NCC Group plc (NCC) Earnings Call Transcript & Summary

Thank you for joining us this morning for our full year results to 31st of May, we've got quite a lot to cover. We'll try and go through it as quickly as possible. But obviously, there's quite a lot of detail to give you today. In terms of agenda, we'll give you a few of the executive highlights then I'll hand over to Guy to give you more of the detail around the sort of the financial performance. I think really importantly, I'm quite keen to talk about our strategy and the actions we've taken around that and the progress we've made. And finally, just finish on a summary and of course, conclude with some questions both from the floor and obviously online as well. So in terms of -- just a few bullets from summary to give you the context. We're making really good progress around our next chapter strategy. Clearly, in the context of the market, I think that underlines the rationale for our strategy and the actions we're taking. The market was a little difficult at the beginning of the year, and that's impacted on our revenue, particularly with our North American clients and also a trickle effect across into the U.K. as well. We've taken a number of actions as a result of that, obviously, focusing both on the market but also actions in terms of realizing cost efficiencies and operational efficiencies within the business. The good news is, and I think this is really important, we have seen a stabilization compared to early on in the calendar year. Very positive. All of our major clients that we've seen in the previous year and this year, we've retained clearly, spending patterns have changed. There is a caution in the market that maybe was a little bit different but we've retained those really important clients. We've seen revenue growth in Europe and I think really importantly, is the continued growth in our Managed Services business for the year, which as everybody will be aware, that is a really key element of our strategy going forward. From the perspective of software resilience, we brought in new management this year, and we're really starting to see the benefits from that perspective. We've had the full -- first full year of our IPM contracts, which have contributed to an overall growth picture for the business. Whilst there was a softer first quarter, the Software Resilience business returned to growth through H2, and we'll talk a little bit about how we're continuing that growth story and the rebranding and repositioning of the software, Escrow software resilience business going forward. From a trading perspective, were in line with expectations. Revenue and EBIT for FY '24 remain the same, and we're maintaining the dividend. Just before I hand over to Guy, there are just a few points I just really wanted to emphasize, and again, bring it back to some of the things I said early on this year when we talked about the strategy and perceptions of the business. And I think this -- and it sets the context for some of the strategic actions we're taking. First, I think it's really important just to emphasize, we're looking at this as 2 distinct businesses. We've got the cyber business on one hand and the software Escrow, Software Resilience business on the other. This business has a phenomenal track record. It's really well recognized and it's really well respected. And I'll just use a quote actually from one of our clients recently, just maybe just to position that and where we see NCC Group. The client actually said they looked for 2 factors when choosing a third party to support them. They wanted reputation and a European footprint. NCC Group is the best they could possibly find. We're highly respected, plus highly trusted by national cybersecurity experts. And I think that just underlines the essence of what is about NCC Group that really is so impressive. We're obviously operating in a very dynamic market, both in terms of buying patterns but also in terms of the cyber threats, digital transformation that we're seeing, which continues to drive some real fascinating projects and buyer requirements, which requires the right sort of capabilities to deliver. And that really comes back to the quality of our people and the DNA, which sits under our business, which is around that insight, intelligence and innovation. And I wanted to try and bring that light to life a little bit as we sort of then talk about strategy and where we're investing. And I think we all talk and we actually were talking about the AI hype cycle. We all know where we sit in that currently. But when people want to know about artificial intelligence, it's NCC, they look at. So we've recently hired our Chief Scientist and a member of the Select Committee of Parliament talking about the risks of artificial intelligence and the security implications of it. We're launching a white paper on artificial intelligence at Gartner today. So we are the place that people go to, and we have AI already embedded in a number of our solutions. So it just shows the depth and strength of our capabilities. So I'll hand over to Guy now just to give you a little bit of a bit more detail on the financial performance.

Thank you very much, indeed, Mike. Good morning, everyone. So I'd like to spend a few minutes talking through a summary of our actual performance for FY '23 and give some data points and outlook for the first quarter so far this year. It's worth pointing out that our numbers for FY '23 have been confirmed but it is not uncommon our auditors have not yet finalized all of their paperwork, which they will do in the next 24 hours or so. So we'll be complete by the end of tomorrow. We're obviously work in close cooperation with them on that. So I'm going to talk through in the next few minutes our key financial highlights. A breakdown of our revenue growth at group level and see what the big drivers were there, then do a bit more of a dive into the 2 individual business units, cyber and then Software Resilience and finish off with a walk on our net debt, and I'll give some highlights on our core performance and what some of our measures of success are going to be going forward, which we'll then talk to you about. So first of all, in terms of our grouping, sort of financial highlights last year, I'm pleased to say our EBIT finished at GBP 28.8 million, which was slightly ahead of the guidance of GBP 28.5 million, which we gave back in June. Our group income finished GBP 335.1 million -- excuse me, up 6.4%. I'll give a breakdown of the drivers of that in a minute but essentially, it was broadly flat on a truly underlying basis for both businesses. Our gross margins dropped by 27 basis points. That was largely as a consequence of the North American and U.K. cyber demand falling away in the other second half of the year. And that falling through to the bottom line. And our EBIT ended up at GBP 28.8 million, [indiscernible] as a result of that revenue reduction falling through to the bottom half. Very pleased that cash conversion remained really strong, in fact, slightly up from 101.9% last year, to 102.9%, and our net debt reduced by GBP 2.8 million to GBP 49.6 million on the year. So I'll move forward to the group adjusted income statement first. As you can see from the income statement here, the reduction in revenue and demand in the second half resulted in cash gross profit finishing about GBP 132 million. So broadly flat year-on-year in spite of the revenue going up. Our overheads increased by GBP 17.2 million. That's -- there's no kind of new news in that but those are as a result of a combination of pay inflation on our investment in the XTR, which we did strategic last year of GBP 6.5 million, an increase in our non-client travel and training as things return to normal post-COVID of GBP 5 million. The strategic investments of GBP 2.5 million, which we signed posted back in February is potentially up to 5% but we confirmed around 2.5% in June and then some other movements on FX and depreciation amortization. Our finance costs increased by GBP 2.5 million to GBP 6.2 million. That's in part due to interest rates as rising in general and also in part down to the increased borrowings as a result of the IPM acquisition. And our tax time charges reduced by GBP 7.2 million, so that our tax rate dropped from 24.5% in the prior year to 16.4%. This is a combination of provision relief against the benefits in U.S. R&D, tax claims and a prior year credit in relation to the treatment of the IPM acquisition. So over in all, this results aid in adjusted profit after tax of GBP 18.9 million and adjusted EPS of GBP 6.1 million. It's worth noting that we were seeing in the accounts today that we've taken a GBP 9.75 million impairments on our North American and Professional Services business. So as is normal, we assess all of our businesses and we boosted so at the 31st of May, our actual year-end. So just after our profits downgrade and the deterioration in revenues in that business and before we took corrective action over the summer. So whilst this is an appropriate and prudent action to take for accounting purposes, our outlook of North America and our belief in the strength of that business remains wholly unchanged. But that did result in a group statutory loss before tax of GBP 4.3 million as a result of that accounting movement. So if I now just move forward to the group revenue bridge. I just want to explain how the main 5 component moving parts between the GBP 314.8 million we posted in our statutory accounts in FY '22, moved forward to GBP 335 million that we've confirmed overnight. So the first adjustment there relates to a fair value adjustment of deferred income and the IPM acquisition, that results true. So it's a true get to a kind of an underlying basis, we should be comparing with GBP 319.2 million. And then you can see on the remainder of the charts, we had tailwinds, largely resulting to U.S. dollar, which averaged at a rate of [ 120 ] for us last year compared to [ 134 ] the year before of GBP 15.9 million and the 2 businesses were broadly flat on a truly underlying basis. And I've got to come and talk through both of the moving parts of the story by half by half for both of those businesses in a minute. Okay. So let's look at Cyber first. So very much a tailored 2 halves as previously spoken about. So just to explain what's on these slides, and you'll see a very consistent slide for Software Resilience in a minute as well. So the left-hand side of the bar chart show the cash constant currency revenue for each for our Cyber business is split between our geographies. And the right-hand side splits it between the historic divisions in which we trade our capabilities. You can clearly see a few things by this. So firstly, and I'll point some of the [ positives ] first. So our Managed Services business continues to really drive its momentum on half-on-half growth. We're really pleased to say they've delivered 12% constant currency growth in the full year and 15% in the second half. And we've seen that continue through the first quarter of this year in terms of momentum. The other very obvious point is that clearly, our Professional Services business dropped away in half 2. And you can see here, this is very much concentrated around North America dropping from GBP 59 to GBP 40.1 from half 1 to half 2 and to a less extent in the U.K. business. The consequence of that very sharp correction in buying behavior and revenue in the second half is what led to overall gross profit in Cyber dropping by 67 basis points. And then after accounting for the overhead, which we spoke through a couple of minutes ago, overall EBIT dropped from GBP 31.9 million to GBP 6.9 million in the Cyber division. It is worth mentioning that our management reporting will adapt now to catch up with structural changes that Mike has made in the business. So in future, the half year, we'll talk through our reporting not by Professional Services, Managed Services and product sales but by consulting and implementation, Managed Services, Technical Assurance Services and incident response. And I'll take -- we'll walk you through that in some detail and transparency when we get to the half year. Okay. Let's look at Software Resilience. So a really strong set of results in software resilience, and it's very pleasing to be able to say that as a result of both top line improvement and efficiencies within the business that we talked about and time posted 12 months ago. So the team delivered revenue growth year-on-year for the last final 3 quarters of the year, which was excellent after a softer Q1. And we also saw split and very encouragingly, we have spoken about the fact that we've always seen the last few years improvements in our verifications, that's people testing their code but we also saw from half 1 to half 2 last year, an improvement in the actual contract revenue as well. So that's the actual revenue received from our customers and on a [ base basis ], that signals a very good improvement trend, which we've seen continue again through Q1 so far this year. On allied to savings in overheads as a result of the operational review that we undertook 12 months ago, that resulted in our EBIT jumping from GBP 26.4 million in Software Resilience to GBP 30.6 million. So obviously, as a CFO, it's always very pleasing to see part of the business growing its bottom -- growing it's top line but growing its bottom line faster than the top line. I'd like to talk about net debt for a minute. So you can see here that we gained inflows of GBP 42.6 million as a result of our operating performance and improvements in working capital. Our CapEx spend was GBP 6.3 million. That was a combination of GBP 7.3 million in operational spend and a net inflow of GBP 1 million on acquisitions and disposals. The dividend of GBP 14.5 million, that is a result of the [ 4.65p ] per share announces that we've previously made. Our interest at GBP 4 million rose by GBP 1.9 million. That's as a result of the base rate increases plus the IPM acquisition borrowings. And our operating lease payments of GBP 7.2 million was flat year-on-year broadly. So those are the key components or net debt walk. Now in a minute, I'd like to introduce you to some of the strategic KPIs, which we're going to measure the business on as we move forward, and we'll talk about the half year. But I also want to kind of set out the financial framework that as a CFO of the finance team and with Mike and the [ ex ] whom we're working on and making sure that we have our operational and financial performance of the business absolutely tied into delivering what we're looking for strategically as well. So there's 4 components of that financial framework that we're driving the business on. So the first is our sustainable revenue growth. So returning Cyber Security to positive growth on the revenue perspective in the second half of the year once we annualize against the deterioration we had in the second half last year. Accelerating our growth in Managed Services and keeping up the momentum that we've got, and Mike spoke earlier on around that. And then clearly maintaining that positive quarter-on-quarter growth in Software Resilience with the team they have established. In terms of gross margin, our 2 areas of focus are improving our utilization. I'm very pleased to say that we've seen some real improvements in utilization through the first quarter of this year after last year's downturn, and we're back to the areas of utilization use that we'd expect to see in the business on an ongoing basis and leveraging our technical resource footprint. So what does that mean? That means using our colleagues and using their skills for our client use wherever those colleagues happen to be in the world rather than just going to a local territory first, and it backs into the organizational changes that Mike and the team have made in terms of globalizing our capabilities that will really, again, help us improve our utilization moving forward but gain more efficiency and be more flexible for our clients. in terms of our cost base, we articulated 12 months ago that we would deliver savings in Software Resilience. I'm really pleased that we have done that, and we will continue to hold on to those savings and also drive for further efficiencies in that business. And then we signed posted back in June that we would target to a minimum of GBP 5 million of savings operationally in the Cyber business this year, annualizing into GBP 10 million, and that's very much one of the things we're working on a day-to-day basis. I'm very pleased to say we've made a number of changes over the summer period and taking a number of actions, which will secure the delivery of that for this year. And then finally, clearly, maintaining our balance sheet resiliency is crucial. So retaining a very strong level of cash conversion, reducing our debt and maintaining our dividend. So those are the 4 key kind of financial piece of framework, which we're working on a day-to-day basis. Moving into our strategy there. So we have refocused our strategic KPIs. And when we get to the half year, again, will be reporting against these split between our geographies and our capabilities in each of the businesses. So you can see that I won't walk through the measures one by one here, you can read them for yourselves. But the purpose of these is twofold. It's to help us provide more visibility to you and our investor base on how we're performing and give us some more comparability against other people in the market. And bluntly, it's also how we'll measure our performance of the business internally as well. That's how we will drive the business forward. So there's total consistency with those 2 things. Okay. So that is it from me. I think it's -- in summary, really pleased that the year-end finished as we expected it to finish. So no surprise, which is great. It's very reassuring to say the performance of Software Resilience. Our Managed Services continued through the first quarter. The stabilization of Cyber has maintained that has stayed the same as Mike talked about from June. It would be unrealistic or it will be wrong to say that those markets were in the condition that they were 12 months ago but the pipeline remains strong. And we will not be relying on a rebound. We've taken action within our efficiencies as a business to make sure that we deliver on our commitments and [indiscernible] for this year, which we remain confident. And just before I hand back over to Mike, I'd kind of like to extend my thanks to everybody in NCC for delivering through a very challenging period last year and getting through an awful lot of work and a lot of effective work, particularly over the summer period. Thank you. Mike?

Thank you very much. So what I'd like to do is just give you a little bit more detail around some of the activities that we've been undertaking since we talked about our strategy in February. Just to give you a bit of a recap of how we're thinking about this and our view of the future. So again, 2 businesses, very much focused on our investment and attention between Cyber -- Cyber Security and our Software Resilience business. There are 4 key pillars to our strategy, very simple. We want to focus on a client, an absolutely client-centric organization, deep client engagement with a breadth of capabilities delivered to them. We need those -- to build those capabilities to ensure that we remain relevant to the market, addressing the full Cyber Security life cycle, global delivery so that we actually not only have the tools and the capabilities to be able to deliver services using the breadth of our colleagues globally. But obviously, that's also a mindset and a change in a way of thinking. And finally, investing in our brands to make sure that we have a clear distinction between our Cyber Security story and also our software Escrow. Our medium-term goals remain very much the same, mid-teen revenue growth for Cyber Security with a mid-teen adjusted EBIT. And within Software Resilience, that continued low single-digit growth. But really importantly, to maintain that global leadership position that Software Resilience currently has. So that's the context and what I want to do is just take you through each of the 4 pillars really just to sort of say what we said we would do and frankly, what we've done. So from a client perspective, we said we would focus on the fastest-growing sectors with a really clear story to those and how they differentiate. We would look at our property portfolio and property footprint, not only to make sure that it was right for colleagues, it's a great place to work but also actually that it was aligned to our client needs and our client footprint and diversify our routes to market. So that actually, we were able to work within an ecosystem of alliance partners. So in terms of progress since we talked earlier on in the year, we've aligned our U.K. business as probably the largest, most complex of our geographies to a truly vertical better teams. We have, therefore, started to really show the investment, and we've got some -- hopefully, some good news coming up very soon to announce in terms of investment in people in the likes of financial services, industrials, et cetera. We have expanded our Cheltenham office because of, obviously, the footprint in that area and invested in colleague need in that domain. We've also rationalized some of our property in North America to focus in -- on New York with a new great office space, which is great for colleagues getting them back to the office there. Really positively, we've continued our investment with Microsoft and aligned with them, and we've gone up an extra tier in terms of the verified managed extended detection and response proposition. You'll remember the XDR, we've now further enhanced that, and our solution state gets into quite an elite position with that, which is phenomenal. And really good -- really positively as well, we've been able to build a global lines with Splunk rather than sort of the regional model we've always historically had, which will enable a far better pricing and competitive pricing model for our clients but equally enable us to accelerate our go-to-market with them as well. And clearly, you'll have heard some of the announcements about Splunk, which and the Cisco acquisition, which is, again, very -- really great sort of step in confidence for, I think, the market around Cyber Security. So it's great to be partnering with them. On the capabilities front, as I mentioned, really importantly to be able to deliver the breadth of what our clients require and the changing requirements in the market. So we said we would focus around our core technical assurance proposition. That's actually our core business and what we're famous for and it give us the license to operate, so incredibly important, but also being able to take that and extend it into our incident response services, build further around our recurring revenue with Managed Services and also build an additional Consulting & Implementation services. And I just wanted to touch on why this is important. And again, it's really sort of -- and it's very simple -- simplified way. When I talk about the full cyber life cycle, it's quite simple. We want to be able to respond to breaches. We want to be able to fix the problems that cause the breach. We want to be able to manage the environment to help prevent breaches in the future, and we can test anything. And it [indiscernible] say, we are outstanding global leaders. We can test everything from a door lock to a nuclear reactor. So that's sort of the quality. That's the life cycle that we're -- that we plan to address. So what have we done? Well, I think we've invested in some absolutely outstanding Cyber leadership. I'm very pleased to say we've hired Kevin Brown on the far left, he'd be delighted to have his photograph up there. Kevin was the Head of BT's side business globally. So that brings a wealth of talent and experience and client relationships. So he's joined to run and bring together all of our global capabilities together. And we've also hired Sian John, who is very well known in the industry, very well respected as our Chief Technology Officer. And she's joined from Microsoft, so has a wealth of experience in terms of working with such a strategic partner. And she's incredibly well known. And as I say, is quite imminent. So for example, Gartner has the EMEA Cybersecurity Summit on currently, and she's providing a keynote around artificial intelligence today, I believe it is. And we've also made great progress working with a key partner in the U.K. So we're one of the first providers of Incident Response as part of the approved incident response providers for the National Cybersecurity Center here in the U.K. So some really great progress, I think, around that. And we've talked about global delivery. And again, I sort of emphasize that it's about really changing a mindset and bringing together the very best of the talent in front of clients, irrespective of geographical location. So we said we would talk about and we would implement global scheduling and resourcing. We start to build that sort of teams to think and act globally. And we'd also focus on building a delivery center -- an overseas delivery center to give us the flexibility and scalability around some of our capabilities. We've made great progress on the scheduling side. We've implemented Kantata, which is a global scheduling tool. We've rolled that out in the U.S. currently. As the precursor of the pilot for the further rollout globally. That will -- the next is actually to our global delivery center. We've restructured our global business around those 4 service areas, so Incident Response, Technical Assurance, Managed Services and -- so it's been a very long day. And the fourth one is Consulting & Implementation services. And really importantly, we have ahead of schedule being able to build our delivery center in Manila. That was the chosen location. So really great news. The Manila center, this is the actual building. It's about 25,000 square feet. So it's a very large facility. It's in a brand-new first net 0 facility in the Philippines. It's the -- so it's really in line with our sustainability agenda. We have appointed the leadership, and it's great to say we've been able to create that interlock between our existing business and the sort of cultural aspects of building in the Philippines, with the leader Saira Acuna has been with us for a number of years. She ran our sales operations. She is the leader, she's from the Philippines. So again, we can build that sort of knowledge of the business to actually our new colleagues as we bring them on board. It's a state-of-the-art building. We've made some great connections within the local community. We are actually working very closely with the local university. So we're actually contributing to the cybersecurity training agenda, all the curriculum now. So actually getting a really wealth of talent come through, which I think is impressed everybody that has been involved in the build-out of this. And great news. I'd say we're ahead of schedule. We've brought our first colleagues on board. So we're actually starting to run this up. And as a sort of a proof point of the way we're looking at this contributing to the future, we'd able to win the first clients using this integrated global delivery model, and it's work that we would not have been able to bid for historically, both in terms of scale and also global reach and the hybrid execution model. So the great example is a critical national infrastructure project that we have won as a result of being able to now talk about and showcase this facility. So great, great news on that and very, very positive progress. The final area is around the differentiated brands. And again, I talked about how we make sure that we have a clean and a clear story about our 2 businesses, Cyber Security and the Software Resilience, software Escrow services. So we have a new distinct brand for our Software Resilience, which has been launched internally to our colleagues. And this will be rolled out over the coming months. As part of that growth agenda, really focusing on the trajectory that Guy has talked about for software resilience. And I will now show you a short video to reveal the brand. [Presentation]

[Audio Gap] colleagues across the Escode business. And again, it plays to this, as I mentioned, the sort of enabling that Escrow -- we are the market leader in Escrow, enabling that growth story that we're seeing such positive steps already through the last few quarters. A few points. We said we would return the Escode business to single-digit growth. We said we would reduce the operational costs and drive greater efficiencies. And we said we would also undertake a strategic review of Escode. So in terms of actions we've taken, we have enacted a number of price of flips, which has again contributed to the positive financial situation Guy talked about. There's been significant progress in harmonizing the internal systems between the legacy businesses in IPM and Escrow, which again has driven a number of efficiencies. And we have now, as part of the ongoing investment in the growth of the business focusing on the sales penetration in the U.S., Australia and also additional sectors such as critical natural infrastructure where we perceive a quite a significant opportunity. Now clearly, we mentioned the strategic review. We stopped the strategic review in light of the market conditions, and we will revisit that in light of the market later on in the year. So summery and outlook very briefly. I think it's fair to say, and I hope you'd recognize that we have delivered the -- some of the foundational components of the strategic change with more to come. There's been great progress, and I would echo Guy's point around our thanks to colleagues for the resilience in progressing through that. Our ambition -- our trading remains in line with expectations with FY '24 revenue and EBIT in line with expectations as per previously. And our ambition remains the same for the business, that medium-term revenue growth mid-teen EBIT for Cyber Security and Escode, the new business, Escode, consistent single-digit revenue growth and maintaining global market leadership. With that, I think we can take any questions, perhaps any questions from the floor.

[Operator Instructions]

Tintin Stormont from Numis. Three questions for me. First, on the Cyber business. When you talk about some stability in North America, and obviously, it's annualizing into year-on-year declines in North America. Are we -- if we look at that slide on Cyber Security revenue and adjusted EBIT, are we looking at that GBP 40.3 million as sort of the run rate on a half year basis is kind of where it's bobbling along? Can you remind us of kind of seasonality?

Yes. So I'll probably have to get back to you on the direct seasonality for that market in terms of half 1 and half 2 Tintin. In terms of -- that is very much kind of broadly the run rate, we'd expect to carry into the second half of the year. We will start, and we do expect to see year-on-year growth in North America and actually because on an underlying basis, we are kind of delivering that by the time you strip out the big tech businesses, which still their work earlier on this year.

Okay. And then secondly, in terms of the global delivery in Manila and Mike, you talked about some earlier contracts that you're winning. And without that, you wouldn't have won them. Just interested in the flavor of kind of what's the scale up that's being required, for example, by that infrastructure company. Because at the moment, I think there's 15 people in the Manila office, and I think it's scaling up to maybe 80 by the year-end. What's the kind of the blend of the contracts that sort of kind of you're bidding for? And how much sort of outsourcing -- offshoring? Are they wanting to see in those contracts? And maybe just thirdly, just as I have the mic, in terms of Escode, are there any incentives for the actual management team there? Or could you just remind us if there are any incentives in terms of, sort of kind of being able to complete the strategic review for that business?

So yes, okay. Let me try and do the Manila one. So the -- so this is quite often net new work. It's -- things that -- and it's because of the blended nature of the delivery that we're able to compete at a price point that allows us to win where that is net new. It's very difficult to give absolute scale because it is about a blended requirement. Clearly, we want to continue to win work and go up larger and larger pieces. But we intend to scale our business quite significantly to be able to go after that diversity of project that we just wouldn't have been able to deliver before. Because they either through price points or because of certain capabilities we want to build in the future. So it's very early days but I think we started to really start to see that forward pricing point. There's another project where we have currently won or in negotiation with a global conglomerate. And actually, that global footprint, the time zone piece is actually one of the key differentiators that allows us to bid for it. So there's a lot of dimensions to play for in that. Do you want to try and cover off the...

Yes. So we obviously announced earlier in the year, we're doing a strategic review of Software Resilience and then we announced that we've stopped that and we'll revisit our position at the end of the year. None of the management team or on any kind of incentive base around strategic review, they've stopped when we'll review that position in due course as we said before.

Harvey Robinson, Panmure Gordon. Just a couple of questions. First question, really, just looking at sort of guidance. And I noted your comments about utilization. So if I sort of [indiscernible] my interest. You talked about some revenue growth. You talked about normalizing utilization, I think, it's what you said. And then obviously, there's some cost of savings. I'm slightly surprised in that context that you're profit growth isn't a little bit more optimistic. Does that sort of draw the obvious conclusion that have you lowered the day rates? Is that the missing part of that guidance? Just quite in my head, my little model. And the second question is following on Tintin's question on strategic review. Back in February, you've got everyone's interest, Mike, when you said there's no cross-selling opportunity, and there's no R&D synergy. It sounds to me on that basis as you've made your mind up. What's missing? What do we need to see? Is it purely a function of market conditions for a sale? Or I mean, what can you tell us on that? Because it's not pretty clear, I thought you were pretty clear.

I'll do the day rates, the margin one first. So yes, it's really pleasing to see that I think we talked in the past about we want to see utilization in the 70s, seen it climb back towards those levels over the first quarter of the year. And There -- we -- into what's happening on day rates, not seeing any material deterioration. I think what we're very focused on is gross margin rather than day rates and that becomes particularly important as when we start bidding for work, which is in our more globalized resource base, we should be very focused around what our client is getting and what's the margin -- what the overall margin for us rather than the day rate is. I think in terms of outlook, look, it's early in the year. This is the quietest quarter by year. I'm pleased with all the indicators that we have at the moment in terms of what the direction that we're heading. There is an -- obviously an uncertainty in the marketplace.

In terms of the strategic review, I think we're, again, absolutely clear the -- we don't see the synergies. And actually, really importantly, we're not trying now to invest in create synergies. And that's a really important sort of differentiation for colleagues internally as well, just in terms of that message, they're having that separation. And I think we have gone a long way down the route of ensuring that the operational clarity between the 2 businesses is now there. We've now also got, if you like, the market clarity in terms of the clear brand and the story. So we have got that operation, which gives us optionality. And so we will look in the context of that and ensure that we can keep that under review. And then we will revisit with the strategic review is that what the right outcome of that would be later on in the year. So we now have clear optionality.

It's Andrew Ripper from Liberum. I've got a couple of questions on Cyber. Just wondering that you don't say a lot about client mix. And just in terms of what happened in tech last year, obviously, it's almost like a heart attack moment in the second half in terms of the drop off. Can you give us a flavor of, say, for example, what proportion of Cyber was tech in FY '23 versus FY '22? Give us a sense of what sort of materially changed in such a short space of time? And then thinking about the go forward, is there any way that you can sort of bring the pipeline of sort of new work to life in terms of a sort of precursor to give us some confidence of improving revenue trajectory in the second half and into FY '25?

Yes. So in terms of the U.K. So what -- we would say U.K., so tech makes up around about 12% of our mix and we're not really seeing any kind of material changes there. I think what we have seen in North America is the concentration of the deterioration was in our largest clients, and they were all -- they were intact. So that clearly we have seen a decline there. I think as Mike said before, we haven't lost those clients. They haven't moved the work somewhere else. They have just paused their programs, and it's part of probably a wider trend, which is inevitable in the current economic environment of clients are being more disciplined and considered about that procurement generally. And that -- whilst that can be frustrating for us, it does offer us opportunities because we're structurally positioned to be able to provide a whole host of cyber services to our clients, which boutiques and many of our competitors can't offer the whole range of types of services, which we now will offer.

I would just add just a couple of points to that, Andrew. I would say the concentration in North America was clearly in some of the largest companies in the world. And I think focus generally in the market is a good thing. It's simpler to generate revenues in existing clients. So I don't think any of us would have said, you shouldn't have pursued the opportunities in those clients. It's -- they're really great clients and nobody said at that point of time, that was a bad thing to do. But there is a natural result of if you concentrate all your efforts in that area to pursue those opportunities, you probably neglecting other areas. What we have done as a result of seeing maybe that's maturing, shall we say, of the North American tech. We'll probably look historically and say there was a bit of a bubble post-COVID. And there was a different way of buying. There is now a maturity and a prudence and procurements are involved in the processes that are much more measured in that North American sort of client base. But because we're actually seeing that. It gives us the opportunity as far as we're concerned, is really now to open up and go after other sectors, where perhaps we wouldn't have had the capacity and bandwidth to go after. So to give you a really sort of tangible example, this increasing regulation and legislation in North America around the OT environment. And we have launched a very quick campaign to talk about that in the North American utilities market, which is hugely fragmented. And in a very short space of time, we've seen traction in 20 new logos and conversations in the pipeline in those levels that we would just have never talked to before. So I think it's those sorts of things we're pivoting. And again, I talked about verticalization, how important that is. In the U.K., we've obviously made those steps already. North America is the next space. That's where we're moving to. Hopefully, that helps.

And the second question, just in terms of pipeline and sort of go-forward revenue trajectory.

So pipeline, I think, is looking -- obviously, I don't want to give too many numbers away but it's looking very positive. We're not seeing, I think, the deterioration we saw in the early part of this calendar year, that has definitely stabilized. We're seeing a return to a strong pipeline in all of our geographies. The buying process is probably still elongated with more measured, as was mentioned in the procurement process, for example, more challenged, particularly for the larger deals but we're starting to see that come back. There's probably a change in revenue mix in terms of we are seeing multiyear Managed Services deals really start to come through and we've seen some really positive steps in some of which has been made public recently. So we're starting to see that come through. So that the revenue -- the pipeline mix is probably a little bit different but the scale of those deals is really something to be hopeful about. But again, we're very measured [ on understanding ] that there's a broader context at the moment but certainly, we're seeing at the moment, it looks very good.

Just finally, how many consultants do you have in Cyber today?

Total -- it's about 2,000, I think, on the top of my head.

Ollie from Peel Hunt. So 2 questions from me. First is on IPM. How is that performing? Obviously, it's North America weighted, did that perform okay? Or was it also hit by the mega-tech drop off, so that provide stability there? And second one, you mentioned a strong pipeline in all geographie, which, region do you think offers your best chances of growth? Or are you looking at sort of a client-by-client basis and global contracts for those clients?

Just on -- trying to answer the IPM question and in terms of demand there. So we don't measure IPM separately now from the rest of the North American business. I think as the further charts we showed earlier, the growth -- further growth opportunities probably is fair to say in North America compared to the U.K., and that's an area we want to capitalize on. And in fact, when we kind of do some of the sales force efficiencies we're looking for from a systems point of view this year will help us capitalize on that market more. In terms of concentration risk and tech drop-off, the base of our client base in Software Resilience is not influenced by that at all, and we're not seeing that have any kind of drive down trend on cyber -- Software Resilience in any of our markets.

Yes. And in terms of opportunity, the answer is probably a little bit of both. Both in terms of segmentation by clients. So they're really focusing on those key clients and key client segments, some of which will be global, recognizing that there's white space that we can go after. And again, that's really important from a verticalization perspective. But in terms of specific geographies, clearly, North America is one where now we see a significant opportunity still being able to try and swing that from a concentration in our tech clients into some of the other verticals.

And from memory in terms of the capabilities, you really wanted to build was really that core consulting scale rather than sort of responding to problems as it were. What metric can you give us to say that sort of kind of upskilling or reskilling or the mix? And how successful are you in convincing very good consultants that work somewhere else that this is a real opportunity and they should go work for NCC?

Can I answer the first?

You can answer the second part. So in terms of the metrics, when we talk in the second half of the year, some of the strategic KPIs will help with that. So we'll pull out how many capabilities we're selling on average to each client within Cyber. That will give an indication of the kind of the breadth of their basket and also the clients over 250,000 a year, kind of that sense -- so that will give a sense of the, I guess, the stickiness of those clients, the breadth of things I'll take. So we will come up those [indiscernible] I agree, they're really important. That's what we'll tell us whether we're succeeding.

Absolutely. And I think I would also highlight Guy's point when we've talked about the historical 3 service or the service domains before Professional Services with a large [indiscernible] group, we'll break those out. So we'll have a much clearer revenue attribution for each of the sort of service or capability areas that we're looking at. So we'll have that as a set of metrics. In terms of attracting talent, I would point to 2 of the U.K. sort of heavy hitters like Kevin and Sian joining, and there are a couple of others who will be joining and we'll be announcing in very short order. The really great thing about NCC is its reputation in the cyber space, the cybersecurity market. And there are not many organizations like it. Cyber professionals want to be able to be part of something that is actually really focused around that as a domain. So we are absolutely seeing the ability to track really excellent talent and attracting really excellent talent like Kevin, like Sian has a knock-on effect because people chat about it in the industry. They'll be chatting about it at Gartner right now. So that is definitely starting to spread the word. And particularly in this current market, getting people out is something that we are very, very focused on. We're actually trying to make sure that we're very selective, which is the other piece.

Just a follow-up question on -- in terms of the direction of travel of Managed Services, it's obviously done a great year relative to this last year but suggesting that, that will -- you see the suggesting that will be a bigger part going forward. Does that make any changes to your cash flows in terms of capital intensity? I mean it's not evident this year, but...

No. Not necessarily on [indiscernible]. There's no great -- we're not -- there is an element of the terms have stayed through the period rather than being something not payment at the end, there's no adverse impact there. It's something we look at every time we signing off any deal.

If no more questions, perhaps we could open up to the online web.

[Operator Instructions] The first question we have is from Nguyen Gen of Jefferies.

Thank you for taking my question and the detailed presentation. I have one question first. You obviously have a lot of initiatives at the moment, whether it's the Manila delivery center to stepping into small sectors increased our service offerings and then new branding. Where do you think the biggest risks in terms of executing these initiatives and how do you balance it out between investing back into the business but then also driving cost efficiency to achieve your guidance for profit growth?

I think it's great question. In terms of risks, there is clearly a number of -- there's macro risks, which are just very difficult to foresee. I'm sure everybody recognizes that, unknown geopolitical impacts, et cetera. So I think that those external risks we're very aware of. From an internal execution perspective, we have been very clear we brought in new talent around our strategy, our transformation office and project management of some of those initiatives that we've got a far better internal controls process to ensure that we are very focused. We are -- we continue to review it. So actually, if we need to dial down, dial up elements of it, we clearly can. The other risks are obviously ensuring that we end -- that we increase that interconnectivity between all the various geographies and markets to make sure that we optimize what we've got. But we continue to keep it under constant review, a member of the ExCom and the Board are all very closely involved in them.

And in terms of, I guess, some of the questions on sustainability of earnings and kind of capital management. Look, we remain -- sort of the Board and ourselves remain committed to kind of financial discipline and our shareholders recognize sort of the value, the financial discipline we have around having the dividend and making sure that's serviceable on an underlying basis through improvements in our profitability. So they will remain sort of some of our guiding principles as we stand today.

There are no further questions on the conference line. I will now hand over to management to address certain questions submitted by the webcast page.

Just wanted to go back to sort of high-level Technical Assurance. Just give us your take, Mike, on how mature stroke penetrated do you think that market is? And -- so I assume all enterprises are doing testing. What about SMBs? How -- can you give us a sense of how penetrated it is? And then can you talk to sort of labor-based solutions for testing versus software and whether there's a sort of change in balance between the two.

In terms of penetration, I think it's one of those areas that, obviously, the enterprise clients are of very maturing. They have -- they tend to have a panel of experts that they're able to call upon. For the SMB market, it is probably continues to grow. And I think I would highlight the focus it now gets as we digitalize as people become aware of cybersecurity, it continues to grow but it's a very competitive marketplace. And obviously, that's where a price point does actually come in. I'd say there's also -- there's a spectrum in terms of some of that technical testing. So there are ways of doing relatively easy testing [indiscernible] give you a relatively low level of assurance which, again, is automated, and we clearly use all of the tools you can probably aware, and we've got those incredibly well embedded in our processes. But there's then a very high-end level. And that requires incredibly skilled colleagues. And particularly when you get into some of what I call -- what we described as red team testing, so acting like an attacker to penetrate an organization that is incredibly skilled work. And that will, I think, still -- whilst the tools involved still remains quite manual because actually you need to think and be quite innovative and respond to the circumstances of a client. So it's not sort of a click and collect. I think the other context in that very high-end element is around the regulatory space. So everybody will be aware of CBES testing. So that's the U.K. regulatory one, for banking it's TIBOR , et cetera. That is an increasingly common approach that is now being applied. So we are seeing that in more and more jurisdictions with that high-end, very complex, very skilled testing is required, and that's an area that we frankly excel at.

We have a couple of questions submitted via the webcast page. And the first 2 come from Julian Yates of Investec. The first question is fairly long, and it goes as follows: Do you feel investment -- the investment part you have set aside will be enough to drive and scale your strategic initiatives? The business has tried before in building out a Consulting & Implementation business, what will make it successful this time, considering the big brands already in this space, and on a 3-year view, what board head count aspiration should we envisage?

Excellent. Right. I'll start with why I think we'll be successful this time and then maybe try and follow on to some of those. So I think the first thing is we're not trying to do it as part of an embedded business within some of the other divisions. So I think as we laid out, we're separating these out as very distinct capability areas within the business with clear individual ownership and plans to grow and invest. So I think that separation is very different to the approach we've taken before. The second part of that is obviously the way we've globalized our businesses. So having global capability areas rather than by individual geographies. So again, they became quite penny packeted as a result. So I think that is quite a fundamentally different approach. Why I think it will be different, and we have the opportunity to be successful compared to, if you like, in the context of other brands, et cetera, is, one, I'd come back to that. We're actually really trusted by our client. And if we're doing some of that very high-end regulatory testing, as we've seen, there's a great conversation to be had with clients about other things you can do as a result of those findings. So again, I think we're very well positioned to have those conversations. They're not easy, and there is sort of a next piece to go. But the other thing is the areas we would focus on within that consulting construct would be naturally adjacent to the very technical areas where which we already operate. So again, I think we have a license to operate in that. In terms of the investment in those areas, we clearly have an incremental investment approach. We are prudent in the context that we're operating because, again, I think there is always the risk that if you go too far, too fast ahead of the curve, then -- clearly then that creates some difficulty. So I think we're confident that we're doing it in a prudent, measured and sustainable growth around that. In terms of headcount...

Yes. So just I think I've given mic, [indiscernible]. But technical head count at the moment is around about 1,250, 1,300. And you'd expect that to broadly grow in line with revenue growth over the next couple of years. There's no kind of sort of driving our margins but it will inevitably [ tend ] depend on how some of the mix comes through. But that's kind of -- we'll be talking around, just kind of believe in sort of high single-digit growth getting up to about 1,350, 1,400, which gives great opportunities for our people on -- to develop and grow, which is really important from an employee branding and proposition point of view. But it's also kind of manageable in terms of attaining that level of head count, given the norms of attrition that we'd expect to perform as every tech business does.

Great. And Julian, second question is, you mentioned a reclassification of the business divisions aligned to the strategic direction of the business will be given at the next results. Should we expect a reclassification of allocated costs between Assurance and Escode? Or are you comfortable in the current divisional cost allocation setup?

So I'd like to take a little bit of time being new in the role to consider that. So inevitably the kind of classification of the costs at the moment has followed their historic norms, and we haven't wanted to change out the time scales right now. If we do make any changes, and it would make a lot of sense to make sure we're exceptionally clear about what is attributable from a central point of view to Software Resilience, what's attributable to the Cyber business. Yes, we will be seeking to do that but I won't make any commitments right now.

And the next question comes from Benji Dawes from Premier Miton. And he has 2 questions. The first question is, what is Cyber utilization currently? When do you hope it will reach mid-70s?

Okay. So it's not a number one to give out right now. But as I said before, we are hitting the broad levels that we'd expect to be as we come into Q2 right now. So I would say we've been on an improving trend since May, June time now.

Great. And the second question is, assuming the utilization quoted, is on head count basis. Can you comment on utilization by revenue, i.e., what's the impact of mix of senior versus junior consultants currently and last year?

So we don't have -- I don't have the utilization and the day rate broken down by head count structure. That becomes quite difficult to get on, quite -- probably quite subjective on a case-by-case basis. It is something we'll have better visibility of in future as Kantata, which Mike mentioned early on, which we now rolled out to North America. If that goes global over the next 12 months, we'll start being able to get into a much better level of kind of project-by-project profitability. But we'll clearly need to make sure we've got the right data through and then I'll able to give some meaningful comparisons on that information as when we've got it.

Thank you. There are no further questions. I'll now hand back to Mike for closing remarks.

Thank you very much. Thank you, everybody, for joining us this morning. And hopefully, you can see the solid progress we've made, particularly against the strategy and the granular level of detail that we've been able to provide around the financial results. Thank you very much, and I look forward to see you in February.