Technology One Limited (TNE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TechnologyOne Full Year Results Roadshow. For this presentation, Edward Chung, Chief Executive Officer; Stuart MacDonald, Chief Operating Officer; and Paul Jobbins, Chief Financial Officer, are on the call in Brisbane. [Operator Instructions] I would now like to hand the conference over to your host today, Mr. Edward Chung. Thank you. Please go ahead.

Thanks, Harmony. Good morning, Stuart. Good morning, Paul. Good morning, everyone, who are online. Thanks for joining us today for the TechnologyOne 2021 full year results presentation. These materials were lodged with the ASX this morning. Let's jump straight in, and I'll start with the highlights. When you think about TechOne's customers and target markets, local governments, universities, [ tapes ], government departments, hospitals, they're hugely complex organizations and they use and rely on TechOne's Global SaaS ERP to run their business. We've got now 15, with the recent acquisition of Scientia and hundreds of modules. So when you add them all up, there's over 300 modules that we provide out to the markets we serve. It's a very, very broad and deep ERP. It provides mission-critical software for those organizations to run them, to automate them, to streamline their processes and really make life easy for these complex organizations. Secondarily, our Global SaaS ERP is available on any device, anytime, anywhere around the world. And it's just -- it couldn't have been better suited for situations like COVID, and as we come out of COVID, remote working or hybrid working in the office and at home. When you put that together, it's allowing our customers in those markets to innovate with greater speed, greater agility and face those challenges ahead that we all face. Our customers can then just leverage our apps to streamline their business, automate it and make life easier for them because we take care of all the technology. And when you put [ that ], there is continuing strong demand for TechOne's Global SaaS ERP. If we turn to the next slide, the key metric for our business is SaaS annual recurring revenue or SaaS ARR growth, and this organic SaaS growth is powering our business. We delivered SaaS ARR of $192.3 million, and that's up 43%, all organically on the prior comparative period. We added about 100 SaaS customers during the year. You can see there that we ended with 637 large enterprise-scale SaaS customers. These are customers with thousands and tens of thousands of users. And with our fast-growing SaaS business, we're on track to hit our target of $500-plus million worth of ARR by FY '26. We ended the year with, you can see on the slide there, $257.5 million in total ARR. So that's an additional $242.5 million of ARR by FY '26. And we have a very clear runway and a line of sight and are confident that we can achieve this. We delivered our 12th consecutive year of record profits with profit up 19% -- profit before tax up 19% to $97.8 million, and that's at the top end of guidance that we set at the half year. As that SaaS continues to drive and power our business, the outlook for us for FY '22 is strong, and I'll get into that in a bit more detail later. I'll turn to the dividend slide now at the bottom of Page 5. There's no doubt we had a great year, and we remain confident on our outlook and confident on the outlook for FY '22 in particular. As a result, the full year dividend is $0.1391 per share. You can see that on the slide there, up 8%. And when you look back over the last 10 years, that's compound growth in dividend of 12%. I just want to go through a couple of key highlights and milestones that we've achieved through the year. So in August, late August, we announced the end of On-Premise by 2024 for our On-Premise customers. It's a watershed moment. It's a key milestone for TechOne and it gives our remaining On-Premise customers ample time to move from On-Premise to SaaS. And when you think about a company -- when you think about TechOne, we've been hugely successful for the last 34 years, and it was an on-premise license fee business. And we've completely reinvented ourselves, completely reinvented our business, our systems, our processes, our culture, our people, our structures and our commissions policies, absolutely everything. And we've delivered a Global SaaS ERP that's massively scalable. It's a single instance Global SaaS ERP. And to be honest, I can't think of many companies in the world that have been able to achieve what we have. The move from On-Premise to SaaS for our customers is seamless. It's simple. We've architected it in such a way, it's the same software, and they can move in weeks, not years, like people using our competitors' products, you think of them SAP, Oracle, INFOR. And by transitioning to SaaS, our On-Premise customers will unlock all the benefits that our SaaS customers get. And there's plenty of them, but I'll just call out 2 or 3. One, they get defense in-depth security built in. We have the highest levels of cybersecurity of any SaaS provider in the world. All of our products and modules are available to the customers. It's frictionless. They can use them. They can try before they buy. It's all available, and they can take those on at any time. And on SaaS, our customers have reported to us, they save 30-plus percent on their total cost of ownership. Now customers have then moved to SaaS, they can easily take our next-generation product, Ci Anywhere, and then they can take advantage of exciting new technology like artificial intelligence, which is built into DXP, and I'll talk about that a bit later. All right. Turning to the next slide. Our future state business will grow at 15-plus percent per annum, and I'm going to take a few moments to explain this. Today, our business is made up of 2 businesses, if you like: Our legacy license fee business, which we're purposely reducing over time; and -- but that's not a true reflection of our underlying business, which is our SaaS and continuing business, and I'm going to get into that now. So when our license fee business is totally wound down as planned, you can see that the SaaS and continuing business will coalesce and become our total revenue, and that will grow at 15% per annum. So if you look at that graph there, you can see today's total revenue, that's in the block -- black dotted line. For FY '21, that was total revenue of $311 million and included in that is $18 million of our legacy license business. Have a look at those orange bars if you like, that legacy license business was circa $75 million in FY '18, then came down as planned to $43 million, again, as planned to '20 to '18. And over the next few years, it will be gone. And this reduction in license fees and our license fee business hits our P&L straightaway. It creates a headwind. So you can see this year, we had an immediate impact in FY '21 compared to FY '20 of $10 million, that was a headwind that we had planned for. But then you can see also in the blue line there, our revenue from SaaS and continuing business, and it's up 9%. And this business, it's high-quality recurring revenue, but the revenue is recognized ratably over time. So it has very little impact on this year's business. So I can give you -- if I can sort of sum that up, a contract which was previously a legacy license deal, that $10 million would have been a one-off hit -- a one-off gain if you like to the P&L. That's now converted to $2 million of annual recurring revenue, which is high-quality. And with our 99-plus percent retention, you can see that's significantly more valuable to TechOne. So what I wanted to reiterate is that our SaaS and continuing business will become -- it will coalesce and will become our total revenue and will grow at 15-plus percent per annum when license fees have wound down as planned. I'd like to now get a bit deeper into the results. Let's go to the results summary, please. You can see at the bottom of this slide here, these SaaS ARR grew 43%, and that's the main metric. That's what's powering our business. If I move up to profit before tax, and that resulted in our profit before tax of $97.8 million, and that was at the top end of guidance. Starting at the top then, you can see that revenue from SaaS and continuing business is up 9%. And that was -- I explained that in the previous slide. Similar -- the revenue from legacy license business, it was circa $75 million back in FY '18, and we're driving that business down aggressively and driving up the revenue from our SaaS in continuing business. Our total expenses, they were in line with our expectations. So we're down slightly, I'll call it [ line ] more, but not to the detriment of R&D. We had strong investment in R&D for future growth, up 13%. I'll talk about that a bit later as well. And then 2 more other sort of notes here. The cash flow generation was very strong, met our expectations. And I'll get into that in a bit more detail. And just a final note. The profit after tax is up 15%. And that was because of an increased tax rate in the year FY '21 due to some reduced R&D tax benefits. But when we look forward going into FY '22 with the updated R&D tax regime, we expect the effective tax rate to return to previous levels in FY '22. Okay. Looking at our margin, you can see there that the profit margin before tax for FY '21 was 31%. That's up on 28% in the prior year. And it's really the strong margin expansion is driven by the significant economies of scale we are getting from our single instance Global SaaS ERP. We're more efficient in all parts of our business, in terms of technology, but also in terms of overhead as all efficiencies from focusing on SaaS flow through all parts of our business. Similar to what we said at the half year, in FY '20, in the second half of FY '20, we rebalanced headcount from our On-Premise business to growth areas like SaaS and to DXP. And that's flowing through into FY '21. And we maintained our COVID-inspired remote implementations. All implementations or most implementations are done remotely now in remote digital user groups. So I just wanted to reiterate that the higher margin and lower expenses, it's coming from the scale that we're getting from our SaaS platform. And as we continue to win more and more SaaS business and our SaaS business scales globally, you'll see that margin continue to improve to 35-plus percent in the next few years. And if you've been following TechOne for a while, when we get there, we'll just set the bar higher again and we'll continue to drive margin growth and margin expansion in our business. Just reiterating that while expenses were in line for R&D, but it wasn't to the detriment of R&D with R&D investment up 13%. And I'll get into that in a bit more detail later but -- we use it to extend the functionality of our Global SaaS ERP, new products, new modules, but also invested in some really exciting new technologies such as local government DXP. I'll get into that in the next section. We'll continue to double in size every 5 years, and I'll jump into the balance sheet there. So on the bottom of the page, Page 17, you can see the balance sheet. We continue to have a strong balance sheet with cash and equivalents of $142.9 million. That's up 14% and after the initial payment for Scientia of $11.6 million. We continue to have no debt, and I just wanted to call out a few items here. You can see there that our trade and other receivables was up, and that's a positive, and it related to many deals closing late in the year. And we've had -- continue to have strong collections early in this year. You can see contract assets there. Contract assets are related to extended payment terms, typically for customers with long consulting implementations or term licenses for customers On-Premise. And those term licenses, they're not perpetual licenses. They're higher quality because, again, they're recurring revenue and they're getting our customers ready for SaaS. And when you think about the end of On-Premise announcement we've made, end of On-Premise by 2024, it marries the 2 strategies together. One is that we move our customers to SaaS and 2 is when we move our customers off -- that one-off revenue to recurring revenue. And if I sum up these contract assets, they'll decline over time as we move all of our customers to Software-as-a-Service. The other important note there is deferred revenue. Deferred revenue represents the amounts that customers pay us -- they prepay us for SaaS annually in advance. And that number has grown 11%, and you should see -- continue to see that number to grow in line with SaaS growth. All right. Might turn our attention to cash flow now. You can see cash flow generation of $63.9 million, that's up 12%. And that's 88% of net profit after tax, which was $72.7 million. And that slightly beat our expectations that we set at the half year of 80% of net profit after tax. It's important to note there that at the half, cash flow generation was negative $3 million. And this is going to occur and reoccur in future years because the majority of our customers have their anniversary dates and therefore, cash inflow in the second half of our financial year. And when you look at the cash flow, it was even more special considering that FY '20 had a bumper start to the year of circa $12 million from large license deals that were closed in FY '19. That's a similar message that we presented at the half. As I've said previously, we continue our long history of strong cash flow generation and we expect that to progressively grow from where it is today to match net profit after tax by FY '24. We'll turn to the segments now, that's at the bottom of the page there. You can see that we break our business up into 3 operating segments on the left: We have our Software segment driven by strong SaaS growth; our Consulting segment really driven by improved execution, margin and delivery for our customers; and then we have the Corporate segment, which really is getting royalties from both the software and consulting segments. If you look at the geographic segment there, you can see that U.K. delivered a profit of $1.6 million, and that's up from a breakeven last year, and I'll get into that in a lot more detail in the U.K. slide. If we can turn to the results analysis and key metrics, I don't -- I won't propose to go through any of this. Important note is that TechOne has one of the highest return on equities of any company in Australia. And when we adjust it for net cash above required working capital, it's even higher at 60-plus percent. I now want to turn to certain significant achievements through the year. Just to reiterate, there's the 14 products we have before the acquisition of Scientia, and we're one of only a few companies globally that has such a big footprint. It's so broad and so deep. As I said, each one of those products can stand on its own, has 20 to 30 modules. And when you put it together, it's a very compelling proposition. We provide mission-critical software which runs, automates and streamlines the organizations that we serve. They're deeply integrated out of the box. They compete on a best-of-breed basis as well as coming together for a total ERP. There's a common platform, a common user interface. And it's this single interface that's -- sorry, single integrated experience that streamlines the business for our customers. Thanks, Paul. We'll turn to the vertical markets now. You can see that, that solution is really resonating with the markets we serve, and all verticals performed strongly. The significant we call it white space or opportunity in the markets we serve and in any single market, we don't exceed 15% of the total addressable market in each sector. And our market penetration -- I'm sorry -- and if you look at the graph there, you can see that local government was up -- it's very small now, 15%; education, up 17%; government, up 22%. Thought I might just pause for a second. Stuart, can you add some color and some examples about how we achieved these results through the year?

Sure. Thanks, Ed. If you look at the impressive logos on the right, they validate the company's strategy and strength of our vertical Global ERP solution. Starting with Charles Sturt. They came to market for a small module. Once we've finalized the sales engagement, we had sold them a full OneEdu solution. Again, a new logo for us, Charles Darwin Uni, came to market to replace their Oracle and other disparate products. Again, we are able to position our OneEdu solution. It should be noted that One Education incorporates our award-winning student management financials, HRP, EAM, just to name a few. The Uni of Tasmania was a partner of ours for 12 years. We've been talking to them for some time about migrating to our SaaS platform with the announcement of the on-prem -- end of On-Prem, sorry. They accelerated the decision-making. It should be highlighted that each of these wins mentioned above are over $1 million in ARR. Onto the successful local government wins. Gympie Regional Council was a full one council win to replace Civica. This started with an unsolicited proposal less than 12 months ago. A partner of ours for 15 years, Logan City Council made a move to the SaaS platform as part of their overall modernization program. In the U.K., there are 3 local council sizes: a district council, a unitary and a borough/city council. We have a strong position in the district space with a very high win rate. With this success, we responded to Blackpool Council to see if we could compete at the unitary level. I'm proud to announce that we are awarded this project and since then have awarded another unitary. This opens up many new and exciting opportunities for us in the U.K. These are only a few of the impressive successes we have had in the half, and it shows our strategy and our vertical ERP SaaS solution is defining the sector we operate in.

Right. Thanks, Stuart. I'll turn to the next slide there. You can see we continued our very strong customer retention across all markets. A slight blip this year, but nothing to be concerned about. We've also added, for the very first time, a new metric. It's known in the SaaS world, and it's called net revenue retention. And the way it's calculated is you grab your opening ARR, add the new ARR sold to existing customers, remove any lost ARR from existing customers and divide it again by opening ARR, and that's how you get the metric of net revenue retention. So in short, this category includes customers moving from On-Premise to SaaS all customers who might take new products, new modules, new users, extensions, et cetera. The only thing it doesn't include is our new logo revenue. It's a quality measure. And anything over 110% is seen as a good outcome. And so you can see that we've delivered strong expansion performance of 112%. It comes from, as I explained before, our Global SaaS ERP. It is very broad. It's mission-critical. There's a lot of functionality for our customers to take. It's a significant opportunity in our existing customer base. And it's frictionless. All customers on SaaS can see all modules, all products, all extensions, everything is available to them. We call it open licensing. It's frictionless. And they can use it, they can configure it themselves. They don't have to ask for purchase orders. They don't need to have any software downloaded. It's all available all the time for our customers. And as a result, it's becoming more and more predictable, it's noncompetitive. It's transactional in nature and is a low cost of selling to existing customers and we will continue to drive what we call product penetration into our existing customer base. Our SaaS business is growing really strongly. So just to mention it again, SaaS ARR is growing at 43%, all organically. And it's also because it's so compelling. We've got one global code line, which makes us hugely efficient. We can invest tens of millions of dollars each year, and every customer gets the benefit of that. There's massive economies of scale. The customers get 2 releases automatically each year with new features, new functions. We've got 8 active data centers. It is the highest level of security. There's vast migration. They save 30-plus percent on the total cost of ownership, and they can take additional products quickly. It really is making life simple for our customers. Next slide, please, Paul. So you can see there that moving our customers from On-Premise to SaaS, there's an additional $145 million just from that, we call it one platform for growth. And we've got a very clear runway. We've announced the end of On-Premise. We've got a clear line of sight and we're working with all of our remaining on-premise customers to move them to SaaS. So our SaaS business continues to grow very strongly. The quality of the revenue stream is extremely high because contractually, it's a recurring contractual nature and we have a very low churn rate. Today, ARR is now 90%. So 90% of our revenue is recurring, which positions us really strongly. It's locked in for the next financial year. So with the fast-growing SaaS business with a hugely compelling value proposition, combined with the announcement of the end of On-Premise by 2024, we are confident we are on track to see total ARR of $500-plus million by FY '26. Now I want to spend a couple of moments on R&D. We continued our significant investments in R&D. You can see the R&D investment of $77 million. That's 24% of revenue and up 13%. It was significantly higher than our benchmark of 8%, but we took the opportunity to invest for the future. And we did it all within our total cost envelope, total cost loan ball. We do this to maintain our leadership in innovation, to really focus on not the here and now, but the next 5 to 10 years. And it's focused on a couple of areas. It's focused on adding new features, new functions, new capabilities to our Global SaaS ERP, with the 2 releases every year in 2021. We delivered 308 new product enhancements, modules, extensions across the enterprise suite. And 2022 is in development now, finishes around Christmas time and is launched in February next year. Going forward, probably this year, we expect R&D to be around 10%. But going forward over the next few years, R&D growth, I should say, will revert to 8% over the next few years. Now I just want to take a few moments to give you an update on DXP. It's so exciting and it's game-changing. We just got to remember, DXP, it's a long-term strategy. It's not a short-term thing. We're going to make significant investments in DXP for future growth, just like we did in our SaaS platform 10 years ago. And if you think about that SaaS platform, over the first few years, we made losses, but we knew it was the right thing to do strategically. And if you look forward now, it's powering our growth and will continue to power our growth 10 years on. DXP is going to be similar. We're making long-term investments that will power our growth in 5 to 10 years' time. TechOne is very strong in supporting our customers in the back office, the hundreds, the thousands of users doing month end processing, processing rates, admitting students. You can picture it, right? We're now reaching into our customers and helping them service their stakeholders, their customers, their rate payers, their students. So we go from the back office with thousands, sometimes tens of thousands of users to the front office with hundreds of thousands, sometimes millions of users. It's really going to differentiate us, make us even more sticky, provide even more mission-critical software for our customers. And going forward, in the future, it will be a significant product and a revenue stream for us. And the customer feedback has been amazing. LG DXP, we've got our first early adopters working on it. Our first customer went live on a couple of months ago. You see the feedback there from [indiscernible]. It says that my feedback is nothing but great. I see there being some thought gone into making our work easier for both customers and for ourselves and our customers, super excited, can't wait. And the next couple of early adopters are about to go live imminently. Student DXP, another really exciting project. It's in the research phase now. And I'll update that more in future presentations. Turning to our defense and debt security. This year, we elevated all of our federal customers to a new security level, and that's IRA Protected, the only Global SaaS ERP provider to be able to provide that. We continue to invest millions of dollars to set the bar even higher. We all know that cybersecurity is a hot topic in all boardrooms. It just isn't feasible for anyone to be on-premise and to be able to keep up with the requirements to manage cybersecurity. You can only do that if you move to a SaaS first strategy. We might move to the U.K. next. Thanks, Paul. We see significant upside in the U.K. It's 3 -- it might even be bigger. It's at least 3x the size of the APAC market. And so we continued our significant investments for future growth. As I said at the half year, we're just completing our customer first or remediation phase and our focus is now on growth. If you look down the left-hand column there in the FY '21 achievements, we delivered a profit of $1.6 million versus breakeven last year. It now has ARR of $9 million, up 20% on this time last year. We closed 8 new logos, 7 in local government, 1 in higher education. We predicted that at the beginning of the year. And as Stuart said, we've closed through this year, 2 unitaries, which pushes us up to the next tier of larger councils in the U.K. And they've probably double the size in ARR in the districts that we've been so successful in. When we look forward, the pipeline for FY '22 is strong. We're confident. U.K. student management and ARP regionalizations are on track for completion. For student management in particular, we finished the last R&D deliverable in August this year. We're now into the third phase implementation. It's looking and feeling good. We're starting to now bid for student management deals in the U.K. We appointed a new Executive Vice President for the U.K., Leo. He comes with a proven track record and he's really focused on growth in the business. And of course, you would have seen recently, we acquired Scientia that provides us that additional brand recognition, the customers that I have in the U.K., in particular, and the scale. The next slide is about Scientia.So in September, TechOne acquired Scientia Resource Management. It's a U.K.-headquartered company, and the impact on FY '21 was negligible. It was insignificant. The acquisition is really focused on that strategic focus of LS to build the deepest functionality for the markets we serve. And when you think about their product, which is scheduling and timetabling it's mission-critical software that all higher education universities need to run their business. They've got an enviable customer list, 150 to 200 customers. We're going to tap that customer list, obviously sell our own products into them. It's the first international acquisition that we've ever made, and it demonstrates our commitment to both higher education and our commitment to the U.K. market. We're excited about the opportunities. And guess what, if you're thinking about student DXP, one of the most important things for a student is obviously their timetable. And this is a very important part for the DXP strategy as well. Okay. I wanted to spend a few moments talking about our people, our culture, our team. TechOne's people solve incredibly complex business problems for our customers. It's them. they've delivered this massively broad and deep Global SaaS ERP. We compete and win against some of the world's largest multinational software companies. We know them, SAP and Oracle. They've got tens of thousands, probably hundreds of thousands of R&D staff, and we're only a fraction of their size. And when -- we're independently recognize and as employer of choice. And we're all reading about the market pressures related to employment. And at TechOne, we continue our investments in our team. It's in a holistic and in an integrated way. We provide our leaders with healthy budgets for remuneration. But equally as important, we've focused our investment on the team and our culture. We focus on our team members and their careers with career plans. We continued our investments in a whole lot of programs and cultural events. You see there, One Talks, Buddy Programs, Grads, Hack Days, continuous eNPS surveys, Marvel Awards, regional days. The list goes on. One thing I wanted to call out is during the year, we were fortunate enough to be able to invest in our company kick off, that's what CKO is there. And we brought all stuff in from all regions to reconnect with our vision, our purpose, our strategies and from their leaders. It was quite amazing to be part of. And our people -- they continue to amaze me with their strong culture of creativity and innovation. And these fantastic results you see here is really -- couldn't happen without them. It's a testament to the leaders of TechOne and our people that have really delivered those results. Now if I fast go to the next slide. Sorry, Paul. The TechOne foundation, it's also another critical initiative to retain and attract staff. The TechOne Foundation defines who we are, defines our values, our culture. And we believe through the youth week -- through investing in the youth, we can have the biggest impact on the future. And like everything in Tech One, we set ambitious goals. And our ambitious goal is to lift 500,000 children and their families out of poverty. There's also a nice quote there. I won't read it all out, but that's from a Tech One graduate and it really just resonates with us as a mechanism also to attract and retain the next generation of Tech Oners. To wrap up this part of the presentation, we delivered record profits, record SaaS ARR, record revenues. SaaS ARR, our key metric, is $192.3 million. That's up 43% totally organically. Our total ARR was up 16% to $257.5 million. Profit before tax, up 19% to $97.8 million. We delivered margin improvement. U.K. is coming out of its customer first phase, really poised for growth, profit up $1.6 million. Our consulting continued to improve its delivery and execution, up 14% to $15.6 million. And we have a very strong balance sheet, cash and cash equivalents and cash flow generation. I just go now to the last section, the outlook for next year. So when we're looking forward to FY '22, the markets we serve are highly resilient. We provide that significant value to our customers with the deepest functionality. It's mission-critical software, it runs, it streamlines. It automates their business processes. With our Global SaaS ERP, we take care of all the technology for them. We've got all the benefits that I've discussed through the presentation and allows our customers to innovate with speed and agility, really make life simple for them. SaaS, it's creating significant opportunity for us. We've got a very strong pipeline for FY '22. We see continuing strong growth, and we'll provide much more detail in the AGM and with our first half results. We're on track to hit $500 million plus ARR by FY '26. Just thought I might pause there now and say thanks, everyone, for listening to the presentation. I'll hand over to Harmony. Harmony can you introduce the Q&A session, please.

[Operator Instructions] Your first phone question comes from Nick Harris from Morgans.

A couple of questions from me. Just the first one. You added 61 SaaS customers in the half. I was just wondering if you could give us a bit of a split between net new customers versus on-premise customers flipped?

We don't disclose the numbers that way, Nick. But what we have done for the first time is disclose net revenue retention, and that's all revenue from existing customers. And I think you can effectively back solve that now because we've said existing customers grew 12%, total ARR grew 16%. And I think that's about $8 million and -- Nick, in new logo revenue. The rest is from existing customers, either flipping the SaaS or taking new products, modules, extensions, et cetera.

And just, obviously, you've said you'll end the on-premise solutions by 2024, which is a massive milestone. Just trying to understand for customers, does that mean you no longer support it and they could still run it offline? Or do they actually have to have to migrate or turn it off?

Yes. Probably the first thing I'd say is we're very loyal to our customers, Nick, and we won't leave them hanging. We've obviously joined a line in the sand, and we'll work with all of our customers to get them to SaaS as soon as they're ready. If there are any customers left after '24, which I doubt there will be many, but there might still be 5%, if it's On-Premise, I can continue using the software, but they'll be unsupported because we won't support On-Premise anymore. But so long as customers and our team are working together and putting a road map together when they're moving to SaaS, then I'm sure we'll continue to support them through that journey.

Got it. That makes sense. And just the Scientia acquisition, and I've probably got a few more, but I'll stop and let other people have a go. Just the Scientia acquisition, are you able to just provide any sort of commentary around the P&L on an annualized basis? And be just this sort of the source code and the software? Are you rewriting the whole thing to put into the T&E stack or just a little bit on how you'll integrate that?

Yes. Okay. So from a P&L point of view, we continue our way, Nick. We're not buying businesses for huge profit growth or ARR growth. It really is a strategic piece of software for us in the higher education product. It's mission-critical. Every university and tech requires this type of software to schedule their rooms, their students, their teachers in an efficient way. Also, it fits really neatly with 2 of our strategies: one, our DXP strategy because we'll be able to deliver that timetable in a really user-friendly way to the thousands of students -- tens of thousands of students and universities; and our U.K. strategy, giving us the scale of the brand recognition in the U.K. We'll provide more detail on P&L and numbers when we provide the detailed guidance that we prepare in the next couple of releases. And what was the second part of your question, Nick? Rewriting the code? Sorry, yes. Yes, we have a way. We have a method. We have a technique in -- when we buy companies. We maintain their code, maintain the customers, provide [ bug ] pieces, et cetera, but we will definitely rewrite their code into our single instance Global SaaS ERP to make it hugely efficient, to have the same look and feel, all those benefits I talked about like every other product. And generally, that takes about 2 or 3 years, Nick. So if you think about the acquisitions we made in 2015, it was spatial, e-planning and strategic asset management, yes, those were rewritten over 2, 3 years, Nick. So we'll continue that method.

Your next question comes from Chris Savage from Bell Potter.

First question, Ed, kind of a general question. You announced the end of life of On-Premise at a few months ago around midyear. Have you seen a change in customer behavior since then? Like have the [ puts and paths ] accelerated in any way?

Chris, it's Ed here. Yes, we announced in late August. So it was only -- yes, it was a couple of months ago. I'd say the majority of our customers are nearly all said, yes, about time. Everyone has a strategy to move from On-Premise to SaaS. We don't see in the market any tenders, any requirements for On-Premise at all. In fact, it's quite unusual. It would be what I'm looking at you kind of think of the one that's been coming out. Does that answer the first part of your question, Chris?

I was more just interested, has this prompted some of the customers who are perhaps a bit tardy in looking to switch? Has that sort of got out of the gates on a bit?

Yes. I might hand it Stuart for that.

Yes. They definitely weren't ready with budgets in the budget cycle. So they've had to go back mainly the councils to go through and get the budget cycle process. So we're working with them to make sure that they can get in their very managed and controlled cycles that they need to be very forward with. So in that regard, they've been probably a little bit caught out from a philosophy and from a need and from an IT standpoint, there's absolutely no issue at all. And we're working with all those councils to manage that.

It's probably important to note, Chris, we've given plenty of notice. FY '24 will work with all of our customers. We speak to them all to make sure that they move there in due course.

My second question is probably a bit more for [ Paul, though ]. The expense growth has been pretty anemic the last few years, sort of low single-digit or even negative like last year. Are we getting to the point where we're going to see a step-up?

We -- Chris, we -- we'll give more guidance obviously at the half year and a little bit of guidance with the AGM. We -- you're aware that we have a headwind of the increasing amortization as we amortize the development of R&D. I mean, I'm not imagining an enormous step-up in costs. We will continue to manage our overall investments and ensure that we can continue to increase our investment in R&D within the parameters that Ed mentioned, maybe at 10% this financial year, but we're not expecting an enormous increase in costs. We will, as I said, give more guidance at the half. But I think you also understand what we talked to with our margin expansion, that we've also said that we expect our PBT margin to be growing to 35% plus in the next few years, and that will happen steadily over that time. So I think that's -- from that broad guidance, without giving guidance, you can work out what we think costs might do.

Chris, I might add that as we move to a full SaaS business, we'll get greater efficiencies in our business, number one. And number two, we continue to drive significant investments in our SaaS platform to deliver higher security, high performance, but also margin expansion for TechOne. And just to reiterate, that's what's really driving us in the next few years.

And last question, probably back to you, Ed. The payout ratio continues to fall and the cash balance continues to increase. Are you sensing or flagging more acquisitions in the next year or 2?

I think we're just, firstly, being conservative, Chris. We look at all things. We look at dividends, special dividends, acquisitions. And I just want to leave the message that we're responsible with the money. We won't waste it. We have very high hurdles. If it made strategic sense, like acquisition, then yes, we'll jump in an acquisition, but we're very cautious when it comes to acquisitions.

Your next question comes from Mitch Sonogan from Macquarie.

Yes, just a quick one. First up, just in FY '21 for the customers that you did slip over to SaaS, are you able to give us any indication of what the multiplier uplift was from each of those annual license fee revenues transition to SaaS?

It's around our standard. Mitch, our standard is 1.25x their annual license fees when they're On-Premise. And we -- I don't have -- we deliver that at that standard rate.

Yes, just a quick one, moving on to Scientia. You mentioned there wasn't much revenue and PBT contribution given the timing of the acquisition, but was there any ARR contribution? I guess I'm just wondering, the last public accounts in the U.K. had them doing sort of over $10 million of revenue. Just trying to understand how that sits today. There's obviously a bit of commentary in the financial statements, but yes, came to understand that.

If you look at the results we've delivered today, Chris, SaaS ARR growth of 43%, total ARR of 16%, it does not -- it's all organic, does not include anything from Scientia. And when we obviously do our next results briefing, we will provide more information at that time. So everything you see today has been organic growth.

Excellent. And just on that, you mentioned there's some hurdles for the earn-out of FY '23. Is it possible to talk about it in any more detail or would that be given in the next result?

Yes, that will be given in the next results. We have profit and ARR hurdles, and that's similar to every other acquisition that we've done, Mitch.

Thanks, Ed. And just another one, just on the R&D spend. Obviously, it continues to tick up. And you've mentioned it will be up around 10% year-on-year before going back to your target. Can you maybe just talk through -- have you increased the headcount through the organization significantly? Has this sort of been ongoing reallocation of resources? Just trying to understand that because the expense line for employee costs through P&L continues to come down, so just trying to understand that dynamic.

Yes. The macro headcount number remains about the same, Chris. We made those balancing in half 2 FY '20. And we obviously want people to continue to grow with the business and move from supporting on-premise to SaaS, and that's always our way. But last year, there was a few people that didn't want to make that move. We offered it to them. So we rebalanced those positions out and moved to SaaS. We continue to invest strongly in R&D, R&D headcount is growing, but within the total cost envelope of TechOne is really investing for the future, future modules and things like DXP and continue to make the SaaS platform scale.

Yes. And just final one for me. Just looking at the higher education. There's a good number of wins in higher education here. Maybe just talk on the competitive landscape, how you're seeing it here in Australia? But you're mainly competing against some tenders. And I guess, has there been any particular competitors that are losing more share than others?

Yes. I'll hand over to Stuart in a second. I'll just reiterate, if I remember saying here in the half saying that the numbers for the half for education weren't very strong in terms of growth, but we had a huge runway in half 2, and we delivered on that -- on that promise. But Stuart, can you talk a bit about the competitive landscape?

Sure. First, I'll just -- I couldn't be more proud of the work and the results we did in the education space. It was a huge success for us all. As an ERP, there really isn't a competitor. So it's really dealing with point solutions. So obviously, you've got an Oracle from financials, but we don't see them playing very much anymore in the space. On the student management side, we really haven't lost a deal in student management at scale for quite some time. Workday came in with some noise about 3, 4 years ago in the space, but has now left the market and not really supporting the student management side. On the HRP side, it is your traditional players that we would see, but we don't see anybody offering the depth and breadth of what we offer as a verticalized ERP SaaS solution. And as a result, that's why you see the wins. So we'll always compete against point solutions and we do very well there, but if somebody is coming for an end-to-end solution, we're the only game. We're pretty excited about that, and that's why we got the results we did.

Your next question comes from Lucy Huang from Bank of America.

I just have 3 questions. So firstly, you've mentioned that post-FY '24 that you expect the business to grow about 15% plus. Just wondering what you're thinking around what will drive this growth? Is it going to come from existing customers taking on extra modules? Do you see that 15% being driven by new customer growth across Australia, U.K.? Just wanted to get your thoughts on what drives that number.

Lucy, it's Ed here. Lucy, it's the continuation of our clear strategy we have today. So it's probably going to be a little bit of all those, to be honest, Lucy. We obviously try to get new logos in the markets. We serve -- I should say, in Australia, we have a lot of logo penetration, but we've got lots of products and modules to sell them. We'll see new logo growth mainly come from the U.K. We'll continue to sell more and more products to our existing customers. We've just bought Scientia, a new product. I'm sure if we fast-forward to FY '24, there will be a couple more products that we've either built or acquired along the way. And so every time we enter a new region or enter or create a new product module extension, we're creating more total addressable market, if you like. And so that market will continue to grow, and we'll harvest that market in new logos in Australia and new logos in the U.K. and product penetration. And so it's effectively why we start disclosing net revenue retention because it's a key plank of ours. So it's going to be a little bit all of those, Lucy.

Wonderful. And then just secondly, you mentioned that you've got a first customer on a trial for DXP local government. So just wondering, have you guys put any thought as to any potential monetization of this product? And what's your thinking around that?

It's very early days, Lucy. But if I can tell you that when we worked with some of the customers and prospects in local government and higher education, they were spending millions of dollars per year each working with the likes of a Salesforce or some start-ups to try to handcraft that create a bespoke solution. And when they're using TechOne to power their whole enterprise, all the data is coming from TechOne. It just makes sense for us to extend and reach out to the front office, create more value for our customers, become stickier. And so we think there's a lot of value in it. That's where we're going, in short. And we think -- we sell property and rating today. It could be 1x property and rating. So we're talking hundreds of thousands, maybe even millions of dollars for a large council. It's very early days. We're testing the market, but we know that they're paying the likes of some start-ups and Salesforce that on millions of dollars a year to try to create what we've already been able to achieve in Phase 1 for local government. It's very exciting, Lucy. I think it will increase our total addressable market significantly in local government and higher education.

Yes. Understood. And then just one last one for me. I just noticed that churn ticked up slightly to 1.37% for this year. So just wondering if you can give us some color around what were the moving parts to that.

It's nothing to be concerned about. We're not concerned. And you see back in '11 and '12, it's sort of -- sometimes it ticks up, sometimes it doesn't. We did see through COVID, a couple of mergers, mergers of some not-for-profits, mergers of some banks, et cetera. And then there's the usual mergers of government departments. So nothing we're concerned about, just a slight blip for the year, Lucy.

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

Firstly, Ed, the success in the U.K. with 8 new logos, certainly a bit of a step up. Can you maybe just talk to how we should think about that from a win rate perspective on the RFPs that you did participate in? So that's the first one, to get a sort of sense for the cadence there. And then the $8 million of new revenue haven't sort of worked all the way through it, but just taking your comments earlier about backing out the existing customer contribution. If you could just give us a sense for maybe how that fell between the U.K. and Australia? And if you could just give us some examples in Australia without specifically talking to a number of logos, which I know you don't like to do, but just how you sort of think about where that's coming from in the Australia market and then what proportion was coming from the U.K.?

Yes. Thanks, Jules. You'll see that we reported total ARR in the U.K. of $9 million from $7.5 million. So it's up $1.5 million. That's all new logos to be honest. We do a fraction of just selling a few products and modules in the U.K. That will grow over time. And then in terms -- I think one part of your question was the win rates in the U.K., I might hand to Stuart. We already set up or we knew that there wasn't going to be much business that came to market in higher education at all during FY '21, and those predictions came true. And we said most of the activity will come from local government. Stuart, can you talk to us about the districts and unitaries and what you're seeing?

Yes. We definitely know our sweet spot with the districts in the U.K. Our win rate's easily over 65%. We know how to position. We know who we're taking out as well as we have a very clean model of the current incumbent and how we replace them. So we're doing very well there. And as I mentioned before, the unitaries, we're learning, but we're doing surprisingly well. And so that is growing, that pipeline is growing quite fast. But I would say our win rate is probably in the high 30s, low 40s, but it's better than we expected and we're learning very fast how to improve upon that.

Jules, there was many parts of your question. Can you just let us know if we've missed any or come back to ones that you would like us to...

That's helpful. And clearly, your -- maybe just in addition, just some of the examples of where you are seeing new logos in ANZ, because it's actually quite a reasonable number. I don't know, just some sort of flavor of maybe sectors or something that we can kind of put an opinion in the board around.

Yes, it might be for you, Stuart, some of those logos in higher end.

Yes. So in our core verticals of government, education and local government, when there's a new logo, we jump on it like mad because it's a rare opportunity that we can actually take advantage of it. So that's where you see the wins that we got this year, definitely from that space because we hyper-focused on it, but our traditional new logos come from the asset-intensive market from the health community service market. For us, that's a greenfield and we're building that out. But when there's an opportunity for a local council in Australia, we jump all over it because it's so important to us.

Yes. Excellent. And just lastly, Ed, from me, just the cash flow generation was good versus your guidance. Just wondered if you could make a comment just around the lease rebate, whether -- sorry, the rent rebate, I think you described it. You said that the company expected it to recur next year? And just if you can give us any color around how you think about cash flow generation as a percentage of NPAT or growth this year, how you see traction next year would be helpful.

Yes. I might start with your last question first. If you can think back to the half, we gave some -- to predict models, if [indiscernible] predictions of cash flow generation. So we predicted that we'd do 88% of NPAT this year -- 80% of NPAT this year, and you can probably draw a straight line between there and FY '24 where it will return to be in line with NPAT, Jules. And we are on track to deliver that guidance, if you like, that we gave back then. Paul, do you want to take the ball on the rent rebate and what to expect this year?

Jules, the rent rebate runs out in July. So it's -- we put the numbers in the notes in the financial statements. It's not -- it won't continue -- It's something that we negotiated when we negotiated the extension here at HQ 2 or 3 years ago. So we're able to take the benefit of it over these 12 to 18 months. So no, not recurring. And I agree with Ed's comments about the cash flow generation versus NPAT that will increase, toed to be in line with NPAT by FY '24 as the R&D amortization catches up to the amount of R&D, which is of the development that's capitalized.

Okay. And just to sort of be clear, you mean July next year in terms of the when that runs out.

'22. '22.

Your next question comes from Michael Aspinall from Jefferies.

I might just start with a few on revenue. Revenue in the continuing business ARR was up kind of much more than revenue recognized, which implies a bit was adding late in the year. And I think you mentioned something similar when talking through working capital. Can you just give us an idea of what the driver of customers being added later in the year was?

Yes. Yes. If you look at our customer base, Michael, local governments, governments, higher education, many of them have financial year-ends around June. And so it's quite interesting, they're either spinning up their budgets in June or waiting to a new financial year in July. So we see this phenomenon where a lot of our business gets done in June, July, August, September. It's been the way for TechOne for many, many years. And that's why, like you said, the amount of deals are done in Q3, Q4. Obviously, we get the benefit of that in the next year. And from a cash flow point of view, it means that's where their anniversary dates fall and that's when we get a big sort of cash inflow from those customers. Does that make sense, Michael?

Yes, that makes sense. And you showed revenue from the continuing business was up 9% this year and kind of growing at 15% every year from here. Just wondering what's going to drive the uptick from, say, 9% to 15%.

Yes. Just to clarify, firstly, it will grow to 15-plus percent in FY '24. And it's really the headwinds that are coming off our license fee business. So if you can picture that slide, where it went from 75 down to 18 today. It will be progressively drive down as we end of on-premise to FY '24. And then as customers are buying more and more SaaS and not buying on-premise anymore, you'll see that grow. So it's the growth in SaaS and the reduction in on-premise license that will result in the SaaS and continuing business becoming our total revenue and growing at 15-plus percent per annum by about FY '24, Michael?

Okay. I think it wasn't the plus 9% excluding the change in initial license fees.

It was 9% when you exclude the initial license fees, that's right. Yes, so we still got a few years ahead. We think as those license fees come down progressively.

And did you mention before that the uplift from moving from on-prem to SaaS was 1.25?

Yes, yes. So if the customer is paying us, say, $100,000 for their On-Premise annual license fees, you add another $125,000 on top of that, so then that's the SaaS platform fee as they come to SaaS platform. If you look at that customer then the total, they will be paying us is $225,000 per annum in that example.

Okay. Cool. Got you. Just wanted to clarify that. And following on one from Mitch. You gave some context on kind of how you retain staff outside of remuneration, there's a very tight labor market in tech by all accounts. What should we expect on kind of the labor front from a pricing perspective? Other companies are kind of seeing double-digit rises in the next 12 months or so.

Yes. We've given our managers healthy budgets for any increases. It's not a number we disclose because some high performance in our business will earn more and lower performance will probably get a lower increase, but it's all done within the cost profiles we set. And again, we're just driving efficiencies in our business in the SaaS platform, for example, and that fuels or funds us to make investments in R&D and in our people. And we're confident that we've addressed in a holistic way, our team and our people. It's not just remuneration. It really is about careers and all of the cultural events and the foundation. So we look at it as a complete package. And we serve our staff, and we seem to be hitting the mark with them.

Okay. And then just a last one from me kind of on the U.K. It's been talked about a bit already. But if I thought forward to say, FY '26. Can you give us kind of a rough idea of how much of that $500 million ARR coming from the U.K.?

That's a good question. It's not something that we've thought about in that much detail yet or disclosed, I should say, Michael. We don't need U.K. to be contributing hugely achieve those numbers. When you look at the SaaS flips we have in Australia, product penetration, new products that we've acquired -- I'll put it this way, we've got many, many levers that we can pull with our customers to achieve that $500-plus million.

Okay. Sorry, I'll just take one more on that. I mean, is pricing a large component of that or a lever that you would pull? And have you pulled that much kind of in the past few years?

Yes, we haven't pulled any pricing levers. We have naturally in our recurring revenue contracts, CPI growth, but CPI has been very low for the last couple of years. And so on 2 fronts, we haven't seen pricing pressure to drive pricing down, but we haven't increased our prices either. So this is all just through selling customers moving to on-premise, selling them new modules, new products or, in fact, winning new logos that we don't have yet, Michael.

Your next question comes from Andrew Donlan from UBS.

Just one from me, sort of following on the last question. Just the net adds of the enterprise customers in the second half in [ 61 ] you kind of talked around the seasonality of the business, which makes sense. But I mean, just given that sort of ending on-premise sales support, how should we think about the pipeline? I mean, should it be that typical seasonality because it has been, I guess, around that 100 net adds for the last couple of years. I'm just wondering if it should look more like the second half in both halves or typical seasonality this year?

We're probably -- it's probably the first, Andrew. We expect that typical seasonality to continue. Announcing end of on-prem does give us a bit of a tailwind. It's a line in the sand. We have been working with the existing -- remaining on-premise customers to move to SaaS. As Stuart said, now they go into their budget cycles. And if you think about those types of government departments or local governments or higher eds, the budget cycles typically are June, July and August, September. So we think that seasonality will continue, Andrew.

[Operator Instruction] Your next question comes from Ross Barrows from Wilsons.

Some considerations around growth. I mean, there's a lot of confidence around the business and rightly so. It's a robust outlook. But can you perhaps share with us some of the things that we were watching closely over the coming year in terms of potential challenges. And perhaps focus on the controllables more than the, I guess, the uncontrollables and externalities.

Thanks, Ross. Thanks for your question. For us, it's all about execution. We've got a very clear runway with our customers. We're very close to our customers. So we are working with them closely. We have road maps of when they're going to move to Software as a Service and when they're going to come to tender and come to market for different products and modules. So we don't see the externalities per se going to have impact, because what we do is provide mission-critical software that is really streamlining the operations of a local government or a university. I remember sitting here probably this time last year, Stuart, when people were asking us about international students and would people -- do you see downside in higher education. But in fact, we only see upside for us because organizations are looking to save money to automate process, et cetera. Is there anything you'd add?

No, I'd only agree.

Yes. So Ross, we think mission-critical software, streamlining business, saving money, all the benefits customers get from SaaS. We just got to remain focused, keep close to our customers and execute for or with them.

Your next question comes from Nick Harris from Morgans.

I promised to come back with a couple more. So sort of better quickly the consulting side. I saw you've got a slide there talking about consulting moving more to a recurring. Could you elaborate on that? And then the second bit also on consulting was just with the move to end of on-premise. Should we expect consulting to grow or just the ease of migration means it stays broadly where it is?

Yes. Thanks, Nick. That's in the appendixes. We've got 2 parts to our consulting business. One, which is new projects. So if we win a new customer or a whole new or a couple of new products into existing customers, the new projects division implements that with our customers and for our customers. The second part is application managed services for existing customers. So think about a customer that's already gone through new projects and is live. They might hire us through application managed services to supplement their own system administrators or by AMS contracts, which is the recurring revenue contracts that you're talking about, to update workflows, write reports, do simple configuration changes. And so part of our strategy is not only to win new business and implement it, but to sell AMS contracts to help our customers extract the most value out of the software that they've acquired. And so that existing consulting, if you like, is a key part of our consulting strategy to sell those application managed service contracts to our customers. It's sticky. It's recurring revenue. It's sort of like ARR. It's not in our ARR number. But it's a great strategy and the team are executing well on that. Was there a second part to end of On-Prem? End of On-Premise is a little bit unrelated in respect because that's about just moving our customers to the Software-as-a-Service from On-Premise. That's frictionless for our customers. It's the same software, spanning weeks, not months. It doesn't need any consulting. But what the magic comes from once you're on the SaaS platform and all products and all modules are available, it's frictionless. They might then approach us to implement it for them, to buy new software, to buy new modules, and so SaaS platform just opens up frictionless sales for us, Nick. I think that comes to time. So how many -- I might just say a few words of thanks and then we might wrap up. It's been a fantastic year. None of this could be done without the passionate, talented, hard-working people at TechOne. Thanks to Stuart, thanks to Paul, thanks to the leadership team and all the staff and team members at TechOne. We couldn't do it without you. Look forward to doing it again in FY '22. Harmony, I might throw it over to you now to wrap up, please?

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