Full Year 2020 Micro Focus International PLC Earnings Call
<unk> Chief Financial Officer, Brian Mclaughlin Muskopf in a moment I'll hand over to Stephen for some comments on our performance in the period. Please note that for those of you already accessing the webcast facility accompanying this call you will find a few slides to support Stephen's comments for those participating only by phone the webcast on the slides can be accessed through.
The front page of the Investor Relations section of the micro focus website.
A recording of this call on those slides will be available. Shortly after this call finishes. The call will consist of a short presentation, followed by an opportunity for Q&A at the end I would now like to hand over to Stephen for some introductory remarks.
Thank you Ben.
Last February we shared with you on three year strategic plan.
One year in we're making solid progress in delivering our objectives. Despite the backdrop of the pandemic through most of the fiscal 12 months, we're covering today.
The additional challenges of executing a turnaround plan.
What has effectively been a global lockdown for the period are significant and I would like to thank our customers and our employees for the flexibility resilience and commitment and adopting new ways of working helping ensure we not only delivered business continuity, but also made progress in the first year of our turnaround plan.
As we now enter the second year of the plan. We believe we are better positioned to deliver against our three primary medium term goals of stabilizing revenues.
Optimizing EBITDA margins and generating significant levels of free cash flow.
Our revenue performance in the period was consistent with market expectations at a 10 percentage year over year decline.
In addition to the micro challenges, we also executed significant change within the business.
So within this context it was encouraging that we delivered an improvement in revenue trajectory across all revenue streams in the second half of the period.
Moving from an 11.3% decline in the first half.
Two an eight 9% decline in the second half.
Clearly, we recognize that there remains a great deal still to do.
But the trends and underlying operational metrics are improving and give us confidence that the actions. We are taking are beginning to have a positive impact on revenue performance.
The group delivered adjusted EBITDA of $1.17 billion with performance being underpinned by a combination of specific cost reduction programs and a natural reduction in costs such as travel.
Cash generation in the period was ahead of expectations, primarily as a result of strong execution and working capital management.
The board has taken the decision to record a non operating charge relating to goodwill impairment.
$2 $8 billion for the period.
This impairment charge reflects changes in our trading performance and overall environment when compared to the original projections. We made at the time of the HPE software acquisition.
It's important to note that this charge does not impact our underlying profitability or cash generation in the period as I have just outlined have remained strong.
Brian will cover these areas in more detail later.
The successful refinancing of our $1 $4 billion term loan that we completed in May 2020 was oversubscribed and means our next term loan is not due to mature until June 2024, given the cash generation performance of the business.
The board has taken the decision to reinstate the dividend.
As such we are proposing a final dividend of $15.05 per share.
Going forward, we will continue to balance equity returns debt reduction on investment in the business.
In FY 'twenty, one we intend to pay a dividend that is approximately five times covered and look to increase this back towards historic coverage levels over time and in line with this balanced approach.
In summary, we've now completed the first year over a three year plan are encouraged by progress so far and have continued to improve our execution plans to better position ourselves for the next phase of our turnaround.
And I want to provide some additional color on the period by summarizing performance at the product group level as shown on slide six.
AMC is a stable and highly cash generative portfolio.
The key area to highlight here is our mainframe application modernization solutions, where we have a leadership position.
COVID-19 is having an interesting impact in this area on one hand customer interest has never been stronger book projects are typically large in scale and customers are flexibility on when and how these projects are initiated.
Performance in the period was impacted by this as customers were understandably cautious and either delayed or re phased projects in response to the immediate term challenges and uncertainty of the pandemic.
However, we are increasingly confident that demand in this area will continue to increase and contribute to the ongoing strength and stability of this portfolio overall.
ADM performance was below our expectations and driven in part by inconsistent execution.
The key solutions within this portfolio are well positioned.
And help some of the world's largest organizations build an integrated end to end software delivery process, which is increasingly key to their businesses.
We're taking action to ensure the strength translate into better performance by repositioning key license and SaaS offerings.
And improving the depth of specialist skills and execution capability within our sales teams.
Performance in item was also below expectations and again driven in large part by execution challenges.
The sales execution improvements I've just covered also apply here.
In addition, we've taken initial corrective actions specific to this portfolio that are focused on improving maintenance renewal performance and reinvigorating underexploited areas of product strength in security. We're pleased with progress made and the investments have progressed as planned.
The delivery of innovation within the product portfolio has been strong and.
And customer engagement and market recognition of this unknown improving.
Operationally there has been good progress in each sub portfolio.
Maintenance revenue performance improved.
And key SaaS offerings returned to growth in the second half of the year.
We remain confident that this business will be a growth portfolio for the group within the next 18 months.
Finally, I am Angie.
Key within this portfolio are the investments in vertical and the repositioning of digital safe is a cloud based solution.
And vertical we've repositioned the portfolio to drive growth, specifically in SaaS and subscription.
And the work in digital safe will complete this year such that we can reposition it for growth in the future.
In summary.
Good progress in security on Diamide G consistency in AMC on what to do in both item and ETF.
Turning now to slide seven.
Our three year plan aims to create a business, which is more efficient agile and better able to execute consistently and the delivery of our customer value propositions.
Given the breadth of this plan we felt it would be helpful to provide additional detail on progress on the FY 'twenty on how we intend to build on this in FY 'twenty, one and into 'twenty two.
Firstly evolving our operating model to accelerate key areas of differentiation within our portfolios.
And improved the visibility of this differentiation and our overall product strategies to our customers on the broader market.
By this we mean being obsessed with delivering innovation across the portfolio in areas, where we are best positioned to help customers.
And be sharper in targeting this investment to capture growth areas in the key markets in which we operate.
In FY 'twenty, we delivered over 500 product releases with approximately a 120 of these and security alone.
We've also improved our SaaS and subscription offerings across the group.
In security and vertical we launched new offerings as part of the increased investment in these portfolios.
And ADM improvements have been made to our existing offerings.
And within I tell them in EMG, the remediation of historical issues with some poorly positioned on unprofitable offerings is at an advanced stage.
The second area of focus is to deliver operational excellence.
Within this we have two key priorities.
Firstly, the transformation of our go to market organization to drive significant improvements in sales productivity.
In FY 'twenty the priority has been getting the right fundamentals in place to drive systematic progress.
This includes implementing a standard approach globally for her we sell train and equip our sales teams.
Deploying our consistent sales management system to ensure accountability and the performance gaps are identified to enable early on corrective action.
[noise] reengineering or approach to ensure deeper levels of product specialism.
And executing comprehensive changes to the sales leadership team.
The second operational priority relates to the changes, we're making to our core it systems and business processes aimed at simplifying operations and delivering a more flexible and efficient operating platform.
Key within this is our move to a single set of core it systems and I'm pleased to be able to update that last month, we made the important step of migrating a significant number of our employees to the new environment.
Our current expectation is for the remainder of our employees to be migrated to this new environment later in the financial year as planned.
I would now like to spend a few minutes talking about how we plan to consolidate the progress to date and accelerate where possible in FY 'twenty, one and into FY 'twenty two in systems and infrastructure. The work, we're doing now will deliver a simpler and more efficient operational backbone for the group.
This means standardizing I T systems, I'm, removing unproductive or unnecessary structure.
During FY 'twenty one our goal is to complete the transition to a single share of <unk> systems as effectively as possible with minimum disruption to our day to day operations.
Successful execution will provide the platform for delivering significant improvements and overall organizational productivity.
The completion of this project will also be a significant step forward culturally for the business.
Enabling our people to work more effectively as one team focused on improving our business and delivering a smoother richer experience for our customers.
In restructuring our go to market, we have two objectives, firstly to improve productivity and secondly to have a coverage model that ensures we deploy the right skilled resources over the best opportunities.
Insistently globally.
In FY 'twenty, we put the foundations in place and strengthened the leadership.
Now in FY 'twenty, one we're focused on consolidating and embedding the work done in FY 'twenty.
Building deeper levels of product specialism, which we began in the middle of last year with security and vertical and you will see similar approaches within the other portfolios and in support of this we're also restructuring sales coverage and compensation models.
By the time, we exit FY 'twenty two we intend for this progress to lead to an end to end customer engagement model that ensures we deploy resources effectively to deliver maximum customer impact and hanes business performance.
This combination of both systems and infrastructure and go to market work will deliver operational efficiencies and productivity enhancements.
Which we will either use to fund incremental investments in revenue generation or to reduce our cost base.
Simply put we're seeking to deliver a sharper differentiated focus on leveraging areas of strength and correcting hot spots within the business.
I know you want to go a little deeper on an important example of this.
Turning to slide 10.
To deliver stable and growing revenues, we need to improve the level of recurring revenues within the business. This means growing in SaaS and subscription and stabilizing maintenance revenues.
In SaaS and subscription we have a clear plan towards a multiyear transition four elements of our portfolio.
In FY 'twenty, one we will continue to invest in infrastructure and delivering product enhancements and you will begin to see us lead with SaaS and subscription offerings in certain areas.
As we progressed further and into FY 'twenty, two we expect certain areas of the business will be SaaS or subscription only and we will further restructure sales plans to help achieve this.
Maintenance is approximately 60% of our group revenue and therefore overall stabilization and growth requires an improvement in the maintenance line.
We made the initial changes in FY 'twenty with key sales team was incentivized on retention on renewals in addition to new business sales.
We're taking this focus on investment further by building our customer success organization.
The focus of which is to improve customer adoption of the latest versions of our products and support very targeted corrective actions on hotspots, where we have attrition rates, which are too high.
As we progress further into 'twenty two the expectation is that these changes will lead.
To better customer experience on improved performance in this key area.
Before I close on hand over to Brian I'd like to talk about our customers.
When we execute well our approach to digital transformation resonate strongly with customers. We're seen as a trusted partner committed to helping customers deal with the challenge of running on transforming their business seasons simultaneously.
This means reducing day to day operating costs, whilst improving levels of cyber resiliency and investing in the latest innovation to exploit new opportunities of business models.
Our product development prioritize ease enabling customers to build on their existing investments whilst exploiting the innovation, we're delivering through expanded capabilities in cloud.
Artificial intelligence cyber resilience analytics and application modernization.
Some of the world's largest organizations rely on our products to run and transform their businesses for them. We're focused on accelerating the delivery of new business applications, simplifying operations to reduce cost and improve flexibility.
Turning analytics into insight and action.
And in this increasingly complex online world, helping customers build comprehensive cyber resiliency.
Our products are deeply embedding an often machine critical the transformation work, we're doing and have covered earlier is aimed at ensuring we execute against these capabilities more consistently delivering a better outcome for all stakeholders.
No, but let me hand over to Brian to take you through our financial performance in more detail before I return to talk about the outlook on what micro focus will look like in FY 'twenty three after the turnaround plan is complete.
Thank you Steven and Hello, everyone and thank you for joining our call as communicated last February the business has made a number of fundamental changes to the way, we operate which starts to improve the rates of revenue decline in the second half of the financial period.
This has allowed us to reposition the business to deliver against our three year turnaround plan.
The objective for the business now is to make incremental improvements to our revenue trajectory simplifying operations and ensuring that the cost savings made over the past year, partly as a result of the pandemic continue to be sustained.
Before we discuss our financial performance in detail I would like to remind everyone that we adopted the offer of <unk> 16 leasing standard from this year.
As a result, a number of the performance measures included in this presentation have been impacted by this change and we have not restated prior comparative.
As we go through the various measures I will highlight these impacts.
We've also included the estimated year on year impact in appendix one of this presentation.
The information I'll refer to on this first slide is on a constant currency basis and for further detail on the impacts of currency movements. Please refer to appendix two.
So let me give you an overview of our financial performance for the year.
As already covered by Steven revenue declines year on year by 10%. However, we delivered a moderation in the rate of revenue decline across all revenue streams in the second half of the financial period.
As a result second half revenue declined by eight 9% when compared to the prior period, whereas the first half declined 11, 3%.
License revenue declined by $19 one per cent and this revenue stream is the area of the business impacted most by the transformation activities setup are Steven and it's also the most sensitive to macroeconomic uncertainty.
The operational metrics, we use to monitor our sales force suggests these changes began to have a positive impact in the second half of the financial period, but we recognize there is more work to do.
Maintenance revenue declined by six 3% in FY 'twenty with that decline driven by our item on ATM product groups. These declined by 12, 7% and 10, 3% respectively.
Maintenance revenues within both security and I M. G returned to growth in the period in security. This growth was driven by a change in mix at a sub portfolio level and an improvement in renewal rates in our core operations.
Within our LNG the growth was driven by vertical where on your subscription offering is recorded within the license and maintenance revenue streams in accordance with the terms of the customer agreements.
Our M C maintenance revenue was broadly flat year on year.
SaaS and other recurring revenue declined 11, 8% in FY 'twenty, we have delivered a number of our objectives in respect of this revenue stream and the decline in the period reflects disruption from the restructuring of the offerings.
Encouragingly a number of these customer propositions returned to growth in the second half of the year.
Consulting revenue declined by 12, 5% in the period and we now expect this revenue stream to trend in line with new license and SaaS revenues. The group generated an adjusted EBITDA of $1.17 billion. During the period at a margin of 39, 1% as a reminder, the group adopted offer of 16 in the financial period.
And we have not restated the prior year comparative excluding this the group's adjusted EBITDA margin would've been 36, 6%.
In FY 'twenty, we also reacted quickly to the pandemic and the impact on revenue to protect the adjusted EBITDA and ultimately the free cash flow of the business. This has been achieved primarily due to the effective management of variable and discretionary costs. In addition to a natural reduction in certain costs as a direct result of the pandemic itself, we reduced spend further by.
Putting in place strict headcount controls and all but a few high priority areas, where we've previously outlined on need to invest.
Cost have also been reduced in areas, such as travel and entertainment plus general office costs as the vast majority of our work force who've been working from home.
As the world begins to come out of Lockdown. It is expected that our employees will return to business travel only when this is absolutely necessary.
In summary, we've generated approximately $1 2 billion of adjusted EBITDA in a period, which includes multiple transformation programs and our response to COVID-19, demonstrating the resilience that underpins our business model.
Moving now to some of the other key financial performance metrics, firstly exceptional items.
The developments of our new Iot platform and other restructuring activities, which have previously been communicated have incurred exceptional expenditure of $185 million in the period.
Spend in relation to it systems totaled $101 million of this amount and as we've consistently communicated. This is a complex multi period Iot project and due to complete within FY 'twenty one.
We will incur approximately $80 million remaining costs associated with this program during FY 'twenty one and this is broadly in line with our previous estimates following the delays associated with COVID-19 that we spoke about last summer.
We've always said that we view this as the platform for further margin expansion on our response to COVID-19 has given us the opportunity to accelerate our plans on this further.
When we spoke in the summer we stated that we will not return to the old way of working and in our continued drive towards operational excellence. We've identified a number of cost savings, which can be achieved by adapting the way. We work we estimate the exceptional costs associated with this program in FY 'twenty, one to be between 50 million and $60 million.
However, these programs will deliver annualized cost savings of approximately $90 million through the delivering of further efficiencies in the way, we work and a reduction in fixed costs associated with proxy.
Perhaps more importantly, the business will be more agile unable to respond to changes quicker. The objective is to restructure and simplifying now says it is revenue stabilize and begin to grow we have greater operational leverage to benefit from.
In FY 'twenty the group recognized an impairment charge of $2 $8 billion. This impairment charge reflects our trading performance and the macro environment when compared to the original projections reduce at the time of the HPE software acquisition back in 2017.
While substantial this charge is a noncash item and so does not impact the cash generated by the business in the year, which has remained strong as.
As Stephen set out earlier today, we are reinstating the dividend and the board are proposing a dividend of $15.05 per share. This is equivalent to half year's dividend up five times cover.
We appreciate the importance of the dividend to our shareholders and the business is highly cash generative with over $700 million of cash at hand at 31 October 2020.
That said our leverage remains above our medium term target and we need to balance our uses of cash to ensure that we are managing the business for the long term.
As such going forward, we aim to pay a dividend that is approximately five times covered by our adjusted profit after tax and we will look to gradually progress. This as we continue to stabilize the business.
The group's net debt at 31 October 2020 was $4. One 5 billion after recognizing an additional $230 million in relation to operating leases following the adoption of <unk> 16.
On a like for like basis net debt was reduced by over $400 million during FY 'twenty and I'll discuss this topic a bit later in the presentation.
So turning to slide 15 micro focus continues to be a highly cash generative business in FY 'twenty alone the group generated over $1 billion of cash from operations and that is after cash spent on exceptional items.
The year on year comparison of free cash flow has been impacted by the adoption of <unk> 16, and the disposal of Susan it in the previous accounting period, Firstly, the adoption of our for our 16 means that the presentation of cash generation from operations interest payments of finance lease payments are not comparable year on year. However, total free cash.
Included on this slide is not impacted by the change in accounting policy.
Secondly, FY 19 included four months cash generation in relation to Susan So now turning to the key drivers of our cash performance in the period.
Free cash flow of $511 million was towards the upper end of our expectations. This performance reflects our cost control measures. Our continued focus on receivables collection and the phasing of both exceptional and working capital spend between FY 'twenty and FY 'twenty one.
In total we estimate approximately $80 million of the FY 'twenty performance relates to this phasing and will therefore reduce FY 'twenty, one free cash flow.
In FY 'twenty. The group had a 33 million dollar inflow from working capital compared to an outflow of $121 million in FY 19.
The primary reason for the improvement year on year is the continued improvement in our collection of aged receivables today, our cash collections have not been impacted by COVID-19, and the team has continued collecting the remaining H debt from the HPE software transaction.
The group's working capital movements, driven by a number of individual movements and as such we provided some supplementary analysis in appendix three of this presentation.
This working capital performance has meant adjusted cash conversion in the period has been particularly strong at 113%.
As you can see the current year's 17 percentage points higher than the comparable period last year. Despite the current economic headwinds.
We're now getting to the stage, where the level of H debt on the balance sheet are close to business as usual levels and therefore, we do not expect a similar quantum two of inflow next year.
We continue to target an adjusted cash conversion of between 95% to 100% in any financial year consistent with our previous guidance.
In addition, the free cash flow was reduced by $48 million in FY 'twenty due to the onetime costs associated with the successful refinancing of the group's term loan facilities as.
As we think about free cash flow in FY 'twenty, one we anticipate a number of one off impacts on our performance.
A significant portion of these one off impacts of timing differences rather than the overall reduction in free cash flow.
As previously disclosed and similar to a number of U K listed companies, we had a potential tax liability in relation to EU state aid.
The latest update on this case requires the British governments collect this amount in this financial year in line with EU requirements as.
As such we have a cash outflow of $45 million in respect of this liability with a maximum total liability of $60 million.
However, we remain of the view that this amount will be repaid to the company once the cases decided in the courts.
Such we expect this to be a cash outflow in FY 'twenty, one with a corresponding inflow anticipated in our future accounting periods.
Secondly, there is the exceptional spend in.
In total in FY 'twenty, one we have $80 million of costs relating to the <unk> platform included in this amount is approximately $50 million that is moved out of FY 'twenty and into FY 'twenty one as a result of the phasing of this important program in.
In addition to this Iot costs, we have the 50 to 60 million of new exceptional spend which I discussed on the previous slide in cash terms. Therefore, the total exceptional spend is expected to be approximately $130 million to $140 million in the year.
Again. These one time investments are being made to deliver out to ya benefits, but will suppress our free cash flow this year.
As a result of these items, we've elected to give the additional disclosure of adjusted free cash flow, which is free cash flow as previously defined but excluding the cash impact of exceptional spend.
This adjusted measure was intended to present, the cash generating qualities of the business from trading performance only and excluding the onetime cost of delivering our transformation activities in our view. This enables a better understanding of the underlying trajectory of the business as we deliver on our plans.
Clearly the intention is the burden of ongoing exceptional costs will fall away and the two measures will converge.
So moving to my final slide we turn to the group's balance sheet strength.
On May 2020, the group successfully refinanced its $1 4 billion dollar term loan which was due for repayment in November 2021, the successful.
From completion of this refinancing was particularly pleasing given the strong demand for the group's debt at a time significant macroeconomic uncertainty.
The offering was substantially oversubscribed with approximately $2 $5 billion in the order book at closing.
In addition in September of this financial period, the group extended to extend our Rcs.
And extending the facility we took the opportunity to review the group's borrowing requirements in the light of the strong cash generation of the business.
As a result, the board elected to reduce the size of the Rcs to $350 million. These actions reduced the company's gross debt and both upfront and ongoing costs associated with the facility.
On a like for like basis, the group reduced net debt by over $400 million in FY 'twenty. Despite the headwind of COVID-19.
We're also electing to repay $80 million against our term loans in the first half of FY 'twenty. One. This is a continuation of our intention to reduce gross debt and interest charges. This does not impact net debt or leverage of course.
Our leverage was three five times at 31 October 2020, which is in line with our original expectations. Following the actions taken as part of the strategic and operational review.
Finally, our closing, saying that we've made substantial progress in FY 'twenty.
There is a clear operational plan to deliver revenue stabilization, while we maintain our relentless focus on cost management over the remaining two years of our turnaround plan. We successfully managed our range of receivables and Unbilled balances, which are back down to normalized levels. We also refinanced our credit facilities, meaning we now have no debt facilities due for.
Maturity until June 2024.
With that I will hand, you back to Stephen for comments on outlook and guidance before we move onto Q&A. Thank you Steven.
Thank you Brian.
Turning now to outlook.
Revenue stabilization remains our most important business objective.
We're committed to achieving this objective as we exit financial year 2023, despite the operational headwind the pandemic created in the first year of a three year turnaround plan.
To deliver against this goal, we're targeting incremental improvements in revenue trajectory annually.
The second half of FY 'twenty saw a sequential improvement in revenue performance and we've continued this momentum into the first quarter of FY 'twenty one.
Finally, I want to finish by summarizing our ambition for the business post turnaround on what that means for the group.
Stable revenues.
Stable revenues from micro focus will mean, we have a go to market organization, which delivers consistently for our customers.
Our growth products are well positioned in key markets and delivering revenue growth.
Our subscription and SaaS offerings are key parts of our portfolio and again delivering growth.
Efficient cost base.
This means we will have completed our internal digital transformation program and know how of an operating platform, which supports a more efficient and agile business.
Ultimately this will mean, we have the cost base to deliver operational leverage as revenues stabilize and ultimately grow.
It is the combination of all these factors, which will provide the opportunity from margin expansion on the sustainable generation of free cash flow.
Thank you for your time today and before I hand back to the operator to open up for Q&A I wanted to take a moment to talk about Brian.
As many of you know Brian has been offered an opportunity to take a new role outside of micro focus and he will be leaving us in the coming months once we obtain the successor.
Brian has been CFO through a time of major change for the company and on behalf of the board I. Thank him for his significant contribution to the company. During this time.
Operator can you open up for Q&A. Please.
That's hard.
I'd like to ask a question on todays call. Please press star one on your telephone keypad and I will prompt you for your time.
Again that is star one.
The first caller on the line is Charlie Brennan with credit Suisse channel when you're ready. Please go ahead.
All right great. Thanks for taking my question.
Two questions. Please.
First is just on your maintenance trajectory.
Important components of getting back to revenue stability can you just give us a sense of watch on.
Oh fuel maintenance portfolio.
And behind that.
Choosing not to renew with micro focus.
Actually leaving microphone because some competitors or are they just choosing not to renew that maintenance contracts.
I'm going on.
As I can remember I think micro focus has been talking about optimizing maintenance.
Hanging fruits.
So to try and improve the maintenance rights.
Sorry that was a long question just as a quick follow up.
I have a financial question.
There are ongoing investments to your medium term targets insurance you on.
And I guess that means the EBIT margin could be under pressure this year.
Are you confident to say that 'twenty, one is going to be the flow of EBIT margin. Thank you.
Let's do the last question first Charlie Yes, we are and we are this year, we're making the right decisions on the long term for the business and we have less of the kind of normal tier one wins that we would have to offset.
Like natural attrition for example for example on the business plus we've got a major systems transition as you know that's now underway.
And that means we're being cautious in terms of just how effectively we were able to run the business. During the during this 12 months, whilst we make that transition. So yes, we are.
And we actually believe we've got quite a lot of opportunity in front of us ideally for productivity capture rather than cost optimization, Charlie because we actually we want to push the productivity you on seek to generate additional revenue opportunities.
In terms of the maintenance side.
We don't disclose Chung right, specifically from a number of reasons that we've discussed and most importantly, amongst them competitive positioning I would encourage you to look at the trajectory as we exit.
The trajectory on the whole of last year as broadly speaking what we're looking to do this year within that we've got very specific actions on what I described in my earlier remarks as the hotspots on the portfolio. So those are areas, where we have elevated churn rates on those three or four places their debt.
If we can make material progress we will have a significant impact in the total and the type of activity. We're doing there is everything from.
Very targeted consulting offers on our expands to move customers to the latest versions of the product where there they're significantly back level through to the customer success organization, which is ensuring a really effective usage of the product on and optimizing customer value from it.
We've got a number of and number of improvement areas. When people don't renew it tends to be any mix of reasons like the one that you've just talked about.
So it might be a shift in weight on.
Their portfolio, so they might be doing more in a.
Hosted environment and less on premise in which case they need less on premise software to monitor them, we need to capture that what new SAS offerings, rather than their existing offerings through too.
Yeah, there's quite a lot of as you as you know to state the obvious it's quite lot financial stress on the system on a number of industries and they are looking for opportunities to reduce costs. So of course, there's a little there's a little bit of that but in essence I would say the churn improvement opportunities are more about our ability to execute against them.
Than anything we've seen micro on the market.
So hopefully I covered all your points there, Charlie but if I didn't I'm happy to pick them up again offline.
Perfect. Thank you.
Okay.
Moving on to our next caller.
Michael brings to <unk>.
Yes.
On your body Michael Please go ahead.
Thanks, and good luck.
Two or three from me if I may.
Historically, Brian the company disclosed the bonus and commission accruals.
2019 was $75 million.
63 million on it.
We laid out was a difficult year on just.
I'm just wondering if you can give it the field on how chunky Twenty's progress then.
Do we go back to a more normal number and does that become a headwind to two on profitability expansion and then just on costs.
Is that something you've got sort of control over what should we be thinking about the rate of cost reduction in 2021 over 2020, and then I've got one fifth day, even after that.
Okay, well, let me take a cost reduction question on cost reductions, we intend to carry on roughly the right. We have been generally through 19 and 20.
But again first cost reduction.
As we've said on the presentation on <unk>.
We invest quite a lot against those cost reductions.
We mentioned earlier on the call.
With your policy around $80 million to $90 million in 2021 is what we're guiding for those investments and those on not exceptional spend on items that are items that are going through the P&L.
Therefore.
The cost reduction.
On a net basis on looking for cost reductions of around $30 million to $40 million on top of that $19 million reinvest it spend.
And I would expect actually then they're off the cost reductions should actually accelerate beyond 'twenty one into 'twenty two.
Two reasons number one we will have to stack C.
I'll be honest single platform and be able to push on and then I think naturally we will be able to start to go off on significant.
Additional costs on top of just taxi system savings due to having a whole load of manual workarounds.
Cope with previously being able to be removed and therefore continuation on local productivity and efficiency.
Right.
Just to be clear Youre, net savings will be $30 million to $40 million or around.
Okay. So that's all good.
The 80 to 90 day net saving.
And on bonuses.
Have they normalize with lofty at higher than 2019 can you say.
Yeah, so on the boat.
Michael.
Year on year impact, which is like the way to think about it was negligible on the business.
It wasn't kind of left them on.
Now less than one per cent of the cost base.
Year on year impact.
And even less on the on the commission side year over year.
Okay.
And then Stephen just on the business transition I mean, I'll just need a lot of other stuff you're talking about the move to subscription and SaaS.
You still have about $650 million of licenses.
What's that going on it like in 2023 or even beyond that.
A multi year transition here, which is a headwind to that return to stable revenues.
It is a multiyear transition Michael.
And the way we're the way we're looking at the business, we've got and the immediate term we've got new capability that we're introducing in pretty much every portfolio. We've got improvements in the delivery infrastructure to underpin the.
Underpin the quality of service improvements. We've also got pretty advanced now in terms of cleaning out the unproductive unprofitable stuff that we felt that there are number of things before got there that to go but we should hopefully be through it as we look over a three year window. We our objective is to be growing the combination.
License and sauce now the exact mix of value that.
<unk> will play out we're going to evolve over time, and we're not going to do it in a whole scale switch, it's actually going to be a key areas within each of the portfolios where we have.
A real strong.
Permission to play with customers, we got really good IP and good capabilities on.
On this actually the preferred model in and a number of those markets. When you aggregate all of that up we talked before about the 2015 20 per cent range I think that only ever true from the unknown as we go forward because the world is moving a little bit more that way for the short term is baked into what we've told you on.
Don't think it's an additional headwind on the revenue stabilization for us and yes.
In the 2023 timeframe I provided we can actually get the offerings position correctly to capture the growth that exists out there.
Okay. That's helpful.
Before we move on to our next caller. Another reminder, that is star one if you would like to enter Keith a question on.
Next caller is Stacy Pollard of Jpmorgan when you're ready. Please go ahead.
Thank you very much a little bit of a follow up on Michael's question I had a simple question around.
Yeah.
But an extra piece of that.
What is difference in retention or renewal rates.
We maintained and south.
Anthony.
Second question.
Martin.
Stacy I'm really sorry, but your broken up completely non.
Okay could you Jim could you try again please.
Sure I hope that's moving.
I hope this works.
South versus maintenance.
Second question margin curve.
Thoughts on 2023.
Oh sure.
Lastly, free cash flow.
Yes.
Yeah, sorry, just at free cash flow, if you don't mind.
Okay. So I got the first two were mainly due to the cash one offline because I couldnt hear you unless we were going to try again, but the debt our renewal rate opportunities in SaaS, and and and and maintenance. We have range, we have a range of more than 10 points between.
Our best and our war.
And we are in every single piece of the business. We think we have good opportunities to move better towards the upper end of that than than the.
Then the war and on some of the improvements we've been making in terms of rationalizing the offers and staff.
Was that just the ones that we.
The wood cleaning I, just don't have the architecture to deliver the customer service.
We consider to be acceptable, so we're either re architected or replacing.
And then in their existing offers we're continuing to make the investments through the P&L not no.
As exceptional through the P&L to improve the resilience.
Our resilience on the overall.
Standards are.
Our delivery so opportunities everywhere Stacey.
I think your second point forgive me you really did break up quite quite strongly your I think your second point was around <unk>.
Margin development.
Okay.
Okay, So where.
We've talked about this year to the earlier question being what we consider to be the floor.
We've got a clear path to improve that.
Into the forties, and then up beyond that to our original.
Ambition of mid Forties has always required and continues to require the combination of revenue stability and operational leverage from the.
From the systems on organizational efficiency that we're building. So we got an immediate term path, making the investments. We believe are required for long term health, we got a path for this could be the bottom and then build and then once we can do the revenue stabilization with the.
The.
Systems work, we get the operational liver leveraged push on from there.
Last question free cash flow target.
Free cash flow target.
Same same same dynamic is as EBITDA stabilize the revenue.
Get operational leverage walk through all the Exceptionals will be worked through that's the point at which we can optimize the free cash flow and we are still striving for the $700 million and we've talked about.
Great. Thanks.
Okay moving on to our next caller, we have that.
At that time delay of Goldman Sachs.
Please go ahead.
Great. Thanks for taking the questions.
A couple on the product portfolio and one on cash flow.
Firstly can you provide some color on the partnership with AWS on main.
Okay migrations, which was announced late last year.
Segments benefit from debt and is it possible to quantify any financial impact.
Secondly on the security on AMG portfolios, which are currently our best performing segments can you call out which assets are outperforming.
Dick mentioned, but it got in the presentation any others to flag also is there a scope for disclosing revenue and margin metrics for the growth assets as you have done for so in the past.
And on the cash flow question actually following up from the previous question can you comment on the free cash flow progression in 2021 assets seems to be some timing issues related to exceptional.
Tax related expenses in FY, 'twenty, which may impact our FY 'twenty one.
Yeah.
Sure thing. So there is a we believe we've always believed on is beginning to really ramp up.
There is.
An opportunity to modernize mainframe workload and we've been pioneering that modernization and a number of ways. One we helped people modernize and stay on the mainframe secondly, we've been the leading.
Partner from moving mainframe workload to distributed and we noted a leading opportunity we believe from moving mainframe workloads to the cloud and we've got multiple proof points.
Around.
Around the globe on that we've been working with AWS on with Azure for Cui.
Some time now on what you saw on the AWS announcement was actually an AWS announcement of their creation of a mainframe competency capability to accelerate that and workload to their cloud and that we were one of their pre approved partners for getting that done gautam. So.
Really on AWS announcement, non endorsement of our capabilities rather than something that something that we did.
Security and <unk> you are right. We did talk about vertical we also have other big data assets. Idaho for example, where we had good success last year. The lumpy business, we may or may not get similar success the share, but we really good success last year and cash.
Candidly in our security portfolio pretty much every asset improved in the second half now it's still we still have a weighted goal.
I mentioned, we have real conviction that this is a growth portfolio for the group and we do we don't expect.
<unk> to be a linear progression from here to there, but we do expect that this is a growth portfolio on our growth portfolio on a sustainable basis.
Ben do you want to take the cash question, Yeah sure the guidance.
We performed really strongly on free cash flow in FY 'twenty.
And <unk> within that number was approximately $80 million all items effectively relates to FY 'twenty. One also on the cash level.
Slide 21, the first day of the 50 million exceptional item, which is.
Basically rebates in line on the project and the second basis $30 million of working capital in respect of tax charges, which again will outflow in FY 'twenty. One so you need to factor that into your model. When you built net and on the last piece is actually the PCE rate on the coal, which was the 45 million.
And he say day again, not something thats going to be a cash outflow in FY 'twenty, one, but the business expects to recover the asset in future accounting periods. Once it goes through the courts.
When you add all that together if you look at on the FY 'twenty and FY 'twenty, one free cash flow in total.
Material shift between the two yet or not.
In terms of the total so there's a bit of time in a phased in between.
Which pretty much will be explained by the 45 million a day date.
Again, we'll be it out and I'll see a cash flow back to the business.
Got it critically on thank you.
Alright excellent refinement to our next caller on one last reminder, that is star one to join our queue for questions.
Our next caller is Julian Serafini of Jefferies.
Please go ahead.
Thank you I just have one question I think Stephen in your prepared remarks, you had mentioned changing how field representatives are incentivized on renewals. If I heard you correctly can you elaborate a little bit on that but what exactly do you mean, Virginia, others. Otherwise are you actually paying commissions on renewals network you just dive into that please.
Yes sure.
No harm.
Materially more focus and materially more resources over the maintenance opportunity and challenges we have in the business than we've had in any prior any prior period.
A part of that is some of our most senior sales leaders on our.
The sales teams that look after some of our biggest customers knowing how the large proportion of their annual compensation directly linked to a specific maintenance target either that they are a group of accounts per country per geography that they are responsible for but that's only part of it the other part of it is investment and resources.
In customer success, which is which is oriented towards recurring revenue stability.
A good example, and also some changes in overall leadership on improvements in systems and tooling to enable our teams and the renewals organization to do a better job takes.
Take some time for those to play through but we're confident that our rate actions to give ourselves the opportunity to improve.
The renewal rates as we look forward.
Got it thank you.
Thanks Julien.
Okay. So I'll just take a brief moment here to see if anybody else would like to join our queue for questions.
Okay.
With no further callers joining our queue I will turn the call over to your host for any closing remarks.
Okay, well I would like to thank everyone for joining us today.
And also for your engagement on your questions today on the calls we filed this morning, and I look forward to speaking to.
Many of our investors over the next two or three days.
And with that I'll, just close by thanking Bryan again for us a very significant contribution to the business and wishing you all.
Good day, and please stay safe and well thank you very much.
Thank you all for joining the conference. This afternoon you may now disconnect your lines.
Please stay connected.
Okay.
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