Morning everybody. Thank you very much for making it in person. So many people in person, given the various travel challenges, shall we say, over the last few days. A very, very interesting session we've got for you today. Lots going on. Delighted to be able to talk to you about where we are in H1 and a little bit more about the future. As such, this will probably take a little bit more time than normal, but we'll do the usual, hopefully Q&A at the end. What I'd like to do is really just give you some initial impressions of the business after I've been in sort of 6, 7 months now. It's been somewhat of a roller coaster, as you can probably imagine.
It's been a period where we've looked very hard at the business, got around, met colleagues internationally, really got under the covers, and then started to think about where we wanna take the business going forward. In terms of a few initial impressions, the first thing I'd say is when we look at the business, it's really two distinct businesses. We've got our assurance business which is the cybersecurity element of what we do, and we've got our Software Resilience business. They're quite distinct. There are limited, very limited synergies between the two. They operate separately. They've got different buyer cycles, different buyers, so operate in quite a distinct way. I think that's an important element for the context of where we're thinking of taking things in the future. The business has got a great track record.
We work with both the public and private sector. We've had a consistent level of growth. We've got true market-leading capabilities, and that comes through time and time again. Interestingly, it's both in our assurance business, but also in our Software Resilience business. We're operating in a very dynamic market. I don't think anybody would deny that the technology agenda continues to change at pace. Evolving ecosystems, the geopolitical situation, all of these things which you're aware of means that sort of the technology and the element of technology that we deal with remain incredibly relevant to our clients. It's a great business. We're continuing to grow, but we could do more, and that's what we're really focusing on as we go forward.
A little bit about sort of what's the secret sauce of NCC, and I've put it into three buckets. There are innovation, intelligence, and insight. By that, I mean, this is something that really comes through in terms of the passion of our people and our colleagues. They're really good at innovating new solutions, developing, responding to what the market wants to do. Great entrepreneurs in but maybe don't scale things the way we would want to. We've got fantastic intelligence of what is happening, particularly in the cyber domain. We work very closely with governments globally, with clients globally, and we get incredible amounts of intelligence from that interaction. We're able to use that to drive insights, which makes it what we do very relevant to our clients across sectors and across geographies.
Underpinning all of that, it's about the people, and what has blown me away since I've been here is the passion the troops have for what they do. They fundamentally believe in the purpose, the mission of the business. They're passionate about it. We're market leaders in testing, in Software Resilience, and we have some really good, and I think this is credit to the team, really good underpinning systems now that allow us to operate with a degree of agility we probably couldn't have done historically. All of that's great, and I'd say just a very quick gambol through. I think it would be, well, I certainly wouldn't have any credibility if I didn't mention the market at the moment. We're clearly operating in a market that there are headwinds, I think, to put it politely.
We're a tech company. We service the tech sector, and we can't operate in isolation. I've been through various cycles over the years, and in professional services, these things happen. It's about how we're able to respond to it, to think about what is the opportunity in the medium term. That's where we're going, and that leads us to the next chapter of our strategy. We're really focused on, irrespective of the market headwinds now, what is the opportunity in the medium term? That's about delivering an enhanced level and accelerated growth by working more in a different way with our clients, with the capabilities and building additional capabilities, how we deliver globally and what's our operating model, and most importantly, how do we build our brand in the external marketplace?
I'll come onto those in a little bit more detail, but the output of that is to deliver a mid-teens revenue growth in cybersecurity over the medium term and also a mid-teens adjusted EBIT margin. Obviously, we need to phase some of this strategy over FY23 and FY24, and I'll come back to elements of that. We'll maintain the single-digit growth in Software Resilience, as we believe that is a very strong business. It's doing fantastically well, and I'll talk a little bit more about what has happened over the last few months, but we maintain market leadership in that domain. That's the next chapter. In terms of H1, I think it's fair to say we've had a robust H1. Very solid. In fact, actually, the our November month was probably our record month ever.
Absolutely, really strong across the group. We've seen double-digit revenue growth, but there are some unusual dynamics at play. We've seen attrition, for example, I think in December, January. The first time it has ever happened, we've had 0 attrition in the UK business. There is a different dynamic. We've got a very strong balance sheet. Tim will come on to this with our refinancing that's in place. The trading outlook is certainly clear that our clients are experiencing the headwinds. I think that is plain to see. There's been enough reporting of that, particularly in the US. As a consequence, there will be an impact on our FY23 revenues, but we still expect to see the business growing in single digits for the year.
Irrespective of that, the conversations with the board have been very much about what is the medium-term opportunity, very confident in where the business is and where it's going, and committed to invest in the next chapter of our strategy. maybe I'll just hand over to Tim to talk a little bit about H1 later on, and particularly some of the actions we've got underway to ensure that we're in a very robust position, at the end of the financial. Our strategy. Excuse me. I talked right at the very top about the 2 elements of our business. maybe I'll just deal with Software Resilience first. We've invested significantly in Software Resilience over the last 12 months. There's been the IPM acquisition.
We've also in the last 6 months brought in a new leadership team. That business is in a very strong state currently. It's clear that it, as I say, it operates in an individual basis, the buying cycle is different, the buyers are different. As such, post our operational review, which I think everybody will be aware of, we are putting into a strategic review to look how we can best realize value for shareholders from the business. As such, our next chapter of growth after that investment has been made now in Software Resilience, will be to focus on how we accelerate the cyber element of NCC Group. We believe that's got the most potential. We all know how fast the market has been growing over a period of time.
Irrespective of any sort of short-term headwinds, we believe this is where the future growth potential of the business is. Our investment focuses on cybersecurity. The strategy will focus around four pillars, underpinned by that secret sauce I mentioned, the innovation, insight, intelligence. The four pillars are effectively our clients at the center of everything we do, the capabilities we have to service those clients, how we deliver those capabilities to our clients, and how we make sure the market is aware of what we do and who we are. It's very externally focused. It's very much about the market. We will, of course, do this organically, but we will be alive to any opportunities for inorganic growth where that makes sense in either products, services, sectors or countries where obviously it makes strategic sense and it's financially sound.
All of these are interlinked and I'll talk through how they all fit together as we go through. Firstly, clients. As I say, clients, as part of the ethos of NCC, is absolutely central, whether you're in IT, HR, finance or client-facing. How you deal with your clients is absolutely central. If I'm honest, we have historically been spread, the way I look at the business, quite thinly. We've got a lot of clients, a lot of geographies, a lot of markets, and as such, it's a lot of management to do all of that. We've been very tech-led in our offerings, very much a almost a product solution-led approach rather than responding to a client problem.
When we look at the, at the, at the opportunities in the markets, whether it's particular geographies or particular sectors, there's a lot of white space to go after. What we'll do is focus on, greater sector, greater sector alignment for our teams. We'll focus on those sectors where there's the fastest growth opportunity, specifically those which are highly regulated, so financial services is a great example. Those most exposed to cyber risk. An example, the industries like advanced manufacturing or, oil and gas, infrastructure utilities, where there are particular threat actors involved. We'll aim to develop a set of relationships with a higher level of buyer, with a C-suite, with a broader set of capabilities, which I'll come on to.
To give you an example of how we're going to try and bring that focus, we've got a great footprint, for example, in the UK financial services sector, but less so in the North American one. What we're going to do is bring that capability together to take our offerings to the North American financial services sector. You see some of the industries there which I've mentioned, those are the sorts of areas where we believe that there's most opportunity or greater cyber risk. The final point I'd just make on in terms of how we go to market is around the channels to market. Historically, I think it's fair to say it has been very much a direct-to-market route. We've gone directly to clients. I think there is huge opportunities to work in a partner ecosystem in a way we've never done before.
We've have some initial steps for that, and I know we've mentioned Microsoft historically, and the Sentinel XDR proposition. I think there's an opportunity to accelerate that, but also there are other partners within the ecosystem that we can build relationships. For example, I'm very pleased to say we've now got our first product offerings on Amazon Marketplace, and there are other channels to market that we're absolutely focused on. I'm very excited about that, and I've worked extensively through that type of relationship before, and we've got a few things. It also informs really well how we build new solutions, which are not just about people, but they're about IP products coming together. Capabilities. Now, the important part, and again, the interlinked nature of this is really important.
Have confidence to be able to go and have a conversation with your clients at a senior level, you've got to be confident in the capabilities you have to be able to take to them. As I say, NCC is a market leader, particularly in the areas like technical assurance and incident response. Really technically excellent. We're missing out on client and market share because we're not able to maybe take in some of the broader sets of offerings and services that our clients need to solve their problems. Part of our focus is actually how do we build out those areas where we believe that it's this adjacent, and that there is areas where we could drive greater share of wallet in individual clients and across the market.
To try and bring that to life a little bit, the way I see this approach is quite simple. We wanna be close to our clients at the moment of most distress when there's an incident, which we're great at, we've got tools, we've got the expertise, we are absolutely technically excellent. What we then miss out on is the ability to help them solve some of the challenges that were the cause of that particular breach through the consulting implementation. We see there's the most market opportunity there. Of course, once you've helped them with the solution, there are certain things that they may not want to operate and run.
We've got a great managed services business in some geographies, actually want to expand that and take it broader, continue to innovate it, and drive that harder into the market as a particular proposition. Again, we see that as a particular area of focus. That doesn't mean that we don't want to lose our market leadership in the technical assurance domain by continuing to innovate with new services and new offerings, particularly such as always-on testing. The aim of this is to win more market share and more share of the wallet in individual clients. The third area is obviously being able to execute and deliver that. If I look at NCC, there has been some really positive steps in terms of operating as an international business.
We've got strong regions, and we also have an established way of making sure that we can service some of those regions from nearshore centers. What we're wanting to do is take that to the next level by building and developing offshore delivery capability in those new domains that I talked about, those new capabilities that we're wanting to build. We need to set that up to think, operate, and act globally. We brought in a project team back in early December as part of this, so we're quite well advanced, and we've developed a shortlist of four locations for an offshore delivery center. That'll be progressed and we aim to have a go live in FY24.
Obviously, that will give us the capability to build, scale rapidly new capabilities, new skill sets, and tap into a global talent pool, which gives us that flexibility in the market. Obviously, we'll be able to use that also, excuse me, to use as a way of being able to pursue different sorts of engagements at different price points. Finally, the sizzle, I think that's the phrase. It's been mentioned on a number of occasions. How do we get NCC better known? Again, if I take it a step back a little bit, if we're quite honest with ourselves, we're a little confused in terms of what our story is.
We have NCC Group, we have NCC in some markets, we have Fox-IT in the Netherlands, and we have Software Resilience. How does all that join together? It's not particularly clear for our clients, for the market. We want to, as part of our focus on cyber as a story, make that a much clearer and invest in that brand positioning, and also make sure that SR, Software Resilience has a clear brand and a distinction of its own. That separate element and story to the market. I'm delighted to say we've appointed a chief marketing officer in January, who's brought together our brand, marketing, comms, public affairs team, so we have a more consistent view of how we go external.
We're going to use that with our focus on clients in the markets to actually target a different layer of buyers outside of our technical heartlands without losing that footprint. A real shift, a real move to actually make it much clearer about what NCC is a leading cyber brand in the marketplace. Clearly, all that has a bit of a cost. In FY23, we've allocated GBP 5 million of cost, and obviously there will be ongoing costs going forward. However, they will net off because, and I think this is an important element to reiterate, the systems are in place now. This is about people and revenue generation.
That gives us the flexibility to either invest, depending on the market conditions, or not, but also it's about almost hopefully real returns quickly in FY24. The net benefit. That's why in FY24, we haven't identified a specific cost because it'd be netted off. In summary, the impact of our Next Chapter strategy will be about driving mid-teens revenue growth, and that'll be driven by our, as I mentioned, managed services and consulting particularly. A mid-teens adjusted EBIT by greater scale and a more efficient operating model, and also that diversified and much more resilient mix of services. A greater proportion of our revenue through a recurring revenue model through managed services as, in particular. I hope that is helpful. I'll now maybe just hand over to Tim to talk a little bit more in detail about H1.
Thank you, Mike. Good morning, everybody. Make sure this works. Okay, here's the usual financial summary I put up. The good news here is we've had a very robust first half. We're slower in Q1 as we came into the year. We also had the NCC conference where we took all our sales and delivery people off the road for a week. Then we had a stronger Q2 with, as Mike said, a record November. You, you can see on the, you know, the arrows there, most arrows are going up. You know, increased revenue, increased profits, increased cash. The bits that have come off are around the margin % on both gross margin and EBIT margin.
Those are the things where I'll come on to talk about low utilization of our technical staff and the gross margin and NCC Con cost are spread across both the cost of sales and the overheads. The other thing in overheads is the investment in people that we've made. I'll come onto that in a moment. Moving on to the operational KPIs. Again, most of them are green. Everything's green except really around utilization again, which I'll come on to. You can see that our growth drivers of remediation sales grew at 20%. XDR sales are going really well. You know, almost 400% from a small base, but it's still going really well and, you know, in line with our expectations.
Group sales orders are up with the pleasing increase in average order value over GBP 250K. That's our internal measure of are we getting larger deals? Are we getting longer deals? Are we getting more annual recurring revenue? That's going up as well. We mentioned last time about day rate change and said, "Look, you know, we can put our day rates up, even in a tougher market." You can see it's up by 5.4% year-on-year. Global resourcing days have increased by 6%. That's that cross-border delivery that we do out of region. The thing we've had that's the issue is direct utilization, which is really around the frontline technical staff.
You can see it's dropped by 6% from 72 rounded to 65, that's because go back to last year, we had a record second half. We got all of the people on the bench. We came into Q1, it was a bit slower to see how it goes. Q2 was better, then as Mike said, we've had some economic headwinds coming through now. Those economic headwinds started in the US in December, where the pipeline started to weaken then in the UK in January. That's meant that we've got too many people on the bench, and our utilization has gone down. As you'd expect, we expect utilization to be in the high 70s, early 80s, and at the moment, you can see we're down in the 60s, so it's too low.
We're taking action, which I will come on to. Pleasingly, our investment and research has gone up, and that's part of our secret sauce, as Mike said before, and that's still going up, which is good news. You can see even on the other side of the technical staff, our attrition has also dropped, and it's gone down from 22% to 15%. I can tell you over the last few weeks, it's actually dropped into single digits. There's a lot less people leaving us. What's happened is we've got that combination of a lot of people on the bench and people not leaving, and therefore, we have to address that issue. In terms of KPIs, with Mike's new strategy coming in, what we're gonna look at is simplifying and reducing the number of KPIs going forward.
Rather than having this huge sheet, we'll align it to the new strategy so we can measure and monitor how the new strategy is going over time, and we'll probably do that from the year-end. Moving now onto the group P&L. As I said, a robust H1 performance. We had double-digit growth in constant currency and at actual rates, it's 17%, 18%. You can see that our gross margin has reduced, that's due to that low utilization point I pointed out before. Our overheads have grown partly because we actually incubated XDR within overheads. We set up XDR with about 40 people. We did it in the center, took it into overheads, and now we're putting it out into the business going forward, having grown it, which is, you know, was a very good model of how to grow it very quickly.
We've also invested in people in the NCC conferences in there and then in leadership development and talent improvement. As you can see, individual significant items are nil currently in the first half. I am flagging up some will appear mainly around the rationalization of our property estates and any non-core assets that we dispose of, and we sold one at the end of December. It's very small. It was the legacy managed services that we sold. You know, that's not going to our size 'cause it's too small. Stuff like that may come into our size if there's anything larger. We've got the strategic actions that we're taking that may have one-off strategic implementation costs. I think finance cost has been a bit of an issue for one or two people about understanding how it works.
We're flagging up here that the expected cost of GBP 4.5 million for H2, and the reason it's gone up so much from the last facility we have, we have a new facility, which I'll come on to, is because interest rates have tripled, the base rates, not the margin. Some people have got the average debt at the wrong level in terms of drawdown versus the net debt. Anybody what needs any help on that, speak to me afterwards. Moving on to Assurance performance. Revenue slower in Q1, but stronger in Q2, impacted by those conferences I mentioned where we took all sales and delivery people off the road. Performance across the territories, UK and APAC grew by 12% at constant currency, and in Q2 grew at 18.5%.
You can see that momentum into Q2 there. North America, GBP 16.1 at constant currency, up 21.8%. Again, momentum in Q2. Europe declined by 2.8%, and it declined by 2.9% in Q2, so that's pretty constant. You can see that they were growing in Q2 and then suddenly the headwinds have appeared. Gross margin has declined by 2.1 percentage points, mainly due to that, the conferences and the low utilization. If you look at it by service line, it's pretty similar. We've got double-digit growth just over in both professional services, and that's driven by that remediation resourcing and day rates and in managed services, which is driven by the XDR momentum and those larger sales orders coming through, which are mainly in that area.
Moving swiftly on to Software Resilience. Pleasing thing here is that although our revenue declined by 1.6% at constant currency, you can see that we returned to growth in Q2. The new management team that's been appointed actually came along in Q2, they're obviously claiming victory. You know, it's very early days, but they have definitely re-energized and re-motivated that team. The gross profit there has increased by 1.4 percentage points because we've got those IPM contract renewals, you remember, that were held by IPM, came up, they've all pleasingly renewed. Obviously I'm not gonna mention fair value adjustments or haircuts here. In Q1, it was slightly slower because we were integrating the North American team, the new team came on board.
You remember I announced some GBP 5 million of contribution increase in FY24 from making the operational review that we've taken to make it more efficient. About GBP 2 million of that has already gone into the P&L here, which you can see going up in the margin. I can say that we're on track to deliver the other GBP 3 million next year. That's good news for Software Resilience. We're very pleased with the Software Resilience current performance. You turn to the service lines within Software Resilience, you can see that we have contract decline mainly in the UK on-prem market, but verification is still growing.
I actually can tell you there's been a recent pickup in contracts with that new team coming in, which is good news, which you'll see at the full year results. Moving on to cash. Free cash flow and cash conversion both up year-over-year. Cash conversion of 91% compared to 75% last year. I do expect it to normalize at 85%. I say this every time, that's my strap line, but it never does. Free cash flow has improved to GBP 15 million, with the interest rate tripling and base rates, you know, amounting to GBP 6.5 million in total. Don't forget the lease interest and GBP 4.5 million of base interest. We are mentioning our balance sheet strength again.
We have a new 4-year facility, which we announced in December, which is about GBP 7.5 million more than it was before. The banks are being very supportive and want to lend us even more money. We've got headroom of about GBP 84 million currently, and the new arrangement fees are, you know, GBP 1.7 million. Don't forget that when you do your finance cost, 'cause you write off the old arrangement fee balance of 18 months, and then the new ones get amortized over the course of the next 4 years. Dividends remain changed at GBP 0.015. I think that is everything on the cash flow. Current trading.
Since the beginning of half two, we have experienced a lengthening of the sales cycle, leading to delays in buying decisions and work commencement, and therefore recognition of revenue, because if we can't deliver it, we can't recognize it. That's particularly been felt, as I said before, in the UK and North America. Given the customer behavior we're experiencing, we're going to get to high single digits in Assurance and Software Resilience will be declined by about 1% still for the balance for the whole year, even though it's improving. As a result of these market conditions, obviously, we've had to react. With those low utilizational rates and attrition, we are announcing today a reduction in headcount, which we'll come to.
Due to that economic background, you know, we are reshaping the business, and we expect the FY adjusted EBIT to be around GBP 52 million, where the consensus is currently at about GBP 56.7 million. This, you know, and this is you know, even though we've taken the profits down, we still believe that investing in the strategy is the right thing to do. We would have done this whether we're trading really well or not trading as well.
In terms of strategic actions, you can see that the board remains confident in the medium-term prospects for the cyber market because they backed us to carry on investing the GBP 5 million that Mike mentioned before. What we're doing is we're reshaping our global operational model and proposing today a 7% reduction of our global headcount, mostly in the UK and North America, which is where we've had the slowing of sales. This will give rise to one-off implementation costs of GBP 4 million, which will be treated as an ISI. The strategic investments of GBP 5 million that Mike mentioned before around the four pillars will enhance our global delivery model, go into our offshore operations, and will support those strategic initiatives.
What will happen is GBP 5 million will drop into this year and come off the EBIT, then next year we'll have net returns of roughly broadly the same. The returns from the revenue and the margin improvements will net off the investment, which means that guidance from us have been unchanged for next year. As a result, EBIT will come down to GBP 47 million. It's GBP 52 million at trading, another GBP 5 million off for investment, down to GBP 47 million, to be clear, which is after the impact of that investment. That investment doesn't stop. As Mike said, it annualizes through. The GBP 5 million goes into recruiting new people, into marketing that we continue every year, into global consulting practices that we continue every year. The GBP 5 million doesn't stop. It carries on all the way through and becomes part of BAU in our cost base.
Because of the revenue and the margin improvement, it will then start generating profits from FY25 onwards. In the medium term, we expect our cybersecurity business can achieve mid-teens revenue and EBIT growth going forward. With that, I'll hand back to Mike.
Thanks, Tim. I think just a few points for summary. Having been in now in the business a few months, it's clear this is a great business. The capabilities in this team are excellent. We've got an outstanding global footprint. We've had a robust H1, and I think, you know, it would be naive for anybody to think that we operate in isolation and don't have to be reflective of what the market is doing externally. I've been through a number of these cycles before, and there are so many levers you can pull, and I think, again, all credit to the team for being able to think about the challenges, identify the challenges, and being able to respond and react quickly and decisively.
I think that's, it's not a, it's not a pleasant place to be, and particularly difficult for our colleagues who are affected, but I think it's the right thing for the long-term future of this business. We've got solid foundations, and I think that gives us the ability to think about the medium term. As I would say, having been in this industry for quite a while, the opportunities to identify and respond and pursue the opportunity of the medium term are what a strong business should do. Our clients may be experience economic headwinds, and we've got to respond to that. Actually, I think it is the right thing to do, and the board is absolutely behind and convinced and committed to investing for that medium-term growth and opportunity to enhance shareholder value.
Our strategy is around the four pillars I've outlined. You can see how they're interrelated and very much market-focused. We've commenced the strategic review of Software Resilience, and indeed, we are looking at the rest of our portfolio and other non-core assets to see how we position them within the business. Our focus is on that investment in cybersecurity with the mid-teens growth that Tim has talked about. We're absolutely keen and key, it's key to maintain that Software Resilience market leadership, and the team have done an outstanding job in the last few months of setting that on the right trajectory. Ladies and gentlemen, hopefully that was a useful walkthrough. Very happy to try and take any questions. I think we've got a microphone. Should we go my left to my right?
Morning, guys. Tintin Staehler from Numis. Just to simplify my life, I have the consensus number for FY24 to be GBP 62 million of adjusted EBIT. Am I correct?
Yep, correct.
Yeah. It's a if, Tim, if there's any way you could provide a sort of a bridge from the GBP 47 million in terms of how you expect that to happen, 'cause obviously, clearly you expect the GBP 5 million to be BAU, but in FY24, there's a GBP 5 million of margin that will be offsetting that. If you can fill in the other blanks, that would be great. In terms of FY23, where do you think the run rate of Software Resilience, the renewal rate of Software Resilience contracts will be? Do you expect that to be maintained at that level or to improve going forward? Lastly, just a more trivial one, what products have you got on AWS Marketplace?
EaaS.
Sorry, what's...
It's the EaaS. It's the Software Resilience-
Okay, there you go.
Okay. Tintin, in priority order, what are the reasons to believe we can get from 47 to 62? It's in 2 parts. It's all to do with the investments we've made in this strategy, and roughly half of it will come from revenue, and half of it will come from margin. What are the things that will happen in revenue to build those blocks? Firstly, the cyber market itself is growing still and predicted to grow still at 8%. Your base business should grow around 8% anyway going throughAnd at the moment you could see we were growing at 10% in the first half, we have factored in a downturn within that. The consulting arm, we think will add roughly 2.5% to that 8%.
That's where we're standing up things like Mike mentioned incident response, Mike mentioned going across the C-suite. We're also looking at operational technology and identity management, which are completely brand-new services that we offer, which will be totally incremental. We're gonna accelerate our managed services division. This comes from partly, I mentioned that the legacy stuff we've got rid of, that will actually help improve revenue because that was dragging us down both from a profit margin and revenue point of view. We and that was our legacy DDI business which we sold off in December. We've got XDR growing at 400%. There's you know, it may not grow at 400%, but it'll grow a lot next year.
We're, you know, we're looking at pulling the whole of the MS together in sort of a global framework. That should contribute another further 2%. Lastly, not forgetting professional services. Mike mentioned continuous testing, always-on testing. We're looking at how we can maximize that, and we believe that professional services still has legs in it and still will grow. We're putting a sort of another 1% on that. That's 8% plus the 5% again gives you 13% and that gives you about GBP 7 million of EBIT. The other GBP 7 million comes from margin. What are the margin improvements there? We need sort of 150 basis points increase. That comes from improving our utilization. You saw we're traveling at 66%.
We believe we can get up to the high 70s, maybe 80% would be about normal. That's the first thing. Towards the end of the year, you'll see the utilization going up, which will flow into next year. The offshoring that we're talking about, the center we're hoping to stand up by the end of the calendar year, that will add about 50 basis points. The consulting business has higher than average margins, that will improve the mix. The Hamilton disposal, which was the old DDI we called Project Hamilton, it was DDI disposal, that will improve the mix 'cause that had below average margins. Lastly, not forgetting Software Resilience, you can see with the improvements we're making on the operational review, that's gonna chuck in a couple of million GBP as well on margin improvement next year.
You add those together, and that's the other GBP 7 million. That's your GBP 14 million to go from GBP 47 million up to GBP 61 to 62 million. Second question was, FY23 run rate on termination rates. Termination rates have been running at about 9% to 10%. They've come down as low as 8 in the half. We think that it's been pretty stable over the last four quarters, we believe that the exit run rate will be around about 9% for the year. It won't change material. In your modeling, don't expect any changes in Software Resilience. It'll run stable.
Yes.
Mike's answered your Amazon.
Sorry.
Mike's answered the Amazon on EaaS.
Thank you, Julian Yates, Investec. Just a couple of questions. In terms of, just following from that question, in terms of the underlying revenue growth of 8%, if you're getting rid of 7% of the headcount, just very simplistically, are you going into next year with less headcount, billable headcount?
Yeah.
Are you increasing prices to get that 8%? Just a very sort of simple-
Yeah.
sort of top thing of view what I've missed there. The second one is, you're investing GBP 5 million in new staff.
Yeah.
At the same time, you're getting rid of 7% of the workforce. Just be interested in how you're balancing that communication into the business in terms of it's quite a material reduction?
Yeah.
Quite a material increase as well, especially when those roles are coming into new areas that may not necessarily be revenue generating initially. The follow on from that, it feels as though they need to be revenue generating initially to hit that incremental growth that you're looking at, and is there a risk that you're taking these new people in, but they're not gonna start generating revenues and leads and opportunities sort of ground running? How much contingency have you built into the plan with regards to that?
Okay. I'll do the first one.
Okay.
On headcount, as you know, we're at 65%, so we've got GBP 2 million on the bench. 7% get us back to a higher level of utilization, but not at the late 70s. What we perceive is, as we go through the second half, and we get to the final quarter is a bigger quarter than this quarter, the utilization will run up to about 80%, so we won't need any more people for the balance of this year. When you go into next year, you're quite right that the revenue increase then goes beyond that, and we will need more people.
What we have there is we have a combination of we'll have to take a view at the time of whether we need to do onshore, nearshore, or offshore recruitment, and it's a balance between the three, depending on client requirements. The way we've modeled it is that the gross margin will increase, and we take it into account within the cost of sales. When I said it was, it's broadly neutral, it's because the margin movement is covering the cost of sales of those new people generating that extra revenue, if that makes sense?
On the margin, but on the revenue side.
Yeah. On the revenue, the revenue comes through.
Yeah.
You need more people to service it, therefore the cost of sales goes up.
Yeah.
Your margin slightly improves because of improvement around things like offshoring and things like that. That's what happens on the gross margin. That's how we get broadly neutral for the year with the extra investment because the GBP 5 million repeats next year with an annualization effect.
Should we be looking for less or more?
More
Actually, it's more
Yes. It depends where-
It's still an investment.
Yes, it depends where it'll be.
Yeah. Okay.
I think that your point about clearly the managing the message, we've done the comms. It's not easy. We're actually doing an awful lot of support for staff across the affected areas. It will be challenging. That's just natural. It's a difficult time. I think our people recognize the challenges in the market and, you know, they haven't been able to miss the reporting that's going on, particularly in places like North America. I think that makes them very aware of the situation we're facing. In terms of building new capabilities, we've got to continue to evolve and change our services mix.
I think we will be building in new increasing types of capabilities in different places, and that won't look like the same as what we've had before and therefore, we're managing our comms, and the business will look quite different in a couple of years. That's just unfortunately where we are at the moment. In terms of the risk of the new capabilities being revenue generating in terms of landing, of course, absolutely. There's always that risk. However, I would say one of our challenges right now is we are receiving opportunities that we can't service because we don't have the capabilities. Tim mentioned identity and access management. That to me is an area where it has been huge for a number of years, and we have no capability.
We really have not been able to. We've not built it, we've not focused on it, therefore, we do have opportunities that we frankly just need to get the right team in quickly. I think that's why we'll minimize it, and we'll minimize it by focusing really on those areas that are hot. What we're not going to do is just build huge generic scale. What we're going to do is build niche teams to service niche requirements.
Okay. Thank you.
Thank you. I'm Harvey Robinson from Panmure Gordon. Just a quick follow-up on Julie and Tinton's questions in terms of the market expectations. Obviously, you talk about a bounce back in revenues to deliver that profit growth in FY24. To what extent is that based on the market rather than just your own internal actions? A follow-up, I think, more strategically. I mean, just a clarification. In the text in your release, it says ongoing review of Software Resilience, and then in the PowerPoint it says commence. If you could clarify when that started. It sounds to me that from your opening comments, you don't see it as a core business. Have you started the sale process or have you not made that decision yet?
Yeah. Where do you wanna start?
Start with based on the market. Do you remember I mentioned before on the market view, our market view at the moment is that we exit this year at 8% on assurance. If that fell off to nothing, that would obviously affect FY24. You have to assume that, you know, when we come and stand before you at the end of the year, that we're trafficking about that as a base. The 5% or 6% on top gives us the revenue increase. In terms of the strategic review. Sorry, can I just add maybe on the market view. It's very difficult to call.
I think the speed with which the market's turned, has been, I think a little bit surprised in terms of the tech market and the sort of the disruption that's going on there particularly. I think if we look through the sort of cycles we've been through before, there's usually an adjustment and then a pickup. I've been through one particular point in time where it was an absolute, it was a diabolical point mid-year. By quarter three, it turned completely. There is pent-up demand in the market for all of the structural reasons we've always talked about: lack of talent, the imperative of this, the external view, the threat. All of those things are absolutely still valid.
Whilst we think there is an adjustment period, and we think probably the FY, the first part of FY23 is gonna be particularly tough, I think we envisage a return to an accelerated level of growth in the market. Clearly, who knows? Don't know what's gonna happen in Eastern Europe, or in Eastern Asia, that's where we see the market at the moment.
Yeah. Tim.
Yeah, Software Resilience. We've implemented a strategic review. We've only just commenced it, so it's too soon to really give any information on it. This is naturally on the back of the operational review we did to make it more efficient. We're considering all options. You know, there's nothing to report so far. However, we're very pleased with the way Software Resilience is performing.
Yeah.
It's really come back. The new leadership team are doing a great job.
I notice that margin numbers don't include any open application sensitivity in PowerPoint.
something else.
Margin numbers you split out for Software Resilience...
Yeah
40-odd %-
I know. Yes. That's what it used to do historically. If you remember, we'd been investing in the people side that took the margin down. We did say last time that it will come back with the GBP 5 million contribution that we're taking or adding to the business for next year.
Hi. It's Charles Brennan here from Jefferies. Just a couple of questions from me. Firstly, in terms of the size of the investment, obviously, people demand reasonably high salaries in cyber. I sit here, and I question whether GBP 5 million is enough to fundamentally change the strategic outlook and the growth profile of the group? Can you just allocate that GBP 5 million across the 4 pillars? Did you want a bigger investment number and you were battered down, or are you happy with 5? Then secondly, just strategically, I don't think I've ever seen an IT services company offshore their way to accelerating growth. There's normally some day rate pressure in there that acts as a headwind.
Yeah.
-proportion of your workloads are offshore today? If you think out in five years' time, what does that look like, and what does that day rate pressure look like for you? Thank you.
Okay. Can I, can I answer the sort of GBP 5 million one first? That's the, that's a, that's a great question, Charlie. I think there is a recognition. It's a big number for NCC for, in terms of an investment. There's also a recognition, I think, we have to be able to execute on that GBP 5 million. Actually trying to drive, I think, a greater number in the sort of timeframes we talk about, there is only so much we do with all of the other things that we've got on. The strategic review of Software Resilience, the right sizing of the business, et cetera. There is, there's quite a lot on. Actually, I think we've been modest and practical in terms of focusing out on what we can make those investments in.
Again, it's in people and if I was to say I was relatively confident I can go out to the market and find the right people. I think it's a bit of a myth, frankly, that NCC pays below the market or anything like that. We are very competitive, and I think that we can attract the right sort of talent to do the sorts of things we want to do. I'm confident from that perspective. In terms of the day rate pressure, it's an interesting one. I hate the conversation about day rate, and sorry, that's a very strong phrase, but I think it's misleading, shall we say.
The reason I think because I think you can blend your delivery pyramids in a way which actually takes you away from a pure day rate conversation. Yes, you can use a cheaper offshore resource, which actually can bring your day rate down, but it actually can drive your margins. I think the blend of the sorts of things we're doing. Take identity and access management as a very simple, classic example. You have a proportion onshore who are close to client and maybe 20%. You have a large proportion offshore who are Java coders, whatever, who you can engage at a lower rate, but actually in a blended way, it's a large engagement, and you can have a very profitable piece of work.
I think that's why you pick particular sorts of areas where you can actually drive a bit of upside from it. In terms of what I think the business is going to look like, very difficult to say out, and we're going through that process now. It will look very different from each of the capability areas that I'm talking about. The incident response, highly likely 100% onshore. Some of the consulting probably, depending if the C-suite, the engagement, is probably a high proportion onshore. Software, the managed services might have a much higher pro-component offshore, and our technical assurance might be split 50/50. I think there's gonna be a blend, but that gives us the flexibility to be able to deliver those things in different ways.
That's why I'm very confident about we can actually pick out the right optimal delivery model for the sort of services we want to deliver. It's a well-trodden path. In the cyber market, it's a very well-trodden path. We're unusual, the fact we don't do it. Does that?
Thank you.
Thank you. Neville Harris, Radnor Capital. Mike, on the consulting side, who are you gonna be competing against? Are, is it a function of taking market share off incumbents, or have you got new services you're gonna put into that market?
I think there will be one of the interesting things about NCC is it's very difficult to say there is a natural direct competitor because it's quite diverse. It will depend by service. If you take consulting specifically, there are a myriad of organizations ranging from where I've come from, the big four, the big systems integrators who operate at that huge digital transformation component. There are then also boutiques who operate in very niche elements, whether that's the operational technology, IT convergence agenda, but there are boutiques. I think it will depend very much about the sorts of service offerings which we're going to market. There will be a little bit of everybody in that sort of mix. As I say, there's an awful lot of white space out there.
There is a dearth, and there's a lack of talent in some of these specific domains that we're not currently servicing. That's why I think there is definitely a lot of market to go after.
Damindu from Peel Hunt. Just 2 questions from me. One is the offshore delivery side. I'm assuming you're looking at potentially Asia and so on. Whenever I've seen companies kind of embark on that journey, unless you have the right sort of leadership or someone who's done it before.
Absolutely.
You take over a preset thing, things can go horribly wrong.
Thank you.
There is a plan in place, and you have recognized someone...
Great question, and exactly one of the-- that's the number 1 risk on our implementation plan. We do have a-- We brought in a dedicated team who have done it before, and that's why the plans have been are in a pretty robust position. Actually, we're confident about where we're going and while we can start to look at some timeframes. That's positive. We do have some leaders who've done it before. I've done it before. We've got some of our MDs have done it before. We do have an experienced team providing the input. Clearly, there are a couple of options how we do it. We find the right talent to put into a location, or we find a boutique. I talked about strategic and acquisition opportunities.
If there was the right target and it made sense to be able to accelerate that, we'd absolutely look at it. That would make total sense. I think it's very well-recognized, but I think we've got a solid plan, and I think we've got it's an important part of the evolution of this business.
Second thing is congratulations to you and the board because I think it's absolutely the right thing to do, to do things to take market share in this environment rather than go back into your shell. The only thing I wanted to ask you is some of these areas that you're looking at, if you go back to NCC pre any of you, there was a time when I think there was a team was hired from Bank of England to set up high-level consultancy, for example, and then I've gone to the New York offices where there were a couple of chaps trying to kind of crack the financial services market. I think NCC has made attempts into these areas.
What are you doing differently, or what's the playbook that you are gonna bring here to make it an more of an immediate success-?
Yeah
than the failures of past?
Very fair question. I mean, I'm, I try not to delve back into why it didn't work historically. I can tell you why I think it will work. One is I've done this so many times. It's my bread and butter. It's what I've always done. I used to be a really good consultant, so I think we can build the teams. It's all about focus and being very clear about what you're trying to do and what the team is trying to do and how you incentivize to get them to the market. I think if you try to wrap them into the day-to-day machine, then of course there's going to be grist and there's gonna be the gears will clash. We won't do it that way.
I think Tim made a really excellent point around how building XDR in an incubator mode separate to, if you like, BAU, has been incredibly successful. Lessons have been learned, and I think we there have a very clear view of actually, if we've picked the right solutions, the right offerings and the right way of attracting the talent with the right little black books or with or existing contracts through team lifts, through acquisition, I think we can then accelerate that entire build-out. Well, brilliant.
Can I squeeze in one last question?
Of course.
I think you touched on, about go-to-market. You talked about the branding side.
Yep.
Is there any kind of sales, organizational changes being made to the assurance side on the go-to-market?
Part of the focus by sector, we are aligning the sales teams by verticals, far more. There is not only through delivery, but also through our sales teams, so that they can start to build longer, more established relationships, get deeper into a client, and actually then pull through all of the raft of services that we have or will build. That is one of the first steps that we're making, and that's where some of the investment's going, frankly, in terms of that people change element is into the go-to-market teams and the very closely aligned element to consulting. They've got to work hand in hand. Excellent. If there's no more questions. Anything online? I don't know if we. Are we doing online questions?
So we have people who are listening, who can ask questions, and then we have other people who can watch and ask questions later. Sara's not in the room. Is there anybody who's texting us through?
Thank you. If you'd like to ask a question and have dialed in today, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. Our first question comes from Bharath Nagaraj from Berenberg. Your line is now open. Please go ahead.
Sure. Thank you. Good morning. Thanks for taking my question. I just have a couple of questions, actually. How do you think you can grow the Software Resilience piece given that it's been declining for the last four years? I mean, I'm just interested in finding out what your sales pitch would be to potential customers. Second part of the same question. Terminations are happening at a high single-digit rate, as you mentioned today. What are customers actually seeing when they're churning? Thank you.
Sorry, Bharath, good morning. Was your first question about Software Resilience?
Yeah, both questions are about Software Resilience.
Both questions are about Software Resilience.
I was just asking how would you grow this? What would your sales pitch be to potential customers to grow your Software Resilience new contracts?
I think Bharath, I know you haven't been following us for too long, but Software Resilience has had a history of problems with its salespeople, having too few, too many, and not doing the right thing. What the new management team have come in is they've focused on getting the sales pitch right, selling properly, and putting proper sales leaders in. We've appointed a new sales leader in the UK, who's doing really well. The one from Iron Mountain is doing fine, and the one in Europe's okay. What we've now got is a stabilized sales leadership team, and I think that's the key thing, and they're recruiting the right people. We've been experimenting with sales development reps, and we're now bringing the right people through into sales account management.
I think it's just a more experienced sales team delivering on that side. What was your second question?
Sorry. Just on the growth piece, I think sorry, I'll just add to Tim's point on the growth element. If we look at the sort of the footprint of the SR business, it is very heavily in financial services, perhaps not surprisingly given the regulated nature of it. Part of the growth opportunity that the management team are focused on is around how do you expand outside of the historical footprint into new sectors, particularly ones where there's either, you know, it's part of the critical national infrastructure, high resilience required. That is a big area of focus for them. Okay. Good point. Sorry, Bharath, your second question was?
With regards to the terminations that are happening, you said they are in high single digits, the churn in your Software Resilience business. What are customers saying when they churn?
Right. We've done surveys on this and, unfortunately, it's like any customer that leaves you. A lot of them just saying, we don't need it anymore, which is really, really helpful about understanding why they don't want it anymore. We're doing a commercial survey to find out the real questions of it. We believe the reasons are partly they don't need it anymore 'cause they've moved on to the cloud, and they don't understand we have a cloud offering. One of the problems is we need to get our salespeople to say, "And by the way, we have a cloud offering," so sometimes they don't. Secondly, they literally do not use the software anymore, and they've gone somewhere completely else.
One of the big misunderstandings is that they believe that when they go onto a Azure or AWS or Alibaba platform, they believe the platform will protect them, even though it's software-specific. The vendor can go bust on Azure, and we had a case of a Japanese media company where they went bust, and Microsoft turned them off immediately. We actually need escrow more on a platform than you do on-prem, 'cause at least on-prem, it's still in your basement working for another six months, whereas Azure turn them off immediately when the subscriptions, you know, stop being paid 'cause the vendor, the software vendor went bust. That's what we've got to get across and sell that to the customers.
Thank you. That's very helpful.
Are there-
Thank you. As a reminder, If you have dialed in today and would like to ask a question, you can press star one on your telephone keypad. If you have joined us via the webcast, you can type your question into the Q&A chat box. We have a written question from Anna Macdonald from Amati, who asks, "In terms of growing capabilities in areas such as identity management, is it a matter of getting the right team in, or could you acquire? Can you talk about the benefits of the conferences?" Thank you.
Sorry, the benefit of the...
Conferences.
Conference. Conferences. NCC, sorry. Yeah. Okay. NCC Con and capabilities. The short answer to in terms of building capabilities, and there's two which sort of leap to mind for me, which is Tim's mentioned digital identity and access management, absolutely fundamental to any digital transformation. That's a key piece. Yes, hiring the team is obviously one way to do it. Now, you can hire a team in multiple ways. You can go after individuals, or you can go after teams and establish teams, or there are a number of boutiques out in the market which are well-recognized, which would also give us that acceleration option. Small teams. We're talking tokens here, so we're not talking at scale.
That will give us the catalyst and the sort of the core of any capability you want to develop. That's one area, and the same applies in the area of information technology and operational technology convergence. A huge issue, particularly in critical national infrastructure, advanced manufacturing, oil and gas. That area is incredibly underserved. That is another area where I think there's definitely an opportunity for us to focus on quickly. In terms of NCC Con, the NCC Con which happened prior to my joining in the latter half of last financial year, was the first post-COVID. The benefits of it are quite clear. It reestablished the connectivity between colleagues who had been working at home for a long period of time.
It gave them some visibility of what we were doing for clients, not only in their local geographies but also internationally. It reestablished, if you like, the sort of the feeling of being an NCC and a leading technology company. It, it had a huge, I think a huge benefit from that point of view. In the context of a people business, that connectivity and feeling of interconnection and relationships is incredibly important, and it, and it just got people really enthused. I attended both conferences, the delivery and the salespeople love to stand up and tell, you know, show and tell and do what they do. It's like a Black Hat conference, if anybody's been to one of those. That sort of thing, where you actually. They, they put up research papers.
They have working groups, so it's working sessions as well, and how new ways of doing sales, new things. The transport, you know, division stood up and talked about how they broke into McLaren and stuff like this. You know, it's really interesting, and it does generate a lot of team building. Going forward, we would have to consider how we do them because they are expensive, and the time of year we did it was in June. We normally do it in January when there's less of a hit on the, you know, the revenue and the utilization.
We, you know, so if we did it again, A, we may go back to that time of year, which is early January, when clients don't want us interfering with their systems or at their premises, and we can do it in a different way by mixing in smaller teams and maybe partly virtual. That's what we'll consider going forward.
Thank you. We have no further questions, so I'll hand back to the speaker team for any further remarks.
Fantastic. Well, thank you very much, everybody. Very interesting times. Thank you very much for making the effort to come in in person, so many. That's, it is great to do these things. I'm much more of a fan of in-person than virtual. I don't know about anybody else. Great to see some faces, not on a screen for once. Thank you very much for that, and look forward to speaking in more detail over the coming weeks. Thank you. Thanks.