Welcome to the Hansen Technologies Limited Update to Outlook conference call. I would now like to hand the conference over to Mr. Andrew Hansen, CEO. Please go ahead.
Thank you, Amanda. Welcome everyone to today's call. I'm joined with Graeme Taylor here to just do a bit of a brief overview of the announcement we've actually put into the marketplace. Look, of course, this is probably only speaking to everyone in the last week or two about our results. We had a fantastic year. We gave good guidance for the balance of the year. Set our target out forward. This is a bit of an unusual situation to be so soon after our results, being able to update the whole marketplace. It's the way it goes. This deal could've actually fallen before, could've fallen in two weeks' time. In the last 24 hours or last night, the signed contract came through from Telefónica, which I'll just update everyone a little bit on. Look, just a quick overview.
I think probably people know who Telefónica is, but Telefónica is the Spanish telco there, own brands like O2 in the U.K., in Europe, and also through Latin America. This specific deal, which I'm here to talk about today, is for their German business, where they are currently trading under the name of O2 Germany. They currently have about 50 million subscribers, which puts it into sizing of where they are in the telco space in the world, that they are very, very large. Clearly, what we're talking about here for Telefónica is a wider strategy for Telefónica to build an operating model for the future. For those which have been on the calls have heard me talk about this change to digitization in the telco marketplace.
What Telefónica did, they started, I'd say probably seven months ago, eight months ago, based on the fact of 5G and their direction with omnichannel and Internet of Things and digitization. What they're doing is wanting to review their existing systems and the landscape, how that operate, and realized that they need to improve a range of things. Things like customer experience, always lower cost to serve, and also support both vertical and horizontal growth. They had a strong drive towards cloud native for future-proofing the technology. I think at the end of that review, and I don't like talking on their behalf, but I know this for a fact, that upon looking at their existing systems, they realized they did need to change them over.
They then entered into what was a global tendering process to identify suitable technologies who could actually help them with their transformational program. As I said at the start of this, I think Telefónica is using this as a blueprint for their other businesses as well. You can understand someone's looked at their existing infrastructure, looked at their solutions, says, "This is not going to be able to help us on our journey. We do want this lower cost to serve. We do want a much improved customer experience, and we want to be providing and making sales of things, new things which they haven't even thought about now," and realized their existing systems and infrastructure were not going to allow them to grow successfully and thought this was going to be their competitive process.
Look, they kicked off a tendering process, which we were involved in. Originally, we were involved with a couple of their SIs, but basically, we end up taking the lead and them wanting to talk to us directly. From that, it actually then went to a proof of concept where vendors like ourselves and some of the other larger players around the world were brought in to actually show our software, our technology, a lot of details around where we're going as an organization, where the roadmap is leading to, et cetera, and how would we look to solve their problems. A fair amount of time was also spent on how we would allow them to operate their business and transition to a new technology stack and how we would be able to assist in that process.
At the conclusion of that, we're very, very grateful of being selected as the preferred party in all these things. It then takes a long-winded journey, Graeme, doesn't it, through the legal process.
Certainly
which we have to go through. I've actually taken, as you would have heard me talk before, once upon a time, systems for telcos, which have got lots and lots of systems, but basically, were big enterprise solutions. They were going for very specific applications. From that, they got our configure price and quote module, our catalog module, our order management, and their portfolio inventory. As well as that, they will be providing over the years to them, professional services to themselves and their systems integrator partner on how best to implement our software. We'll end up having a team on-site to support them. This is a very much a major deal for our business to win. On the back of wins which we've announced, like with Dish or things like Verizon, other deals we're winning at the moment now.
I think the significance of this deal here, hence we've had to put a note to the marketplace, was that whereas Hansen likes an annuity stream, in this particular case, given the capital expenditure which Telefónica were doing here, they were looking to actually want to capitalize and therefore decided to pre-buy off Hansen licenses to actually use our software, and a number of transactions into the future. Were wanting to be paying that to us in the first 12 months of the deal, which is quite unusual. As we've outlined before, some companies do like the fact to put on their balance sheet and actually wanted the advantage of actually capitalizing it. That's probably the best way of summing up the drivers, Graeme?
Yes, of course, we're all familiar with IFRS 15, which required us then to, given we have no obligations forward in relation to these licenses.
Yeah
effectively taking that revenue into the second half of our year, and hence the announcement.
Yeah. That led to not only making the announcement about the deal, but given the fact that we had given guidance only in the last week or two, it does update our guidance. Graeme, you might just work through what the numbers, what the change is for everyone, please.
I think what you're seeing in the numbers pretty much says it all. We're really taking our license revenue and upgrading our revenue range, both at the upper and lower limits. We still expect to see with license revenues now being very, very margin rich, we're seeing the corresponding uplift in our underlying EBITDA margin. Really it's a simple process where this revenue is flowing right through the business and uplifting us quite significantly in the second half beyond what we'd previously reported to the market. I think the other thing that's important to note, we've been very consistent in the messaging around these things. If these deals do come in from time to time, we're still of the view that our longer-term margins will trend back into that 32%-35% range.
That's certainly the underlying principles that will see Hansen continue to trade into the future. Certainly, something approaching 40% now is the expectation for H2 of this financial year.
Hence the announcement's out there, guys. I suppose just in some closing statements to answer some people's questions. Look, we knew the acquisition of Sigma Systems, even Enoro Sigma Systems, were going to be able to build on top of a very, very stable and predictable revenue stream we get around the world from our energy market. That we've got some products here which are very current and very modern at the moment now. We remain very optimistic to our company's future on where we're going, and it's so gratifying to actually know where our cash is coming from and the predictability of our business, but where organic growth is now coming from our company. On top of that, our target of AUD 500 million shows our continual faith in acquisitions I've talked about.
Guys, I think the significance of this, and I'm trusting there's a lot of shareholders on the phone and I'm giving you words of comfort. This will be a showcase for other telcos which are looking to break the cycle of aging and legacy systems. A process to follow and go through to how you would actually move from a legacy architecture to a very modern SaaS cloud microservices-based technology to which we actually are providing here at the moment now. Not just only in Telefónica, but as I've been discussing over the last couple of weeks, the rollout of 5G and digitization of the industry is really looking for a technology footprint to actually help them assist in the growing and future-proofing their business. Guys, we're very, very happy, very, very exciting. It's a great win for the team.
As I said, it's happened very quick in the last 24 hours. That's how quick they were to kick the project off and want to pay us the money, which we're very grateful for. We feel the market now is fully updated. On that note, I probably don't have much more to actually offer, but I'll hand it back to you, Amanda. If there's any questions, I'd be more than happy to answer some if I can.
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 are on a speakerphone, please pick up your handset to ask your question. Your first question comes from Garry Sherriff from RBC. Please go ahead.
Hi, Andrew and Graeme. Just a few questions on the process for this Telefónica contract. You did say that it could present an opportunity to roll out this software to other geographies for Telefónica. Just wondering if there's been any early discussions with them on rolling out to other geographies. That's probably question one. Question two, just around the process. Who was the incumbent provider? How many were shortlisted and what was the feedback, I guess, you got from Telefónica to get you over the line?
Let's probably answer those questions in different sort of orders, Garry, to give you some comfort. Look, I've not actually had the debrief yet of the other parties, to be brutally honest. We're probably more focused in kicking off the project where we go. I know that this is part of new sales in COVID. I think, in these crazy times to be able to close as we are doing significant deals. With their CIO, their CFO, CEO, from my study to their study last year, giving them comfort about the project and Hansen and what we're actually doing. They did have other parties we know. The incumbent is probably one of the largest telcos in the world, who's incumbent, it's probably wrong for me to actually outline that at this stage now.
I understand your question, I suppose we're here to celebrate our win, not someone else's loss at this point now. All I could say is, Garry, this move, as I've said, that people are now looking to take a modular, a best- of- breed approach, rather than one great big system. In regards to the rest of Telefónica group, there's no doubt they have taken the lead on this digitization and refresh of new technology, and this will be the blueprint. No, it's got to be installed, it's got to be migrated. This is a very large project, because as you know, you've got an incumbent system, which has to keep on operating the business whilst you're trying to then migrate for new products and services into a new system. Have we had some discussions? Mate, only very initial conversations.
When you talk about that implementation, can you give us a sense, I know you guys are receiving the cash up front, but maybe just give us a sense of the implementation timeline.
Look, I think, Garry, one of the other things that's a little bit unique with the Sigma software, we're working with a systems integrator that will be actually installing our software. We're providing software, as Andrew outlined. We're in the background, providing technical support, but it's something that sits there on a as required basis to a certain degree. The large revenue that we're talking about at the moment is purely prepaid license fees. From a cash flow point of view, they'll be paying for an amount of that upfront, something about 15% initially, and they will be getting the balance of that 85% before the close of the 2021 calendar year. Look, it does create a little bit of a lag with respect to when we consider EBITDA to cash, at the end of this year.
Look, it's not concerning given the richness of Hansen's cash flow. Yeah, that's it in a nutshell.
Yeah, they're basically buying a product off us or products off us. A systems integrator's role now is to help them move the data from their other systems, et cetera, to move across onto our software at the same time. There's a progressive rollout towards the second half of this calendar year. It'll be progressively rolled out and adopted through the company.
Understood. Last question is just on the M&A front. How well advanced are those opportunities, and is travel a prerequisite to execute deals? Should we be thinking something likely to drop by the end of this current calendar year, or is it longer in your view? I guess the final question, are they likely to be larger M&A deals in your view, or multiple smaller bolt-on acquisitions over time? Thank you.
I reckon, Garry, you asked me those same questions a week and a half ago. Clearly, you didn't like my answer. I'll have to go them again. Look, Garry, is travel a hindrance? Travel is not stopping us having conversations and engagement. That would not even stop us on doing due diligence. The areas of travel for us would be, as you know, we like to integrate the businesses, even though that's probably the number one from our point of view. Therefore, the ultimate Hansenization of business would be hindered a little bit during this point of time, Garry. Deals out there, look, as I've always said, it shouldn't be the size. It's the right timing of buying some of these deals.
We like probably the marketplace are looking for sort of strategic acquisitions, which have good sorts of your organic growth in the business going forward as well, and regions around the world. We will continue to be as disciplined, as patient as we all have been to make them at the right timing.
Thanks a lot.
Thanks, Garry.
Thank you. Your next question comes from Nic Burgess from Ord Minnett. Please go ahead.
Morning, gents. Congratulations on the contract win. Great stuff. A few follow-up questions. Andrew, you mentioned, or maybe it was Graeme, that the implementation is being done by a third party. Is that sort of the first time that you've used a third party, or this is sort of standard practice in various areas of the business?
Well, installing our software is not quite right. A systems integrator's job is to help an organization transition technology. Our software, we own the IP, Nic, that doesn't change. It's our source code. None of those things are actually changing. If you imagine you're running your business, you need to hire additional staff to try and transition the business.
The systems integrator's job is, this is what they do for a living, is help you migrate from one technology to another. Now, in this particular case, I think they have announced Tech Mahindra as being the systems integrator in this work. We work with Tech Mahindra in other parts around the world, and so there's certainly collaboration and programs at work where we will help Tech Mahindra by providing training as we do with the customer on the use of our software.
We have an ongoing role in maintaining and looking after our software and upgrades, et cetera. There's a bit of a collaboration of all parties coming together. We actually work with Telefónica now in the U.K. with their ownership of Tesco Mobile. We're not unfamiliar with their processes and their systems, and certainly are familiar. A bit of the norm is working with a systems integrator in most of these cases, Nic. It's quite rare these days that you would not have someone to assist the business to go transitional through applications.
Okay, thanks. You described the contract as being a suite of products. I think you might have mentioned during the call Enoro and Sigma. Are we right in thinking that Enoro and Sigma form the large rump of the product that they're buying off you?
Well, certainly, yes. I think so at the moment now, because a lot of our products, because they keep on getting upgraded, are in customers for a decade or two. That's the beauty of what Hansen has. We've got this lovely, predictable revenue stream, which allows us to keep on investing in our products. Just grabbing more market share, where our organic growth is coming from. Certainly, Sigma and when we bought the Sigma business, we knew the investment they had made and the investment we've continued to make with our team is just ripe for the industry, Nic, to take advantage of those newer technologies as the digitization, that new 5G, that new Internet of Things where these companies are actually now aiming to go.
Okay. Thanks. Just on the numbers, AUD 25 million total contract value. Graeme, you've said that AUD 21 million will be recognized as revenue up front or in the second half. That difference of four, does that just roll over into the first half of next year in terms of revenue, or is that earned over the life of the contract?
There's an element there, Nic, that's related to some maintenance, and we're assuming a particular position in relation to that. If that maintenance is based on that level of license fees going forward. Of course, the other part that's a possibility down the track, depending upon how many people they bring on to the new system, of course, like most of our software, once they've consumed the level of licenses that they've pre-acquired, well, of course, they come back to us for further licensing. We're just giving you the deal that's been signed today, and with that longer-term view of a customer that stays with us for our typical 8-10 year cycle, there's going to be revenues beyond what we're talking, and that's what's so exciting about it.
Yeah. They've bought, it's a subscription-based model, you call like a SaaS model. They've pre-bought so many transactions off us into their future.
Yeah. Okay. That's your assumption on maintenance, but there's potential for that to grow and other project expenditure as the contract matures once implementation's happened, et cetera.
We would see the very standard Hansen projects. I think we will pick up maintenance and support on our application. Down the track, we'll pick up additional transaction fees as they continue to roll and grow the business and change requests, et cetera. Won't be hosting in this case because it's cloud-based, et cetera, but there's always those additional professional services we'll be there providing all of our customers.
Great. Thanks very much.
Thanks, Nic.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Jules Cooper from Shaw and Partners. Please go ahead.
Hi, guys. Thanks for taking the question. Look, it may have been asked before, so apologies if it has, but if I look at the revenue guidance, it's at the midpoint increased by AUD 21, which you've outlined and explained well. The EBITDA increase is about AUD nineteen and a half mil. I guess, you've noted you'll have a team on site to support the systems integrators. Andrew, you made a comment there about hosting. Is really that sort of difference between AUD 21 and AUD nineteen and a half capturing that sort of the cost of goods or the cost of sale and the onsite sort of team? Is that how we should think about that?
I think so. There are a few costs which we would be incorporating. I think the main thing about this, the license, as we all know, luckily for Hansen, doesn't come with a cost. There is no real cost goods sold other than some handy commissions for people and things like that to go around. There is some work we're doing as well. I think that would be the best, the slight difference in that number.
Yeah, that's right.
Got it. Yep, all right. Then, Andrew, you've obviously said that this is going to be a showcase for other telcos, but could you maybe just talk to how the Sigma pipeline looks now with this deal being closed? Maybe just sort of give us some sense for is there a rebuilding phase now for that pipeline or it's as strong as ever?
I think it's a pretty strong pipeline. We're enjoying the pipeline. To be honest with you, Jules, is it rebuild? I think the best thing to think of these terms is the product is very current at the moment now. The product's relevant. It's got 10 years' worth of life in it now. Having your products become cloud native, et cetera. Developing your application in micro is a very, very modern way of looking at the technology.
From a telco's point of view, make no difference to what I would have said a week ago. We're really optimistic about the future of these products in the telco, which is now looking to really optimize their position in 5G and what we can do to help them actually get there. The pipeline's always been there, closing deals and beating the biggest in the land.
That is very, very reassuring to our team.
No, it's excellent. Sigma's proved to be a cracking acquisition. Well done.
Yep. Yeah, great team of people. Very happy.
Thank you. There are no further questions at this time. I will now hand back to Andrew for closing remarks.
I'd just like to thank everyone for their interest in joining today and hurrying together from our side as well. It came through very quickly, and we got it to the marketplace. I do apologize that we couldn't be announcing this at the same time our results went out there, but you know it's the Hansen way. These things will land when they land, and we'll bring it to everyone's attention when it is. Thank you for your interest, and everyone enjoy their day. Thank you.