Ladies and gentlemen, good evening and welcome to 74Software H1 results presentation. My name is Arthur Carli and I'm in charge of Investor Relations for the group. I'm here to remind you that this presentation is live and is being recorded. A replay will be available on our Investor Relations website as soon as possible after the meeting. On top of that, I would like to remind you that this presentation contains forward-looking estimates that are subject to risk and uncertainties. All of that is described in our universal registration document. With that, I would like to hand over to our executive team and our CEO, Patrick Donovan.
Thank you, Arthur, and thank you, everyone, for joining us here today. Joining here with me today is Eric Bierry, the Deputy Chief Executive Officer, and Tobias Unger, our CFO. To go through some opening remarks, I'll start with covering a few points on just globally overall the building up of 74Software. Eric will join and cover some key developments in both Axway and SBS. Tobias will go through the financials in detail for the first half of 2025, and I'll come back and do some closing remarks and a Q&A session. With regards to the Q&A session, as we go through the presentation, there is a chat available on the website, and you can enter your questions there, and we'll cover those, or you could do it if you're on the call line, and the operator will feed the questions through to us. With that, let's dive in.
As a reminder, 74Software is not that old of a brand. The 74Software public company has only been under that moniker since December of 2024. It came about about 10 months ago now, when Axway and SBS came together in September of 2024. Since then, I can't say enough good things about our employee base, keeping the focus and dedication of delivering value and successful outcomes every day to our customers. Their focus and dedication has allowed us to have the good financials of the four months combined for 2024, and we'll share with you the first six months of 2025 here today. We're happy to say effectively all metrics are moving in the right direction, and we're really pleased with the results we get to share here today.
For those of you new to this story, 74Software was built out of the combination of Axway and SBS in September 2024. In December, we took the opportunity to rename the listed company and the investor brand to 74Software, with a goal of really leveraging the portfolio across the two recognized brands of Axway and SBS to continue delivering value to the customers with the leading products within the portfolio and continue to build out a strong, long-term, successful software company. With 74Software combining the two companies together, we look to leverage this combined strength to deliver a better service internally with our G&A functions such as legal, HR, finance, etc., at a lower cost base so we could spread the cost base over a broader set of products. With that, drive financial strength into the business.
That has allowed us to have an enhanced equity story, which you have seen in the market. We've had expanded stock coverage over the past six months, and we're getting a renewed interest from the investor market. This also allows us to look at synergistic opportunities across the portfolio of ways we could help serve the customers better by making the product set potentially deeper within a customer base. We look to also leverage the larger size to get a better market visibility overall while trying to have a stronger and elevated employer brand. We want to do this while remaining very faithful to the roots and our culture. We've been saying over the years, if you've been listening to me at the Axway level and now the 74Software level, that we have three constituencies that we are looking to serve equally well: our employees, our customers, and our shareholders.
We really want to make our group the place to be for our employees. We want them to be engaged and with us on this journey. For our customers, our customer relationships across the portfolio are with enterprise customers that want to be with us for the long term. A customer over 10, 20 years or more is not uncommon with the value we bring with our portfolio. We look to continue delivering these brilliant customer experiences with this group, 74Software. For our shareholders, we want to continue to look for ways to build a predictable and profitable long-term project that's self-sustaining, that could look out over the next 20 years and continue delivering value back to our shareholders that go along with us on this journey.
For the first half of 2025, I'm happy to say that we achieved a revenue of $344 million, which was up 6.5% organically, and that was seen across both SBS and Axway brands. We had an improvement in margin as we expected, achieving 12% of revenue in the first half. We had strong commercial momentum, exceptionally strong commercial momentum across both brands in the first half. That may skew a bit the timing of the revenue between the first and second half, but we have been really pleased to see this disciplined execution carried out through the go-to-market teams. Finally, and Tobias will cover this more in his section, we also increased our ARR nicely across both brands, strengthening our recurring revenue model. With that, I want to turn it over to Eric Bierry to go a little deeper on some key developments in both the brands. Eric?
Thank you, Patrick. As you told, I think we did have a very robust first half with a good market traction across all the portfolio from 74Software. If we are looking deeper into Axway, we did sign 58 new clients. Compared to last year, it's definitely better compared to the 49. What is really important within these new clients, a large part is linked to MFT. When we are looking at the MFT market, it means that we gain market share because it's not an unlimited market, and it has given the proof that we are very strong within that business line. A second thing, we see that over the H1 bookings, 35% of the total booking is linked to managed deployments. That's what we call own-managed. If we are looking at the B2B integration product line, we see that it's even more than 60%.
It means that the market is shifting where on this robust technology, the clients are expecting not to maintain too much or increase their capabilities internally, but they do rely on us, on our ability to operate their core business, which is really important. I'm going to come back later on the second slide on Amplify F usion and Amplify E ngage. If we are looking at SBS, the first thing which is very important is today on H1, 75% of the total revenue is now product revenue. It's up by 8% on a year-on-year basis. As per plan, the service revenue did decline by 19% on H1. This will not be the case at the same level in H2, but it's really what we were expecting to deliver. Meaning that maintaining growth across SBS, the ability to stay very focused on the product revenue is now becoming a reality.
Second, we did, inside SBS, manage to give the proof that we are able to cross-sell the new product, the digital native SaaS product called Modular within our client base. The proof is coming especially from the regulatory capabilities. I'm going to come back also within that in a second. The last thing we should be saying, of course, if we do compare with the 58 new clients on the banking application, we know that the number of new logos is taking a lot more time, but we can say that we do have six new logos and across all the different geographies because it's one in the U.S., two in Europe, three in Africa, where inside this, one is linked to regulatory reporting, four are linked to core banking, and one is linked to financing. Let's move to the incubation part.
You know that it's really important in our way to drive and keep control on our ability to launch, invest, and without jeopardizing that investment across the world market and across all our people on the field. The first one is regulatory reporting. As said just before, we have been able to cross-sell more than 230 contracts, what we call SaaS service for reporting. Already in H1, 109 are live for 57 banks. We are now giving the proof, and especially for the French market, the COREP reporting has been delivered. Our client, and in this case, it's 30 clients, have been able to deliver that reporting without any issues at the end of June. The second is the digital engagement platform. We did know that for H1, it was very critical to go live with the first early adopter.
It's in France, and it was really important to be in that situation, which is now done since June. We are four others expected to be live in the next semester. Looking at digital core, of course, renovating and re-engaging with a new core banking full digital native is taking time. We took the decision to bring step by step proof to the market that we are able to deliver part of it. We took the decision to start with the instant payments. 22 banks today are live with instant payments, which is one of the very important first steps to move forward. You can say maybe you have seen this morning the last press release, but our first big client who would be live in 2027 within the full digital core is National Savings and Investments, so NS&I. In the U.K., we are talking about more than 23 million accounts.
This is definitely for us one very critical milestone coming in the next two years, of course. We will be able to show the proof that our new core banking new generation is going to deliver the value the market is expecting. Fourth, talking about Amplify Fusion and Amplify Engage. I'm going to start with Engage. Today, we have more than 100 active clients. Maybe for you following this, it was formerly called Marketplace. Meaning that Engage is going to progressively leave the incubation zone. We are ready to deliver that to all the sales force of the company and to move into what we call the performance zone and now to move at scale. The second is Amplify Fu sion. If you remember, it's the combination with the iPaaS and the API capability.
That investment is also very critical for our ability to deliver the value and combining API on one side and the no code capability for integration. This one, today, we can say that we have already 30 early adopters. We're going to keep a very strong and disciplined control within that investment for this year to be ready to move at scale starting next year. Patrick, that's what we can say about the developments in H1.
Thank you, Eric. Let me turn it now over to Tobias to go deeper into the financials. Tobias?
Thank you very much. Yes, very happy to be here as well, to explain to you how the half year was looking on the financial side. As Patrick already mentioned, we had a very strong H1, with revenue growth, and, more importantly, ARR growth in double digits. The nice thing about the margin at the same time was that it was up significantly compared to H1 2024. Axway is at 16.6%, SBS at 7.9%, which, of course, for the first half of the year is good. Let me remind you that the second half of the year is the half of the year that is stronger on the profitability side. Therefore, that is a really good development for the H1. On the cash flow, unlevered free cash flow, our metric that we're guiding on, we had 22.2% in the first half of the year.
Now, just have to warn everybody not to expect the same number in the second half of the year. It's exactly the opposite as on the profitability side. Cash flow is strong in the first half of the year and not so strong in the second half of the year. The strong cash flow has really allowed us to de-lever ahead of schedule. We were targeting to be below two times leverage ratio by the end of the year. We have achieved that already at the end of June. We will not expect that the leverage is coming down a lot further in the second half of the year, given what I just said on the cash flow. The fact that we are below two will allow us to save a little bit of interest for the second half of the year.
Earnings per share at $0.20 on a fully diluted number. On this slide, I'm not going to spend a lot of time. Just wanted to point out the net profit turnaround from the pro forma figures in H1 2024 from - $15.6 million to + $5.8 million. Of course, the pro forma figure, the H1 in 2024, was impacted by a lot of different things, including the carve out of the business in the SBS business insights for first year half . Nevertheless, it is a significant improvement. It's also an improvement on the Axway standalone figures for the H1 2024. We mentioned already the organic growth that was strong at 6.5% for the half year. Axway contributed to that with 8.9% organic growth, and SBS was 5% organic growth. Just to remind you, our business is more or less split 50/50 between Axway and SBS.
Axway is contributing 47% in the first half, and SBS 53%. Therefore, the growth rates are obviously the blended growth rate is driven by both companies at a very strong performance. On the Axway side, it has to be noted that the growth was partially driven by customer-managed deals that were signed earlier in the year than we originally anticipated. Also, compared to last year, we signed more of those deals in the first half of the year. Therefore, that number is very high. In terms of our strategic priority, you know that we want to become a pure-play software player for the whole group, and we want to go towards subscriptions and recurring revenues.
The trend is going in exactly the right direction, with, first of all, our service revenue contribution to the total revenue dropping from 23% to 19%, or vice versa, saying that product revenue grew from 77% contribution to 81% contribution. The recurring revenue as well increased from 71% to 75%, up four percentage points. Within the product revenue, subscriptions grew, both customer-managed as well as own-managed subscriptions, while maintenance and support continues to go down in line with the strategy to transform some of these maintenance contracts into subscription contracts. Licenses were about flat at the 6% contribution to the overall group. More and more predictable and less and less impacted by the traditional license model. In terms of the split in Axway as well as in SBS, you can see on Axway the transformation going from maintenance fees to customer-managed subscriptions.
On the SBS side, you can see the transformation going from service revenues towards own-managed subscriptions. Those two metrics or contributions I wanted to point out as they underpin our strategic direction for the revenue also in the future. Looking at the product line split, and here I have to say on the Axway side, it is impacted by the customer-managed subscriptions, and it depends a little bit which business line has what kind of mix of customer-managed versus Axway-managed. The split shifted a little bit, but we do not see anything extraordinary. Looking at the ARR growth by product line would show a much more balanced movement because that is not impacted by the upfront recognition.
On the SBS side, the one thing to point out is that the Modular products are becoming more important as a part of the portfolio in line with what Eric was talking about on the SaaS deployments. Moving to the ARR, we had in both businesses a strong double-digit growth in ARR. What you can see on the slide is also the absolute amount of ARR at each end of the quarter in the last seven quarters. The absolute amount of ARR is, of course, impacted by FX, and that's why you can see some of the charts or the bars looking a bit more flat towards the Q2 now, especially on the Axway side, which is impacted by the dollar quite a bit.
As you know, we're focusing always on the organic growth, and there you can see that the organic growth, the underlying growth of the ARR is really strong. I wanted to point out that both businesses, Axway as well as SBS, since the end of 2023, have added roughly $30 million each of ARR to the balance. That's ARR up about $60 million between both businesses, and we believe that creates a lot of value for shareholders going forward. A few words on the margins. You have seen gross profit margin go up on the 74Software level, and profit and operating activities go up on that level as well. The contribution to those metrics comes on the gross margin.
It's a very strong improvement on the Axway side that is driven by the large amount of customer-managed subscription, where the upfront revenue that is booked in the half year obviously comes at a very high profitability, and that's why the product gross profit margin has improved quite a bit on that side. On the SBS side, the gross profit margin has improved very slightly, and that's mainly helped by the shift from product from services revenue towards product revenues. On the costs, on the operating costs, we had good developments in the first half on both businesses. We are seeing the uplift, obviously, in the profit and operating activities level. We are going into the second half of the year with confidence that we will dare also achieve the levels that or the improvements versus last year on those lines.
A few words on the cash flow statement and the cash flow, as I guess I need to explain a little bit, the 22.2% unlevered free cash flow in the first half of H1 of 2025. The operating cash flow was very strong at $90 million. We had a very positive change in net working capital. As we explained, I think six months ago, we have strong cash collections in the first half of the year, and that's what's showing here in the net working capital change. However, what we also did as of end of June 2025 for the first time is introduce a factoring program. I think we were talking about this before that we're looking at ways to optimize our cash flow or cash collections. We have executed a factoring program where we sold $12.5 million of receivables to a factoring bank.
That flows through net working capital and is included in these numbers. The reason why we did that is because our interest expenses are driven by the leverage ratio. By moving from above two times leverage to below two times leverage, we could actually get into a cheaper bracket on the debt interest. That's really the reason why we did this. We can save a significant amount of interest costs in the second half of the year and on a full-year basis. The other thing to highlight here, we capitalized R&D of about $9.2 million in the SBS business. That is a very low level of only about 10% of the overall R&D spend that we are capitalizing on an annualized basis. I talked already about the debt repayment.
We were able to repay $42 million of debt due to the strong cash flow and cash collections in the first half. That, again, has helped us to reduce to the level where we are at at the moment. Just to illustrate the points in a chart, and that's on this slide. The $42 million of debt repayment plus the $16 million of positive change in cash balance allowed us to reduce our net debt figure by $58 million, coming down from 2.87x leverage to 1.83x . That's what I wanted to say. Thank you.
Thank you, Tobias. I'll now give some closing remarks and cover our guidance as well for the full year and a little bit beyond. At 74Software, this is now a software house, and we're creating a software house mindset. A key part of this are the brands underneath of Axway and SBS, or if we welcome a future brand as well. Within those brands are products in a product portfolio, let's say approximately 10 within the portfolio now. The key is each one of those products in the portfolio should be a market-leading product or have a very strong niche position within a market or within a use case. We want our teams driving the products to drive a very customer-centric approach to get closer and closer to the customer, their needs, the roadmap they need for us, because this model grows through the existing customers.
As Eric said earlier, adding a core banking system, you add a few a year. Their big wins are longer-term projects, but you have to keep your current customers satisfied and referenceable to get the next customer. It goes across the whole portfolio. We track the NPS to track how we're doing in that method. We want to always constantly be looking at our portfolio for ways to help the products in the portfolio grow and achieve the best they can within their respective markets, given the maturity curve of the software in the software lifecycle. We have another unique opportunity where you have the infrastructure side of Axway could sell through some of the application side on SBS. We have done that in the past through an OEM relationship, but now that we're together, we're continuing to look for ways to facilitate that to happen.
We also want to have that portfolio discipline that we talked about over the past several years to make sure each product and portfolio has a purpose that's well-defined and that it fits in nicely to the overall company story. As I mentioned, to start this, we're very happy to see the focus R&D efforts and sales and marketing efforts, and we're going to continue to try to bring focus in those areas to deliver the products the customers need and to make sure the prospects and the market hears about it and gives us every opportunity to compete and win our fair share of the deals. Overall, we need an engaged team. We measure the employee engagement score, which we've talked about in prior presentations.
We want to build a very efficient organization, especially with the G&A departments, what we call chapters, to help facilitate a better service internally to our different brands and also externally to our customers. We do all of this with a strong discipline across running continuously a software company and take a very software-centric approach growing through the product revenue and doing the level of services that are necessary to make our customer satisfaction high to get the products adopted, but then to partner with others to do non-value-added services for us to really focus on a standardized offer and product to deliver to the market. This is a slide we've shared several times since we started talking about the companies coming together and our forecasts for our future. We are going to be sticking strongly to this.
For 2025, we've given guidance of $700 million of revenue, which is about 2% to 4% organic growth run rate for the year. We are really focused on that 2% to 4% organic growth. The $700 million, if you mathematically look at the revenue we did for the full year 2024, we'd be above $700 million. We did anticipate some hit in the foreign currency exchange rate, as Tobias said, especially in the U.S. market. We will see where we end up for the year. The 2% to 4% organic growth is where we're targeting, and we're expecting to land within that range. On the profit on operating activities, we're confirming that we should be within the 14% to 16% range for the full year. We are really happy with the improved performance in the first half of 2025, especially when compared to the pro forma 2024.
We should continue to see this improvement as we end the second half of the year. There is a slight change in our forecast for the unlevered free cash flow. With the strong first half, we're changing our guidance from approximately 10% to saying we should be above 10% for the first half or for the full year. As Tobias mentioned, we wanted to be at below two times leverage ratio for 2025 and de-lever the business for the full year. We were really pleased to see the performance of the teams in getting us there in the first six months of 2025. That is a great achievement. For the rest of the year, it's to keep that achievement, stay below two times as we enter 2026. As we look out to 2027, we expect to be greater than $750 million and at a 17% profitability level.
You start seeing the unlevered free cash flow start coming up closer to our profit level. It should be somewhere a few points below our profit level after 2027 ongoing into the future, with targeting a 20% profitability from 2028. If we could pull it forward a year sooner, we will take every opportunity to do so. With the ambition to get to a billion by 2030, which would obviously require us to be back in the M&A market. With the capital this portfolio and this company can generate, we focus on deleveraging the debt we took on to do the deal and getting our leverage ratio below two, which looks in very good shape for 2025. As we go into 2026, both companies have been created over their histories with an opportunistic approach on M&A that creates value for the business.
We will continue to do so and we'll look to start that in 2026. For the capital generated by a business, that would be the first priority to be looking for the M&A. If those opportunities aren't there or if they're of smaller scale, we'll look to return to dividends or also use a tool to buy back shares in the market to add value to our shareholders. With that, we'll start taking questions. I have received some questions on the chat line, which we'll go through now, and we'll come back and cover the ones on the phone in a minute. With the first question, let me turn it over to you, Eric. As SBS is now fully outside of Sopra Steria and not tightly linked, how do you see the partner ecosystem accelerating?
Are you able to work now with a broader partner set, maybe even say a few words on how it fits into the product strategy? Are you seeing early traction from global integrators or regional players?
It took a few months before moving and attracting the partner ecosystem. We can say that today there are two global players investing close to us, and we have closed with one of them an opportunity already in the U.K. brought by them. I think it's a significant change and opportunity for us. For sure, the ability for us to engage with that partner ecosystem is a lot more linked to our new product because it was designed to be able to drive with partners. Our legacy product, I would say, was not designed to work within a partner ecosystem. We are still not able to deploy that strategy across the whole portfolio of SBS, but definitely, it has started. I think our image within the integrator ecosystem has really changed in a few months, and it's a good opportunity for us.
Okay. The next question, and maybe ask Tobias to answer this one. Given the strong first half, how does the full-year guidance look? Why does it look prudent given we've grown 6.5% organically in the first year? Are you expecting a somewhat lower second half than the first half?
Yes, as you saw, we left our guidance unchanged, and we've grown 6.5% in the first half of the year. We are expecting a much lower second half of the year. As I mentioned, we do have the customer-managed deals that were assigned early and therefore drove significant upfront revenue in the first half. We also had a similar effect on licenses where we signed, especially in the SBS business where we still sell licenses, a level of licenses in the first half that we haven't seen in the past. In the second half, we're actually expecting to sign less than previously. There is a shift in both businesses from the seasonality, and therefore we left our guidance unchanged as we still expect to be in that range.
As we look at the pipeline, that mix between license or upfront customer-managed was all heavily weighted more in the first semester. The second semester will be more own-managed, which is good for the long term and helps build that run rate of own-managed revenue as we go into 2026. That should be a nice impact for 2026, and we'll see it in the ARR as well. Quick mention to please press star one on your line to ask any questions on the line. The next question we have is regarding M&A. With the leverage ratio now below two times and the strong free cash flow generation, is M&A back on the agenda for fiscal year 2026? Are you targeting bolt-on acquisitions adjacent to Axway or SBS, or are you actively considering a third platform?
I'll go ahead and take that one and first say that getting to two times leverage ratio in the first half of 2026, a lot of good work was done there to collect the invoices that are sent out on maintenance and subscriptions and really push into the seasonality of the free cash flow that both businesses have, as well as the factoring program. That was really in an effort to manage our interest costs and the drag of the interest costs on the profitability. When we look, we're still targeting that two times for the full year, and we don't want to get ahead of ourselves. We have started being in the flow of traffic, we call it in the U.S., and seeing the deals now come across our desk and taking the calls and evaluating M&A. It's much like the sales cycle within both businesses.
When you see something interesting, there's a long lead time for that to develop and churn into something that we want to react on and move forward. We're being rather picky right now on both sides of the business to make sure it's the right type of M&A that would add value. Even if we want to do something in 2026, we have to start looking now, which we have done, given the de-leveraging we've hit at this point. For 2026, we could see a bolt-on. Those smaller acquisitions, we can move quite a bit quicker. A larger acquisition and adding a third line, I'm not sure we strategically would want to do in 2026. It could be far too disruptive to the teams as we're still in the journey of building out the chapters and building out the way we work together.
Because for both companies, this was quite a big challenge to bring two companies of equal size together and to get operationally all the discipline and structure that's needed, especially since SBS was carved out of Sopra. A lot of that structure and G&A was performed by Sopra. It has to be built and created with all the systems and activity within the group so we could build and add new products, new platforms going forward. It's a long way to say that 2026, if there's an opportunity, we'll definitely be looking at it. A bolt-on could go quicker. I'm not sure I would be in favor of adding a third leg to the stool in 2026 or even really 2027. We could do a material roll-up strategy of one of our core competencies in either line.
I've gone through all the chat questions I see here in front of me now. Operator, could you open up the line and ask any questions you may have on the line?
Thank you. If you have any questions, please press star one on your telephone keypad now. We will take our first question from Edward James, Cantor Fitzgerald. Your line is open. Please go ahead.
Thanks for taking my question and congrats on the really good results. I've got three questions, and if I could just take them one by one, if that's okay. The first one being, it's clear that 74Software is getting very well on this. We also saw the Temenos report earlier this week with very strong results. When I read insight that the underlying core banking software market is in an early robust place and maybe even picking up a little bit.
Eric, the question, if I understood, is the underlying core banking market picking up quite strongly and maybe implying that we should be growing faster. I think is what he's really after here.
Yeah, maybe. There is a fact where banks, they cannot stop their modernization. They can try to save costs on services consulting, but on their core business, they need to continue to invest and to bring more, I would say, digital engagement within their core banking. Doing that, they have to invest both on the digital engagement part, but also on the core. We do see a good traction. We do not see the markets accelerating, but they are not reducing their investment. We think that from a long-term perspective, definitely that market is going to continue to move at that speed. The maturity of our product is now giving the opportunity to accelerate within that digital engagement. We know that the lifecycle of this kind of modernization is between two to four years. That's where we are. The underlying trend is not bad.
Okay.
That's great. Thank you. I'm very clear. I had a second question just on margins, and there's already been a couple of questions on the H1/H2 split, so I'll leave that. The other one I wanted to dig into was just on the SBS synergies. The Q1 update was strong in that regard. By the looks of things, the realization of synergies continues to be really good. If you could just give us some color on that, particularly as I can see the R&D and marketing cost line items for SBS have come down in absolute terms year over year. Just any color on that, and if you're maybe tracking a little bit ahead.
Tobias, do you want to cover that one?
Sure. When you talk about synergies, you're focusing on the cost. I think Eric was talking earlier a little bit about revenue synergies. As we said before, revenue synergies are not a major thing, but they do help, and there is nice traction there as well. To focus more specifically on the cost side, we do have, or we have achieved some early synergies already in Q1, as we said, and even in Q4 last year, sort of the really low-hanging fruits on the corporate side, let's say. Those would have come through in the numbers now. In terms of the sales and marketing and R&D, I remind you we're not integrating those between the two businesses.
It's really efficiencies that we are getting there from becoming more efficient in the way we do R&D, in tailoring down a little bit the R&D investments as we had the incubation zone products becoming available, or some of them becoming available, and so on. That's really the underlying trend on the R&D side. On the sales and marketing side, I would say it's a bit seasonal as well. We don't expect a huge amount of change in the ratio for the full year.
I've got.
Great. Thank you. Just one final one for me. The minor change to the free cash flow guidance is clearly a positive one. If you could just unpack a little bit what's given you the increased confidence there, has it got much to do with kind of the acceleration that you've seen on the product side of the business, particularly with some of the recurring revenues there and how that's flowing through the P&L I guess you spoke about how ARR should continue to build in the second half of the year. Does that give you increased confidence of the free cash flow outlook as you move into 2026 as well?
I want to say one quick thing before Tobias gives the answer. When we built the 10% unlevered free cash flow as a percentage of revenue when we gave our guidance in the rights offering roadshow, the treasury structure and treasury systems of both companies were not at a place where we had consistently reliable forecasts. We have put those in place in the first six months, and we've hired a treasury team and taken full control of the treasury. They've done a fantastic job in including things like the factoring program. These were things we weren't even really considering using, those level of tools in the past. Within Axway, we weren't in need of that service at that level. Now with the size of the group, we've really built a rock-solid treasury team, and we see the benefits coming through.
The cash recovery team has done an amazing job on both companies, really cleaning up the receivables. We expect that to continue for the rest of the year. You could layer on to the top of that.
Yeah, maybe just to complement that with two additional points I would make. One is signing a deal earlier in the year on a customer-managed subscription that used to be a maintenance deal. You usually do have an upsell multiple on that deal, right? If you sign it earlier in the year, then obviously you also collect more cash earlier in the year. That's one thing. The other thing is the effect of the factoring program. As I explained, it's really an acceleration of cash flow. We moved some of the July-August cash flow into H1. If we're assuming we're going to do the same at the end of the year, we'll move some of the 2026 cash flow into 2025. Therefore, the increase of the guidance comes as well from that effect, of course, because that flows through the net working capital, as I said.
That's great. That's all for me.
Maybe just to state what I wanted to say is, you know, on the, let's say, just excluding the factoring, I think, yes, we are going to be around the 10%. If you layer that on top, then we're going to be above.
Maybe a question that flows out of that. We were below two times for the first half, and getting below that level saves us on an annual basis about $1 million in interest expense. We have a question. Thanks to lower debt, you'll reduce your debt costs and also the lower leverage ratio. What do you expect for the second half versus the first on interest expense?
A little bit lower than on the first half, but that's obvious. Look, I mean, we also have the interest rates going in our favor a little bit. We do not expect to have, what was it, $9 million in the second half of the year, but a little bit less.
Okay. Maybe another question for you, Tobias, for putting you on the spot quite a bit. The operating costs were flat year over year in absolute terms, despite a reduction in the number of average employees. Could we expect some additional cost savings in the second half of the year?
I think I would say our trend is downwards, yes. Especially as we told you before, our three-year plan, especially on the SBS side, is to improve the profitability quite a bit. Some of that comes from the revenue growth, but some of that also comes from the cost containment or cost reductions. Therefore, yes, we should see continuously reduction in cost base. That should also be visible in the headcount numbers where we make use of attrition to not grow as fast as our revenue.
Seasonally, we normally have a lower cost base in the second half than the first half as well, due to holidays in the second half primarily. Our staff costs drop a bit. Another question, how much could you save on SBS R&D as products mature and the R&D comes to an end? Maybe I'll cover a first comment on that, and then if Eric or Tobias want to add anything, I'll welcome them to jump in. If I remember right, for the full-year basis in 2024, R&D costs were around 31%, 32% at the SBS level. If you roll back in the capitalized R&D, that gets up to about 37%, 38% of revenues. The plan is that these will gradually come down year over year.
One big part of that plan is as products come, as Eric said earlier, out of the incubation zone and start going G&A, we expect to lighten the load of the R&D spend. We're also looking for opportunities to really get focused and deliver the code with a less percentage of overall spend from our revenues as we go through that period as well. We do expect it to come down to end and normalize, and normalize for a core banking type company like SBS is somewhere around 25%. Do you want to add anything on?
A small additional comment. Of course, on the integrated product, if we want to cross-sell, we need to bring all our clients with a lot more discipline into the ad version. This is ongoing. For some of them, we are close to the targets, meaning that this will be allowing us with that standardization also to continue to reduce and to accelerate the cross-sell of the Modular product. It is that combination.
Because we don't have to maintain multiple versions out in the market of those core vendors.
Maybe something we were doing years ago. I think that discipline has really changed, and that's the way we look forward.
Okay, I have another question. Despite the strong customer-managed subscription models sales at Axway in H1, working capital was greater than zero. Even adjusting for factoring, should we now expect for the working capital to stay structurally above zero at Axway?
The net working capital definitely will be above zero. The change in net working capital from period to period is what I was always trying to highlight because that was negative last year. This year, we expected that to be still slightly negative. As we go into next year, it should at some stage turn positive.
That's full year, right?
I'm talking full year. I'm not talking seasonality adjusted because that's a bit too cumbersome to explain. I think on a full-year basis, as I said before, that trend we see, and we confirm that's still going to happen. The absolute amount of working capital on the balance sheet will be positive.
For 74Software as a whole, any different comments?
I think it's a combination of the positive changes on the Axway side from the transition to the subscription model. On the SBS side, we don't see a structural change in net working capital, and it depends on the growth that we have on revenue to see how much we need to fund that growth. It's not a material big number. The real driver of it is really on the Axway side.
Okay. Operator, do we have any other questions on the line?
There are no audio questions at this time. Please proceed.
Thanks, Alan. With that, I'll go ahead and close this first half 2025 call. We will look to join you again at the full-year results. Thank you all for joining. Have a good evening or afternoon wherever you're at. Bye-bye.