Technology One Limited (TNE) Earnings Call Transcript & Summary

Thanks, Bernadette, and good morning, everyone. Welcome to the TechnologyOne 2021 Half Year Results Presentation. These materials were lodged with the ASX this morning. Well, to jump into it, we're very pleased with our results. The results were strong and all the key metrics were as we expected. There's continuing strong demand for our Global SaaS ERP solution. Our key metric is SaaS ARR growth. And we delivered SaaS ARR of $155.8 million. That's up 41% on this same time last year. And you can see that with this strong SaaS ARR growth, it drove and it underpinned our net profit before tax to $37.3 million. That's up 44% on the last year. Now I'd just like to note that, like usual and like previous years, our first half results, that's our first half profit, is not always indicative of the full year. You'll see on the next slide there, and I'll get into this in a lot more detail later, that SaaS will continue to drive our growth and the outlook for FY '21 is strong. And I'll get into much more detail later on in the pack. Turning to the dividend. We remain confident on the full year outlook. And with that, the interim dividend was declared to be up 10%. And that's $0.0382 per share. And you can see over the last 10 years, we've had compound growth of dividend of 10% per annum. I want to get into the results now and turning to the results summary. That's Slide 9. You can see there that profit before tax was up 44%, driven by total revenue up 5% and total expenses down 5%. Now getting a bit deeper, you can see revenue from our SaaS and continuing business is up 7%. And that's as expected. And we expect that important metric to be up 10% over the full year. And we expect in the next few years, over the next 4 years, that will grow to 15-plus percent per annum. And I'll get more into that in a moment. Our SaaS ARR, as I said, was up 41%. And that's driving that SaaS and continuing business. And our expenses were down 5%, in line with our expectations. And that will be broadly in line with the full year compared to last year. And I just got to note there that we invested strongly in R&D, up 14%. I'll get into that also in some more detail later. And some final metrics there. Our cash flow generation was down as expected but in line -- it was down in line with our expectations. It will be up strongly over the full year. And I'll get into that also in much more detail later. All right. So turning to the next slide. It's called revenue from our SaaS and continuing business. Now this is the future business state. I want to spend a few moments on this. You can see there that our total revenue was up 5% compared to the prior half. But it's not really a true reflection of our business. The key metric for us is our revenue from SaaS and continuing business. And it was up 7%. And at the full year, we expect it to be up approximately 10%. Now we've got a strategy to move all of our customers to SaaS, and we're doing that. And as part of doing that, we're also driving down license fees as planned. Now this reduction in license fees, it hits our business and our P&L immediately. Whilst our SaaS grows, it's high-quality recurring revenue that gets recognized over time. The second part is because we still have a legacy license fees business, it's impacting the growth of the SaaS business. Because when we do a deal with the customer, it's either SaaS or it's either legacy license fee deal. The most important point here that I want to reiterate is that our revenue from SaaS and continuing business will grow at about 15-plus percent per annum when the legacy lines is totally wound down as planned over the next few years. Turning to expenses. Our expenses were down 5% at the half, but it's not to the detriment of R&D. Our R&D investment was up significantly, up 14%. And that's for future growth. And we did it to continue to extend the capabilities and functionality of our Global SaaS ERP and some exciting new investments that will fuel our growth, such as DXP, and in particular, our local government DXP. And I'll get into that in more detail shortly. Turning to the next slide. Our profit margin for the full year last year was 29%. And that increased from 27% the year before. In FY '21, we can expect that over the full year to also increase probably by about 1%. I want to reiterate that our margin expansion and lower expenses comes from the significant economies of scale we're getting from our single instance Global SaaS ERP solution. And as we continue to win more and more customers on to SaaS and we continue to get more and more scale from our Global SaaS ERP, you'll see that margin continue to expand even further to 35%. And as we've said previously, as we get to 35%, we'll continue to drive that margin even higher. Now in terms of efficiencies in our Global SaaS ERP, of course, that's on a technology front, but it's also on a payroll cost front as those efficiencies flow to all parts of our business. Last year, we delivered some payroll cost reductions in half 2 as we rebalanced headcount from old business like legacy on-premise business to the new growth areas like SaaS and like DXP. And that's flowing into the half 1 '21 result. And I just wanted to point out that we're always doing this. We're always rebalancing into new growth areas and high-growth areas in our business. And finally, in addition, we'll maintain the COVID-inspired learning, such as remote implementations and digital user groups. Turning to the balance sheet. You can see we've got a strong balance sheet with cash and equivalents of $100.1 million. That's up 20% on the prior year. And I just wanted to call out there deferred revenue. Deferred revenue was down slightly, but it will show growth of 10% to 15% over the full year. And I'll just jump into that in the next slide now. Thanks, Paul. You can see that our deferred revenue forecast is to be up 10% to 15% for the full year. Now last half, during COVID, we provided some payment terms for some large customers who have got long-term implementations. Now these are locked in, they're on track and they'll be received in half 2. So we've got lots of payments that will be received in half 2. And that's why that deferred revenue forecast will be up 10% to 15% on the prior year. Turning to cash flow. Our cash flow generation was a small negative in the first half. And that's a normal occurrence in TechOne. It's a normal occurrence because our cash flow is substantially lower in half 1 than it is in half 2. In half 2, we've got contracted annual invoice states in half 2, a majority of them there, substantial amount, but the revenue is spread equally through the year. So I just want to reiterate that, that's a normal occurrence. The important thing is our cash flow generation for the full year will be strong. The second point there is that if you look at that small negative of about $3 million, it was down as expected. Because last year, half 1 FY '20 had some abnormal cash collections. It was about $12 million for a few very large deals, which closed late in FY '19 and we collected the cash in the first quarter of FY '20. So if you normalize that out, then cash flow generation half 1 would have been about minus $7.7 million. Turning to the next slide. And this is called cash flow generation for the full year. So to recap, in 2018, we changed our reporting and our accounting to align with other SaaS companies. And this included capitalizing R&D. And we did it to make us comparable with our SaaS peers. Now in the first 5 years, amortization is less than capitalization. So we expect full year cash flow generation this year will be approximately 80% of NPAT. Now over the next few years as capitalization and amortization aligns, then we expect that cash flow generation will progressively grow from that 80% to 100% in FY '24. All right. Turning to the top of Page 9 now, Slide 17. This is our half 1 segment analysis. And you can see there, we've got the operating segment on the left-hand side and the geographical segment on the right-hand side. All segments are doing well. The Software segment is being driven by that strong growth in SaaS and SaaS ARR. The Consulting segment is up, being driven by that continued improved execution, and there's a slide in the appendix. And Corporate profit is up because of the resultant royalties that come from the other two segments. Turning to our geographical segment analysis. You can see that we delivered a profit for the U.K., $0.5 million. That's a turnaround of $1.3 million from the half last year and is on track for a profit for FY '21. I'll get more into the U.K. later. We've got our normal results and key metrics there, really focused at the analyst. The thing I wanted to call out is that our full year return on equity will be 40-plus percent. And that puts us in some of the best -- the highest return on equity metrics of any company in Australia, and we're very proud of that. All right. I'd like to turn to some of the significant achievements now. You can see through the results and you'll see through our forecast, our outlook for the full year that there's continuing strong demand for our TechnologyOne Global SaaS ERP. We added about 100 customers since the last -- this last -- this prior comparative period. We now have 576 large-scale enterprise customers. Now we don't handle the small end of town. These are large enterprises with many thousands of users running their complete businesses using our Global SaaS ERP. A question that we often get is, well, what makes us different? How is the TechOne SaaS different to other SaaS providers? And it's quite simple. It's because we're providing this total ERP solution, not individual products. And I want to just take a few moments explaining that. We're not best of breed. We're not just accounting or just HR payroll or just CRM. During COVID, we saw that many organizations had to quickly pivot and be able to work remotely and they cobbled things together. And to tell you the truth, it's a bit of a dog's breakfast, and there's a word emerging now, which is best-of-breed fatigue. And it's where systems don't talk to each other and they're not integrated or their own integrations is quite expensive and quite clunky. And that's not us. TechnologyOne provides a total enterprise solution. So you can see there on this slide, we've got 14 products. It's a very, very broad product base. And within each product, there's 20 to 30 modules each. So we're talking about a massively broad and massively deep system of over 300-plus modules that a customer can take from us. It's got the deepest functionality for the markets we serve. There's no one like us in our markets that has the breadth of functionality and the depth of functionality. And when you look at it, it's totally integrated. When our customers deal with us, there's one contract, one vendor, one experience and it's totally integrated. Our proposition is hugely compelling for our customers. We take care of everything for them so that they can focus on their business, so that they can focus on innovating and meeting the needs of their customers. And you can see on the next slide there, that's a compelling value proposition. That customers get massive economies of scale, two releases each year, defense-in-depth security built in. I'll get into that a bit more in detail later. They're always on the latest release, the latest tech, whether we introduce new disk systems, which we did in the last half. And to put the icing on the cake, they save 30-plus percent on their total cost of ownership. And by being on SaaS, there's less friction and they can take more and more products at the blink of an eye. Turning to the next slide there. We've got significant runway for growth just by taking our existing customers to the TechOne Global SaaS ERP. We call it flipping or transitioning customers from on-premise to SaaS. And you can see that there's $180 million of ARR runway just by taking just those existing customers just to the SaaS platform. And we predict by FY '26, we'll have 90% of our customers there. Turning to R&D. We continued our R&D investments and it's significant investments for future growth. We spent $34.6 million before capitalization. That's up 14%. So even though costs were down 5%, we continue to invest strongly in R&D, and that's for future growth. And you can see there that we continue to extend the functionality and capabilities of our Global SaaS ERP. We have the 2 releases a year and we delivered 2021A to the market and had over 400 product enhancements for our customers. And '21B is in the development pipeline now and will come out shortly. We continue to extend our SaaS platform. We rolled out our new disk system, which is faster, more secure in the second half. And we continued to deliver on DXP. And I want to spend a few moments now just recapping on DXP. Now if you think about TechOne, we're very successful and known well in our markets for our total ERP solution. And that's very powerful for what we call the back-office users. They're your payroll clerks, your accountants, your student administrators, your rating clerks. And they use all of that 14 products and 300 modules to run their business. We're now extending ourselves into the front office. So in organizations, that's thousands of employees in an organization. Or in local government, there are hundreds of thousands of ratepayers in one council, let alone all councils. And there are tens of thousands of students in one university, let alone all universities. Now DXP for us is a long-term strategy. If you think about SaaS, we set that up about 10 years ago. We made huge investments. We learned a lot of lessons. We created many, many versions to the global SaaS ERP we have today. And we made significant losses in the first few years, but now it's fueling our growth. That will be the same in DXP. We'll make lots of investments early up and then it will fuel our growth. It will create a new platform for growth. It will be very, very exciting. And some of the early feedback we've got from customers is exactly that. It's very exciting and it's really transforming their business. There were two parts of DXP. There's our initial part, DXP 1.0, really focused on the employee, whether that's expenses and time sheets and meetings. And that helped us get the tech right and really start to roll that out in our customers. We launched that maybe 2 halves ago. And we're just starting to get traction and making sales in DXP 1.0. But the real value, the real differentiation, the real run rate, the real platform for growth will come from DXP 2.0. Now that's DXP for ratepayers, local government DXP or DXP for students, higher educational student DXP. If I focus in there on local government DXP and just tell you a story. I met with a new CEO of a big local government in Australia. And he came in, only in 2 months in the job, and said that his mayor said, "Ed, we've got to stop our investments in back office and data centers and all that jazz and focus on the ratepayer and focus on the customer." And it really just solidified that, that's -- we're on the right path and that's the strategy for us to get even more compelling and deeper into the markets we serve. Now this CEO is going to be in for a world of pain because they're not on SaaS. They're on-premise. So to be able to take advantage of the new technologies, artificial intelligence, things like DXP, you have to come on to SaaS before taking DXP. And we were talking earlier and DXP -- LG DXP in particular, we've got about 3 or 4 early adopters for Stage 1 and the feedback has been fantastic. But the point I wanted to add is LG DXP is already helping us differentiate in the sales cycle because customers, new and existing, are saying that, "I want LG DXP," and we're saying, "You can't get there unless you come from on-premise to SaaS first." So there's a number of flow-on benefits from the DXP strategy, and in particular, LG DXP. Turning to the next page. We've got a lot of rigor in R&D. And in recent weeks, we've been fielding some questions about how we treat R&D. So I just wanted to spend a moment on this. And it's there on the slide there. But just to go through it carefully is we expense all maintenance and research, and we only capitalize development based on actual time sheets that our developers are doing on projects. And that capitalization and amortization is independently audited along with our financial statements. Previously, we published a policy that capitalization will be in the range of 40% to 60% and amortization will be in a period range of 3 to 7 years. And now that we've got a couple of periods under our belt, because we're a SaaS ERP provider, we expect the norm to be as follows: a range of capitalization of 50% to 55% and a 5-year amortization period. Now if we vary for this, we'll be very transparent and we'll provide detailed reasons. But I just thought we'd take a moment to address some of the questions that we fielded. Turning to the next slide, please. You can see there that we continue our defense-in-depth security. We're the vendor that continues to set the bar higher and higher and higher. We're the only global SaaS ERP provider end-to-end to be classified as IRAP-protected and we achieved that in half 2 last year. I'm going to tell you a story about that in a second on the next slide. So if we turn to the next slide, you can see there's a couple of points on here. Firstly, we continue our 99%-plus customer retention across all markets that we serve. So we've got, I'd say, world-beating customer retention and world-beating customer churn. The second point is that our APAC market penetration in any single vertical doesn't exceed 15%. So there's significant runway for future years in APAC. Now if you look at the vertical market breakdown there, you can see we continue to have strong results in local government. In education, our deals, our business are weighted to half 2. So we've got a very strong and deep and clear pipeline to half 2, and we expect education to have a strong second half. And I want to spend a few moments on government and focus on government. Because as I said, we achieved IRAP-protected last half. And last half, you would have recalled, we reported that the Tasmanian government, because of that, moved all of their business to SaaS. This half, there's a couple of case studies we want to talk about now. And that is the Department of Agriculture, Water and Environment, that's a new department, a recently merged department with two large departments coming together. Now one was a TechOne department and one was an SAP department. So there was a choice to be made. Do they go TechOne or do they go SAP? Now Department of Ag, Water and Environment went TechOne. They went TechOne because of our Global SaaS ERP, which is available in any device anywhere, anytime. They went there because we have the deepest functionality for federal government with our out-of-the-box solution called OneGov. We were the first to e-invoicing. And importantly, we're IRAP-protected. So when you bundle all that together, it was a very, very compelling proposition and they came with us. And the runway and the pipeline for federal government customers, Australian federal government customers to come to SaaS is very deep and very strong. And we predict we'll continue to have a very good run at government -- in federal government in Australia. Secondarily, we signed a whole-of-government New Zealand contract, the central government, with MBIE just recently. And with that, we signed not only MBIE, but the first New Zealand government customer to come to the Global SaaS ERP for all those same reasons that Ag did. And that's opened up a pipeline of 20-plus New Zealand central government agencies. So we're going to have a very good couple of periods in government also. Turning to the United Kingdom. We continued that significant investment for future growth. And we're coming out of what we call the customer first/remediation phase. That's where we had some red projects, where we need to be at the regionalizations right. And we're at the end of that now. And we've got Redditch and Bromsgrove went live recently, York St John. And we're getting referenceable in the U.K. And so our focus is now returning to growth. Jumping into a bit of the details there. You can see we delivered a half 1 profit of $500,000 versus a loss of $800,000 same time last year. And under the covers there, consulting profit also turned around. In the half, we closed 2 new logos in local government and preferred for an additional 2. I think as at this morning, we might now be preferred for 4 or 5 new local government logos in the U.K. An important milestone for us is that just recently, in Q3, we are preferred for our first unitary council. And that pushes us up to the next tier of councils. So we've been very strong in sort of the smaller end as we get a beachhead, as we get our products right, et cetera. And now we're moving up to that next tier of larger council in the U.K. Our pipeline for the U.K. for FY '21 is strong with many new logos and increasing ARR, mostly in local government, as we said at the full year. But we're now also starting to see pipeline growth in higher education. And that's because of our focus in higher education, but because also the regionalizations are coming towards an end. So by FY '22, those regionalizations, the product will be finished and the implementations will be done. We continue to see that significant upside in the U.K. in many years. And what I predict is we'll replicate the success we've had here in APAC in the U.K. in the local government and the higher education markets. It's very exciting and huge runway for growth for us. Turning to the next slide, please. Our SaaS business, as you can see, is growing very fast and it's very high-quality recurring revenue. When you combine that with the low churn rate, I think you'll see that we can get to that $500 million ARR target, which I'll talk about. Today, at the beginning of FY '20, 85-plus percent of the revenue is recurring. We always exclude consulting because that's a pull-through from winning the ARR business. And our target is that by the beginning of FY '27, 95% of our revenue will be recurring revenue. Now just to sum up the results, bottom of Page 16 there, Slide 32. We're very pleased with the results. And we recorded a record half 1 profit, revenue and SaaS ARR. The SaaS ARR was $155.8 million, up 41%. The revenue from our SaaS and continuing business, as I said that's a key metric, was up 7%, will be up 10% over the full year and will get to 15-plus percent as we wind down our legacy license fees. Our profit before tax was up 44%. Our U.K. profit was up 100%. And we ended with strong cash and equivalents of $100.1 million. All right. We'll change gears now and focus on the outlook for the full year and the guidance for the full year. So you'll see on Slide 34 on the bottom of Page 17, we're predicting and forecasting strong profit growth for 2021. I'll just get through a few of the key sort of metrics and key points here. Our markets are resilient. And we see that with our mission-critical software and that deepest functionality, our customers will continue to transition to SaaS. And when they're on SaaS, they will continue to roll out all of our products to take as much of the enterprise suite as they can take. Our Global SaaS ERP, it's really allowing our customers to focus on their business and meet the challenges of their business with greater agility because they don't have to worry about the underlying tech. We take care of all of that for them and make life simple for them. We think and predict and expect over the full year that SaaS ARR, which is our key strength of our company's offering, is expected to be up around 35%, 35-plus percent over the full year. And as I said earlier in the presentation, we're going to continue to aggressively grow our SaaS business but also reduce our legacy license fees. Now that's going to be down about $7 million on a full year basis. And that's a significant and immediate impact on our P&L. But it's an integral part of our strategy as we focus on growing the SaaS business and the high-quality recurring revenue. And finally, we expect full year expenses, that's all expenses, to be broadly in line with last year as we continue to invest in new areas for growth. So to sum all that up, that continuing strong growth for 2021 results in a net profit before tax of between $94.3 million and $98.6 million. And to be clear, that's 10% to 15% on -- up on the FY '20 underlying profit of $86.1 million or up 14% to 20% on the statutory profit of $82.5 million. And finally, I'd just like to end on a couple of slides on the long-term outlook. To recap, we're positioned well for the future and we'll continue to double in size every 5 years. As I explained, SaaS continues to grow strongly. SaaS underpins our growth. It's really resonating with the customer base. As our customers move to SaaS, all the products are available for them. So they'll continue to take more products and our product penetration will increase. We'll continue to grow in APAC, in the U.K. And we'll continue to get those massive economies of scales from our single instance Global SaaS ERP. And our profit margins, full year profit margins, will grow to 35%. When we get there, we'll set the bar even higher. Two more points just to wrap up. Our SaaS and continuing business, that's the key metric for us. Once we've totally wound down our license fee business, we expect this to grow 15-plus percent per annum over the next few years. And we remain committed and focused on our total ARR and increasing that to $500 million by 2026. At that point, I might take a breather and open up and hand back to Bernadette for any questions from the phone or from the webcast.

[Operator Instructions] Your first question comes from Michael Aspinall.

It's Mike Aspinall from Jefferies here. Just a couple for me. Firstly, on guidance, with the majority of revenue now SaaS and expenses guided for flat, can you give us an indication of what's going to be the swing factors between the top and bottom end of guidance?

I'm just finding it a bit hard there. Michael, was your question, what could be the swing factor between the top end and bottom end of guidance?

Yes.

In the end of the day, we've got a very clear pipeline and forecast with our revenue, our deals. And we've got a very myopic focus on costs. If there's any swing factor, it could still be license fees. Even though license fees is a much smaller part of our business now, it might be around approximately $20 million by the end of the year. We still have to close the deals, Michael. So that's probably the main swing factor that could impact on the top or bottom end of that guidance.

Okay. Great.

And I should say, Michael, because license fees have an immediate hit whereas positive or negative versus winning a SaaS deal on the last day of the year is 1 day of revenue recognition.

Yes. Got you. And the bottom end of guidance implies second half profit down a bit. Can you just comment on what's driving that?

Yes. If you look at license fees, it's all driven by license fees. So last year, full year, we did $27 million worth of license fees. And I can't remember the skew to be honest, but most of it was in the second half. If you then just compare $27 million license fees, with most in the second half, compared to $20 million license fees, again with most in the second half, it's license fees that is the part that could -- that is skewing that result as you sort of highlight -- that could skew the result as you highlight.

Okay. Cool. And then just two more quick ones. Just expenses are expected to be in line both the year, a minus 5% in the first half. Can you just talk about where you're making those investments for the second half?

Yes. So there will be two parts to that. I think as we continue to grow SaaS fees, and obviously we'll have more of the variable cloud costs, and the second part is the investment in people, the investments that we'll be making there in new growth areas, such as R&D. I know that we're making some pretty significant investments in R&D and DXP in the SaaS platform. So that's where the majority will be made.

Okay. Great. And just a final one for me. And maybe you touched on it just then with the variable cloud costs, but gross profit margins were down both on the stat accounts and on the management accounts. Can you just talk about what's driving that?

Yes. It's a simple answer. It's the license fees again. So if you exclude license fees and look at the margins, excluding that, I think you'll find they're up.

Your next question comes from Chris Savage.

Few but generally quick questions. Ed, you highlighted there were about 100 flips in SaaS from the first half this year to last. Can you tell us how many new logos you added in the first half?

We don't disclose those, Chris. We're having a pretty good run at new logos, maybe something we disclosed at the full year. But this year, if I can give you a flavor, this year, our new logos, we predict, will be probably the highest maybe in the last 4 or 5 years.

And last year, you added, what, 40 to 50 new logos?

I think it was around 40, Chris.

Yes. Cool. Secondly, it might be one more so for Jobbo. But there was a $5 million drop in provisions in the balance sheet. Now was that the payment of that legal case and hence the reduction? And I guess, part B to the question is was there a positive impact or not on the P&L from that reduction?

Yes. You've identified that correctly. It was the payment of that provision. It's held on trust until the full federal court hearing, which is coming up shortly. And it had no impact on the result for this period because it was provided for last year.

Lovely. And last question, back to you, Ed. When you were talking about DXP, you sort of paralleled it to your SaaS investment 10 years ago that was initially loss-making and now is fueling the growth. Are you telling us that DXP will also be a drag or be loss-making initially before it kicks into profit?

Yes. What I'm trying to say, Chris, is we'll continue many investments in that. And that's all in the R&D number. So it's not an additional expense or additional number that's not already disclosed. And we'll continue to make those investments there. Probably what I'm saying is it will fuel our growth. And it will be in what we call platform for growth and be quite significant, I feel, in the future. But it will take some years to ramp that up to become material, Chris. So what I'm trying to say is don't expect to get a big hit on revenue as a platform for growth in the first few years. But when we start to really amp that up and get some customers live and continue to build it out, then I think you'll see significant revenue streams from it in the future.

Okay. I'm sorry, I know I said that was the last question. But one thing I didn't understand on the call, when you were talking about the whole-of-government contract you got in New Zealand, you said something like MBIE? What was that?

MB, Ministry of Business -- MBIE, I just can't recall what the rest of the shortcut is. Business, Innovation and Employment, Paul is saying, MBIE.

All right. Cool. Sorry, I'm not up on my New Zealand government departments.

It's all right.

[Operator Instructions] Your next question comes from Dan Coughlan.

Just the first one, you touched on at the end of the prepared remarks, but just on the product penetration. I just noticed you didn't have the usual slide on the average product per customer. Are you able to maybe give some qualitative kind of commentary around how the cross-sell opportunity is progressing, especially as it relates to the SaaS flips?

Yes. It's something we just haven't included at the half year, Dan. We will include it again at the full year. There's plenty of runway. I'll just reiterate what we said at the full year. I think we have on average 5.7, 5.8 products per customer. Those on SaaS have 1.5 products on average more than those on-premise. And that's because once you're on the SaaS platform, you're always on the latest release. So then you can always take the latest features and functions. And it's frictionless. All the software is available to all customers on the SaaS platform. And we like them to try it and use it. And if they love it and are getting business benefit out of it, then we can talk to them about buying it. We'll provide those usual disclosures in the full year as well, Dan.

Perfect. And then just another one around the SaaS transitions. So 37 new customers on SaaS compared to at the full year. Obviously, a bit of a mix between completely new customers and those transitioned from on-prem. So to get 90% of on-prem to SaaS, I think, kind of implies around 80 to 90 SaaS transitions a year. Just wondering if you can talk through how you're thinking about the timing of those transitions. Should it be the second half this year? Or does it kind of weigh more into the next financial year and beyond?

I think you've nailed it in some of your questioning. You're right. On average, we do between 80 and 90 SaaS flips or transitions a year. And we can't see any end to that and it might even accelerate. But the 80 to 90 is a good benchmark. And they're always half 2 weighted. So if you think about our normal weighting of deals, they've always been half 2 weighted. Majority of our customers are government, local and higher education and they tend to have their buying cycles around June, July, August, September. June, it might be the end of financial year and they have budget left, or July, new financial year and they're waiting for a new financial year's budget. So that's the reason for the half 2 skew. And we expect that to continue as per normal, Dan.

Great. And last one for me. Just in terms of the competitive landscape, you mentioned in your prepared remarks that the council -- sorry, the government department merger. And that was a department of SAP on the other end. Are you able to just talk through who some of the other contract wins have been away from? And anything -- any changes in the competitive landscape that are worth noting?

Maybe I'll start but then hand over to you, Stuart. I think we're not seeing any dramatic shift in the competitive landscape. It seems to be the same competitors in local government and higher education in government. Stuart, is there anything you can add?

No change, traditional. Yes, no real change both here and in the U.K.

[Operator Instructions] Your next question comes from Mitch Sonogan.

Just following up from the previous one, half-on-half of 37 new SaaS customers. If you have to look at the incremental SaaS ARR per customer, it was up at about $570,000 versus only about $200,000 in the pcp. Can you maybe just talk through what the drivers were? Obviously, we've seen a few big new customers there. But was there a big weighting to some of the big education or government customers?

Yes. I think that's the flow-through from some of those government wins, to be honest. And as I think about the question, there's no real average in TechOne. You can have a small customer with a $50,000 ARR per year or a very large customer with a $4 million or maybe $2 million ARR per year. I'm just trying to highlight those big swings. And we have a deep pipeline. And we work with our customers as to when they're going to transition from on-premise to SaaS. And it really just depends where the deals fall. So averages in themselves aren't probably a good thing to look at in that respect. But I can tell you that some of the big customers were government customers that came in the first half.

Yes. And just following on from that. I remember last year, I think around May, TechOne was offering a year of free SaaS fees for on-prem customers to transition to your SaaS products. Can you maybe just give us a bit of an understanding of how that -- or is that program achieved what you're hoping for? And what are the sticking points of some customers not transitioning across as fast as you might have hoped?

Yes. So if you think about that, Mitch, that was at the height of COVID. And some of our customers said, "Look, we want to move, but we don't have the budgets for them." And they were government customers and local government customers that are really high creditworthy customers. And we did offer that up. We offered it up in support of them during COVID. And to be honest, not many had to take it up. But it created a conversation with them that opened up the door to move them to SaaS. So the impact of that alone was pretty minor, to be honest. But the important thing is it showed that we supported the markets we serve and it opened up a conversation to move customers to the SaaS platform.

Yes. And just looking at the variable cloud costs. Can you just give us a bit of a sense of how we should think about that moving forward as the business continues to grow in that SaaS line? I think it's generally tracked at sort of 20% to 21% of the SaaS fees. That dropped to about 17% second half. Now it's back up to 19%. How should we think about that second half or probably more so longer term as the SaaS business continues to grow?

I think if -- we look at it on a full year basis, Dan -- I'm sorry, Mitch. And on a full year basis, we've tracked that it's probably increased its margin by about 1 percentage point or 1% every year. And we continue -- that's where we're really continuing to drive the efficiencies of the Global SaaS ERP. Maybe if I just spend a few moments, I think it was this half when we completed the move to a new disk system, yes. And actually, it was last half to help us achieve IRAP. Yes, so if you think of all layers of the SaaS platform, we're always focused on how we can use the latest technology to make it, say, quicker, more resilient, more secure for our customers and for TechOne to make it more efficient and to grow margin for TechOne as well. And one of the things we did last half was look at our disk system in the SaaS platform. And we completely refactored it and moved all customers from the old disk to the new disk technology. The two things we achieved there was margin improvement for our -- but for customers it was technology that sort of was one piece of the pie to get that IRAP-protected certification. And that's just one case. We've got many, many, many initiatives that are happening in the SaaS platform to achieve all those type of things, a list as long as your arm, to be honest. And the team are always focused on making it better for our customers, more secure, quicker and, of course, getting margin and scale and performance for TechOne. And so I just thought I'd highlight that. But you'll continue to see us drive that efficiency. And that's what will underpin the TechOne total net profit before tax margin from 29% at full year last year, up to 35%. And when we get there, we'll continue to drive it harder and higher.

Perfect. And just final one for me, Ed. When you were talking about the specific market verticals, you're expecting a stronger second half in education. Obviously, the big education providers have been through a pretty tough 12 months and still are. Can you maybe just talk -- are they still actively in the market to look to replace new systems? Or is it more about ongoing upsell? Has there been any change in how they're coming to market over the last 12 months?

I might hand over to Stuart to answer that question, Mitch.

Yes. There's a lot of activity right now in differentiation in the market. They're looking at different ways that they're going to attract their students to come and join their university or higher education sector. And we're helping quite a bit. A lot of the noise right now in the sector that we're helping out with is in the portal side. It's really where that student is interacting with the university. And we've been doing a lot of work there for the last few years. And we're seeing a lot of activity. And we've probably got 5 or 6 higher ed customers that are actively looking at right now.

So Stuart, our education customers, they're also looking to save money, streamline their business when they come to our SaaS platform?

Yes. So we've got a lot of the higher ed obviously moving from the on-prem into the SaaS to save the money, at the same time, trying to get a better benefit to get the realization of the latest software and giving that feedback and that support back to the customer base. But tied to that as well is the portal side. So to get to the portal, they've got to be on the SaaS platform. So all of that comes into play.

I think you said to me before the call as well. We've got this student DXP, which is a bit more early stage than the LG DXP. But even talking about that to the higher ed customers is creating another differentiation to get them to the SaaS platform.

Yes. We've got three higher ed customers that are working with us in the early adopter program. And it's very exciting what we're doing. It's really that last piece of the puzzle in trying to support their customer, the student, all the way from acquisition all the way through alumni. So we're trying to support that whole process and keep them as sticky to their student as they can be.

[Operator Instructions] Your next question comes from Lucy Huang.

So I just have three. So firstly, and just in terms of your existing SaaS customers, actually you had one prior to the first half. Are you able to talk through how those patterns had changed over the last 6 months, whether you saw them take up more modules or products? Just wanted to see how the existing cohort can change over time.

Yes. Maybe talk about that one first. There was a similar question at the full year. And the full year was -- if you like, our second half was largely impacted by COVID. And so our customers at that time said to us, "Let's just get to SaaS. Let's get to the SaaS platform." Yes, most customers, when they come to the SaaS platform, look at taking more products. But those customers that were on-premise coming to SaaS really just needed to get their staff working remotely any device anywhere, anytime. And so product penetration was probably smaller in the second half, sure, but we got all those customers to the SaaS platform. And we always knew and we discuss with the customers, once you're on the SaaS platform, that will open up much more opportunity for product penetration. Is that something you can just comment on, Stuart?

Yes. We're absolutely seeing that there was a need to get to the SaaS platform. And then from there, they're uptaking the software on a piecemeal approach. So it's very much a module-by-module acquisition now, not a big product-by-product. So they're acquiring it a piecemeal at their own speed, which is really the whole design that we want to get across. They get full access and they can acquire at their own speed and on their own terms. So they're really doing a lot of that work themselves.

Understood. Wonderful. Just my second question, so I think you gave guidance around 15% growth in SaaS and continuing businesses once the legacy revenues do come up. What's going to be the key driver here? Is it mainly the transition of existing on-prem continuing to migrate to SaaS? Or do you think a large -- larger parties just increasing product penetration amongst existing customers?

It's probably quite a few of those, Lucy. So the first is we've got four platforms for growth. First is moving our customers to the SaaS platform, that's number one. When they're on the SaaS platform, our customers take more products. So they're already 1.5 more than on-premise because it's less friction. And because when you're there, it's the phenomenon we saw on-premise many years ago, best-of-breed move to enterprise. We see that same phenomenon going on in SaaS. Best-of-breed is going to move to enterprise because it's fully integrated, it's one look and feel, it's one vendor, one contract. So we think that enterprise will win on SaaS just as it did on-premise. And the second part is when we wind down legacy license fees, it is a drag right now on revenue. It is a drag on the growth of the SaaS business. Because if we're transacting a legacy license fee, it means we're not transacting a SaaS or an ARR business. So when that's wound down, and we're getting pretty close now, we'll do about $20 million this year, and if it comes down $5 million year, next 3 or 4 years, legacy license fees will be gone. Then we really accelerate, if you like, SaaS ARR. So when you put all those things in the mix, that's what will help drive SaaS ARR at 15% per annum. Sorry, SaaS and continuing business, I should say.

Wonderful. Yes, understood. And just last one, are you able to give us an indication in terms of your current R&D budget, how much is allocated to DXP versus a spend in the core SaaS platform? Just wanted to see where majority of the spend is directed to and how much DXP takes up of the R&D.

Yes. I think it's -- I'm just talking in rough numbers. DXP is right at the start. So it's probably 10% to 15% of the total R&D spend. And then every product has a breakup. So it's not something that's easily broken up just off the top of my head. But the DXP is at a part where it's new. We always start somewhat small. But as it gains more traction, if you think of the whole R&D spend, just as we've done when we moved from our last generation software to our current generation, the DXP team will grow as the R&D team sort of existing customers shrinks and then it becomes mainstream. So we always have this sort of seesaw, where we're toggling the investment in new technologies and new products, et cetera, versus the existing. And we're at a point now where the majority are in existing and we're starting a new, if you like, technology product line called DXP. But as that expands out, it will become a higher proportion within the total R&D spend.

[Operator Instructions] Your next question comes from Gareth James.

Could I just clarify, please? There's obviously that fall in employee cost in the first half. And I think you referred to the transition to SaaS has been a driver of that. Are you able to elaborate on more specifically where those costs are coming from and the likelihood of that continuing going forward?

I think, as I said in the presentation, Gareth, half 2 last year, we did our rebalancing. We took away from those supporting, selling, servicing on-premise and really focused them into DXP and SaaS. And we'll continue to make -- and so R&D is up 14% at the half. We'll continue to make more investments in new growth areas. So we're expecting full year expenses to be broadly in line with last year. And then, Gareth, we'll continue that normal trend now of investing in those new areas from growth going forward.

Sure. And just one on the SaaS ARR growth guidance. I think you've guided to 35% for the full year versus 42% in the first half. What would be the drivers behind that second half weakness were?

Yes. We don't look at it as a weakness, Gareth. We look at it over a full year and the pipeline of deals we have. It's somewhat like license fees, wherein -- before we move to SaaS is the same phenomenon happens. We've got a full pipeline of deals and forecast, and we work closely with our customers to transact those through the year. Sometimes, some close earlier first half. Sometimes, they close a bit later in the second half. And that's why we sort of -- that's why we say the first half is never indicative of the full year. We always look at our performance over the full year. And it really comes to where the deals fall, Gareth.

Thank you. We will now go over to the webcast questions. Your first question comes from [ Troy Reynolds ]. And the question is you added approximately 101 SaaS customers over the past year. How many of these are completely new customers and how many are existing customers who are previously on legacy license?

Thanks for your question, Troy. It's not something we disclose down to that level. But I can say that the majority of our customers from on-premise to SaaS flips -- we do, do somewhere in the order of 40 to 50 new logos per annum. And they will follow the similar skew to the rest. So maybe if I can just guide you to 40 or 50 over a full year, look at the skew. But the majority of our business is coming from on-premise customers to SaaS and then taking more products while they're there.

Your next question comes from [ Ray David ]. And the question is the $180 million ARR runaway to SaaS by FY '26 on Page 25 on the presentation, is that assuming the customer takes additional modules? Or is that like-for-like for existing modules sold per customer?

That's our like-for-like for existing modules per customer. So grabbing everything they have on-premise and moving to the SaaS platform. On top of that, you have customers taking more products. And on top of that, we have new logos. And that's how we can get visibility to that $500-plus million or that $500 million by FY '26 of ARR.

Your next question is from [ Troy Reynolds ]. And the question is what is the average solutions of the 14 total used to the average customer? And how has that changed over the past year?

That's a hard question, Troy, because there's no such thing as an average customer. Customer is by products, by modules and then by number of uses. So there's many variables that a customer can take. We disclose in the full year -- and we will disclose in the full year, the average number of products or product take-up per customer. I think it's around 5.8 products per customer. And we have a focus to increase that to 8 products per customers over the next few years. So I hope that helps answer the question.

Your next question comes from [ Tim Hall ]. Okay. So the next question is from [ Tim Hall ]. And the question is can you please elaborate on the $20 million drop in deferred revenue over the last 6 months? Is it purely license fees that will enable a $40 million recovery in the second half? Or is there something else?

Thanks, Tim. The deferred revenue is covered in the slide on the bottom of Page 7, Slide 14. The deferred revenue drop, I can't look to see the $20 million you referred to. But if I look at the slide there, you can see full year '18 at $137 million, full year '19 at $148 million, full year '20 at $144 million and our forecast of full year up 10% to 15%, that's between $159 million and $165 million. Just to recap what I said during the presentation last half, so at the half FY '20, it was at the height of COVID, we did provide some payment terms to customers. And they were largely large enterprise customers who had long implementation time. So they want to pay progressively. Now all those projects or moves to SaaS, they're on track. They're locked in. They're contracted. So we've got significant receivables and payments that will be made to us in half 2 that are locked in. And that's why the deferred revenue forecast will be up 10% to 15% over the full year.

Just to add to that. Sorry, Bernadette, I'll just add to Ed's comment. It also reflects the fact that the majority of our anniversaries with customers are in the second half. So we do see that the increase in deferred revenue does increase by more in the second half. And then it reduces in the first half as we draw down that revenue and recognize it. So it is cyclical. And we do see it increase more in the second half.

The next question is from [ Bruce Carmichael ]. And the question is what are the biggest risks to your growth goal of doubling in size in 5 years?

Thanks, Bruce. Good question. Execution, so it's not the strategy, not our platforms for growth. It really comes down to us executing well, continuing to service our customers, given them compelling experience, scaling our global SaaS platform. We now have 576 customers, then we'll get to 600, 700, 800. We always reach these sort of hurdles. But we've got a smart, innovative, creative team, who always solves the problems and continues to execute well. Thanks for your question, Bruce.

Your next question comes from [ Lachlan Bergersen ]. And the question is thanks for the great presentation. Could you elaborate on the reduction in employee costs of $11 million? And what caused this?

Thanks, [ Lachlan ]. Yes, a question we received in kind over the last little bit as well. Half of it is caused by R&D capitalization. The other half is that rebalancing of headcount that we did in half 2 last year away from on-premise, away from supporting on-premise or the legacy businesses and to SaaS and DXP. And we did get some cost efficiencies there. And that's what you're seeing in half 1. But as I said, we'll continue to invest in new growth areas, in R&D, in SaaS, in DXP. And that's why you'll see total expenses broadly in line with last year over the full year. Thanks for your question, [ Lachlan ].

There are no further questions at this time. I'd now like to hand the conference back to today's presenter. Please continue.

Thanks, Bernadette. Finally, I'd like to thank Stuart. Thanks, Paul. Thanks, team, at TechOne, whose passion, commitment, creativity and innovation. We take on the world's biggest and scariest ERP providers. And we beat them here in a homegrown Australian company. Without them, we wouldn't be able to deliver it. Thanks also for shareholders for your continuing support, and thanks for your time today and the presentation. Thank you, everyone. Thanks, Bernadette.