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Edited Transcript of TNE.AX earnings conference call or presentation 21-May-19 1:00am GMT

Half Year 2019 TechnologyOne Ltd Earnings Call

TOOWONG , QUEENSLAND Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of TechnologyOne Ltd earnings conference call or presentation Tuesday, May 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Edward James Chung

Technology One Limited - CEO

* Stuart MacDonald

Technology One Limited - COO

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Conference Call Participants

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* Gareth James

Morningstar Inc., Research Division - Senior Equity Analyst

* Josh Charles Kannourakis

UBS Investment Bank, Research Division - Research Analyst

* Jules Cooper

Ord Minnett Limited, Research Division - Senior Research Analyst

* Mark Bryan

Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research

* Michelle Wigglesworth

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to TechnologyOne Half Year Results Roadshow. For this presentation, Edward Chung, Chief Executive Officer; and Stuart MacDonald, Chief Operating Officer, are in Sydney with invited analysts and shareholders. Paul Jobbins, Chief Financial Officer, is also 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.

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Edward James Chung, Technology One Limited - CEO [2]

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Thanks, Charlie. Welcome, everyone, in the room here in Sydney. Thank you for coming. And welcome to all those on the phone call. Let's jump into the results. So you can see there that TechnologyOne has reported a half 1 net profit before tax of $24.5 million. And by all accounts, TechOne is a successful SaaS company with 2 really strong underlying key metrics: our SaaS business continues to grow strongly with SaaS fees recognized of $37.5 million, which is up 42%; and SaaS annual contract value of $85.8 million, and that's up 45% on the previous comparative period. Given our confidence for the full year, our half 1 dividend has increased, and that dividend is up 10%. That's $0.0315 per share and 75% franked with a payout ratio of 56%. And the Board will, as usual, continue to consider special dividends at the full year-end.

Now turning to the results summary. FY '19 is a transition year to AASB 15, which is the new revenue standard. So we've restated FY '18 for that new revenue standard and FY '18 profit. Firstly, we're going to show you the results summary based on statutory reporting that's based on that revenue standard. It's AASB 15 and it's mandatory reporting, but it's not how we measure our business because it sets the bar too low. As you'll see there, the half 1 FY '18 statutory profit is $10.6 million. So I'm going to spend the time focused on what we call a comparable restatement of FY '18. Comparable is how we measure the real performance of the business because in FY '18, it applies that AASB 15 revenue restatement to the FY '18 results, but we also include pro forma capitalized development to FY '18 because that sets a much higher bar for us to compare our business against. And so if you're looking on the bottom of Page 5 there, we've got our results summary comparable reporting. It's how we measure the business. It sets the bar much higher. And the restated FY '18 profit is $23.5 million, note that $10.6 million under the statutory reporting.

So I'll get into the detail now. You can see there that revenue was up 5%, and that's in line with expectations and not indicative of our full year results. Expenses was up 5%, and therefore, net profit before tax was up 4%. That's in line with our expectations and not indicative of the full year results.

Now looking under the covers in revenue. You can see our SaaS fees recognized there grew strongly, up 42%, and's that because our SaaS business is growing strongly. Now on-premise business, our initial license fees was $11.0 million, down $4.7 million on the same period last year, and that's in line with our expectations and reflects our transition to the SaaS business.

Looking at expenses there. You can see that we've added 2 new lines to show, be transparent about some of the capitalization. So we've got capitalized commission expenses, and that's required under AASB 15 to match those acquisition costs of winning new business; and capitalized development costs, and we're showing them both in FY '19 and pro forma FY '18. And that's the difference between statutory reporting and comparable reporting.

A look to the other metrics there under the profit. Operating cash flow is up strongly, up 100-plus percent. I'll talk more about that in the cash flow slide. And total ACV is up 15%, and underpinning that is our SaaS ACV, which is up 45%. And that's because our SaaS business continues to grow very strongly.

Now turning to the top of Page 6. Our outlook for the full year is strong, and I'll get into much more detail later. But I thought I'd just spend a couple of slides on SaaS ACV and ACV. You can see there on the bottom of Page 6, our SaaS business is growing very fast. All of our new business is driven by SaaS, and we're approaching 400 SaaS customers on our SaaS platform. It's really driven by our one global code line and a multi-centered data infrastructure, which delivers massive economies of scales for the markets we serve. We have that multiple active-active data centers, built-in defense-in-depth security. Our customers are always on the latest technology and they always have the latest release. They get 2 new releases each year, which provides some new features and new functions. And for our existing customers, it's fast migration from on-premise to TechnologyOne SaaS platform. And our customers are telling us through their case studies and their results that they're saving 30% on their total cost of ownership by coming on the SaaS platform. And when they're there, they're taking additional products faster and it's making their business more agile. So coming to the SaaS platform makes life simple for our customers. You can see that our forecast of SaaS ACV for the full year is up 45%.

Turning to the top of Page 7. Our forecast total ACV, that's the combination of our SaaS ACV and our on-premise license fees, is growing fast. And it will be up 20% for the full year. Turning to cash flow. Our operating cash flow was $7.8 million, up $4.9 million on the previous year, and that's versus the net profit after tax of $17.9 million. We have to remember that our operating cash flow is skewed to half 2, and we predict that our operating cash flow will improve significantly over the full year and aligned with NPAT.

I'm just looking at the key core layouts in the cash flow side. You can see that we've had good collections and receivables. We had significant collections in the first half for the deals closed late in half 2 FY '18 and also by remediating the U.K. projects that we've sold out previously. You'll see there that we have an unearned income line now, and that relates to the nonrefundable payments that we receive in advance from our customers, for SaaS fees and for on-premise annual license fees, and we recognize that revenue over future periods. And you'll also see there that we've got a payment for purchase of business and that related to deferred consideration or earn-out one of the applied businesses many years ago.

Turning to the balance sheet. The balance sheet is very strong with cash and equivalents up $68.2 million, up 19%. Net cash grew strongly to $0.329 per share and we have no debt. I'm looking at a few of the key lines in the balance sheet there. You can see again the trade and other receivables has improved quite dramatically. Again, that's from collecting the cash for deals signed late in FY '18 and the remediated projects in the U.K. If you look at trade and other payables there, that's $45 million. That also includes contingent consideration for potential earn-out of $8.4 million of an acquisition we made a couple of years ago and have moved from noncurrent last period into current this period. And then you see our unearned revenue there of $113.6 million. And I need to call out that that's nonrefundable payments received in advance for our customers for SaaS fees and on-premise annual license fees, which we recognize the revenue over future periods.

All right. Looking at the bottom of Page 8 there. We've got our segment analysis. And as a SaaS company, we now manage our business in 3 operating segments: firstly, the software segment that consolidates what we previously had sales, R&D, the SaaS platform, and it includes the capitalized development; the consulting segment, which is responsible for implementation of our software, and that remains unchanged; and the corporate segment, which includes the corporate functions and remains unchanged. And then when we look at the year-on-year analysis of the segments, you can see that the software segment is down. So that was impacted by timing of some of those on-premise initial license fees, in the first half it was $4.7 million less than the previous half; and our investments for growth that we're making in that segment. The consulting business has returned to profit growth, and I'll talk more about that in a consulting profit slide later on. And our corporate segment had a few investments to future growth.

At the top of Page 9 there, you see our results analysis and key metrics largely for our analyst community. I won't go through that except to call out that our return on equity remains very high, one of the highest in ASX companies -- or all companies in Australia.

Turning to some of the significant achievements of the first half. We've split our vertical market ACV of $188 million into our vertical markets. And you can see there that the strength continues in our local government market, education market, government and health and community services. Our APAC market penetration in any single vertical market doesn't exceed 15%. So there's significant room for growth in future years. And we continue our 99-plus percent customer retention rate across all markets that we serve.

Turning to the bottom of Page 10. TechOne recorded 389 enterprise customers on the TechnologyOne SaaS platform. That's up 39% from the same period last year, and we continue our targets of 1,000 customers by 2022. And just a reminder, I'm going to recap, that these are large-scale customers. They don't have tens or hundreds of users, they have thousands and hundreds of thousands of users.

We continue to add significant investment for future growth in R&D with investment of $27.8 million. That's pre any capitalization, and that's 22% of revenue.

Turning to the bottom of Page 11 there. That R&D expenditure was up 7% on last year, and we're tracking to our full year target of 8%. That's around $60 million pre capitalization, and perhaps that's the right amount of spend for our ambitious R&D program. And looking at that, you can see that TechOne has spent $200-plus million in R&D over the last 5 years to maintain our leadership in innovation.

We continue to extend our SaaS platform. We delivered 2018B to market with over 240 product enhancements across our enterprise suite. We're delivering on AI and machine learning, and we're delivering that through our new generation -- our next-generation digital experience platform and the apps that will be released in FY '19. And this year, under development currently is 2019A, our next release. And we met expense in maintenance and research and capitalized development based on actual time sheets that our R&D folks spent on development through the year.

At the top of Page 12 there. You can see that TechOne continues our incredible pace of innovation across our entire SaaS platform and software suite, with DXP being released in a matter of weeks to early adopters.

At the bottom of Page 12 there. Consulting reported a profit of $3.4 million, and that's a massive turnaround, up 100-plus percent on the same period last year. That turnaround was driven by a number of things. It's driven by new leadership in the group; splitting the group into 2 focus divisions, which is the new projects division and the application managed services division for our existing customers; improvements in those systems and processes for those 2 different groups; improvement in culture in those different groups; and we rolled out a disciplined, new and improved implementation methodology for our new projects group; and finally, some significant reduction in U.K. Red Projects. So you can see there that the turnaround has occurred in APAC. It's up 100%. And the turnaround, as we've said at the full year result, is underway in the U.K. Its loss in the consulting group went from $2.5 million loss last year to $700,000 loss this year.

Now turning on top of Page 13. In U.K., we continued our significant investment for future growth in the U.K. The U.K. recorded a loss of $900,000 versus a restated loss of $3.2 million for the prior comparative period. Just repeating that consulting has turned around. It recorded a small loss of $700,000 versus last year of $2.5 million. That Customer First strategy that we've talked about, where we slowed the sales and really focused on customers, all the Red Projects have been addressed and majority of customers are live. Reference-ability has improved quite dramatically. We signed 4 new customers in the half. The momentum is really building. It's building particularly well in local governments. In higher education, we're now just finishing those couple of projects, if you like, and really then we'll ramp up growth in education. And the pipeline is strong in the U.K. We see a significant upside in the U.K. in the coming years, and the total addressable market in the U.K. is at least 3x the size of the APAC market.

Turning to the bottom of Page 13 there. Our focus on existing customers and harvesting the substantial growth in the customer base is a key strategy of TechOne. If you remember, TechOne has 14 licensable products, and underneath that, it has at least 350 modules. In FY '17, on average, those existing customers had 5 products of TechOne. And we predict and have strategies that over the next 10 years, we seek to add 3 more products on average to each one of those customers. And if we added that 3 products over the next 10 years, that's an additional $420 million of annual recurring revenue. If we just add one more product, that's $140 million of recurring revenue.

All right. I'll now get into the outlook for the full year. FY '19 is a transition year to AASB 15. And so therefore, as I've stated at the front of the presentation, we've had to restate FY '18. And we've done it firstly on a statutory basis. That's simply just restating revenue under AASB 15. And you can see there on the bottom of Page 15, by simply restating revenue, net profit before tax goes from $6.5 million reported last year to restated $24.8 million restated under the new accounting standard. Again, this is not how we measure our business because it sets the bar far too low.

So we will restate it also on a comparable basis. And at the top of Page 16 there, just to make it clear, comparable basis is restating revenue for AASB 15 defines what we've done in the statutory basis but also includes pro forma capitalized development to FY '18 as well to set the bar much higher.

So I'll spend some time now going through this slide. At the bottom of Page 16 there, you can see that the net profit before tax is $50.8 million. So this is how we measure our business. It sets the bar much higher. And at $50.8 million, it's far greater than $24.8 million under statutory reporting.

I'll go through each one of the lines now. In FY '18 reported, we had initial license fees of $65.3 million, and we've restated that to $28.7 million of initial licensees we sold to on-premise customers. It remained at $36.6 million of initial license fees were sold as high-quality recurring revenue and is now reported in the SaaS fees line.

On the annual license fees. This is -- or on-premise annual license, this is high-quality recurring revenue for on-premise customers only, and it transfers to SaaS fees as our customers transition from on-premise to SaaS. It was previously recognized upfront as annual license fees. It's now recognized daily under the new accounting standard.

The next line there is SaaS fees of $58.1 million. That incorporates what we used to have 3 things: SaaS initial license fees, SaaS annual license fees and the SaaS platform fee. It's very high-quality recurring revenue and it's now recognized daily. Now when I break those 3 things up, the SaaS initial license fees was previously under the old standards, recognized upfront as initial license fees for its term, e.g., if we filed a 5-year term, that was 5 years of license. The revenue is now recognized daily. The SaaS annual license fees was previously recognized annually upfront on its anniversary date. That's now recognized daily. And the SaaS platform fees has no change. That's always been recognized daily.

So you can see revenue has been restated for FY '18 to $254.5 million. That's a difference of $44 million under this new accounting standards. The expenses excluding R&D are largely unchanged except for capitalization of commissions. Under the new revenue standard, we must match the acquisition costs that go with those. So those capitalization of the commissions, we pay our sales team of $2.5 million there.

The R&D expenses is pre capitalization. There's no change. But we've called out a separate line there called capitalized development. And so we've done pro forma capitalization into FY '18, and we've said in the IFRS presentation that it will be based on -- in our FY '19 numbers on actual time sheets. We predict that's somewhere between 40% to 60% and are amortized over 3 to 7 years. So in FY '19, we won't know until the time sheets are done, but we've used 50% in FY '18 just as a pro forma comparable. So that's the comparable number that we measure our business against and report against.

Now looking forward to the outlook for FY '19, the full year. We expect to see strong continuing growth. And because the baseline is a little bit gray, we've reset the baseline there through our comparables. We've predicted our net profit before tax of $71.6 million to $76.3 million rather than give a percentage because people might have different baselines. We predicted $71.6 million to $76.3 million, that's net profit before tax. And that's up on the statutory profit, to be clear, of 189% to 208%. So the statutory profit was $24.8 million and up 41% to 50% on that comparable profit because that's $50.8 million that I just went through.

So FY '19 is a transition year for TechOne to AASB 15, and there's been a lot of changes in TechOne over the last few years as we've transitioned our whole business to become a SaaS business. And when we think about it and look to other companies that have done it, there's very few companies that have been able to make the transition of SaaS without missing a beat. This is a very strong result. There's lots of complexity. We've reengineered our whole business, our systems, our process. We've retrained our whole organization to become the SaaS business that you see in front of us today. So it's a very strong result and it positions us very well for strong growth going forward.

All right. Just some of the assumptions we've made to underpin that outlook for the full year. The pipeline remains strong for the second half. Our SaaS ACV is forecast to be up 45% on the previous year. Our total ACV, that's the SaaS ACV as well as our on-premise annual license fees, is forecast to be up 20% to $213 million. Our consulting profit will be $10 million by the full year, which is up 66% on the previous year. Our total expenses for the full year will be up 7%. And underneath the covers is operating expenses will be up 4% and R&D expenses pre capitalization will be up 8%. And U.K. will record a small loss of $1 million, and no new acquisitions in the second half.

Now just turning to our long-term outlook. Just wanted to recap our foundations for long-term growth. TechOne has diversified revenue streams, 14 licensable products, 350 modules, 6 vertical markets and diversified geographies. We have a strong and very loyal customer base. We provide mission-critical, key software to their businesses to run their business. 75-plus percent of our revenue is now recurring and we continue our 99-plus customer retention rate over the last 30 years in all vertical markets we serve.

Now our platform to the growth. One is we focus on our existing customers to harvest that substantial growth in the customer base. As I said before, our customers on average have about 5 products. If we can sell another 10 products -- 3 products over the next 3 years to our customers, that has the potential to add $420 million additional ARR.

In addition to that, we have continuing growth in APAC in all the vertical markets we serve: local government, education, government, health and community services, asset and project industries, financials and corporates. Just to reiterate, in APAC, our penetration is less than 15% in all markets we serve.

In addition to that, we have continuing growth in the U.K. The U.K. market is at least 3x the size of the Australian market for our enterprise system, and we're approaching critical mass. FY '19 will return to growth for the U.K. in 2019.

In addition to that, our SaaS business is growing quickly. Now all new businesses is driven by SaaS. We're approaching 400 customers on the SaaS platform. We have that one global code line, massive economies of scale, the multiple active-active data centers, defense-in-depth security, always on technology, 2 releases per year, fast migration for existing customers. Those customers have come to SaaS, it's proven they save 30-plus percent and they take more products quickly on the SaaS platform than they would on-premise. That's making life for our customers. That's driving the SaaS business. Now SaaS business will continue to grow strongly. We predict it's growing at 45% per annum.

And when you wrap all that up, our recurring revenue is increasing as a percent of our total revenue. It's improving the predictability and the quality of our business. We predict that by the end of -- by 2022, we'll have 84% of our business as recurring revenue, and that recurring revenue is growing at 20-plus percent per annum.

We see our profit margins continuing to improve to 25% in the next couple of years. And then when we hit that, we'll continue to drive to 30%. That's being driven through our SaaS platform and the margin increasing to 30% controlling our cost, controlling our spend in R&D and still meeting that ambitious R&D agenda, harvesting our substantial customer base and U.K. returning to growth. So you can see that we're very well positioned for the future and we'll continue to double in size every 4 to 5 years.

Just to wrap up the presentation before I head into questions. On the summary page here. TechOne at this half has recorded record profit, record revenue, SaaS fees and SaaS ACV. The profit of $24.5 million is up 130% on a statutory basis and up 4% on a comparable basis. Our SaaS fees recognized of 37.5% is up 42%. Our SaaS ACV of $85.8 million is up 45%. The total ACV of $188 million is up 15%. We've announced an interim dividend up 10%. Total consulting profit has turned around dramatically, reporting a profit of $3.4 million. In U.K, our consulting loss has improved dramatically by 71% to $716,000 loss. U.K. overall has improved from a $3.2 million loss to a $900,000 loss. And finally, strong growth for FY '19 with profit before tax in the range of $71.6 million to $76.3 million.

All right. I'll just pause there for a second. Charlie, can I now hand over to you to open up for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Edward, over to you to take questions from the participants in Sydney. Edward will then take questions from the phone.

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Edward James Chung, Technology One Limited - CEO [2]

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Right. Thanks, Charlie. Just looking in and around the room. Is there any questions? Mark?

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [3]

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Yes. Can we dig in, if we may, to the initial license fees? So all that you put down on the SaaS and the reasons in the first half why they're down. That's part of the natural transition towards SaaS. Thinking as we're going to second half, typically TechOne has driven anywhere between 50% and 70% more by less than second half relative to the first half. Would we still be thinking about a similar trend in 2019?

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Edward James Chung, Technology One Limited - CEO [4]

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Yes. So just for everyone on the phone. Mark has asked, would we expect a similar trend to previous years where we do more initial license fees in half 2 than half 1. And the short answer, Mark, is yes. So we've got a very clear pipeline for the full year. Our buying patterns of our customers still remains the same, where they're either spending up their budgets at 30 June or waiting for a new budget for the first -- for their first month, which is July, our Q4, July over September. So we still see a skew in initial license fees towards the second half.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [5]

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And that magnitude is going to be broadly similar to anywhere between -- that would imply anywhere between $15 million and $20 million in the second half, which is a rough approximation?

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Edward James Chung, Technology One Limited - CEO [6]

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Yes. It's hard for us to be precise on that number, Mark. We do know the skew is definitely half 2. Some of our customers might move to the SaaS platform and transition to SaaS and therefore it ends up as SaaS fee, or they might remain on-premise and buy the special license fees, but it's definitely skewed to half 2, but I couldn't answer the magnitude of that. A lot of moving parts as we transition customers to SaaS.

Josh?

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [7]

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Ed, just following on from that. So if you look at the broader first half-second half split, can we just talk a little bit about how you expect that to transition onto the new standard over the next few years as the SaaS portfolio increase?

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Edward James Chung, Technology One Limited - CEO [8]

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Yes. Absolutely. And similar to what I said at the AGM recently is that over the next, say, 4 to 5 years, we expect the first half-second half skew to be around 45-55. But there's a bit of a transition to get there and that's because twofolds -- 2 sides to 1 coin is we still have 800 customers on-premise who will buy initial license fees. We are seeing that transition down as people move to the SaaS platform, and then we're seeing recurring revenues grow. So as initial license fees come down and recurring revenues grow, that skew will move to the 45-55.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [9]

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So the customers that are coming on and contribute to the initial license fees, is the existing guys rolling over their contracts? Or are they new on-premise guys as well?

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Edward James Chung, Technology One Limited - CEO [10]

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Yes. It's not really people renewing contracts. If you think about that slide where we're harvesting the existing customer base, with about 1,200 customers and 400 on the SaaS platform, it means we still have 800 on-premise. And those on-premise customers are either growing themselves buying more users or buying more modules of old products. So they might not have HRP, for example. They pay us HRP on-premise and that's recorded as an initial on-premise license fees, for example.

Jules, did you have a follow-on question from that or a separate question?

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [11]

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Yes. Sort of a, let's say, bumping on the same path. In the U.K., I think you called out 4 new customers. I was just wondering if you could give us a sense of the new customers signed in APAC or -- essentially, what we're trying to do is look at the increasing the SaaS part, it's 38%, I think, in APAC if you deduct the U.K. ones. And so what was existing and what was new players coming out of those in addition to cloud? What was existing and what was new customers in APAC?

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Edward James Chung, Technology One Limited - CEO [12]

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Yes. We don't have the breakup this half of new and existing across the group or in APAC. It's something maybe I'll have to come back and answer those questions and work out the different ways to disclose that going forward. I can tell you that about 30% of the business was done as new business. But let me work with yourself and other colleagues to work out of the way to report that going forward.

Any further questions? Yes, Michael.

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Unidentified Analyst, [13]

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Part of the RED (inaudible) listed basically that you won a customer from SAP. It seems to be highly significant.

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Edward James Chung, Technology One Limited - CEO [14]

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Okay. But I might hand to Stuart. That was Unison Networks in New Zealand. Stuart, do you just want to tell -- a few minutes?

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Stuart MacDonald, Technology One Limited - COO [15]

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Sure, I'd love that. It's a great story. So it was actually an ERP that came out for an asset management solution. So we bid with that. As we're starting through the sales cycle, we actually looked at what they're doing with their financial solution, which was SAP. By the time it was all done, we actually took the SAP system out at the same time. So it started with assets. And by the time they looked at our full ERP solution, they felt there was more power in what we could provide than SAP as well. And so it became a holistic approach to the whole platform. So it's a great story for us, a massive win.

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Unidentified Analyst, [16]

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Yes. I just have to believe that that I'm not expecting more (inaudible) entire future. It's kind of too late today. And then I read that usually it leads to (inaudible) taking into the role. You just want to be at the end of it. So I'm sorry, can you talk of that? (inaudible)

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Edward James Chung, Technology One Limited - CEO [17]

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I think we're very strong in the markets we serve, Michael, and we're proud for that win. It wasn't just taking out an EIM solution. It was taking out their financials and a few other products along the way.

Yes.

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Michelle Wigglesworth, [18]

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Michelle Wigglesworth of Milton Corporation. Yes. We could see a lot of fixed base on number of users. I was wondering are you seeing any future risks from any of the university contracts with Chinese students pulling out of the market?

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Edward James Chung, Technology One Limited - CEO [19]

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Yes. So the question for the phone is because we're based on users, do we see any risks with Chinese students pulling out of the market? I think over the years, we've seen small ups and downs in users in our market. In the universities we serve, it's probably quite the opposite. Shortly, actually, we see them approaching us inviting more users. And they're probably more of the research-intensive universities. It doesn't mean the risk isn't there. But it's not something we've seen lately or that we can predict in the higher education university market.

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Unidentified Analyst, [20]

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I've got a follow-on, if I may. In addition, also, if you can get our head around revenue impact of the SaaS system. We need to think about the cost. If we look at the variable costs, it's like growth margins are a bit about 86%, traditionally SaaS business would obviously be north of 90%. As we're modeling out over the next 3 to 5 years, should we also expect for the 1,600 basis points ratcheting up with the GPM? Would that be a reasonable assumption there?

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Edward James Chung, Technology One Limited - CEO [21]

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You should definitely see margin growth. As we deliver more and more through our SaaS platform, we'll see margin growth. The thing that might make your model a little bit more difficult is the Consulting business. By having Consulting business, it definitely would have an impact on that.

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Unidentified Analyst, [22]

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Some disruption to the top of the business.

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Edward James Chung, Technology One Limited - CEO [23]

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Top of business. Yes, yes. Definitely. Any other further questions from the floor today?

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Unidentified Analyst, [24]

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You talked last time -- I think (inaudible) talked a lot about any device, anywhere, any time. And there's not been a lot about that in here. And that was, just as you've said, intimated, like you said you've achieved by pulling out. You're seeing actually a growth coming on there. Can you just explain a bit?

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Edward James Chung, Technology One Limited - CEO [25]

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Yes. Good question.

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Unidentified Analyst, [26]

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What you presented last time, that could be a significant add-on opportunity, which is not in your numbers per se. You're still evolving in that.

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Edward James Chung, Technology One Limited - CEO [27]

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Yes. We definitely are.

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Unidentified Analyst, [28]

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And the other thing is, every tech company or systems company are going to see the last 3 months and talk to you about the (inaudible) software, APIs, I think, they're called. Can you talk about what you've been doing a bit with the API? Because this technology (inaudible).

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Edward James Chung, Technology One Limited - CEO [29]

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There's probably 2 parts to your question, David. An update on...

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Unidentified Analyst, [30]

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Can you repeat the question?

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Edward James Chung, Technology One Limited - CEO [31]

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Yes. I'll repeat the question, yes. So there's an update on the anywhere, anytime, any device. And second part is what are we doing around integrations and APIs. So in terms of the first part, TechOne's strategy has been to be cloud first, mobile first for our customers. And we deliver that 2 ways. We deliver that through CI Anywhere, which is any device, any time for our customers as well as the SaaS platform. And we've been very successful with that, and that's resonating with our customers and that's partly why you see this SaaS number being so strong.

The second part is really around us reaching our customers' customers, us reaching the students in universities, us reaching ratepayers in local government and us reaching the thousands of employees in organizations. And behind that, underpinning that is our DXP strategy, our digital experience platform. And that is where we provide apps to universities that reach out to the students. So that strategy is underway, and we spent...

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Unidentified Analyst, [32]

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And it's working really well, I suppose?

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Edward James Chung, Technology One Limited - CEO [33]

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Yes. It's early days as well, David. So we've written the first 14 apps for our customers. We're about to launch them to early adopters in the coming months to really get their feedback thereby and add their -- and so we can keep improving that product.

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Unidentified Analyst, [34]

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And it's not really in any of this particular specifics. You're looking at them (inaudible) to get people into SaaS, but it will be sort of an upstream.

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Edward James Chung, Technology One Limited - CEO [35]

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An upstream, yes. Yes. It's an additional revenue stream yet to come. It's very exciting some of the technologies we're seeing. That is also where we will use AI and ML to make those customers' lives easier. AI is definitely a buzzword in our industry. And we see that, that's a solution looking for a problem. But when you find a real problem you're trying to solve for employees in an organization, for example, we're putting in expense claims. We can use some of the best AI engines in the world to just take a photo and order magically -- as test that I've taken a cab from here to here and put my expense claims without me pressing any more buttons. So that's how -- where -- that's DXP strategy and that's AI. Answered the first part of your question, David.

The second part is the buzzwords around integrations and APIs, et cetera. TechOne doesn't do -- it does a deep footprint into the vertical markets we serve, but it doesn't do every single application. And over the years, we've integrated with bucket loads of applications, and we'll continue those integrations to customers, whether in the universities to their learning management systems and library systems. We just continue those to be honest. And we've always had an architecture that allows us to integrate with third-party systems.

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Unidentified Analyst, [36]

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Partially, the reason I have asked that -- this -- I mean, I think the market is starting to appreciate if the pricing is right. It's not like an issue, okay? We particularly -- we said this is the seller's ability to integrate, which sets you up to all sorts of things, but we're not properly speaking of it.

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Edward James Chung, Technology One Limited - CEO [37]

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Yes. Correct. Correct. Any more questions from the floor before I hand over to the phone? Josh, yes.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [38]

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One for me, please. Just -- so I've been looking sort of first half-second half in terms of what ACV is locked in today. Can we talk a little bit about what's locked inside versus what needs to be -- what -- and deliver? I think you can see it from the numbers. But I guess what I'm trying to understand is just what that then implies or how quickly you need to deliver those contracts?

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Edward James Chung, Technology One Limited - CEO [39]

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Yes. So you can actually see in those -- perhaps the total ACV slide, you can see what's locked in at the half. And therefore, you can predict what we need to close in the second half. Now you can do the simple math to see what that is. And in our models, to get to our projected $71.6 million to $76.3 million, we've therefore predicted when we needed to close those deals, Josh. And you can probably do the maths, and I can talk to you off-line and a bit more about that.

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [40]

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Yes. I guess in terms of pipeline. That will...

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Edward James Chung, Technology One Limited - CEO [41]

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Yes. The pipeline, correct. The pipeline...

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Josh Charles Kannourakis, UBS Investment Bank, Research Division - Research Analyst [42]

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You see that start converting pretty close into first -- the start of the second half.

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Edward James Chung, Technology One Limited - CEO [43]

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Yes. All I can say right now is the pipeline is strong, and we've predicted where those deals can fit -- have that forecast profit.

Okay. I'll hand it over to Charlie to take questions from the phone. Please, Charlie?

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Operator [44]

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Our first question comes from the line of Gareth James from Morningstar.

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Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [45]

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Just 3 questions for me. The first question is just on the consulting revenue. Just wondering what happens to that as you move towards a 100% SaaS business?

Second question is on -- I think you've guided to 41% to 50% comparable profit before tax growth. Just curious to know what I should assume happens to free cash flow growth, and by free cash flow, I mean the operating cash flow less investing cash flow.

And then the third question, just on the DXP project. Just interested to know if you've got any kind of idea with regards to how big that's going to be in terms of, say, a proportion of group revenue going forward.

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Edward James Chung, Technology One Limited - CEO [46]

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All right. Thanks, Gareth. Three questions, I'll go through each one individually. The first one was around consulting revenue and how do we see that going forward and is there a difference between on-premise and SaaS. Whether it's on-premise or SaaS, the implementation fees is the same for our customers. We do have a strategy to continue to drive down our cost to implement because in the end of the day, our customers have a fixed budget and it's better having license fees or SaaS fees than it is having consulting fees. You would have seen that consulting revenue was lying [low] for the year, but profits increased dramatically because we have that focus on improving margin in the business as well.

Your second question was around free cash flow, what to expect for free cash flow. So we've got our profit growth guidance there that's in the slide in the deck. What I'll say to you in response to that question is free -- our cash flow doesn't change. So we're still doing the deals in the same way that we've done them over the last few years. Cash flow is second half-weighted because that's where the majority of the deals are, but expect to see no change to cash flow going forward.

And the third question, Gareth, was around DXP. Any idea of the revenue and the potential? And I'd say to you, it's a bit too early days for us on that one. We're really just towing the water with these first few apps with our customers. That includes also what would they be prepared to pay. So just a little bit too early for us to predict revenue for that, Gareth.

Charlie, any further questions?

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Operator [47]

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There are no further questions at this time, sir. Please continue.

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Edward James Chung, Technology One Limited - CEO [48]

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Okay. Any last questions from the floor?

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Michelle Wigglesworth, [49]

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One more question around (inaudible). Can you just give us an idea of what private sectors they come from? Kind of the numbers (inaudible) government and education of the claimers previously?

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Edward James Chung, Technology One Limited - CEO [50]

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Yes. So same sectors, and it's never smooth. We've got those same [6] factors. Some years, you get more existing. Some years, you get more in new. But there's nothing here that I'd call out special from any of those sectors, I'm afraid, from any of business it's coming from.

All right. There's no further questions from the floor here, Charlie, and none from the call. We might wrap up the results call.

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Operator [51]

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Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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Edward James Chung, Technology One Limited - CEO [52]

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Thanks, Charlie.