Technology One Limited (TNE) Earnings Call Transcript & Summary

Thank you very much. Good morning, Stuart. Good morning, Paul, and good morning, everyone down the video conference. Welcome to our half 1 2022 results briefing. The presentation materials were lodged today with the ASX, and these are the first results with our recent acquisition of Scientia. Scientia is a mission-critical timetabling and scheduling solution further evolves our already very deep education solution. And all information you see here today includes Scientia unless otherwise stated. You're going to see some really strong results today, something we're very proud of, and it's the culmination of many, many hard years and from our talented and innovative people to move us from a traditional on-premise license fee business to the very strong SaaS business you see here today. We've transformed this business not only once, but 4 times over the last 35 years for our customers. Now let's get into the results. Our key metric for our business is our SaaS ARR business. And you can see it grew strongly. SaaS ARR was up 44% to $225.1 million, and that's all organic growth. Turning to the next slide. We now have 714 large-scale enterprise customers using TechnologyOne SaaS to power their business. That's up 24% from the same time last year. We added 138 customers, and you're seeing that's probably the largest growth we've had in 1 period and there's truly an acceleration to SaaS from all of our verticals. Turning to the next slide. You can see our SaaS and continuing business revenue. That's $169.5 million for the half, up 21%. This is now 97-plus percent of our business. It's a huge shift in recent years from our legacy license business to our SaaS business, which is performing very, very strongly. Turning to the next slide. We reported our 13th record year of half year profits. Our net profit after tax was up 18%. These are really strong results, and it really validates our SaaS strategy, which continues our growth trajectory in Australia and the U.K. SaaS continues to drive our growth, and the outlook for FY '22 is very strong. I'll get into that in more details in our outlook section. And I wanted to slow down now and just have a brief discussion. We all can see in the financial press that there's a lot of news about growing inflation, growing costs and a generally deteriorating economic environment. Over the last 35 years, TechOne has continued to grow really strongly through challenging environments such as this, and will do so again this year and many years to come. We do it for many reasons, and I'll just pace those out slowly. The first is the markets we serve, local government, government, higher education, they're very resilient to challenging economic environments like this. The second is we provide mission-critical software. Our software underpins, our software runs local governments, it runs higher education, it runs governments. So it's mission-critical and will always be required by -- in the markets we serve. In times like this, organizations look to streamline their business, automate processes, reduce their costs, and there's no better way to do it without moving to our Global SaaS ERP. Recently, last year, we commissioned an independent research firm, IBRS and Insight Economics, to look at what organizations save by moving to our Global SaaS ERP, and they did a very high-fidelity research and found that organizations save 30-plus percent on their total cost of ownership by moving to our Global SaaS ERP. The fourth is that TechOne has never increased prices or our price book over the last 35 years. But right from the very start, 35 years ago, we built CPI into our subscription revenue contracts. And you can see our subscription revenue contracts is quite a large proportion of our revenue. And finally, when you look at our cost base, we will continue to extract the significant efficiencies and margin expansion that comes by having our single global code line, which is very efficient, where we invest in one global code line for 1,200, 1,300 customers in 6 vertical markets, it's very, very efficient. In light of our strong results and our confidence going forward, the interim dividend is up 10% at $0.042 per share. And as per usual, the Board will continue to consider different capital management initiatives. Turning to the P&L now. You can see down the bottom there that SaaS ARR is up very strongly, up 44%. That's all organic growth and looking to revenue growth, total revenue grew 19%. And the key metric for us is that revenue from SaaS and continuing business up 21% as expected. Now we're going to look under the covers now to look at TechOne's underlying business before the acquisition of Scientia. And it was up strongly with net profit after tax up 16%, and when you look at revenue growth there of 13% and expense growth of 13%, it's in a very strong position going forward. I just wanted to reiterate a recap on Scientia. It's important to note that we've worked with Scientia for many, many years, 20-plus years in same customer sites, integrating our products and providing that mission-critical tight integration between our student management product and Scientia's timetabling and scheduling product. We first acquired them late in calendar 2021, and it's a strategic product to further build out our footprint in our OneEducation solution in the U.K. as well as Australia. It's a mission-critical product. It's required by universities. It's very sticky. It helps run their business. And Scientia has a very enviable customer list. Here are some of the logos here on the slide. They have about 100 of U.K.'s top blue-chip higher education institutions as their customers. In the short term, we're investing in Scientia to move it to our SaaS platform. We've released our very first version of Scientia on SaaS. That's in the first 6 months of acquiring them. And we've used our recipe, our knowledge, our processes, our experience in what we developed Cloud 1.0 10 years ago to the multi-tenanted SaaS we have today. And with that recipe, we'll iterate very fast to give customers that same experience so that they can get all the benefits that our SaaS customers get. And by moving to SaaS, what those 100 customers will see is our log on to use Scientia, and then they will see TechOne's entire enterprise suite for higher education. They'll see the 14 products and the hundreds and hundreds of modules that are available for them and it will help create this frictionless environment for us to sell financials or HR payroll or assets or student management to this very deep and rich customer base. It will be frictionless from day 1. So I just wanted to reiterate that we didn't acquire Scientia for its earnings as it recently made some losses, but we're already seeing some significant opportunities going forward as a result of this acquisition. It will have an impact to this year's group net profit before tax margin, which means margin will be flat this year, but then we'll get back next year into our normal group growth margin as you've seen in previous years. So I just want to reiterate that the margin will be in line with last year over the full year for TechOne, and that's caused by the Scientia acquisition. As per normal, with Scientia, as we've done with all of our acquisitions, over the next few years, we'll continue to invest in R&D to completely rewrite and reengineer the product into our Global SaaS ERP and our SaaS architecture to extract those significant economies of scale that we see in all of the other TechOne products. Turning to the balance sheet now. Our balance sheet is very strong with cash and equivalents up 16%, and deferred revenue is up strongly as we grow our ARR. So we should expect to see deferred revenue grow as our ARR grows. Put simply, all parts of our business are performing very well. We're trading very well. We're selling clean contracts. We're implementing very well, and we're collecting the cash. And so you're seeing all that in a strong balance sheet. Turning to the cash flow now. You can see we had cash flow generation of $1.6 million. That's up $4.6 million since previous year. Traditionally, cash flow generation in TechOne is skewed to the second half, and that's because our revenue is spread evenly being a SaaS business, but the customer anniversary dates when they pay their annual fee is skewed to the second half. So this is as expected. And if you look forward into the next slide, you can see that we'll have strong cash flow generation over the full year. And as we disclosed in half 1 last year, we expect cash flow generation this year to be in that 85% to 90% of net profit after tax, and then progressively grow over the next couple of years to be in line with net profit after tax in FY '24 onwards. Turning to the next slide. Just want to reiterate that we will continue to grow our margin to 35%, and it won't stop there. When we hit 35%, we set our ambitious targets, and we'll disclose those shortly, and we'll keep driving our business. And these are coming from the significant economies of scale that we're getting from our single instance Global SaaS ERP. It's a wonderful thing, and we've got initiatives as long as your arm to drive costs down, to make performance and security high for our customer, and importantly, to get the margin expansion in TechOne. So I just want to reiterate from the previous slide that margin this year will be in line with last year, largely affected by the Scientia acquisition. Going forward, you should expect to see increases in net profit before tax margin in the same manner we have delivered in the last few years. And we're on the segment slide here, and you can see all segments are performing very strongly. I'll move to the next slide. We've got our normal results, analysis and key metrics, largely for the investment community. I just want to call out that our full year return on equity will be very strong, as usual, to be 40-plus percent, which puts us in the top companies of any company in Australia when it comes to return on equity metric. I just want to slow down now and deep dive into some of our significant achievements. There's no doubt that there's continuing strong demand from our Global SaaS ERP. It truly transform business and makes life simple for our customers. We're going to slow down, as I said, take a few moments and deep dive into how we do this. Stuart, can you take us through this now?

Yes. Thanks, Ed. Customers buy from us for many reasons. The first is the total enterprise solution. We have 15 products, and each product has between 20 and 30 modules. We're famous for our finance product for which the company was started and is traditionally the first product for which we sell to a new customer. We then take a very traditional ERP strategy to leverage the enterprise. Every product is fully integrated and they have a common look and feel, they have a standard product release, and each product has best-of-breed functionality, which allows us to increase our footprint. This is all underpinned by our fourth generation of ERP, our Global SaaS ERP, enabling our customers to work anywhere on any device at any time, providing defense-in-depth security, and we're the only ERP provider to have that level of security across our suite. We have 2 releases per year, and that cadence allows our customers to take hundreds of new features and functions throughout. And then behind all of that, as Ed has already mentioned, because it's the power of SaaS, our customers are realizing a 30% benefit on cost of ownership. We then take it even further with differentiation of the verticalized solution. We're able to leverage our 35 years of experience and our close relationship via The Power of One design to fully understand our customers and, thus, the relevant industry. We then embed the IP gained into our products. This means our customers get a faster implementation, faster return on their investment, and therefore, we can increase our ARR with them and also significantly decrease our [ LAR ] exposure. We have 6 verticals we focus on: local government, education, government, asset-intensive, health community service, corporate and finance. Finally, we ensure that our solution has mission-critical software for the verticals we serve. So in local government, that would be property and rating; and in education as an example, would be student management. And this is again, unique in the SaaS ERP world. I then show you an example of a customer we have to see how this works. This is a customer that joined us in 2013 in the local government space and acquired finance from us for $367,000. They continue to increase their product purchases year-on-year. And with that, you'll see there's also a CPI increase as well. In FY '19, they became a SaaS customer. It should be noted that ratables is a metric we use for local government vertical to tie our growth within the council to the council's growth itself, and therefore, within each of our LG customers' contracts to have a ratables metric. We would use student count for the education sector as another example. And you'll see this customer across the growth threshold in FY '19, resulting in automatic uplift as well as the CPI increase. Nine years later, this customer has gone from $367,000 in ARR to $3.5 million. It's very important to highlight the TAM for this customer, which is currently $6.2 million, allowing us to have significant growth as well. But the TAM for this customer will continue to grow as we continue to release new modules and new products, they use more of the solution, again, the ratables, and then obviously, the CPIs we've already mentioned.

Thanks, Stuart. That's to take a run through a journey of a real-life customer growing 8 years ago from $360,000 to $3.5 million, and there's a lot of runway growth. And that's why we're very confident that we've only got 15% market penetration in any vertical. So there's a bucketload of runway as you can see from that single customer example that Stuart showed us. On average, you'll see that customers have 6 products in a couple of slides. And so there's many more products, modules, CPI growth that we can get with our customers. You can see here that we continue to grow very strongly in all of our verticals, just to call out the top 3 there, local government up 19%, higher education up 49% and government up 21%. Stuart, can you take us through some of the notable new business ARR wins through the half?

Yes, absolutely. So Swinburne, another great story for us, customer of ours for 10 years. Again, like the LG example, they started with finance. They've now become a significant student management customer for us. And in the first half, they took their full solution to the SaaS platform. And at the same time, they bought a tremendous amount of new modules through that purchase. Mornington Peninsula is an interesting story. We actually lost this deal in 2018 to Oracle. Oracle was unable to deliver the project and the council went back to market in late 2021. We won this deal in the first half at almost twice the original value. Royal Conservatoire was a great win for us in the U.K. It's a very prestigious logo, and it solidifies our position and our growth in the education market in the U.K. Derby, we've done very well historically in the U.K. in the council level, and we've mentioned before that a unitary council is significantly bigger than a council in the U.K. We won our first council last year. And in the first half, we won our fifth unitary -- sorry. We won our first unitary council last year. We won our fifth unitary council with Derby in the first half. Ministry of Justice, this is another significant win for us in New Zealand and solidifies our position in the government sector.

Thanks, Stuart. Thanks for those customer stories. Turning to the next slide. You can see that we continued our very strong customer retention at 99-plus percent, which means churn was very low. In fact, churn was less than 0.1%. We introduced a new metric at the full year, which is net revenue retention, and that's your sales of new ARR to existing customers. Anything greater than 110% is seen as good, and we've had very strong expansion performance of 114%. As I've said before, it comes from those stories that Stuart told around landing with maybe financials and expanding over time with many, many products and modules that our customers then take up. In fact, there's over 350 modules. And it's frictionless for our SaaS customers. All products, all modules are available for all customers to see is what we call open license. You don't need to buy a license. You can try before you buy. You can use it, and we can see what you're using and then approach you to have a conversation if you love using it to buy that product or module of ours. It's very predictable, and there's a low cost of sale. We're very happy with these results at the half year. Turning to the U.K. now. You can see that we delivered a profit of $2.3 million. That's up 100% on the prior year. Total ARR in the U.K. is $17.6 million. We introduced that we had new leadership. It's working very well, and we have very happy and referenceable customers. Previously, we talked about completing our customer-first remediation. We're right at the tail end of that now. We're poised for growth, and we're focused on growth. Looking forward, we've got strong references, a strong pipeline. The U.K. student management product is just around the corner. Our customer is in UAT and will go live this year. We've delivered 5 live HRP customers. And with the recent acquisition of Scientia, we've integrated the teams. We've got a very enviable customer list. We're poised for growth in the U.K. Just reminding everyone on the next slide that we called an end to on-premise in August last year. We gave customers lots of runway to move to our SaaS ERP. It's aided -- this end of on-premise has aided the acceleration of customers to the SaaS ERP. We're well on track. We've got commitments from most of our customers, and we will deliver all of our customers to our SaaS ERP by the end of 2024. This is a watershed moment for us. I can't reiterate how long it's taken to get here and the hard work and the innovation, creativity of our team 10 years ago coming on the SaaS journey, totally reengineering our product, refactoring our organization, new culture, new policies, new everything, you name it. And TechOne has made the shift. You saw it in the metric there, that 97-plus percent of our business now comes from SaaS and continuing business. I can't think of any other company that's moved from on-premise to SaaS and done it without missing a beat, done it without impacting our customers, done it without impacting our profit. It's just been a fantastic journey that our team has delivered. Now that our customers are on the Global SaaS ERP, they can take advantage of our latest generation product Ci Anywhere. They can take advantage of the future through things like artificial intelligence delivered through our DXP. It's a very exciting time for our customers as well. Looking forward to the runway for moving our on-premises customers to SaaS by FY '24, a significant runway to go. That's $142 million of additional SaaS ARR from existing on-premise customers. That does not include any product penetration, does not include any new logos. That's simply from coming from on-premise to SaaS. And we continued our significant investment in R&D for future growth. You can see there that we invested $41.5 million in R&D. That's 24% of revenue for future growth. And there's a few things to call out there. Over the last 10 years, we invested $500 million in R&D to maintain our innovation, our leadership position, that deep ERP that you saw really focused on those verticals. Continue our 2 releases a year, with the 22A release recently released to our customers with over 470 new features and functions, and 22B is just around the corner. I'm going to now focus on DXP. Just to remind everyone that this is a long-term strategy. TechOne is very, very strong in the back office when it comes to DXP -- when it comes to our Global SaaS ERP. That's the ratings clocks, the accountants, the payroll clocks, the people processing our rates in councils, and now we're reaching into what we call the front office, the end users the employees, the rate payers [indiscernible] councils and the students that attend university. And it's going to be a long-term strategy. Just like we invested millions of dollars in cloud and then SaaS, and we made losses at the beginning, it's contributing significantly to our business today. That's the same with DXP. We're making significant investments in DXP, which will be a future platform for growth, and it will be quite a good platform for growth going forward. Our first LG DXPs has got Phase 1 live now in 3 customers, Moreton Bay Council, City of Canning, City of South Perth. We're working on Phase 2. The software is delivered to the early adopters and in 22B just around the corner, the third and final phase of LG DXP will be delivered. We're very excited about it. The early feedback is fantastic from our customers. And in student DXP, we've done very, very deep research. It's right at the beginning of its journey with 3 or 4 years of significant development ahead of us to create a great digital experience for students. I just want to now recap all of that in the summary. You can see we delivered record half 1 profit revenue and SaaS ARR. Our SaaS ARR all organic, up very strongly, 44%, total ARR 23%. Importantly, our total revenue is up 19% and revenue from our SaaS and continuing business was up strongly to $169.5 million at the half. That's up 21% and 97% of our revenue. Profit after tax up 18%. U.K. profit at $2.3 million, up 100% employees for growth and very strong cash collection as usual. We are on track, locked and loaded and -- to achieve our $500-plus million ARR by FY '26. Of course, none of this could be achieved without the people at TechOne. It's their grit and determination, them working tirelessly to solve significant complex problems for our customers and deliver the Global SaaS ERP we have today. You can see there a bit of a myriad of all the photos. We recently celebrated our service awards for people in TechOne from 5, 10, 15, 20, all the way to 30 and 35 years. It was quite a fantastic event to see everyone and celebrate their longevity. People join TechOne for a number of reasons, but there's 3 that we're focused on, and one is their career. So people stay with us for a long time and move with us and grow with us as we grow and have fantastic careers in TechOne. The second is we focus on their well-being, their mind, their body, their soul, their finances. And the third is our purpose. People join TechOne because we solve complex problems using our Global SaaS ERP for local government, government, higher education, all our vertical markets. And by doing that, we streamline those businesses so that they can focus on delivering their critical services, their critical infrastructure to you and I as rate payers, as students, as people that live in Australia, New Zealand and the U.K. So to the TechOne team, thank you very much. We couldn't do it without you. These results are from all your blood, sweat and tears, and we look forward to continuing in the future. Turning to the outlook now. A bit of a reiteration of the story I told earlier. We read in the financial press that there's increasing inflation, growing costs. There's many, many quotes we could have pulled up. You see one there on the slide. We've been here before, and we've navigated these challenging environments, and we grow strongly and we'll continue to grow strongly. It's because our markets are resilient, local government, government, higher education. We provide mission-critical software. It runs their business. It powers it, they couldn't operate without us, and they turn to our Global SaaS ERP in times like this to save 30-plus percent on their total cost of ownership. Our subscription revenue contracts, which is a large portion of our revenue base, has always had CPI built in from the very beginning, and that continues. And then when you look at our own cost base, we focus on continuing to benefit from our single instance Global SaaS ERP. We're very confident for the full year and beyond. And so we give our outlook of continuing strong profit growth, and we'll deliver profit growth of 10% to 15% for the full year. There's a couple of other metrics here that I just want to call out to help with guidance. SaaS ARR growth. That's the key indicator of the strength of our company, and it will be 40-plus percent all organic. So that's organic growth, not coming from Scientia. And as we continue to aggressively grow that SaaS business, we'll continue to reduce our legacy license fee business. Last year, it was about $18 million. This year, it will be $12 million as planned. That's an integral part of our strategy as we focus on growing our SaaS business, and reduce our legacy license business as planned. Turning to the long-term outlook. We're positioned well for growth, and we'll continue to double in size every 5 years. Our SaaS is growing strongly. We've got significant opportunity in our customer base with more products, more modules. That customer journey that Stuart showed really highlighted that. Continuing growth in all regions, in APAC, in the U.K., and our profit margins will be 31% this year, same as last year, largely caused by Scientia. And we'll continue to grow to 35-plus percent over the next few years in the same cadence that you've seen previously. We'll grow total ARR to $500-plus million. Our team is [ myopically ] focused. We've got detailed plans with our customers. We'll deliver that, and then we'll let you know what our plans are for next. And of course, we've got a very diversified business, 6 vertical markets, 15 products, hundreds of modules, geographic expansion. We're very excited about what the future holds. Thank you, ladies and gents. I'll hand over to Lexie now for question and answer.

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

That's a great result and really appreciated that customer journey slide. That's really helpful. Just a couple of questions from me. Just the first one, you added 138 new SaaS customers in the last 12 months. Could you give us an idea of how many of them were flipped from on-prem to SaaS just to understand as in how many net new versus flipped?

We don't disclose that level of detail, Nick. But you can see -- you can calculate from the NRR slide that we've probably done about circa $9 million to $10 million of new business, Paul? And so then the rest of the businesses come from SaaS customers moving to SaaS or buying more products and modules, Nick.

Okay. I'll work my way through that. And just on the inflation side, could you just -- I appreciate you've got CPI pass-throughs. Just talk us through the detail of how that works. Do you basically every annual renewal reprice things? Or July is a new number?

Yes. We've -- as you know, Nick, we've got customers with anniversary dates all throughout the year. We use the CPI that's the closest or the last published before their anniversary date. So it's not a once a year, it's a cycle. So when the customer's renewal comes up, whatever the prevailing CPI is at that time, that's what's passed through to the customer.

And then just my last question. Obviously, just the PBT margin side of things. As you come to the end of life for the on-prem, should we expect your cost base to drop reasonably and a big sort of step-up in margin then just by virtue of not having to support the legacy stuff? Or is it more a gradual sort of sliding scale transition as you wind down the old stuff and reinvest that into new stuff?

Yes. It's more the latter, which is a gradual transition. If you think back to previous sort of results presentations, Nick, we've talked about us transitioning staff away from on-premise to SaaS, and we'll continue that all the way to the very end. What you will see is margin expansion as we've put out before from the 31% it is to 35%. I got asked the question before, how should I think about that? If you look back at our past and the growth we got every year, think about it that way. And I just wanted to reiterate, that's not the end. We'll get to 35%. And before we get there, we'll set the next long-range target, and we'll deliver on that. We have a list of initiatives as long as your arm in our SaaS business, which do a number of things. They either increased performance for the customer, increase security per customer and using new tech, we can take advantage of that and increase the margin in our business. And so we have this great relationship where we continue to provide more value to our customers using our -- using those initiatives.

Your next question comes from Josh Kannourakis from Barrenjoey.

A couple of questions for me. Firstly, just on the SaaS transition. Just to gain a bit more detail. You previously mentioned the sort of [ 2.25 ] multiple in terms of from some of the on-prem to the SaaS flips. Is that still the case on some of the new ones? Or are there any trends you can talk about in terms of how that's transitioning? And maybe whether new customers are taking additional modules or any other extra color on some of the new stuff you put through the business would be great.

Yes. Thanks, Josh. I'll give a similar response too at the full year. [ 2.25 ] is our standard approach. But it's probably better to use more [ 2.0 ]. And the reason for that is we have what we call behavioral discounts in our business. So our behavioral discount comes in many forms. If you buy multiple products, you get a discount. If you buy more products, you get a discount. If you sign standard agreements without changes, you get a discount. If you take on an AMS contract, you get a discount. So our standard price is [ 2.25 ], but knowing that customers have shapes and sizes buy different things and different billing materials, we guided at the full year to use [ 2 ] as your indicator for modeling. So if you can continue that, that would be great.

Awesome. That's great. And just maybe either for you or for Paul, just on the cost profile in terms of OpEx. How should we be thinking about it over the sort of next 12 months? Are there any major sort of moving factors or other inflationary pressures that we should be taking into account? And then the final one is just around that Scientia acquisition, just that looks like there's a bit of a reduction in contingent consideration. Has that -- where has that sort of gone? And is that something we need to factor into the cost base?

Yes. Great. Paul, do you want to tackle both those?

Just I'll start with the continued consideration for Scientia. At the time of acquisition, we bought it very close at the end of the year. And when we were preparing the financial statements last full year, we really didn't have a very clear picture of how the business was operating. We knew that it was a very important strategic product from our -- for our overall enterprise solution. But -- and we didn't buy it for earnings, as Ed said. The change to the total consideration was actually a reduction based on the first earn-out, which we now know they haven't achieved. We're still recognizing the deferred consideration for the second earnout, and operations for that business so far are actually going really as we expected. The first part of your question, Josh, was more about costs for the full year. You'll be able to see in the slide the contribution to cost from Scientia, and that has led to, I guess, a flat year-on-year margin compared to last year. We are -- all our cost to grow broadly in line with revenue. So we've also made a statement in the results summary that cost for the full year will grow in line with revenue growth. And as Ed said during the presentation, margin for the full year will be largely flat year-on-year. So I think that gives you enough so you should be able to work out what we expect full year cost to be, but if you...

Can I add then, Paul? After that, Josh, so when you think about next year, we expect margin expansion to 35% over the next few years using the same history that you would have seen us. And then as we get close to that, we'll set the next goal, and we'll deliver on that as well.

Yes. Okay. No, I got it. And so just on the SaaS numbers as well in terms of the SaaS fees. It looks like you're getting a bit of good leverage on that side in terms of the sort of relationship between the SaaS revenues versus that line. Is that 1 of the other drivers of it over the next couple of years? Or...

Yes, definitely. Definitely you're right. We'll continue to grow SaaS very strongly, not only this year, but over the next few years, as we move people to Software-as-a-Service and sell them more products and more modules that you saw in our customer journey slide, Josh.

Your next question comes from Mitch Sonogan from Macquarie.

Can you hear me?

Yes, we can.

Great. Maybe just following on just on the guidance for the full year, you've put a bit of information there about cost growth. But just on the R&D expense, can you maybe just tell us what's baked in from a capitalized R&D perspective into that guidance, the 10% to 15% PBT growth? And is the total R&D expense, should we expect 24%?

Yes. I'd probably more look at the physical number we spent in the first half and extrapolate that to the second half, Josh, rather than use 24% of revenue. When you think about R&D investment, that is our people, our people that are building our products for now and for the future. Our people -- we invested in our people. There was wage growth, which was a good thing. And that's largely where the R&D investment growth came from.

Do you mind if I add, Ed?

Yes, please.

The full year R&D development and capitalization will very much be in the range that we've stuck within since FY '19, which is 50%, 55%. And the activities that are capitalized is based on the actual activities that the development team performed.

Thanks, Paul.

Yes. Excellent. And maybe just looking at Scientia costs. Talking about moving the product over to your SaaS platform and integrating it, but you're also going to follow that with complete rewriting and reengineering. Can you maybe just, I guess, talk to what costs you incurred doing that over what time frame? And maybe can you talk about when you expect margins in that business should approach the group margins?

Yes. Thanks, Mitch. It's our recipe, right, where we partner-prime-acquire, which we have done with Scientia and then we reengineer into the Global SaaS ERP platform. We don't intend to add the staff to Scientia. It's refocus them and their R&D efforts into rewriting. It takes about 3 years when you look at our history with our spatial business that we acquired, the strategic asset management business and any other business that we've acquired. And then when we're there, the customers get all the significant benefits that everyone gets from being on the Global SaaS ERP. So to answer your question in short, we won't add a lot of cost to the Scientia business, but we refocused the team to rewrite it in the TechOne way on our Global SaaS architecture. I can't remember the second part to your question, Jules -- I'm sorry, Mitch.

No, that's pretty clear. Just in terms of over what time frame, you've answered that. Maybe just a final one for me. In terms of your end of on-premise on October 2024. You've obviously given the customers a bit of time frame or upfront lead times to make a decision there, but you mentioned you've had commitments from most customers. Can you maybe just walk through what some of the sticking points are for those final customers in terms of committing to go over to the SaaS business?

Look, it's a similar story to when we announced it in August last year. We maybe had about 400 customers remaining on-premise at that time. And we probably have less than a handful, less than 3 or 4 that wanted to have a conversation with us because they weren't too happy. But to be honest, we've talked to them, and they all understand that it's inevitable. If you think of the market today, you would not see 1 tender of any business that's going for an on-premise solution, it's all Software-as-a-Service. They're all moving there. And so we worked with those handful of customers, and we've got a clear path for them. So there's not really any objections other than our customers are long-range planners and want to plan and put in their budget cycles and our project teams set up. So we've worked with all of them now, Mitch, and develop those plans with them and are literally signing them up quarter by quarter so that they can get there before time runs out.

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

Ed, if we -- you made a comment earlier that the new SaaS ARR was $9 million or $10 million, which I guess is sort of a 12-month view. How should we sort of think about the first half, second half kind of contribution? And I don't know whether you can sort of just provide that for this half just compared to the full year number.

Yes. We don't go down that level of detail yet. I can understand once we've done a few halves of the disclosures, you can work it out. But to answer your first part of your question, Jules, the SKU is the same. A lot of our business is done in the second half because of the buying cycles of government, local government or higher education, whether that's towards the end of their financial year, 30 June, or at the beginning of a budget year. So we still will see largely a skew of new business to the second half, Jules.

Got it. Okay. And if we were to sort of think about the -- so I think it was a roughly $33 million added from the full year to now in your SaaS ARR. Scientia hasn't contributed to that line, has it? It's all reflected in your total ARR number?

Yes, that's right, Jules. Spot on.

Yes. And you can't sort of help us with just understanding the expansion with existing customers that are on the SaaS platform already in that $33 million?

We can. There's a little bit of a [ backsolve ] required. I might hand over to Paul to just pace that out for you and everyone on the call, Jules.

Jules, It's a similar profile that we saw at the full year. It's -- of the new ARR added by existing customers, which as you identified as is largely -- is roughly $33 million. 2/3 of that was the increment from the flip and the other 1/3 is new product into existing customers. I think that answers the question.

Got it. Super helpful. And if we look at the U.K., I mean, great to see signing some good logos in that market. But if you back out Scientia, the growth in the ARR was about $700,000. So there's probably maybe some currency moves there. But just trying to understand, these customers that you're signing, they're obviously starting quite small. Is that way I should think about them and they will scale over time? It just seems not a big increase for what looks to be some really good unitary success.

I think you already answered the question that you've asked, Jules. If you think about last year, I think total new ARR added last year in the U.K. was about $1.5 million. We got very, very close to that in the first half. Unfortunately, currency resulted in the number that you saw in front of you. So we're very happy with the first half new ARR added because it was almost the same as full year last year, and you nailed it. It was currency. The second part of your question is, yes, we are landing and expanding in the U.K. So largely, we're selling core products, Stuart?

Yes. And it's important to note that we only have 8 of our 15 products in the U.K. So as we land and we sell what we have today, we'll still be porting more and localizing more products in the future. That's part of our strategy. And that's also -- if you go back a couple of years London School of Economics, that's why they bought us in the first place, they saw our strategy when we're going to bring HRP, which we've now done, student as it completes and they'll be taking that over time.

Your next question comes from Michael Aspinall from Jefferies.

A couple from me. It sounds like we should expect ARR to benefit from CPI next year. Is there any scope for customers to push back on that given the inflation is going to be at much higher levels than what we've seen historically?

No, there isn't, Michael. Our customers are used to CPI right back to 35 years ago when CPI is 0%, we pass on 0, and when CPI is [ 3%, 4%, 5% ], we pass that on. So there is no scope for that, Michael, to answer your question. Additionally, conversations we have with our customers is providing more value. So we invest $80 million per year in R&D. And for that, our customers get new features, new functions, they're always on the latest tech. They're on the fourth generation software, our Global SaaS ERP. We don't charge customers anymore for moving from generation to generation unlike SAP and Oracle would. We've developed, as Stuart said, the most trusted SaaS in the world. Our Global SaaS ERP is certified IRAP-protected. You'll find there's no other provider like that. And that all comes from the single fee that our customer pays every year. So our conversations with the customer are more about providing more and more value to them rather than as an additional cost.

Yes. Okay. And just to help my understanding. Are those contracts, the SaaS contracts, kind of 3, 5 years and even when you're sort of signing a new contract, CPI just rolls through?

Yes, that's right. So CPI in our contracts is not at the end of the contract, it's yearly.

Yes. Okay. And for cost, the full year, we spoke about how you retain staff outside of just remuneration. I'm just wondering what you're seeing, though, in terms of labor cost increases? And what you're thinking in terms of if you'll be adding headcount or kind of just staying flat for the next year or so?

Look, there's no doubt that it's very competitive out there, and we pay competitive wages. At the full year, we discussed that we set aside a healthy budget for this year to stay competitive and to invest in all those things that we discussed, and we've done that. Also at the full year, we disclosed an eNPS result for the company. So every 6 months, we poll our staff. We ask them the normal NPS question that this is focused on them and give us feedback on what we're doing well or not so well. And you might have seen in the sustainability report that was released, I think, in about November last year, Paul, through this period, through the competitive pressures with our investment, our eNPS went from plus 1% to plus 17%. So our staff are telling us you're moving in the right direction. Can we do more? Sure, we can always do more and different. So we saw it. We budgeted for it. We've addressed it. We'll continue to watch it. We'll continue to work with our people, and we are planning to grow our business and grow head count as we continue to scale and add more products, more features, more functions for our customers.

Okay. And a couple for Paul, maybe. Just following on, I think, to Josh's question on contingent consideration for Scientia. It sounds like have you recognized provision on the balance sheet on the initial earn-out versus running it through the P&L?

We're still -- Michael, we're still in the provisional and accounting period. So we'll finalize the formal acquisition accounting with the full year. And at that point, we will finalize all the fair value accounting and the purchase price allocation. We were able to adjust effectively the opening balance of the initial consideration because we realized that we didn't have the full information at the time of acquisition and at the time of completing last year's financial statements. So there's -- there hasn't been an adjustment through the P&L and it was an adjustment to the provision on the balance sheet.

Okay. Yes. Cool. That's great. And then I think it was Jules' question. Just looking at the U.K., yes, ARR increased I think you said FX from about $1.5 million. If I look at your disclosure on where revenue comes from, I think, it's Slide 42, you showed 13% of revenue from the U.K., which is about $22 million or $12 million, excluding Scientia, which is up about double first half last year. I'm just wondering how I reconcile kind of that change in ARR of about $1.5 million versus the change in revenue ex Scientia was up about $6 million?

Revenue also includes consulting revenue from our implementation projects. So this is based on license revenue. Yes. I think the difference could be consulting, but I'll -- yes, we'll confirm it.

Okay. So if that was the case, then consulting, had a good strong half in the U.K.

It did. And you can see that on Slide 45, the contribution from the U.K. consulting.

Okay, cool. And then last one -- or 2 more quick -- hopefully, quick ones. Capitalized commissions up from [ 1.8% to 4.45% ]. Is that a shift in the channels that you're using to sell or something else that's driving that?

No, it's not. We don't work with channel partners. It's a reflection of the fact that more of our sales are ARR and SaaS ARR, particularly, with longer-term contracts. So in the past, some of our -- a proportion of our commissions would have been based on initial license fees, what we now call legacy license fees. So we've seen that shift. So the majority of our sales now are SaaS ARR. And under AASB 15, we're required to capitalize...

And match it against the length of the SaaS contract we sell 3 to 5 years.

Okay. Yes. That makes sense. And last one, maybe back to you, Ed. Just thinking about is there any further acquisition potentials in the pipeline?

There's always acquisition potential in the pipeline, Michael. If you look at Scientia, it's timetabling and scheduling product; look at DMS, the spatial product; ICON, the planning product; JRA, the strategic asset management product. We are, first and foremost, after product, IP that makes us deeper into the verticals we serve, so local government and higher education are our main target areas. We get lots of approaches all the time. So firstly, it has to be a product that makes us deeper in the verticals. And secondly, we do have very high hurdles in our business and has to pass those 2 things. I hear Paul talking, we won't squander the money, and we'll do these acquisitions carefully. If you look at our recipe, they're largely smallish acquisitions that make us deeper in the vertical markets that we can quickly bring into our ERP, rewrite it and continue to sell to all our existing customers.

Your next question comes from Chris Savage from Bell Potter.

Just a couple of questions that haven't already been asked. Just the guidance around the initial license fees of $12 million for the full year. I'm slightly surprised it's not coming down faster given the accelerated SaaS flips, and I'm guessing there's some level of discretion in those license sales as well. My question, Ed, is, are you dependent on that level of initial licensees to get the top end of the guidance? Or could you potentially do lower and still get towards the upper end?

It's a great question, Chris. We've got a lot of levers, as you know, in our business to achieve our profit guidance, and we're comfortable we can get there. To the extent we can, we would love to drive license fees down because then we sell it as a SaaS deal, which is not profit for this year, but for next year and it builds our recurring revenue base, and you'll continue to see us do that, Chris. So right now, we're comfortable at guiding that $12 million number, significant headwind and drop from last year circa $6 million. If we can drive that lower and still deliver profit, we will.

And I think I know the answer to this one, it's probably more for Paul, but continuation of an earlier question. So if there is some gain on contingent consideration at the full year -- sorry, I'll reword it, I'm assuming the guidance doesn't assume any gain on contingent consideration for the full year.

Yes, that's true, Chris.

So anything that is recognized as upside?

Yes, that's right.

More or less.

But I mean, as I've said, the business is operating well. We've been able to implement some good cost synergies and we see some real revenue synergies. And we see some more benefits from being able to transition Scientia customers onto our SaaS platform in time. We believe there's a good opportunity for them to hit the second earnout, and we'd be happy if they did.

Yes, sure. And last question, Ed, I think I asked this every result. The cash building and building. I mean it's pretty obvious it's going to be north of $150 million at the full year. Any thoughts around capital management, buyback, specialties? I know you've got some limit on franking, so what's your thinking?

Isn't it great to have such a strong business churning out lots of cash, that's what I'm thinking. But look, we won't squander it. That's probably the first thing. And we've continued to look at ways to utilize it well in capital management alternatives. Give us a war chest to acquire businesses that make sense that are in that sweet spot that we talked about, Chris. So the message for me is we won't squander it, and we are looking at ways, different capital management alternatives as you put it.

There are no further phone questions at this time. We'll now move to the questions from the webcast. Your first question comes from Bruce Carmichael with Teaminvest, who asked, over the last 5 years, the major contribution to the growth in earnings has been economies of scale, with the sales growth being the minor component. In time, growth with economies of scale will plateau. How do you see earnings growing after this plateau?

Great. Thanks for your question, Bruce. I'd argue it's been quite the opposite, to be honest. We have managed the business very, very carefully to ensure that we've continued profit growth and looked after our customers over the last 5 or so years. It might look like headline revenue has come down. But you got to remember, we've had significant planned license fee reduction year-on-year, which is a key hit to revenue, and therefore, key hit to profit as we've been growing this fantastic SaaS business over the last few years. So if I recap, license fees in its top was about $75 million, which came down to $47 million. That's about a $30 million hit to the P&L in that year, which went to $27 million, which is about a $15 million hit, which went to $17 million or $18 million, Paul, a $7 million hit. So that's been the big drag on what looks like top line revenue, but we've been growing our ARR and SaaS ARR business quite strongly. We're largely through those headwinds now, Bruce. So now you're seeing top line revenue this half at 19%. And when you look excluding Scientia was at 13%, but importantly, our SaaS and continuing business growing at 14%. And we set a goal to grow that consistently at 15%, and we're always there. We're right at the cusp of that. We've managed through the transition of on-premise to SaaS to rebalance our business, to focus on margin, to extract huge margins from the SaaS platform through key investments in R&D, to deliver consistent and steady profit growth of 10% to 15% and always at that top end of guidance. We will continue, Bruce, to sell products and modules to our customers, continue the growth in U.K. We're investing in new platforms for growth like DXP. We've got some exciting new investments a little bit too early to talk about. And we drive revenue growth for ensuring we have those many, many platforms for growth. And so we're very confident that we'll continue to drive the business forward and deliver 10% to 15% profit for as long as we can see. It's very exciting times, Bruce. And in the next few road shows, we'll be able to talk to you about some of those additional investments that we plan to make in R&D for future growth. Can we have the next question please, Lexie?

Your next question comes from [ Troy Ronald from Poland Capital ]. And they've asked, should we view the Scientia acquisition as a sign of management and the Board is willing and open to use acquisitions to further scale the U.K. businesses?

I think when it comes to acquisitions, if you think about how we answered the previous question is, we're always looking at acquisitions provided that they make us deeper in the vertical markets we sell and service. We've known Scientia for a very long time. Their product is fantastic. We've integrated with those, Stuart, for 20-plus years. If we see more acquisitions like that, we'd be willing to make them. I would note that we're not after David and Goliath-sized acquisitions. We do things that are comfortable for us that we know we can integrate, and we know we can execute well that we know that will add significant value for us and our customers going forward. Let's go to the next question, please?

Of course, your next question comes from Roger Taylor from Morgans Financial Limited, who asked, Stuart, I'm not sure if you've covered it already, but could you please -- sorry, could you give us more details around the growth in modular per user please?

It's a bit of a challenging one to answer because we have 300 to 350 modules that we sell. So I think an easier way to answer your question is, the customers we have on the SaaS platform, on average, have about 2 whole products more than on-prem, and we sell a tremendous amount of modules into our customer base day on day. So I can't give you the exact number other than once we've moved them across to the SaaS platform, because of the frictionless experience, it's just so much easier than more of them to start absorbing the modules and take benefit of those modules. So I can't give you an exact number, but I can tell you that it's more than 2 products per customer that moves from the on-prem to the SaaS platform.

Thanks, Stuart. It looks like there's 1 last question on the call, Lexie.

Yes, your last question comes from Gareth James with Morningstar, and they've asked any price increases based on headline or core CPI?

Thanks for the question, Gareth. Typically, it's based on headline CPI. Obviously, it's different in each country. In Australia, it's typically the national headline CPI. In New Zealand, inflation has been running a little bit higher there as it has in the U.K. So it's the appropriate inflation metric for each region, and typically, as I said, headline.

Thanks, Paul. Lexie, it looks like there's no further questions from the webcast, and we're just on time. We might thank everyone for joining the call today. It's been a great result. Thank you again to all the hard-working people at TechOne. Lexie, can I hand to you to wrap up the call, please?

Of course. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect.