Half Year 2020 Micro Focus International PLC Earnings Call
[music].
Thank you all.
Just on school.
Oh.
Right.
Well I'm joined by all Chief Executive Officer.
I don't she's going on so Brian.
In a moment Oh Honda.
Some comments on all before.
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Have you already oxygen the west coast.
In the school, you'll find a few slides to support Stephen's comments. So there's got despite.
So what cost on the sites can be accessed from page on the Investor Relations section.
I guess website.
Hi, recording of this call on those sites will be available shortly after this call finishes the coal consist of a short presentation.
She's acumen.
No.
Steven So some introductory remarks.
You bet.
In February we shared with you or three your strategic plan.
We're making progress executing against the objectives lead I used as part of this club.
Under the same time dealing with the practical I'm going to normally complex, what's cool get 19, which impacted operations during March and April.
Cool is the second largest trading months in orphan onto you on the largest within this result was period.
A revenue performance was consistent with the guidance given at that time as our preliminary results on the fourth of February.
When taking into account and the expected disruption to new sales activity, which we highlighted separately.
Cool with 19 updates on the teams have moved.
I will talk about product good performance on the actions, we're taking later, but in summary.
We've made good progress and no security portfolio.
Application modernization and connectivity.
Together with information management and governance performed broadly as we expected.
Well performance in our I told.
I'd operations management, and SDN application delivery management portfolios has been below your expectations.
The impact on our adjusted EBITDA on cash was largely mitigated through a combination of cost control.
Not sure reductions in costs, such as trouble on strong working capital management.
In addition, as a result is cool that 19, we've incurred an impairment $922.2 million or approximately 8% of or intangibles and goodwill balance.
Brian will discuss the rationale for this in more detail in his section.
Despite the challenging market conditions, the refinancing over 1.4 billion dollar term loan facility was oversubscribed and completed successfully on the 22 nights with me.
As a result, so nics term loan is not due to mature until June 2024.
In addition, the company has significant cash resources.
Perfectly as itself to use of April the business adult creating casual $600 million.
On total available liquidity of 1.1 billion.
We're five months into the execution of our through your strategic long.
This is why 20 is a transformational year for.
We're making solid progress on a seeking to build additional flexibility such that we can adopt or approach.
Response to the opportunities and threats arising from continued macroeconomic disruption caused by corporate 90.
I'd like to told not to a response to covert 90.
As a company, we operate globally, which significant development centers in the U.S.C., China, India Israel onto your G.
And we health business operations in 49 countries.
As corporate 19 developed a global impact when a company.
We reacted quickly in developing a comprehensive approach.
Focused on ensuring the health and safety over employees.
On continuing to deliver great service to our customers and partners.
In support of this or business continuity plans have been so really testing on the proving robust.
I'm proud of the we are team has responded by acting decisively on being proactive in lounging in adopting a ways of working to be as effective as possible in support of our customers. During this very challenging time.
To provide some color here I want to highlight an example from the health care sector.
Our solutions are helping customers responding to adopt.
Or fall to fly on demand solution, although the health provider to scale quickly while simultaneously improving the cyber security standards as they dealt with significantly increased the mind.
More broadly within the healthcare sector multiple organizations are embedding or predictive analytics technology.
Monitor and helped drive the spread of corporate 19.
Looking beyond an individual sector a customer we've also change their approach to customer engagement for example.
During the period, we hosted our key European and North American customer events, which we call Microfocus universe.
Two four months of the first time.
More than 4000 customers and partners to indeed life sessions.
It was in some more accessed on demand content, explaining how to microfocus can support and help accelerate customers digital transformation programs.
During March where we transition to remote working on up more than 90% of our people working from home.
Additionally, we have a live in over 101 also sees open worldwide.
Looking forward, we will take you considered approach to exactly when and how do we returned to more office based environment.
What do you sell certain however is that we will not be returning to working as we did pre crisis.
Instead, we're taking the opportunity presented by what Weve allowance, we've learnt from this experience to rethink your approach to how do we calibrate how are we innovate and who we work.
This is expected to result in those adopting a more flexible hybrid model going forward.
Like most other organizations corporate 19 has had an impact on her financial performance.
We estimate a reduction of at least 2% on probably closer to 3% on a revenue when compared to the same period a year ago.
The majority of this relates to specific license opportunities, which are being delayed and these were primarily weighted to sectors impacted most like cooling team, including automotive transportation on retail.
Some of these opportunities have already closed or will close in the second house.
Well there is obviously a risk for the slippage with these opportunities and more broadly within the pipeline for Q3 on Q4.
In addition, we also saw the to lead to a number of maintenance renewals.
And examples of customers renewing but for a subset of their installed licensees.
Given the criticality of a software in most cases, we expect these renewals to be delayed not council and analyzing the examples of possible renewals to ensure the correct auctions are taking going forward.
Looking now to the performance of the product group level.
Application modernization and connectivity is a stable and highly cash generative quicker.
This business will continue to trend slots over the medium town and performance with a strong or weak in any single period.
Should not be taken as an indicator of the longer term revenue trends.
The area of growth within this portfolio continues to be or mainframe workload modernization products and the solution. We offer customers here is very well position to continue to develop felt the market momentum.
You know application delivery management.
<unk> performance is being below expectations and was driven in part by inconsistent sales execution.
The key solutions within this portfolio well positioned and already help some of the world's largest organizations build and integrated end to end software delivery process focused on delivering speed without compromising quality.
However, these trends are not being captured in a performance well enough yet.
The corrective actions being taken as part of the transformation of our go to market organization are designed to address this inconsistency in execution.
For example, you organization is being simplest light and resources realigned to deliver better balance across our core revenue streams.
More dedicated focus on key products within each portfolio.
The underlying performance and I told needs to improve overall.
You go to market improvements I discussed a second ago also apply title.
In addition, we have taken initial corrective actions specific to this portfolio.
Got a focused primarily on maintenance renewal performance.
In parallel we are undertaking a more comprehensive assessment of any fault the substantive actions required.
In order that we drive.
Towards our aim of delivering a strong core of stable revenue in this portfolio.
And security, we're pleased with progress we're making.
The strategic investments in go to market hires are progressing as planned.
And overall the business is performing in line with or expectations I know the plan, but I plan to pass back to revenue growth.
Finally in information management and governance.
A key within this portfolio of the investments investigator and digital safe.
The repositioning of the lots of products it to deliver a cloud based solution.
These are progressing well adoptees.
Moving now to an updates on progress against our strategic plan.
In February we announced four initiatives.
Which when combined with existing programs are designed to deliver go no strategic vision for its like 23, and create a business, which is more efficient agile and better a link to our customers value proposition.
Firstly evolving or operating model to accelerate and improves the visibility of a product strategies undervalued more differentiation.
In the last six months, we've made a number of key hires.
On the planned organizational changes required to drive more autonomy and effectiveness in a security and Deltic a product groups are progressing well.
The changes, we're making here are intended to support the delivery of revenue growth in these product portfolios.
Secondly.
Transforming our go to Mako organization to deliver significantly improve sales effectiveness over time.
Since we last spoke we've implemented a consistency it was methodology and overall approach to education on enablement.
We've begun simplifying the go to market organization, and realigning resources to ensure better balance across our different revenue streams.
Within each product portfolio.
We need to bed this in through multiple sales cycles like course, correct to drive further efficiencies.
Suddenly accelerating the transition to sasson subscription to better align to the market opportunity, we see where these models are becoming the defacto standard.
The additional what to date in this area has focused on the planning and development of customer offerings for security on valves ticket products.
This transition will take place over multiple financial periods.
Finally, completing the core systems and operational simplification work that we need to do to deliver a robust and efficient operating platform.
He within this is the development of a single set of operational systems, which we failed to succeed.
This is a global program being executed principally in the UK, U.S.C. and India and in conjunction with our systems integration partners.
As communicated previously we had two possible cutover plans as we seek to bollin speed.
Under compliance obligations under Sarbanes Oxley I.
Which limits the time frames within which we can make substantive changes to our operational controls.
The move of this complex program to remove working has been executed effectively but the impact of doing this at a critical time in the project means that we have no news turtles tentative crossover scenario.
Sales in November Twentytwenty on February 2021, that's Cesar original expectation of me on November 20 Twond.
This will clearly have a cost impact for the program and the feel extend to the impact is heavily dependent on what doesn't restrictions in key geographies. However, what is already underway to mitigate any cost type cost input as much as is possible.
In summary.
We continue to make progress overall.
Looking to accelerate father within security and in driving the changes we need within or go to Mark organization.
As you would expect the execution of these initiatives is no also being ballance within your risks and opportunities, which have arisen due to covert 19, so to be adopter approach has required to deliver against their goals.
I now want to hand over to Brian to besides all the detail on or each one performance.
Thank you Steven Hello, everyone and thank you for joining the call.
As Steven mentioned, a few moments ago. The period. We're reviewing has been one a significant change for our customers partners and employees.
We've reacted quickly to minimize disruption to our business.
So this send a processes and the associated to control environment approve robust and ensuring goods business continuity.
Our ability to close off year, while 90% of the workforce because what remotely is a good example of this.
As a management same office has been on protecting our staff, including our decision not to follow any employees, whilst maintaining service to customers Stephens said, but also seeking to manage discretionary spend on working capital in life Cobiz 19.
I want to remind everyone that we adopted the offer a 16 leasing standard from one November 2019 on a modified retrospective basis.
As a result, a number of performance measures included in this presentation I've been impacted by this change and we have not restated prior year comparisons as we go through the various measures I will highlight these impacts.
We've included in appendix one of this presentation Dms the estimated year on year impacts.
The information or refer to on this first slide is on a constant currency basis, unless stated otherwise I'm for further details on the impacts on the business of currency movements. Please also refer to appendix too.
So let me give you an overview of our financial performance.
During the first six months the financial year. The group's revenue performance has been consistent with our guidance.
Our original guidance was for revenue decline of approximately 9% on a constant currency basis in the first half of that Fourtwenty.
This decline was anticipated due to disruption arising from the structural changes, we're making two I'll go to market I'm product organizations.
The changes made to the go to market organizations were not product specific so the impact was pervasive across all product groups.
In addition, we've estimated the covered non seem reduced revenues by at least 2% further in the period caused by specific deals which have slipped as a direct result of the coated 19 pandemic. However, it is likely that the impacts on trading performance was greater.
Similar to most businesses, we witnessed a slowdown in customer buying behavior in the quarter ended April twentytwenty, which is on surprising given the global lockdown restrictions imposed.
Enabled us to provide context April is our second largest trade is month of any financial yet.
The table on the slide sets out revenue performance by stream.
Steven has already provided an overview of product group performance and we provide further product groups analysis in appendix three to this presentation.
License revenue declined by 21.3% in the period. This revenues generated primarily through new projects undertaken by our customers.
Such license revenue has been impacted by coated 19 as customers naturally seek to delay investment decisions until the impacts of the pandemic is better understood.
In addition license revenues the revenue stream impacted most by the transformation activities, we've undertaken as part of the strategic and operational review.
The remainder of decline was anticipated and included within our original revenue guidance.
The majority of the maintenance revenue declining resin all rights on ATM product groups.
These declined by 16.3% 99.3% respectively.
Maintenance revenue within the other segments was broadly flat year on year.
The disappointing performance in order to one I'd EM was compounded by the year on year impacts certain one off switch were factored into the guidance issued by the group in February switches Quincy.
The timing of these one off some of the consequential impact some revenue facing means that the maintenance decline is not indicative of the underlying trend within these product groups.
I was looking beyond these one off factors underlying performance does need to improve.
Initial corrective action actions have been identified on the or an execution with more comprehensive assessments of any additional substantive actions required being undertaken in parallel.
The impact curve is not seem will have an all customers investment decisions remains largely on nine however, as a reminder, or software delivers mission critical applications, which our customers rely on to run their business. We're currently reviewing our customers.
By industry vertical.
The potential downside scenarios, which could affect each vertical.
Microfocus benefits from a highly diverse customer base, which is not concentrated buys a school geography.
That's another return revenue decreased by 12.7% in the period before the impact of the deferred written you had come in.
In February we outlined our intention to transition certain areas of the business to subscription or SaaS revenue models with the objective of achieving an excess of 15% of total revenue from these revenue streams bias for 23.
We clearly in the early days of this transition on the vast majority of what state has been focused on rationalizing on profitable assess operations and having SAS capability to certain product offerings.
This transition is intended to be a multi period transition.
Therefore, 20 predominantly focusing on extending the capabilities within the products in the security and big data products offerings.
Consulting revenue declined by 14.8% in the six months ended 30 April 2020 in the period totaled 19 caused delays in certain projects with physical access to customer size is required for delivery.
Over the previous two financial years.
We've continued to reposition our consulting revenue stream to focus on projects related to the sale of new licenses.
Retention of our install base.
This work is broadly complete and we anticipate this revenue stream will stabilize and future accounting periods, obviously subject to the current in parts of credit 19.
The group generated an adjusted EBITDA or 562.2 million in the period at an adjusted EBITDA margin of 38%.
As a reminder, the group it's up to <unk> for a 16 in the financial period and as a result, adjusted EBITDA benefited by approximately $35 million, we have not restated the probably a comparison.
We've reacted quickly to largely mitigate the close to 90 negative revenue impact the adjusted EBITDA level.
This has been as she primarily due to the close management of variable and discretionary costs. In addition to an actual reduction in certain costs as a direct result of the pilot pandemic.
We have reduced spend further by putting in place a hiring freeze on head count in all but a few specific and high priority areas.
I'm costs have been reducing obvious areas, such as travel and entertainment plus other predicts where there is as the vast majority of our workforce of in working from home.
As well begins to come out of look to how it is expected that our employees will return to business travel only when this is absolutely necessary.
In March this year, we took the difficult decision to suspend the for 19 dividends in order to preserve cash. This dividend was approximately $190 million of which $143 million was subsequently used to reduce gross debt as part of the refinancing it may twentytwenty.
Given the heightened sense of macro uncertainty we continue to believe it is right to approach the current financial paired with a reduced risk appetite on a heightened sense of caution.
As such we do not intend, Japan interim dividend at this time.
This is not a decision the board has taken lightly and we appreciate the patients of our shareholders encapsulated its dividend through these unprecedented times.
It is the board's current intentions propose a final dividend in relation to the current financial year. If it is prudent to do so within the context of our business performance on the macroeconomic environment.
Moving now to some of the other key financial performance metrics.
Firstly exceptional items.
HP software related exceptional spend in the period totaled $126.2 million.
With Archie system spend totaling 71.5 million of this amounts.
The exceptional cost associated with the HP. So for acquisition are still expected to complete in the first half of that for 21.
The majority of the expenditures still to be incurred relates to the single Archie platform.
This remains a key strategic priority of the group Stephens said earlier.
The delivery of this platform significant enabler of increasing operational efficiency and removing complexity from up business. It also represents the next catalyst for real pricing cost reductions.
In the period the group recognized an impairment charge of $922.2 million the impairment charges attributable to the increased economic uncertainty as a result of coated 90.
Due to the Sunset and see it is extremely difficult to undertake an impairment review.
As a result, our approach has been very much about undertaking the review as early as possible.
Ordinarily, we've not undertaken in Penn reviewing the half.
For the substantial change in the macroeconomic environment is considered a trigger event from an audit perspective, and we felt it was the right thing to do to assess the group's access for impairment at this stage.
The dates the only meaningful data point, we have to assess the impacts on the business.
He is the 2% negative revenue impacts witness in the first half.
As a result, we took a pragmatic approach with our offices by reflecting this in our business planning model, while updating our weighted average cost of capital whack to reflect the increasing risk in the water financial markets wacky as a key assumption in the impediment model and the business is highly sensitive to small changes in the way.
The impact of coated 19 on economies in financial markets continues to evolve at pace and is without Morgan precedent.
This impairment represent circa 8% of the group's goodwill and other intangibles balance and we will continue to monitor the carrying value of assets as the situation in vols.
As a whole sorry, including as part of our annual impairment review in October.
Adjusted cash conversion in the period has been particularly stronger the 131.5%.
Cash conversion is typically stronger and each one where cash is collected from Q O Q4 billings in the first off of the following financial year.
Nonetheless, as you can see the current year was 16.4 percentage points higher that's comparable period for last year and that's despite the current economic headwinds.
Free cash flow for the period was $304.9 million the year on year comparison, a free cash flows impacted by few one off which I will discuss in further detail on the next slide.
The group's net debt of 30 say pool, Twentytwenty was $4.3 billion after including approximately $204 million to $4 million in relation to operating leases following the adoption of five for 60.
As that says he April 29 team, we reported an adjusted net debt figure, which was restated to include the 1.8 billion dollar retentive value may to shareholders in May 2019.
However, this figure has not been restated for the impacts of off for a 16 or the tax payment in respect to the Sousa disposal of approximately $260 million adjusting for these items on a like for like basis. The group is actually reduce net debt year on year and I will discuss in more detail later in the presentation.
Turning to slide 12, Microfocus continues to be a highly cash generative business.
The group generated free cash flow of $304.9 million in the six months ended 30 April twentytwenty.
The year on year comparison of free cash flow has been impacted by the displays with Susan in the previous accounting period on the adoption of our for a 16.
The six months ended says here from 2019 included four months cash generation in relation to Souza.
Due to the carve out nature of the Sousa disposal. The exact impacts of this is difficult to quantify but as an indication Suzy generated 40 million of adjusted EBITDA in the four months before disposal.
The adoption of our for a 16 means that the presentation of adjusted EBITDA interest payments on finance lease payments are not comparable year on year.
In the period, we've elected to change our definition of free cash flow to include finance lease payments and this change has been made to both financial periods. We've made this change in order to wait comparability and as a result total free cash flow is not impacted by the change in accounting policy year on year.
The group had a working capital inflow of $99 million in the six months ended at 30 April Twentytwenty due to the strong working capital management and typical seasonality of our business I discussed on the previous slide.
We continue to incur cash exceptional costs, which in the period reduced the free cash flow by $122 million. Excluding these costs free cash flow would have been $426.9 million.
Moving to the final slide of the Finance section, we turn to the group's capital discipline and balance sheet strength.
And maybe Twentytwenty the group successfully refinanced its 1.4 billion term loan due for repayment in November 2021.
The successful completion of this refinancing was particularly pleasing given the strong demand for the groups that at a time, it's significant macroeconomic uncertainty.
The offering was substantially oversubscribed with approximately 2.5 billion in the order book at closing.
As the results of the refinancing note. Some loot loan is due for repayment until June 20 to 24.
In addition associates will Twentytwenty. The group had 1.1 billion of available liquidity comprising cash reserves I'm fully committed result revolver facilities.
As a results of this financing the group also elected to pay 143 million down of the original timeline facility on completion of the transaction.
On a like for like basis, the group reduce net debt by $270 million in the six months ended 30 April twentytwenty, despite the headwinds type advancing.
Our leverage was 3.4 times, a 30 April Twentytwenty, which is in line with our original expectations.
Finally, I'll close by saying that our capital allocation policy is unchanged on our medium term leverage target remains a 2.7 times.
With that I'll hop back to Stephen to sum up before we move on Q and I. Thank you Steven Thank you bye.
I want to total no two outlook.
Historically, we've given forward revenue guidance within a tight 2% to 3% range for the current financial year.
However, in the current environment, it's not possible to prevail dot level of forward revenue guidance, which is why we read through formal guidance with our trading update me.
In the main or products, a mission critical to a customer's core business operations and a large part of a revenues are recurring and contractual in nature.
This dynamic was highlighted during the first half of the financial period, where we saw an impact in relation to couponing team of between 2% to 3% on revenue. Despite the majority of the global economy entering glop dine in our second largest trading month.
Although we have some degree of resilience, we're obviously not immune.
And the ultimate impact of Cobot 19 on the global economy remains unclear as does the timing and extend to which the impact flows through into customer spending plans on enterprise software.
Are working assumption is macroeconomic conditions are unlikely to improve in the second top of the financial year.
So while we were originally anticipating a stronger second half to this financial year.
Some of the reasons for thinking about still hold true.
We have to balanced against the second tough, which includes a major trading month of October on that because of fuel six month impact of corporate 19.
The revenue streams, which are under normal circumstances, more predictable and driven by bookings in the previous periods our maintenance in size.
In maintenance, we had a couple of distorting one offs in each one which will not repeat nature.
So all other things being equal we would anticipate a better maintenance performance in the second tough.
That said in each one we witnessed a small number of customers delaying the renewal.
Or partially renewing with a smaller footprint.
These are being investigated to ensure that we mitigate.
As soon as many cases as possible and therefore minimize any impact to meet this performance in future periods.
In Psas were completing the rationalization and refocus of existing offers and beginning a transition in new areas as such we expect performance in this area in each two will be broadly in line with each one.
The area, we expect to be most heavily impacted by corporate 19.
So new project business, which drives license and consulting revenues.
In terms of license or most critical trading month as of October and we regularly to a meaningful portion of our sales for the full year in the last few weeks of this month.
Forecasting accurately in this area within the current on south to macro environment is extremely challenging.
Looking to longer term trends, we believe they tonight for digital transformation programs will continue to accelerate let's companies seek to rebuild and reshape the businesses and our core customer proposition can be even more relevant looking forward.
In helping organizations to bridge the gap between existing and emerging technologies.
Customers are able to better balance the need to both run on transform their businesses.
Such that they deliver innovation foster with less risk.
We believe these are key elements of a successful digital transformation program.
In support of this we're continually refining or approach and offerings to deliver shop are more focused solutions for customers.
In summary.
Our strategic and operational improvement plans are focused on creating value for shareholders by stabilizing revenues improving profit margins and maximizing cash generation.
Within this or immediate priorities are to stabilize revenues through the execution of our plans and security investigator on by driving improved performance in both I told media.
Optimizing cash generation through continued disciplined in both cost and working capital management.
And delivering a core systems transition as the key enabler for capturing productivity improvements looking forward.
The executive team is fully committed to driving the successful execution of this plant and we will cost correct as required to adapt to changes in the macro environment as a result call. It 90.
Thank you for your time today, Aldo hand back to the operator, who will open up for Q.
Thank you very much so wed like to ask the question. Please press star one on your telephone keypad.
If you change your mind to restrict your question. Please press star Keith.
Please enjoy your line remains muted locally as you will be advised when you ask your question.
So once again that star one if you would like to ask a question.
And we do you have a couple of questions in queue already me first question comes from the Linac Stacy Pohlad from JP Morgan. Please go ahead.
Thank you very much three three quick ones for me first of all I'm not sure. If you gave it exactly but can you give us an idea of the extra costs, but the delay in the core system transformation program. So I mean, we've seen the exceptional how does that come through but is there sort of an extra amount or does that just continue for an extra six months because of.
Hello.
And then also what kind of benefit would you get once that's completed so the the wrap their second question really just your commentary on H. to made it sound like you're expecting growth to slow further.
Oh sure. If you had to comment on that I know it it's nebulous and difficult to put an absolute type finger on but any any further thoughts there and third question. What are you thinking on the disposal front is that is that even still a possibility or would you consider selling off any other businesses.
Just checking on that.
Okay Stacy.
Let's do each too far.
As we said as we went through the we went through the numbers.
We're unable to forecast as tightly as we normally do given was given what's going on more broadly.
What we're saying is we expect the second tough macro environment to be no better than the flushed out.
And therefore, we've got a six month window in which we are dealing with the impacts of corporate 19 to offset well what can really help too.
Level dine in concentrate on the recurring elements of our stream over revenue streams and also to make sure that were much sharper in terms of how we Alain de business cases on the project oriented.
Project oriented opportunities that we see such that the business case is robust and solid and even if the customer is facing.
Investment challenges.
Let's get to different to the Q.
On the extra cost the if we think it will be between 20, and 30 million well what can help to mitigate as much of that as we possibly can and the benefits are consistent with what we've said on multiple conversations previously.
Cable platform single SAP systems alloys for both organizational effectiveness and efficiency.
Huge strike running multiple systems at the moment and then secondly, it gives us a platform for cost efficiencies as well.
Then on the on the disposal front, we conducted in leading up to February I really comprehensive review.
That review, we concluded the best way to deliver shareholder value was to execute the plan that we laid out that's what we're doing now having said that our jobs not wanting assets, so gilts, creating value, but for now we're executing the plan and and that's what we believed that we will deliver the best overall returns for shareholders.
That's right and just to add beyond says they see that Stephen gave only.
The additional costs around the platform clearly with some delay around being able to go to that single platform.
The majority of the additional cost is is the incremental cost of having to hold both platforms over the longer with some of the inefficiency that brings so clearly we have plans once we have.
Everything on so that stocks the environment that we'd be able to let go of some of the costs associated with two other specs.
And that's because some of the delays the world is just encountering at the moment there'll be a bit more time that what he doesn't do is slowed down what was previously disclosed in the actual program itself. Its simply means that actually as well as happens I'm a bit of additional costs that will also be a more of a waiting if the cost itself into 21 than 20.
You too so the total exceptional cost associated with the stacks the transition.
We will be impacted by about 20 to 30 million, but within that if you see a higher cost and 21 is simply moving out of Twentytwenty is just substitution.
Okay. Thanks.
Your next question comes from the line of well well last from me. Please go ahead.
Afternoon.
I wanted to dig into the revenue performance. So some of the comments you made on revenue a little bit more on first steel maintenance you.
Got you think the.
Performance in the first half is not really indicative of the underlying performance can you give us.
We're able to give us a number for why you fail, but underlying performance perhaps actually.
Yes, and on makes sense as well are you seeing any change do you think in the attrition rates on on that made sense on that's difficult with cover not say, but you do you think you're seeing any change that.
And then secondly on revenue I wondered if you could give some comments on the geographical split some wise North America looks to be so much worse than the rest of world.
Okay. Thanks, well this is Brian let me start with the ounces that our intense dispositioning, what we have said in a cost.
Well is old news than what is new news on that maintenance. So when we did the full year results back in February we pointed to a first cost guidance that minus 9.3.
Within that 9.3 at the time with some of the maintenance commentary that were repeating today. So we were already aware of some one off items within the maintenance we called out then that we knew coming through in the those as lets say within the 9.3.
Since then there's been some additional curve it impacts and there is some maintenance within the 2% additional as well, which I'll ask in students to speak to it in a moment.
And then of course, we can talk a little bit to what we think the future holds but in terms of new news.
The vast majority of that maintenance number was already there when we spoke chip full yet.
Data yet well this probably appointed two points of the one offs and not number.
That won't repeat yes, but then we did see some element of delay.
Some element of.
Not to fill 100% renewal as customers quake.
Understandably in many cases are looking to.
To optimize the spend that they have as well so we're working really hard to understand.
Got really detailed plans against each of those points can make show that we don't see.
As a trend that continues but if it's kind of market at the moment recorded 19, exactly exactly where though the actions, we're taking a working or whether we still have some of that to you know to play through.
In terms of in terms of geography the.
Basically we got a lot of work to do in North America, we've made some.
Significant structural changes to both the leadership team and the overall steel structure I'm encouraged by the early signs of that there's much more disciplined already around the basics, particularly of pipeline pipeline generation.
So I would.
Yes, I would say that we're more confident in our ability to execute in North America looking forward than we have been in the in the previous six months when no trying to rebuild some of the activity obviously into quite a difficult a difficult environment, but we do feel genuinely on a better trajectory for the longer term with the changes we've made.
Alright, thank you.
Your next question comes from the line of John King from Bank of America. Please go ahead.
Hi, Thanks for taking my question.
So just just thought she just follow up on on the last question, what we're getting the maintenance just.
Obviously, we have seen new gradually maintenance declines gradually getting was I'm. Just wondering if would you said that something entirely a function at the smaller proportionate contribution license revenues or is there anything and the channel or maybe the mix, perhaps that what we've seen its some of that some of the.
I guess, yeah sense that some mix effects that weighing on that just trying to just trying to unpack the underlying should decline and they and the maintenance.
No not that no. One was just a clarification on the outlook statement starting in that was wedding essentially saying that.
I can look at the outlook can only the macro and.
Maybe five that actions, it's you react to that with that essentially a leading to the I'd say you could you could basically cut further cost notes that should protect EBITDA, perhaps you could give some commentary and how you might respond if it's not quite well and H.B. you had softer than perhaps we expect to the 11.
Okay.
Well, John let me take the second one first so you're quite right in the implication that thing.
Yes.
Well the real struggling a bit at the moment.
With the imperfections over it we did get one break of timing in the of course, we just finished.
The operational review in February we announced as part of the full year results. So we had.
No of course that we were preparing for the coated anyway, we had no idea, but but fortuitously for US. We had just spent six month strange thing up the business looking at all the different ways, we could reacts under various wolfson scenarios.
And therefore as you know we'd already put in place a whole series of cost actions.
In February just shortly before coated bright ever since the did break what we've been doing is going back and road testing all the things that we already had in place.
If you like it was something of a head start.
Turning to the areas that we can push on holiday if we need to.
I think on top of thought it's also worth saying that look some of the savings were starting to experience.
Or actually a direct result of caveat that we may be you know, we're being honest with ourselves wouldn't that got off to that halt and I. If we hadn't realized it was going to be the case and oversee I'm thinking about travel and entertainment in the first place.
What we're trying to do in those instances load those Dennis taking what might be perceived as a threat and actually turn it into an opportunistic. So you know the challenge for us I'm for all businesses now under a new way up working that we've all got you see is to take the fat in the inefficient staying out of all that travel and entertainment costs that we.
We were wearing an option to make sure that as we come out of this we sort of land back a number.
Multiples lower than the number that we went seen on.
Thank you another warm weather is opportunity to come out of a threat is clearly you know off the back of that all of all locations around the world and looking at all facilities costs. So we've ramped up all of the work in those areas and of course, there's a whole let layer of infrastructure and headcount cost and other expenditures.
The go around about those items as well.
So where you know I think it's fair to say that anybody at the moment.
Sensible will have ramped up all that cost work anyway, but I think we had a structure around it somewhat fortuitously somewhat say, but we did having done the were up a bit of a head start that.
In terms of our ability genuinely so look at what the businesses doing and therefore understand what that might mean for as I think we do have strong financial discipline I'm very detailed forecasting.
Quite granular level now so I mean, how about for at least the last six to nine months to enable us to starts to really look into that so it would cost base of different parts of the business and we have our head count by location by individual parts OSFI costs.
Mailable Suez whichever way, we want to look at it say our ability to manage our cost I think is in a pretty good place what we what we need to make sure. We do is that we see.
What we need to do fast enough to make it biting sorry.
The other part the question, yes, even come so John on the maintenance basically this for leave us on maintenance the volume a license that you sell the attach rate to that volume the renewal rates are the churn rate on the winback of customers back on to maintenance.
So in the current climate the a win back so difficult customers are looking to minimise spend not not increase spend.
Yes, and the attach rate is fine attach rates of fine. So all the emphasis we've got now as you quite correctly say is fixing the volume so getting the license correct enforced plus.
Then.
We've taken some pretty significant actions in terms of the resource deployment across renewals to make sure that was much more attention end to end on our biggest customers and therefore, a biggest customer renewals. So we're still focused on all four we believe the the biggest leveraged comes from arresting the the performance in license supply.
And the volume Yeah, and then ensuring that we've got more weight over the renewals.
That's very helpful. Thanks, I appreciate it.
Thanks, John.
The next question comes from your line of Julian Sartini from Jefferies. Please go ahead.
Hi, Thank you so I have one more question. Unfortunately, so in terms of the.
I guess the delays renewals can you share I guess, especially on the Winback commentary you are just providing can you share if you've had to do any sort of like discounting or just changing in terms of customer food payment terms or something along those lines to to help with the collecting the maintenance payments and then the second question I'd like to US to is talking about the acquired 23 plan and you mentioned moving some.
Onyx towards the SaaS or subscription model can you share, which products will be going to a SaaS models, such as security and Vertica and then on the subscription front could you conceptually just moved everything subscription if the market one or two.
Okay. So Julian so lets a maintenance.
Typically don't offer discounts on maintenance, because our software tends not to be discretionary, yes, and we we focused very very significantly on the quality of service that we that we deliver we have had a few request from customers in genuine stress for help in how do they do that and wherever practical we're looking to try to try and help.
But that's the customer service response, rather than as being an impact on you want to performance in terms of win but typically what close he is a win back is that.
Customer has a mission critical application then they've had an issue and the Ryan originally but I mean since may know shielding expect maintenance back on clearly everyone's pretty focused on the kind of core running of the business and we're seeing less of activity. We think we'll come back just a question when it. It's just a question of when it comes back.
On saw us I'm.
Sasson subscription so in our best ticket portfolio will offer both sauce on subscription capability and our security portfolio, we already have saw us in our application.
Business and we're building capability in our identity piece of our security older security business and in our.
Yeah Security operations center, so quite broadly across security, we have SaaS capability already in a in ATM and are working working how to to accelerate dot and weve rationalized most of the unprofitable.
Non viable Sosh Eni, Tom it's not complete yet, but we're working through that.
We have a flagship sasol for already built their Colts Max.
Tend to your question on subs, Yeah, if I take your AMC business, we have a subscription offer in mainframe solutions. So we already have customers moving mainframe workload modernizing it and then running it and as you are re ws on the subscription basis unlikely that the whole portfolio would ever want smoothes out way and some of them.
Genuine legacy business again, probably customers wouldn't want to move that way, but what taking an offering by offering approach on young we think we've identified where such as the right and so stops is already on so yeah, I know for flexibility where the customer once the choice <unk> I think just to add to that it's definitely.
These two to two to the way you phrased your question that it does start with Vertica and security and that's where the market led.
These to subscription will assess with would come from in the first base from our perspective I think we've you know we made it clear when we did the full year presentation that we felt that we were taking a fairly conservative and sensible approach targeting 15% of group revenues than we said if there was a market drive to it.
Well, we felt that we saw opportunity we would we would go to close to 19, 20%.
Great revenue.
I'm pretty sure that there's nobody on the senior management team, who would see does revolutionary from our perspective.
I think I think we see as evolutionary but if for example, within but because the market wants to move to subscription and we feel that we can get a better competitive advantage by moving fast that we just simply will.
And of course, some of the financial flop, how that the business has will help us to do that.
Okay, great. Thank you.
The next question comes from the line of go 10 pad I from Goldman Sachs. Please go ahead.
Great. Thanks for taking my question, let's see if I may.
Let's see I.
Big picture question on your mid dumped on tissue plan I appreciate that disability follow up question, but to the extent possible can you comment on the timeline that you expect sustainable improvement or stability revenues previously commented on any quality pulling from fiscal 21.
Now become.
Fytwenty too or is it beyond that.
Secondly can I. Please follow up on maintenance revenues are.
Linked to the that can give you have to make any changes.
Let me will take assumptions venue undertook the it doesn't give you.
Lastly on free cash flow most other software companies has been quite cautious on their free cash flow guidance in training trendy, but do you have tended what an above trend cash conversion in one age which benefited from someone else, but how should we think about cash flow developing HM.
Okay.
Okay. The.
Yeah, let's do the maintenance one first go it's on the nor we Didnt you, we didnt model or change in renewal rates when we when we look to the impairment.
We continue to see upside in our renewal rates on more working aggressively to get after that as quickly as we can come to the mid term plant in February we laid a three year plan through to ask why 23 successful execution of which would we delivered stable revenues and EBITDA margins in the mid Fortys you on a floor level of fleet.
Free cash flow generation, we're still committed to those targets, we're still executing with a balance so.
Caution at the moment in terms of the macro environment and speed on the other hardware, we can see opportunity to actually to actually go faster, we're still committed to executing to that timeframe and obviously we of course correct if any event that the.
The economic impact is deeper done well or longer than neo them. We all hope it is but we haven't backed off at all in the plans we laid out.
In February.
I enjoyed a couple the cash Colin.
Yes, so evolution of cash you acquire already phone cash performance was.
Frankly outstanding.
We did a cash conversion in the 130 sprite Swan.
Actually you would normally expect all rights wants to be much better than h. too as we said before because of course, you'll collecting.
The end of October if the prior years revenues. So you would expect to have a you know a really good first off cash conversion, but even in the context of that.
So as I said on the presentation, you know all collection percentages this half year compared to the same half year last year in 19, we'd actually outperformed last year that this year even into the current macroeconomic headwinds we're looking at.
I think we've done that via frankly, a vastly improved operational.
Performance within our own teams, we have a very joined up very sophisticated working capital group.
And we work as we work all the particularly visible of working capital very hard now.
We still have you know probably 345% to go.
Before truly world class, but I think.
Were virtually there now.
And that improvement frankly, you can see it coming through in the numbers. So at for age to just naturally you wouldn't expect to see the same level of seasonal performance than if you go back in the previous years, you'll see the same.
Kind of.
Trends intra year on year on year as well.
My expectation is that we haven't seen anything since the end of H. one to suggest that our working capital performance is degrading a tool as fatigue set CNO time goes by.
Through the current crisis I would say from my perspective from what I've seen in May and June if anything our teams are still outperforming every forecast we put in front of them. So our cash collections is still exceeding.
The targets, we set but just as importantly, we are still continuing to collect the rumpled the very old that we've been talking about since you know sort of the beginning of last year.
And we're heading into the final cores that as well so.
I think there is pretty much nothing but good news from a working capital on a cash collections perspective, I'm pleased to state.
Thank you.
Your next question comes from the line of Michael braced trend. Yes. Please go ahead.
Great. Thanks, Good afternoon, a couple from me as well just digging into the.
Application delivery management business I mean, if I look at the maintenance trend that last year. It was minus 2% in the first off through the minus 3.3 for the year, let's say minus 4% to the second halt, but it does seem to have deteriorated quite a lot.
It would suggest the that's related to the.
The one off sites that were featured in the second half last year can you maybe talk a bit more about that and.
Assuming this is the luxury ball and businesses.
So to us I wouldn't say jobing community it sounds like develop as Doug maybe task oriented than that for the renewal rights and that's pretty much lower can you say something a lot and then secondly on the cost side of things can you just say well the exceptional items will be this year next.
What level of savings that is expected to achieves presumably after that but no incremental savings that youre planning to to bring bad on the us cost base.
Yes, Hi, Michael.
ATM, yes, there are some one off the one else impact ATM on and I told.
The a and you're right to is the Mercury Borland Borland businesses.
I would put the issues that we have above and beyond the one offs as being either planned for and understood. Okay. So not new news all are related to an end consistent level of execution, which we are addressing through a more systematic deployment of resource across the renewals. So it's more a combination of things we.
Understood to be happening on some execution rather than what we consider to be in any we add any we systematic.
In terms of in terms of or systemic rather in terms of cost. The we've modeled out the efficiencies and effectiveness savings. We believe we can get in the back office from deploying consistent systems standard systems.
Where we think the bigger prices or not is genuine organizational productivity yeah. The there's just an ongoing operational try again on the business and in February I talked about the the inefficiencies and the impact on hard on sales effectiveness and what if we could get back to industry benchmark, we could yield.
So that yes, there are cost savings, yes, we have modeled those out but the organizational.
Productivity benefit on top is is it is if anything a bigger price and that's what we're getting often yeah.
Second quarter you question on the exceptional so I'll, let Ben answer it with the with the indicative numbers and it just a quick.
Good morning on those numbers at the minute. We are obviously in a lot of what's going on at the minute Rephasing the projects and so we have the latest version of what we think the split of numbers between the two years will be which were happy to share, but just bear in mind. The important thing is that the total number is not expected to move apart from that 20 30 million, we talked about earlier so.
Just had to ban and then maybe Ben you can talk little bit about indicatively, they kind of savings that we're expecting to make wants that sees fully fully live.
Yeah sure say so in terms that they exceptional spent calm and all current expectation is the second half day will be approximately $110 million and with the remained calm in the first off all at flight 21, and then in terms of and the margin or expectations around cost savings as we said it it's something that was still.
I'll walk you through and they all comes back to the it targets, we set ourselves and the and the EBITDA margin of 45, the mid Fortys full fivetwenty freight side and it's a gradual progression to that base all baked into those numbers Michael.
Okay.
So the good thing for one more or.
Maybe I'll actually.
Mm Hmm.
Okay.
Apologies, we can't take one more we have a requirement to be closed for for the New York markets opening so I'd just like to thank everyone for their time and then on questions. Today, we very much appreciate it. Thank you and if there any questions that we didn't mention getting today. Please contact other myself bridal Ben.
So our best to answer them before close today. Thank you guys.
Thank you for joining today's call you may now disconnect your lines.