NCC Group plc (NCC) Earnings Call Transcript

Good morning, everybody. Thank you very much for making it in person, so many people in person, given the various travel challenges, shall we say, over the last few days. A very, very interesting session we've got here today. Lots going on. Delighted to be able to talk to you about where we are in H1 and a little bit more about the future. So as such, this will probably take a little bit more time than normal, but we'll do the usual, hopefully, Q&A at the end. So what I'd like to do is really just give you some initial impressions of the business after I've been in sort of 6, 7 months now. It's been somewhat of a roller coast, as you can probably imagine. It's been a period where we've looked very hard at the business, got around, met colleagues internationally, really got under the covers and then started to think about where we want to take the business going forward. So in terms of a few initial impressions, the first thing I'd say is when we look at the business, it's really 2 distinct businesses. We've got our Assurance business, which is the cybersecurity element of what we do, and we've got our software resilient business. They're quite distinct. There are limited -- very limited synergies between the 2. They operate separately. They've got different bio cycles, different buyers, so operate in quite a distinct way. And I think that's an important element for the context of where we're thinking of taking things in the future. The business has got a great track record. We work with both the public and private sector. We've had a consistent level of growth. We've got true market-leading capabilities, and that comes through time and time again. And interestingly, it's both in our Assurance business, but also in our software resilience business. We're operating in a very dynamic market. I don't think anybody would deny that the -- the technology agenda continues to change at pace, evolving ecosystems, the geopolitical situation, all of these things which you're aware of means that sort of the technology and the elements of technology that we deal with remain incredibly relevant to our clients. It's a great business. We're continuing to grow, but we could do more. And that's what we're really focusing on as we go forward. So a little bit about sort of what's the secret source of NCC. And I put it into 3 buckets, sort of our innovation, intelligence and insight. And by that, I mean, and this is something that really comes through in terms of the passion of our people and our colleagues. They're really good at innovating new solutions, developing, responding to what the market wants to do, great entrepreneurs and -- but maybe don't scale things the way you would want to. We've got fantastic intelligence of what is happening, particularly in the cyber domain. We work very closely with governments globally, with clients globally, and we get incredible amount of intelligence from that interaction. And we're able to use that to drive insights, which is -- makes it what we do very, very relevant to our clients across sectors and across geographies. But underpinning all of that, it's about the people. And what has blown me away since I've been here is that the passion the troops have for what they do. They fundamentally believe in the purpose, the mission of the business. The passion about it. We're market leaders in testing and software resilience. And we have some really good and I think this is credit to the team, really good underpinning systems now that allow us to operate with a degree of agility we probably couldn't have done historically. Now all of that's great, and I said just a very quick gamble through. But I think it would be -- I certainly wouldn't have any credibility if I didn't mention the market at the moment. We're clearly operating in a market that there are headwinds, I think, to put it politely. We're a tech company. We service the tech sector, and we can't operate in isolation. And I've sort of -- I've been through various cycles over the years and in professional services, these things happen. And it's about how we are able to respond to it to think about what is the opportunity in the medium term. So that's where we're going. And that leads us to the next chapter of our strategy. We're really focused on irrespective of the market headwinds now, what is the opportunity in the medium term. And that's about delivering an enhanced level and accelerated growth by working more in a different way with our clients with the capabilities and building additional capabilities, how we deliver globally and what's our operating model and most importantly, how do we build our brand in the external marketplace. So I'll come on to those in a little bit more detail, but the output of that is to deliver a mid-teen revenue growth in cybersecurity over the medium term and also mid-teens adjusted EBIT margin. Obviously, we need to phase some of this strategy over FY '23 and '24, and I'll come back to elements of that. We'll maintain the single-digit growth in software resilience as we believe that is a very strong business. It's doing fantastically. And I'll talk a little bit more about what has happened over the last few months, but we maintain market leadership in that domain. So that's the next chapter. Now in terms of H1, I think it's fair to say we've had a robust H1, very, very solid. In fact, actually, the -- our November month was probably our record month ever, absolutely, really strong across the group. We've seen double-digit revenue growth, but there are some unusual dynamics at play. We've seen attrition, for example, I think in December, January, the first time it has ever happened. We've had 0 attrition in the U.K. business. So there is a different dynamic. We've got a very strong balance sheet, and Tim will come on to this with our refinancing that's in place. But the trading outlook is certainly clear that our clients are experiencing the headwinds. I think that is plain to see. There's been enough reporting of that, particularly in the U.S. And as a consequence, there will be an impact on our FY '23 revenues, but we still expect to see the business growing in single digits for the year. Irrespective of that, the conversations with the Board have been very much about what is the medium-term opportunity, very confident in where the business is and where it's going and committed to invest in the next chapter of our strategy. Now maybe I'll just hand over to Tim to talk a little bit about H1 later on and particularly some of the actions we've got underway to ensure that we're in a very robust position at the end of the financial. So our strategy, excuse me. I've talked right at the very top about the 2 elements of our business. And maybe I'll just deal with software resilience first. We've invested significantly in software resilience over the last 12 months. There's been the IPM acquisition. We've also, in the last 6 months, brought in a new leadership team, and that business is in a very strong state currently. It's clear that, as I say, it operates in an individual basis, buying cycle is different. The buyers are different. So as such, post our operational review, which I think everybody will be aware of, we are putting into a strategic review to look how we can best realize value for shareholders from the business. As such, our next chapter of growth after that investment has been made now in software resilience will be to focus on how we accelerate the cyber element of NCC Group. We believe that's got the most potential. We all know how fast the market has been growing. We're growing over a period of time, irrespective of any sort of short-term headwinds, we believe this is where the future growth potential of the business is. So our investment focuses on cybersecurity. The strategy will focus around 5 -- 4 pillars, underpinned by that secret sauce, I mentioned, the innovation insight Intelligence. But the 4 pillars are effectively our clients at the center of everything we do, the capabilities we have to service those clients, how we deliver those capabilities to our clients and how we make sure the market is aware of what we do and who we are. So it's very externally focused. It's very much about the market. We will, of course, do this organically, but we will be alive to any opportunities for inorganic growth, where that makes sense in either products, services, sectors or countries where obviously make strategic sense and it's financially sound. But all of these are interlinked and I'll talk through how they all fit together as we go through. So firstly, clients. As I say, clients as part of the ethos of NCC is absolutely central, whether you're in IT, HR, finance or client facing. How you deal with your clients is absolutely central. Now if I'm honest, we have historically been spread the way I look at the business quite thinly. We've got a lot of clients, a lot of geographies, a lot of markets. And as such, it's a lot of management to do all of that. We've been very tech-led in our offerings, very much almost a product solution-led approach rather than responding to a client problem. And when we look at the opportunities in the markets, whether it's particular geographies or particular sectors, there's a lot of white space to go after. So what we'll do is focus on greater sector -- great sector alignment for our teams. We'll focus on those sectors where that's the fastest growth opportunity. specifically those which are highly regulated. So financial services is a great example. All those most exposed to cyber risk. As an example, the industries like advanced manufacturing or oil and gas infrastructure utilities, where there are particular threat actors involved. We'll aim to develop a set of relationships with a higher level of buyer with the C-suite with a broader set of capabilities, which I'll come on to. To give you an example of how we're going to try and bringing that focus, we've got a great footprint, for example, in the U.K. financial services sector but less so in the North American one. So what we're going to do is bring that capability together to take our offerings to the North American financial services sector. You see some of the industries there, which I've mentioned, those are the sorts of areas where we believe that there's most opportunity or greater cyber risk. The final point I'd just make in terms of how we go to market is around the channels to market. Historically, I think it's fair to say it has been very much a direct-to-market route. We've gone directly to clients. I think there is huge opportunities to work in a partner ecosystem in a way we've never done before. We've had some initial steps to that. And I know we've mentioned Microsoft historically and the Sentinel XDR proposition. I think there's an opportunity to accelerate that. But also, there are other partners within the ecosystem that we can build relationships. So for example, I'm very pleased to say we've now got our first product offerings on Amazon Marketplace and there are other channels to market that we're absolutely focused on. So I'm very excited about that, and I've worked extensively through that type of relationship before. And we've got a few things. It also informed really well how we build new solutions, which are not just about people, but they're about IP products coming together. So capabilities. Now an important part -- and again, the interlink nature of this is really important. We have confidence to be able to go and have a conversation with your clients at a senior level. You've got to be confident in the capabilities you have to be able to take to them. As I say, NCC is a market leader, particularly in the areas like technical assurance and incident response, really technically excellent. But we're missing out on client and market share because we're not able to maybe take in some of the broader sets of offerings and services that our clients need to solve their problems. So part of our focus is actually how we build out those areas where we believe that it's adjacent and that there is areas where we could drive greater share of wallet in individual clients and across the market. To try and bring that to life a little bit, the way I see this approach is quite simple. We want to be close to our clients at the moment on most distress when there's an incident, which were greater. And we've got tools, we've got the expertise. We are absolutely technically excellent. But what we then miss out on is the ability to help them solve some of the challenges that were the cause of that particular breach through the consulting implementation. So we see there's the most market opportunity there. Of course, once you help them with a solution, there are certain things that they may not want to operate and run. We've got a great money services business in some geographies, but actually want to expand that and take it broader, continue to innovate it and drive that harder into the market a particular proposition. So again, we see that as a particular area of focus. But that doesn't mean that we don't want to lose our market leadership in the technical assurance domain by continuing to innovate with new services and new offerings, particularly such as always on testing. So the aim of this is to win more market share and more share of the wallet and individual clients. The third area is obviously being able to execute and deliver that. If I look at NCC, there has been some really positive steps in terms of operating as an international business. We've got strong regions. And we also have an established way of making sure that we can service some of those regions from nearshore centers. What we're wanting to do is take that to the next level by building and developing offshore delivery capability in those new domains that I talked about, those new capabilities that we're wanting to build. So we need to set that up to think, operate and act globally. We brought in a project team back in early December as part of this. So we're quite well advanced. And we've developed a shortlist of 4 locations for an offshore delivery center. That will be progressed, and we aim to have a go live in FY '24. And obviously, that will give us the capability to build, scale rapidly new capabilities, new skill sets and tap into a global talent pool, which gives us that flexibility in the market. Obviously, we'll be able to use also excuse to use as a way of being able to pursue different sorts of engagements at different price points. And finally, the sizzle, I think that's the phrase. It's been mentioned on a number of occasions. How do we get NCC better known? And again, if I take it step back a little bit, if we're quite honest with ourselves, we're a little confused in terms of what our story is. We have NCC Group, we have NCC in some markets, we have Fox in the Netherlands, and we have Software Resilience. How does all that join together? It's not particularly clear for our clients for the market. So we want to, as part of our focus on cyber as a story, make that a much clearer and invest in that brand positioning and also make sure that software resilience has a clear brand and a distinction of its own. So that's a separate element and story to the market. I'm delighted to say we've appointed a Chief Marketing Officer in January, who's brought together our brand marketing comms public affairs team. So we have a more consistent view of how we go external. And we're going to use that with our focus on clients in the markets to actually target a difference at layer buyers outside of our technical heartlands without losing that footprint. So a real shift, a real move to actually make it much clear about what NCC is a leading cyber brand in the marketplace. Now clearly, all that all has a bit of a cost. In FY '23, we've allocated GBP 5 million of cost. And obviously, there will be ongoing costs going forward. However, they will net off because, and I think this is an important element to reiterate. The systems are in place now. This is about people and revenue generation. So that gives us the flexibility to either invest depending on the market conditions or not, but also it's about almost hopefully, real returns quickly in FY '24. We -- the net benefit -- so that's why in FY '24, we haven't identified a specific cost because it'd be netted off. So in summary, the impact of our next chapter strategy will be about driving mid-teens revenue growth, and that will be driven by our, as I mentioned, managed services and consulting, particularly, a mid-teens adjusted EBIT by greater scale and a more efficient operating model and also that diversified and much more resilient mix of services and a greater proportion of our revenue through a recurring revenue model through Managed Services in particular. So I hope that is helpful. I'll now maybe just hand over to Tim to talk a little bit more in detail about H1.

Thank you, Mikey. Good morning, everybody. Sure it works. Okay. Here's the usual financial summary I put up. And the good news here is we've had a very robust first half. So we're stronger -- sorry, slower in Q1 as we came into the year, and we also have the NTC Conference, where we took all our sales and delivery people off the road for a week. And then we had a stronger Q2 with, as Mike said, a record November. So you can see on the RO there, most arrows are going up, increased revenue, increased profits, increased cash and the bits that have come off are around the margin percentage on both gross margin and EBIT margin. And those are the things where I'll come on to talk about lower utilization of our technical staff and the gross margin and NCC Con costs are spread across both the cost of sales and the overheads. And the other thing in overheads is the investment in people that we've made. So I'll come on to that in a moment. So moving on to operational KPIs. Again, most of them are green. So everything is green except really around utilization, again, which I'll come on to. So you can see that our growth drivers of remediation sales grew at 20%. XDR sales going really well, almost 400% from a small base, but it's still going really well and in line with our expectations. And then group sales orders are up with the pleasing increase in average order value over $250,000. That's our internal measure of are we getting larger deals? Are we getting longer deals? Are we getting more annual recurring revenue, and that's going up as well. We mentioned last time about day rate change and said, look, we can put our day rates up even in a tougher market, you can see it's up by 5.4% year-on-year. And global resourcing days have increased by 6%. That's that cross-border delivery that we do out of region. The thing we've had that's the issue is direct utilization, which is really around the frontline technical stuff. You can see it's dropped by 6% from 72 rounded to 65. And that's because go back to last year, we had a record second half. We've got all of the people on the bench. We came into Q1, it was a bit slower to see how it goes. Q2 was better. And then as Mike said, we've had some economic headwinds coming through now. And those economic headwinds started in the states in December, where the pipeline starts to weaken and then in the U.K. in January. And that's meant that we've got too many people on the bench and our utilization has gone down. As you'd expect, we expect utilization to be in the high 70s or the 80s, and at the moment, you can see we're down in the 60s. So it's too low. So we're taking action, which I will come on to. Pleasingly, our investment and research has gone up, and that's part of our secret sauce, as Mike said before, and that's still going up, which is good news. But you can see even on the other side of the technical stuff, our attrition has also dropped and it's gone down from 22% to 15%. And I can tell you, over the last few weeks, it's actually dropped into single digit of the technical staff. Our attrition has also dropped and let's tell you over the last few weeks, it's actually dropped into single digits. So there's a lot less people leaving us. So what's happening is we've got that combination of a lot of people on the bench and people not leaving and therefore, we have to address that issue. In terms of KPIs, with Mike's new strategy coming in, what we're going to look at is simplifying and reducing the number of KPIs going forward, so run having this huge sheet, but we'll align it to the new strategy so we can measure and monitor how the new strategy is going over time, and we'll probably do that from the year-end. Moving now on to the group P&L. As I said, a robust half 1 performance. We had double-digit growth in constant currency and at actual rates, it's 17%, 18%. You can see that our gross margin has reduced, and that's due to that lower utilization points I pointed out before. And our overheads have grown partly because we actually incubated XDR within overhead. So we set up XTL with about 40 people. We did it in the center, took it into overheads and now we're putting it out into the business going forward, having grown it, which is -- was a very good model of how to grow it very quickly. We've also invested in people in the NTC conferences in there, and then in leadership development and talent improvement. As you can see, individual significant items in currently in the first half. However, I am flagging up, some will appear, mainly around the rationalization of our property estates and any noncore assets that we disposed of. And we sold one at the end of December. It was very small, is the legacy managed services that we sold, but that's not going to ISS because it's too small. But stuff like that may come into our side if there's anything larger. And then we've got the strategic actions that we're taking that may have one-off strategic implementation costs. I think finance cost has been a bit of an issue for 1 or 2 people about understanding how it works. And so we're flagging up here that the expected cost of GBP 4.5 million for half 2. And the reason it's gone up so much from the last facility we have a new facility, which I'll come on to is because interest rates have tripled, the base rates not the margin, and some people have got the average debt at the wrong level in terms of drawdown versus the net debt. So anybody needs any help on that, speak to me afterwards. Moving on then to Assurance performance. Revenues slower in Q1, but stronger in Q2, impacted by those conferences, I mentioned, where we took all sales and delivery people off the road. So performance across the territories. U.K. and APAC grew by 12% at constant currency and in Q2 grew at 18.5%. So you can see that momentum into Q2 there. North America, 16.1% at constant currency, up 21.8%, again, momentum in Q2. Europe declined by 2.8% and it declined by 2.9% in Q2, so that's pretty constant. So -- but you can see that they were growing in Q2 and then suddenly, the headwinds have appeared. Gross margin has declined by 2.1 percentage points, mainly due to that the conferences and the low utilization. If you look at it by service line, it's pretty similar. We've got double-digit growth just over in both professional services, and that's driven by that remediation resourcing and day rates and in Managed Services, which is driven by the XDR momentum and those larger sales orders coming through, which are mainly in that area. Moving swiftly on then to software resilience. So a pleasing thing here is that although our revenue would decline by 1.6% at constant currency, you can see that we returned to growth in Q2. The new management team that's been appointed actually came along in Q2, and they're obviously claiming victory that it's very early days, but they have definitely reenergized and remotivated that team. So the gross profit there has increased by 1.4 percentage points because we've got those IPM contract renewals. Remember that were held by IPM came up and they've all pleasingly renewed. And probably I'm not going to mention fair value adjustments or haircuts here. But the -- and in Q1, it was slightly slower because we were integrating the North American team and then the new team came on board. You remember, I announced some GBP 5 million of contribution increase in FY '24 from making the operational review that we've taken to make it more efficient. Again, about a couple of million of that has already gone into the P&L here, which you can see going up in the margin. And I can say that we're on track to do all the other GBP 3 million next year. So that's good news for Software Resilience. So we're very pleased with the Software Resilience current performance. If you turn to the service lines within Software Resilience, we're on track to deliver another GBP 3 million next year. So that's good news for Software Resilience. If you turn to the service lines within Software Resilience, you can see that we have a contract decline, mainly in the U.K. on-prem market, but verification is still growing. And I actually can tell you there's been a recent pickup in contracts with that new team coming in, which is good news, which you will see at the full year results. Moving on to cash. So free cash flow and cash conversion both up year-on-year. So cash conversion of 91% compared to 75% last year. I do expect it to normalize at 85%. I say this every time. That's my strapline, but it never does. And free cash flow has improved to GBP 15 million with the interest rate tripling and base rates amounting to GBP 6.5 million in total. So don't forget the lease interest and $4.5 million of base interest. We are mentioning our balance sheet strength again. We have a new 4-year facility, which we announced in December, which is about GBP 7.5 million more than it was before. And the banks have been very supportive and want to underside more money. And so we've got headroom of about GBP 84 million currently. And the new arrangement fees are GBP 1.7 million. Don't forget that when you do your finance cost because you write off the old arrangement fee balance for 18 months and then the new ones get amortized over the course of the next 4 years. Dividends remain changed at 1.5p, and I think that is everything on the cash flow. So current trading. So since the beginning of half 2, we have experienced a lengthening of the sales cycle leading to delays in buying decisions and work commencement and therefore, recognition of revenue because if we can't deliver it, we can't recognize it. That's particularly been felt, as I said before, in the U.K. and North America. Given the customer behavior we're experiencing, we're going to get to high single digits in Assurance and Software Resilience will be declined by about 1% still for the balance of the whole year even though it's improving. So as a result of these market conditions, obviously, we've had to react. With those low utilization rates and attrition, we are announcing today a reduction in headcount, which I'll come to. But due to that economic background, we are reshaping the business and we expect the FY adjusted EBIT to be around GBP 52 million, with the consensus is currently at about GBP 56.7 million. So this -- and this is -- even though we've taken the profits down, we still believe that investing in the strategy is the right thing to do, we would have done this, whether we're trading really well or not trading as well. In terms of strategic actions, you can see that the Board remains confident in the medium-term prospects for the cyber market because they backed us to carry on investing the GBP 5 million that Mike mentioned before. So what we're doing is we're reshaping our global operational model and proposing today a 7% reduction of our global head count, mostly in the U.K. and North America, which is where we've had the slowing of sales. This will give rise to one-off implementation costs of GBP 4 million, which will be treated as an SI. The strategic investments of $5 million that Mike mentioned before, around the 4 pillars will enhance our global delivery model, go into our offshore operations and will support those strategic initiatives. And what will happen is $5 million will drop into this year and come off the EBIT. And then next year, we'll have net returns of roughly broadly the same. So the returns on the revenue and the margin improvements will net off the investment, which means that guidance from us have been unchanged for next year. So as a result, EBIT will come down to GBP 47 million. So it's GBP 52 million at trading, another GBP 5 million of for investment down to GBP 47 million, to be clear. which is after the impact of that investment. That investment doesn't stop. As Mike said, it annualizes through. So the $5 million goes into recruiting new people into marketing that we can continue every year into global consulting practice that we continue every year. So the $5 million doesn't stop. It carries on all the way through, it becomes a BAU and our cost base. But because of the revenue and the margin improvement, it will then start generating profits from FY '25 onwards. So in the medium term, we expect our cybersecurity business can achieve mid-teens revenue and EBIT growth going forward. And with that, I'll hand back to Mike.

So I think just a few points for summary. Having been now in the business for a few months, it's -- this is a great business. It's -- the capabilities in this team are excellent. We've got an outstanding global footprint. We've had a robust H1. And I think it would be naive for anybody to think that we operate in isolation and don't have to be reflective of what the market is doing externally. I've been through a number of these cycles before, and there are so many levers you can pull. And I think, again, all credit to the team for being able to think about the challenges, identify the challenges and being able to respond and react quickly and decisively. And I think that's -- it's not a pleasant place to be and particularly difficult for our colleagues who are affected, but I think it's the right thing for the long-term future of this business. So we've got solid foundations, and I think that gives us the ability to think about the medium term. And as I would say, having been in this industry for quite a while, the opportunities to identify and respond and pursue the opportunity of the medium term and what a strong business should do. Our clients may be [indiscernible] the headwinds, and we've got to respond to that. But actually, I think it is the right thing to do. And the Board is absolutely behind and convinced and committed to investing for that medium-term growth and opportunity to enhance shareholder value. So our strategy is around the 4 pillars I've outlined. You can see how they're interrelated and very much market focused. We've commenced the strategic review of software resilience. And indeed, we are looking at the rest of our portfolio and other noncore assets to see how we position them within the business. So our focus is on that investment in cybersecurity with the mid-teens growth that Tim has talked about. And we're absolutely keen and key to retain that Software Resilience market leadership and the team have done an outstanding job in the last few months, offsetting that on the right trajectory. So ladies and gentlemen, hopefully, that was a useful walk through. Very happy to try and take any questions. Then we've got a microphone. We go left my left to my right.

Tintin Stormont from Numis. Just to simplify my life. I have the consensus number for FY '24 to be EUR 62 million of adjusted EBIT. Am I correct?

Yes, correct.

Yes. So it's -- if -- Tim, if there's any way you could provide sort of a bridge from the EUR 47 million in terms of how you expect that to happen? Because obviously, clearly, you expect the EUR 5 million to be BAU, but in FY '24, there's a EUR 5 million of margin that will be offsetting that. But if you can fill in the other banks, that would be great. In terms of FY '23, where do you think the run rate of Software Resilience -- the renewal rate of Software Resilience contracts will be and do you expect that to be maintained at that level or to improve going forward? And lastly, just a more trivial one, what products have you got on Amazon Marketplace?

Yes. So it's the software resilience.

Okay.

Okay. So Tintin in priority order. What are the reasons to believe we can get from 47 to 62%. So it's in 2 parts. It's all to do with the investments we've made in this strategy. And roughly half of it will come from revenue and half of it will come from margin. So what are the things that will happen in revenue to build those blocks? So firstly, the cyber market itself is growing still and predicted to grow still at 8%. So our base business should grow around 8% anyway going through. And at the moment, you can see we were growing at 10% in the first half. So we have factored in a downturn within that. The consulting arm, we think will add roughly 2.5% to that 8%. The -- and that's where we're standing up things like Mike mentioned, incident response, Mike mentioned, going across the C-suite. We're also looking at operational technology and identity management, which completely provide new services that we offer, which will be totally incremental. We're going to accelerate our Managed Services division. So this comes from partly, I mentioned that the legacy stuff we've got rid of that will actually help improve because that was dragging us down both from a profit margin and revenue point of view. We -- and that was our legacy DDI business, which we sold off in December. And then we've got XDR growing at 400%. The [indiscernible] for it grow a lot next year. And then we -- we're looking at putting the whole of the MS together in sort of a global framework. So that should contribute another further couple of percent. And then lastly, not forgetting professional services, Mike mentioned continuous testing always on testing. We're looking at how we can maximize that. And we believe that professional services still has latent and still will grow. And so we're putting a sort of another 1% on that. So that's 8% plus the 5% beginning gives you 13%, that gives you about GBP 7 million of EBIT. The other GBP 7 million comes from margin. So what are the margin improvements there? We need sort of 150 basis points increase that comes from improving our utilization. So you saw we're traveling at 66%. We believe we get up to the high 70s, maybe 80% would be about normal. So that's the first thing. So towards the end of the year, you'll see the utilization going up, which will flow into next year. The offshoring that we're talking about the center, we're hoping to stand up by the end of the calendar year. That will add about 50 basis points. The consulting business has higher than average margins, and that will improve the mix. The Hamilton disposal, which was the old DDI project halt DDI disposal, that will improve the mix as that had below average margins. And then lastly, not forgetting Software Resilience, you can see with the improvements we're making on the operational review, that's going to chuck in a couple of million pounds as well on margin improvement next year. So you add those together, and that's the other GBP 7 million, that's your GBP 14 million to go from GBP 47 million up 616. Second question was FY '23 run rate on termination rates. Termination rates have been running at about 9% to 10%. They've come down as low as 8% in the half. We think that it's been pretty stable over the last 4 quarters. So we believe that the exit run rate will be around about 9% for the year. So it won't change material. So in your modeling, don't expect any changes in software resilience. It will run stable. And it makes sense to do Amazon. It makes sense to the Amazon on EAS.

Julian Yates, Investec here. Just a couple of questions. In terms of just following from that question, in terms of the underlying revenue growth of 8%, if you're getting rid of 7% of the head count, just very simplistically, are you going into next year with less headcount, billable headcount or are you increasing prices to get that 8% just a very sort of simple sort of top thing what I've missed there. And the second one is you're investing GBP 5 million in new staff, but at the same time, you're getting rid of 7% of the workforce. Just be interested in how you're balancing that communication into the business in terms of it's quite a material reduction and quite a material increase as well, especially when those roles are coming into new areas that may not necessarily be revenue-generating initially. And the follow-on from that, it feels as though they need to be revenue-generating initially to hit that incremental growth that you're looking at? And is there a risk that you're taking these people in, but they're not going to start generating revenues and leads and opportunities sort of ground running and how much contingency have you built into the plan with regards to that.

Okay. So I'll do the first one. So on headcount, as you know, we're at 65%. So we've got to win on the bench, 7% get us back to a higher level of utilization, but not at the late 70s. So what we perceive is as we go through the second half and we get to the formal quarter is a bigger quarter than this quarter, the utilization will run up to about 80%. So we won't need any more people for the balance of this year. When you go into next year, you're quite right that the revenue increase then goes beyond that, we will need more people. But what we have there is we have a combination of we'll have to take a view at the time. of whether we need to do onshore, nearshore or offshore recruitment and it's a balance between the 3 depending on client requirements. But the way we've modeled it is that the gross margin will increase and we take in account within the cost of sales. So when I said it was, it's broadly neutral is because the margin improvement movement is covering the cost of sales of those new people generate extra revenue if that makes sense.

On the revenue side?

Yes. So on the revenue, the revenue comes through, you need more people to service it. Therefore, the cost of sales goes up, but your margin slightly improved because of improvement around things like offshoring and things like that. So that's what happens on the gross margin. So that's how we get broadly neutral for the year with the extra investment because the $5 million repeats next year with an annualization effect.

Should we be looking for less or more blatant the next?

More. Yes, but it depends where Yes, but it depends where it will be.

I think your point about clearly managing the message. We've done the comms. It's not easy. We're actually doing an awful lot of support for staff across the affected areas. So it will be challenging. And that's natural. It's a difficult time. But I think our people recognize the challenges in the market, and they haven't been able to miss the reporting that's going on, particularly in places like North America. So I think that makes them very aware of the situation we're facing. In terms of building new capabilities, that's -- we've got to continue to evolve and change our services mix. So I think we will be building new increasing types of capabilities in different places. And that won't look like the same as what we've had before. And therefore, we're managing our comms and the business will look quite different in a couple of years. And that's just importantly where we are at the moment. In terms of the risk of the new capabilities been revenue generating in terms of lending, of course, absolutely. There's always that risk. However, I would say one of our challenges right now is we're receiving opportunities that we can't service because we don't have the capabilities, and Tim mentioned Identity and Access Management, and that to me is an area where it has been huge for a number of years, and we have no capability. We really have not been able to -- we've not built it. We've not focused on it. Therefore, we do have opportunities that we frankly just need to get the right team in quickly. And I think that's why we'll minimize it. And we'll minimize it by focusing really on those areas that are hot. What we're not going to do is just build huge generic scale. What we're going to do is build niche teams to service these requirements.

Harvey Robinson from Panmure Gordon. Just a quick follow-up on Julian and Tintin's questions in terms of the market expectations. Obviously, you're talking about a bounce back in revenues to deliver that profit growth in FY '24. To what extent is that based on the market rather than just your own internal actions? And then a follow-up, I think, more strategically, just a clarification in the text in your release, it says ongoing review of Software Resilience and then in the PowerPoint it says commenced. So could you clarify when that started. And it sounds to me that from your opening comments, you don't see it as a core business. Have you started the sales -- sale process or have you not made that decision yet?

I'll start with based on the market. So if you remember, I mentioned before on the market our market view at the moment is that we exit this year at 8% on Assurance. So if that fell off to nothing, that would obviously affect FY '24. So you have to assume that when we come stand before at the end of the year, that we're dropping it about that as a base, the 5% or 6% on top gives us the revenue increase. In terms of the strategic review...

Can I just add maybe on the market view. It's very difficult to call. I think that the speed with which the markets turned has been, I think, a little bit surprised in terms of the tech market and the sort of the disruption that's going on there, particularly. But I think if we look through the sort of cycles we've been through before, there's usually an adjustment and then a pickup. I've been through one particular point in time where it was an absolute diabolical point midyear by quarter 3 completely. There is pent-up demand in the market for all of the structural reasons we've always talked about, blacker talent, the imperative of this, the external view, the threats, all of those things are absolutely still valid. So whilst we think there is an adjustment period and we think probably the -- the first part of FY '23 is going to be particularly tough, I think we envisage a return to an accelerated level of growth in the market. Now clearly, who knows? I don't know what's going to happen in Eastern Europe or in Eastern Asia, but that's where we see the market at the moment.

Yes, Software Resilience. So we've implemented a strategic review. We've only just commenced it. So it's too soon to really give any information on it. This is naturally on the back of the operational review, it did to make it more efficient, and we're considering all options. But there's nothing to report so far. However, we're very pleased with the way Software Resilience is performing. It's really come back. And the new leadership team are doing a great job.

There's a margin I understand [indiscernible].

Yes, that's what it used to do historically. If you remember, we've been investing in the people side that took the margin down. And we did say last time that we will come back with the final contribution that we're taking adding to the business for next year.

It's Charlie Brennan here from Jefferies. Just a couple of questions from me. Firstly, in terms of the size of the investment, obviously, people demand reasonably high salaries in cyber. I sit here in my question where the GBP 5 million is enough to fundamentally change the strategic outlook and the growth profile of the group. Can you just allocate that GBP 5 million across the 4 pillars. And did you want a bigger investment number and you battle down? Or are you happy with $5? And then secondly, just strategically, I don't think I've ever seen an IT services company offshore their way to accelerating growth. There's normally some day rate pressure in the acts as a headwind. Can you just talk about what proportion of your workloads offshore today? If you think out in 5 years' time, what does that look like? And what does that day rate pressure look like for you?

Okay. So can I answer this sort of GBP 5 million on first? That's a great question, Charlie. So I think there is a recognition -- it's a big number for NCC in terms of investment. There's also a recognition, I think, we have to be able to execute on that GBP 5 million. So actually, trying to drive, I think, a greater number in the sort of time frame we talk about. There is only so much we do with all of the other things that we've got on the strategic review of Software Resilience, the rightsizing of the business, et cetera. So there's quite a lot on. So actually, I think we've been modest and practical in terms of focusing on what we can make those investments in. And again, it's in people. And if I was to say I was relatively confident I can go out to the market and find the right people. I think it's a bit of a myth frankly, that NCC pay below the market or anything like that. We are very competitive. And I think that we can attract the right sort of talent to do the sort of thing we want to do. So I'm confident from that perspective. In terms of the day rate pressure, it's an interesting one. I hate the conversation by day rate. And sorry, that's a very strong phrase, but I think it's misleading, shall we say. The reason I did -- because I think you can blend your delivery pyramids in a way which actually takes you away from a pure day rate conversation. So yes, you can use a cheaper offshore resource, which just tumbering day down, but it actually can drive your margins. So I think the blend of the sorts of things we're doing to take identity and access management as a very simple classic example. You have any proportion onshore who are close to client and maybe 20%. You then have a large proportion of offshore who are Java coders, whatever, who you can engage at a lower rate. But actually, in a blended way, it's a large engagement, and you can have a very profitable piece of work. So I think that's why you picked particular sort of areas where you can actually drive a bit of upside from it. In terms of what I think the business is going to look like very difficult to stay out. And we're going through that process now. It will look very different from each of the capability areas that I'm talking about. The incident response, highly likely 100% onshore. Some of the consulting probably, depending on the C-suite, the engagement is probably a high proportion onshore. Software and managed services might have a much, much higher proponent offshore and our Tesco market spa50-50. So I think there's going to be a blend, but that gives us the flexibility to be able to deliver those things in different ways. So that's why I'm very confident about we can actually pick out the right optimal delivery model for the sort of services we want to deliver. And it's a well problem part particularly in the cyber market is a very well proven path. We're unusual in the fact we don't do it.

[indiscernible] Mike, on the consulting side, who are you going to be competing against? Is it a function of taking market share of incumbents? Or have you got new services you're going to put into that market?