Tracsis plc (TRCS) Earnings Call Transcript & Summary

Welcome to the Tracsis Interim Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Chris Barnes, CEO; and Andy Kelly, CFO. Chris, over to you.

Thank you. Good afternoon, everybody. Thank you very much for joining this presentation today. This is a presentation of our interim results for the period up to January 31, 2023. In terms of the agenda for today, Andy and I will split the presentation between us. We'll start off with the highlights section. And for any of you that are new to Tracsis, just a short overview of the business and our overall objectives. Andy will then give a more detailed review of the financials for the period, and then we'll provide much more detail around our growth strategy, what's been delivered in the period, how that then sits alongside the ESG activities that are going on across the group. And then at the end, we'll give a forward look to the second half of the financial year, and then a longer-term view about our strategic plans for the growth of the group. So to start off with in terms of who Tracsis is. So we were founded in 2004 as a spin-out from Leeds University. The business was IPO-ed in 2007 and since then, has grown through a mix of both acquisition and organic growth. So over that period, we delivered 17 acquisitions to expand the capabilities of the business into a range of rail software technologies and also into a range of consultancy and data analytics and GIS capabilities. The business is growing at a compound annual growth rate of around 30% each year, all self-funded, and we use the cash -- the high levels of cash generation from the business to fund both R&D and new products, often in partnership with our clients and also to fund acquisition. So the group has now got a footprint in North America, a footprint in Ireland and a footprint across the U.K., and we're looking to continue to grow and expand that. In total, we have around 550 employees. For the last full financial year, we delivered revenues of around GBP 70 million. And our ongoing target is to have EBITDA margins greater than 20% across the group at any one time. We have a very sticky client base with a lot of blue chip clients across the rail and wider transportation industries. That gives us a strong to principal market position, and puts us in a really strong position to work in partnership with our customers to develop new technology and to develop new products. We also alongside that, made a commitment last year to be carbon neutral by 2030, which is both important from an employee attraction point of view, and an employee retention point of view. And also is really increasingly important to our customers, many of whom are delivering public transport or related solutions in their home countries. So in terms of the highlights for the period, in summary, very, very high levels of activity across all parts of the group. Our key underlying focus is on growing annual recurring revenue and annual recurring revenue in the period grew by 16%. That's driven both by large contract wins from previous years going live and hence becoming recognized recurring year-on-year revenue, and also supported by a number of new contract wins that we secured in the period and strong North American performance. We'll go through the details of that as we go through this presentation. Alongside that, we've seen a full COVID recovery of all parts of our business that were affected during the COVID pandemic. And so overall, we've got really good visibility of our future pipeline, supported by a really strong orderbook and by a really experienced team across the organization. In addition to that, we are implementing what we call OneTracsis. This is around simplifying the group structure to basically set us up, so that we can scale the business more quickly moving forward. And we're also implementing all the lessons learned from the 3 large enterprise-wide SaaS deployments that we as a group have delivered over the past 12 months. Again, we'll share more details on that as we go through the presentation. We're continuing to invest for growth. We've got a strong balance sheet, which continues to support M&A activity. And we are also seeing an increasingly large pipeline of opportunities for the next generation of product development that sits around our existing product suite. And again, we'll provide more information on that as we go through this presentation. In terms of just the final slide and the overview, the other important part is that we are simplifying the group around common operating models. So those of you that are familiar with Tracsis will know that the 17 acquisitions we've made historically had largely been unintegrated. So they were businesses that were very successful in their own right. They were adopted into the group, but we hadn't brought them together into a more integrated operating model. That is now well in progress. We're probably about 75% through this process now. And just to explain how we're doing that, we're doing that around common operating models. So how you deliver product is very different from how you deliver consultancy is very deliver -- different from how you deliver a major sporting event or music festival. So we are integrating the business around 4 service lines. We have Rail Technology U.K. So that is all our portfolio of both software and hardware in the U.K. managed by one leadership team. We're doing the same in North America. We then will have a single figure head for our consultancy data analytics and GIS businesses. Why is that? It's because they're all professional services businesses where we as -- it's all about selling people, selling capabilities, selling knowledge and know-how. That is different from how you sell products. And then we have a fully integrated Events and Traffic Data business. They have been integrated, one, to deliver our carbon neutral adjectives by having a single vehicle fleet, by having a single ownership of everything related to how we manage our carbon emissions across the group. It's also where we have our highest health and safety risk. So we bring everything together there under one operational footprint. So we will have, by the end of this financial year, 4 figure heads on each of those businesses and running those day-to-day P&Ls but also taking responsibility for delivering organic growth. The entrepreneurs that used to sit within the businesses are still there, but they're now running a much more focused technology play. So how do we take -- how do we grow our technology pipeline, how do we interact with our customers around our technology road map? How do we make sure that we're underpinning this with next generations of some of the fantastic products that we already have across the group. So therefore, we end up with a shared best practice model, which is the blue box along the bottom in terms of how we manage our IT infrastructure, how we manage our information security, how we take the businesses to market to make sure that we maximize our opportunity to collaborate across the different product lines that we have. We have a much more common way in which we develop and support our clients, and we develop and build in all of the lessons learned from the large enterprise software deliveries that we had in the past few months into an integrated PMO offering. So we expect all of the people changes related to this could be ready by the end of July. And then next year, there'll be some final changes made in terms of making sure we've got all of the final pieces of the IT infrastructure in place. There is some costs associated with this, which Andy will discuss in a moment. But this is an important part of our journey as a business to make sure we've got the ability to scale up more quickly, to recognize revenue more quickly and to service the pipelines of opportunity that we have across all parts of the group. Andy, do you like to just give an overview of the financials for the period, please?

Yes. Thanks, Chris. So we've delivered strong financial performance in the first half, and that reflects the high activity levels right across the group that Chris was talking about supplemented by a strong performance from the Icon Geo and RailComm businesses that we acquired in the previous financial year. Revenue in total grew by 34% to GBP 39.2 million and that included 13% organic revenue growth. And really importantly for us, on the Rail Technology & Services Division, 16% increase in annual recurring and repeat revenue. That strong revenue growth has resulted in a 21% increase in EBITDA to GBP 7.5 million, and we closed the half with GBP 17 million of cash in total on the balance sheet with no debt. And reflecting the strong financial performance in the first half, we declared an interim dividend of 1p per share. So just turning to the income statement in a little bit more detail. That 13% organic revenue growth reflects a number of drivers. So we've seen further increase in our rail software license revenue. That includes the benefit from contracts that we signed in the previous financial year as well as new contracts in the period. We've seen very strong demand in remote condition monitoring. And that's linked to entering the final phase of the current 5-year network rail investment cycle. We've seen high activity levels and increased revenue in our professional services businesses. And alongside that, we've seen a full post-COVID recovery in our Events and Traffic Data businesses, where activity levels are back where we saw them before the pandemic. Alongside that, we've seen a strong performance from RailComm in North America in the first half. This business delivered GBP 5.2 million revenue, which was ahead of our expectations, and we'll talk about the drivers of that a little bit later in this presentation. What you will notice is that our EBITDA percentage in the first half is a little bit lower than that 20% plus target that Chris referred to at the start. And there's 2 reasons for that. We've had approximately GBP 800,000 of non-repeat costs in the first half. About GBP 400,000 of that relates to executing the organizational redesign that Chris referred to. We expect there will be a further GBP 600,000 in the second half, so approximately GBP 1 million in total for this financial year to complete the transformation. And the other category of costs in the first half was GBP 400,000 for a one-off cost of living allowance, where we gave everybody in the organization other than directors and the leadership teams of GBP 1,000 one-off cost of living support as we enter the autumn or winter last year in recognition of increasing fuel prices and food prices. Looking at the Rail Technology & Services division. Here, we had 25% organic growth and you can see on the right-hand side, the 3 main product categories that we have in this division, all showed strong levels of revenue growth over the first half of last year. In Operations and Planning, that includes the benefit of our TRACS enterprise rollouts as well as a new license deployment in RailComm. In digital railway infrastructure, that includes a very strong remote condition monitoring demand, double-digit growth in our safety and risk management software business and also the benefit from RailComm’s yard automation and infrastructure offerings. And in customer experience, that was driven by new contract wins in smart ticketing as well as increased levels of transactional delay repay revenue. And as I said before, overall in this division, we've seen an increase of 16% in our annually recurring and repeat revenue to GBP 10.8 million in the first half. We would typically expect to see EBITDA margins on this side of the business to be in excess of 30%. So the slightly lower H1 margins reflect both the one-off restructuring costs also investment during the period to strengthen our SaaS delivery capabilities, and we would expect to see this margin recovering as we go through FY '24. But overall, on this side of the business, high activity levels a large pipeline and further large software contract wins in the period. On the data analytics, consultancy and events side of the business, we've seen high activity levels in each of the 4 business areas. Data Analytics/GIS and in our Transport Insights Businesses, we've seen high demand, including for our specialists train performance and planning capabilities. And in Data analytics/GIS, an important contract win in the period that we talk about in due course. Full COVID recovery in Events and Traffic Data with those businesses now being managed by a common management team. In Events, we had approximately GBP 1 million of revenue in the first half last year that was related to supporting COVID testing and vaccination centers that hasn't repeated this year. So whilst it looks like that business has gone backwards slightly, actually, on an underlying repeat basis, we've seen good growth there. And as Chris mentioned, the integration that's happened between the Events and Traffic Data businesses has been completed and through the second half of the year, we'll be working to integrate the professional services side of this division. Turning finally to cash. The group has got a strong cash position. We typically tend to be more cash generative in the second half of the year, which is to do with the timing of software license renewals and the seasonality in certain parts of our business. And we go into the second half of the year with a strong trade receivables book that gives us confidence that we'll see that unwind in the working capital investment in H2. We closed H1 with GBP 17 million of cash in total. We expect we will pay approximately GBP 8.5 million in the second half in relation to contingent and deferred consideration for historic acquisitions. That completes our contingent and deferred consideration for the majority of our acquisitions. It leaves us with only approximately GBP 1.1 million to be paid through FY '24 and FY '25. And given our levels of cash generation in the second half of the year, still leaves us well positioned to continue to support in acquisitive growth alongside the organic opportunities for the business. So with that, I'll pass back to Chris to start to take us through in more detail some of the key developments in the period in each part of our business.

Great. Thanks, Andy. So this is a slide that we use on a frequent basis to talk through what our strategic priorities are and then to provide updates around the core areas that underpin our ongoing growth. So those 4 strategic priorities, just as a reminder, our ongoing strong organic growth. We're targeting double-digit organic growth each period is to expand our addressable markets. So that's looking for both new product opportunities, but also new geographic opportunities. That's why we entered into the U.S. market last year. Acquisition, still remains a fundamental part of our strategy. But those acquisitions will be brought into more clearly structured, more clearly well-defined organization, as we talked about at the start of this presentation. And then on the top right-hand corner, this is all about implementing OneTracsis to how do we make sure as a business, we have a much better understood brand, market position product offering and are able to really maximize the opportunities that are open to the group moving forward. So we'll now provide updates across the 4 -- 5 core areas that we're investing in. Just as a reminder, on our website in the Investors section of the website are product demonstration videos for all of the 4 green boxes that you can see on the slide here. Each of those is about 10 minutes in length. If you've got some time to look at those, they'll provide you with some really detailed case studies and examples of our strategy in each of those areas. You'll be able to see working demonstrations of the software and the products that we offer in these spaces, and that will help to give you a much better understanding of what we do as an organization. So Andy and I will split this presentation up. So I'll just talk through the first 2 or 3 slides, and then Andy will talk through the following slides. So in terms of our operational performance software, one of our key products in that portfolio is a product called TRACS Enterprise. It's been a product that's been under development by the team for the last 4 or 5 years. It went live with its first deployment last summer. We then went live with our second full deployment in January. Lots of lessons learned in that process. The second go-live was much smoother than the first because of a much better understanding of the dynamics that go on with these large complex software transformation programs. We now have 3 further programs in our orderbook. One of those is for freight, 2 of those are for passenger operators and they will deploy throughout the next financial year. The one key thing we have learned is around a need to sort of modularize this product better moving forward. That would help us much implement the product in a much more straightforward manner. And that is something we're already starting to work on. So we're looking at modularizing the product around train planning, around resourcing and around control. All of those factors work together today within the singular product that we produce, but we think there's a better way to architect that. So that's something we're working on to -- again, embed the lessons learned from our first deployments in future deployments. So today, around 1 in every 5 U.K. Rail journeys is now using TRACS Enterprise as the fundamental product used for timetabling, used to the way in which rolling stock and crew allocated and being used to manage service recovery across the U.K. network. So some really important developments there for us as a business. In the U.S., we've also seen some significant developments in the period in the operational performance space. So we've had for -- or RailComm has had for a number of years, a Computer Aided Dispatching products that's used by a number of transit operators and short line rail operators across the U.S. market. But our system has never spoken to a system called Positive Train Control. And Positive Train Control is an automatic train protection system that has to be used across the U.S. railway to protect against collisions or to minimize the risk of any sort of significant rail-related fatalities. So over the past -- before we bought RailComm, this product was already in development. Since we have bought the business, that product has now gone through to factory acceptance testing. The license for this product was deployed to the customer in January, and this is a really important step in opening up a new product family opportunity for us in North America. So being able to combine our Computer Aided Dispatching technology with Positive Train Control opens up a really interesting market opportunity for us in which there is only other one competitor in that marketplace. And hence, this is something that we're really looking to grow moving forward. And there'll be more information to follow later on this year around more detail around this product and who the client is the first adopter of this piece of technology. If we then look at remote condition monitoring, we have seen the busiest period we've ever had for this technology, largely driven by demand from the U.K. What typically happens in a 5-year control period within network rail is that the first 1 or 2 years are used to plan major infrastructure upgrades, years 3 and 4 are usually about starting to procure major parts of the technology needed as part of those upgrade programs and in years 4 and 5 are around the implementation of those solutions. So we have just completed year 4 on April 1, we moved into year 5. And the demand we're seeing right now reflects that. So it's demand not just from network rail from big system integrators that are doing major infrastructure upgrades as part of the planned spending from network rail. In addition to that, we have got some orders through in North America for the provision of remote condition monitoring, and that's a key focus for us moving forward. The biggest area we see for growth there is actually around grade crossings or what we call in the U.K. level crossings, where there is regulatory requirements coming in North America for those crossings to be monitored on an ongoing basis. And to do that, you need to do that via technology solution. So we expect the RCM demand to continue and it's an important part of our growth plan, both here in the U.K. and in North America. The final area I'll talk around is around smart ticketing and delay repay. So we have -- the U.K. is only accredited Pay-As-You-Go smart ticketing solution for use on the U.K. railway. Our specialism is in the back office functionality where all of the smart algorithms sit in terms of making sure you have the best fair allocation to a particular journey. So then linking that to automated delay repay compensation because we know which train you are on, and we know whether that train arrived on time, always delayed. But that technology can be deployed with different tokens that are used by the customer. So you can see from the map on the right-hand side here, there are 3 regions there, the yellow, the blue and the green regions, which are GTR, South western Railways and Great Western Railways have all deployed our technology with a smart card. And that smart card is a piece of plastic that is branded in the colors or branding of the train operator, and you touch in and touch out on barriers to confirm when and where you start your journey. In those examples, the train operator owns your CRM data, and you create an online account that's linked to you and linked to your travel patterns. But that's not the only way you can deploy that technology. You can also deploy that technology with a contactless bank card. So you can see here the Welsh region is highlighted in pink. So where is it going ahead and implementing our technology but with a contactless bank card solution. Now with this version, you do not need to sign up for an account, you do as you would -- if you're using this technology on the underground in London, you simply walk up to a barrier, you tap your credit card. And at the end of your journey, you tap your credit card again. And we know that you've completed the journey between 2 locations. The benefit of this technology is that you do not have to sign up for an account. So you -- just because you have a bank card, we know that we can guarantee payment, and that is what you use as your travel token. Now in both those cases, you need a gateline against which you can -- we can actually register your tap from your credit card or from your smart card. And that excuse the pun, but that provides a barrier to entry because where those barriers do not exist and in many parts of the country, those barriers do not exist, you therefore, can't implement this type of technology. So we've been developing our own product called the Hopsta app. The Hopsta app is a mobile-based version of the front end of our ticketing solution. When you walk into a station, you will press in the initial adoption, your press a button that says start my journey and that will also create a barcode on your phone that then provides confirmation of a valid ticket to travel on the network. The difference is that, that won't have a destination on it. So as you travel around the network all day, you use that barcode if there are barriers to confirm where you've entered the next of the station if your ticket is inspected by a ticket officer on a train, you can confirm that you have a ticket. And as you go through the day, we use that barcode on your phone to understand where you've traveled. And at the end of the day, when you finish your journey, you'll hit stop my journey on the app, and we know that your journey has completed. In later versions of the app, you won't need to start and stop your journey. We will geofence your phone based on your location. But what it does is it means we can start to implement this technology in areas where there are not existing very expensive gateline solutions in place. So we have signed our first 6-month pilot for this contract. We're in month 3 of that pilot now. That's going to give us some really interesting insight on customer adoption rates, customer behavior on how we best implement that technology. And so we will provide more information later this year. following on from that to explain what that looks like and what we expect the future rollout of this technology to be across the U.K. So lots going on in the smart ticketing space. A lot of that is linked to the future direction of Great British Railways. The government wants to have a nationwide Pay-As-You-Go solution. We're not quite sure what technology that will we'll sit behind that just yet, but we're in a really strong position to be part of that discussion and to have our technology very much sitting now as part of the solution moving forward. Andy, do you want to just talk through the updates on the other areas?

Yes, will do. So in our risk management and safety software business, the core product is something called RailHub. RailHub is a platform that provides a single log in that then interfaces with a number of source systems that gives you a single place to plan and execute in a safe manner, maintenance and upgrade work on the U.K. railway. And in the summer of 2021, we won a large contract to deploy this throughout network rail and that rollout was completed in December of 2022. So that's now been rolled out to 22,000 individual users right across network rails organization in addition to a similar number of individual users in their supply chain. So it's a really key milestone for us completing this large and technical enterprise license deployment and leaves us really well positioned to continue to work in partnership with network rail to now build upon the capabilities and the functionality that's included in that platform and therefore, to continue to grow the value and the impact of this product. Finally, on Data Analytics and GIS, we won a large new contract in the period to develop what's called an area in monitoring system which combines satellite data imagery with advanced data analytics to provide a confirmed audit trail of land usage that is then linked to the distribution of European Union subsidies for farmers and other land users based on how that land is being used. So this is a really important combination for us of the earth observation capabilities that came with the acquisition of Icon last year with our existing data analytics and GIS technologies. And there are future growth opportunities in this area elsewhere in the European Union. What we're also seeing in this space is an increasing requirement for our customers to use location data to help them to deliver their ESG agenda and to meet an increasing level of environmental regulatory requirements. And also increasing demand from our customers to help with just using the vast amounts of data that they have access to. And cleansing that data, structuring it and organizing it in a way that allows it to be layered upon itself in order to provide real insight to deliver improved efficiency and improved ESG outcomes in their businesses. So a lot of space, a lot of interesting activity in this space, very high activity levels for our business. We're now looking to grow this outside of its core market in Ireland and see if we can continue to grow this business in the U.K. and elsewhere. Turning now to ESG. So you will have seen, and as part of our annual reporting last year, we made a pledge to be carbon neutral by 2030. We've made good progress in this area in the first half of the year. Most of our carbon emissions come from running our vehicle fleet in the Events and Traffic Data businesses. And therefore, one of the core strategic reasons for integrating those businesses was to bring that fleet management piece and the whole operating model under 1 common management team with a focus and accountability for driving that carbon reduction plan over the next few years. And alongside that, we're rolling out ISO14001 as an environmental management system right across the group. So that we can run our other carbon reduction programs in a consistent and coordinated way, and we'll provide more data on that as part of our year-end reporting. Similarly, on the social side of ESG, we're working very hard to define and determine exactly what our targets, both qualitative and quantitative are in this space and we'll provide more information on this as part of our year-end reporting. In the meantime, we have produced a Tracsis vision video which tries to be spill down in a short space of time, exactly what Tracsis is about from terms of a vision in terms of a purpose that's available on our new Tracsis plc website, so I'd encourage you to take a look at that. So with that, I'll pass you back to Chris to cover the closing remarks and the forward-looking statements.

Okay. So in terms of this, we've got just 3 further slides to share. So the first one is on the forward look for the rail industry in the U.K. and U.S. So in both those markets, we are seeing digital transformation becoming an ever-increasing topic of conversation. And we are really well placed to be part of that discussion, both with products we already have and with new versions or iterations of those products that we could develop. In terms of specific developments in the U.K., the Transport Secretary has confirmed a commitment to implementing the Great British Railways organization. From a publication published yesterday, that looks like it's going to come to Parliament in September of this year. And the reason that needs to happen is because they need to be set up as a legislative body, they need to be set up as a legal entity so that they can actually start to procure work and actually start to make a difference to the future direction of the industry and how it adopts future digital technologies. They've also confirmed that the headquarters is going to be in Derby, which is great for Tracsis because we have a number of our team based in Derby. So that is all really very positive. That tells us there's increasingly clear direction to implementing the recommendations of the Williams-Shapps review that was published in 2021, all of which is directionally really good news for the Tracsis organization. Alongside that, new national rail contracts are being issued to train operators to give them much longer visibility in terms of the arrangements that they have for running the train operations across the U.K. There's a stronger focus on operational efficiencies, on cost savings, and there's really clearly defined quality target measures that each operator has to meet. And if they meet those targets, they get incentivizations in terms of payments for delivering improved customer service and an improved experience. So again, a lot of that feeds into products or services that we provide into those customers. U.K. rail industrial election has been a distraction of sorts, it's not had really any direct impact on us to date, but it does cause a distraction in terms of the need for the industry to go through a continual replanning exercise. Network rail have now resolved their industrial action the train operators are expected to follow suit sometime in the near future, that will just give real clarity to everybody moving forward, which obviously is important. We are seeing in the U.S. as well some impacts around unionized labor shortages as a result and a hangover from COVID. That is having a small impact on our -- some of our implementation schedules. But in general, we're able to cope and manage with those changes, and obviously, having these issues properly resolved will give us a clear path moving forward. In terms of our outlook, we continue to see strong industry demand from both passenger and freight operators and really good senior level engagement across network rail and increasingly with the newly formed Great British Railways team. There is a little bit of uncertainty at the moment with all those changes going on around who holds which budget and the delivery time lines that therefore go with the release of those budgets. We're working through those conversations with our customers, and there may be some small material impacts to us just in the short term, but there are things that will manage through the day-to-day operation of the business. In terms of our Data, Analytics, Consultancy & Events business, we have really strong visibility moving forward of our pipeline here. As Andy said earlier on, the data analytics and GIS business is having very strong demand driven by ESG requirements, lots of interest in location data, lots of interest in increasingly in data from across the transportation space, how we use that to drive more predictive analysis and more -- and potentially into things like AI and machine learning capabilities. So a fascinating area for us to be part of. We're seeing strong demand for our operational consultancy activities. If you imagine we specialize in timetabling we specialize in train planning, we specialize in allocating rolling stock to complex operating environments, lots of demand for that at the moment and for the software that sits behind it. Our traffic data business has got record levels of orderbook has won several large contracts in the past few months. And despite cost living pressures just about every large sporting event a musical festival this summer is completely sold out. So we've got really good strong orderbook and a high confidence that we can deliver what will be a complex program of work over the coming months but something that's really exciting to be part of. So in conclusion, Q3 trading is in line with our expectations. We have been awarded a number of new contract wins that are now in the final contracting stages which will underpin further growth through Q3 and Q4. Our rail software pipeline continues to grow across passenger freight and infrastructure. We're making good progress in North America and we're now looking at what products from our U.K. portfolio, should we introduce into the North American market and over what time scales. RCM is the obvious one that goes first, but there are other areas that are of real interest to clients in North America. And importantly, acquisition remains a key part of our ongoing strategy. So lots of opportunities being explored there at the moment with more information to follow in the future. So overall, we'll continue to drive our innovation and deliver the large ongoing portfolio of programs that we have. We will continue to implement our OneTracsis strategy, which is all about increasing collaboration and embedding best practice across the group, continue to pursue M&A but in very restricted areas, the M&A has to be in areas related to rail technology, related to recurring revenue or related to data analytics and GIS. We continue to commit and deliver to our ESG priorities and implement ISO14001. And overall, therefore, our long-term growth stress remains unchanged, and we continue to look forward with them, a really positive outlook to the coming months and coming years ahead of us. So thank you very much for listening today. We will now open up for any questions that you have.

[Operator Instructions] The first question is revenue growth has been excellent during the recovery from COVID, but margins have never recovered to the pre-pandemic levels. has this business suffered a permanent downturn in profitability?

Absolutely not. It's all part of the growth curve of the business as we now implement that new structure that we talked about at the start of the presentation. we've got opportunities across all parts of our business. Pipeline is strong. orderbook is strong. It's -- at the moment, this is all part of investing in the scalability and growth of the business moving forward. So we expect this year to see that slight drop off in margin performance that we've seen in H1. We expect as we go back into FY '24 and FY '24, that margin to pick back up to at least the levels we saw before COVID. And our overall objective is obviously to continue to see that margin improvement moving well into the future.

And you've covered this a little, but what is the impact of the strike action on the business?

So overall, we have not really been impacted very much at all. The only real area where we're seeing a small impact at the moment is some indecision around the time line of placing future work. So we have a number of contracts where we've been awarded or being told that we've been supplier nominated for those contracts, but there's a little bit of uncertainty just right now with the transition to Great British Railways or exactly when that contract will be placed with us. So we're working through those in partnership with the clients. We're told that they are critical path programs that will go ahead, but there's just a little bit of uncertainty at the moment as to exactly when some of those programs will take place. We're not talking about a big impact on FY '23 financial performance, but there are just things again, that help us plan for the future and make sure that we can plan with certainty moving forward.

Great. Can you give us the likely direction of Great British Railways?

Yes. So what we believe is going to happen is it's going to -- you're going to move to a structure where we have a regional Great British Railways Director. So several directors across the U.K. that are responsible for both infrastructure and train operations services within those different geographies. So today, what you have is you have a number of different train operating managing directors, and you have a range of different network rail managing directors that run the U.K. on a regional or route basis. So from what we understand is they will come together much more closely. We will see Great British Railway setting the sort of strategic direction for the railway. So are there going to be certain areas where there's going to be a standard U.K.-wide solution? Or are we going to continue to see multiple solutions of different types across different parts of the U.K.? So what we're doing, making sure we're doing is engaging with a range of senior stakeholders right now across the network rail and existing train operating structures, but also as Great British Railway senior figures are identified is making sure we're engaging with them as well to understand how the transition will take place. So there's sort of things like what the rail delivery group does today? Well, how does that integrate into the Great British Railway structure. Things like that, we're not totally clear on yet, but we expect Great British Railways to set out a really clear future direction for the industry around which we can then hang our future investment decisions much more clearly.

What are you seeing in terms of wage inflation and staff churn?

So we -- our salary increase year runs alongside our financial year. So we do salary reviews in the summer with effect from the first of August. In this year, that was, on average, around 5% or 6% and we're not seeing significant levels of staff churn. So we're very fortunate in that respect. And people who know us well, we know that we are implementing a people strategy alongside that to make sure that we continue to invest in developing people, rolling out our OneTracsis training and development program. And the other benefit of moving to that new organizational structure is it will start to create really clear career paths and collaboration opportunities for our people moving away from that so operating model into a much more integrated operating model. So yes, we've had no significant concerns in that area. The cost of living allowance that we paid in August of last year was a conscious decision to continue to look after our people, and we will continue to do that.

Great. And how do you see recurring revenue percentage contribution to total revenues evolving over time?

We're absolutely focused strategically in growing that. So both organically as we continue to grow the number of software licenses that we've got in place, and as a key criteria for acquisition of looking for businesses that have high quality recurring revenues as part of that proposition. So absolutely, we'll look to see that growing. It's worth saying that the parts of our revenue that aren't included in that ARR metric are also both very high margin. Because they include some bespoke software development work that often leads to then future software contract implementations or it includes a level of hardware sales and framework agreements or transactional revenue in the customer experience side of the business. So absolutely, we expect to see that ARR percentage growing, and we're very focused on it. Equally, the bits that aren't in that ARR are still very high value and often quite sticky revenue streams for us.

Should we anticipate a focus on the U.S. for your future acquisitions?

There will definitely be a focus on acquisitions in the U.S., and we are -- we have a target list of companies that we are looking to talk to and engage with in the North American market. We would also like to if we could acquire into the Mainland European market as well because to organically grow or sort of very U.K. dominant products in that market is very difficult. So I think a key way for us to get into that market were to be to buy into organizations that have got similar products that don't compete with us in the U.K., but would give us that footprint and then obviously, the U.K., we still -- there's still a lot of headwind here for us to grow. And so it's a multipronged attack. And there is lots of discussion going on at the moment across the whole breadth of what I've just shared. What's really important, though, is that it's around the technology play, the recurring revenue play. We are not looking for distressed businesses. We're not looking for turnaround businesses. We're looking for organizations that have a really strong track record of profitability and free cash flow generation. And with the level of opportunities we've got right now, we can afford to be quite careful there in who we choose and how we choose to engage. But North America will definitely be -- is definitely front and center of that thought process.

Tremendous. And at the moment, we've got just one more question, which is what's the quantum that we can expect from data analytics and GIS going forward? And over what sort of time frame?

So that business is approximately GBP 10 million business today. And I would expect that to follow the similar growth prospects that we've set for the group as a whole of targeting kind of 10% organic growth over a sustained period. I think where it gets really interesting for us is where we can start to point those capabilities back into the rail side of our business. So can we accelerate that growth by layering on to the core business today that kind of data as a service offering back into some of our existing client base on the rail side. Now that's early stages, and it's probably a bit early for us to start to give confident levels of growth rates for that. But that is really the opportunity in that business to then accelerate that growth curve.

Lovely. And that's the end of questions. Chris, do you have any closing remarks?

Just to say thank you very much for joining us. Our team has done a fantastic job, as always, over the past 6 months in terms of delivering those levels of activity we've seen across the group. We're really excited about the future that's ahead of us, and we look forward to providing further updates throughout the year as we land new contract wins and continue to build on our success. So thank you very much for joining us.

Many thanks, indeed, Chris and Andy. And to everyone listening, you'll now be taken to web page to give feedback on today's presentation. If you can't complete it now, you'll get a follow-up e-mail. We would be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.