Technology One Limited (TNE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Technology One full year results roadshow. [Operator Instructions] I would now like to hand the conference over to your host today, CEO, Mr. Edward Chung. Thank you, sir. Please go ahead.

Thank you, and good morning, everyone, and thank you for the introduction. This morning, I've got Stuart MacDonald, the Chief Operating Officer, to my right; and Cale Bennett, our new CFO, with me to my left. Welcome to the 2023 results presentation. These materials will lodge with the ASX today. Today, I'm going to take you through the results, then Cale will take us through the financials, and Stuart will take you through our significant achievements, our secret sauce, if you will, and particularly our strong NRR result. Some have questioned what happens after we transition our business and our customers from on-premise to SaaS, will we fall off the cliff. So we're going to spend some time and present our first ever cohort disclosure to show how we land and expand with our customers over time and how SaaS transitions has simply been a step in our customers' journey with us over time. Then I'll explain the key initiatives that we are delivering to build the future and help us to continue to up in size every 5 years and finally provide you with outlook and guidance for FY '24. Now turning to our highlights. You're going to see some strong results today that we're very proud of. It's a culmination of many, many years of hard work from the talented and innovative team to totally transform our entire business from on-premise to SaaS without skipping a beat for our customers and without impacting our growth and our profit. We listen, we watch. We're constantly learning and evolving and evolving our offerings, and our team have an exceptional focus and executing to the higher standards. And this execution is against this very clear strategy. And this strategy has been very consistent and has stood the test of time. Firstly, we're an ERP software provider. We have a very broad and very deep functionality. And if you think back to 2008, we had 11 products. And today, we've got 16 products and over 400 modules, and we continue to invest in even more features and more functionality for our customers. We have the deepest functionality for the specific vertical markets we serve. You'll hear us say it all the time. We're not all things to all people. We provide mission-critical software that powers universities, powers local governments, governments and large infrastructure providers. And our global SaaS ERP, it's our fourth generation ERP. It's highly efficient, which allows us to invest for our customers. And all but a handful of our traditional ERP customers are now on SaaS, and all our SaaS customers unlock significant benefits, including 2 releases a year, providing new reaches and functions, defense and depth security. We have the highest level of cybersecurity certification of any ERP provider on the planet. Our customers are always on the latest release and have the latest technology. And all products and modules are available for our SaaS customers so that they can take the one with little friction. And then finally, our customers save 30-plus percent by moving to our Global SaaS ERP. Now as I said, this is our fourth generation ERP. It's available any device, anywhere, anytime. And we've successfully reengineered our entire code base. That's millions of lines of code, enabling our customers to be on this latest technology. And when you think about it, there's been no other ERP provider on the planet who's been able to rewrite their code base once let alone the 4 times that TechOne has done over the last 36 years. And with the Power of One, we build, we market, we sell, we implement, we support and we run our SaaS ERP, and our game-changing SaaS+ solution as service, which we'll describe a bit later, can only happen because of the Power of One. And finally, we're an innovation-driven company, and that we leverage new and emerging technology at each generation for our customers. So to sum up, we're unique. It's this clear strategy, which resonates with the market and why we win against our competitors. And once we land a customer, they expand with us over many, many years by taking more products and more modules to streamline their business. It's why our customers stay with us forever and what fuels our consistent strong growth. And so you can see our total ARR grew strongly, up 23% to $392.9 million and that growth came from both new and existing customers. All but a few of our customers have transitioned to SaaS and the total ARR, which is our key metric, simplifies our business a little bit more. Now -- in what is now our 12th year as a SaaS business, our business is more predictable. So it was probably the most measured Q4 that we've had in a very long time. And as a result, we are set up well for the first quarter of the new year and set up well for the full year FY '24. And this ARR growth culminated in strong profit growth, up 16% to $129.9 million. That beats the original guidance we set in May of 10% to 15% profit growth. And for those who've been following us for a while, we had a target, and that target was $500 million ARR by FY '26. And you can see at the end of FY '23, we have about $393 million now in total ARR. And you've heard me say many times before that cloud is war. And we've won this war in our vertical markets as we've now transitioned all but a few of our customers to SaaS. And our customers on SaaS, they take more products more quickly than our customers did on-premise. And we've proven this. And this results in a very clear and strong and predictable pipeline, which in turn leads to our very strong net revenue retention number. So we're confident that we're going to beat our original target. And now we upgrade that target to $500 million ARR by FY '25. And that's a whole 12 months earlier than originally planned. And so if we're on track to surpass $500 million ARR by FY '25, the next question is what's your next ambitious goal? And as you'd expect, our strategies, they don't end with transitioning to SaaS. They don't end with moving our whole customer base to SaaS or $500 million all that in FY '25. We plan out for the long term. We plan out 10 years. And we've got long-term strategies for every aspect of our business, including R&D, to build future platforms for growth. And our focus is to maintain our momentum well beyond $500 million and continue to double in size every 5 years. And with the completion of our fourth generation ERP, we call it CIA, we've now showcased to our customers our exciting new products and solutions that are going to enable us to continue to double in size every 5 years. Things like DXP, like App Builder and like SaaS+ that will continue our momentum and our strong growth. And SaaS+, it's a game changer in the ERP industry. We all know Salesforce.com and they removed all the complexity of on-premise to SaaS, and Technology One is removing the traditional complex, long, risky, expensive implementations by introducing SaaS+. SaaS+, it's the next logical evolution of SaaS where TechOne delivers the entire outcome faster with little risk and in one single annual fee to our customers. That is no traditional consulting. SaaS+ will deliver faster time to value as we continue to dramatically drive down implementation time frames, removing the need for traditional long drawn out risky implementations. Through the Power of One, TechOne is the only SaaS ERP provider able to deliver on this compelling value proposition because we own all parts of the value chain. Firstly, we've got our deep mission-critical products Secondly, we've got specific IP built up over 36 years. And thirdly, we've got our highly skilled and talented in-house consulting team. And SaaS+ will power our growth for many, many years to come, and we'll update you more on that a bit later as well. And when you narrow down to FY '24, our outlook is strong, and I'll get into guidance a bit later. Now just before I hand over to Cale, I'll provide a bit of a highlight. We delivered 16% profit before tax growth. That beat our original guidance of 10% to 15% profit growth. And in addition to this strong profit performance, we delivered strong ARR growth, up 23%, and strong net revenue retention of 119%. And remember, at 115%, we can continue to double in size every 5 years, and we delivered strong cash conversion with cash flow generation to NPAT of 102%. That's 1 year ahead of our plan. So you can see the operating result was good across all parts of our business, which allowed us to make additional investments earlier. And this had a small impact on our PBT margin, which we'll talk about a bit later. But these investments are for the future, beyond $500 million ARR and they enable us to continue to double in size every 5 years.

I'll take you through the results summary, beginning with the income statement. It's worth reiterating that this is a strong result. With total ARR up 23%, revenue from our SaaS and recurring business grew 22% to $390.7 million in FY '23. You'll note that we have split out our consulting into 2 segments: our recurring AMS business for existing customers and our traditional project-based consulting, which we will report under the traditional and legacy business category going forward. Consistent with our communicated strategy, our legacy license business continues to reduce as planned. There will be no more license fee sales going forward. As our business continues to involve -- evolve, the next impact will be on our traditional consulting business. Our revolutionary SaaS+ offering, which does away with the long, risky, expensive implementations, we'll see the traditional consulting line, which is one-off in nature, decline over time. The revenue will shift to SaaS fees recognized, which is recurring for the life of the relationship. Leveraging the lessons that we learn as we transition to SaaS, we will closely manage the bottom line impact of the transition. As called out in Note 5 on the right, other revenue is up because of the finalization of the earnout of Scientia with a $7.4 million impact reported at the half. It should be noted that there was an expense impact in the form of the impairment of customer contracts and software in the amount of $6.8 million made at the same time. The net impact is immaterial at around $600,000. While the sellers did not achieve their aggressive earnout targets, the results have exceeded our initial business case. Total expenses grew 21% to $311.5 million in FY '23. Within that, our operating cost of $268.7 million, which is before the net impact of capitalization and amortization of R&D of $26.5 million and includes our continued investments for growth that has served the business so well over time, in addition to the one-off costs I'll talk about on the next slide. Profit before tax was up 16% to $129.9 million and net profit after tax was also up 16%. The effective tax rate for the year was 21%, consistent with last year, and we expect the effective tax rate to settle around 23% with current policy settings. We continue to expect our profit margin will increase to 35% over time. As we move our entire business to SaaS, our P&L has become a lot more predictable. Our revenue is more predictable because SaaS is contracted for multiyears as opposed to a license. As you saw in our first half results, we were going to have a good year. With the predictability of SaaS, we had the confidence to invest. In the end, we beat profit guidance and delivered 16% PBT growth, ARR growth of 23% and NRR of 119%. Our cash flow generation to NPAT outcome of 102% is a year ahead of schedule. Importantly, we have good ongoing visibility of a strong pipeline. This allowed us to accelerate our investment program in the second half. These investments are long-term investments that enable us to grow beyond $500 million in ARR into the next leg of our journey to continue to double in size every 5 years. Specifically, we invested in the U.K., our largest market opportunity in scaling our service center in Malaysia and in R&D, delivering on DXP, App Builder and SaaS+ investments. We continue to actively evaluate acquisition opportunities within the markets of local government and education to further our growth in these markets and support our growth beyond $500 million in ARR. To demonstrate our commitment to investing growth, during the second half, we invested $2 million to make a nonbinding and indicative proposal for a U.K. publicly listed higher education software provider, a transformational combination opportunity. However, following significant due diligence, we did not proceed as the potential acquisition did not meet our set criteria. Whilst we remain disciplined, our intention is clear. We see our underlying PBT margin for FY '23 at 30% if we strip out this one-off $2 million impact. To reiterate, our PBT margin is 35% in the medium term. Our operating segments are on the left-hand side of this slide. As a SaaS company, we manage our business in 3 operating segments. Strong growth in our SaaS recurring revenue is driving the profit from the Software segment. Our Consulting segment is down as planned as we invest in our SaaS+ offering. We expect this to continue to reduce over time as we gather momentum and reach scale in SaaS+, as I previously talked to. The corporate segment benefits from growth in the operational segments, but was impacted by the aforementioned $2 million in acquisition due diligence costs. On the right-hand side, you can see our geographic segments with all of our regions growing strongly. The U.K.'s profit is up 54% year-on-year. While still in its relative infancy as a region, the investments we are making in the U.K. continue to gather momentum. We'll talk more about the U.K. later in the presentation. Turning to the balance sheet. We finished the year strongly with timely invoicing, a fantastic effort from our collections team and clients paying in advance for their SaaS ERP, resulting in a strong year-end cash and investments balance of $223.3 million, representing $0.688 per share. This is evidenced in our modest receivables increase despite the 23% increase in our ARR. This is the result of our team selling well, servicing well and collecting well. Our contract assets which increases we implement large projects prior to payment have not moved year-on-year. Given the high credit quality of our customer base, there is minimal risk to this number. With growth in our ARR and clients paying in advance, our deferred revenue liability has correspondingly increased by 17% to $214.5 million. The timing of renewal sales drive this number with the revenue earned in subsequent periods for those upfront payments. TechOne continues to maintain balance sheet flexibility for inorganic growth with significant cash holdings and no outstanding borrowings. In the period, net assets have increased by $67 million. As mentioned on the balance sheet, we had a measured second half resulting in cash flow generation to PBT coming in at 102%. This is calculated as operating cash adjusted for lease payments and capitalization of both commissions and R&D as a percentage of NPAT. Cash flow generation is higher than usual because of the collection performance in the year, but we expect it to be approximately 100% in future periods. Cash flow becomes increasingly predictable and stable with the business now having completed its transition to SaaS. By all measures, our company is performing well. Our applications are mission critical for our verticals, resulting in customer retention of 99% over an extended period. Strong revenue and cash generation and a clean balance sheet, which has built a significant cash reserve over time, enables us to reward our shareholders. Our Board has determined a final dividend of $0.119 per share in addition to a special dividend of $0.03 per share. This takes our FY '23 total dividend to $0.195 per share, up 15% on FY '22. I'll now hand over to Stuart to take you through some of our elements.

Thanks, Cale. Before I jump into the details, I'd like to remind everybody of our diversified multiple platforms for growth. Technology One has a very clear strategy. of providing a true SaaS ERP solution with mission-critical products for our community. As a verticalized business, we hyperfocus on the markets we serve. Our products and services are designed specifically for these markets and empower the verticalized strength, we have been so fortunate to have gained. This foothold in the customer with our land-and-expand strategy usually means we're starting a partnership with the customer with our financials product. and selling the remaining 15 products over time. This deep understanding of the vertical and that specific customer enables us to develop a white space analysis. Currently, this white space in Australia alone is worth more than $2 billion. It's this deep understanding of our customers that empowers our confidence to guide between 115% and 120% NRR per year. which should be noted as industry best practice. We continually invest in R&D to not only bring new features and functions to our already award-winning products, but we developed new modules and completely new products, which in turn increases the TAM for our customer base. It's these new products such as DXP LG and DXP Student, which are on track to grow our white space from $2 billion to $4 billion in APAC alone. Our new go-to-market strategy of SaaS+ leverages our unique Power of One philosophy, powered by the unique integration within Technology One of the sales team, the consulting team and R&D, which has enabled us to bring to the market ERP implementations to take less than half the time of our competitor, while at the same time increasing the ARR per deal by 40%. And we've become the ERP provider of preference for local government and education in Australia and New Zealand. The U.K. is now in a growth phase. When it was 3x the population, we are in a fantastic place to leverage the success we have in Australia and New Zealand and become the preferred ERP in the U.K. for the markets we serve. As we've highlighted, CIA is our fourth-generation global SaaS ERP solution, and it is fueling our growth. designed specifically for our verticals and with defense and debt security, over 400 modules are twice yearly upgrades, our customers have taken to it fantastically well. And this is validated by the new logos as well as customers that are migrating to CIA at a rate that is exceeding our expectation. CIA is also the foundation for our DXP products, such as expense management as well as our new DXP LG, which is -- which was released in the last 6 months, and we've seen significant interest in the application. And we are on track to release to our early adopter version of DXP Student with our 24A release. As mentioned, we have 16 products that make up our ERP. And each of these products have between 20 and 40 different modules. If we look at Financials, which is our flagship product, it is definitely the product that separates us from the Oracles and SAPs for its functionality, its ease of use related to verticals it was designed specifically for. If we look at EAM, or Enterprise Asset Management, the adoption of this within our market has been fantastic. It was one of the first products we released with our SaaS+ design, and the market adoption has exceeded our original targets. We have a GIS product that day in and day out beats Esri. We have an HRP product that consistently beats Workday who only have HR, and we are fortunate enough to have the HR product as well as the payroll side which is unique within our industry. And then the crown jewels, which is our Property Rating and a student management products that continue to dominate in the sectors we serve. The growth of our ARR and the subsequent growth per customer is something we're very proud of. This graph shows the ERP strategy of landing and expanding within our customer base is not only being achieved, it's accelerating. For transparency, we've included the impact in light blue, which represents the acquisition of Scientia. When we acquired Scientia, we brought on new logos to TechOne. Now these are small customers, about 80,000 each. Therefore, with the significant increase in the amount of logos, we've diluted the total ARR per customer in the short term. We wanted to represent the traditional growth as well as the growth with the acquisition of Scientia or what we now call our timetabling and scheduling product. The strategy of our fourth generation solution CiA, it's amazing products and the modules are underpin it have all been validated with the success that we see in this graph. It shows significant growth in each of our core verticals as you would expect. Our core verticals of local government education and government, all grew at the rates you would traditionally expect. We should note that we are no more than 15% penetrated in any vertical we serve. Let me reiterate that, we are no more than 15% penetrated for any vertical we serve. Two highlights of our success in the half. We were selected over SAP for the Department of Veteran Affairs for a full OneGov solution. This opportunity is over $2 million in ARR, a significant win for us, and we're very proud to be supporting the veteran affairs. This is a real testament to not only our product, its scalability, its defense and debt security, but it also validates that we have a product in our OneGov solution that competes and beats SAP. If we look at the University of Buckingham, we sold them a full one education SaaS+ solution. It should be highlighted that SaaS+ is the only way we sell in the U.K. Uni of Buckingham, selected our student management solution to replace tribal, finance solution to replace Unit4, HRP solution to replace Unit4 again. This highlights that the market is excited about our SaaS capability of our OneEducation solution, including student management, which nobody else has. Please let me repeat that. Nobody, no software provider in the world, not SAP, Oracle, Workday, Ellucian, not even Tribal, can provide a true SaaS student management solution, let alone, financials, HR, payroll, enterprise asset management as well as 13 other products in a fully integrated ERP specifically designed for SaaS with defense and depth security that our markets require. But it's a SaaS+ offering that is really setting us apart and accelerating our growth as it delivers the speed of implementation and zero risk to the customer that the industries we've been serving have always asked for, and we are the only company on the planet that can do it. We're beyond proud of this slide as it represents 2 core KPIs and formal commitments we've made to you over the past few years. Firstly, if we look at NRR, as we've previously mentioned, with the metric achieving 115% alone, we will double in size every 5 years. And I'm happy to report we achieved 119%, which is at the top end of our guidance. If we look at our churn historically, we've always had a target of 1% churn, and I'm proud to say we achieved 1% churn again, while at the same time, coming to the conclusion of our SaaS flip program. As we've mentioned to you today already, our traditional ERP strategy is anchored around a land-and-expand philosophy. Leveraging the concept of cohort analysis that is common within our SaaS industry, we are, for the first time, providing a very clear insight that customers continue to purchase additional products and modules repeatedly over time. Let me take that one step further. We've constantly been asked what happens after the SaaS flip program finishes. And therefore, we wanted to show you the growth of ARR for customers that have already flipped. This graph resets the cohort of customers that flipped to SaaS. We rebaselined their ARR to 0 and showed all the ARR growth post SaaS flip. We are very proud of this graph because once again, it validates our ERP strategy, how important SaaS is, how powerful and valuable products are to the verticals we serve and our continued investment in R&D is paying off. In summary, with our customers now move to SaaS our ability to provide their mission-critical software, specifically designed for their vertical, the release of new products like DXP LG and DXP Student, which are redefining the industry and our unique ability to provide all of this within a SaaS+, we don't see the SaaS flip program finishing. We see it as enabling our next stage of growth. Now let me translate this whole story into 3 real-world examples of 3 different customers and 3 different verticals. These 3 customers have all been with us for many years. The original traditional license sale is represented by the ARR in gray. And then the growth of ARR with the customer once they flip to SaaS is represented by the dark blue section. However, as these graphs show, growth continues over time as they continue to purchase new products. So it's not just the flip to SaaS, but it's also the adoption of new products that is generating the new ARR. Now if I take this concept and add SaaS+, this is an example of a large local government customer who have been with us for many years. In 2017, they actually began the flip to SaaS that is highlighted in the dark coloring. They bought new products, as you'd expect, as a result of the flip. However, earlier this year, they came to us to buy our enterprise asset management solution product as well as additional property and rating modules. As they were doing this, they looked at the speed which they could implement property and rating product under the traditional model as well as with SaaS+. They decided they would move even faster than originally projected by a factor of years leveraging SaaS+. Offering that took the opportunity -- as a result of that, they took the opportunity to flip the product to SaaS+ to get that speed benefit. With that, you see, not only are they getting additional products and speed of implementation that resulted in a much quicker return on investment, but we also benefit from significantly greater ARR. The U.K. continues to accelerate growth. In FY '23, total ARR grew by more than 50%, a fantastic result. And I'm beyond proud to highlight, we sold 2 new student management deals in Q4 in the U.K. We have referenceable products and customers in region. Our pipeline is fantastic. We have a strong sales and consulting team. This all shows the U.K. is firing on all cylinders, and we are beyond excited by this continued growth that we have for the foreseeable future. We released our 23 B solution in Q4, which contained over 540 new features. 87% of these features were customer-driven, 12 new modules and additional new technology and security to support our defense and debt security posture, which remains the highest accredited ERP for security in the markets we serve. Our 23 B solution has had the fastest adoption from our customer base than any release in our history. Within this release, we released our first 3 modules of our groundbreaking DXP LG product. The initial feedback from the market is fantastic. And our road map for this product will again differentiate us in local government market. Our DXP Student product, which will put the Power of One education in the hands of the student for the first time. with completely new technology and empowerment for the student that no other product in the market can compete against. This is on track for our early adopter release with our 24A solution in February. I'd like to take just 1 minute and talk about the amazing team we have within TechOne and the programs that we've developed or refreshed in FY '23 to support them. As you know, -- we've had our Technology One foundation with a target of supporting over 500,000 children and their families out of poverty. And I'm happy to inform you that to date, we've helped over 84,000 children and our team dedicated over 5,400 hours to this goal in FY '23. We've implemented an employee share purchase program which we've been told many times is the best employee share purchase program in Australia with more than 40% of our team worldwide participating in this program. We could not be more excited that the TechnologyOne team is now part of the long-term growth of this amazing company. In FY '23, we completely refreshed our mission, purpose values, core beliefs or what we call our TechOne way to reflect our evolution to a SaaS+ company.

Thanks, Stuart. So to wrap up the results, ladies and gents, you can see that we delivered record profit, record revenue and record total ARR. Profit before tax was up 16% to $129.9 million, and that beats our original guidance of 10% to 15% profit growth. We delivered NRR of 119%. And just remember, at our long-term target of 115%, we can continue to double in size every 5 years. Our U.K. ARR grew 52%. You can see that our U.K. strategy and investments are paying off, and we delivered strong cash flow performance, and that was 102% of NPAT. Now with strong profit, strong cash collection, a strong pipeline and outlook. We invested ahead of the curve in the U.K. in our Malaysian service center in R&D, things like DXP, App Builder products and SaaS+ and we also invested in acquisition due diligence. And with total ARR of $392.9 million, up 23%, we've now upgraded our $500 million ARR target by bringing it forward 1 year, that's $500 million of ARR by FY '25. Now I'll turn to building the future. So if we're going to surpass $500 million by FY '25, as I said before, our plans don't end at $500 million or that don't end in FY '25. We now focus on what we call build in the future. Our focus is to maintain our strong momentum well beyond the $500 million and continue to double in size every 5 years. And to be honest, it's why we invest in R&D for the long term to continue to build platforms for growth, products, new modules, new offerings. And Stuart reminded us of this chart at the outset of significant achievements. And today, you heard him deep dive into NRR, our white space in the U.K. So now I'll touch a little bit on SaaS+ and on acquisitions. So you've heard us talk about SaaS+ a number of times. We launched SaaS+ to the market last year as a long-term strategy. That's a game changer in the ERP market. I just want to remind you why we launched SaaS+. So today, we all have SaaS+. But in the ERP world, it still relies on traditional implementations with system integrators. So if you're implementing SAP or Oracle or Workday or [indiscernible], they provide the software and then you need system integrators. And to be honest, it's in the interest of system integrators to drag out implementations because quite frankly, that's how they make money. And these traditional implementations are complex, they're long, they're risky, they're expensive. And when things go amiss, which is often the case in large ERP implementations, the vendor blames the system integrator and the system integrator blames the vendor. We, on the other hand, are the only company able to deliver SaaS+ because through the Power of One, TechOne owns the whole value chain. We've got our deep mission-critical products, industry-specific IP built up over 36 years. and our highly skilled in-house consulting team. We have changed the ERP world because we've taken away long, complex, risky, expensive implementations from our customers and now deliver our SaaS ERP and implementation in one sync for you. And just like we moved carefully from legacy one-off on-premise license fees to high-quality SaaS recurring revenue, we're going to carefully move from one-off low-quality consulting revenue to high-quality SaaS+ recurring revenue, which continues forever or for as long as we have the customer relationship. And this is the additional 40% ARR that Stuart talked about. Now we're having some early wins. We targeted 10 deals this year. It's the first year of a long-term strategy, but we signed 34. So you can see that our SaaS+ offering is resonating with the market, and our first year's results far exceeded our initial expectations, and we'll provide more details as this strategy continues to evolve. As Cale mentioned, during the year, we made approximately $2 million investment in due diligence for one potential acquisition. In the end, we made a nonbinding and indicative proposal for a U.K. higher education software provider. And I thought I'd just recap on how we pick our potential targets. Firstly, they have to be in our vertical markets of higher education or local government. Secondly, they have to bring something -- bring IP a product, something unique, something like student management, like property and rating like ECM. Thirdly, they need to operate in our current regions, APAC or the U.K. But to be honest, U.K. is a special focus for us as we continue to grow fast in this market. Fourthly, it's preferred that they're a SaaS provider, but they don't have to be because we've got the technical and commercial experience to transition customers from on-premise to SaaS, just like we've done with Scientia. In 1 year, we've created the first SaaS version of the time tabling and scheduling product. And then, of course, the potential acquisition needs to be accretive and meet all of our financial metrics. So if you look back at our M&A history, our philosophy and criteria, it's very clear, and it's also embodied in our core beliefs. And the philosophy is that every product we acquire has to be fully rewritten into our single global code line. That gives 1 experience for our customers and huge efficiencies for our organization and to be on a 0 technical debt going forward. So as you'd expect, as we grow our ability to take on larger and more complex acquisitions, so has our ability has grown accordingly. So our history reflects this philosophy. If you think back, the first acquisitions are relatively small purchase price of around $10 million, and then that increased gradually to $15 million to $20 million. And at each stage, we proved our ability to successfully acquire businesses, integrate them and as I said, rewrite their whole product. And at each one of their acquisitions, you look back has delivered significant value to our customers and to our shareholders and importantly, further cements our relevance to the markets we serve. Now this latest potential acquisition, it was significantly larger, but still less than 5% or 6% of our market cap. Now just to remind you of the significant due diligence, we didn't proceed as the potential acquisition, it just didn't meet our criteria. And the NDA we have with the target company, it prevents us from disclosing any more. In the end, we demonstrated our discipline and we didn't proceed. I'd now like to just turn to the outlook for 2024. Every time you pick up the papers and watch the news, you can see the economic outlook and geopolitical issues that continue to create uncertainty. And TechOne has been in -- seeing difficult and challenging economic environments many, many times in the past 36 years. And we've continued to grow strongly during these times, and we'll continue to do so. As we've seen over the last few years, the markets we serve, they continue to remain resilient with our mission-critical products, providing our customers the opportunity to reduce their costs, streamline their business and improve their efficiencies in such challenging economic times. Our customers report to us that they save 30-plus percent by utilizing our global SaaS ERP solution. The TechOne Global SaaS ERP solution is driving our continued success. As a result, our sales pipeline of opportunities for FY '24 is strong, and this positions us well for continuing strong ARR growth and strong profit growth in FY '24. And just to remind you, we're on track to surpass $500 million ARR by September 2025. We'll provide further guidance at both the AGM and with the first half results in FY '24. Finally, ladies and gents, none of these excellent results would be possible without the talented and committed people who make up TechOne. We'd like to thank every member of TechOne, everyone across the globe. We'd also like to thank you, our shareholders, for your continuing support. Can I now hand back over for question and answers.

[Operator Instructions] Edward, we'll now start with the questions from the phone call. Your first question comes from Bob Chen with JPMorgan.

A few questions for me. Just on the ARR number disclosed. Can you talk a little bit about the split between SaaS ARR versus SaaS+ ARR that sort of contributed to the numbers?

Yes. Bob, probably at the outset, I'll start by saying SaaS+ is a long-term strategy. So think about the transition that we did from on-premise to SaaS. It didn't happen overnight. It happens over many, many years. And that's the same with SaaS+. So while it's exciting and while it's resonating with the market, it's going to take some time before it becomes a massive part of our business. So to be honest, from an impact on the P&L this year was immaterial, but getting some significant traction moving forward.

Okay. Great. And then just on the net revenue retention. You've obviously very pleasing number with that 119%. Can you unpack how much price rises impacted that versus a product uptake?

Yes. I might hand to Cale. Before I go there, you saw the result was quite strong at 119%. Cale, can you talk to us about maybe the impact of additional inflation, if you like, over normal inflation. And then we don't really break down Bob, the difference between SaaS transitions and product. But after Cale answers, I'll give you some guidance.

Yes, Bob, I guess, a high level I guess it's no surprise that we're still in an inflated -- inflation environment in the markets that we serve. So there is a tailwind there in the year. But even when you strip that out, I think we remain at the high end of that 115% to 120% range. So it was probably smaller than one might expect that tailwind there.

I might just add a little bit more color. I think if you look at the long-term CPI 3% this year, it might have been a reach of 5.5% or something like that, Cale. To answer your question, Bob, there might have been a tailwind this year of 2.5%. But if you took that out of 119%, it's still a very strong number. And then Bob, the second part of your question we don't break down the difference between transitions to a product, but you can probably just make some extrapolations from previous years that it was in there, but getting less and less every year. And I suppose the reason Stuart spent so much time in introducing cohort analysis was to show that we don't rely on SaaS flips to drive our business as we see it as only just one product that the customers might take out of our 16 products going forward. And as Stuart said, that once they're on SaaS, they 2 products, right, Stuart. Yes. Bob, any more questions?

Just final one, just on SaaS+. How should we think about the margin in that SaaS+ business longer term?

Yes. I think we'll provide more info as a strategy evolves, but we will take some short-term pain and losses just as we did in the SaaS platform. But when it starts to really fire and you think the strategy is really on its own in a number of years, then it becomes 100% margin, to be honest, because once the customer pays that fee, it continues for the life of their relationship with us. So if I can just reiterate at the beginning, we take some short-term pain, just as we did with SaaS platform, just as we did coming off license fees, to be honest. That's why we put the first slide in the appendix just to remind everyone that we've got history during these business transformations. But over time, it will become hugely profitable, Bob.

Your next question comes from Chris Gawler with Goldman Sachs.

Can you hear me okay?

Sure, okay.

I just wanted to confirm a couple of things from the presentation. Just in terms of the SaaS ARR number, just note that you didn't sort of disclose that this time around. I just wanted to confirm that you did need that 40% guidance provided the first half result?

Yes, you're right, Mate, there or thereabouts. I think you can probably back solve it anyway if you used last year's closing SaaS ARR and put those numbers in and then that added on a little bit for the remaining on-premise ISM, you get to $393 million, so there or thereabouts.

Yes, sure. And then just on the 115% NRR number, just to confirm that, that is like a medium-term sort of aspiration to sustain that, that's something that you hope to sort of continue to achieve going forward?

Yes, we'd be unhappy if we didn't achieve it, to be honest.

Yes. Cool. Understood. And then just given the growth in the U.K. and the NRR outlook that you're talking to, it seems like you've made pretty conscious decision to really reinvest back into R&D to hold margin sort of flat, but you've said that you're expecting margin expansion in FY '24. Can you give us a sense for the extent of margin expansion is historical on the guide?

Yes, I would look at that. And you got to -- we put all in context, Chris. We've moved the business now from on-premise to SaaS. So we don't have lumpy license fees. So it's very predictable. We've got a very clear pipeline. So that adds the predictability of it. And then, to be honest, I think what Cale was saying is we could see the full year profit when we deliver the half year results. So that allows us to make investments and going to your point, we invest for the long term. We've got a good track record of our return on those investments we make. And so we invested in things like SaaS+, DXP, App Builder that we talked about, but also in the U.K. as well to make sure we can continue to double in size every 5 years beyond $500 million ARR. And so "full circle." So context is we just had a fantastic result allowed us to invest. It is one of our metrics that we're also focused on and going to your question, yes, if you look at traditional run rates, amongst all of those metrics, we expect to grow to 35% over the next few years.

Yes, sure. And then just one last question just on the U.K. Strong results this year. I mean how should we think about U.K. growth next year is sort of that high secure $1 million NRR sort of something that you're hoping that you could replicate in '24? I mean how much visibility do you have into the pipeline in the year?

Stuart, do you want to handle?

Yes, the pipeline in the U.K. is growing significantly. Our visibility is probably a little stronger than we actually have in Australia because of the growth that we're taking, introducing the brand into the region. I would say the growth trajectory continues. So if you look at the growth we took over the last 2 years and you kind of followed that line, that's the line that I would continue to graph.

Your next question comes from Josh Kannourakis with Barrenjoey.

Guys, can you hear me okay?

Yes, sure can.

A couple of quick questions. Firstly, just around this, I guess, the transition with some of the customers from Ci to Ci Anywhere. Can you just give us a bit of an update on how we should think about the uplift in ARR per customer and where you're at in that journey?

I might kick it off and hand to Stuart. Ci Anywhere, as we said, is our fourth generation. And at every generation, there's new technology that our customers leverage in order to streamline their business. And we've always had in our programs moving our customers from on-premise to SaaS. And then when they're on SaaS to move them from Ci, which was the same generation they were on-premise and it was frictionless and there was no training needed to our latest generation, Ci Anywhere. And it's quite a nice program for us to move customers to the latest tech. Stuart, do you want to just elaborate a bit further on that?

Yes. It's a long-term strategy. We've got a lot of customers to move across. And so we're doing very well with the program. It's probably being picked up a little better than we actually expected initially. I think it's resonating so well because of the power of CiA. So customers are trying to move there as quickly as they possibly can. So that CiA live program is doing really well. But it's a long-term strategy. It will take us quite a few years based on the size of our portfolio of customers to move them across. But they're moving at a pace that it has exceeded our expectation.

And what's the uplift, Stuart, from...

It's about 100 -- so if you take what the ARR is today, add 15% on top, that would be what the uplift would look like. Yes. Sorry, Josh, just to clarify, and that's ongoing. So that goes for the life of the contract.

Got it. That's very helpful. And I think at last count, your sort of 100 or so of the sort of 900 customers were sort of on that. So there's still a fair runway, I guess, to go in terms of that.

Yes.

Just next question. I know you mentioned you can't talk exactly about what the acquisition was. But I think people that follow the space or Ellucian sort of end up buying tribal for, I think, it's GBP 172 million. I guess my question on that would be more so just around the competitive dynamics in that student management space. Just what you guys, if you could make any comments on what you think that means? And I guess is there any risk that you see in terms of competitive threats increasing within either Australia or the U.K. as a result of that acquisition?

It's a really good question, Josh. So if you look at the traditional players, you'd look at tribal, you'd look at Ellucian and you look at old Oracle are really the ones that play in the space. Workday tried to come into the space, but left after they found out it was so complex. And they've kind of stopped the whole development in student management. But if you look at all of the brands I just mentioned, they're all on-prem products that are putting it in the cloud. None of the products are SaaS. And so all they're doing is taking that old on-prem product and just lifting it to the cloud, but getting none of the benefits of cloud. So none of that security, none of that elasticity that you need for a cloud solution -- for a SaaS solution. And so we see them as competitors, they have a feature function. But from a technology standpoint, they're really not a competitor anymore. And I think that's why we won the last 2 in the U.K. that we did. So yes, they're keeping us honest but at the same time, our technology is years ahead of them. And what that's also done is it's kind of leapfrogging even further because now we're coming out with DXP Student, which is leveraging that SaaS capability, of which no other provider in the market has.

I might just add also, Sure, we've got SaaS+. So you'll never find Ellucian or Tribal because they use third-party system integrators.

Yes. And then that SaaS+ will help the customers that are still in that traditional product derisk their move across to the world of SaaS. And so we'll be leveraging that in the near term.

Got it. That's super helpful. One, just quickly following from Chris. So if we go back to the margins, should we think about historically, you've sort of talked about 100 bps is sort of what you'd like to target and that gets you, I guess, to that sort of 35% near term. Is that a reasonable sort of assumption in terms of sort of hope sort of -- or targeted sort of growth in PBIT margins over the next few years?

Yes, it's definitely reasonable, Josh. And maybe just a little bit more context I'll add is, you saw a very strong result this year and enabled us to invest. So I would take stronger revenue growth and profit growth over margin growth. So just signaling that there's margin important, and it's very important we have focus on it. But if we can continue to deliver the revenue and ARR growth we've had and increasing profit growth we have them, we would do that and invest in R&D as well. Josh, I hope that's clear.

Your next question comes from Apoorv Sehgal with UBS.

My question is a little bit long but trying to say slowly. So total ARR grew 23% year-on-year, and if we're just trying to split that out between the SaaS conversions versus the underlying growth, you said that SaaS ARR grew at 40%, right, roughly. So that implies about $9 million of on-premise ARR, which is down about $37 million year-on-year. So that's effective conversion tailwind, right, using a 2x multiplier, which implies that you've got about a 12% tailwind from the on-premise conversion leaving about 11% remainder for the underlying growth to get your 23% total. Now that 11% underlying, it's pretty much consistent with FY '22. So that's fine. My question is going into FY '24, you're going to get a pretty negligible tailwind from the further SaaS conversions, which means for you to keep doing that 15% to 20% NRR growth, I guess the underlying momentum implicitly has to step up from that sort of 11% to I guess, mid-teens to high teens. So firstly, does that sort of ballpark sound logical, what I'm seeing, but also then secondly, what drives the acceleration in underlying growth? Is it basically summed up by, I guess, what you're showing in 2019 everyone's on SaaS now, that creates an inflection point our business to drive further product and module uptake in '24?

I think you've probably answered all your questions in the same answer, Apoorv. But yes, so we spend a lot of time or Stuart spent a lot of time going through that cohort and customer journey analysis to answer that question specifically. So firstly, probably your math is right. I can't follow just as quickly as you call it out. But secondly, we've never seen it as a SaaS flip. And therefore, no clear form, we've never seen it as underlying or not. We've seen it only as just a project that a customer takes in their journey. And I think maybe 2 halves ago, you showed Morton. And you showed where they took SaaS flip and then grew from $300,000 to $3 million ARR. And so I suppose, Apoorv, that's what we're trying to show in these detailed cohorts analysis and individual customer journeys is that it is just a project. That's been happening over many, many years. And in that second cohort chart, as Stuart said, when we rebaselined their year and their dollars to 0 when they move to SaaS, it shows that the continued growth grows very strongly. And in fact, we know that they take more products when they're on SaaS. So long-winded answer back at you, sort of answering your question along the way and just reiterating that will continue to take more products and modules. Stuart, to add a little bit.

Yes. I'd also look at it slightly differently. I'd look at the SaaS flips as a technology enabler. And so we had to go through that program to get into the world of SaaS, so they can get those new products. So you see it as kind of its ending, but we see this enabling that next stage of growth. We had to go through this phase to get there. And so I would just change the optics a little on the view of it.

That's a good point Stuart. You can't get DXP unless you're on SaaS. The technology is just aren't available for your on-premise. And what Stuart didn't say is DXP LG is out there, and it's as you said at the last results, it's selling itself. We're not demonstrating and customers are talking to each other and moving to SaaS and taking the whole product suite, for example, one council in order to get DXP. So there's a little bit of carrot and stick, but the carrot here far outweighs the stick that might have been there before.

And just to tee off of that, that's what we're also seeing that's resonating in the U.K. related to the student management. They're knowing that they need to take our student management to get to the DXP student. And so they're seeing that as the enabling tool to get there.

One final quick question. It's a follow-up to Josh's question on the competitive dynamics in the U.K. Just specifically, like Unit4, we're a pretty major player there in to bring customers onto the cloud by 2025 is my understanding. Base prices obviously can be somewhat disruptive. Does that create an opportunity for TechOne to maybe win new customers?

Absolutely. We're being very, very successful against Unit4 in the U.K. Now absolutely, that confusion, that disruption, that risk that they're seeing, again, in Unit4, it's taking on-prem products and they're putting it into the cloud. They haven't reengineered it, redesigned it, leveraging new technologies. And so customers are sitting back saying, why am I going to be paying more for the same thing? And that's just not on-premise. This is my opportunity to actually go through and hit the market and see what's out there that is better. And that's why SaaS+ is resonating in the U.K. so well because it's giving them that low risk and that quick adoption of the product so that return on investment is so much greater. So yes.

It's a good point, Stuart. Maybe I'll wrap up, like for just in the U.K.. So the things that make us separate in the U.K. is one, we're enterprise. As Stuart said, there is no other provider like us. They're all single point solution. Two we are true SaaS with all the things that come with SaaS, that we've been selling our value proposition for a long time and three, add SaaS+ on that, there is -- from a strategy product delivery point of view, there is not one like us at all.

And I'll geek out one more piece. And we provide that mission-critical software. So it's not just your traditional ERP of just finance and HR, we have payroll, which is unique. We have student management which is unique. And then we have the other -- 14 other products that sit behind it as well. So it's a depth and breadth of the offering.

Your next question comes from Nick Harris with Morgans.

Keen to unpack SaaS+ a little bit more. I appreciate it's a small piece of the overall pie. But just trying to unpack the cadence a little bit. I think you said you targeted 10 this year and you got 34. Could you just give us some sort of, obviously, it's a great outcome. Can you just give us a bit of a flavor for how long that average implementation is? Or do you get most of them migrated in this year or how do we think about it? And then I'll ask a second question.

Yes, yes. Don't think of them as implementing in the year because most of our deals sell pretty evenly through the year as a starting point, Nick, and then it all depends on the size of the customer and the products they're buying, but implementations typically go between 6 and 9 months. The beauty of SaaS+ is it's not just the commercial offering of going. Here's my SaaS+ implementation. In our business, we look at the implementation time frames of every module or a piece of functionality or every business process, how do you want to look at it. And we have teams of the best presales person, consultant support person and R&D around each one of those pieces of functionality, we call them a module. And that team implements the first customer just saying 60 days, The next one gets done in 50 days, and we use R&D and we use tech to continue to drive that down. So it's a multifaceted strategy, which will take a whole lot of time to unpack. But we believe that if it was as is to as is, we'd get significant margin in 3 or 4 years as an implementation -- as the dollars catch up and the implementation rolls forward and it's high-quality recurring revenue. But as we drive the efficiencies through our business, you can see the margins will be massive. So we will unpack that a lot more, Nick, in future presentations. But one, it resonates with the customers, and two, it will have fantastic impacts on our bottom line as well.

Ed, I mean, the key thing is, obviously, you're very comfortable with that risk given the implementations you've done today.

Yes. And if you -- one of the reasons that we put that chart in of moving from license fees to SaaS if you look at what TechOne did, we moved probably the only company in the world that moved from on-premise to SaaS without skipping a beat. Some of the P&L hits per year were $20 million. License fees went from $60 million to $40 million to 20. This is nowhere near that scale. So we can manage that risk as you put it and still deliver great outcomes for the customers and for our company.

Without pretty much lead into my next question. So thank you kindly for the segue. I should say well done on that migration as you say I've seen pretty much every company trying to move from on-premise to SaaS flip up and you guys have done it fantastically, so well done. Just my question, just a consulting impact from SaaS as it was like $1.7 million this year. Is that sort of the magnitude we should think about long term? Or will it accelerate? And I appreciate it accretive if you're moving it from one...

One or the other. Yes, it's hard to know, but you're in the zone, if you use those type of numbers, you're in the zone. So we don't expect it to be like the license fee impact of $20 million but even it was, we'd see it and we manage it carefully just as we did with license fees..

Your next question comes from Andrew Gillies with Macquarie.

Just a quick one for me. Most of my questions have been asked. Given sort of the increased focus on R&D, can you maybe give us a little bit of insight into how you allocate R&D? Like what's a good idea? Is it generally customer-led demand? And then maybe if you could please split between how much of your total R&D cost is OpEx and how much of it is sort of maintenance versus growth?

Yes, yes. We don't go into all that detail, but I can tell you how we make decisions in R&D. We have more ideas that you can focus stick at. And every year, our team comes to us with a whole laundry list and business cases for R&D. That's one input. There's also a big backlog from our customers of what they request. But there's also, I suppose, our ideas, if that makes sense, Andrew, like I'll tell you the world didn't need an iPhone until it got an iPhone. And so I suppose the world didn't know it needed DXP until we delivered DXP or another way, the world didn't know it needed SaaS+ until we debit it. So it's a complex -- it's a complex thing, isn't it. So you add all these things in and we make judgment calls on where we think we're going to get the biggest bang of the buck. In terms of OpEx versus CapEx, I think it's in the back of the slide deck there. We capitalized 54%. So the rest is OpEx. And then we don't go into disclosures what's maintenance versus growth, Andrew.

Yes. No, sorry, referring more to maintenance versus growth. Then in terms of the customer value proposition, the cloud-native strategy, how would you -- how are the conversation you're having with customers now changed relative to that 12 to 24 months ago, especially given you've signed 34 and SaaS+ relative to the 10 expected?

Yes. I think -- can you just ask that question 1 more time, please?

How are the conversations you're having with customers, how are they different relative to sort of 12 to 24 months ago, now you're delivering on SaaS+?

Yes. Well, I suppose firstly, they're on us, let's see your first part, and customers then can take up more products, modules, things like SaaS+ and DXP, App Builder. Stuart, have you got anything else on that?

Yes. We've been trying for years for customers that are already in SaaS to be able to give them a frictionless experience for that new product or new module. And now with SaaS+, we're not only giving it to them frictionless it's with low risk as well because putting in an HRP solution is challenging. And so there's risk associated to that. So if we can derisk that makes the buying cycle much faster and also makes the decision-making internally for them much faster because we've given that packaged proposal. So the back and forth is minimized. So you're seeing a faster uptake, not only because of the new technology, but the way that we're now packaging it within the SaaS+ framework.

Melanie, back to you.

Thank you. We'll now start with questions from the webcast. Your first question comes from Darryl Lynch who asks can you please explain why ROE was less than the previous financial year.

Thanks for your question, Darryl. I might hand that to Cale.

Thank for your question, Darryl. Yes. If you think through the mass of ROE, as we talked to, we brought forward some investments into FY '23. And so there was an impact there on the cost of doing that, and we're also expanding the balance sheet as we build those assets for the future. So while there is a short-term impact on ROE, where very confident that we'll see the return on that investment in future periods as we have in the past.

Your next question comes from Jules Cooper. On SaaS, it's been rolled out in U.K. and covers ECM. What products is SaaS+ now available on in the ANZ region? For example, financials, student management, property and rating, et cetera?

Thanks, Jules. Everything in the U.K. is SaaS+. So it's our only go-to-market approach in the U.K. It helps us further differentiate. And like we said, we're enterprise. We've got the mission-critical products and now we've got SaaS+ in the U.K., and we're the only true SaaS provider, we believe, in the U.K. And in Australia, it's a gradual over time. So financial supply chain, I think HIP is there. Yes, sorry, EAM is SaaS+. And so the remaining products will be done in the next 12 to 24 months, Jules. And then it's just a careful rollout and lessons learned through our customer base.

Thank you. Ladies and gentlemen, that's all the time we have for our question-and-answer session, which concludes our conference call for today. Thank you for participating. You may now all disconnect.