Thanks, Bernadette, and g ood morning, everyone. Welcome to the TechnologyOne 2021 Half Year Results Presentation. These materials were launched with the ASX this morning. Well, to jump into it, we're very pleased with our results. The results were strong. All the key metrics were as we expected. There's continuing strong demand for our global SaaS ERP solution. Our key metric is SaaS ARR growth. We delivered SaaS ARR of AUD 155.8 million. That's up 41% from the same time last year. You can see that with this strong SaaS ARR growth, it drove and it underpinned our net profit before tax to AUD 37.3 million. That's up 44% on the last year, I'd just like to note that like usual and like previous years, our first half results, that's our first half profit. It's not always indicative of the full year.
You'll see on the next slide there, and I'll get into this in a lot more detail later, that SaaS will continue to drive our growth and the outlook for FY 2021 is strong, and I'll get into much more detail later on in the pack. Turning to the dividend, we remain confident on the full-year outlook, and with that, the interim dividend was declared to be up 10%, and that's AUD 0.0382 per share. You can see over the last 10 years we've had compound growth of dividend of 10% per annum. I want to get into the results now and turning to the results summary, that's slide nine. You can see there that profit before tax was up 44%, driven by total revenue up 5% and total expenses down 5%.
Getting a bit deeper, you can see revenue from our SaaS and continuing business is up 7%, and that's as expected. We expect that important metric to be up 10% over the full year. We expect, in the next few years, over the next four years, that will grow to 15%+ per annum. I'll get more into that in a moment. Our SaaS ARR, as I said, was up 41%, and that's driving that SaaS and continuing business. Our expenses were down 5% in line with our expectations. They'll be broadly in line with the full year, compared to last year. I've just got a note there that we invested strongly in R&D, up 14%. I'll get into that also in some more detail later. Some final metrics there-
... our cash flow generation was down as expected, but it was down in line with our expectations. It'll be up strongly over the full year. I'll get into that also in much more detail later. All right, t urning to the next slide, i t's called revenue from our SaaS and continuing business. This is the future business state. I want to spend a few moments on this. You can see there that our total revenue was up 5% compared to the prior half, but it's not really a true reflection of our business. The key metric for us is our revenue from SaaS and continuing business, and it was up 7%. At the full year, we expect it to be up approximately 10%. We've got a strategy to move all of our customers to SaaS, and we're doing that.
As part of doing that, we're also driving down license fees as planned. This reduction in license fees, it hits our business and our P&L immediately. Whilst our SaaS grows, it's high-quality recurring revenue that gets recognized over time. The second part is because we still have a legacy license fees business, it's impacting the growth of the SaaS business because when we do a deal with a customer, it's either SaaS or it's either legacy license fee deal. The most important point here that I want to reiterate is that our revenue from SaaS and continuing business will grow at about 15 %+ per annum when the legacy license is totally wound down as planned over the next few years. Turning to expenses. Our expenses were down 5% at the half, but it's not to the detriment of R&D.
Our R&D investment was up significantly, up 14%. That's for future growth. We did it to continue to extend the capabilities and functionality of our global SaaS ERP, and some exciting new investments that will fuel our growth, such as DXP and in particular our local government DXP. I'll get into that in more detail shortly. Turning to the next slide. Our profit margin for the full year last year was 29%, and that increased from 27% the year before. In FY 2021, we can expect that over the full year to also increase probably by about 1%. I want to reiterate that our margin expansion and low expenses comes from the significant economies of scale we're getting from our single instant global SaaS ERP solution.
As we continue to win more and more customers onto SaaS, and we continue to get more and more scale from our global SaaS ERP, you'll see that margin continue to expand even further to 35%. As we've said previously, as we get to 35%, we'll continue to drive that margin even higher. Now in terms of efficiencies in our global SaaS ERP, of course that's on a technology front, but it's also on a payroll cost front as those efficiencies flow to all parts of our business. Last year we delivered some payroll cost reductions in half two as we rebalanced headcount from old business like legacy on-premise business to the new growth areas like SaaS and like DXP. That's flowing into the half one 2021 result. I just wanted to point out that we're always doing this.
We're always rebalancing into new growth areas and high growth areas in our business. Finally, in addition, we'll maintain the COVID-inspired learning, such as remote implementations and digital user groups. Turning to the balance sheet. You can see we've got a strong balance sheet with cash and equivalents of AUD 100.1 million. That's up 20% on the prior year. I just wanted to call out there deferred revenue. Deferred revenue was down slightly, but it will show growth of 10%-15% over the full year. I'll just jump into that in the next slide now, t hanks, Paul. You can see that our deferred revenue forecast is to be up 10%-15% for the full year. Now, last half, during COVID, we provided some payment terms for some large customers who have got long-term implementations.
These are locked in, they're on track, and they'll be received in half two. We've got lots of payments that will be received in half two, and that's why that deferred revenue forecast will be up 10%- 15% on the prior year. Turning to cash flow. Our cash flow generation was a small negative in the first half, and that's a normal occurrence in Tech1. It's a normal occurrence because our cash flow is substantially lower in half one than it is in half two. In half two, we've got contracted annual invoice dates in half two, a majority of them there, substantial amount, but the revenue is spread equally through the year. Just want to reiterate that that's a normal occurrence. The important thing is our cash flow generation for the full year will be strong.
The second point there is that if you look at that small negative of about AUD 3 million, it was down as expected because last year, half one FY 2020 had some abnormal cash collections. It was about AUD 12 million for a few very large deals which closed late in FY 2019, and we collected the cash in the first quarter of FY 2020. If you normalize that out, then cash flow generation half one would have been about AUD -7.7 million. Turning to the next slide. This is called cash flow generation for the full year. To recap, in 2018, we changed our reporting and our accounting to align with other SaaS companies, and this included capitalizing R&D. We did it to make us comparable with our SaaS peers.
In the first five years, amortization is less than capitalization, we expect full-year cash flow generation this year will be approximately 80% of NPAT. Over the next few years, as capitalization and amortization aligns, we expect that cash flow generation will progressively grow from that 80%- 100% in FY 2024. All right, t urning to the top of page nine now, slide 17. This is our half one segment analysis. You can see there we've got the operating segment on the left-hand side and the geographical segment on the right-hand side. All segments are doing well. The software segment is being driven by that strong growth in SaaS and SaaS ARR. The consulting segment's up being driven by that continued improved execution, and there's a slide in the appendix. Corporate profit is up because of the resultant royalties that come from the other two segments.
Turning to our geographical segment analysis, you can see that we delivered a profit for the U.K., AUD 500,000 . That's a turnaround of AUD 1.3 million from the half last year, and it's on track for a profit for FY 2021. I'll get more into the U.K. later. We've got our normal results and key metrics there, really focused at the analyst. The thing I wanted to call out is that our full-year return on equity will be 40%+, and that puts us in some of the best, the highest return on equity metrics of any company in Australia, and we're very proud of that. All right. I'd like to turn to some of the significant achievements now. You can see through the results, and you'll see through our forecast, our outlook for the full year, that there's continuing strong demand for our TechnologyOne global SaaS ERP.
We added about 100 customers since this prior comparative period. We now have 576 large-scale enterprise customers. We don't handle the small end of town. These are large enterprises with many thousands of users running their complete businesses using our global SaaS ERP. A question that we often get is, well, what makes us different? How is the Tech1 SaaS different to other SaaS providers? It's quite simple. It's because we're providing this total ERP solution, not individual products. I want to just take a few moments explaining that. We're not best of breed. We're not just accounting or just HR payroll or just CRM. During COVID, we saw that many organizations had to quickly pivot and be able to work remotely, and they cobbled things together.
To tell you the truth, it's a bit of a dog's breakfast, and there's a word emerging now, which is best of breed fatigue. It's where systems don't talk to each other and they're not integrated, or if there are integrations, it's quite expensive and quite clunky, t hat's not us. TechnologyOne provides the total enterprise solution. You can see there on this slide, we've got 14 products. It's a very broad product base. Within each product, there's 20 to 30 modules each. We're talking about a massively broad and massively deep system of over 300-plus modules that a customer can take from us. It's got the deepest functionality for the markets we serve. There's no one like us in our markets that has the breadth of functionality and the depth of functionality. When you look at it's totally integrated.
When our customers deal with us, there's one contract, one vendor, one experience, a s I said, it's totally integrated. Our proposition is hugely compelling for our customers. We take care of everything for them so that they can focus on their business, so that they can focus on innovating and meeting the needs of their customers. You can see on the next slide there, that's a compelling value proposition that customers get massive economies of scale, two releases each year, defense-in-depth security built in. I'll get into that a bit more in detail later. They're always on the latest release, the latest tech, whether we introduce new disk systems, which we did in the last half. To put the icing on the cake, they save 30%+ on their total cost of ownership.
By being on SaaS, there's less friction and they can take more and more products at the blink of an eye. Turning to the next slide there. We've got significant runway for growth just by taking our existing customers to the Tech1 global SaaS ERP. We call it flipping or transitioning customers from on-premise to SaaS. You can see that there's AUD 180 million of ARR runway just by taking just those existing customers just to the SaaS platform. We predict by FY 2026 we'll have 90% of our customers there. Turning to R&D, w e continued our R&D investments, and it's significant investments for future growth. We spent AUD 34.6 million before capitalization, t hat's up 14%. Even though costs were down 5%, we continue to invest strongly in R&D, t hat's for future growth.
You can see there that we continue to extend the functionality and capabilities of our global SaaS ERP. We have the two releases a year, and we delivered 2021A to the market and had over 400 product enhancements for our customers. 2021B is in the development pipeline now and will come out shortly. We continue to extend our SaaS platform, w e rolled out our new disk system, which is faster and more secure in the second half. We continued to deliver on DXP. I want to spend a few moments now just recapping on DXP. Now, if you think about Tech1, we're very successful, and known well in our markets for our total ERP solution, and that's very powerful for what we call the back-office users.
They're your payroll clerks, your accountants, your student administrators, your rating clerks, and they use all of that 14 products and 300 modules to run their business. We're now extending ourself into the front office. In organizations, that's the thousands of employees in an organization, or in local government, there are hundreds of thousands of ratepayers in one council, let alone all councils, and the tens of thousands of students in one university, let alone all universities. DXP for us is a long-term strategy. If you think about SaaS, we set that up about 10 years ago. We made huge investments. We learned a lot of lessons. We created many, many versions to the global SaaS ERP we have today. We made significant losses in the first few years, but now it's fueling our growth, t hat'll be the same in DXP.
We'll make lots of investments early up, then it will fuel our growth. It will create a new platform for growth, i t'll be very, very exciting. Some of the early feedback we've got from customers is exactly that. It's very exciting, and it's really transforming their business. There were two parts of DXP. There's our initial parts, DXP 1.0, really focused on the employee, whether that's expenses and timesheets and meetings. That helped us get the tech right, and really start to roll that out in our customers. We launched that maybe two halves ago, and we're just starting to get traction and making sales in DXP 1.0. The real value, the real differentiation, the real runways, the real platform for growth will come from DXP 2.0. That's DXP for ratepayers, Local Government DXP, or DXP for students, higher education or student DXP.
If I focus in there on local government DXP and just tell you a story. I met with a new CEO of a big local government in Australia. He came in only in two months in the job and said that his mayor said, "Ed, we've got to stop our investments in back office and data centers and all that jazz, and focus on the ratepayer and focus on the customer." It really just solidified that we're on the right path, and that's a strategy for us to get even more compelling and deeper into the markets we serve. Now, this CEO is going to be in for a world of pain because they're not on SaaS, they're on-premise. To be able to take advantage of new technologies, artificial intelligence, things like DXP, you have to come onto SaaS before taking DXP.
We were talking earlier, DXP LG in particular, we've got about three or four early adopters for stage one, and the feedback's been fantastic. The point I wanted to add is DXP LG is already helping us differentiate in the sales cycle because customers, new and existing, are saying that, "I want DXP LG," and we're saying, "You can't get there unless you come from on-premise to SaaS first." There's a number of flow-on benefits from the DXP strategy, and in particular, DXP LG. Turning to the next page, w e got a lot of rigor in R&D. In recent weeks, we've been fielding some questions about how we treat R&D, I just wanted to spend a moment on this. It's there on the slide there.
Just to go through it carefully is we expense all maintenance and research, and we only capitalize development based on actual timesheets that our developers are doing on projects. That capitalization and amortization is independently audited along with our financial statements. Previously, we published a policy that capitalization will be in the range of 40%-60%, and amortization will be in the period range of three to seven years. Now that we've got a couple of periods under our belt, because we're a SaaS ERP provider, we expect the norm to be as follows: a range of capitalization of 50%-55% and a five-year amortization period. If we vary for this, we'll be very transparent, and we'll provide detailed reasons, but I just thought we'd take a moment to address some of the questions that we fielded. Turning to the next slide, please.
You can see there that we continue our defense in-depth security. We're the vendor that continues to set the bar higher and higher and higher. We're the only global SaaS ERP provider end-to-end to be classified as IRAP protected, and we achieved that in half two last year. I'm going to tell you a story about that in a second on the next slide. If we turn to the next slide, you can see there's a couple of points on here. Firstly, we continue our 99%+ customer retention across all markets that we serve. We've got, I'd say, world-beating customer retention and world-beating customer churn. The second point is that our APAC market penetration in any single vertical doesn't exceed 15%, so there's significant runway for future years in APAC.
If you look at the vertical market breakdown there, you can see we continue to have strong results in Local Government. In education, our deals, our business are weighted to half two, so we've got very strong and deep and clear pipeline to half two, and we expect education to have a strong second half. I want to spend a few moments on government and focus on government because, as I said, we achieved IRAP protected last half. Last half, you would've recalled, we reported that the Tasmanian Government, because of that, moved all of their business to SaaS. This half, there's a couple of case studies we want to talk about now, and that is the Department of Agriculture, Water and the Environment. That's a new department, a recently merged department, was two large departments coming together.
One was a Tech1 department and one was an SAP department. There was a choice to be made. Do they go Tech1 or do they go SAP? Department of Agriculture, Water and the Environment went Tech1. They went Tech1 because of our global SaaS ERP, which is available on any device, anywhere, anytime. They went there because we have the deepest functionality for federal government with our out-of-the-box solution called OneGov. We were the first to e-invoicing, and importantly, we're IRAP protected. When you bundle all that together, it was a very compelling proposition, and they came with us. The runway and the pipeline for Australian federal government customers to come to SaaS is very deep and very strong, and we predict we'll continue to have a very good run at federal government in Australia.
Secondarily, we signed a whole-of-government New Zealand contract for central government with MBIE just recently. With that, we signed up not only MBIE, but the first New Zealand government customer to come to the global SaaS ERP for all those same reasons that Ag did, and that's opened up a pipeline of 20 plus New Zealand central government agencies. We're going to have a very good couple of periods in government also. Turning to the United Kingdom, we continued that significant investment for future growth, and we're coming out of what we call the customer-first remediation phase. That's where we had some red projects where we needed to get the regionalization's right, and we're at the end of that now, and we've got Redditch and Bromsgrove went live recently, York St John, and we're getting referenceable in the U.K., and our focus is now returning to growth.
Jumping into a bit of the details there. You can see we delivered a half line profit of AUD 500,000 versus a loss of AUD 800,000 same time last year. Under the covers there, consulting profit also turned around. In the half, we closed two new logos in local government and preferred for an additional two. I think as at this morning, we might now be preferred for four or five new local government logos in the U.K. An important milestone for us is that just recently in Q3, we preferred for our first unitary council, and that pushes us up to the next tier of council. We've been very strong in sort of the smaller end as we get a beachhead, as we get our products right, et cetera, and now we're moving up to that next tier of larger council in the U.K.
Our pipeline for the U.K. for FY 2021 is strong with many new logos and increasing ARR, mostly in Local Government as we said at the full year. We're now also starting to see pipeline growth in Higher Education, and that's because of our focus in Higher Education, but because also the regionalization's are coming towards an end. By FY 2022, those regionalization's product will be finished, and the implementations will be done. We continue to see that significant upside in the U.K. in many years. What I predict is we'll replicate the success we've had here in APAC in the U.K. in the Local Government and Higher Education markets. It's very exciting and huge runway for growth for us. Turning to the next slide, please. Our SaaS business, as you can see, is growing very fast, and it's very high quality recurring revenue.
When you combine that with the low churn rate, I think you'll see that we can get to that AUD 500 million ARR target, which I'll talk about. Today, at the beginning of FY 2020, 85%+ of the revenue is recurring. We always exclude consulting because that's a pull-through from winning the ARR business. Our target is that by the beginning of FY 2027, 95% of our revenue will be recurring revenue. Now, just to sum up the results, bottom of page 16 there, slide 32. We're very pleased with the results, and we recorded a record half line profit revenue and SaaS ARR. The SaaS ARR was AUD 155.8 million, up 41%. The revenue from our SaaS and continuing business, as I said, that's a key metric, was up 7%, will be up 10% over the full year, and we'll get to 15%+ as we wind down our legacy license fees.
Our profit before tax was up 44%. Our U.K. profit was up 100%, and we ended with strong cash and equivalents of AUD 100.1 million. All right, we'll change gears now and focus on the outlook for the full year on the guidance for the full year. You'll see on slide 34 on the bottom of page 17, we're predicting and forecasting strong profit growth for 2021. I'll just get through a few of the key sort of metrics and key points here. Our markets are resilient, and we see that with our mission-critical software and that deepest functionality, our customers will continue to transition to SaaS. When they're on SaaS, they'll continue to roll out all of our products to take as much of the enterprise suite as they can take.
Our global SaaS ERP is really allowing our customers to focus on their business and meet the challenges of their business with greater agility because they don't have to worry about the underlying tech. We take care of all of that for them and make life simple for them. We think and predict and expect over the full year that SaaS ARR, which is our key strength of our company's offering, is expected to be up around 35%, 35%+ over the full year. As I said earlier in the presentation, we're going to continue to aggressively grow our SaaS business, but also reduce our legacy license fees.
That's going to be down about AUD 7 million on a full year basis, and that's a significant immediate impact on our P&L, but it's an integral part of our strategy as we focus on growing the SaaS business and the high-quality recurring revenue. Finally, we expect full year expenses, that's all expenses, to be broadly in line with last year as we continue to invest in new areas for growth. To sum all that up, that continuing strong growth for 2021 results in a net profit before tax of between AUD 94.3 million and AUD 98.6 million. To be clear, that's 10%-15% up on the FY 2020 underlying profit of AUD 86.1 million, or up 14%-20% on the statutory profit of AUD 82.5 million. Finally, I'd just like to end on a couple of slides on the long-term outlook.
To recap, we're positioned well for the future, and we'll continue to double in size every five years. As I explained, SaaS continues to grow strongly. SaaS underpins our growth. It's really resonating with the customer base. As our customers move to SaaS, all the products are available for them, so they'll continue to take more products, and our product penetration will increase. We'll continue to grow in APAC, in the U.K., and we'll continue to get those massive economies of scales from our single instance global SaaS ERP and our profit margins. Full year profit margins will grow to 35%. When we get there, we'll set the bar even higher. Two more points just to wrap up. Our SaaS and continuing business, that's the key metric for us.
Once we've totally wound down our license fee business, we expect this to grow at 15%+ per annum over the next few years, and we remain committed and focused on our total ARR and increasing that to AUD 500 million by 2026. At that point, I might take a breather and open up, hand back to Bernadette. Bernadette, for any questions from the phone or from the webcast.
Ladies and gentlemen, we will now begin the question-and-answer session, starting with phone Q&A. If you wish to queue for a question, please press star followed by one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star followed by two. Your first question comes from Mike Aspinall, p lease ask your question.
Hi, Edward and team, i t's Mike Aspinall from Jefferies here. Just a couple from me firstly on guidance. With the majority of revenue now SaaS and expenses guided for flat, can you give us an indication of what's going to be the swing factors between the top and bottom end of guidance?
I was just floating it a bit hard there. Mike, was your question what could be the swing factor between the top end and bottom end of guidance?
Yeah.
In the end of the day, we've got a very clear pipeline and forecast with our revenue, our deals, and we've got a very myopic focus on costs. If there's any swing factor, it could still be license fees, even though license fees is a much smaller part of our business now. It might be around approximately AUD 20 million by the end of the year. We still have to close the deals, Michael, so that's probably the main swing factor that could impact on the top or bottom end of that guidance.
Okay, great.
I should say, Michael, because license fees have an immediate hit, whereas positive or negative versus winning a SaaS deal on the last day of the year is one day of revenue recognition.
Yeah, got you. The bottom end of guidance implies second half profit down a bit. Can you just comment on what's driving that?
If you look at license fees, it's all driven by license fees. Last year, full year, we did AUD 27 million worth of license fees. I can't remember the skew, to be honest, but most of it was in the second half. If you just compare AUD 27 million license fees with most in the second half compared to AUD 20 million license fees, again, with most in the second half, it's license fees that is the part that is skewing that result, as you highlight. That could skew the result, as you highlight.
Okay, c ool, j ust two more quick ones. Just expenses are expected to be line ball for year and are - 5% in the first half. Can you just talk about where you're making those investments for the second half?
Yeah, t here'll be two parts to that. I think as we continue to grow SaaS fees, then obviously we'll have more of the variable cloud costs. The second part is the investment in people, the investments that we make in our new growth areas, such as R&D. I know that we're making some pretty significant investments in R&D and DXP in the SaaS platform, so that's where the majority will be made.
Okay, great, and t his is the final one from me, and maybe you touched on it just then with the variable cloud cost, but gross profit margins were down both on the stat accounts and on the management accounts. Can you just talk about what's driving that?
Yeah, i t's a simple answer. It's the license fees again, i f you exclude license fees and look at the margins excluding that, I think you'll find they're up.
Okay, great, t hanks for that.
Thanks, Michael.
Thank you, y our next question comes from Chris Savage, p lease ask your question.
Hi, Chris.
Thank you, and g ood morning. G'day, a few, generally quick questions. As you highlighted, there were about 100 flips in SaaS-
Yeah.
... from the first half this year to last. Can you tell us how many new logos you added in the first half?
We don't disclose those, Chris. We're having a pretty good run at new logos. Maybe something we disclose at the full year. This year, if I can give you a flavor, this year, our new logos, we predict, will be probably the highest maybe in the last four or five years.
Last year you added, what? 40-50 new logos?
I think it was around 40, Chris.
Yep, c ool. Secondly, it might be one more so for Jobo, but there was a AUD 5 million drop in provisions in the balance sheet. Was that the payment of that legal case and hence the reduction? I guess part B to the question is, was there a positive impact or not on the P&L from that reduction?
Hi, Chris. Yes, you've identified that correctly. It was the payment of that provision. It's held on trust until the full federal court hearing, which is coming up shortly. It had no impact on the result for this period because it was provided for last year.
Wonderful, l ovely, and l ast question back to you, Ed. When you were talking about DXP, you sort of paralleled it to your SaaS investment 10 years ago that was initially loss-making and now is fueling the growth. Are you telling us that DXP will also be a drag or be loss-making initially before it kicks into profit?
Yeah, w hat I'm trying to say, Chris, is we'll continue many investments in that, and that's all in the R&D number. It's not an additional expense or additional number that's not already disclosed, and we'll continue to make those investments there. Probably what I'm saying is it will fuel our growth, and it'll be in what we call a platform for growth, and be quite significant, I feel, in the future. It'll take some years to ramp that up to become material, Chris. What I'm trying to say is don't expect to get a big hit on revenue as a platform for growth in the first few years. When we start to really amp that up and get some customers live and continue to build it out, then I think you'll see significant revenue streams from it in future.
Okay, s orry, I know I said that was the last question. One thing I didn't understand on the call, when you were talking about the whole of government contract you got in New Zealand, you said something like MBIE, w hat was that?
MBIE, Ministry of Business, MBIE. I just can't recall what the rest of the shortcut is-
Okay.
... Business Innovation Employment, Paul's saying, MBIE.
All right, cool. Sorry, I'm not up on my New Zealand government departments.
Sorry.
Thanks a lot, c heers.
Thanks, Chris, t hank you.
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 Dan Coughlin, p lease ask your question.
Morning, Ed and Paul, t hanks for taking my questions. Just the first one, you touched on it at the end of the prepared remarks, just on the product penetration, I just noticed you didn't have the usual slide on the average price per customer. Are you able maybe give some qualitative kind of commentary around how the cross-sell opportunity is progressing, especially as it relates to the SaaS flips?
Yeah, i t's something we just haven't included at the half year, Dan. We will include again at the full year. There's plenty of runway. I'll just reiterate what we said at the full year. I think we have on average 5.7, 5.8 products per customer. Those on SaaS have 1.5 products on average, more than those on premise. That's because once you're on the SaaS platform, you're always on the latest release. You can always take the latest features and functions, and it's frictionless. All the software is available to all customers on the SaaS platform, and we'd like them to try it and use it. If they love it and are getting business benefit out of it, then we can talk to them about buying it. We'll provide those usual disclosures in the full year as well, Dan.
Perfect, t hanks, Ed. Just another one around the SaaS transitions. 37 new customers on SaaS compared to at the full year. Obviously a bit of a mix between completely new customers and those transitions from on-prem.
Yep.
To get 90% of on-prem to SaaS, I think kind of implies around 80%-90% SaaS transitions a year. Just wondering if you could talk through how you're thinking about the timing of those transitions. Should they be taken after this year or do they kind of weight more into the next financial year and beyond?
I think you've nailed it in some of your questioning. You're right, o n average, we do between 80% and 90% SaaS flips or transitions a year, and we can't see any end to that, and it might even accelerate. But the 80%- 90% is a good benchmark. They're always half two weighted. If you think about our normal weighting of deals, they've always been half two weighted. Majority of our customers are government, local government, higher education, and they tend to have their buying cycles around June, July, August, September. June, it might be the end of financial year, and they have budget left, or July, new financial year, and they're waiting for a new financial year's budget. That's the reason for the half two skew, and we expect that to continue as per normal, Dan.
Great, t hanks, Ed. Last one from me, j ust in terms of the competitive landscape, you mentioned in your prepared remarks about the government department merger, and that was a department had an SAP on the other end. Are you able to talk through who some of the other contract wins have been away from and any changes in the competitive landscape that are worth noting?
Might go and start, but then hand over to you, Stuart. I think we're not seeing any dramatic shift in the competitive landscape. Seems to be the same competitors in local government and higher education in government. Stuart, is there anything you'd add to that?
No change, t raditional, y ep.
Yeah.
No real change, both here and in the U.K.
Okay, great. That's all from me, t hanks.
Thanks, Dan.
Thank you, o nce 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 Mitchell Sonogan, p lease ask your question.
Good morning, Ed. Thanks for taking the question. Just following on from the previous one, half on half of 37 new SaaS customers. If you actually look at the incremental SaaS ARR per customer, it was up about AUD 570,000 versus only about AUD 200,000 in the PCP. Can you maybe just talk through what the drivers are? Obviously, there's been a few big new customers there, but was there a big weighting to some of the big education or government customers? Thanks.
Yeah, I think that's the flow through some of those government wins, to be honest. As I think about the question, there's no real average in Tech1. You can have a small customer with a AUD 50,000 ARR per year or a very large customer with a AUD 2 million ARR per year, just trying to highlight those big swings. We have a deep pipeline, and we work with our customers as to when they're going to transition from on-premise to SaaS. It really just depends where the deals fall. Averages in themselves aren't probably a good thing to look at in that respect. I can tell you that some of the big customers were government customers that came in the first half.
Yeah, t hanks. Just following on from that, I remember last year, I think around May, Tech1 was offering a year of free SaaS fees for on-prem customers to transition to your SaaS product. Can I just get a bit of an understanding of how that, or is that program achieved what you were hoping for? What are the sticking points of some customers not transitioning across as fast as you might have hoped?
Yeah, i f you think about that, Mitch, that was at the height of COVID, and some of our customers said, "Look, we want to move, but we don't have the budgets for them." They were government customers and local government customers, really high creditworthy customers. We did offer that up. We offered it up in support of them during COVID. To be honest, not many had to take it up. It created a conversation with them that opened up the door to move them to SaaS. The impact of that alone was pretty minor, to be honest. The important thing is it showed that we supported the markets we serve, and it opened up a conversation to move customers to the SaaS platform.
Yeah, t hanks, mate. Just looking at the variable cloud costs, can I just get a bit of a sense of how we should think about that moving forward as the business continues to grow in that SaaS line? I think it's generally tracked at 20%-21% of the SaaS fees, but it dropped to about 17% second half. Now it's back up to 19%. How should we think about that second half and probably more so longer term as the SaaS business continues to grow?
We look at it on a full year basis. I'm sorry, Mitch. On a full year basis, we've tracked that it's probably increased its margin by about one percentage point or 1% every year. That's where we really continue and drive the efficiencies of the global SaaS ERP. Maybe if I just spend a few moments. I think it was this half, Stuart, we completed the move to a new disk system. Yep. Actually, it was last half to help us achieve IRAP.
Okay.
Yeah, yeah, if you think of all layers of the SaaS platform, we're always focused on how we can use the latest technology to make it, say, quicker, more resilient, more secure for our customers and for Tech1 to make it more efficient and to grow margin for Tech1 as well. One of the things we did last half was look at our disk system in the SaaS platform, and we completely refactored it and moved all customers from the old disk to the new disk technology. The two things we achieved there was a margin improvement for our customers. It was a new technology that was one piece of the pie to get that IRAP protected certification. That's just one case. We've got many initiatives that are happening in the SaaS platform to achieve all those type of things.
A list as long as your arm, to be honest, the team are always focused on making it better for our customers, more secure, quicker, and of course, getting margin and scale and performance for Tech1. So, I just thought I'd highlight that. You'll continue to see us drive that efficiency, and that's what will underpin the Tech1 total net profit before tax margin from 29% at full year last year up to 35%. When we get there, we'll continue to drive it harder and higher.
Perfect, and j ust a final one from me, Ed. When you were talking about the specific market verticals, you're expecting a stronger second half in education. Obviously, the big education providers have been through a pretty tough 12 months and still are. Can you maybe just talk, are they still actively in the market to look to replace new systems or a bit more about ongoing upsell? Has there been any change in how they're coming to market over the last 12 months? Thanks.
I might hand over to Stuart to answer that question, Mitch.
Yeah, there's a lot of activity right now and differentiation in the market. They're looking at different ways that they're going to attract their students to come and join their university or higher education sector, and we're helping quite a bit. A lot of the noise right now in the sector that we're helping out with is in the portal side. It's really where that student is interacting with the university, and we've been doing a lot of work there for the last few years, and we're seeing a lot of activity, and we've probably got five or six higher ed customers that are actively looking at that right now.
Stuart, our education customers, they're also looking to save money, streamline their business-
Yeah.
... come to our SaaS platform.
Yeah, w e've got a lot of the higher ed obviously moving from the on-prem into the SaaS to save the money, at the same time, trying to get a better benefit to get the realization of the latest software and giving that feedback and that support back to the customer base. Tied to that as well is the portal side, t o get to the portal, they've got to be on the SaaS platform. All of that comes into play.
I think you said to me before the call as well, we've got this student DXP, which is a bit more early stage than the DXP LG. Even talking about that to the higher ed customers is creating another differentiation to get them to the SaaS platform.
Yeah, w e've got three higher ed customers that are working with us in the early adopter program. It's very exciting what we're doing. It's really that last piece of the puzzle in trying to support their customer, the student, all the way from acquisition all the way through alumni. We're trying to support that whole process and keep them as sticky to their students as they can be.
Thank you.
Thanks, Mitch.
Thanks for that, G.
Thank you, o nce 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 Lucy Huang, p lease ask your question.
Good morning, Ed and Paul, t hanks for taking questions, I just have three.
Hi, Lucy.
Firstly, just in terms of your existing SaaS customers, I think you had one prior to the first half. Are you able to talk through how their spend patterns have changed over the last six months, whether you saw them take up more modules or products? I just wanted to see how the existing cohort spend changes over time.
Yeah.
That was it for that one, t hanks.
Yeah, I might talk about that one first. There was a similar question at the full year. The full year was, if you like, our second half was largely impacted by COVID. Our customers at that time said to us, "Let's just get to SaaS. Let's get to the SaaS platform." Yes, most customers when they come to the SaaS platform look at taking more products. Those customers that were on-premise coming to SaaS really just needed to get their staff working remotely, any device, anywhere, anytime. Product penetration was probably smaller in the second half, Stuart, but we got all those customers to the SaaS platform, and we always knew, and we discussed with the customers once you're on the SaaS platform, that will open up much more opportunity for product penetration. Is that something you can just comment on, Stuart?
Yeah, w e're absolutely seeing that there was a need to get to the SaaS platform, and then from there they're up taking the software in a piecemeal approach. It's very much a module-by-module acquisition now, not a big product by product. They're acquiring it a piecemeal at their own speed, which is really the whole design that we want to get across is they get full access, and they can acquire at their own speed and on their own terms. They're really doing a lot of that work themselves.
Thanks, Lucy.
Understood, w onderful. Just my second question, I think you gave guidance around 15% growth in SaaS and continuing businesses once the legacy revenues do come up. What's going to be the key driver here? Is it mainly the transition, so existing on-prem continuing to migrate to SaaS? Do you think larger part is just increasing product penetration amongst existing customers?
It's probably quite a few of those, Lucy. The first is we've got four platforms to grow. The first is moving our customers to the SaaS platform. That's number one. When they're on the SaaS platform, our customers take more products. They're already one and a half more than on-premise because it's less friction and because when you're there, it's a phenomenon we saw on-premise many years ago. Best of breed moved to enterprise. We see that same phenomenon going on in SaaS. Best of breed is going to move to enterprise because it's fully integrated. It's one look and feel. It's one vendor, one contract. We think that enterprise will win on SaaS just as it did on-premise. The second part is when we wind down legacy license fees, it is a drag right now on revenue.
It is a drag on the growth of the SaaS business because if we're transacting a legacy license fee, it means we're not transacting a SaaS or an ARR business. When that's wound down, and we're getting pretty close now, we'll do about AUD 20 million this year, and if it comes down AUD 5 million a year, next three or four years, legacy license fees will be gone. We really accelerate, if you like, SaaS ARR. When you put all those things in the mix, that's what will help drive SaaS ARR at 15% per annum.
Wonderful.
I should say SaaS and continuing businesses.
Yeah, u nderstood, t hank you. Just last one, I think you gave us an indication in terms of your current R&D budgets. How much is allocated to DXP versus say, spend in the core SaaS platform? Just wanted to see where the majority of spend is directed to and how much DXP takes up of the R&D.
Yeah, I think, ju st talking in rough numbers. DXP is right at the start. It's probably 10%-15% of the total R&D spend. Every product has a breakup. It's not something that's easily broken up just off the top of my head. The DXP is at a part where it's new. We always start somewhat small. As it gains more traction, if you think of the whole R&D spend, just as we've done when we moved from our last generation software to our current generation, the DXP team will grow as the R&D team existing customers shrinks, and then it becomes mainstream. We always have this seesaw where we're toggling the investment in new technologies and new products, et cetera, versus the existing.
We're at a point now where the majority are in existing, and we're starting a new, if you like, technology product line called DXP. As that expands out, it will become a higher proportion within the total R&D spend.
Wonderful, u nderstood, t hank you so much.
Thanks, Lucy.
Thank you, o nce 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 Gareth James, p lease ask your question.
Oh, hi, guys. Could I just clarify, please, there was obviously that fall in employee cost in the first half, and I think you referred to the transition to SaaS as being a driver of that. Are you able to elaborate on more specifically where those costs are coming from and the likelihood of that continuing going forward?
I think, as I said in the presentation, Gareth, half two last year, we did our rebalancing. We took away from those supporting, selling, servicing on-premise and really focused them into DXP and SaaS. R&D is up 14% at the half. We'll continue to make more investments in new growth areas. We're expecting full-year expenses to be broadly in line with last year. Gareth, we'll continue that normal trend now of investing in those new areas from growth going forward.
Sure, j ust on the SaaS ARR growth guidance. I think you guided to 35% for the full year versus 42%-
That's right.
... in the first half, just what the drivers behind that second half weakness were?
Yeah, we don't look at it as a weakness, Gareth. We look at it over a full year and the pipeline of deals we have. It's somewhat like license fees, wherein before we moved to SaaS is the same phenomenon happens. We've got a full pipeline of deals and forecasts, and we work closely with our customers to transact those through the year. Sometimes some close earlier, first half, sometimes they close a bit later in the second half. That's why we say the first half is never indicative of the full year. We always look at our performance over the full year, and it really comes to where the deals fall, Gareth.
Sure, o kay, a ll right. Thanks, guys.
Thank you.
Thank you, w e'll now go over to the webcast questions. Your first question comes from Troy Reynold, and the question is: You added approximately 101 SaaS customers over the past year. How many of these are completely new customers and how many are existing customers who were previously on legacy license?
Thanks for your question, Troy. It's not something we disclose down to that level, but I can say that the majority of our customers from on-premise to SaaS flips, we do somewhere in the order of 40 to 50 new logos per annum, and they will follow the similar skew to the rest. Maybe if I can just guide you to 40 or 50 over a full year, look at the skew, but the majority of our business is coming from on-premise customers to SaaS, and then taking more products while they're there.
Thank you, y our next question comes from Ray David. The question is: The AUD 180 million ARR run rate to SaaS by FY 2026 on page 25 on the presentation, is that assuming the customer takes additional modules, or is that like for like for existing modules sold per customer?
That's like for like for existing modules per customer. grabbing everything they have on-premise and moving to the SaaS platform. On top of that, you have customers taking more products. On top of that, we have new logos, and that's how we can get visibility to that AUD 500,000+ or that AUD 500 million by FY 2026 of ARR. Thanks, Bernadette.
Your next question is from Troy Reynolds. The question is: What is the average solutions of the 14 total used to the average customer, and how has that changed over the past year?
That's a hard question, Troy, because there's no such thing as an average customer. Customers buy products, buy modules, and then by number of users. There's many variables that a customer can take. We disclose in the full year, and we will disclose in the full year the average number of products or product take up per customer. I think it's around 5.8 products per customer. We have a focus to increase that to eight products per customers over the next few years. I hope that helps answer the question.
Your next question comes from Tim Hall.
Thanks, Bernadette.
The next question is from Tim Hall: Can you please elaborate on the AUD 20 million drop in deferred revenue over the last six months? Is it purely license fees that will enable an AUD 40 million recovery in the second half, or is there something else? Many thanks.
Thanks, Tim. The deferred revenue is covered in the slide on the bottom of page seven, slide 14. The deferred revenue drop, I can't see the AUD 20 million you refer to, but if I look at the slide there, you can see full year 2018 at AUD 137 million, full year 2019 at AUD 148 million, full year 2020 at AUD 144 million, and our forecast of full year up 10%-15%. That's between AUD 159 million and AUD 165 million. Just to recap what I said during the presentation, last half, so at the half FY 2020, it was at the height of COVID. We did provide some payment terms to customers, and they were largely large enterprise customers who had long implementation time. They want to pay progressively. Now, all those projects or moves to SaaS, they're on track, they're locked in, they're contracted.
We've got significant receivables and payments that will be made to us in half two that are locked in, and that's why the deferred revenue forecast will be up 10%-15% over the full year.
Thank you, t he next question.
Sorry, Bernadette, I'll just add to Ed's comment. It also reflects the fact that the majority of our anniversaries with customers are in the second half. We do see that the increase in deferred revenue does increase by more in the second half, and then it reduces in the first half as we draw down that revenue and recognize it. It is cyclical, and we do see it increase more in the second half.
Thanks, Paul.
Thank you.
Over to you, Bernadette.
The next question is from Bruce Carmichael, and the question is: What are the biggest risks to your growth goal of doubling in size in five years?
Thanks, Bruce, g ood question. Execution, i t's not the strategy, not our platforms for growth. It really comes down to us executing well, continuing to service our customers, giving them a compelling experience, scaling our global SaaS platform. We now have 576 customers, then we'll get to 600, 700, 800. We always reach these sort of hurdles. We've got a smart, innovative, creative team who always solves the problems and continues to execute well. Thanks for your question, Bruce.
Your next question comes from Lachlan Berg Jansen. The question is: Thanks for the great presentation. Could you elaborate on the reduction in employee costs of AUD 11 million and what caused this?
Thanks, Lachlan. Yeah, a question we received in kind over the last little bit as well. Half of it is caused by R&D capitalization. The other half is that rebalancing of headcount that we did in half two last year, away from on-premise, away from supporting on-premise, all the legacy businesses, and to SaaS and DXP. We did get some cost efficiencies there, and that's what you're seeing in half one. As I said, we'll continue to invest in new growth areas in R&D, in SaaS, in DXP, and that's why you'll see total expenses line ball broadly in line with last year over the full year. Thanks for your question, Lachlan.
There are no further questions at this time. I'd now like to hand the conference back to today's presenter, p lease continue.
Thanks, Bernadette. Finally, I'd like to thank Stuart, thanks, Paul, thanks team at Tech1, whose passion, commitment, creativity, innovation, we take on the world's biggest and scariest ERP providers, and we beat them here in a homegrown Australian company. Without them, we wouldn't be able to deliver it. Thanks also for shareholders for your continuing support, and thanks for your time today and the presentation, t hank you, everyone, t hanks, Bernadette.