Technology One Limited (TNE) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Technology One Half Year Results Road Show. For this presentation, Edward Chung, Chief Executive Officer, is here on the call in Brisbane. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host today, Mr. Edward Chung. Thank you, sir. Please go ahead.

Thanks, Darcy. Good morning, everyone. My name is Ed Chung. I'm the CEO. And to my right, I have Stuart MacDonald, Chief Operating Officer. And unfortunately, Paul Jobbins is away, unwell at the moment. So we've got Mr. Gareth Pye, Group Director, standing in for Paul. I'll now get started. Well, welcome to our half year 2023 results presentation. The materials that you see before you today have just been lodged with the ASX. And you're going to see some really strong results presented today that we're very proud of. The TechOne team continues to deliver amazing results for our customers and each other, and this is reflected in the results that we present to you today. We're constantly listening, watching the market, our customers, listening to our staff, constantly learning, evolving our offering quickly. Our team are aligned and have exceptional focus and are executing probably to the highest standards that I've seen in my 16 years at TechOne. And this execution is against our very clear strategy, which we went through in detail at the full year. And this strategy has been very consistent and it stood the test of time. And here's a reminder. Firstly, we're ERP software. We've got very broad and deep functionality. If you think back to 2008, we had 11 products. And now in 2022, we had 16 products and over 400 modules. We've got the deepest functionality for specific vertical markets. That is, we handle things to all people. We provide mission-critical products, which power and run local governments, unis, government departments, large infrastructure providers. We've got our global SaaS ERP. And this is our fourth generation ERP, which is highly efficient and allows us to invest for our customers. Nearly all of our customers are now on SaaS, and our SaaS customers unlock significant benefits, 2 releases each year, providing new features, new functions, defense in depth security with the highest levels of cybersecurity certification of any ERP provider on the planet. Our customers are always on the latest release and the latest tech. All products and all modules are available to all customers so that they can take on additional products without friction. And of course, our customers save 30-plus percent on their total cost of ownership. We have an any device, anywhere, anytime approach. This is a fourth time, as I said, that we've successfully re-engineered our entire code base, that's 16 products, 400 modules, millions of lines of code to always be on the latest technology. No other ERP provider has done this once, let alone the 4 times we have over the last 36 years. We have the Power of One, and that's where we bid, market, sell, implement, support and run our SaaS ERP. And of course, our game-changing Solution-as-a-Service, which I'll discuss a bit later, can only happen because of Power of One. And finally, we're an innovation-driven company where we leverage new and emerging technology at each generation for our customers. Now with this consistent strategy, we've delivered strong SaaS ARR growth of 40% with customer adoption driving SaaS annual recurring revenue to a record $316.3 million. And our total ARR grew strongly, up 22%, again to a record $350.6 million. Now you all know we had a target of $500 million ARR by FY '26. And with $350.6 million in total ARR, we're confident that we'll surpass this target by FY '26. This ARR growth culminated in strong profit growth, and that's profit before tax up 24% to $52.7 million. And our outlook continues to be strong, and I'll get into full year guidance a bit later. Turning to the dividend. By all measures, our business is going very well. We provide mission-critical apps, which power local governments, higher educations, hospitals, governments, et cetera. We have strong recurring revenues and 99-plus percent customer attention over 36 years. This all results in consistently strong cash generation. We have confidence in the outlook, and we retain significant firepower to investment growth. For example, if we could find a great acquisition like Scientia, we'd do it all again. Now the half year dividend has been increased by 10% to $0.0462 per share. I'd now like to hand to Gareth to take us through the results in some more detail.

Thank you, Ed. So I'd now like to take you all through the results summary. As mentioned previously, this was a strong result. A few call-outs before we dive into the numbers. If you go to the bottom of the slide, you can see SaaS ARR is strong, up 40% to $316.3 million and ARR is now $350.6 million, up 22%. Now let's dive in. Moving to the top of the slide, you'll see revenue from SaaS and continuing business grew 18% to $200 million, driven by revenue for SaaS fees up 51%. As per strategy, you can see our legacy license business continues to reduce as planned. Other revenue is up as a result of the finalization of the earn-out of Scientia. This was a great acquisition that has achieved our desired outcomes. Scientia only just missed their ambitious earn-out targets. Stuart will discuss this later in more detail, and please refer to Appendix F. Now moving down to the middle of the slide, you'll see total expenses grew 21% to $157.6 million. Within that, our operating costs of $133.2 million, and this is before the impact of capitalization and amortization of R&D as well as including our continued investments in growth. Moving now to our net profit after tax, was up 24%. As mentioned, in the full year, we expect the effective tax rate to remain between 22% and 24% going forward. Our balance sheet. Our balance sheet remains strong. Cash at the half was $139.1 million, up 20%. That's equivalent of $0.43 per share, and we continue to have no debt. I'll talk to the cash flow performance shortly. Net assets grew $55 million or 28% year-on-year. Some of the key items required on the balance sheet include contract assets. These represent extended payment terms provided to some customers, typically with large implementations or term licenses for on-prem customers. This balance we expect will reduce over time. This is monitored and managed closely. There is no risk in these numbers. Capitalized development shows the carrying balance of our investment into our software. We'll talk more about this later. Deferred revenue increased 9%. We expect this to grow even more by the full year. Deferred revenue of payments received in advance from customers for SaaS fees and on-premise annual license fees. These will be recognized as revenue in future periods. This balance is impacted by the month within the year that the ARR is sold and/or renewed. Cash flow. Cash flow generation will be strong over the full year. Traditionally, cash flow generation for TechOne is weighted to the second half. This is aligned with our customers' anniversary dates. This half, we delivered a breakeven cash flow generation as expected, with cash and cash equivalents up 20%. This is the same slide we showed at the full year. You can see group margins continue to improve to 35-plus percent in the coming years, driven by the significant economies of scales from our single instant multi-tenanted global SaaS ERP offering. When we get to 35% margin, we will look to set a new target. I'd now like to take you through our segments. On the left-hand side, you can see our operating segments. As a SaaS company, we manage our business in 3 operating segments. The profit from the Software segment has been driven by a strong growth in our SaaS recurring revenue. Our Consulting segment is down as we invest in our SaaS+ offering. The Corporate segment benefits from growth in the operational segments. On the right-hand side, you can see our geographical segments, with all of our regions growing strongly. The U.K.'s profit is up 29% year-on-year. We'll talk more about the U.K. later in the presentation. This slide shows a slightly different lens on the result. Some callouts are, on the left-hand side, you'll see our EBITDA margin has improved from 35% to 37% this year. On the right-hand side, you can see our earnings per share has increased 24% year-on-year, in line with our profit after tax. Our full year ROE is expected to be a world-class 40%. I'll now hand over to Stuart to take us through the significant achievements.

Thanks, Gareth. As you can see, all the verticals have double-digit growth and, again, validating our strategy of hyperfocus, providing mission-critical solutions for the markets we serve. If we focus on our 2 key verticals, local government grew by 23%; and education grew by 20%, confirming that extending the product footprint of mission-critical software in our regions of Australia, New Zealand and the U.K. is continuing to be successful. I'd like to highlight a few impressive wins for the period. According to Forbes, London Business School is the #1 ranked MBA program worldwide. They used Infor for their financial systems and came to market to replace. We competed against Oracle, Unit4 And advanced. We sold them our OneEducation SaaS+ solution. And as quoted by the CIO, "The product in SaaS+ is revolutionary. It will help us move into the 21st century. And that is why we are winning in the U.K." The city of Parramatta. The City of Parramatta has used us for years for financials and supply chain. We submitted an unsolicited proposal because we saw the value of the council leveraging our SaaS solution and the road map we started with them many years ago. And as a result, we replaced Oracle for HRP and Infor for Property & Rating. We won this deal because our OneCouncil, CiA solution, is unique and because of the Property & Rating solution within it. This win grew the ARR of the City of Parramatta by more than 3x the value, again, validating our strategy of landing an account and expanding it, leveraging SaaS and ERP, messaging and values. TAFE Victoria is made up of 12 TAFEs within Victoria. They've all been a customer of ours for more than 15 years, all with SaaS versions of financials and supply chain, and 8 of the TAFEs use us for student management. Two-and-a-half years ago, we began work with the Department of Education and the TAFEs themselves, as they had to address the obligations under the new asset management accounting framework, or AMAF. And as a result, I'm proud to say that we've sold every TAFE in Victoria, our SaaS enterprise asset management solution to manage AMAF, and this solidifies our dominance in the TAFEs in Victoria. Although this result is not within our normal 1% churn target, it's well within our plans as we anticipated the following 2 issues. As we close out the end of on-prem campaign, it was anticipated that a few very small customers would not transfer across. For context, these customers are on average $20,000 in ARR and not within our core verticals. With the acquisition of Scientia, we are focused on customers within the regions we operate. Again, it needs to be noted that these results are well within the plans we forecast, and most importantly, these results remain industry-leading. Over 16 products and over 400-plus modules is the power of the SaaS ERP. It has always been our strategy to acquire a SaaS account with their primary focus of core financials and support the account over time and sell them additional CIO products to that customer base. I provided you an example of this with our customer profile in our last presentation. As mentioned before, the industry's best-in-class target is between 115% and 120%. NRR of 119% is once again a testament to this strategy as it confirms we are building, selling and delivering mission-critical products our customers expect. I'd like to address any concerns regarding the effects of CPI and ForEx on these results. Although we all know that CPI is in the region of 6%, however, this increase in CPI has only had a 1% impact on the NRR results. ForEx is not material at all, and it has no direct impact to these results. Again, I would like to remind you that our target range is between 115% and 120%. And we are very proud of these results as they are a testament to our strategy and the team's ability to execute. As I've been forecasting, the U.K. is now in an impressive position to capitalize on all the hard work that has been completed over the last few years. Firstly, we have 15 of our 16 products available and localized for the U.K. This includes our student management product that has received fantastic interest during our U.K. showcase in April, which was attended by the largest and some of the most prestigious universities in England. I'd like to take a moment and talk about the Scientia acquisition. Although they did not achieve the earn-out targets originally proposed by the sellers, their business absolutely achieved the targets we set internally for the acquisition. However, even more importantly than the fantastic financial results, with the purchase we received the world's best timetabling and scheduling product with over 300 customers worldwide, allowing us once again to build out our OneEducation SaaS ERP solution, which is unique in the industry. And within that are 97 of the best universities in the U.K., for which we are now able to transfer to our SaaS platform, which we are doing at pace. And now we have a fantastic opportunity to sell our OneEducation solution to them. And we've already seen significant pipeline growth as a result of this campaign. We also acquired an amazing team of more than 100 members worldwide, with the best industry knowledge of how universities manage their timetabling, scheduling activities. And this team is now helping the student DXP team as we now integrate this world-class functionality of our timetabling scheduling features into our revolutionary student DXP application. They will put all the power of this and other student-facing information of our OneEducation solution in the hands of the student for the very first time in the industry. And now if I focus back on the U.K. as a whole, we have more than 120 team members in region now giving us the size of a team needed to deliver at scale. We now have over 150 customers in the U.K., which provides us with a wealth of impressive references. And I'm proud to inform you that at the half, the new ARR sold was close to the full ARR sold for all of FY '22, and we forecast this growth to continue. Technology One invested $49.4 million in R&D at the half. This is up 19%, and this is 24% of our revenue. With the completion of CiA, we've begun the mass transition of customers to our fourth generation product. And we've begun the hyperfocus to design and deliver the initiatives that will support the growth beyond the $500 million ARR goal. And this concludes some of the following: continue the success of our SaaS+ delivery, the solutions will be faster and will increase the margin; invest in App Builder and DXP, that will increase the TAM of the 2 key verticals of education and local government. If I focus on the amazing team within R&D, we have all experienced a great resignation period in the industry over a year ago. And during this period, we increased our focus on the team to not only retain the fantastic talent we have but to acquire the new talent we needed to continue our success. We did this by focusing on eNPS, which is reviewed twice a year and implementing a wellness program, which is broken down into 3 sections: purpose, career and well-being. We then reviewed the salaries, promotion cycles and many of the other employee benefit programs to make sure we recognize the talent within our organization. And I'm more than happy to inform you that while other software companies in our industry are downsizing their teams, we're actively increasing ours. Our turnover in R&D is single digits, and we're experiencing a boomerang effect of team members coming back to Technology One, which is truly amazing. This and the introduction of the first-ever CTO who has brought energy, passion and innovation to the team, we are well positioned to continue to develop and introduce new products and solutions to the market that we've done for 36 years.

Thanks, Stuart. Before I get into the summary, I just wanted to pause for a moment and give you an update and give you reassurance about the incident that impacted our internal Microsoft 365 back-office system. As outlined in our couple of ASX announcements, we acted immediately to investigate the issue. We initiated our cyber response strategy, which included the appointment of leading security and forensic experts to work through containment measures, and we've reported this incident to the relevant authorities and regulatory bodies. Now in relation to the unauthorized third-party access, I can confirm that our customer-facing SaaS platform is not connected in any way, shape, form to the Microsoft 365 system and therefore, has not been impacted. As you would expect, customers have asked many questions. And through that engagement, it has provided us the opportunity to further strengthen our relationship with them. And all the feedback to date has been very positive and supportive. Our internal back office system, it was isolated to contain the incident, and that system was successfully restored as fully operational, and there's been no impact on the business. In addition, the third-party experts have confirmed our Microsoft 365 system is secure, and there's been no further illegal activity detected. Now finally, as you'd appreciate, any future information about our security posture and activities, it may compromise them. And if you ask your own security experts, they'd probably say the same thing. So to wrap up the results, we delivered a record half year profit, revenue and record SaaS ARR. SaaS ARR was up 40% to $316.3 million. U.K., our ARR was up 20% to $21.1 million. The investments that we've made over a long time are paying off in the U.K. Profit after tax was up 24% to $41.3 million, and we delivered NRR of 119%. And remember, our target is 115%. Delivering 115%, we'll continue to double the business in size every 5 years. And finally, with our total ARR of $350.6 million, up 22%, we are on track to surpass $500 million ARR by FY '26. All right. We'll turn to the -- our guidance for the full year now. From our results, you can see that we're clearly on a high. We expect to see continuing strong growth with net profit before tax growth of 10% to 15%. Now let me provide a bit more context on this guidance. Firstly, underpinning these strong results is SaaS ARR growth of circa 40%, and we have our planned legacy license fee reduction from circa $10 million to $2 million. That's an immediate and planned hit to our bottom line of $8 million this financial year. Secondly, we know there's a lot of uncertainty in the markets, discussion about inflation, wars, COVID-19 hangover. Over the past 36 years, we've continued to grow strongly in challenging environments like this, and we expect to do so again. Just to remind everyone, the markets we serve such as local government, higher ed and government, they're resilient. TechOne provides mission-critical software, which powers our customers' operations. Our customers turn to our global SaaS ERP to save, and they save 30-plus percent and it streamlines their business, and our subscription revenue contracts pass on CPI. Now thirdly, with these strong results, these strong guidance, we have lots of visibility and confidence in our pipeline. We're investing in growth. We're investing in SaaS+, in DXP, in App Builder, the U.K. and our talented people. And finally, we're confident that we will surpass $500 million ARR by FY '26 and will continue to double in size every 5 years. I'll now turn to our long-term guidance. So if we're going to surpass $500 million by FY '26, our plans don't end at $500 million or in FY '26, and we continue to focus on building the future. And our focus is to maintain our strong momentum well beyond $500 million and continue to double in size every 5 years. It's why we invest in R&D. And we invest in R&D for the long term to continue to build platforms for growth. That's new products, new modules, new offerings. And one of our key long-term investments and initiatives is Solution as a Service or SaaS+, and this is one of our most exciting initiatives. And let me explain. We all know that salesforce.com changed the world from on-premise to SaaS. And just like salesforce.com changed the world, TechOne is going to change the ERP world. SaaS+ will deliver quicker for our customers and we'll take on all the responsibility and remove the complexity for our customers. It's something that our customers have always wanted, and we're delivering this through the Power of One. Today, we have SaaS, but we have all the complexity of long, risky implementations. So you can picture it, right? You'll turn up, whether it's TechOne or a system integrator and they'll talk to you about project management, project plans. They'll talk about methodologies, configuration, ask you who your SMEs are, talk to you about config documents, as is to be mapping, testing, testers, data migrations and on and on. And we're going to change the ERP world because we're going to take away all that complexity and long risk implementations for our customers and deliver our SaaS and implementation in one single fee. Now none of our competitors can do this. We build market, sell, implement, support and run our global SaaS ERP for our customers. Now TechOne is already miles ahead from our competitors because we have what we call the Power of One. We own the software. We don't throw it over the fence to an implementation partner like SAP and Oracle does. We implement our software. And finally, we've got 36 years of deep IP and expertise in our markets. No one else has this. And for us, we're just going the next logical step. We're going to take away complex and long risky implementations for our customers and deliver our SaaS and implementation in one single fee. And we call it SaaS+. Now like everything in TechOne, this is a long-term strategy. And it's like SaaS was for us many years ago. We invested and made significant losses for many years, but now it's powering our growth. And I'm very confident in 10 years from now, we'll look back and have changed the ERP world. Now we're having some early wins. We targeted 10 deals this year, but we've sold in every region, and we focused on local government and higher education, and we're confident that we'll triple the target by the year-end. So you can see that we're positioned well for growth. We have strong NRR with 115% to 120% target. This alone selling to our existing customer base can double our business in 5 years. We have $2 billion of ARR white space in our APAC customer base. The R&D investments we're making over the next 5 years increases APAC ARR, doubles it from $2 billion to $4 billion. Solution as a Service, as I just discussed, is a game changer, and it will lift ARR again by 40%. We continue our search for strategic acquisitions like Scientia for timetabling and scheduling in 2021, like Property & Rating all the way back in 2001. We continue to win new logos in APAC, and we continue our growth in the U.K. And finally, our focus and strategy is to grow our margins to 35-plus percent through significant economies of scale delivered through our global SaaS ERP. Ladies and gents, none of these strong results would be possible without the talent and the committed people who make up TechOne. We'd like to thank each and every member of the TechOne team across the globe. And we'd also like to thank you, our shareholders, for your continuing support. Can I now hand back to Darcy for questions and answers.

[Operator Instructions] Edward, we will now start with questions from the phone call. Your first question comes from Chris Gawler from Goldman Sachs.

Can you guys hear me okay?

Yes, sure can.

Perfect. Firstly, I wanted to talk about the pricing pass-through dynamics. We know that you guys have contractual CPI pass-through. Just wondering -- obviously, inflation has been elevated for a little while now. When do we expect that to start to flow through in NRR and into ARR, given it sounds like it was going to be contributing this half?

Yes. So just to recap, what Stuart said on the call was, if total NRR for the half was 119%, the impact of additional CPI, I'll come to that in a second, was about 1%. So we look at normalized CPI in TechOne's history at about 3%, Chris. And our average CPI, because it's a bit different in every region, is 6%. So if we got the equivalent of 1% into NRR this result, then you're going to see it in future periods. And the reason you're going to see that is that although we've got annual contracts and bill annually -- invoice annually for our customers, those anniversary dates are all different depending on where they originally did their first purchase with us. So you expect to see those in future periods from this moment onwards.

And are you seeing any pushback at all? Or is there any scope for pushback from new customers on the contractual pass-through at all?

There is 0 scope, and we don't receive any pushback. And so if I explain to you that it's a term that's been built into our contracts from the very beginning. So it's not unusual for our customers. And when CPI was 0 through the COVID era, they got 0. So now that it's higher at 6%, they're getting 6%. And so, one, there's no pushback and, two, to the extent there was any, it's contractual and has to be paid.

Yes, that makes sense. And then next question, just on the SaaS ARR growth of 40% for this year, that implies around $100 million to $110 million incremental SaaS ARR versus last year in FY '22. Do you mind helping us break that down, the contribution from new business? Is there an acceleration in the SaaS lift that you're seeing or an increase in the uplift multiplier? Just interested to get a bit more color on that, please?

Chris, it's largely driven through the end of on-premise program. So we called it -- how long go, Stuart?

3 years.

Three years ago? Yes. So FY '24 is effectively the end of on-premise program. So any acceleration we've seen from SaaS lifts has been driven by that. Is that helpful?

Yes, that's helpful. So you're expecting of the residual on-premise space, most of that to have transitioned to cloud largely in '23, a little bit in '24?

Yes. Exactly. Yes.

Okay. That makes sense. And then just last question before I jump back into the queue. You've spoken again about getting to PBT margins of greater than 35% in the next few years. I guess two parts. I mean does that mean FY '25, FY '26? And secondly, do you expect that ramp to be pretty linear from here?

Yes. I think we purposely haven't given a date on that, but the guidance that we give people is -- aside from last year, Scientia, look at the history of how much, what do you say, how much margin we've added every year. And if you model that going forward, you're probably in the right zone.

Your next question comes from Darren Leung from Macquarie.

Congratulations on a good result. Had 3 from us, please. It's been sort of too long away since the data breach and obviously a good outcome in terms of maintaining and resolving it sort of quickly. I know you mentioned your existing clients have had a lot of questions about it. I'm curious as to what your discussions with prospective clients have gone following that data breach?

Yes. I might start and then hand over to you, Stuart. I think the most important thing to firstly understand is that it was our back office Microsoft 365 system. And it was definitely not our customer-facing global SaaS ERP that we sell our customers. There's a big air gap between the 2, and there's absolutely no way at all that it can be impacted by -- the front office customer-facing global SaaS ERP cannot be impacted by what happened in Microsoft 365. I've also got to say that, that has had no operational impact on the business, was up and running very fast and our cybersecurity experts have given it the all clear in terms of no more illegal activity. Now Stuart, can I hand over to you too talk about not only the customer -- existing customer conversations, but impact on prospective customers?

The conversations have been the same. Once we clarified that it was the back office 365 system, it had nothing to do with the customers' data and the on-premise -- sorry, and the SaaS platform, the questions really came to, we'd really like to understand how you went through this. We'd like to learn from it. So there's a lot of customers actually asking us too debrief at the end of this whole situation so that their IT team can learn from the exercise as well. So it's been very positive, very supportive. And it was really the same if it was a current customer or a potential future customer. It was that same conversation that we have with both.

Great. Just a second one, a bit more left wing one, but you're seeing some of the sort of ASX-listed software peers and, indeed, I guess, globally, to scaling back on their R&D and development spend more broadly, just given the sort of [ pointed ] economic cycle. Is this something that the TechOne business could potentially think about?

I think we're in a different place to be honest. We are -- well, the results speak for themselves. We've got excellent results, strong results. And when we look at the future pipeline and our guidance and even the pipeline going out many years is very strong, and that gives us confidence to continue to invest and invest for growth. And our approach to managing costs, generally speaking, is that we know or can predict with a high degree of certainty what our revenue is going to be, and we know what margin we want to achieve. And we make sure that we manage the whole business to achieve that margin growth. And to the extent we can be more efficient in every other part of the business, that frees up funds for us too invest into R&D. And the reason that we take that approach is because our R&D investment is for the long term. Our R&D investment is for new products, new modules, new offerings that will continue to provide us platforms for growth to continue to double in size every 5 years. So you would have heard on the call that we're very confident that we'll surpass $500 million ARR by FY '26. And then with our long-term investments, we're going to double in size again.

Understand. And maybe just a final one on Slide 22. You've obviously got that little bar that shows products for customers sort of increasing in the second half. And I know to talk to your point about ARR increasing and greater product pickup and maybe even to your point around continued R&D spend. Can you give us a view as to what those sort of products are that customers are taking up? What sort of -- where you're allocating your development efforts and driving that, please?

I might hand over to you, but I'll start, Stuart. There's no specific product that drives that. It's through our sales and marketing and messaging and just our general approach to landing and expanding. But Stuart, do you want to add a bit more color to that?

Yes. It's also probably a little bit more complex under the cover. So even when we talk about a product, a product will have between 20 and 40 modules in itself. So even a customer that says it has financials, it might only have a subcomponent of the full financial suite. And so that's the beauty of the ERP message. We constantly are bringing new features to market. We're also positioning new features. We're integrating to other components, and so you see that -- just natural progression into more and more of our product suite as they start to use it. So it's not as cut-and-dried to say there are 16 products and this customer has 4 of them. They might have 4 products, but a subset of those. And so that's the continuing story of the ERP message. So it's far more complex.

Your next question comes from Josh Kannourakis from Barrenjoey.

Can you hear me okay?

Yes, sure can.

Perfect. A few quick questions. Firstly, a quick follow-up on the CPI one. So is the way that we should read that, that the 1% sort of in the first half, probably a bit more into the second half, but it should be -- if we look at the full annualized run rate into FY '24, that should be a little bit more into the -- for the FY '24 year if you sort of keep rolling that through?

We haven't done precise models like that, but Gareth, is that -- that's in the zone?

That's in the zone. Yes. [indiscernible]

Perfect. No, that's okay. I just want to clarify that. Second one, just around great to see the legacy license fees dropping off probably more than what we expected this year. So if we look at those annual license, the ARR at $34 million. Just into the second half, given you've sort of already talked about the SaaS ARR growth, can you give us a bit of a feel for just how much that sort of comes off into the second half, that sort of legacy annual license [indiscernible] out?

Yes. The annual license fees -- I can't give you the precise numbers, Josh, but there won't be much that carries on into FY '24.

Okay. Great. No, that's right. Okay. Perfect. And then just final one, just around costs and sort of looking through into the -- I guess, into the second half. Like is there anything other than, obviously, it's been a strong year. So I imagine in terms of remuneration and commissions, bonuses, things like that could be a bit more significant, given the -- how strong the second half is expected to be. Can you just maybe talk through some of the moving parts on the cost side into the second half?

Yes. We manage, as I said before, to make sure we get margin improvement. So we look at the whole business in total. But Gareth, is there anything else you'd add in, in there?

No, no, I think so. As you said, we manage our expenses within an envelope to hit our profit targets. Yes, nothing unusual there, Josh.

Yes. I guess it's just, everyone's probably looking at it. It seems like it's a very -- clearly, a very strong second half sort of outcome and probably not too commensurate with the 10% to 15%, I guess, but I'll leave that for you guys to manage. And then final one, just really quickly, if that's all right. Just on the Consulting side. Obviously, there's been that transition as the solution as a service. Maybe you could just talk a little bit about that, Ed, in terms of the take-up of that so far and how that impacts the Consulting profile as well?

Yes. We've got an appendix, I can't remember which one it is. It's in the back, our core Consulting. There has been no change to the Consulting business in that about half is what we call AMS, application managed service. And that is a subscription fee. It's not included in our ARR numbers, where half of it, the customer, existing customers sign up, and it's almost like we become their system administrator as if they were part of their staff. And we do simple things like change workflows, write reports, et cetera. That half will continue as always. The other half is what we call new projects, and that's if a new customer comes on board and needs to implement for the first time or an existing customer buys a completely new product and then it gets implemented by the new projects team. It's that part of the business, which, over time, and I've got to stress it will be over time, will move from traditional Consulting to SaaS+. And we're just using the same methods that we did to transform our business from legacy license fees to SaaS. So if you think about legacy license fees, Josh, at its high, it was $65 million, and then it came down to around $40 million, then I think, $30 million, then $17 million, then $10 million last year and then $2 million. So you can see that we've managed significant headwinds every single year and still delivered for our customers and delivered growth for our business. We're just going to use those same techniques to come from -- of traditional Consulting to SaaS+, albeit the numbers are a lot smaller. So does that answer your question, Josh, that we'll do it carefully over time?

Yes. No, that's perfect. Because in terms of that, though, the -- as an extra bit of granularity, that's only with the new customers in it. So if I'm an existing customer already on a solution, I'm not going on to Solutions as a Service.

No, you can be a new customer. So imagine -- I'm sorry, you can be an existing customer. Imagine your City of Parramatta that Stuart talked about and you -- this is just an example. You had financials and supply chain, but you came to us to buy enterprise asset management, a whole new product that you didn't have it all, then we can offer you that as solution or service, SaaS+.

Your next question comes from Apoorv Sehgal from UBS.

A couple of specific questions first and a more general one after that. Just firstly, on the trade receivables down about $10.4 million. I think you said impacted by new deals [indiscernible]. Could you just explain that, please?

Yes. I might hand over to Gareth to get into that, Apoorv.

Yes. It literally just came down to the timing of a number of our deals at the end of the half. So customers sign when they sign and that just we had a few deals signed right at the end of the half that impacted our trade receivables balance.

And Apoorv, I think that comment refers to the variance or the comparative when you compare that reduction against last year's reduction in trade receivables. Is that right, Gareth?

It is the cash flow that's opening. So it's 31 or -- 30 September down to 31 March, and it's just the movement in the balance. So we just had some -- we collected strongly. We just had some late invoicing that just impacted us at the end of the half.

Okay. Sure. Could you give some color on like what proportion of customers are now on the pure CiA platform at the moment? And my understanding is, obviously, SaaS is one thing, but the pure CiA is getting customers, there is a big opportunity for you. And what sort of the friction, I guess, of the customers not yet on pure CiA and what can you do about that?

Yes. Got it. I might hand to Stuart to take that question, please.

So we started the development of CiA probably about 11 years ago -- 10, 11 years ago. And as the modules were coming out, we actually released module by module to the market. And so the simple answer to your question is the vast majority of our customers are somewhere in the middle. They've got components that are still the old product called CI and the majority of the product in CiA as we've been bringing it over time. So it wasn't a big bang. We've been doing this incrementally over time. So to answer your question, if the amount of customers that are pure CiA will be quite small and to transition our customers across, we introduced a concept called CiA Live. And so what we're doing for that is we're actually providing all of the requirements to get our customers from the old product of CI to CiA, we take full responsibility. And that product has been well represented and taken up quite well over the last few quarters, and we continue -- we will continue to see it grow. So to answer your question, not a lot of customers are full CiA, but you'll see that build over time. But the vast majority are probably more heavily CiA than CI as they transition those remaining modules across.

And if I can just add, through that CiA Live program, it's our job to make it frictionless for the customers, Apoorv.

Yes. Yes, of course. And last quick question. Just the R&D capitalization rate, 52%, a bit lower than usual. Are you still expecting that 54% for the full year of '23?

Yes, we are, but I might hand over to Gareth.

Yes. We are, Apoorv. But as you probably would expect, R&D cap is just based on the work that was done, so based on the time sheet. So it just depends on what our teams have been focused on, and it just happened to be 52% at the half full or full year. We expect to be back on trend, I guess, you'd say, at 54%.

Your next question comes from Wei Sim from Jefferies.

Great results. The first one is just in regards to the PBT margin trend that we're expecting going forward. Here, you on the kind of 35%. But just thinking forward in terms of our expenses coming through, we have some more investment going into the SaaS+ platform and maybe saw some off-license fees coming. So I'm just wondering, is this trend something that we should start to see now? Or is it that we may see a bit of a pause in terms of where the margin is at currently before we start to see that uptick in '24, '25?

I think our main game, if you like, Wei Sim is to deliver that PBT of 10% to 15%. That's our first and foremost. Of course, we're focused on margin improvement. And as I said, I can't remember who asked the first question. If you look at our history at margin improvement growth, that's what I would model going forward to get us the 35% margin over time.

Okay. Got it. The second one is just in regards to churn. So if I think about the guidance that we've given for FY '23, even if we ex out the ERP, it still seems kind of higher than what we historically expect. So just keen to understand what's driving that assumption.

Yes. To be honest, I don't -- it might be a touch higher, but it's still world's best practice. But I might hand to you, Stuart, to get into the detail.