Thank you for standing by, and welcome to the Integrated Research Limited fiscal year 2021 full-year results investor conference call. 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 one on your telephone keypad. I would now like to hand the call over to Mr. John Ruthven, Chief Executive Officer. Please go ahead, sir.
Good morning. Welcome to the FY 2021 full-year results briefing for Integrated Research. My name is John Ruthven, and I'm the CEO of IR. With me today is Peter Adams, our Chief Financial Officer. This morning, we posted our results presentation to the ASX website, which we will be referring to during this call. Today's presentation is in two sections. First, a full-year results analysis. I will provide a high-level introduction, and Peter will follow with a detailed overview. I will then talk to our transition and growth strategy and then close out and take some questions. Moving to the CEO key messages slide. The key point I'd like to emphasize today is that we're making good progress in our customer and innovation-led multi-year transition. This growth strategy will result in higher quality SaaS subscription revenues.
FY 2022 is an important year in this transition as we move to TCV, or total contract value, and free cash as our primary operating metrics. This transition commenced in FY 2021, and we see it in three phases. FY 2021 was about innovation, FY 2022 execution, and FY 2023 scale. We were pleased to deliver a stronger second half in FY 2021 after the disappointment of the first half. For the full year, revenue is down 29% and NPAT down 51% in constant currency. These results reflect a difficult trading environment in which deal deferrals and cautious buying behavior had an impact, particularly in the first half. During the second half, we worked a four-point plan to improve performance. The result was a second-half revenue up 30% on the first half, NPAT up 210% over H1, and solid cash flow.
Strategically, we remain well-positioned for long-term growth, benefiting from growth trends in remote working and cashless payments. We've delivered a rich portfolio of new products into the market and have a future product roadmap that positions us well to build share in a growing AUD 1.2 billion total addressable market. As I move to slide five, the impact on the first half on full-year results is confronting. Revenues declined 29% to AUD 78.5 million, driven by a shortfall in license fees that are recognized upfront. Our NPAT result came in at AUD 7.9 million, with virtually all the profit coming in H2 after the near breakeven first half. The annual result is driven by the fall in revenue and partly shielded by a reduction in operating expenses that Peter will talk to later. We were negatively impacted by the increase in the Australian to US dollar exchange rate.
NPAT in constant currency would have been AUD 11.9 for the full year. The cash flow story shown on the right-hand side is down, but highlights the fundamental strength in our business model. Our contracts with customers are non-cancelable, term-based agreements. Cash receipts from customers was AUD 78.8 million, down 18%. There was no data factoring. Operating cash flow was AUD 21.1 million, a stark comparison to the AUD 7.9 million of reported profit.
The company remains in a positive net cash position. Second half performance of FY 2021 demonstrates that we have regained positive momentum in the business. Compared to the first half, both revenue and profit are up 30% and 210% respectively. Cash flow from operations was down 14% compared to the first half, and naturally, a flow on effect from lower first-half revenues. Importantly, the EBITDA margin bounced back to just under 40% and broadly consistent with FY 2020 performance.
We're in a multi-year transition which is framed in three phases. Innovation, execution, and scale. When we look at it across three key elements, product, revenue, and metrics. In FY 2021, a year of innovation, we delivered new SaaS products for MS Teams, Zoom, and Webex, as well as payment analytics in the Transact portfolio. In FY 2022 and FY 2023, we will extend and expand on this foundation with direct routing, SBCs, vendor integrations, as well as launching into real-time and high-value payments. As we transition, we will move from upfront revenues to higher quality SaaS subscription revenues with higher levels of ARR or annual recurring revenues. Importantly, to provide transparency to the underlying performance of the business, we will evolve our performance metrics. We commenced this four reporting period ago when we introduced pro forma subscription revenues to smooth out the lumpiness of upfront revenue recognition.
This year, we will move to TCV and free cash flow as the two primary operating metrics, and by FY 2023, expect to be reporting in the full spectrum of SaaS metrics. FY 2022 is anchored on execution, particularly the front end of the business. We've made go-to-market and organizational changes to drive this. Focus account territories, new business teams, customer success teams, investment in SDRs, and additional marketing spend to drive demand. In February, we shared a four-point plan, as well as a set of performance indicators that would be used to turn around performance in H2. This slide reports on our progress. FY 2021 was a strong innovation year with the delivery of lots of new product. Real-time and high-value payment solutions are now due this half. Customer growth and retention, as well as new SaaS customer acquisition, was solid, but behind expectation in terms of new customers.
We've done a lot of work in the last 12 to 24 months to ensure our systems and processes are evolving to meet the demands of running an ARR business. Progress is good and ongoing. I will now hand over to Peter to provide a detailed overview of our financial performance.
Thanks, John. We are on slide nine, titled Revenue. Revenue for the year was down 29% to AUD 78.5 million. There are several factors for the decline in revenue. The pandemic had a significant impact on performance. The sales cadence was disrupted through limitations on travel, cancellation of trade shows, and limited face-to-face meetings. The company improved sales in the second half. Maintenance fees of AUD 18.1 million declined 24% over the previous corresponding year. The three contributors to this decline include maintenance cancellations of approximately 12%, an impact from currency translation of 7%, and the residual from perpetual-to-term contract conversions. Revenue from subscription fees of AUD 312,000 relates predominantly to our early cloud products, not to be confused with our new cloud products recently released during the year.
As the business transitions to higher SaaS revenues, it is appropriate to understand the underlying performance through a pro forma revenue lens using a subscription model. This is not a new concept. We have presented pro forma revenues over the previous four reporting periods. The calculation of these numbers is based on amortizing the license fees over the term of the contract and adding recurring maintenance. Whilst these numbers do not form part of our statutory reporting, the pro forma equivalent subscription revenues of US$52.1 million for the year is down 3% compared to the prior year. We've also disclosed in this slide cash receipts from customers of $58.9 million, which is predominantly aligned to the pro forma revenue number. In summary, the statutory revenue model with the upfront license recognition is more volatile and less aligned to cash flow.
The pro forma revenue numbers are more stable, predictable, and more aligned to cash flow. A reconciliation of the statutory reporting revenue to pro forma revenue is included in the appendix to this presentation. Turning to slide 10, Geographic and Product Analysis. We have continued our seven-year series of revenue on a statutory basis, represented by the line on each chart, compared to pro forma subscription revenue, represented by the bars on each chart. What insights do we glean from these charts? There are a few points I'd like to make. FY 2021 was a difficult trading year for reasons already outlined in the presentation. The impact was global and clearly seen by the downward movements on the lines in the chart. What the charts don't show is that we have seen a positive momentum return in the second half, which John explained earlier.
Exchange rates have also impacted the reported results. The geographic charts are in natural currency to eliminate this consequence. The product charts show pro forma subscription revenue in both Australian dollars and US dollars to provide a view to underlying performance. As I said, there is greater volatility in the upfront revenue model compared to the pro forma subscription model. The upfront revenue model is impacted by the time length of contracts. The average deal term in FY 2021 was approximately three years, compared to four years for the preceding year. The pro forma subscription model is not impacted by deal length. Revenue from new cloud products released during the year have not come through yet in either the upfront revenue model or the pro forma subscription model.
The reason is that cloud bookings is not an upfront revenue event, and it takes time for the delivery of those cloud revenues to come to fruition. The good news is that we have AUD 5.5 million in cloud bookings to be released as revenue over coming periods. Further, we will continue to build the bank of bookings in coming periods through the addition of new customers and the sale of new products to existing customers. Lastly, blended upfront and revenues recognized over time from the new and hybrid cloud solutions will increase. We'll continue to report pro forma subscription revenues to assist you. Further, we will commence reporting total contract values or TCV at the end of each reporting period to provide further insight on performance. Operating expenses shown on slide 11 are down 12% over the prior year to AUD 68.7 million.
The key takeaway from this slide is that we have maintained our spend on development despite the difficult trading conditions. The investment in development has borne fruit this year with several new products to market, as John referenced earlier. The main reduction in expenses is across sales and marketing, representing a decrease of 20%. As mentioned earlier, we have adapted our structure and process through the pandemic, since travel and face-to-face meetings have been significantly reduced. Approximately 1/3 of the cost base is in the U.S., so there is sensitivity to movement in currency as presented at the bottom of the slide. Moving forward, we would expect an increase in the cost base back toward FY 2020 levels. The current scarcity of developers has put some pressure on the cost base. Further, the transition of the business to cloud has seen some resource reallocation and alignment.
Margins may remain under some pressure for the short term. However, further out, we would see margin expansion through the optimization of the cloud platform and other economies of scale. Turning to slide 12, headed net cash flow analysis. Cash flow from operations was AUD 21.1 million for the year, which was driven by a strong cash conversion rate of 100%. Cash collections from customers were strong, and there were minimal doubtful debt exposures. The cash generation continued to support ongoing development. Our balance sheet shown on slide 12 remains in a net cash position of AUD 5.5 million at 30 June. Trade receivables of AUD 79.5 million remains a strong source of future cash flow. We have AUD 14.7 million undrawn in our debt facility, and I will now pass back to John who will talk about our growth strategy.
Thanks, Peter. Moving to our transition and growth strategy. In order to expand our target addressable market, we take a platform-centric approach to solving customer problems. We've been transitioning our product portfolio to a hybrid delivery model, allowing our customers to consume products in a way that best matches their own internal delivery models. Underpinning this hybrid delivery model is the Prognosis platform, made up of Prognosis Server, along with our newer Prognosis Cloud and Prognosis Edge. These components deliver services that can be pieced together to accelerate our product delivery efforts and unlock higher value customer use cases. IR's target addressable market is AUD 1.2 billion and growing. We offer solutions that deliver deep domain data to a broad set of customers with increasing intelligence in the products.
Deep is about domain data, leveraging our know-how for extracting meaningful information from critical systems and surfacing it, extending our reach using the Prognosis Intelligent Edge. Smart is about evolving our platforms to leverage newer technology, like ML and AI to solve higher value problems and emerging complex use cases. Wide is about extending the platform with an open API interface, surfacing more data, expanding beyond traditional IT operations. It opens up the platform to democratize value creation in the medium term. As you will have seen, the disruption of the payments market continues. In the last few weeks, we've seen Square acquire Afterpay and Microsoft and ACI announce a partnership to develop cloud-based payment solutions. The rise of cashless payments has been accelerated by the pandemic and the resultant changes in social and commercial behavior.
At the same time, new regulatory standards are driving the requirement for financial institutions to upgrade their real-time and high-value payments environments with a move away from traditional clearance methods. This plays well into IR's position and value proposition. Monitoring analytics of card transactions with expanding support for real-time and high-value payments. This slide illustrates that IR is well positioned to benefit from cards growth and the new real-time payments market. The size of the market is significant. Some 737 billion payment transactions globally in calendar year 2020, defined as non-cash transactions, excluding checks. Per the Capgemini World Payments Report, these volumes are growing at 11.5% CAGR out to 2023. IR's growth opportunity is in two main areas. Firstly, card payments, where we already have a significant customer base of financial institutions and card processors like Fiserv, FIS, JPMC, Barclaycard, and others.
There are two primary vectors for growth: to provide payments analytics to processors and banks, and to provide a broader range of user types within new and existing customers. During FY 2021, we announced a major deal with ACI for transact payments analytics, and we have a growing pipeline in support of this. Second, real-time payments, an emerging market globally, and is the simplification of the payment process from initiation to reconciliation. We will be launching new high-value and real-time product lines in the coming months that will provide customers with the monitoring and analytics tools needed to capture greater insights into this new payment space. The growth in this segment is projected to be 23.4% CAGR out to 2024. Going to slide 18. The future of work is evolving rapidly as organizations set their course for employees' work location and work environment and how they engage and collaborate.
Whatever an organization's strategy, hybrid work is here to stay. With it comes even more complexity and challenge in supporting the UC environment to provide a reliable and rich user experience. Industry-specific video applications are emerging, which are mission-critical to the delivery of services like healthcare. There's an increase in partnering between UC vendors and carriers to integrate telephony and the UCaaS application. At the same time, there is a rapid expansion of what is classified as the collaboration environment, with faster growth in rooms as part of this new hybrid way of working. These are complex, mission-critical environments to support. Gartner sizes the unified communications market as 550 million users, of which 185 million are the higher value, more sophisticated conferencing users. This segment saw significant growth in 2020, with solid mid to high single-digit growth projected out to 2025.
We have a strong on-premise market position supporting the likes of Cisco and Avaya, where our average users per customer is in excess of 25,000. There will be a long tail to this business due to the nature of our large enterprise customer base. As a proof point, in July, we closed a net new customer of 40,000 user Cisco environment. Critical to winning this business was our ability to support a multi-vendor hybrid environment on-premise and cloud, Cisco and Microsoft Teams. With new products launched in FY 2021, we have coverage of up to 60% of the market, Microsoft, Cisco and Zoom. We signed a foundational deal with BT to support their DigiCo platform and have just announced a partnership with ServiceNow, which will embed Collaborate into organizations' wider IT management workflows and processes.
Further innovation is underway to support enterprises and carriers to integrate existing telephony solutions with new UCaaS applications. Our first such solution will be in market this half, initially supporting MS Teams direct routing through a wide range of telephony systems from AudioCodes, Ribbon, Oracle, Avaya, and Cisco. Let's move to slide 19, IR's customer base. We have a significant global blue-chip enterprise customer base across diverse segments. Our innovation strategy is to map our solutions to the customer journey, whether they are on-premise, hybrid whilst migrating to cloud or pure cloud. We establish and maintain long-term relationships, as can be seen by the customer tenure, many of them more than 15 years. In H2, we renewed our agreement with Visa, a customer for 20 years. The average weighted life of our contracts has typically been greater than four years.
However, we have seen a shortening of this in FY 2021, driven by more cautious buying behavior and in some cases, less certainty by customers on their own strategy for on-premise and cloud. Key to our growth is new business and new customers. An important win was Zebra Technologies, a mobile computing company who licensed our Collaborate SaaS products for MS Teams and Zoom for over 12,000 users. Historically, our maintenance retention has been relatively high, particularly in the transact and Infrastructure product lines. Current conditions and cloud migrations have put pressure on that, as the graph shows. Moving to slide 20. We have a clear set of priorities to accelerate our growth. We've implemented a focused go-to-market with key design elements to maintain and grow the base and add significantly more new customers. We've also increased investment in our demand generation engine.
We are cognizant that our systems, people and processes need to be aligned to transform IR. We are clear on the priorities in FY 2022 to further this and ensure our journey to higher quality subscription revenues stays on track. Like many tech companies, we have experienced an appreciating talent market and are taking appropriate steps to ensure our reward and recognition programs retain key talent. Tied to the action plan just discussed, we have in place key performance indicators across customer growth and retention, new customer acquisition, product innovation, and business model transition. Some key takeouts from this slide. Improving customer retention and reducing churn. 30% of TCV from new customers, a significant step up from prior years. More of our TCV from new products. Growing our deferred revenue backlog. We are confident that these targets will serve us well in transitioning and growing the business.
In conclusion, let me highlight the key messages from today's presentation. We're executing a plan to grow higher quality, SaaS-based subscription revenues. There is confidence from better second half results and a solid balance sheet. Innovation is driving new products and an extension of our value proposition that in turn expands our addressable market. Finally, the long-term growth trends of remote working and cashless payments further reinforces IR's value proposition. Operator, that concludes the presentation. We can now open it up for questions.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up your handset to ask your question. The first question will come from Ray Tolson, shareholder. Please go ahead.
G ood morning, both of you. Thanks very much. You may also remember, I'm a member of the Teaminvest. In the past, or the last presentation or something, you talked about clients maybe looking to rely more on the proprietary embedded software, monitoring software. Has that changed, do you think? Is it more likely it's reflected in the customer retention graphs?
Thanks, Ray. Good question. I think you're referring to the fact that we talk about three types of competitor that we would face in the market. The category that you're referring to, I think, is the vendor's own tools.
Yeah.
What we experience is, as companies transition from, say, on-premise to a UCaaS environment, that it's quite natural that as they explore the options to support that environment, they will assess the vendor's own tools. Gartner's research supports that as well. What plays to our favor, and I think one of the points I made in my remarks was that our average user count for the enterprise customer base is over 25,000. With that comes complexity, and the complexity is driven by multi-vendor, multi-platform, and just the significant size. Generally, our solutions value proposition gets stronger and stronger with the size of customers that we serve. Directly to your question, customers would continue to evaluate vendor tools as a potential solution.
Okay. Thanks. Just can you go into a bit more detail about the incentives you talked about a couple of slides ago? I couldn't quite follow what was going on there. Mainly about incentivizing sales teams given the change to the SaaS product range.
Ray, could you just be more specific there? I'm not following directly your question.
Right. Well, with the change now to promoting the SaaS products, how has that changed, if it has, the sales team incentives? What are they incentivized on the basis of now that may be different from before?
It's probably easier to answer the question by explaining what we've done with our go-to market or what you might call our coverage model. We now have globally implemented new business teams that sell exclusively new business and account management teams that exclusively support existing customers. We've also put in place a global customer success team whose remit is to ensure the health of our customers. Obviously, customers that are getting full value and also understanding the value they're getting are more likely to renew. That plays directly at retention. Thirdly, in terms of demand generation, we've made significant investment in terms of putting SDRs or what the industry calls sales development reps that are really lead generation, as well as program spend to support campaigns in the field from a digital marketing perspective to promote our products.
Okay. I'll leave it at that. Thanks.
Thanks, Ray.
Again, if you have a question, please press star then one. Our next question will come from Peter Cooper, investor. Please go ahead.
Good morning, John and Peter. Just a couple of quick questions. This is particularly for Peter. Given that expenses were pretty well held during last year, are there any sort of expense items that you think will sort of bounce back in FY 2022 that you just can't hold back any longer?
Yeah. Thanks, Peter, for your question.
I referenced in the presentation that we would see expenses heading back toward FY 2020 levels. The reason for that, as you just referenced, we held costs down quite well for the FY 2021 period. We've had some catch up in costs, particularly in the development side of the business. I t's well published in the market that there's a strong demand for developers, which is having an impact on costs. The other reference point is just the fact that our evolution to cloud requires investment. It is a different selling motion, to simply selling on-premise. That's all playing out. As I said in the presentation, whilst there's some pressure on short-term margins, I think further afield, once we get the cloud and the cloud-based products cranking and through economies of scale, we would see improvements to margin over the medium to longer term.
Great. That's great. Thanks, Peter. Just one other question. I saw that there was bad debt actually written off during the year of about just under AUD 1.2 million. Was that a single large debtor or customer, or was it a series of small customers?
Yeah, good question. It was predominantly a single customer. This particular customer, I think they failed to raise capital, and so they fell into financial difficulty. We would see that as a one-time through cost.
Yep.
T he broad summary is we don't typically have bad and doubtful debts as a general rule.
Yep. Okay, thanks. Just a final question for you, John, I think. What's your pipeline looking for the next six to 12 months in terms of contracts?
I guess the simple way to answer it is, in terms of the plans that we have in place and expectations of where we'll hit in on our TCV targets, we've got adequate pipeline in place. We're currently certainly focused on delivering a good first half. Certainly driving a cadence around monthly performance. We've got a good level of confidence that we've got pipeline in place, and that's not to say that we aren't aggressively working to grow that pipeline with the investment I referenced in terms of the earlier question around both programs spend to support programs and digital marketing, as well as sales development reps to drive lead generation at the top of the funnel.
Thanks very much, John, and good luck, guys, for the first half of FY 2022.
Thank you.
Thanks, Peter.
The next question will come from Peter Richardson, investor. Please go ahead.
Morning, John and Peter. A question for Peter, probably. A lot of talk about moving to SaaS revenue. It's not apparent from the numbers how much of, say, FY 2021 was SaaS revenue. The question is, how do we measure it, and how do we get visibility of how much of a proportion of your revenue is from SaaS as we go forward?
Thanks, Peter. That's a good question. I referenced in the presentation, obviously, there's a difference between cloud-based revenue recognition versus on-premise revenue recognition, where the cloud revenue is recognized over time. In FY 2021, there was minimal revenue from our new cloud products. However, I mentioned that we have AUD 5.5 million of cloud-based bookings at the end of FY 2021. That'll be revenue that is recognized over coming periods. Also, we will obviously be selling further cloud-based products, which will add to the bank of bookings. To the core of your question, how do you measure performance when you've got this mixed blend of on-premise revenue and cloud revenue? The short answer at this point in time is we're moving to a total contract value metric or a TCV metric.
Basically, if we write a contract to sell on-premise for AUD 100, that we were to do the same thing, say, for a cloud-based customer for the same value, the revenue recognition would be different. The fact that we sold in each situation a AUD 100 contract, I think that's worthy of note. Actually comparing that to preceding periods to basically present what our underlying performance actually is.
Okay. Yeah, thanks for that. I just what I was trying to understand, because you're going to transition from the upfront lumpy process to the cloud-based periodic process. Just trying to figure out how we measure how far through that transition process you are or will be in the future as well.
Yeah. John, did you want to handle the execute and scale question? I guess that's interesting.
Sure. Thanks, Peter. It's a good question. In fact, I'd direct you to slide seven in the presentation where we try to give a view of the transition. Another factor to consider around the timing of that transition is the average weighted life of our contracts. We provide a view of that on the customer slide, which is slide 19. Our average weighted life over the last 12, 18 months has pulled back a little from just over four years to just under three. One of the things that plays into that transition or the transition you're asking about is essentially one roll of our contracts. You could put one` factor in place being as we renew contracts and they come into our books under a revenue over time versus upfront revenue. That's part of the transition.
In terms of the way that we want to provide metrics and visibility to the underlying performance of the business, we're envisaging by FY 2023 that we can be reporting much more in line with SaaS and subscription metrics.
Okay. Great. Thanks.
The next question will come from Sean Burns with BB Proprietary Ltd. Please go ahead.
Hi, guys. Thanks for taking my question. My question is probably along the same, a similar vein as a couple of previous questions. Just looking at the retention rates, those falls are pretty weighty. Am I right in thinking that, in terms of the turn of the book on contract renewals, that we're probably, and you said there around three years, that we're probably one year through that process, so we have two more years where there could be pressure on renewals as customers come up and make that judgment as they're moving from on-premise to SaaS? Is that the right way to look at it? That you've probably got two more years of similar type of pressure? Thanks.
At the end of the day, there'll always be commercial pressure on renewals. What we do to ensure that our renewal rates are solid and can return to higher levels, we've made investments, as I mentioned earlier, around customer success managers. We've also introduced flex licensing. Flex licensing allows a existing on-premise customer who's moving to cloud and is potentially in a hybrid phase in the middle of that journey to sign a single commercial agreement with us that allows them to consume the product, if you will, in those three different environments. Rather than them having to go back to a competitive evaluation for their UCaaS environment, they can stay with us as a single vendor and simply choose how to consume that. That's a second element that I think will help prepare that.
Also reflecting on FY 2021 in terms of customer losses, there would've only been a handful of customers that we actually lost. There were certainly some contracts that renewed at a lower value, and part of the reason for that is that if they sign a shorter term agreement under an upfront revenue model, then you also see the total value of that contract or the recognized value reduce. Finally, to your question around timing. Yeah, I think it's fair to think that in terms of the roll of the portfolio, we've still got a couple of years of that to roll through.
Just to add on a bit there, John. What you're saying is you're hoping, you'd be surprised if you see similar type of numbers going forward, given in terms of drop in retention rate, given the action that you've taken to stem that, you'd hope that those would be, that's the plan, that they would be much lesser going up the next couple of years because you've for it. That's the aim of what you've done or how we should see that.
On slide 21, we've tried to be pretty transparent about the performance indicators inside the business. On the first column there, we talked about both pro forma subscription revenue retention as well as customer retention rates.
Okay. Thanks, guys. Thanks very much.
Thank you.
The next question will come from Ed Kopp, investor. Please go ahead.
Thank you, John and Peter. My name is Ed Kopp. I'm also a member of Teaminvest. I was wondering, John, if you could help me understand the decline in revenue, is that mainly because some of the clients chose not to renew to turn towards a vendor supplied tool? Or perhaps have decided not to use the service because it's too expensive and have opted for no analytics? Or have they turned to some of the newer products in the market like a Splunk?
There are quite a few questions in there. In an upfront revenue model, any shortening of a contract renewal results in less revenue recognized. That's one factor to consider. As I answered in the prior question, we only had a handful of customers that didn't renew with us when we look back over FY 2021. In terms of new business, we internally talk about three aspects to our selling motion, and that's to maintain the base, grow the base, and add net new customers. As we've brought new products to market, we are transitioning our selling model and our go-to market very heavily towards new business. Again, I'd draw your attention to slide 21 in terms of our expected performance in the business as we've brought new products to market.
One of the metrics that we've introduced to our reporting is the percent of our total contract value that we derive from new products, as well as the percent of total contract value that we'll derive from new customers. There's no single answer to your question. It's a matter of maintaining the base, ensuring that our existing customers stay with us. It's about ensuring that as they grow with us, both by what we call capacity, where they have more requirement for what they already have licensed, or they take on new products, as well as us adding to our customer base.
John, a supplementary question. Where is the greatest competitive challenge coming from? I'm sort of struggling to understand where those renewals haven't been occurring. What products are out doing a better job of meeting your customers' needs than what Prognosis provides?
Let me try again. We would have only lost a handful of customers, which is to your question around customers not renewing. The only way that we would have a customer loss is if they don't renew their agreement. In terms of your question around our competitive threats, our competitive threats come from vendor tools, and if we position and sell to the sweet spot in the market for us, which is larger customers with high complexity, then our conversion and win rates are much higher. You also have a new breed of smaller competitors that we've referenced in the past that we contend with. You also have customers who would look to essentially use proprietary solutions inside their business to manage the environment. Those are generally the three competitive forces that we would face.
Further question. This one's for Peter. As a member of Teaminvest, one of the things that's always bothered us about Integrated Research was the upfront recognition of revenue. I'm glad that we're transitioning to a more annualized view of revenues. Is there no flexibility in the current accounting standards to just make the switch now rather than?
Yeah, that's a really good-
maybe three years?
That is a really good question and something that we've been working on internally. T he facts are that accounting standards don't change. It's really about your commercial model and what changes you can make to your commercial model to facilitate the revenue to be recognized over time. Naturally, the offering of cloud-based solutions will certainly drive revenue over time. With regard to our on-premise solution, that's a little trickier. What we're looking to do is offer what I would call flex licensing, where the customer has the choice, if you like, of taking their solution on-prem or over cloud. That is probably not the silver bullet to actually achieving revenue over time, but it's a step in the right direction.
Further, I guess the offering of hybrid-type solutions where it's partly delivered in cloud, partly delivered on-premise, is also likely to give rise to revenue over time capabilities. We have done a lot of work in this area, and I would very much like what I think you're suggesting is can we just sort of click our fingers and get the whole model to just move over time? It would appear that that's not going to happen. We are going to have to go on this journey. However, all of this is accounting, and from a cash flow perspective, we're already there. I mean, the customers for a three-year contract pay us annually in advance. There's no change to the cash flow from this journey. It really is about the accounting.
Thank you.
If you have a question, please press star then one.
Operator,
N o.
Thanks, operator. Thank you all for your attendance today. I hope that today's presentation has given you a sense of the momentum and direction of the company. The key messages that we would like you to take away is that the transition and the journey that we're on is well underway, and it's executing a plan to move to higher value, higher quality SaaS-based subscription revenues. The recovery that we saw in the second half gives us confidence and for both revenue and profit growth. The new product launches that we've brought to market this year increase our addressable market, which again, gives us confidence as we move the business forward. The underlying structural changes in the market and the trends of cashless payments and remote working continue to augur well for our strategic direction.
Again, thank you for your support of us as a company and for your attendance on the call today.
This concludes our conference for today. Thank you for your participation. You may now disconnect.