Welcome to the FINEOS Corporation Holdings plc half-year results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you'll need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Michael Kelly, CEO. Please go ahead.
Thank you, Dacia. Hi everybody. Welcome to our first half-year results for FY 2025. I'm here on behalf of FINEOS, and I'm joined by our CFO, Ian Lynagh. We're going to go through a PowerPoint which we issued this morning on the results and achievements for the first half. Please move to slide two, where I just want to mention that FINEOS is very singular focused on our mission, our vision, and our purpose. We have a playbook in FINEOS which really defines our culture. It's fantastic for aligning our team and indeed aligning us with our clients and with our market and focus. That has been a tremendous asset for us for many, many years. That singular focus is what drives FINEOS. I moved to slide three now and talk about the financial highlights. Subscription revenue of $36.4 million.
We've grown by 5.7% on the subscription revenues, and that now represents 54.3% of our total revenue. As we've said before, our goal is to drive our subscription revenues much higher as a percentage of overall revenues. Our annual recurring revenue is $76.4 million at the 30th of June. That's up 11.2% from $68.7 million at June 2024. Our total revenue for the half is $67.1 million, up 4.2% on the first half of 2024. Gross profit, a healthy $51.4 million, and the gross profit margin being $76.6 million. Gross profit is up by 8.4% on the first half of 2024, and the gross profit margin is up by 73.6% in the first half of 2024. EBITDA was $13.1 million, and the EBITDA margin of $19.6 million. Both of those numbers are up.
EBITDA up 80% on the EBITDA margin, and the EBITDA margin is up 11.3% on the first half of FY 2024. The free cash flow position of $34.0 million or the cash position of $34.9 million as of the 30th of June gave us a free cash flow of $15.1 million, which is up from $6.1 million in the first half of 2024. Overall, a fairly pleasing set of results. In terms of operational highlights, if you turn to slide four, our focus very much has been on the AdminSuite and bedding that into Guardian Life, who went live with the system last year.
What our focus is to have all of Guardian 's new business for the lines of business that we're supporting come to the FINEOS platform from the beginning of 2026, and then to begin to work on the migration strategy with them from their old legacy systems. That program's going extremely well. We're a very happy customer, and the program is slightly ahead of schedule. Pretty confident in terms of that, but we will keep focused on it. The existing client, a top 10 U.S. group carrier, also contracted with us during the half to move from an on-premise version of our product to the FINEOS cloud platform and indeed really move across the whole [Admin]Suite. That, again, was a big milestone for us. We're continuing to work with the large clients around legacy migration to the FINEOS platform.
This carrier that just signed up in June has been a long-time client of FINEOS, very conservative, and has now moved to the FINEOS platform, which is really good news for us in terms of the go-forward. We're expecting positive free cash flow for FY 2025 in aggregate, as mentioned several times over the last year or so, with sustained annual profitability from 2026 onwards. We're really focusing in on the growth, the margin expansion, and then looking for future investment opportunities as we grow our margin and our cash flow. Cost-efficiency activities continue to deliver the savings. We also included an absorption cost, a one-off cost in the first half of $1 million from a restructuring activity we undertook during the half. Again, slightly higher on the cost side in the first half when compared with our second half as we move forward.
There will be further cost savings as we continue the rest of the year. Expectations on the cost side are very positive from our perspective. We won two new North American deals, small to medium size, one for absence and claims and one for FINEOS Claims. Both of those were achieved in the first half. We achieved several more go-lives. We're finding that carriers who've bought from us over the last year or two are going live pretty quickly and moving straight into the migration agenda, which is really good and has been all part of our R&D focus to make the product easy to onboard, upgrade, and integrate to. It's further strengthened our position also for the full suite. As we work in either claims or claims and absence customers, they become targets for our full suite, AdminSuite, from new business all the way through to claims.
The other thing we've been doing over the past year or so is embedding AI capabilities into our product. We launched that capability in our product at our June event in New York and received very positive feedback from our customers. There's been a lot said about AI over the past year or two. There have been various degrees of outcome in terms of the experimentation and the proof of concepts and stuff that are going on. There are question marks for sure in terms of the value of it. What we're seeing is that embedded within our suite, we're getting the maximum amount of value from the AI capabilities. It is going to be a continuous integration and a continuous embedding within our suite and indeed across our whole business. We see the advances that are being made, and we're taking advantage of those as they grow.
We're also taking advantage of the AI in a very ethical way, and indeed, being in a regulated environment, as we are serving some of the biggest carriers in the world, we have to be very careful in terms of audibility of decisions and so on. Again, we're very much on the legal compliance side around the AI. If you turn to page five, this one, as you probably are familiar with, talks to our people. We had a pretty good result around the people side with 88% utilization and over 90% employee retention. We're now at about 1,007 people. The stat on this particular page is that the number of contract resources has slightly increased as well from 14.1% in the first half of 2024 to 17.4% of contract resources.
That gives us great flexibility in terms of the go-forward and in terms of having contract people and companies come in and work for us. I'll turn to slide six now. We have been focused on North America as our growth strategy since we IPO'd. As you can see here, the North American revenues grew by 5.1% in the period. We're slightly up, with 79.8% of total revenue coming from North America. The APAC region overall revenue has also increased by 10% due to a growth in subscriptions and also in the services side of 11.5%. EMEA is down, and that's really a legacy issue. We talked about that last year where we lost our probably longest client or our longest and our first client in the U.K., where they were no longer strategic to us or us to them. They finally retired our system.
That was a one-off impact on our number in FY 2024. Overall, a good set of results. I'm going to hand over to Ian now to go through some detail on the financials. Over to you, Ian.
Thank you, Michael. Thank you, everybody, for attending this call and giving us your continued support and interest in the company. What I'm going to do now is just provide a bit more light in terms of the financial figures. If you turn to page eight of the report, starting off with the subscription fees, it has grown period to period by 5.7%. In particular, what we have shown there is a healthy growth in ARR. That's come about as a combination of regions.
Naturally, what happens with customers as they move from one year to the next, we have indexation of pricing or they grow in terms of their premium and therefore the subscription fee grows along with that. In essence, the main reason why the ARR has grown there as well has also been complemented by the deals which were closed in Q4. As Michael said, there were two smaller-sized deals, small to mid-sized deals, and then there was one larger deal with an existing client bringing across a significant amount of our business from an on-premise installation of FINEOS over to the cloud. Continually, what we're seeing is that we're reducing the on-premise customer footprint to a more negligible level. That's the reason why the initial license fee, as I've mentioned before, remains small.
That really is just a revenue stream that's associated with our on-premise customers as of when they order new licenses for new users on the on-premise solution. We pump through the number there, and that would just continually decline. We're not selling on that particular platform. We're selling on the cloud. That would just come in as it comes in. We can see also an increase in services. However, as you look through your own analysis, you see services are slightly down on the second half of last year. There's a combination of reasons as to why that has actually occurred. Naturally, the backdrop, as we've mentioned before, is that we continue to encourage our customers to take on self-service and need their demand themselves, so that they can take more continuous software releases and do the QA and configuration themselves as opposed to having to rely on FINEOS.
We're continually growing our system integrator network, who in turn will also help us in terms of market presence and growth within our marketplace. In addition, we have had, as everybody's aware, quite a significant level of FX volatility in the marketplace, particularly with respect to the U.S. dollar. That's caused a level of impact on the service revenues for the first half of the year. We have a particular deal with a client where we've agreed to a milestone payment for work that's done this half of the year, and that amounts to approximately $1 million. That's just deferred into the second half. We collect that at that point in time. Overall, steady growth in revenue, which was positive.
In terms of the cost of sales, we have got a reduction as you know, we have been looking at our cost for a long time, including the cost of people. We got the net impact of that in a positive way year on year in terms of this half of the year, which is positive. We have seen a slight reduction in contractor costs. Michael mentioned that our contractor proportion of people in the company has increased. Where that's increased is more in our R&D capacity. We're giving ourselves a lever in R&D to allow that to expand if demand comes in at particular points in time and contract to level again if that's required.
It's just giving us a bit more flexibility on the R&D side, whereas the reference here to the reduction in contract costs is really our project people, our professional services people, product consulting, as we term it within our company. The gross profit is up. We have a gross profit of $51.4 million. That's up by 8.4%. Indeed, the gross profit we're showing now is above what we're targeting for FY 2027. We're still very much committed to those longer term commitments that we made when we had the roadshow in November of last year. We're reiterating that in our numbers. We're delighted that that's staying at that level. We don't expect it to increase much more as time moves forward over the next half of the year, but certainly expect to keep it at a good level. EBITDA is where we're particularly happy.
We've seen a good increase there, in comparable periods from $11.3 million up to $19.6 million. As you know, we're targeting 25% by FY 2027. We're seeing a steady improvement there in EBITDA. As mentioned, we see more cost outage occurring in the second half of the year as we've had to absorb some restructuring costs this half. EBITDA should continue to improve as we work our way through the year. Ultimately, what you're seeing there is that the net loss after tax is at $1.3 million. This is our steady recovery in terms of getting back to that profitability situation when you make the comparison to the $5.3 million loss that we made in the comparable period last year. That's steadily moving in the right direction, which makes us very happy. If you could turn now, please, to page nine. Subscription fees continue to grow as a revenue.
That's now at 54.3%, and we're pushing that very hard in terms of that continuous growth. As mentioned earlier on, service fees, we're not putting the same level of focus on the growth of service fees, both in terms of our working with system integrators and allowing customers to take on more self-service. Indeed, as our products mature out continuously and greater automation is included and greater functionality is included, there's just going to be less services to bring the products on board. It's very much about the growth in subscription fees, which is what we're driving there. You can see that's continually growing the bottom line there, and we expect that growth pattern to continue as we move forward. If you move now to page 10, you can see the arrows there in terms of the operation expense.
They're all down except for one, one being up, which is R&D. I just want to explain that a bit more in terms of what's happening in R&D. I referenced there a moment ago the fact that we have taken on a level of capacity in terms of flexibility around R&D through a third party. That's worked out very well. That's something we instigated in or about Q3 of last year. It's been running now for a while, proving very successful. What that's allowed us to do is look at our existing R&D capacity that we had in place in the first half of the year. We've done a level of redistribution of workforce. Where that has occurred in the first half was predominantly with our permanent staff in R&D. We had to pay restructuring costs in the R&D function more so than anywhere else.
There was higher salary costs because as some people moved on, there was money owed based on long service or holidays, etc. That's the only reason why the R&D figure has actually gone up compared to the rest. We'll see a reduction in R&D for the second half of the year and then a more normalized picture as we move forward. As we've committed repeatedly, we're not looking to increase our R&D expenditure as an absolute figure except in line with indexation, salaries, etc., and we still see that very much as being the path which will continue for the foreseeable future. With respect to the other groupings there, we've got lower employee costs. That's a derivative benefit from the activities that we did last year. There are some offsets there, but not a significant amount. We're seeing also in G&A that, again, there's just a level of cost reductions.
We have had a gain in terms of FX on the cost side, but that's, obviously, on the revenue side, we've had a hit as well in terms of the U.S. dollar in particular. Approximately 70% of our revenues are in U.S. dollars. Of course, we have revenues in Australian dollars, New Zealand dollars, and Canadian dollars. What's happened over the last half year is that the euro has strengthened against all those other currencies, and the euro being our operational currency, that has been the impact. On the flip side, we've had some natural hedging taking place as well because we have costs in all of those regions. In particular, our second biggest cost region is the U.S., where approximately 35% of our costs are there.
That's helped in terms of balancing that figure, particularly in a volatile world we have out there at the moment in terms of what may happen with respect to tariffs and trade deals, etc., and the impact that has on the U.S. economy. That gives us some natural hedging, which is very helpful. If we move on now to page 11, in terms of the R&D investment there, this is focused on the people costs because we're talking about what we can capitalize and what we can expense. As you can see, we've had benefit there from some of the work that we did last year, so the overall people costs are still remaining constant. Whereas in the operating expense, there are other expenses which you need to cater for within that. Yes, it's keeping at a constant level.
That's going to allow us to continually strive towards what we've set up as a target to achieve in 2027 and then subsequently in 2029. A target for 2027 is that R&D as a percentage of our total revenue will be 30%. We're currently at 37%. That will improve in the year because the second half of the year will see less costs, as I described earlier on, in terms of our R&D fund. If we move on now to page 12, the balance sheet, I won't talk about cash here because the next slide talks more about cash. I'll emphasize that there. I'll just pick out a few items here. Around trade receivables, it is down, and that's really due to higher collections from customers in the first half of the year. That's always a positive sign for us.
That's one of the key KPIs we use in the company, the DSO number. If our customers pay us quickly, that's usually a good sign. They like the service, they like the product, they like us. We have a very good picture on that, and we've seen some improvements indeed, year on year. Of course, we've also had increased fees that we're sending out, so that's another reason for that. Developing expenditures are simply the R&D, outpacing amortization, so you expect that to go up. It's just natural. The goodwill decrease is really down to the FX movements we've heard too. Naturally, at this side of the year, we're halfway through the year. You're familiar with our invoicing pattern where approximately 50% of our subscription fees is invoiced in the first half of the year, indeed within the first month of the year.
That then creates a deferred revenue position when compared to the end of last year. We now move on down to the cash flow statement on page 13. Net cash generated from operations has seen a significant increase there, 73%. That's a combination obviously of having more to invoice, more revenue collection. It's also credit to the work that we've done in terms of the cost reductions and the monies that we've taken out of the organization. That's great, a very, very good position. The investment levels is predominantly our R&D investment, so that's pretty much in line with expectations in terms of what happens within an organization such as ours. The exchange rates, we've seen a significant hit there. You know, if you look at the difference between comparable years, that's at $5.1 million. It's a negative, for the first half of the year, $4.1 million.
Yet, despite that, we still managed to achieve a $15.1 million positive free cash flow absorbing in that FX movement compared to $6.1 million at the same period last year. That gives us the confidence at the half-year point in terms of achieving positive free cash flow for the entirety of the year. You need to take into account that more revenue comes in the first half and less in the second half due to the way that we invoice our subscription fees. That gives us a terrific head start. When you look at the backdrop as well, as you know, we have been investing over the last five or six years very significantly in the R&D product. That investment level is not going down, but we're now starting to see a greater return of that investment, you know, as we return to profitability.
Nevertheless, we have a situation here where the bank balance that we started off with at the beginning of this year is less than it was at the corresponding period last year, and nonetheless, the balance we've ended up with at the half-year, albeit only marginally greater than last year. I think taking into account the start position of the cash balance plus the FX movement is a significant achievement. That gives us a lot of confidence again, you know, in terms of achieving positive cash flow at the end of this year. Again, looking at being very much cash generative thereafter in subsequent fiscal years. I'll leave it at that, Michael, and turn back to you.
Okay. Thank you, Ian. If we move to slide 15, for closing remarks, effectively, our focus continues to be revenue growth and free cash flow for this year, with the real focus on FINEOS AdminSuite, making sure that Guardian has a great experience and that they can take all their new business onto the FINEOS system for the lines on the system from next year onwards. Indeed, that we can focus in on legacy and migration. We're also really focused in on traction on the A and Z market in particular, and trying to get our customers, all of them, to kind of upgrade to the cloud. That's been going quite well. In the first half, we've also seen we were coming to a nice go-live in the first half. That's just happened actually, this month in terms of one of the customers moving to the cloud.
Indeed, some of the slowdown in terms of A and Z over the last year or two, I was talking to one of the CEOs just recently, and she told me that mental health claims are very, very high for their company in Australia. That is something that is dragging the focus of carriers to look after that in their own business. Bits of slowdown in terms of their focus, but everybody is focused on the need to upgrade to the cloud and all the advantages that that brings to them. We're expecting that to pick up over the next 6- 12 months. We'll also continue to drive those operational efficiencies as Ian has gone through. We're feeling good about that in terms of our cost base for the second half and into next year as well.
The pipeline for the employer market, as in FINEOS absence for employer, given that we now have the two employers up and running, one 40,000 employee customer and the other one with 50,000 employees, both are now referenceable and so on. We've kind of bedded down the product. We expect that market to grow for us, but very much at the big end of the market in terms of large employers first coming over to FINEOS. We have a pipeline there as well. Progressively embedding AI has become the norm in FINEOS. The important thing about AI is it's important what you're embedding it into and the data and the quality of the data, and the trueness of the data as well in terms of a core system.
Gartner and other analysts are really focused in and quoting 80% of CIOs are saying that core systems should have embedded AI in them. That's certainly what we started to do over a year ago, and we're making really good progress there. In terms of the outlook and the guidance, we've now got ourselves into a very strong position as a single product or single platform, SaaS product vendor in a very, I suppose, conservative market of carriers, who once they move their business to you, they become very sticky and long term. We've moved ourselves into a very good position where we have our leg in the door of several large carriers. We're also starting to experience the margins of a SaaS player and the benefits of being a SaaS player as we move along. We have a very strong relationship with AWS, our cloud partner.
We work very, very keenly with them in terms of SaaS and driving outcomes on innovation and so on, together with them, and we're really enjoying that. Overall, the headwind we see is FX, and particularly as Ian has mentioned earlier, the U.S. dollar and just the, you know, how that's going against the euro currency, which is our base currency, operating our operational currency. That's important in terms of the watch item for the future. We're kind of lowering our guidance to the lower end of the range is where we're coming in at now, just given the environment and so on. Also, in terms of the sales cycles, we have a solid pipeline ahead of us, and we're working with several customers or clients who are paying us to do studies and stuff like that. It's just a question of when we close deals.
Sales cycles can tend to be lengthy, especially if you're dealing with a carrier who's been burnt by other vendors in the past. That just is something we have to accept and get over. The more we can make our platform easy to kind of onboard and make them really comfortable that it's a kind of a no-brainer to move to FINEOS, the better for us. Our sales cycles should start to increase in terms of conversion and so on. We have the track record now in the employee benefits space in North America that we craved, and we are continuing to see ourselves as market leader in that space. FY 2025 costs are expected to decrease when you compare them to last year. We continue to expect the pre-positive cash flow as we go through to the end of this year and profitability from then on. Overall, we're feeling good.
If you turn to the last slide on page 17, as Ian referenced as well, we did a reset last November with our investors and analysts in Sydney. We began again this November as it turns out. We put these targets that we're aiming for in terms of 2027 and 2029. As Ian said, we've already achieved the EBITDA margin that we actually set ourselves out for 2027. We're still working in terms of a few key areas of the business just to get us to those targets that we've set ourselves. Indeed, we're looking forward to coming down again in November and talking to you about where we go from here. With that, I'm going to close out the formal presentation and ask first, questions from the audience. Thank you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speaker phone, please pick up the handset to ask your question. Your first question comes from Tim Wilson from Macquarie. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. Just maybe clarifying a couple of things. Just to confirm, you're talking about sequential half-on-half cost reductions pretty much across each of the segments. You'd call that obviously the one-off things that impacted one of the line items in the first half. Just to confirm, that's what you're saying?
Yes, that's what we're saying, Tim. I think we flagged that, and I think it was to you on the last call, half a year ago that that's how we saw the year play out. First half costs would be higher than second half costs. That's exactly what we're saying.
Yeah, okay. That's great. In terms of maybe, you've sort of called out the currency impact on both sort of revenue and expenses. Do you have a sort of constant currency sort of revenue growth or expense and/or expense number that you could call out?
Yeah, we don't keep that number, Tim. It is something that we could look at. As I said, we have many currencies that we deal with. We have six revenue currencies and we have nine currencies in total that we deal with because we have cost basis elsewhere. It's quite a lot of movement. It is something we can look at, but we don't have that figure immediately at hand.
Okay, that's right.
Yeah, we’ll take that.
That's fine. If you haven't got it, that's fine. Maybe asking the sort of question in a different way. From what you're seeing in the pipeline, if you look at the 2027 and 2029 guidance numbers across subscription fees, R&D, et cetera, it seems to imply, particularly on the subscription fees, that there's obviously quite an acceleration from the level you've got now, unless of course you think service fees are going backwards, but I don't think that's your assumption. Can you just talk through what makes up that 65% subscription fees in 2027 initially?
Yeah, sure, Tim. What we're doing at the moment is we're bedding in primarily absence and claims, large clients who have big portfolios that they're migrating towards FINEOS. In most cases, they have a good chunk of the business already on FINEOS, but they still have work to do. We're working on the migrations. We're building migration suites and stuff like that with them. Indeed, that's a key focus for us this year and next year in terms of doing as much as we can to accelerate that. We then see the cross-sell upsell coming, and carriers are reluctant to talk to us about other components this year. We do see that coming next year and the year after. Most of that 65% will be existing cross-sell upsell.
There will be some new business, but most of it is actually stuff we can see ahead of us through our customer success teams.
That ratio is effectively telling us that the pipeline on an underlying, for want of a better word, content currency type basis should accelerate from the numbers that we're seeing now.
Yeah, yeah.
Okay, and then just in terms of the working capital, like the debtors, I just noticed the debtors are starting much lower than you've been at this point in time the last couple of years, like materially. You can see that the preferred revenue is actually up a bit. Just the sort of other major moving parts from a working capital point of view that impact your ability to sort of say you'll be positive on a sort of 12-month free cash flow basis?
You want to take that in?
Yeah, yeah, sure. On the cost side, I mean, like any organization of our nature, the most significant cost relates to our people. You know, that's anything between 80%- 83%, 84%, depending on the way you categorize it. Our second biggest cost then is actually AWS, our platform partner, that Michael referenced there earlier on. That's in U.S. dollars. So far, the euro is threatened against the U.S. dollars. That cost has gone down. We have the people cost pretty much under control. They're the two main moving parts that we have, and we've got a very, very good fix on them. We work hard as well then with other suppliers, be it around insurance or software, et cetera. Again, we've got a good, good tap on that. On the cost side, we're feeling very, very comfortable.
On the revenue side, it depends on when the deal flow comes in, in terms of, you know, there's still work to be done there in the second half of the year with respect to positive free cash flow. We're much more confident, you know, as the months go on, as to the ability to achieve that. Of course, at the half year there, achieving $15.1 million, as compared to $6.1 million this time last year, it was a positive mid-year indicator of our ability to achieve that.
Yeah, there's nothing out of the ordinary on a working capital line that you're expecting to get to that free cash flow positive?
Nothing out of the ordinary, Tim. Correct.
Okay. Thank you. Those are my questions.
Thanks, Tim.
Thank you. Your next question comes from Siraj Ahmed from Citigroup. Please go ahead.
Hi, Michael. Hi, Ian. I've got three questions. This is for sure. Michael, pretty strong number in terms of ARR. You added $5 million in the half, right? How should we think about the second half? I mean, you're calling out some macro weakness, clients taking some time, but just what sort of visibility do you have in terms of the second half?
Yeah, look, ARR will continue to grow. We did get a bump in ARR in the second quarter. I think Ian said fourth quarter, but the second quarter of the half, we got a bump, a nice bump in the ARR. It's going to continue to grow, Suraj. It's hard to say exactly what we're going to achieve because some of it will depend on the new business. As you know, most of the revenues we forecast in the year, for over the last year or two, have been already in our, you know, we can see them. I can't give you any exact figure in terms of what it will grow to, but it will still grow towards the end of the year and into next year.
Okay, and maybe just on that as well, I mean, policy and billing, and you said the whole FINEOS AdminSuite is what you're pushing, right? I mean, you're waiting for a third potential client. I think you're being pretty close to it as well. Any updates on that?
Yeah, look, we have, I think we had a potential client for AdminSuite a year ago that had done the study and everything with us with one of the SIs. They were basically put up for sale, believe it or not, by a very large medical company that owned them. That transaction has taken place. A large proportion of their book has gone to another client of ours, so the FINEOS system goes that way, but some of the system stays in terms of the remainder of the book. We're back talking to them about an AdminSuite deal. It won't be as big as the deal that we were looking at, but on the positive side, we've moved the product in leaps and bounds in terms of where we were just over a year ago, especially focused around the Guardian Life work.
We'll see how that goes in terms of the admin side. There's one or two other carriers that are kind of looking at the admin side, but it's early days. I don't want to say anything about that. You know, the obvious area to go is cross-sell, upsell. The admin part of the suite really does complement the claims part and gives them extra operational efficiencies and all kinds of other benefits. You know, we have to be mindful of where these carriers are on their journey. Lots of them are head down trying to kill off legacy, and we don't want to annoy them by showing them the next shiny toy that they can have. We're starting to come around to those big picture type discussions with some of the carriers.
Got it. Last one, maybe for Ian or you, just in terms of the revenue guidance, let's say it's $138 million a day of targeting given the headwind. This is confirming the building blocks for that. I think Ian, you sort of mentioned there's $1 million services revenue that's coming through the second half, which shouldn't happen in the first half. On the subscription side, is most of it already won? It's just, you know, delivering on it. Is there further wins that's required to hit that number? Thanks.
There is further business required to hit the number, but a significant proportion of it is already booked. It's a smaller proportion that we need to win, but there is a level of expectation around wins. As Michael mentioned, the pipeline is strong. We are expecting to close more business in the second half of the year. That's my answer.
Okay. Just confirm, there's a $1 million services benefit as well. Is that right, Ian?
Correct.
Okay, thank you.
Thanks, Suraj.
Thank you. Your next question comes from Howard Suen from Citi. Please go ahead.
Hi, can you hear me?
Yeah.
Thank you for taking my question. I have two questions, both on the operating expense side. The first one would be on the OpEx forecast looking into the second half, and also, if we look further into FY 2027, do we expect the cost level to go down if we look at longer term? Secondly, on the R&D expense, previously you mentioned about the usage of agentic AI. I was wondering, if we have increasing usage, would it be a bit difficult to get the R&D as a percentage of revenue to come down as well?
It's a great question. We're expecting the revenues to go up next year and beyond. Therefore, by that particular kind of growth, we'll see R&D as a percentage go down. We're also expecting to hold our R&D levels fairly steady where they are now, as we said at the beginning of the year. Because we've finished out a large scope of the core system development and so on, and we have carriers now who are quite satisfied with the core, it's all now work around the edges where we're making the system faster, easier to use, and so on. In that, we're embracing areas around AI, which is all part of automation and making the system more valuable in terms of what it delivers benefit-wise for our customers. Also, around the digital side in terms of integrations with other platforms and other vendors and so on.
We're able to scoop out extra resource out of the pool that we already have to do that new work, because we don't have to do some of the stuff that we've been heavily working on the last three, four, five years. If we do more R&D, it has to be a very special purpose, and there'll have to be some kind of a contribution from the carrier that wants us to do that. Again, we see the R&D going down as a proportion of the overall revenue to more normal levels over the next year or two. Hopefully that answers your question for you.
Thank you.
If I could just add to part of that question, we certainly expect to see the operating expense in the second half of this year be less than it was in the first half of the year. You asked that question there. In terms of, you know, what is the trajectory out to 2027? This is an area which we'll keep a very close eye on. We want to make sure we're controlling costs very effectively, but it's very hard to state what it would look like in 2027. We'll have a better equation, but as you've noted there as well, you know, the advent of AI can help. Other things can help as well in terms of where our resources are located, et cetera. Just to reiterate, the second half of the year will have a better operating expense profile than the first half.
Thank you. If I could have a follow-up on the free cash flow in the second half. If we look at a better operating expense control, looking into the second half, what are your forecasts in this half?
As I stated before, we've got, in terms of revenue streams, two revenue streams. Basically, our services fees are fairly even month on month. We invoice them month in and month in arrears. That gives us a very kind of constant type picture. If you look at our subscription fees, what you have is a wave pattern where you've got a big wave in Q1 at the high points in terms of revenues come in. It dips in Q2. It goes up to a smaller level in Q3 and then dips again in Q4. Overall, what we're expecting is that the level of free cash flow in the second half of the year is significantly reduced than the first half. What we're targeting is to be positive free cash flow in aggregate.
I'm not expecting it to be a very big number, but it will be a very big significant change from the previous years.
Thank you.
Thank you. Your next question, it comes from Hai Nguyen from Oceanside Family Investment Trust. Please go ahead.
Good morning, Michael. Good morning, Ian. Thanks in advance for taking my questions. I have two today. My first one is, in order to reach the 75% recurring revenue by FY 2029, what is the sale mix going to look like in terms of new, in terms of new logos versus cross-sell expansions versus price uplift? My second question is, once again, to reach 80% gross margin and 40% EBITDA margin by FY 2029, what would go wrong to prevent us from reaching those targets? Thank you.
Good question. We're dealing in North American employee benefits, which is dominated by about 15 big carriers, of which we have six of them already signed up on the FINEOS platform. We see a lot of cross-sell and upsell within those six. There's also about six more that have gone with vendors who came into the market with admin from the PMC and the pensions area that haven't gone well. Those carriers have more or less canceled those programs and gone back to their legacy systems. Those carriers are still targets for FINEOS when they can pull themselves together and get the budgets together to go again.
I think the good news for those carriers is that we're already advancing the platform so well that it will fit them and they'll get an easy ride when they do jump on, thanks to all our earlier customers who've come with us on the journey. We do see a number of the carriers in the space converting the bigger guys. We've gone through our TAM in terms of the overall target market. There are probably another 80 carriers that carry the lines of business. We will convert them, or quite a few of them, we hope. They're not going to be big deals, so they'll just incrementally add to the subscriptions. There's the employer market as well, which is another TAM that we're addressing. We're pretty much focused on the domain in North America that has got us to here as part of our strategy.
We're not looking to add any new kind of super duper bells and whistles to FINEOS. We've got a steady trajectory that we're working on to accelerate, as I said, embedded AI, digital, and so on, and make the product even more attractive and build out our moat against other competitors. What could go wrong? Obviously, at a macro level, we don't know what's going to happen in the next four years. That's something we're all watching as countries look at how America has changed. That is something that's on all of our minds. We don't know in fairness. We can't look ahead. If there's a massive downturn in the employment market, say in North America, that would have a headwind effect on FINEOS.
If the currency of America becomes so weak that it's no longer the greenback and the kind of dominant currency that everybody looks to, that could be a problem as well. Those kinds of issues are issues at the macro level. If a large client left us for some reason, the black swan event, cyber or whatever, in terms of one of our technologies getting attacked or something like that, that could be an issue as well. We keep focusing in on the downside risks. We're very, very tight with AWS on security and stuff like that. Indeed, we're very tight with our clients about those kinds of issues. We just have to navigate and go forward. As everybody does, any of those events, if that hits FINEOS, there's likely going to be an impact on lots of other things as well.
We'll just be in the pile of everything else that gets hit. I can't see, you know, we're steadily growing. We've kind of been heads down building this platform out. We've got some really good customer success with our clients and very happy customers. They're the things we can focus on that we can control and hopefully then continue to grow the business.
That's great. Thank you.
Thank you. Your next question comes from Sinclair Currie from Moelis. Please go ahead.
Oh, hi, both of you. Thanks for the presentation. I guess I, you spoke a little about embedding AI into the platform. As I recall, I think some of your larger customers, AI is still in scope if you wanted to upsell that, even though they might be on longer-term deals. With that in mind, how far are you off having something which could be saleable or turned into a product in AI?
Thanks, Sinclair. Yeah, we already have a product that's ready to go and releases this year, and we'll continue to release into next year. Focus in on things like GenAI, which are really, really valuable to case managers in terms of all the different documents and medical records and stuff like that that they're looking at. We can expedite the process around all of their work using AI. We can also help with claims guidance, and indeed new business, persistency levels and stuff like that using AI, more on the machine learning and the predictive AI, and then agentic, obviously, overlaying on top, which is coming. Overall, I think the way we look at AI, it's a technology that we need to embrace that we build into the core.
We sell more and more on value, based on what we can save a client or what we can help them to achieve in terms of business growth and so on. We take a macro view of that. We will be charging them for AI usage, because it's embedded into our product. We actually get charged by our vendor on the AI front as well, which is AWS, as Ian mentioned earlier, on the cloud side. We will be growing a kind of an extra line of revenue off the back of the AI, but it's going to come in multiple factions. We're not looking at some brand new product that we've kind of jumped out with and say that that's your AI, you have it there now, you have to license that. It'll kind of seamlessly just come into the suite.
The value prop is going to just increase for the clients and make the overall proposition much more attractive.
Okay, thanks. Just to follow up, trying to put your mind around the sort of scale of that opportunity from where you are now, if you have a dollar of revenue of a client, is it too early to even think about what that sort of upsell might look like?
It's a little too early. We think of the macro picture, full AdminSuite, in terms of them buying more from us and buying more automation. In that automation, the AI will be embedded. It's a little bit too early for us to think that way. Another part of the AI and that story is embedding it in FINEOS. On the cost side, we're seeing innovation and savings as well, which is worth drawing out. It has got lots of benefits, but it's early days with it. I don't think, as I said, I don't think we're going to be selling an AI, particularly, outside of the whole core. There will be maybe areas where we could get an early adopter to take some of our AI across their legacy. That's something that we can do, but it's early days on it.
I can't give you kind of real fundamental answers, but certainly it's an attractive piece of the whole suite.
Excellent.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Kelly for closing remarks.
Yeah, so thanks everybody for joining us today. Thank you guys for the questions. As I said, we'll be down in November and looking forward to meeting everybody and giving you a full overview of where we are and how we see the future. A good set of results for the half. We're quite pleased with them and, indeed, looking forward to the next half and achieving that free cash flow that we've set out from last November. Thank you everybody for joining us.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.