decia. And hi, everybody. Welcome to our first half year results for FY '25. I'm here on behalf of FINEOS. I'm joined by our CFO, Ian Lynagh. And we're going to go through a PowerPoint, which we issued this morning on the results and achievements for the first half. So please move to Slide 2, where I just want to mention that FINEOS is very singular focused on our mission, our vision and our purpose. And we have a playbook in FINEOS, which really defines our culture. And it's fantastic for aligning our team, and indeed, aligning us with our clients and with our market and focus. So that has been a tremendous asset for us for many, many years, and that singular focus is what drives FINEOS. I move to Slide 3 now and talk about the financial highlights. Subscription revenue of EUR 36.4 million, so we've grown by 5.7% on the subscription revenues, and that now represents 54.3% of our total revenue. And as we've said before, our goal is to drive our subscription revenues much higher as a percentage of overall revenues. Our annual recurring revenue is EUR 76.4 million at the 30th of June, and that's up 11.2% from 68.7% (sic) [ EUR 68.7 million ] at June '24. And our total revenue for the half is EUR 67.1 million, up 4.2% on the first half of '24. Gross profit, a healthy EUR 51.4 million, and the gross profit margin being EUR 76.6 million (sic) [ 76.6% ] , so gross profit is up by 8.4% on the first half of '24, and the gross profit margin is up by 73.6% in the first half of '24. EBITDA was EUR 13.1 million, and the EBITDA margin of EUR 19.6 million. Again, both of those numbers up; EBITDA up 80% on the EBITDA margin. And the EBITDA margin is up 11.3% on the first half of FY '24. And then the free cash flow position of -- the cash position of EUR 34.9 million as of the 30th of June gave us a free cash flow of EUR 15.1 million, which is up from EUR 6.1 million in the first half of 2024. So overall, a fairly pleasing set of results. In terms of operational highlights, if you turn to Slide 4, our focus very much has been on the AdminSuite embedding that into Guardian -- Guardian Life, who went live with the system last year. And really our focus is to have all of Guardian's new business for the lines of business that we're supporting come to the FINEOS' platform from the beginning of 2026 and then to begin to work on the migration strategy with them from their old legacy systems. And that program is going extremely well with a very happy customer and the program being slightly ahead of schedule. So pretty confident in terms of that, but we will keep focused on it. An existing client, top 10 U.S. group carrier, also contracted with us during the half to move from an on-premise version of our product to the FINEOS' platform and indeed really move across the whole IDAM suite. So that, again, was a big milestone for us. And -- we're continuing to work with the large clients around legacy migration to the FINEOS platform. So this carrier that just signed up in June has been a long time client of FINEOS, very conservative and have now moved to the FINEOS platform, which is really good news for us in terms of the go forward. We're expecting positive free cash flow for FY '25 in aggregate, as mentioned several times over the last year-or-so, with sustained annual profitability from 2026 onwards. And really focusing in on the growth, the margin expansion and then looking for future investment opportunities as we grow our margin and our cash flow. Cost efficiency activities continue to deliver the savings. And we also included an absorption cost, a one-off cost in the first half of EUR 1 million from a restructuring activity we undertook during the half. So again, slightly higher on the cost side in the first half when compared with our second half as we move forward. And there will be further cost savings as we continue the rest of the year. So again, expectations on the cost side are very positive from our perspective. We won 2 new name North American deals, small- to medium-sized, one for Absence and Claims and one for FINEOS Claims. And both of those were achieved in the first half. And of course, we achieved several more go-lives, and we're finding that carriers who bought from us over the last year or 2 are going live pretty quickly and moving straight into the migration agenda, again, which is really good and has been all part of our R&D focus to make the product easy to onboard, upgrade and integrate to. This further strengthens our position also for the old suite. So as we work in either Claims or Claims and Absence customers, they become targets for our full suite AdminSuite from new business all the way through to claims. And the other thing we've been doing over the past year or so is embedding AI capabilities into our product. And we launched that product capability in our product at our June event in New York and received very positive feedback from our customers. There's been a lot said about AI over the past year or 2, and there's been various degrees of outcome in terms of the experimentation and the proof of concepts and stuff that are going on. So there's question marks for sure in terms of the value of it. But what we're seeing is that embedded within our suite, we're getting the maximum amount of value from the AI capabilities. And it is going to be a continuous integration and a continuous embedding within our suite, and indeed, across our whole business. We see the advances that are being made, and we're taking advantage of those as we grow. We're also taking advantage of the AI in a very ethical, and indeed, being in a regulated environment as we are serving some of the biggest carriers in the world, we have to be very careful in terms of audibility of decisions and so on. And again, we're very much on the legal compliance side around the AI. If you turn to Page 5, this one -- as you probably are familiar with, this one talks to our people. And we had a pretty good result around the people side with 88% utilization, over 90% employee retention. And we're now at about 1,007 people. So I suppose to start on that particular -- on this particular page is that the number of contract resources has slightly increased as well from 14.1% in the first half of '24 to 17.4% of contract resources. So that gives us great flexibility in terms of the go-forward and in terms of having contract people and companies come in and work for us. I'll turn to Slide 6 now. And again, we have been focused on North America as our growth strategy since we IPO-ed. And as you can see here, the North American revenues grew by 5.1% in the period and were slightly up, 79.8% of total revenue comes from North America. So the APAC region overall revenue has also increased by 10% due to a growth in subscriptions and also in the services side of 11.5%. EMEA is down, and that's really a legacy issue. We talked about that last year, where we lost our probably longest client or -- our longest and our first client in the U.K., where they were no longer strategic to us or us to them, and they finally retired our system. So that is a one-off impact on our number in FY '24. So overall, a good set of results. I'm going to hand over to Ian now to go through some detail on the financials. So over to you, Ian.

Thank you, Michael, and thank you, everybody, for attending this call and giving us your continued support and interest in the company. So what I'm going to do now is just provide a bit more light in terms of the financial figures. And if you turn to Page 8 of the report, starting off with the subscription fees, it has grown period-to-period by 5.7%. And in particular, what we have shown there is a healthy growth in ARR. That's come about a combination of regions. Naturally, what happens with customers as we move from 1 year to the next, we have indexation of pricing or they grow in terms of their premium, and therefore, the subscription team grows along with that. But in essence, the main reason why the ARR has grown there as well as also been complemented by the deals which were closed in Q4. So as Michael said, there's 2 smaller size deals, small-to-midsized deals, and then, there was 1 larger deal with existing clients bringing across significant amount of business from an on-premise installation of FINEOS over to the cloud. So continually, what we're seeing is that we're reducing the on-premise customer footprint to a more manageable level. And that's the reason why the initial license fee, as I've mentioned before, remains small. That really is just a revenue stream that's associated with our on-premise customers as and when they order new licenses for new users on the on-premise solution, and we pump through the number there. And that would just continually decline, and we're not selling in that particular platform. We are selling on the cloud. So that will just come in as it comes in. We can see also an increase in services. However, as you look through your own analysis, you see services is slightly down on the second half of last year. And it's a combination of reasons as to why that has actually occurred. Naturally, the backdrop, as we've mentioned before, is that we continue to encourage our customers to take on self-service. Indeed, they demand it themselves so that they can take more continuous software releases and do the QA and configuration themselves as opposed to having to rely on FINEOS, and we're continually growing our system integrator network, who, in turn, would also help us in terms of market presence and growth within our marketplace. But in addition, we have had, as everybody is aware, quite a significant level of FX volatility in the marketplace, particularly with respect to the U.S. dollar. So that's caused a level of impact on the service revenue for the first half of the year, and we have a particular deal with a client where we've agreed to a milestone payment for work that's done this half of the year, and that amounts to approximately EUR 1 million. So that's just deferred into the second half. So we collect that at that point in time. But overall, a steady growth in revenue, which was positive. In terms then of the cost of sales, we have got a reduction. As you know, we have been looking at our costs for a long time, including the cost of people. So we've got the net impact of that in a positive way year-on-year in terms of this half of the year, which is positive. We have seen a slight reduction in contractor costs. And Michael mentioned that our contractor proportion of people in the company has increased. But that increase is more in our R&D capacity. So we're giving ourselves a lever in R&D to allow that to expand if demand comes in at particular points in time and contractor level again if that's required. So it's just giving us a bit more flexibility on the R&D side, whereas the reference here to the reduction in contractor costs is really our project people, our professional services people, product consulting as we term it within our company. The gross profit is up. So we have a gross profit of EUR 51.4 million. That's up by 8.4%. And indeed, the gross profit we're showing now is above what we're targeting for FY '27. We're still very much committed to those longer-term commitments that we made when we had the roadshow in November of last year. So we're reiterating that into our numbers. So we're delighted that staying at that level. We don't expect it to increase much more as time moves forward over the next half of the year, but certainly expect to keep it at a good level. EBITDA is where we're particularly happy. We've seen a good increase there in comparable periods from 11.3% up to 19.6%. And as you know, we're targeting 25% by FY '27. So that's -- we're seeing a steady improvement there in EBITDA. And as mentioned, we see more cost outage occurring in the second half of the year because we've had to absorb some restructuring costs this half. So EBITDA should continue to improve as we work our way through the year. And ultimately, what you're seeing there is that the net loss after tax is at EUR 1.3 million, and this is our steady recovery in terms of getting back to that profitability situation when you make the comparison to the EUR 5.3 million loss that we made in the comparable period last year. So that's steadily moving in the right direction, again, which makes us very happy. If you could turn now, please, to Page 9, subscription fees continues to grow as a proportion of revenue. So that's now at 54.3%. And we're pushing that very hard in terms of that continuous growth. As mentioned earlier on, service fees, we're not putting the same level of focus on the growth of service fees, both in terms of our working with system integrators and allowing customers to take on more self-service. And indeed, as our products mature out continuously and greater automation is included and greater functionality is included, there's just going to be less services to bring the products on board. So it's very much about the growth in subscription fees is what we're driving there. And you can see that's continually growing at the bottom line there, and we expect that growth pattern to continue as we move forward. If you move now to Page 10, you can see the arrows there in terms of the operation expense. They're all down except for one being up, which is R&D. And I just want to explain that a bit more in terms of what's happening in R&D. I referenced there a moment ago the fact that we have taken on a level of capacity in terms of flexibility around R&D through a third party. That's worked out very well. That's something we instigated in or about Q3 of last year. So it's been running now for a while, proving very successful. And what that's allowed us to do is look at our existing R&D capacity that we had in place in the first half of the year, and we've done a level of redistribution of workforce. So where that has occurred in the first half was predominantly with our permanent staff in R&D. So we had to pay restructuring costs in the R&D function more so than anywhere else. And also, there was higher salary costs because as some people moved on, there was money owed based on long service or holidays, et cetera. So that's the only reason why the R&D figure has actually gone up compared to the rest, and we'll see a reduction in R&D for the second half of the year and then more normalized picture as we move forward. As we've committed repeatedly, we're not looking to increase our R&D expenditure as an absolute figure, except in line with indexation, salaries, et cetera. And we still see that very much as being the pattern, which will continue for the foreseeable future. With respect to the other groupings there, we've got lower employee costs. That's a derivative benefit from the activities that we did last year. Yes, some offsets there, but not a significant amount. And what we're seeing also in G&A is that, again, there's a level of cost reductions. We have had a gain in terms of FX on the cost side, but that's -- obviously, on the revenue side, we've had a hit as well in terms of the U.S. dollar in particular. Approximately 70% of our revenue is in U.S. dollars. And of course, we have revenues in Australian dollars, New Zealand dollars, Canadian dollars. And what's happened over the last half year is that the euro has threatened against all those other currencies, and euro being our operational currency that has been the impact. On the flip side, we've had some natural hedging taking place as well because we have costs in all of those regions. And in particular, our second biggest cost region is the U.S., where approximately 35% of our costs are there. So that's helped in terms of balancing that figure, particularly in the volatile world we have out there at the moment in terms of what may happen with respect to tariffs and trade deals, et cetera, and the impact that has on the U.S. economy. So that gives us some natural hedging, which is very, very helpful. If we move on now then to Page 11, in terms of the R&D investment there, this is focused on the people costs because we're talking about what we can capitalize and what we can expense. And as you can see, yes, we have benefit there from some of the work that we did last year. So the overall people costs are still remaining constant, whereas the operating expense, there's other expenses, which you need to cater for within that. But yes, it's keeping at a constant level. So that's going to allow us to continually strive towards what we've set up as a target to achieve in 2027 and then subsequently in 2029. And the target for 2027 is that R&D as a percentage of our total revenue will be 30%. So we're currently at 37%. That will improve in the year because the second half of the year will see less costs, as I described earlier on, in terms of our R&D cost. If we move on now to Page 12, the balance sheet. I won't talk about cash here because the next slide talks more about cash, so I'll emphasize that there. I'll just pick out a few items here. Around trade receivables, it is down, and that's really due to higher collections from customers in the first half of the year. And that's always a positive sign for us. That's one of the key KPIs we use in the company as the DSO number. And if our customers pay us quickly, that's usually a good sign. They like the service, they like the product, they like us. So we have a very good picture on that, and we've seen some improvements indeed year-on-year. Of course, we've also had increased fees that we're sending out. So that's another reason for that. Development expenditure is just simply the R&D outpacing amortization, so we expect that to go up. It's just natural. And the goodwill decrease is really down to the FX movements referred to. And then naturally, at this side of the year, we're halfway through the year, you're familiar with our invoicing pattern, where approximately 50% of our subscription fees is invoiced in the first half of the year, indeed within the first month of the year. So that then creates a deferred revenue position when compared to the end of last year. We now move on then to the cash flow statement on Page 13. So net cash generated from operations. So we've seen a significant increase there, 73%. So that's a combination obviously of having more to invoice, more revenue collection, but it's also a credit to the work that we've done in terms of the cost reductions and the monies that we've taken out of the organization. So that's creating a very good position. The investment levels is predominantly our R&D investment. So that's pretty much in line with expectations in terms of what happens within an organization such as ours. But the exchange rate, we've seen a significant hit there. If you look at the difference between comparable EBIT, that's at EUR 5.1 million. It's a negative for the first half of the year of EUR 4.1 million. Yet despite that, we still managed to achieve a EUR 15.1 million positive free cash flow absorbing in that FX movement compared to EUR 6.1 million at the same period last year. So again, that gives us the confidence at the half year point in terms of achieving positive free cash flow for the entirety of the year. Again, you need to take into account that more revenue comes in the first half and less in the second half due to the way that we invoice our subscription fees, but that gives us a terrific head start. And then when you look at the backdrop as well that, as you know, we have been investing over the last 5 or 6 years very significantly in the R&D of the product, that investment level is not going down, but we're now starting to see a greater return on that investment, as we return to profitability. But nevertheless, we have a situation here where the bank balance that we started off with at the beginning of this year is less than it was at the corresponding period last year. And nonetheless, the balance we've ended up with at the half year, albeit only marginally greater than last year, I think taking into account the start position of the cash balance plus the FX movement is a significant achievement. So that gives us a lot of confidence again in terms of achieving positive cash flow at the end of this year, and again, looking at being very much cash generative thereafter in subsequent fiscal years. So I'll leave it at that, Michael, and hand back to you.

Okay. Thank you, Ian. If we move to Slide 15 for closing remarks, effectively, our focus continues to be revenue growth and free cash flow for this year with the real focus on FINEOS AdminSuite, making sure that Guardian has a great experience and that they can take all their new business onto the FINEOS system for the lines on the system from next year onwards. And indeed that we can focus in on legacy and migration. We're also really focused in on traction on the ANZ market, in particular, and trying to get our customers, all of them, to kind of upgrade to the cloud. That's been going quite well. And in the first half, we've also seen -- we were coming to a nice go-live in the first half, and that just happened actually this month in terms of one of the customers moving to the cloud. And indeed, some of the slowdown in terms of ANZ over the last year or 2 -- I was talking to one of the CEOs, which was just recently, and she told me that mental health claims are very, very high for their company in Australia and that is something that is dragging the focus of carriers to look after that in their own business. So it's a slowdown in terms of their focus, but everybody is focused on the need to upgrade to the cloud and all the advantages that, that brings to them. So we're expecting that to pick up over the next 6, 12 months. We'll also continue to drive those operational efficiencies that, as Ian has gone through. And we're feeling good about that in terms of our cost base for the second half and into next year as well. The pipeline for the employer market as FINEOS Absence for Employer, given that we now have the 2 employers up and running, one 40,000-employee customer and the other one with 50,000 employees, both are now referenceable and so on, and we've kind of bedded down the product. We expect that market to grow for us, but very much at the big end of the market in terms of large employers first coming over to FINEOS, and we have a pipeline there as well. And then progressively, embedding AI has become the norm in FINEOS. And look, what -- the important thing about AI is it's important what you're embedding it into and the data and the quality of the data and the trueness of the data as well in terms of a core system. So Gartner and other analysts are really focused in, and I'm quoting 80% of CIOs are saying that core systems should have embedded AI in them. And that's certainly what we started to do over a year ago, and we're making really good progress there. In terms of the outlook and the guidance, we've now got ourselves into a very strong position as a single product or single platform SaaS product vendor in a very, I suppose, conservative market of carriers, who once they move their business to you, they become very sticky and long term. So we've moved ourselves into a very good position, where we have our leg in the door of several large carriers. And we're also starting to experience the margins of a SaaS player and the benefits of being a SaaS player as we move along. We have a very strong relationship with AWS, our cloud partner. We work very, very keenly with them in terms of SaaS and driving outcomes and innovation and so on together with them, and we're really enjoying that. So overall, I suppose the headwind we see is FX, and particularly, as Ian has mentioned earlier, the U.S. dollar and just how that's going against the euro currency, which is our base currency, operating -- our operational currency. So that's important in terms of the watch item for the future. And we're kind of lowering our guidance to the lower end of the range is where we're coming in at now just given the environment and so on. Also, in terms of the sales cycles, we have a solid pipeline ahead of us, and we're working with several clients who are paying us to do studies and stuff like that. But it's just a question of when we close deals. And so sales cycles can tend to be lengthy, especially if you're dealing with a carrier who's had -- who's been burned by other vendors in the past, and that just is something we have to accept and get over. So the more we can make our platform easy to kind of onboard and make them really comfortable that it's kind of a no-brainer to move to FINEOS, the better for us, and our sales cycle should start to increase in terms of conversion and so on. We have the track record now in the employee benefit space in North America that we craved, and we are continuing to see ourselves as a market leader in that space. So FY '25 costs are expected to decrease when you compare them to last year. And we continue to expect the free positive cash flow as we go through to the end of this year and profitability from then on. So overall, we're feeling good. And if you turn to the last slide on Page 17, as Ian referenced as well, we did a reset last November with our investors and analysts in Sydney, and we'll be down again this November as it turns out. But we put these targets that we're aiming for in terms of 2027 and 2029. As Ian said, we've already achieved the EBITDA margin that we actually set ourselves out for '27. So again, we're still working in terms of a few kind of key areas of the business just to get us to those kind of targets that we've set ourselves. And indeed, we're looking forward to coming down again in November and talking to you about where we go from here. So with that, I'm going to close out the formal presentation and ask for questions from the audience. Thank you.

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

Just maybe clarifying a couple of things. So just to confirm, you're talking about sequential sort of half-on-half cost reductions pretty much across each of the segments. You called out, obviously, the sort of one-off things that impacted one of the line items in the first half. But just to confirm, that's what you're saying?

Yes. That's what we're saying, Tim. And again, I think we flagged that, and I think it was to you on the last call, half a year ago, that that's how we saw the year play out, first half costs will be higher than second half costs. So that's exactly what we're saying.

Yes. Okay. That's great. And just in terms of maybe you've sort of called out the currency impact on both sort of revenue and expenses. Do you have a sort of constant currency sort of revenue growth or expense -- and/or expense number that you could call out?

Ian, can I ask you to comment on that?

Yes. We don't keep that number, Tim. It is something that we could look at. As I said, we have many currencies that we deal with. We have 6 revenue currencies, and we have 9 currencies in total that we deal with because we have cost bases elsewhere, which is quite a lot of movement. It is something we can look at, but we don't have that figure immediately planned.

Yes, we'll take that.

Yes, that's fine. That's fine. You haven't got it, that's fine. Maybe asking the sort of question in a different way. Just sort of from what you're seeing in the pipeline, if you look at the sort of '27 and '29 sort of guidance numbers across subscription fees, R&D, et cetera, it seems to imply, particularly on the subscription fees, that there's obviously quite an acceleration from the level you've got now unless, of course, you think service fees are going backwards, but I don't think that's your assumption. So can you just talk through what sort of makes up that 65% subscription fees in 2027 initially?

Yes. Sure, Tim. I mean, what we're doing at the moment is we're betting in primarily Absence and Claims, large clients, who have big portfolios that they're migrating towards FINEOS. And in most cases, they have a good chunk of the business already on FINEOS, but they still have work to do. We're working on the migrations. We're building migration suites and stuff like that with them. And indeed, that's a key focus for us this year and next year in terms of doing as much as we can to accelerate that. But we then see the cross-sell, upsell coming, and carriers are reluctant to talk to us about other components this year, but we do see that coming next year and the year after. So most of that 65% will be existing cross-sell, upsell. And there will be some new business, but most of it is actually stuff we can see ahead of us through our customer success teams.

Yes. So that ratio is effectively telling us that the pipeline on an underlying sort of one of their constant currency type basis should accelerate from the numbers that we're seeing now?

Yes. Yes.

Yes. Okay. And then just in terms of the working capital, like the debtors is -- I just noticed the debtors are starting much lower than you've been at this point in time last couple of years, slightly materially. And you can see that the deferred revenue is actually up a bit, but just the sort of other major moving parts from a working capital point of view that impacts your ability to sort of say you'll be positive on a sort of 12-month free cash flow basis?

Do you want to take that, Ian?

Yes. Yes, sure. So on the cost side, I mean, like any organization of our nature, most significant costs related to our people, that's anything between 80% to 83%, 84% depending the way you categorize it. Our second biggest cost then is actually Amazon AWS, our platform partner that Michael referenced here earlier on and that's in U.S. dollars. So, so far, the euro has strengthened against U.S. dollar, so that cost has come down. And we have the people costs pretty much under control. So they're the 2 main moving parts that we have, and we've got a very, very good fix on them. We work hard as well then with other suppliers, be it around insurance or software, et cetera. And again, we've got a good tap on that. So the cost side, we're feeling very, very comfortable. On the revenue side, it depends on when the deal flow comes in, in terms of there's still work to be done there in the second half of the year with respect to positive free cash flow. But we're much more confident as the months go on as to the ability to achieve that. And of course, at the half year, they're achieving EUR 15.1 million as compared to EUR 6.1 million this time last year. It's a positive midyear indicator of our ability to achieve that.

Yes. And to be specific, there's nothing out of the ordinary on a working capital line that you're sort of expecting to get to that free cash flow positive.

Nothing out of the ordinary, Tim, correct.

Your next question comes from Siraj Ahmed from Citigroup.

I have 3 questions. Just first one, Michael, pretty strong number in terms of ARR. You added EUR 5 million in the half, right? How should we think about the second half from -- I mean, you're calling out some macro weakness, clients taking some time, but just what sort of visibility do you have in terms of second half?

Yes. Look, ARR will continue to grow. We did get a bump in ARR in the second quarter. I think Ian said fourth quarter, but the second quarter of the half, we've got a bump -- a nice bump in the ARR, but it's going to continue to grow, Siraj. And it's hard to say exactly what we're going to achieve because some of it will depend on the new business. But as you know, most of the revenues we forecast in the year over the last year or 2 have been already in our -- we can see them. So I can't give you any exact figure in terms of what it will grow to, but it will still grow towards the end of the year and into next year.

Okay. And maybe just on that as well. I mean, policy and billing, and you said the whole FINEOS AdminSuite is what you're pushing, right? Just -- I mean, you're waiting for the potential client. I think you have been pretty close to it as well. Any updates on that?

Yes. Look, we have -- I think we had a potential client for AdminSuite a year ago that had done the study and everything with us, with one of the SIs, and then, they were basically put up for sale, believe it or not, by a very large medical company that own them. That transaction has taken place. So a large proportion of their book has gone to another client of ours. So the FINEOS system goes that way, but some of the system stays in terms of the remainder of the book. And we're back talking to them about an AdminSuite deal. It won't be as big as the deal that we were looking at, but we -- on the positive side, we've moved the product in leaps and bounds in terms of where we were a year -- just over a year ago, especially focused around the Guardian work. So we'll see how that goes in terms of the admin side. There's 1 or 2 other carriers that are kind of looking at the admin side, but it's early days. So I don't want to say anything about that. And then, the obvious areas to go is cross-sell, upsell. The admin part of the suite really does complement the claims part and gives them extra operational efficiencies and all kinds of other benefits. And so we have to be mindful of where these carriers are on their journey, lots of them are head down trying to kill off legacy. And we don't want to annoy them by showing them the next shiny toy that they can have, but we're starting to come around to those big-picture-type discussions with some of the carriers.

Got it. And last one, maybe for Ian or you, just in terms of the revenue guidance, let's say it's EUR 138 million that you're targeting, given the headwind, just confirming the building blocks for that. I think, Ian, you sort of mentioned there's EUR 1 million services revenue that's coming through in the second half, which should happen in the first half. And then, on the subscription side, is most of it already won, it's just delivering on it? Is there a further win that's required to hit that number?

Yes. There is further business required to hit the number, but there's a significant proportion of it is already booked. So it's a smaller proportion that we need to win, but there is a level of expectation around wins. As Michael mentioned, the pipeline is strong. We are expecting to close more business in the second half of the year. And so yes, that is my answer.

Okay. And just on probably the EUR 1 million services benefit as well. Is that right, Ian?

Correct.

Your next question comes from [indiscernible] from Citi.

Yes. I have 2 questions, both on the operating expense side. So the first one would be on the OpEx forecast looking into second half and also -- sorry, if we look into -- further into FY '27, do we expect the cost level to go down if we look at longer term? And secondly, on the R&D expense. So previously, you mentioned about the usage of agentic AI. So I was wondering if we have increasing usage, would it be a bit difficult to get the R&D as a percentage of revenue to come down as well?

Well, it's a great question. So we're expecting the revenues to go up next year and beyond. And therefore, by that particular kind of growth, we'll see R&D as a percentage go down. But also, we're expecting to hold our levels to fairly steady where they are now, as we said at the beginning of the year. And because we've kind of finished out a large scope of the core system development and so on, and we have carriers now, who are kind of quite satisfied with the core, it's all now around -- work around the edges, where we're doing stuff around making the system faster, easier to use and so on. And in that, we're embracing areas around the AI, which is all part of automation and making the system more valuable in terms of what it delivers benefit wise for our customers and also around the digital side in terms of integrations and so on with other platforms and other vendors and so on. So we're able to scoop out extra resource out of the pool that we already have to do that new work because we don't have to do some of the stuff that we've been heavily working on the last 3, 4, 5 years. If we do more R&D, we'll also look for -- it has to be a very special purpose, and there'll have to be some kind of a contribution from the carrier that wants us to do that. So again, we see the R&D going down as a proportion of the overall revenue to kind of more normal levels over the next year or 2. So hopefully, that answers your question for you.

If I could just add to part of that question, we certainly expect to see the operating expense in the second half of this year be less than it was in the first half of the year. You asked that question there. In terms of what is the trajectory out to 2027, this is an area which we'll keep a very close eye on. We want to make sure we're controlling costs very effectively, but it's very hard to state what it will look like in 2027. We will have salary inflation. But as you move to there as well, the advent of AI can help. Other things can help as well in terms of where our resources are located, et cetera. But just to reiterate, the second half of the year, we'll have a better operating expense profile than the first half.

If I could have a follow-up on the free cash flow in the second half. So if you look at a better operating expense control, looking into the second half, what are your forecasts in this half?

Well, as I've stated before, we've got, in terms of revenue streams, 2 revenue streams. I mean, basically, our service fees are fairly even month-on-month. We invoice them monthly in arrears. That gives us a very kind of constant-type picture. But if you look at our subscription fees, what you have is a wave pattern, where you got a big wave in Q1 in terms of the -- at the high point in terms of revenues coming in. It dips in Q2. It goes up to a smaller level in Q3 and then dips again in Q4. So overall, what we're expecting is that the level of free cash flow in the second half of the year is significantly reduced in the first half. And what we're targeting is to be positive free cash flow in aggregate, but I'm not expecting it to be a very big number, but it will be a very big significant change from the previous years.

Your next question comes from Hai Nguyen from Oceanside Family Investment Trust.

I have 2 today. My first one is, in order to reach 75% recurring revenue by FY '29, what is the sales mix is going to look like in terms of new logos versus cross-sell expansions versus price uplift? And my second question is once again to reach 80% gross margin and 40% EBITDA margin by FY '29. What would go wrong to prevent us from reaching those targets?

Yes. Good question. Again, we're dealing in North American employee benefits, which is dominated by about 15 big carriers, of which we have 6 of them already signed up on the FINEOS platform. And so we see a lot of cross-sell, upsell within those 6. There's also about 6 more that have gone with vendors who came into the market with admin from the PMC and the pensions area that haven't gone well. And so those carriers have more or less canceled those programs and gone back to their legacy systems. Those carriers are still targets for FINEOS when they can obviously pull themselves together and get the budgets together to go again. And I think the good news for those carriers is that we're already advancing the platform so well that it will fit them, and they'll get an easy ride when they do jump on. So thanks to all our earlier customers who've kind of come with us on the journey. So we do see a number of the carriers in the space converting the bigger guys. And then there's -- we've gone through our TAM in terms of the overall target market. So there are probably another 80 carriers that carry the lines of business. And again, we will convert them or quite a few of them, we hope. But again, they're not going to be big deals. So they're just going to incrementally add to the subscriptions. And then there's the employer market as well, which is another TAM that we're addressing. So we're pretty much focused on the domain in North America that has got us to hear as part of our strategy. We're not looking to add any new kind of super-duper thousand whistles to FINEOS. We've got a steady trajectory that we're working on to accelerate, as I said, embedded AI, digital and so on and make the product even more attractive and kind of build out our moat against other competitors. What could go wrong? Obviously, at the macro level, we don't know what's going to happen in the next 4 years. And that's something we're all watching as countries look at how America has changed. And that is something that -- it's on all of our minds, so we don't know in fairness, we can't look ahead. But if there's a massive downturn in the employment market, say, in North America, that will have a headwind effect on FINEOS. If the currency of America becomes so weak that it's no longer the greenback and the kind of dominant currency that everybody looks to, that could be a problem as well. So those kind of issues are issues at the micro level. Or if a large client left us for some reason, I don't know, the black swan event, cyber or whatever in terms of one of our technologies getting attacked or something like that, that could be an issue as well. But look, we keep focusing in on the downside risks. We're very, very tight with AWS on security and stuff like that. And indeed, we're very tight with our clients about those kind of issues. So we just have to navigate and go forward, and as everybody does, any of those events, if that hit FINEOS, there's likely going to be an impact on lots of other things as well. So we'll just be in the pile of everything else that gets hit. So I can't see -- we're steadily growing. We've kind of been heads-down building this platform out, and we've got some really good customer success with our clients and very happy customers. So they are the things we can focus on that we can control and hopefully then continue to grow the business.

Your next question comes from Sinclair Currie from Moelis.

I guess, you spoke a little about embedding AI into the platform. And as I recall, I think some of your larger customers, AI is still in scope. If you wanted to upsell that even though they might be on longer-term deals. With that in mind, how far are you off having something which could be saleable or turned into a product in that -- in AI?

Thanks, Sinclair. Yes, we already have a product that's ready to go and releases this year, and we'll continue to release into next year. So focusing on things like GenAI, which are really, really valuable to case managers in terms of all the different documents and medical records and stuff like that, that they're looking at. So we can expedite process around all of their work using AI. We can also help with claims guidance, and indeed, new business persistency levels and stuff like that using AI, more on the machine learning and the predictive AI, and then, agentic, obviously, overlaying on top, which is coming. So overall, I think the way we look at AI, and it's a technology that we need to embrace that we build into the core. And we sell more and more on value based on what we can save the client or what we can help them to achieve in terms of business growth and so on. So we take a macro view of that. We will be charging them for AI usage because it's embedded into our product. We actually get charged by our vendor on the AI front as well, which is AWS on the -- as Ian mentioned earlier, on the cloud side. So we will be growing kind of an extra line of revenue off the back of the AI, but it's going to come in multiple factions. And we're not looking at some brand-new product that we'll kind of jump out with and say that's your AI, you have it there now, you have to license that. So it will kind of seamlessly just come into the suite, and the value prop is going to just increase for the clients and make the overall proposition much more attractive.

Okay. And just to follow up. So trying to put your mind around the sort of scale of that opportunity. From where you are now, if you have $1 of revenue of a client, is it too early to even think about what that sort of upsell might look like?

It's a little too early. And again, we think of the macro picture, full AdminSuite, in terms of them buying more from us and buying more automation, and in that automation, the AI will be embedded. So it's a little bit too early for us to think that way. Another part of the AI and that story is embedding it in FINEOS. And so on the cost side, we're seeing innovation and savings as well, which is worth drawing out. So it has got lots of benefits, but it's early days with it. So I don't think -- as I said, like I don't think we're going to be selling an AI, particularly outside of the holdco. There will be maybe areas where we could get an early adopter to take some of our AI across our legacy, and that's something that we can do. But it's early days on it. So I can't give you kind of real fundamental answers, but certainly, it's an attractive piece of the whole suite.

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

Yes. So thanks, everybody, for joining us today, and thank you guys for the questions. So as I said, we'll be down in November and looking forward to meeting everybody and giving you a full overview of where we are and how we see the future. But a good set of results for the half. We're quite pleased with them and indeed looking forward to the next half and achieving that free cash flow that we've set out from last November. So thank you, everybody, for joining us.

Thank you.

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