Thank you for standing by, and welcome to the FINEOS Corporation Holdings Plc full 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 will 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.
Hello, welcome everybody to the FINEOS FY 2025 results presentation. I'm joined here today by our CFO, Ian Lynagh, and between the two of us, we're gonna give you an overview of the results presentation, that we published on the ASX this morning. I'll click on to slide two. This slide really covers off, you know, our playbook, mission, vision, and purpose, and it's what gives FINEOS the real clarity and alignment within our team in terms of our focus on Life, Accident and Health. In terms of our vision, in terms of protecting people from illness, injury, and loss, and making that accessible to everybody. Of course, our purpose, working with our carriers, and employers, to help them care for the people that they serve through the delivery of superior insurance technology.
More and more, we see in the life accident health world, a move from just, you know, being insurance and protection and giving, you know, payments to more caring in terms of return to work and helping people recover from illness. Also prevention and, you know, trying to keep people healthy before the kind of the situation where they need protection even eventuates. We're seeing more and more of that trend of prevention in the marketplace from our own carriers, and indeed, we see that as a very positive situation. I'll turn now to slide three and cover the highlights for FINEOS last year. Subscription revenues have grown to EUR 75.6 million, and that's up 8.2% on FY 2024, representing 54.6% of our total revenues.
Our ARR coming into this year was $78.3 million at the December 31st, up 10% from the $71.2 million on FY 2024. Total revenues was up 3.9% on FY 2024. A total revenue of $138.4 million. On a constant currency basis, it's up 6.3%, and it would have been $141.7 million if we had have reported on a constant currency basis. Slightly above the midpoint of our guidance that we gave last year. The gross profit, $105 million. Again, you know, gross margin 76.2%, which is really healthy. Gross profit is up 5% on FY 2024, and the gross margin is up from 75.4%.
Really, we're operating at a really good gross margin level. That's part of our target for next year, which I'll talk about at the end. Our EBITDA was EUR 30.4 million, and the EBITDA margin was 21.9%, again, representing a healthy jump of 50% up on FY 2024, and the margin being up 15.2% on FY 2024. Our cash position at the end of the year was EUR 27.8 million, and that was up again, you know, by over EUR 8 million. Positive free cash flow within that was EUR 6.4 million, and obviously there's no debt in this company as well. On the EUR 6.4 million, there was an extra cash receipt from share options that had converted as well towards the end of last year.
Added to the EUR 6.4 is the EUR 1.6 million, in the note at the end of the page there, which brings us up to the EUR 27.8. Turning to the next slide four. We're looking at the operational highlights, and of course, the free cash flow is something we promised the market in November 2024 when Ian and I came down and we did a roadshow. We're delighted we've come through with that, and a very healthy number it is too. We're also thrilled that we've hit a net profit as well. We didn't promise that to the market in FY 2025, but we're certainly very, very pleased with it.
Really what we're seeing in our business, you know, is we're demonstrating higher margins from the cost efficiencies and the growth that we're generating out of the business. Overall, very pleasing in terms of this business coming back into free cash flow and profitability as we move forward. Last year, we won four new name North American carriers licensing the FINEOS AdminSuite for Claims and Absence. I just want to stop here and point out that we have rebranded our products because as of 25.4 release of FINEOS, we actually released the full AdminSuite to all of our clients in the cloud. However, most of them are still only using Claims and Absence.
What we decided to do to make sure that our clients fully understood that underneath, the water, you might say, even though they're using claims and absence today, but underneath the covers, they have the full access to the full AdminSuite when they license the product. Which is phenomenal, really, to be able to give them that opportunity with no pre-integrated or no big SI project, that they can just switch on extra components of FINEOS and, you know, their users and their IT people are seeing a multiplier effect out of that. We won four new names last year, albeit a little bit later than we would have liked.
Certainly the conservative nature of our industry and just what has been going on in the markets over the last 12 months or so, the deals were a little bit slower coming in, but again, we're delighted. Every deal we win is a very long-term contract, so we sign our clients up for five years and we end up doing business into the long term and actually expanding and cross-selling across the customer base. There's really growing evidence that FINEOS is market leading in this employee benefit space. Group, group voluntary and absences are a real key focus, and that's where we're winning the deals. Two existing U.S. clients also contracted to upgrade from the on-premise version, the old version of FINEOS Claims, to the FINEOS AdminSuite for claims, and one of those was a top 10 group carrier.
A sizable deal for us in terms of the uplift, and the momentum on both of those is going really, really well. Again, we're feeling our carriers really leaning in and increasing their commitments to us. Really what we're doing is replacing very old infrastructure that they have with a modern core platform, cloud native, embedded AI, and so on. I'll talk about that as I go through. We're seeing that significant momentum, growing into a lot of activity in terms of go lives, upgrades, and so on within our services and our product groups. All of these things are moving much quicker for us as we drive the efficiency in our business and really deliver the benefits of that to our clients.
We've also built the SI partnerships, and we're increasingly seeing the SIs now coming up to speed and actually delivering customer success with us, with our customers. You probably will see some publicity over the next few months, where we'll try and bring our SIs into some of the PR that we do on, you know, customer success with FINEOS and so on. That's going nicely. Again, we're looking to our SIs in North America now to give us the introductions and help us build relationships with their SI partners in other markets. Again, you know, we've built that kind of confidence with our SIs, and they're very happy to lean in and work with us.
You would have seen recently an announcement with PwC. We work with EY, we work with Capgemini, and we work with other SIs as well, Deloitte and so on. All of this is coming to fruition in terms of us moving more to becoming a product company. Then we're gaining a real multiplier effect from embedding AI in our product. You know, we have a kind of a head start on anyone in terms of people in the industry doing proof of concepts and stuff like that with AI. We have a real system with a huge amount of data underneath it, which is kept real time.
It's all compliant, it's secure. Therefore, when we put our agents to work on FINEOS, we're seeing the results very quickly, and our carriers don't have to spend any additional time and money looking around the corners or trying to build stuff themselves. More and more, we feel that the embedded AI in FINEOS is gonna help carriers kind of relax and go forward. We are in a very regulated environment, and our carriers are quite concerned about AI as well, in terms of not automating decisions and stuff that need to be taken by humans, and, you know, maybe causing any issues with the regulators or indeed with their clients. AI is definitely something that we are seeing as a huge asset for FINEOS, and we're gonna basically grow the business off the back of that as we keep embedding.
On the next slide five, this one covers our people. I won't go through this one too much, except to say that high numbers of utilization, very high employee retention rates, and, you know, we're down to 1,009 people at the moment. 16.9% of those are actually contracted in. We've kept flex in our workforce, which means we can cut back on our workforce or grow our workforce, depending on how things go and so on. We are in a very strong position with, you know, contractors and with partners who supply resources to us, and they've skilled up on FINEOS and are very dedicated to us. A good story there in terms of the people side.
Slide six is the revenue breakdown, again, you know, no surprise really, that North America is our biggest region, indeed, 80% of our revenues are coming out of North America. We've had some nice wins at the end of the year, our customers are increasingly doing more business with us in that region. However, we are very keen to look at other regions and to start the work around building ourselves up in the other regions. The EMEA region, we did lose a legacy customer, a smallish customer by U.S. standards, but still, we lost that, the revenue went down in the U.K. Again, that customer was non-strategic to us. They've been around for a long, long time with us.
services revenues, we're not aiming for big growth in our services revenues. We're really aiming for the growth on the product side, so they've kind of leveled off as well. That kinda concludes my section for the moment. I'm gonna hand over to Ian now, who'll cover off the financial slides with you. Thank you.
Thank you, Michael, and welcome everybody to this full year briefing of FINEOS. What I'll do now is give you a bit more insight into the financial performance of the company. If you'll move now to page eight, with respect to the revenues, obviously, as Michael just said there, our focus is very much on that product revenue subscription fees, you know, growing that ARR. We've signaled to the market repeatedly over the last few years that we see services remaining reasonably flat. Didn't expect to be quite as flat as that, 62.2 versus 62.2, so, you know, spot on the same. The subscription revenue, what's driving that is those four new customers. We signed up two of them at the end of Q2.
We signed up another two at the end of Q4, so they didn't fully contribute to the growth, but they were a factor in terms of that growth. The two migrations, one of them was quite significant, as Michael said as well. That's going from on-premise to the cloud. We had the traditional upsell with customers, including indexation of pricing, and some have moved up a level, you know, in terms of what they're consuming for us. We're very pleased with that growth in the subscription fee, you know, which in turn gave us an ARR growth of 10%, which was very, very positive. As stated before, the initial license fee, you can see a year-on-year reduction in that. Initial license fees pertain singularly to our on-premise customers.
Anytime they require new licenses, then we charge a fee for that. We have less and less of them. We have less and less activity there, so you can see consequently the revenue going down. As we move forward into FY 2026, you know, I don't see it getting any higher than that. I see it going down a, you know, it's a smidgen again, but it is progressively declining. That's the, that's the revenue side. Cost of sales, we've seen a improvement in that, compared to FY 2024. We did have some software costs in increases, and we also had to make a provision for an estimated software spend.
Just to explain what that actually means, because that actually also impacted the NPAT number we gave within this presentation. That's with our main platform provider, Amazon AWS. Back in December 2022, we signed a five-year contract with them with a committed spend. Any of you that are familiar with the way they contract, the more you commit to, the bigger the discount you get. We made a commitment, but due to the efficiencies we've been driving over the last two years, we're spending less than was originally anticipated. That's meant that, you know, when you look at the full duration of the spend, it means we're probably going to spend less in the five years than we originally estimated.
We had to make a provision for that in the accounts, but the plan is we go back and renegotiate with Amazon AWS for another five years, sometime during the course of this year. To comply with accounting practices, we just had to put that provision in. The full size of that provision is about EUR 2.7 million, and about EUR 1.0 million is allocated against cost of sales. Really, that's what's impacted the costing there. In terms of overall operating expense, you know, our initiatives around driving efficiency, around labor being in lower cost regions, looking at better automation through the application of AI, as well as just getting economies of scale have seen the ongoing OpEx going down.
You see a good positive outcome there year-on-year, in terms of approximately a $5 million reduction, 6.3% reduction. EBITDA, very positive move on that, you know, over $10 million increase compared to the previous year. That brings us up to a margin of 21.9%, and as you know, we've committed to the market to achieve 25% in FY 2027. We're well on track. If you go back to FY 2023, that was around 9%. Last year, 15.2%, 21.9%. You can see we're really focused on trying to drive those numbers through. As Michael said, you know, ultimately, we got a net profit after tax of $1 million. We never signaled that to the market. We weren't targeting that directly.
We were very, very focused on achieving the positive free cash flow. Needless to say, we're delighted with that, and we only see that trajectory improving year on year. That's a massive turnaround, obviously, from a $5.8 million loss that we incurred in FY 2024. Moving on to the next page, another, you know, commitment that we made was, you know, to keep on increasing that annual subscription fee. You can see the CAGR now is at 12.3%. As I mentioned in the previous slide, we've increased our ARR by 10%. So that's the key figure that we're looking at as well. Then, of course, we got the big increase in terms of subscription fees.
We increased the percentage of that, and to achieve the targets that we're talking about in 2027 and 2029, we need to keep on increasing that percentage. Again, we're extremely focused on that, whereas we're not as focused on the service revenue in terms of generating that. It's not because we don't want service revenues, it's because we want to work with the SIs. They will invoice directly. The more sophisticated we make the product, the less services are required. For some of our very large customers who are going to generate even larger recurring revenue for us moving forward, they want to take on self-service capabilities rather than get the service from FINEOS, for obvious reasons, you know, in terms of their cost management. All those things impact service fees, but for the right reasons.
We had signaled back in November 2024, that kind of trajectory, that kind of scissor movement, where revenues will go up and costs go down, and we flagged that we're going to see that crossing over. We're almost at touching point there in FY 2024, but you can see the crossover in FY 2025. Obviously, that's why we're able to, you know, relay a profit, you know, as well as a positive free cash flow situation. We expect to see that margin continue to increase. That trajectory, you know, is not going the opposite direction moving forward. It's going to keep going that direction. If we move on then to slide 10, just looking at the OpEx, which, you know, you saw the headline up above.
If you look at all the online items there, you know, excluding research and development, which I'll come back to in a moment, we can see a decrease in cost. Common theme, you know, is with respect to the headcount and where they are actually located. There are some other elements there, like under G&A, you also see, you know, FX movements. You know, there was a share option charge, increasing it, or decreasing the cost. That was offset by a decrease in software costs. We had to get more software to the organization to run our business, and some restructuring costs that we incurred. You know, here's another theme you've seen there, which is one of the consequences of moving some of the workforce to lower-cost regions. Our overall headcount year-on-year is reasonably consistent.
It's just the work is getting done in different regions without segregating the quality of the work. That's been really important to us, you know. As we've said before, we've had overlap of resources to make sure handovers work very well. We have a high demand environment, you know, where customers expect an excellent service and excellent outcome, you know, we've got to make sure we've been managing that very, very tightly, and we have. With respect to R&D, we've seen some higher software costs, which includes the provision. You know, there's another EUR 0.8 million put against that in terms of that provision that I mentioned earlier on. Slightly lower capitalized R&D costs, but only slightly lower, and we have restructuring costs.
Most of the restructuring that we did in FY 2025 related to our R&D teams. We had resources in higher cost regions, and we decided that we would look to relocate those roles into lower cost regions. Consequently, the restructuring cost was also higher with respect to the R&D team. We, as always, reserve the right, you know, and we will, we'll signal it if, you know, if events dictate that, you know, more investment is required in R&D, we are a technology company, then we will, we will look to do that. Still in all, if we move on to the next slide, what you can see is that, you know, R&D as a proportion... This excludes overhead costs. You know, this is just, it's people costs.
R&D as a percentage of the overall revenue is continuing to improve. We've signaled that in FY 2027, we're looking to get that down to 30%. You can see the trajectory there is moving in the right direction. Last year was at 37%. Sorry, the year before last was at 37%, and last year was at 34.7%. You know, we see that continuing to improve and getting more into industry norms in terms of that percentage. We're still going to invest heavily in R&D, and as we've signaled before, we will continue to invest in the AdminSuite.
There's always capabilities customers will require, particularly those customers that, you know, need to move off legacy, may require some extra functionality to enable the FINEOS system to take on that business, which makes perfect sense for us in order to increase the annuity fee. Progressively, we're investing more in AI and digital capabilities, and capabilities to enable better self-service and better onboarding onto our product set. It's really exciting that we can actually switch that focus, you know, to allow customers to move on to our product set in a more effective way. We don't expect to decrease the amount of money we're spending in R&D, but certainly as a percentage of revenue will decrease, you know, as we've signaled and as has been evidenced here. We move on now to slide 12.
I don't want to dwell too much into the balance sheet. The next slide is going to talk about cash, and I'll talk about cash there. Development expenditure, you know, that's really the capitalized R&D. Spend is a little bit ahead of amortization. We expect that to balance out, you know, maybe in 2027 there'll be similar figures. You know, there's a bit of catch-up taking place there. We see a slight increase as well in trade accruals, but that's really due to an increase in payroll, share option, exercise gains, et cetera, and a little increase in deferred revenue. Again, because of the fact that we're signing up subscription fees. We have some new name customers signed up, you know, towards the end of last year.
That they'll be put in there along with other provisions. There's the provision 2.4 in relation to the software spend. Apologies, I said 2.7 earlier on, I believe. It's EUR 2.4 million. Moving on now to slide 13. The next cash generated from operation activities, you know, a vast improvement there, you know, EUR 38.6 versus EUR 18.8. You know, due to the increased revenue, decreased costs, you know, we're very, very positive. We got some additional cash in from share options that were exercised to EUR 1.6 million.
As Michael mentioned earlier on, if you add in the EUR 6.4, which is the positive free cash flow we generated to EUR 1.6 on top, gives you that EUR 8 million difference at the bottom line there, which is a 40.4% increase. We're very proud of that. We knew that that was very important to the market, very important to us, too. You know, prior to IPO, we were always a profitable company. It's very much in our DNA.
We made the bet to invest ahead of the curve in terms of R&D. We're now starting to see the payback, you know, in terms of getting greater market share, you know, increasing the margins, increasing the recurring revenues, and getting back to a positive cash generative situation, you know, which we plan to continue to improve on as the years roll by. That's it from me. I'll pass back to Michael for the outlook and key priorities.
Thank you, Ian. Okay, I'm going to switch over to slide 15, and I'd just like to mention that we won a very prestigious award for our embedded AI in the FINEOS AdminSuite from Technology Ireland. This was an award which was competed for by all comers. You know, we have a lot of multinationals from the States, particularly in Ireland. It's a hub for EMEA, but also local companies. We were really called out for the kind of thoughtful way we'd put the AI into the system and how it was, you know, agentic and assistive in terms of driving better outcomes and presenting users of FINEOS with, you know, an opportunity to really improve the...
I suppose, taking the crud out of the back office, and driving more positive outcomes for customers and clients. We were delighted with that. That was towards the end of last year. In terms of key priorities, though, going forward, we're still very focused on Guardian, who are ahead of schedule in terms of their own goals that they set for themselves. We'll continue to drive new business onto the system and make sure that everything goes on this year. Also, we're starting the migration from the middle of the year, and we're excited about that because we're in the business of legacy system retirement, and they have a multi-billion book that's going to come across to FINEOS.
We're going to continue to scale and upsell large customers, and again, with a focus on benefit realization of the product they have, but also looking at, you know, legacy migration and taking their legacy systems out, which with some of these carriers, the scale that they're at is a multi-year project. We've been at it now for three or four years, but, you know, we've still got some time to go. As they grow their business on FINEOS, our fees increase. I want to point that out in this call-out. Our fees are not based on per seat SaaS-type fees. Our fees are basically aligned with our customer success. As our customers grow their business, we grow our business, and we're very much in partnership in a long-term relationship with these clients.
We'll also increase new business sales, and, you know, our partners are starting to work with us now to identify opportunities where they think our product can fit, and so we're going to see more activities with the SIs. As we progressively embed AI in the FINEOS platform, we're going to continue to see improved platform performance, and already the feedback is very positive. Let's put it this way: we're in very early days in this. We're in a regulated environment, highly regulated, with very conservative insurance carriers. They take years to make decisions, so you can imagine when you bring something like this in, that they're very, very keen to make sure that it's all compliant, and it fits with the regulator.
Again, this is going to take a few years over the in the coming couple of years. We're getting our customers more comfortable with this, and we have a couple of big customer meetings in March and in Sydney and also in New York. We'll be talking about this a lot more with them. We're going to continue to drive internal efficiencies through the usage of AI. I think every company is adopting AI and taking advantage of that, you know, across the whole spectrum of the business. Then, you know, pipeline in terms of deal conversions of FINEOS Absence for employer. We have actually done a lot of work in this area in terms of making the product deployable with employers in a much simplified fashion.
We're also talking to some of our carriers about partnership around this and how we could work together, because our primary goal is actually the carrier market and to make Absence a real part of the employee benefits industry. Turning to the last or the second last slide, I think it's slide 17. Revenue guidance for this year, we're going to put it out there at between $147 million and $152 million. And this is really supported by the strong pipeline we have in, albeit, as I said, last year, we saw that pipeline. It just took a long time to get negotiations and decisions and so on done, but we're very optimistic about this year.
We continue the strategy of driving operational efficiency within FINEOS, and, you know, we're going to continue to drive up that positive cash flow and profitability in the business for this year. We're also continuing to drive sales in North America, but we're actually looking to expand our product outside of our target market of North America, and we do see some opportunities to do that, particularly with the multinationals in different countries, and so we're looking at that as well at the moment. The pipeline remains solid, you know, and very much FINEOS being the market leader in employee benefits in North America today. Switching to my last slide 18.
Subscription fees, look, Ian and I put these guidelines out in 2024. We're still confident we'll make these guidelines in terms of subscription fees moving up to 65% of the total revenues in FY 2027, and 75% or thereabouts in 2029. R&D investment will decrease, as Ian said earlier, to 30% next year, and 25% in 2029. Again, as Ian said, we reserve the right to expand that R&D if we see new opportunities, but that's the way things are trending in terms of, you know, percentage of total revenue for R&D spend. The gross margins and EBITDAs are, they're almost where we said they'd be back in 2024. They're almost there now, as you can see from last year's results.
We'll drive them on, and we'll get them up to 80% for gross margin and 40% for the EBITDA. Making FINEOS is a very strong company in terms of future growth. I just lastly would like to point out the slide 19. We have an investor roadshow, which we'll be hosting on the 25th in Sydney, and all the details are made available, and if you contact Howard or Jackie in Automic, you can get all the details. We're looking forward to it. That's it from me and from Ian. I think a positive year, looking forward with a very positive attitude in terms of the future, and we're open for questions now. 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 speakerphone, please pick up the handset to ask your question. Your first question comes from Tim Lawson with Macquarie. Please go ahead.
Hi, gentlemen. Thanks for the update. I really just had one main question. With your subscription mix targets for FY 2027, I won't worry about the 2029 ones, just the FY 2027 ones. If you think about the sort of revenue guidance you've provided today for 2026, and I appreciate that's an overall revenue guidance rather than calling out any sort of subscription versus services number, it just seems to imply a very significant acceleration in the calendar year of 2027 to hit those targets. Can you just sort of help us unpack your assumptions behind both that near term and then the sort of medium term number, please?
Yeah, Tim, thanks for the question. I'll start off, Ian, on that one. The way that this business is set up is, as I said, long-term contracts with milestone events in terms of things we have to do with customers as they grow their business with us. Our focus through 2026 and 2027 is, with our existing clients, is going to be very much on migration and growth of their use of our product, plus the cross-selling as well. We've kind of got locked-in revenues and foresight of events in the next year. That should give us a nice lift in terms of our subscription fees into 2027. We've got a nice pipeline as well, some of which we didn't convert in 2025, but we'll convert in 2026 and beyond.
You know, we're feeling comfortable about the 65% revenue, or sorry, percentage in next year. Do you want to add to that, Ian?
Yeah. You know, what you're seeing there in terms of what we reported in 2025 was a higher contribution, almost a 5% increase year-on-year in terms of the recurring fee, the subscription fee. You know, so we're looking to see these steps continue to move as we move forward. You've also seen that the subscription fee % as a proportion of revenue has increased, and we expect that percentage to increase, you know, in terms of year-on-year growth on the annuity to grow in 2026 as we move into 2027. We definitely see 2026 as being a stepping stone to achieve. It's not all gonna be laid on 2070.
Secondly, you know, to Michael's point there, we still see a significant contribution of that growth coming from existing customers, and as they upsell, and a lot of them are getting very significantly through their programs of, you know, reducing legacy systems, and some are really starting to get very engaged around and pushing us hard. Michael mentioned earlier on about Guardian starting halfway through the year. We have other very large customers out there, you know, pushing hard to make that happen. We see that as a big factor, you know, in terms of that growth. We do have line of sight, and the way we put our plans together is very much on a bottom-up basis. We look at the individual transactions for our customers.
We recognize it is a, it is a significant growth, but we do have line of sight of it. It's not, you know, 100% guaranteed, but it's still there to be had.
Maybe just on that, are you sort of seeing across there for the 2026 year an acceleration throughout the quarters? Are we thinking the sort of, obviously consistent with what you've given us guidance for in FY 2026, but is the fourth quarter, for example, or second half even, like, materially accelerated versus the first half?
I think the caveat you'd have to put in there is that these customers move at their own pace. You know, we certainly have plans in place to close business in the first half of this year, and you know, we believe that will materialize, but it could get pushed out a bit. Firstly, if you close it in the first half, then that gives a lift to the second half automatically. It, that second half obviously will get an automatic lift, and we do see more business closing in the second half as well. We see both halves contributing, but the first half contribution helps the second half. Just by mathematical, you know, calculation, the second half.
Will have a better revenue outcome than the first half in our-
Yeah, I'm just trying to think I'm trying to think about that split as effectively, if you were to annualize the second half, are we gonna be effectively, materially? Well, I expect we will be, but like, you know, significantly above, you know, on an annualized second half, what your guidance range is? 'Cause that's sort of the, you know, math that need to work to hit those 27 targets, unless you have an acceleration in 2027 itself, of course.
We have both.
Yeah.
Yeah, we do have both. I mean, we have big bumps in 2027 as well, which we've already got locked in in terms of our revenue forecasts, with existing customers. We have them coming in in the second half of 2026 as well. As Ian says, we've pipeline we're closing now, so, you know, you'll see more deals coming through in the first half of as well. We're coming off the back of.
Okay.
The back of a good ARR, Tim, you know, 10% growth on that. We still see deals closing in the next couple of quarters. We see the second half getting even better in terms of the upside. Next year is gonna be another, you know, opportunity for growth with existing customers. Like, we don't make these forecasts willy-nilly, you know, based on a lot of new name wins and potential and so on. We're very much looking at our customer base. We're growing large chunks of business on FINEOS with these large carriers, so we're able to be a bit more comfortable in terms of predicting. You know, these guys are like oil tankers. They take their time to move, but once they get going, it's very hard to turn them.
you know where they're going, and we can predict that in terms of our numbers out with that growth that we're seeing on our platform.
Thanks, gents. That's my questions.
Thank you. Your next question comes from Richard Harrisberg with Canaccord Genuity. Please go ahead.
Hi, Michael and Ian. Thanks very much for the opportunity, congratulations on a really great result. I also just had a question on the revenue outlook, and I was just curious, you kind of touched on it before. There's sort of an existing growth in your customer, you know, their own sort of book, which drives your revenue going forward, as opposed to being on a per-seat basis. How much of that sort of future revenue growth is underwritten by that? Which I guess is a question on, you know, how much you expect general insurance premiums to increase, you know, on average, based on historic.
Yeah, well, we're expecting, Richard, sorry. How are you? Nice to talk to you again. Thanks for your question. We're expecting by the volume of business that's coming across in terms of migrations we're working on, we're expecting their usage of the system to grow and their volume on FINEOS, as in their premiums on FINEOS, to grow. That basically gives us a clip of the ticket every time we can crash through a milestone tier in our pricing. That's, you know, that's what gives us that kind of stickiness and that long-term confidence. These are five-year contracts with these carriers, they're really locked in.
To be honest, you know, they put us under enormous pressure to get the product into shape so that they can get this migration done because their legacy systems are creaking, and they know they're not gonna carry them into the next world that we have now with AI and so on. That's kind of given us the confidence in terms of the growth that we can see coming on the platform. We also see cross-sell and up-sell then to existing clients. Again, we have some of the biggest customers in this, in the segment, the domain we have in the States. Again, you know, we'll see upside there.
They won't buy a cross product until they feel that they're over the line on the products that they've already got, as in it's already done and, you know, they've got everything over and so on. That's one thing that we've kind of been sitting patiently to kind of wait for. There's no point in sell-selling or sending sales guys into them when, you know, they're in deep throes of migrating to FINEOS. That, you know, that kind of gives us, again, the confidence that, like, we're all, you know, positive in terms of the focus. The system is a large system of record, very complex in terms of what it does, highly regulated, and these carriers need to get off the junk that they have in the back office. Large, 50-year-old mainframes wrapped up with a lot of technical debt.
They're as motivated as we are to get them over to the cloud-native FINEOS platform.
Thank you. That makes a lot of sense. I guess maybe a different way to ask the question, you know, just purely based on growth in, you know, volume of existing customers and excluding cross-sell or up-sell and sort of new customers signed, is that growth what sort of gives you the confidence to get to the EUR 147 million on the lower end of the guidance? On top of that, the reason for the range in the guidance is, you know, the strong pipeline you guys are seeing then?
Probably a good way to look at it. I'll let you answer that, Ian, but that's, you know. We've been conservative how we've managed expectations in the market. We don't want to upset anybody, so we've left a range. We are confident in terms of, you know, the projections and stuff like that we do put out. Do you want to answer that in any kind of other way, Ian?
Yeah. I think, Richard, I also, a large proportion of our confidence is derived from existing customers scaling on the system. You know, 40%-50%, you know, my confidence would be around that, you know, just from that singular element alone. The more we stay focused on those customers, the more we deliver the capabilities we want, the more we collaborate with them and their size.
to help to migrate across, that provides a very strong backdrop for us in terms of, you know, how we move forward. In terms of the range, there are other factors in the range as well. You know, we both alluded to the fact that opportunities can slide up and down, and we see that. They don't often go away, by the way, but they do slide up and down in terms of timeline. That's one of the reasons why we've been giving a range. You know, another reason would be that when we look at the opportunity profile, sometimes you've got a small deal, a medium-sized deal, or a large deal. The size of those deals in terms of the revenue they can generate for FINEOS can be quite significantly different.
That's another reason why you'd give a, you know, a variance in terms of the range. I think the other area as well, the last one I'll mention, is just around the services fees. You know, if we work on a particular deal with an SI, and they want to take on a much more expansive role, and we're looking at some of our SIs, like PwC, for example, whose skill set is progressively growing, so they can take on more work. Particularly, they may take up more work than we had originally anticipated or may have performed last year. Then that can have an impact in terms of service revenues we obtain. As long as that's contributing towards the growth and subscription revenues, you know, we can work with that.
All those factors contribute towards that range.
Really appreciate all the extra color there. Maybe I'll just ask one more question. It was great seeing the operating leverage come through, and especially with some of the cost efficiencies you've been putting through the business to FY 2026, do you think those costs are sort of expected to remain around these levels? Are there sort of further areas you can squeeze out there? Yeah, or what's the right way to think about that?
Yeah, I'll take that one, Michael. I think, for your planning, you know, as you're doing your modeling yourself and the rest of the analysts on the call and investors, I think you should be thinking about our cost overall, perhaps increasing in the range of 3%-4%. I referred to Amazon, Abe, you asked there earlier on in the conversation about driving efficiencies. We've driven a lot of those efficiencies through the product set at this point in time. As we expand our footprint with customers, we will see the cost of sale going up with respect to that infrastructure bit, that's happening. Unfortunately, like everybody else, we're suffering from third parties increasing costs, we've also put through some salary reviews.
You know, I would plan out about 3% or 4% increase in overall costs. Internally, we're still looking at ways of, you know, driving even that down. From a planning point of view, I'd look at it that way.
Great. Thanks so much. Congrats again on an inflection year in the business.
Thank you.
Thanks, Richard.
Thank you. Your next question comes from Sraj Ahmed with Citi. Please go ahead.
Can you hear me okay?
Yep.
Hi, Siraj.
Hi. just first thing, maybe I missed this, like the split between subscription and services that you're expecting next year. Can you help us with that? Within the revenue guidance, yep.
We guided next year. We set a set of targets for next year, where, or sorry, subscription revenues, product revenues would be 65% of the overall total revenue, meaning services is 35%.
Sorry, for FY 2026?
For 2027.
Yes. Sorry, I got that. Michael, just trying to think about next year, right? Can you give a split, maybe just on the revenue next year, just within subscription and services?
I think if I could just jump in there, Michael. I think, you know, as I said, deal size can vary a bit, but I guess, you know, you look back in time, we were approximately 50% in terms of subscription fee. Two years ago, last year, 55%.
Yeah.
We've got to get to 65% by FY 2027. You can kind of make your own assumption about what we're trying to target, you know, to, as a stepping stone to get there, but we do see some variability about it. We've given guidance in total revenue, we have to, you know, see what happens. We did, this year has to be a stepping stone to getting towards FY 2027.
Okay. The reason I'm asking is, maybe just a follow-up to that is, ARR was $78.3, right? At the end of the period. I'm guessing it's a bit lower now because of FX, or is it, still the case, it's $78.3?
It's margin-
Yeah.
Lower.
Everything is lower, including the services.
Yeah, okay.
Everything gets hit by FX.
Okay.
It's kind of the percentage was still hold, but yeah revenues are gonna go up and down in real terms based on FX.
Sure. Yeah. The reason I'm asking is, let's say $78.3, it seems like, service is flat to slightly up. You sort of need to get closer to maybe $85 million of subscription revenue, especially the step up that we're talking about for next year, right? You're starting at $78 million, that would be like a 108% sort of conversion, right? About this versus 105% this year. Is that just confidence in the pipeline, Michael? Like you mentioned, that your pipeline is quite strong, and I think quite a few of them will close. Or is it, like you mentioned, quite a few customers are going live, and so the volumes just organically pick up?
It's just key to understand that up conversion, like from ARR to subscription revenue.
I think it's mostly growth that we see on the platform in terms of volumes, which will lead to, you know, subscription thresholds increasing. That combined with some cross-sell is mainly what we see in front of us in existing clients, Sharad. Obviously, the new business, new names are kind of gravy on top as they start converting. We're hoping to see a better kind of uptick in terms of new name as well, particularly in our domain market in North America.
I think I have flagged in the past that because of some disastrous attempts for core system replacement from some competitive core systems vendors who came in from other domains, carriers really got burnt. It kind of caused a lot of angst in the market and made it difficult for carriers to come back out again and to look to do a major migration off their legacy. You know, we have just taken the brunt of that. In terms of the backlash of that is that the carriers will freeze because they have to reset. A lot of them have come back to legacy, those carriers that had those disasters. They've learned a lot, and I think the next time they come out, they'll recognize a vendor that is purpose-built and ready to go for them.
Of course, as we keep, you know, doing things with our own carriers, we're, you know, proving out the product and proving out that our carriers are getting good efficiencies on the product. Again, you know, it's a slow-moving industry. It's a very big product. These projects are big, so you know. It's very sticky and long-term, and that's what's, I suppose, something that we want to call out as well.
Sure.
It moves slow, but it's very solid.
Got it. Last one, just on gross margin. You're just clarifying. The full year gross margin this year had a negative impact from the provision, right? Which sort of unwinds next to next year from the sounds of it. You're already at 76%. FY 2027, you've retained 75%. Is there anything that should be going up, isn't it? Just trying to understand whether there's something I'm missing. Thanks.
We would expect a slight improvement in gross margin as we go through to this year. We don't want to go ahead of the target we set for FY 2027, albeit we've already achieved it. You know, keeping it around about that mark for this year, we expect it to be reasonably consistent with last year, with perhaps a slight improvement.
All right. Thank you.
Okay. Thank you, Sharad.
Thank you. Your next question comes from Jules Cooper with Shaw and Partners. Please go ahead.
Hi, Michael, and Ian. Can you hear me?
Yes. Hi. Hi, Jules. Good to talk to you again.
Absolutely, and great set of results and outlook. Michael, I just wanted to sort of dive in to I think it was on slide 16, the third tick mark there, where you talk about a focus on legacy system migration. Now, there's a huge opportunity in the industry, and particularly with your customers, given their scale and I suppose the small footprint today that you've got with those customers, and you're making good progress. As we think about AI, we are you know, hearing from lots of different vendors and customers of, you know, the improvements in velocity that they're seeing in real time, and it's only gonna get faster. Do you think that? And I know when you're migrating a book, it's not just about the speed of coding.
That, you know, there's all the people side and the project, you know the change management, et cetera. Do you sort of see this as a real moment where you can kind of unlock those legacy books that before the cost and the risk was just prohibitive and held people back?
Yeah.
Just, like, sort of get your perspective on that, if I could.
Thanks, Jules. Yeah. I do actually see it as a kind of moment of truth for these carriers. For years and years, they've been reluctant to take those big back-end systems out, those systems of record that they have. They've gone through the dot-com. You would have imagined they would have wanted to reinvent them so that they were totally internet-type systems, but they didn't. They built front ends. You know, they've gone through the mobile phone, and they've built front ends to do mobile phone transactions and a lot of technical debt around the old back-end systems. They've gone through the cloud, and some of them have been innovative enough to port from a mainframe to a cloud, Amazon or Microsoft, whatever they've done, but it's still the same old system.
The AI revolution is basically gonna really threaten those old systems because AI performs on data, and having the data in a real-time, you know, full kind of rich sense is what AI will thrive on. Also, having a modern system with the kind of workflow automation that you would expect in a modern system, you know, really gives AI all the tools that it needs to perform and move on. In the future, we see the back office, you know, the work in back offices being reduced, all that paperwork and all that kind of crud work, I call it. That's gonna be reduced, and it's gonna give people more time to focus on their customer and more time to do other services as well for the clients.
You know, over the next few years, I think AI is really gonna change the industry. And being a system of record that we have today as a modern cloud-native one, we're ready to go in terms of the AI operating with us. We are in a regulated environment, so we'll have to go as quickly or as slowly as the regulators allow, and also what's comfortable with carriers, because a lot of them are very ethical, and they don't want to mess around with customers. We will not be making decisions about claims. We will not be turning down underwriting opportunities for any kind of bias reasons, and we have to be really careful at the, you know, in terms of how things are done in FINEOS. We're at one with our carriers.
They all feel the same about this, they all do realize that the world doesn't stand still, and those old workhorse systems that they've had it for many years, they've basically gone past their sell-by date. Those who still think that they should keep them and work away are probably the ones that will be, you know, disappear in the future, and the others that modernize and go forward will actually have the revenues and margins and so on to be able to buy those books of business. Now, that's my own opinion, so I just wanna put that out there. It's, you know.
I think you've.
it's how we think about it.
You painted a really good picture there of like the, you know, the pressure to migrate and move those books of business. I guess my question was more in the mechanics of it. You know, the things that have held them back in the past as they've gone through.
Okay. Yeah, yeah.
Cycles.
Okay.
Is it sort of making it easier-
Yeah, yeah.
A decision at the board table to go, "Hey, we could actually do this now at half the cost.
Yeah.
half the time and with half the risk?
We've introduced AI, believe it or not, onto the back-end books of business that they've got, and our SIs are working on that, we're using LLMs to basically stack and get ready, employers that are gonna come across to FINEOS. We've been building out then on our side, tooling, to allow us to validate and read all of that in, so that'll make it easier as well. We've been working with one of our big carriers on that and in partnership, and that is going well as a set of tooling. Last but not least, you know, we've put a lot of money into building out the full suite and making it easy to onboard on FINEOS. In other words, that it's purpose-built and the carriers can easily put business over.
We don't have a huge big project at the front end of every time we do an implementation, which is what those carriers who failed ended up doing, having to build software with those vendors. We don't have that. We're making it much easier to onboard, upgrade, integrate, and migrate to FINEOS. The time has never been more crucial for them to move, but it's also never been easier in terms of our industry and the domain we focus on. Is that what you were getting at?
Yeah. Excellent. Thank you.
Thank you. Your next question comes from Sinclair Currie with MA Moelis Australia. Please go ahead.
Hi, good morning. Thanks for the presentation. Just had a question about competition. There's been some movements among your competitors in the M&A. I was interested, maybe a little bit of an overview of how you see the competitive environment. If you could throw in, you know, any statistics maybe around, you know, what percentage of RFPs you've been successful with or something like that, just to bring that to light, that'd be really interesting. Thanks.
Yeah. Hi, Sinclair. Look, the competitive environment within the employee benefit space, core system space in North America, it's kind of leveled off a little bit in terms of the core vendors. You would have seen that Vitech was acquired by Majesco. Majesco has kind of multiple systems that they've acquired over the last several years, addressing multiple variants of the markets, you know, across all kinds of insurance, P&C and whatever. Now they've added pensions and a pensions book to their business. Vitech had largely retreated from the group benefits market over the past 12, 18 months, and they're really trying to focus in on their pensions portfolio.
That Vitech, Majesco, it was a merger rather than an acquisition, I believe, and purely a kind of an agreement between the two PEs that own the business, that they would basically collaborate. Obviously, that takes one competitor out, you know, when it comes to RFPs and stuff like that. We kind of had seen Vitech, we hadn't seen them in the market much anyway. And look, five years ago, they would have been the guys that were up and coming because they'd come out of the pension space and into the group space with their admin system. Five years ago, we weren't ready because we were still hard at it with New York Life.
Going back to what I said to Jules, you know, we migrated six books of business off old systems for New York Life to give them a $4.5 billion book of business on FINEOS AdminSuite for group, and they went live with voluntary this year as well, and FINEOS Absence. That's the only carrier that has fully eliminated legacy. And they're still standing on the FINEOS platform for the last three years, running that full book. You know, when we talk to clients, they kinda get great confidence out of that, and they do talk to New York Life and so on, and they're a good reference for us and a good client, a good partner.
A lot of our other carriers on the big end of the market are also in the process of migrating as well, and they're moving quickly to the platform. I think, you know, momentum is building. We're not seeing other vendors really of any significance in the space. Again, we see, you know, tool set, P&C type vendors coming in and out, and it depends, you know, depends on the carrier. Some carriers get very excited about really techie type software, but, you know, that tends then to be a big project build, and that's gonna cost them a lot of money. It's not necessarily the best outcome for them, but look, you know, everybody makes their own decisions.
I think as a mainstream vendor now in our space, we've got market dominance in terms of a big slug of the employee benefits market, and we're kind of getting the new business deals as well, and we're getting the cross-sells. We still see several years ahead of us, where we really want to become that, you know, true partner to the employee benefits industry, that big system of record. Like, you know, with the AI and everything else, that's gonna change into, you know, much more intelligent and automated system for the future carriers that will go on our system.
Okay. Thank you.
Thank you. We have a follow-up question from Siraj Ahmed with Citi. Please, go ahead.
Michael, somewhat linked. Can you just touch on, because of the whole agentic stuff that you're trying to demo in late March, how are you thinking about pricing this, right? What's the economic model you're thinking in terms of this?
Sorry, Siraj, I'm finding it very difficult to hear you. Can you hear that, Ian? If you can, go ahead and answer it.
Is it the economic model with regards to AI? Is that what you're referring to, Siraj?
Yeah, for the agentic features you're rolling out, right? In late March, in the re-announcing.
I mean, the pricing model we have for our core systems is based on the premium income that the customer has with regards to all the core systems, except for Absence, which is based on the number of employees. The agentic AI is built on add-ons, you know, that's sitting on top. Depending on the nature of it will be charged in different ways. For example, we do document intelligence, document summarization, the pricing of that is based on the number of documents that you summarize and provide intelligence on. It's gonna be very much on a unit price or volume-based. We're giving customers the opportunity as well to decide, for example, if I just talk about documents, you know, which documents types, which cases, they apply it against.
They can pull the lever up and down and decide to what extent they want to, you know, use that AI capability. We also have case intelligence, so that would be the agentic AI capability. Again, they can decide the cases or the customers, et cetera. It'll be very much on a volume basis with the opportunity for the customer to pull the lever up and down, bit like a, you know, fuel pump. You decide how much petrol you want to put in the tank.
Yeah, just to mention, we're not putting a huge emphasis on charging for all of this, 'cause we see it as built in, it's embedded, we really will. You know, it's a usage-based model, you know, we're not looking. We have to keep modernizing and keep bringing a more compelling platform to our clients. They're already paying us good money for the product, we'll continue to look at opportunity to increase our fees by cross-selling and upselling. We'll also deliver, you know, modernization within the platform continuously, that goes back to the R&D program that we have. We're looking to really make a sticky, long-term relationship with these carriers so that they feel very comfortable with us as partners.
Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Kelly for closing remarks.
Thank you, Darcy, and thanks, Ian, as well, for today and coming along on this call. Appreciate all the questions from the analysts and indeed everybody who's listened to us today. As I said, we're feeling pretty positive about this year and next year, and we're looking forward to the opportunity to present to everybody at the end of March. I think it's the March 24th. Please come along to that if you can. There'll be a few of us down there at the time. It's an opportunity to meet some of us as well in person. Thanks, Darcy.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.