Thank you for standing by, and welcome to the Hanson Technologies Limited Update to Outlook Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Andrew Hansen, CEO.
Please go ahead.
Thank you, Amanda, and 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 2 about our results and we had a fantastic year. We gave good guidance for the balance of the year and 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.
But it's the way it goes that this deal could have actually fallen before, could have fallen in 2 weeks' time. But in the last 24 hours or last night, the signed contract came through from Telefonica, which I'll just update everyone a little bit on. So look, just a quick overview. I think probably people know who Telefonica is. The Telefonica is the Spanish telco there, but 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. And they currently have about 50,000,000 subscribers, which puts it into sizing of where they are in the telco space of the world, that they are very, very large. Clearly, what we're talking about here for Telefonica is a wider strategy for Telefonica to build an operating model for the future. For those which have been on the calls have heard me talk about this change in digitization in the telco marketplace.
So what Telefonica did, they started, I'd say, probably 7 months ago, 8 months ago, based on the fact of 5 gs and their direction with omnichannel and other things and digitization. What they're doing is we want to review their existing systems and the landscape, how that operate and realize 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 our cloud native for future proofing the technology. So I think at the end of that review, and I don't like talking on their behalf, but I know this full facts that upon looking at their existing systems, they realized they did need to change them over. And so 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 Telefonica is using this as a blueprint for their other businesses as well. So you 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 of serve. We do want a much improved customer experience, and we want to be providing and making sales of things, new things which haven't even thought about now and realize their existing systems and infrastructure were not going to allow them to grow successfully and thought this is going to be their competitive process. So 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 of them wanting to talk to us directly. And 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 road map is leading to, etcetera, 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. So 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, Graham, doesn't it, through the legal process, which we have to go through.
So 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, they're basically with big enterprise solutions, but they were going for very specific applications. And from that, they got our configured 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 we'll be providing over the years to them professional services to themselves and their systems integrated partner on how best to implement our software. We'll end up having a team on-site to support them. So 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 the whereas Hanson likes an annuity stream, in this particular case, given the capital expenditure, which Telefonica were doing here, where they were looking to actually want to capitalize and therefore decided to pre buy off Hanson licenses to actually use our software and a number of transactions into the future. And we're wanting to be paying that to us in the 1st 12 months of the deal, which is quite unusual. But as we've outlined before, some companies do like the fact to put on their balance sheet and actually want to be advantage of actually capitalizing it. That's the best way of summing up the drivers, Brian?
Yes. And of course, we're all familiar with IFRS 15, which required us then to, given we have no obligations forward in relation to those licenses, effectively taking that revenue into the second half of that year and hence the announcement. Yes.
So I think so that led to not only making the announcement about the Easter deal, but given the fact that we had given guidance only in the last week or 2, it does update our guidance. And Graeme, you might just work through what the numbers, what the change is. That one, 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. And 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. So 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've previously reported to the market. So I think the other thing that's important to note, we've been very consistent in the messaging around those 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% to 35% range. And that's certainly the underlying principles that we'll see Hansen continue to trade into the future. But certainly, something approaching 40% now is the expectation for H2 of this financial year.
So hence, the announcements out there, guys. I suppose just in some closing statements to answer some people's questions. Look, we knew the acquisition of Sigma and even the Neuro Sigma 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. Then we've got some products here, which are very current and very modern at the moment now. We remain very optimistic to the 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 $500,000,000 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 and 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. So not just only in Telefonica, but as I've been discussing over the last couple of weeks, the rollout of 5 gs 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. So guys, we're very, very happy, very, very exciting.
It's great win for the team. As I said, it's happened very quick in the last 24 hours. That's how quickly they were to kick the project off and want to pay us some money, which we're very grateful for. And we feel the market now is fully updated. So 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 Your first question comes from Gary Shereff from RBC. Please go ahead.
Hi, Andrew and Graeme. Just a few questions on the process for this Telefonica contract. You did say that it could present an opportunity to roll out this software to other geographies for Telefonica. Just wondering if there's been any early discussions with them on rolling out to other geographies. That's probably a question process.
Who was the incumbent provider? How many were shortlisted? And what was the feedback, I guess, you got from Telefonica to get you over the line?
Let's probably answer those questions probably in different sort of orders. So, Gary, to give you some color. 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, I was 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, but it's probably wrong for me to actually probably outline that at this stage. Now I understand your question, but I suppose we're here to celebrate our win, not someone else's loss at this point now. But all I could say is, Gary, 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 the Telefonica Group, there's no doubt they have taken the lead on this digitization and refresh of new technology. And this will be the blueprint, but now it's all 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. So have we had some discussions?
But only very initial conversations.
And when you talk about that implementation, can you give us a sense, I know you guys are receiving the cash upfront, but maybe just give us a sense of the implementation time line?
Look, I think, Gary, 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. So we're in the background. We are providing technical support, but it's something that sits there on an as required basis to a certain degree. The large revenue that we're talking about at the moment is purely prepaid license fees.
And 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. So 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. But look, it's not concerning given the richness of Hansen's cash flow.
So that's it in a nutshell. Yes. That basically buying a product of us or products of us. Systems Integrated's role now is to help them move the data from their other systems, etcetera, to move across onto our software at the same time. So there's a progressive rollout towards the second half of this calendar year, and it will be progressively rolled out and adopted through the company.
Understood. Last question is just on the M and A front. How will advance to those opportunities? And is travel a prerequisite to execute deals? I mean, should we be thinking something likely to drop by the end of this calendar year?
Or is it longer in your view? And I guess the final question, are they likely to be larger M and A deals in your view or smaller multiple smaller bolt on acquisitions over time?
I reckon, Gary, you asked me those same questions a week and a half ago. Clearly, you didn't like my answer. I have to go on again. Look, Gary, look, we 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. And so therefore, the ultimate hand sanitization of the business would be hindered a little bit during this point of time, Gary. And 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 strategic acquisitions, which have good sorts of organic growth in the business going forward as well and regions around the world. But 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, guys.
Thank you. Your next question comes from Nick Burgess from Ord Minit. Please go ahead.
Good morning, gents. Congratulations on the contract win. Great stuff. A few follow-up questions. Andrew, you mentioned or maybe it's Graham, 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?
Installing itself is not quite right. So a systems integrator's job is to help an organization transition technology. So our software, we own the IP. Nick, that doesn't change. It's our source code.
None of those things are actually changing. So it's if you imagine you're running your business, you need to hire additional staff to try and transition the business. And the systems integrators' 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 of work where we will help Tech Mahindra by providing training as we do with the customer on the use of our software. But we have an ongoing role in maintaining and looking after our software and upgrades, etcetera. So it's a bit of a collaboration of all parties coming together. So but we have worked in fact, we actually worked with Telefonica now in the U. K.
With their ownership of Tesco Mobile. So we're not unfamiliar with their processes and their systems and certainly are familiar. So a bit of the norm is working with the systems integrated in most of these cases, Nick. It's not it's quite rare these days that you would not have someone to assist the business to go transitional through applications.
Okay. Thanks. And so you described the contract as being a suite of products. And I think you might have mentioned during the call Onoro and Sigma. So we're right in thinking that Onoro and Sigma form the large ramp 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 2. That's the beauty of what Hanson has. We've got this lovely predictable revenue stream, which allows us to keep on investing in our products. So 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, the investment we've continued to make with our team is just right for the industry, Nick, to take advantage of those newer technologies as they the digitization, that new 5 gs, that new Internet of Things where these companies are actually now aiming to go.
Okay. And just on the numbers. So $25,000,000 total contract value. Graham, you've said that $21,000,000 will be recognized as revenue upfront or in the second half. So that difference 4, does that sort of 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, Nick, that's related to some maintenance. And we're assuming a particular position in relation to that. So 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 their 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.
So we're just giving you the deal that's been signed today. And with that long term view of a customer that stays with us for our typical 8 to 10 year cycle, there's going to be revenues beyond what we're talking. That's what's so exciting about it. Yes.
It's a subscription based model you call like a SaaS model. They have pre bought so many transactions off us into their future.
Yes. Okay. And so that's your assumption on maintenance, but there's potential for that to grow and other project expenditure as the contract matures once implementations happen, etcetera?
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, etcetera. Won't be hosting in this case because it's cloud based, etcetera. But there's always those additional professional services that would be there providing all of our customers.
Great. Thanks very much.
Thank
you. 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 2021, which you've outlined and explained well. The EBITDA increase is about $19,500,000 And 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 $21,000,000 and $19,500,000 capturing that sort of the cost of goods or the cost of sale and the on-site sort of team? Is that how we should sort of think about that?
Yes, 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 Hanson, doesn't come with the cost. There is no real cost to be sold other than some handy commissions for people and things like that to go around. But there is some work we're doing as well.
So I think that would be the best the slight difference in that number.
Yes, that's right.
Got it. Yes, all right. And 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? And maybe just sort of give us some sense for do you have to is there a rebuilding phase now for that pipeline or it's as strong as ever?
Look, I think it's a pretty strong pipeline. We're enjoying the pipeline. To be honest with you, Jules, is a rebuild? Look, I think the best thing to think of this terms is that the product is very current at the moment now. So the product is relevant.
It's got 10 years worth of life in it now. Having your products become cloud native, etcetera, developing applications in microservices is a very, very modern way of looking at the technology. So from a telco's point of view, it made 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 5 gs and what we can do to help them actually get there. So we the pipeline has always been there, closing deals and beating the biggest in the land, that is very, very reassuring to our team.
That's excellent. Sigma has proven to be a cracking acquisition. Well done.
Yes. A 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.
Well, I'd just like to thank everyone for their interest in joining today and having 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 Hanson way these things will land when they land and we'll bring it to everyone's attention when it is. So thank you for your interest and everyone enjoy the day.