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Edited Transcript of NCC.L earnings conference call or presentation 25-Jul-19 8:00am GMT

Full Year 2019 NCC Group PLC Earnings Call

Manchester Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of NCC Group PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Palser

NCC Group plc - CEO & Executive Director

* Tim J. Kowalski

NCC Group plc - CFO & Executive Director

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Conference Call Participants

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* Julian Robert James Yates

Investec Bank plc, Research Division - Technology Equity Analyst

* Kenneth Charles Rumph

Jefferies LLC, Research Division - Equity Analyst

* Oliver Trevor Russell Knott

Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst

* Robin Alexander Speakman

Shore Capital Group Ltd., Research Division - Research Analyst

* Sanjay Jha

Panmure Gordon (UK) Limited, Research Division - Capital Goods Analyst

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Presentation

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Adam Palser, NCC Group plc - CEO & Executive Director [1]

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Fantastic. Well, welcome. Welcome to NCC Group's Full Year Results. We've just got a couple come in from the back. Good morning. And so we're delighted to report a very strong half 2 performance for NCC Group, which is entirely a credit to a lot of hard work by people right across the Group, whether geographically spread, whether across functions of sales, delivery or support. And it is the hard work of our technical teams doing challenging and important work, which has led to a significant increase in second half profit versus last year. It is due to the combined efforts of people right across the Group, which has led to a substantial improvement in cash, whether that is securing more favorable terms, whether it is closing off jobs more quickly, raising invoices more speedily, ensuring debt is paid.

Second half cash conversion was around 170%, for example, driving a decrease from H1, net debt of GBP 45 million, down to the GBP 20 million you're seeing today.

If there is one result that we've achieved in the second half that absolutely gives me joy, it is the fact that we've managed to recruit and retain a substantial number of technical specialists. So you'll recall at the half year, we were highlighting that we weren't able to resource all of our opportunities because we didn't have enough people. Well, I'm delighted to say that compared to this time last year, we have over 100 net new heads in our technical teams. We've welcomed people who've gone off and had some great experience elsewhere, and they've come back to join us, the boomerangs as we call them.

And you'll see, again, in more detail that attrition has fallen. So we've done a better job of retaining these people. And that's due to a whole raft of factors, but that is essential to me. And whilst I know some of my colleagues will be watching this, this morning, or later, I want to say that we all know we have much more work to do to make NCC the truly great place that we want it to be. I am absolutely delighted to be able to attract those cyber specialists, especially in times that we have today when that talent is scarce. Without that, we wouldn't have the ability to do the work that we do today.

We have more to do, and I'll acknowledge, in particular, the work that we're doing and going to do in our sales teams, where we want to provide much more support, much more training to ensure that we are fit for our growth in next year and beyond.

And also on systems. I'll talk a bit more about our transformation program in a moment. But that significant transformation program. And it's been a busy year, right? Let's face it. What we're doing, to remind you, is we're creating a global powerhouse of 1,800 people, weaving it, stitching it together from the component parts of acquisitions, some of whom have different processes, some of whom have no processes, to create one global, powerful entity. And it's been, again, a joy and an inspiration to watch teams coming together from across the world to work and make that happen.

So full year, that makes us a company that's delivered robust revenue growth, improved profitability and excellent cash results, all the while undertaking that intensive, strenuous transformation program, which is building the foundations for future growth and margin improvement.

Overall, we've seen a 10% revenue growth in Assurance and in that division, gross margin has continued to improve.

Escrow has been in a year of transition. We've seen a slight decline at the full year of 3%, but we walk into this year with our sales teams further strengthened and also with our cloud proposition recently launched and with some encouraging initial demand.

Overall, we see demand in cyber or information security continue to increase. The connected environment continues to grow, our dependence on that environment continues to grow, the number of bad actors out there continues to grow. And crucially, regulation will increase inexorably. And as it does, so will compliance failure.

We've all seen recently the high-profile fines, Equifax, British Airways, Marriott and of course, the small matter of Facebook's GBP 5 billion fine, it's probably in dollar fines. So again, this is a trend that will continue. It will be lumpy. A few years ago we had the Sony hack. Today, we have these high-profile advent of GDPR showing its teeth. But demand will continue to grow.

Our 3-year Securing Growth Together program, which celebrated its first anniversary in May of this year, is on time, on budget and on track to deliver the foundations we need for future growth and margin improvement. And overall, we look forward to another dynamic year and expect full year trading to be in line with our expectations.

Now for a more detailed look at the numbers. All yours. Thank you.

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [2]

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Thanks, Adam. Good morning. Just to start with the financial highlights. So you can see, we've had a robust revenue growth, we've grown profit and we've had better cash generation. And what you can see, if you remember, the interims here, there were a few more red arrows on this financial slide than now. So we're going in the right direction, and we're delivering solid financial results.

The only thing there is to point out is on the Escrow. You can see the Escrow down on margin has affected the gross margin, so those 2 red lines are connected. So it's one line affecting both. But otherwise, it's all green and it's all good.

Turning to the detail. This is the income statement. So we've had a profitable growth in the first year of transformation. So as Adam says, what we've done is got all those metrics going in the right direction now for the full year, even though we've been transforming and changing processes, people and the systems, which is quite a tricky thing to do. And the things I would highlight here is that you can see the revenue growth on top line there. As Adam has said, of the sort of 7.6%, mainly driven by North America, Europe and the rest of the world and a bit of softness within the U.K. coming out, which Adam will talk to later.

On gross margin, we grew in Assurance but it was impacted by Escrow, as I said before in those financial highlights. And that's really because within the Escrow team, revenue has gone down slightly, but also, we've staffed up to the team at the year-end. And when you get to full set, it takes about 3 months for an Escrow salesperson to get fully effective. So we've got the cost in there, but not all the benefits yet. That will come into this year.

And then on the G&A line, that's increased as a result of investment in people and training as we professionalize our business. So overall, you can see that our adjusted [PBT] came in at the -- around GBP 34 million that was predicted as the consensus, so we delivered on that.

And then if you look at the adjusted EPS at the bottom, that's ahead by 12.2% at 9.2p. And one thing to point out on the ISIs, which is in the appendix of your pack, is they were broadly cash neutral. In fact, they were cash neutral, okay?

So looking at the revenue bridge there. What you can see here is that the whole growth on revenue has really come from the 9.7% in Assurance. As I said before, a lot of it coming out of North America, Europe and the rest of the world. But -- and that's adjusted for the product sales. But look at the Escrow line, the Escrow in gentle decline, it's just GBP 1.1 million down. So it's to say that it's still a good business, and that's the shape of where we're up to at the minute.

So moving on to the EBIT bridge then. So year-on-year growth, whilst transforming here and investing in the transformation. So what you can see clearly here is that these are the -- if you like, the effective P&Ls and EBIT across Assurance, Escrow and the support functions. You can see that Assurance is driving the profit growth for GBP 6.1 million. And it's up on revenues, it's up on margin, which has been offset by an increase in people investment within Assurance and some corporate costs being allocated to it.

Within Escrow, that's down because revenue is down and margin is down, and it's also in -- had an investment in people and corporate costs, as we said before. But that's down by GBP 2.9 million. And then the support costs are slightly ahead by GBP 300,000 as we professionalize, but that has been mitigated by a lower depreciation charge, when you look at the detail of that bridge.

Moving on then to Assurance, the detail. You can see here, we've got profitable growth, but there has been some regional variability. So within the growth by territory, you can see North America up by 23.4%; Europe, 13%; disappointed in the U.K., which is 1.1% statutorily, but if you strip out the product sales, it's up by 3%, but it's still behind where we expected it to be.

You'll remember, we mentioned about the technical resourcing challenge we had in the first half, where we didn't have enough technical people to supply the demand. So that's also within these numbers. And Adam will come onto that later.

Gross margin grew by 0.6% as we improved the value selling, in spite of the low utilization. So you can see the figures below there. The average order value across the U.K. and the U.S. went up by 23% to 28%, respectively. So that's a good sign of the higher value selling model that we're moving towards.

Global resourcing, that's cross-border territories where technical consultants in the U.K., Europe are going over to America or going from America back, there's 31% increase in that. That's just demonstrating our global capability of moving resources around the world to where they're most efficient.

And then the utilization in tech consulting, if you remember, it was hot at the half year, about 82%. That's now come down to 75%, and that's come backwards. And that's around the area we'd liked it to be. But even with that, we've still been able to deliver world-class investment research on the back of that.

So if you look down at the bottom of that pane on the right-hand side, what you can see is a pleasing improvement in the adjusted EBIT margin of 8.5% up to 10.6% in Assurance on the back of those metrics.

On Escrow, again, this is a division in transition. As Adam said before, we are targeting growth and confident we can get it to medium term growth, and we're expecting it to be around flat this year. So what we've got is, we've got good growth in America of 11%, we've got disappointing within the U.K., mainly as a result of the operational challenges we had around the sales team, which is now fully staffed as we got into the new year.

And just to say, the early demise of Escrow has been prematurely called because in the last quarter, we signed our largest ever on-premise deal with a major international bank of GBP 800,000. So there's still a great demand from premise software out there and security. So it's been called too early.

You can see when we get to -- Adam's got these slides, but renewal rates remain firm around 90% across the world, which is excellent. And we've now just launched at the end of March our cloud offering, which is Escrow as a Service, and the early signs there are very encouraging. And we just wanted to highlight to the analysts in the room that we are investing in Escrow services, money going to be going in, which may temporarily dilute the Escrow margin because we're investing in it before we get returns back out of it. And Adam will talk about that later. And then if you look down at the margin there, that explains why we're down 6% on the EBIT margin, the factors above.

Moving on to the net debt slide. I think that you'll remember, those of you who were here at the half year, I said that working capital was a temporary spike. I don't think the markets believed me because the share price reacted adversely, as you know. This shows, not only it was it a temporary spike, we had a huge effort in the second half to get that money back in. And you can see the results of it, taking GBP 25 million off GBP 45 million debt.

So -- and that has been right across the company, not just in finance. As Adam said, all our colleagues across the business have been working on it, across the world. It's been really pleasing to see sales guys coming to me saying, "We'd like to do upfront payments to clients," and ideas like that, which is great at the front end, not just throughout the business. So everybody has worked collectively right across the business to get this down, and done a tremendous job.

So you can see that it's sustainable as well, it's carrying on, and it's still there. Our debtor days have improved by 18 days to 56 days at the half year. Our creditor days have improved as well, up to 52 days from 31 by 21 days. So those things I was saying about -- to pay it, we were paying our suppliers too quickly and we were getting our money from our customers too slowly. We're reversing those around to be the proper way around [within] a normal company.

And strong cash generation has come up, it's 110% for the year, cash generation, which is defined down here in the ratio, which I won't go through, but you can see it there, 110%. We did 174% in half 2. That is not sustainable, unless anybody knows a company that can do that. But that was a real, real effort.

And what we're saying now is that we're going to drop it to around 85%. It normally rolls around 85%, 90%. But we're investing in the SGT transformation, especially in the system side, and this is the peak year of investment. Because it's the peak year, it will be a drag on CapEx. So we have a higher level of CapEx spend than we'd normally have, and that drags down the conversion.

I'm also pleased to say the banks have shown lots of confidence in us by giving us a new 5-year deal, which we've signed up, and it's a GBP 100 million RCF with a GBP 75 million accordion, which is the ability to flex out your facility. And it's across a 3-bank club across the 3 contents of U.K., Europe and the USA, where we operate. So it actually matches our operational profile. And it's actually a slightly better facility than we had before in terms of being covenant-lighter.

Moving on to the cash flow, we've got the cash flow there. You can see it starts, the cash flow before working capital. So the things to pull out of these 3 items, I'd like to pull out, is what one is the movement in working capital, which obviously, a demonstration of what's happened in the first half of that sort of GBP 9 million swing on the working capital line.

I think you can also see that the tangible CapEx is actually lower here at GBP 3 million for this year. And as we've started to invest in SGT and the CapEx is coming into this year, and software expenditures within there, so it's about GBP 9 million, but you can see it was GBP 12 million. So there's a slight saving in CapEx this year that will reverse next year.

And the other thing to pull out is the acquisitions and disposals net, that's a GBP 15 million swing year-on-year between proceeds coming in last year and deferred consideration going out for Fox this year. So we've managed to get the net debt of GBP 20 million, even with a GBP 9 million outflow of deferred consideration to previous acquisitions. And there are no more deferred acquisition considerations left to pay. So that's the end of that.

So overall, in summary, I think today's financial metrics show that we're in a stronger place, more robust place with more control and sustainable improvement is carrying on.

And on that basis, I'll hand back to Adam.

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Adam Palser, NCC Group plc - CEO & Executive Director [3]

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Lovely. Thank you. So I'm going to take a few minutes now to talk about -- and just to remind you, really, where we're going. Say a few words about how we're doing, and then probably say a few more words about what's next.

There's a fair bit here that some of you would have seen before, so I'm going to go fairly quickly through it. It will be in the pack, you can always ask me about it afterwards.

But just on 12 months ago, we undertook the first employee engagement survey that had been done in NCC Group for some while. And we did that for obvious reasons: to listen to our people, to hear what they wanted. They gave us some great pointers of things that they wanted to tackle.

And one of the main things that came out was why we're here? What's the firm for? What are the values that the firm lives? And so we undertook an exercise of engaging them, engaging our leadership team to come down on what our mission, our vision and our values were. And we defined them. Mission, to make the world safer and more secure. Our vision, to be the leading cybersecurity advisor globally.

And globally is a word, I'm afraid, you can hear a lot more over the next 10 minutes. Because increasingly, we see NCC Group as a global company, okay? We have an unashamed ambition to serve companies around the world, to flex our resource around the world and to give people the same standard of service wherever they are.

Values, we have defined, okay? And they all mean something to us. Don't worry. I won't inflict them all on you in much detail. But the first one, work together, so important. Once again, we're trying to knit together disparate acquisitions, disparate ways of working into one global powerhouse. But work together also means, we want to work more closely with our clients. We don't want an arms-length transactional relationship. We want to get to know them, we want to understand how they make money, so that we can offer them solutions. So that we can take away their pain of cyber, and they can just get on with doing what they do, okay?

So along the way, towards our vision, we identified things that will mean we're getting there and achieving it. And we always talk about our 3 stakeholders: our shareholders, our clients and our people. For shareholders, we identified that we want to continue to deliver double-digit growth and make margin improvement in Assurance. In Escrow, we want to return it to sustainable growth. And along the way, you should expect to see continued disciplined cash generation.

For our clients, we wish to offer the global delivery platform and to remain at the forefront of vulnerability management. There is no one like NCC in the world with an understanding of vulnerabilities. We work across technologies, we work across sectors, we work across 4 continents. We fund our people constantly to break the next technology, and that's what gives us our leading edge.

And critically, for our people, we want to become the hub for cyber talent. We want to be the place that you come, to get the NCC brand on your name. You may go off to get some great experience somewhere else, you may then come back for another stint in the NCC family. But we want to be that cyber hub. We're going to continue to do our employment surveys. We'll measure our engagement. We want to be a one-star company as measured by the Best Companies survey. And to capture it, we want to be a quirky, distinctive environment where individuals and teams come to thrive.

So we have a mission. We have a vision. We know what we want to achieve. And we have our Securing Growth Together transformation program. That's the vehicle through which we execute change in the business. And it has 5 streams: develop our people, lead the market, win business, deliver excellence and support growth.

That program is going very well. Be in no doubt, as I've said before, a huge amount of activity. And of course, the great thing about being a global firm, some poor soul always ends up getting up at 1 a.m. in the morning to join the conference call. But watching people put that effort in, go the extra mile, as they say, is truly an inspiration.

You can see some of the progress we've made here. The systems challenge, I think when we set out the half year, going from 48 to 10, let alone all of the [spreadsheetery] that was going on, was quite a daunting challenge in certain -- in some of your eyes. But I'm very pleased to report the progress that we've made. Salesforce going live in June was the most recent of our significant installations. And we still have Workday to come later this year, completing over the next 12 months.

I talked before about our people, but I want to talk again, okay? So over the course of the last 12 months, the number of colleagues in NCC grew by almost 12% to just over 1,800. Critically, voluntary attrition, people resigning to you and me, it drops to 17% down from 19% last year, and total attrition fell also. Total attrition being held up a little bit by the work we've been doing with our sales teams. So in the U.K., we had a new managing director back in November. We've applied much greater performance techniques and there has been significant turnover. But again, we welcome a number of new colleagues into NCC as we prepare for growth.

The bit I'm particularly pleased about, I talked to you about this earlier, was our focus on technical security consulting, where, in a market that is clamoring for talent, is fighting against the scarcity of that talent, we have a net increase of over 100 heads and a significant reduction of attrition down to 18%.

Across the Group, we've done a lot of work on our people agenda. So we've defined many of the things you'd expect to see. We're launching our pilot mentoring program, we're launching our management training. Again, all with the aim of strengthening our firm and providing a quirky, distinctive environment where individuals can thrive. And part of that is NCC Cares, our global well-being initiative designed to make sure we provide a rounded environment and that we give something back.

Now what does it mean? Yes, what is our transformation program, what does our strategy mean for our 2 divisions of Assurance and Escrow? Well, this is what we told you it meant last year, and I unashamedly repeat it here now. So for Assurance, increased global capacity and reach, having a coordinated managed detection and response business that's founded on our Managed services, that's our repeat revenue. Developing deeper client relationships, we get greater predictability of revenue, we can lower our cost of sales. And frankly, we can do a better job for our clients and maintaining the leading technical edge.

Escrow. Our plan for returning Escrow to growth is very straightforward, we will operate flawlessly in the U.K. and maintain our market-leading position. We will sell other things to our existing client base, of which Software as a Service, our cloud resilience offering, is the first. And then we will expand internationally, building on our already scalable footprints in North America, in particular, and in certain European countries.

Now when you look at the progress we've made against each of those strategic priorities, it's pretty compelling. But I'm -- I can't go through all of this, but I do want to draw out some things. Once again, cross-border delivery has increased by over 30%. So our ability to, technical term, slosh resources around the world, to deliver on client spikes, to smooth out hot spots and cold spots in demand or resourcing is improving. We've got a way to go, but we're very pleased to see material evidence of our ability to do that improving.

Taking the assets that we had from our Accumuli and Fox acquisitions, and we now have one development roadmap. We have one product offering set for managed detection and response, okay, which we see as the next-generation of managed services in the information security landscape. And that's going extremely well. Here, we're now serving clients from both locations. We're able to flex our offering. We're launching our managed intelligence service into North America and we have done in the last few months and seeing tremendous initial demand. We're launching it in the U.K. as well over the coming months.

We've begun managing some of our most important accounts globally. And critically again, globally, our investment in research has increased by 15%, measured by days. And that's led to some tremendous high-impact research, whether it's in Internet of things, whether it's in the application of AI or machine learning, whether it's in connected health, smart cities and blockchain, I could go on.

But one of the distinguishing features of NCC Group in a busy cyber market is our ability to stay world-leading with relatively little investment, certainly compared to the CapEx demands that other companies face. We fund our brilliant people to break the next technology, and then we go and educate our clients as to what the risk is and how we help them.

The output of all that is this. And again, we increasingly look at NCC Group as a global business. So focusing now on our global business lines of technical security consulting, that's our heartland, and that is the technical advice based on vulnerability, et cetera. Risk management, that is our business offering. And again, managed detection and response we've spoken a bit about.

Technical security consulting, TSC, as we call it, up almost 14%, supported by that cross region delivery, hugely important, that. The ability for U.K. resources this year to go and be deployed in support of growth in North America and the Nordics and elsewhere in Europe helped us to manage those spikes in demand. Average order value increasing nicely.

With risk management consulting, that is a great offering, okay? That is the bit that helps us solve the business aspects of cyber for our clients, 30% growth in North America, admittedly off a smaller base than the U.K. We're doing, I think -- and if we're not doing it, we will very shortly be doing more risk management work in the Nordics than we are technical work, which gives, for me, an indication of where that business stream can get to; huge, huge, huge opportunity. And indeed, quite scalable because less dependent on more distinctive resource like the technical consulting is.

U.K. has been a disappointment for us, that's really held back our U.K. results in particular. And I would point out a couple of things. I think the GDPR surge up to May 25, 2018, was a blessing and a curse, clearly, we have the benefit of it at the time. But we weren't expecting quite such a lull in demand in the following 12 months. People maybe thought GDPR was done, but I think that will come back.

And secondly, we just found it so easy to sell at that time, we probably took her off the board and really put our effort into increasing sales in managed detection and response. So more we can do there, and we have still high hopes for it.

Products. Tim has mentioned, I will mention just very briefly, here we flagged very clearly before, our move away from reselling third-party products where we have little value add. We don't -- we do not want to dilute our margin, okay?

MDR, very pleased. Clearly, it's still a small part of our portfolio today, but it is growing. And we're going to continue to grow it and we want it to become a larger part of our portfolio because of the predictability and because of the opportunity for higher gross margins that it offers. I'm very, very pleased to point out that the sales orders in this last 12 months were almost GBP 50 million against our revenue of GBP 36 million, which is a good sign that the market -- well, we are getting traction with the market and layering in future backlog.

Coming across to Escrow. So we've had a bit of challenge in the U.K. We found the U.K. market a challenge across both of our divisions over the last 12 months. But I will point out a few things.

On-premise software may well be declining as a percentage of the overall market, but there's a huge installed base there which is becoming under increased scrutiny, increased regulation, increased compliance. And again, there remains a market for us to go after.

The signs that we have signed our largest ever deal, as Tim mentioned, with a major international bank, tell us that this market is still there, and escrow is a good business. I will come and talk to you a bit more about Escrow as a Service in a minute, our cloud-resilience offering. And I want to calibrate. We're excited about this. We've got a long way to go, okay? We have more scalability to prove, et cetera, et cetera. But it's exciting. We're very pleased with the initial demand, and we're getting some decent growth over in the U.S.

So just to give you some facts and figures to back up my words here. When it comes to our Escrow revenue in the round, we've had some increase in our verification revenue, verification testing, but it's been overshadowed by a decline in our contracts.

Now yes, it's important that we look into that and see what's going on. Does that herald a shift away from on-premise into SaaS software, et cetera? No, it doesn't. If you look at our rolling, trailing 12-month renewal rates, they are constant, okay? And by the way, they're all above 88%, these 2 are above 90%. So what we're seeing there is no change in our termination rates with clients, okay? So that we're not seeing people flooding out of on-prem here.

What we have seen is a challenging U.K. market. We've had trouble renewing our contract base or with securing new contracts. Part of that, probably a challenge in the market; part of that, we can do better ourselves. And since the half year, when we first flagged a little decline in Escrow, you can see the increase in our sales headcount up to 44. And we walk into this year fully staffed to secure the contract base that we need.

Escrow as a Service, which is our cloud-resilience proposition, I mean, let's just rehearse this for a moment. What does Escrow do? It gives you confidence that if your supplier goes through, you can get access to continued business service, right? Your software will continue to use. If an on-prem provider goes bust, for example, you still got a copy running in a server on a base -- in the basement somewhere, okay?

But with Escrow -- sorry, with Software as a Service providers, the need is even more acute. Because if your SaaS provider goes through and they've stopped paying the bills then your Azure service or your AWS service or whatever may get switched off.

So our Escrow as a Service offering is -- it provides the option to either access or replicate a client's unique environment, so that they can get business continuity. We launched this softly March 29, I think it was -- 25th, with our direct sales force, and we've already sold it a couple of dozen or more times. We're very pleased with the initial result, and you can see some of our case studies there.

A long way to go, right? We're excited about it, if we can develop this into a similar proposition to our core Escrow, then it provides the opportunity for great growth and hook us into the adoption of cloud software. This coming year, we're going to be working hard to ensure the scalability of that offering, to develop that product offering to cover other parts of the market and also on our channel strategy to scale it.

And so in summary. Over the last 12 months, delighted to report the robust revenue growth, improved profit and cash conversion at a time of intense operational transformation. Looking forward, again, we intend to secure continued double-digit growth for Assurance, along with margin improvement.

Escrow, we expect to stabilize revenue this year and return to growth thereafter. And as I've just said, we'll be working to accelerate the adoption of our cloud proposition.

Delighted with the work we've done on our -- with our people over the last 12 months, but it can never be taken for granted. We will continue to strive to make NCC the employer of choice. And in particular, we're going to be putting further work into strengthening our sales capabilities and effectiveness, both in the U.K., where we are regenerating and over in the U.S., where things are going extremely well, and we are bringing people on very rapidly.

Overall, I've talked about the increased regulatory pressure and high-profile breaches which, among other things, will continue to increase the importance of cyber and see aggregate demand increase.

Our 3-year securing growth transformation continues on track. And overall, we look forward to another dynamic year with confidence and expect full year trading to be in line with our expectations.

Thank you very much. We'll take some questions.

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Questions and Answers

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [1]

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Firstly, congratulations to (inaudible) and all that on that access management...

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Adam Palser, NCC Group plc - CEO & Executive Director [2]

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If we can go from the beginning.

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [3]

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Ken Rumph from Jefferies. Probably people are going to ask about the weakness in the U.K., I wanted to ask about the strength of everywhere else, really. Are there any special factors, big contracts, anything within any of those other regions that would -- or trends or themes like GDPR or whatever, that perhaps have got a different cadence that would make us cautious for the current year?

And secondly, just ask about staffing and physical space. We've been kind of talking about Manchester having more space than you need and so on. How about the rest of the world, having enough?

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Adam Palser, NCC Group plc - CEO & Executive Director [4]

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Yes, let me go and launch into a few of those answers, and Tim can correct me, clearly. So if we look at the U.S., in particular, when we put the growth down to a number of things, but two we would highlight here: one is self-serving, candidly, because we've worked hard to create a powerful and empowered North American business under stronger -- in stronger leadership. So we're really proud of what the team over there are achieving. It's a very strong leadership team. It's very close, and they're all very committed. So well done there.

I think if there is an external dynamic I always point to, it's the fact that the U.S., in particular, the U.S., but also North America more generally has a lot of technology producers. We can all think of people that we buy materially, buy things from, services that we use which come from well-known North American companies. And there's a whole set of fast-growing ones as well.

So if you are a technology producer like that, then privacy, data protection, security, they're existential. Because if people lose faith in your service or your product, then they're just not going to buy it. And we've seen examples of consumers just move wholesale from one thing to another and cause a huge problem.

So there, it's not being necessarily driven by regulation. Don't get me wrong, we've still got FedRAMP, HITRUST, and the Americans do love their regulation, which does help. But I think there is that huge business imperative driving a significant part of the technology market.

Yes, but then again, we're seeing good growth in Europe. So -- and it's just, again, quite a lot of dynamics stuff being driven by regulation. I think it's the TIBOR financial services regulation, for example, which is now driving banks to do a lot of work on regulatory compliance. And that is feeding our cybersecurity reviews, it is feeding our red teams, it is feeding an array of work.

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Kenneth Charles Rumph, Jefferies LLC, Research Division - Equity Analyst [5]

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And space?

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Adam Palser, NCC Group plc - CEO & Executive Director [6]

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Space. I missed that bit. We're not underserved in space globally, I think.

Tim, something to say?

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [7]

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So within -- you'll notice within the ISIs, if you've been to Manchester, we're on 3 floors. And if you go back in time, we had web performance and software testing, and that was about 50 people, that was sold. So we have more space there, so we're now proposing to restack the floors and adopt a more agile way of working. So we're going to sublet or assign 1 of the floors in Manchester out and make it more efficient because people need offices less and less these days.

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Adam Palser, NCC Group plc - CEO & Executive Director [8]

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Most of our offices overseas still have room to support more people. And remember, the people we've got, there's a blend of those who are in the office every single day and those who work remotely. Most of our offices have got capacity to support more. There are a couple which are creaking at the seams, and we're going to be doing something to extend this year.

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Sanjay Jha, Panmure Gordon (UK) Limited, Research Division - Capital Goods Analyst [9]

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My name is Sanjay Jha, I work with Panmure Gordon. Two questions, if I may. You said earlier in your presentation that you found it easier to recruit and retain staff in the second half. What sort of -- what changed in the marketplace? And is that sustainable? Are you paying more, is that a reason?

And secondly, on Escrow, your sales guys. Are they sort of -- when they go to see a customer, are they talking about on-premise? Are they pushing the EaaS product? I mean, how does that play?

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Adam Palser, NCC Group plc - CEO & Executive Director [10]

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No, fine. So let me talk to the people point, first of all. So there's a couple of things. It's a package. We did do some targeted reward resetting at the half year for some roles, but this is absolutely not just about paying people more. We've worked very hard with a number of things. We made a promise to rein back utilization from something that was quite hot.

Our people proposition is that you come to NCC -- they don't work for me, right? They come here to work with people who are like-minded, to do great work, to do their hardest and most important challenges for other people. And the challenge for us is to find that great work for them to do, so they work among a community of people that they enjoy, they respect and they spark off. So that's hugely important. They want to spend some time doing research. So we've tried to rein the utilization back a little, not too far, to make sure that there is space for that to happen.

And I'll also pay tribute to work that we've done, just stitching the firm together, launching our in-tier -- internal social media or our communications platforms, all trying to build a nervous system of a firm, so that you can feel part of the greater whole, get excited about some work that's going on in Canada or in Holland or whatever else.

So we -- it's one of those things. NCC is by no means perfect as a place to work. We're really working hard on that, but we're not perfect. But I think if you are cyber talent, I'd like to think that we are a much more stimulating place to work than just an IT services firm. So that's part of it.

When I look at the sales side of Escrow, a lot of our sales team is desk-based, okay? But the average order values in our Escrow business are really very low indeed. So it's not economical to send people out on the road. We do have a -- an account team that looks after our largest clients, but most of it is desk-based.

The great thing about our Escrow as a Service offering is that now when they phone up and it turns out that they haven't got any on-prem software, they've got a conversation to have. So again, we only soft launched this March 29, and we've really -- only really launched it to the whole of the direct sales team over the last month and a bit. But we're equipping them to have a conversation regardless of what their software strategy is.

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Sanjay Jha, Panmure Gordon (UK) Limited, Research Division - Capital Goods Analyst [11]

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Could you talk about sort of wages in the sector as a whole? Are they sort of -- what sort of wage inflation you're expecting this year or next year?

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [12]

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Yes. So the wage inflation, obviously, for cyber talent is greater than GDP. It does vary around the world. So on a -- as an overall average, it's in the sort of 5% to 7% range, which is ahead of GDP. And so -- but it's obviously more in San Francisco than it is in the U.K., so it does vary.

So -- and as Adam said, when we did the targeted mid-cycle reset, it was sort of isolating historical differences and the overall increase there was only about 4%. Because what will happen, you will have somebody getting 15% and somebody getting none, et cetera, depending on when they joined the firm. So it wasn't a huge increase overall.

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Adam Palser, NCC Group plc - CEO & Executive Director [13]

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Julian?

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Julian Robert James Yates, Investec Bank plc, Research Division - Technology Equity Analyst [14]

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Just a couple of questions from me. A follow-up on the attrition point. Take all the comments that you made there on what you've done in H2. Are there any risks we should be aware of heading into next year in terms of the sustainability of that attrition? Or is it really sort of the same as what you've done in H2?

And in terms of risk management in the U.K., you sort of spoke about that there's stuff to do there, in the coming years, sort of -- that sounded quite encouraging. Are you looking at different ways to take the offering to market? Are you looking to maybe use your technical capabilities to maybe upsell from that base? Or are you looking at your verticals to get into there? Maybe just talk a little bit more about how you're looking to go-to-market and push that pace -- piece in the risk piece?

And then on -- just last one on Escrow, just a very quick one. Can you talk about pricing for the Escrow as a Service offering versus on-prem?

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Adam Palser, NCC Group plc - CEO & Executive Director [15]

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Absolutely. You have to remind me with the second one, attrition and...

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Julian Robert James Yates, Investec Bank plc, Research Division - Technology Equity Analyst [16]

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Yes, the [sustainability] with attrition? And then the second one is about your risk management, how you've -- your reach to market, basically?

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Adam Palser, NCC Group plc - CEO & Executive Director [17]

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Yes. Okay. [Can barely hold] 2 things in short term memory, it turns out. But attrition there is, there's no particular reason why we would see -- this is an abnormally low point in attrition, for example. Yes, it's certainly -- we see a variability across the year. So after bonus season, that's often a time that people would choose to take a break from NCC, if they're going to do so. So you may see a little spike then.

But overall, no, we are absolutely intent on making NCC the employer of choice. So this is a rolling program. I hope we do better, right on this going forward.

When it comes to the risk management. At the end of the day, pretty much everything we do is risk management, yes. So what we're looking at is how we make risk management just part of our complete offering. There's an awful lot of stuff we can do, a lot of it is quite tactical, so I don't want to go through all of it.

But many of our opportunities, many of our engagements end with a pretty obvious risk management piece of work to be done, to strengthen the business as a whole, whether it's policies, whether it's processes, whether it's people or whatever else. And so working on -- I mean, we're working on capturing those opportunities and then feeding them into the pipeline to make sure that we execute them.

We're also going to replicate some of the good work we've done on NDR, which is just to make the proposition clearer, to equip our sales team, make it easier to sell. And I'm sure we'll get some good traction in that way.

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Julian Robert James Yates, Investec Bank plc, Research Division - Technology Equity Analyst [18]

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In terms of verticals, is -- that's something you've mentioned before. Is that a continuing theme in the business? Early days, obviously, but...

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Adam Palser, NCC Group plc - CEO & Executive Director [19]

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No, very much so. I mean the public sector and financial verticals are now set up in the U.K. Over in the U.S., we've got the enterprise accounts, which are managing the technology sector in a more specific way. So that vertical-based approach, which, in English, is just getting a set of people to understand a bunch of customers better, so that we speak their language, whether it's transport or whatever else. Yes, we still see that as our direction of travel.

Pricing, Escrow pricing. So -- you may wish to add to this. But the -- we have 2 offerings, we have Access and Replicate. Access is designed to be very similar to our on-premise software. So again, fairly low average order value, but something we intend and hope to sell in significant volume. Replicate, where we're looking to, guess what, replicate someone's cloud environment, is a more bespoke service and more akin to our verification testing as an analogue.

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Julian Robert James Yates, Investec Bank plc, Research Division - Technology Equity Analyst [20]

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So there's no sort of price deflation as we move to a cloud environment over the coming years in terms of the business model? That's sustainable in terms of like-for-like pricing broadly?

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Adam Palser, NCC Group plc - CEO & Executive Director [21]

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Yes, we don't believe so. We've more to learn, but the models that we've got, we don't believe so.

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Oliver Trevor Russell Knott, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [22]

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Oli Knott, Nplus1 Singer. Can we just talk a little bit about the product split within Assurance? And really, just thinking about -- obviously, there's a move towards the higher-margin services. And as you can, just how much of the EBIT improvement over the next couple of years comes from higher gross margin products? And how much comes from just the operational gearing of the revenue coming through?

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Adam Palser, NCC Group plc - CEO & Executive Director [23]

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Yes, sure. So I think it's true to say that we are always -- I want to sort of pick my words carefully here. Because we value, pretty -- a lot of the work that we do, okay? So whilst we're very proud to work with some of the largest, most important organizations on the planet, we also help over 1,000 small- to medium-sized enterprises deal with this intractable thing called cyber, that they don't really understand and neither do most people.

So -- yes, we're very proud of that work, and we're going to continue to do it because there's volume there, right? And that's fantastic. So we're going to continue to hit that work and we're going to do a lot of stuff that you would expect us to be doing, some of which is the more commodity end of the spectrum, okay? Whether it's about pen testing or infrastructure testing or similar.

We also do even much higher end of services, whether it's forensics, whether it's red teaming. And I can tell you from personal experience, having sat with some of our red teamers -- red teamers, by the way, because I didn't know this a few months ago, pen testing is when they -- when you say, come and have a crack at this IP address, okay? Red teaming is objectives based. Can you get into CEO's inbox? Can you get onto my trading floor? Things like that. Watching them work is inspiring and terrifying because you realize that no one is safe anywhere.

So that's a very powerful service, and we're privileged to have some people and some capabilities that just aren't readily available across the world. We absolutely want to beef up and do as much of that specialty work as possible, whether it's red teaming, whether it's specific detailed work on transport systems, which tend to be quite bespoke and going forward.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [24]

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Rob Speakman from Shore Capital. 3 questions. Firstly, just a follow-on the questions on Escrow pricing. I'm just -- just to be clear, in terms of where you feel you're going on margins in Escrow. Do you expect a further gradual decline in the next 2 or 3 years?

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Adam Palser, NCC Group plc - CEO & Executive Director [25]

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Tim may add to it, but I would -- we see the possibility of dilution from investment in Escrow as a Service, right? As we invest in getting our channel up to speed, et cetera, et cetera. But we don't see a dilution in margin over the 3-year period.

Is that right?

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [26]

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That's right. Because I think we were mentioning outside, when you saw on Adam's slide, the contract base has been declining and verification has been increasing. Contract has higher margin than verification and what we're doing is retilting that on the commission schemes to get the contract base growing again, which will have higher margin, which will offset the margin dilution of verification. So the base should be broadly flat.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [27]

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Okay. Second question, just on cash conversion going forward, clearly, a very encouraging performance in H2, so congratulations on that work. Going forward, do you expect cash conversion to return to the kind of 90% levels? I guess the question really is, do you anticipate more cash going into working capital from this point?

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [28]

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Yes. So as I said, for this year we're predicting sort of an 85% cash conversion, which is slightly suppressed because of the SGT spend. Going forward, I would expect it to be about 90%.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [29]

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Okay. I'm...

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Adam Palser, NCC Group plc - CEO & Executive Director [30]

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[all said] again -- and this is an unnecessary qualification in some regards, but we do see ourselves as a growth business...

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [31]

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Yes.

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Adam Palser, NCC Group plc - CEO & Executive Director [32]

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Okay. So we will not hesitate to invest where we see growth opportunity come through. All things being equal, we would expect, as Tim says, no increase in working capital.

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Robin Alexander Speakman, Shore Capital Group Ltd., Research Division - Research Analyst [33]

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Okay. And thirdly, just wondering, really, the renewal of debt facilities of GBP 100 million.

I mean, you said you've got a GBP 75 million accordion on top. You've got GBP 55 million or thereabouts of outstanding debt at the moment. So just wondering what the sort of capital strategy is, a kind of reminder on that, please? I mean, are you thinking possibly acquisitions? Or...

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Adam Palser, NCC Group plc - CEO & Executive Director [34]

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Do you want a crack?

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Tim J. Kowalski, NCC Group plc - CFO & Executive Director [35]

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Yes. I'll start with the refinancing. So the refinancing, we had GBP 100 million before, we've refinanced again at GBP 100 million. The accordion was GBP 50 million, we've increased the accordion to GBP 75 million. So the only change really from the last facilities was a GBP 25 million increase on the accordion.

We've been asked this question before, we seem to be heading towards almost debt free. So we have quite large facilities. That's just to give us the flexibility around what we want to do. So at the moment, we are in a period of transformation, and we don't yet have the systems for scalable growth globally. And so at the moment, we are very focused internally on transforming the company and generating the cash. But we have the fire power there if something came up.

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Adam Palser, NCC Group plc - CEO & Executive Director [36]

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What a great place to be, right? I mean the focus is, you can see, is on strengthening the balance sheet, creating the robust ways of working at systems, which that mean we can bolt on or add to in the future. Be very surprised if inorganic growth wasn't part of our future, but our immediate priority, unless something really interesting pops up, is to strengthen the balance sheet and strengthen our foundation.

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Unidentified Analyst [37]

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Harry from Cantor Fitzgerald. A couple on Escrow. Firstly, Escrow as a Service, could you talk about what's the market there in terms of when you thought about going into this, how big or small is it? That would be number one.

And then just two, on the U.K. How do you think about how you feel as though in this sort of next 2 years, you can get back to growth? Is it just a question of putting more salespeople in there? If you could give us maybe sales productivity where it is now and where you'd like it to get to? That would be helpful.

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Adam Palser, NCC Group plc - CEO & Executive Director [38]

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Yes, sure. So there are probably going to be fewer figures in the next couple of sentences than you'd like, ideally. There's some nice facts and figures in the blue booklet that you'll enjoy reading, which is sitting on your seat about Escrow as a service, I'm sure.

The opportunity for cloud-resilience is huge because the adoption of SaaS software around the world is enormously rapid. I was lucky enough to sit with somebody relatively high up in Microsoft, and I think whatever it is. Azure is now 1 billion a year in the U.K. alone, let alone around the world, let alone around the world. So there's no doubt that the world is adopting SaaS software at a rate of knots.

So our ability to help 2 stakeholders: number one, corporates, large organizations, governments who have to adopt cloud software. Take advantage of the agility, the updates and all the stuff that comes with that easily and in a sort of risk-free way or lower-risk way is compelling, okay? And that's really an analogue of the existing service that we provide on-prem today.

The second thing, which I think is equally exciting, and having worked for a small software company myself a while ago, it's really hard to sell to the big people because they won't trust you're not going out of business. So we can work with them and provide them with a way to sell in a more unconstrained way to large organizations. And I think that's quite an exciting second strand.

So we don't believe that we're market-constrained. We think the challenges here are about making sure you've got a simple technical solution, which is replicable. And that over time, we build out from what we have today with a single-tenant offering to multi-tenant and [down, down] along the way.

In terms of the U.K., I can't give you sort of numbers about sales productivity. We have been looking very closely at all the stuff you'd expect, call [times], proposals, conversion rates, et cetera, et cetera.

As Tim has said, we've noticed that our sales team is focused very much on verifications over the last couple of years and therefore, not put sufficient effort into renewing the contract base. That's something that we have taken steps to address, partly through having more people, partly through modifying commission schemes, partly through refreshing and upgrading sales management.

So you've seen the rapid increase in heads. There's always a lag between the introduction and the effectiveness, and we'll be driving that this year and beyond.

Any more from anyone? Well, I think just remains to say, thank you all for coming.