Micro Focus International plc
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

[Ben Donnelly:]

Good afternoon, everyone. This earnings call covers the 12 months period to the 31st of October, 2020. I am joined by our Chief Executive Officer, Stephen Murdoch; and our Chief Financial Officer, Brian McArthur-Muscroft. In a moment, I will hand over to Stephen for some comments on our performance in the period. Please note that for those of you already accessing the webcast facility accompanying this call, you will find a few slides to support Stephen’s comments. For those participating only by phone, the webcast and the slides can be accessed through the front page of the Investor Relations section of the Micro Focus website. A recording of this call and those slides will be available shortly after this call finishes.

[Stephen Murdoch:]

Thank you, Ben. Last February, we shared with your our three-year strategic plan. One year in, we're making solid progress and delivering our objectives, despite the backdrop of the pandemic throughout most of the fiscal 12 months we're covering today. The additional challenges of executing a turnaround plan and what has effectively been a global lockdown for the period are significant. And I would like to thank our customers and our employees for the flexibility, resilience and commitment in adopting new ways of working, helping ensure we not only delivered business continuity, but also made progress in the first year of our turnaround plan. As we now enter the second year of the plan, we believe we are better positioned to deliver against our three primary medium-term goals of stabilizing revenues, optimizing EBITDA margins, and generating significant levels of free cash flow. Our revenue performance in the period was consistent with market expectations at a 10% year-over-year decline. In addition to the macro challenges, we also executed significant change within the business. So within this context, it was encouraging that we delivered an improvement in revenue trajectory across all revenue streams in the second-half of the period, moving from an 11.3% decline in the first-half to an 8.9% decline in the second-half. Clearly, we recognize that there remains a great deal still to do. But the trends in underlying operational metrics are improving and give us confidence that the actions we are taking are beginning to have a positive impact on revenue performance. The group delivered adjusted EBITDA of $1.17 billion, with performance being underpinned by a combination of specific cost reduction programs and a natural reduction in costs such as travel. Cash generation in the period was ahead of expectations, primarily as a result of strong execution in working capital management. The Board has taken the decision to record a non-operating charge relating to goodwill impairment of $2.8 billion for the period. This impairment charge reflects changes in our trading performance and overall environment, when compared to the original projections we made at the time of the HPE Software acquisition. It's important to note that this charge does not impact our underlying profitability, or cash generation in the period, as I have just outlined, have remained strong. Brian will cover these areas in more detail later.

[Brian McArthur-Muscroft:]

Thank you, Stephen. And hello, everyone. And thank you for joining the call. As communicated last February, the business has made a number of fundamental changes to the way we operate, which started to improve the rate of revenue decline in the second-half of the financial period. This has allowed us to reposition the business to deliver against our three-year turnaround plan. The objective for the business now is to make incremental improvements to our revenue trajectory, simplifying operations and ensuring that the cost savings made over the past year, partly as a result of the pandemic continued to be sustained. Before we discuss our financial performance in detail, I would like to remind everyone that we adopted the IFRS 16 leasing standard from this year. As a result, a number of the performance measures included in this presentation have been impacted by this change, and we have not restated prior comparatives. As we go through the various measures, I will highlight these impacts. We've also included the estimated year-on-year impact in appendix one of this presentation. The information I referred to on this first slide is on a constant currency basis. And for further detail on the impact of currency movements, please refer to appendix two. So let me give you an overview of our financial performance for the year. As already covered by Stephen, revenue declined year-on-year by 10%. However, we delivered a moderation in the rate of revenue decline across all revenue streams in the second-half of the financial period. As a result, second-half revenue declined by 8.9% when compared to the prior period, whereas the first-half declined 11.3%. License revenue declined by 19.1%. And this revenue stream is the area of the business impacted most by the transformation activities set out by Stephen and is also the most sensitive to macro economic uncertainty. The operational metrics we use to monitor our Salesforce suggests these changes began to have a positive impact in the second-half of the financial period, but we recognize there is more work to do. The maintenance revenue declined by 6.3% in FY ’20, with that decline, driven by our ITOM and ADM product groups, these declined by 12.7% and 10.3%, respectively. Maintenance revenues within both Security and IM&G returned to growth in the period. In Security this growth was driven by a change in mix at a sub-portfolio level and an improvement in renewal rates in our core operations. Within IM&G, the growth was driven by Vertica, where our new subscription offering is recorded within the License and Maintenance revenue streams in accordance with the terms of the customer agreements. Our AMC maintenance revenue was broadly flat year-on-year. SaaS and other recurring revenue declined 11.8% in FY ‘20. We've delivered a number of our objectives in respect of this revenue stream, and the decline in the period reflects disruption from the restructuring of the offerings. Encouragingly, a number of these customer propositions returned to growth in the second-half of the year. Consulting revenue declined by 12.5% in the period and we now expect this revenue stream to trend in line with new license to SaaS revenues. The Group generated an adjusted EBITDA of $1.17 billion dollars during the period at a margin of 39.1%. As a reminder, the Group adopted IFRS 16 in the financial period, and we have not restated the prior comparative. Excluding this, the Group's adjusted EBITDA margin would have been 36.6%. In FY ’20, we also reacted quickly to the pandemic and the impacts on revenue to protect the adjusted EBITDA, and ultimately the free cash flow of the business. This has been achieved primarily due to the effective management of variable and discretionary costs, in addition to a natural reduction in certain costs as a direct result of the pandemic itself. We reduced spend further by putting in place strict headcount controls in all, but a few high priority areas where we've previously outlined our need to invest. Costs have also been reduced in areas such as travel and entertainment, plus general office costs, as the vast majority of our workforce have been working from home. As the world begins to come out of lockdown, it is expected that our employees will return to business travel only when this is absolutely necessary. In summary, we've generated approximately $1.2 billion of adjusted EBITDA in a period which includes multiple transformation programs, and our response to COVID-19, demonstrating the resilience that underpins our business model. Moving now to some of the other key financial performance metrics. Firstly, exceptional items. The development of our new IT platform and other restructuring activities which have previously been communicated have incurred exceptional expenditure of $185 million in the period. Spend in relation to IT systems totaled $101 million of this amount. And as we've consistently communicated, this is a complex multi-period IT project, and due to complete within FY ’21. We will incur approximately $80 million remaining cost associated with this program during FY ‘21. And this is broadly in line with our previous estimates, following the delays associated with COVID-19 that we spoke about last summer. We've always said that we view this as the platform for further margin expansion. And our response to COVID-19 has given us the opportunity to accelerate our plans on this further. When we spoke in the summer, we stated that we will not return to the old way of working. And in our continued drive towards operational excellence, we've identified a number of cost savings, which can be achieved by adapting the way we work. We estimate the exceptional costs associated with this program in FY ‘21 to be between $50 million and $60 million. However, these programs will deliver annualized cost savings of approximately $90 million through the delivering of further efficiencies in the way we work and a reduction in fixed costs associated with property. Perhaps more importantly, the business will be more agile and able to respond to changes quicker. The objective is to restructure and simplify now so that as revenues stabilize, and begin to grow, we have greater operational leverage to benefit from. In FY ‘20, the Group recognized an impairment charge of $2.8 billion. This impairment charge reflects our trading performance and the macro environment when compared to the original projections produced at the time of the HPE Software acquisition back in 2017. While substantial, this charge is a non-cash item, and so does not impact the cash generated by the business in the year, which has remained strong. As Stephen set out earlier, today we are reinstating the dividend and the Board are proposing a dividend of $0.155 per share. This is equivalent to half year's dividend at five times cover. We appreciate the importance of the dividend to our shareholders. And the business is highly cash generative with over $700 million of cash at hand at 31 October, 2020. That said, our leverage remains above our medium term target, and we need to balance our uses of cash to ensure that we are managing the business for the long-term. As such going forward, we aim to pay a dividend that is approximately five times covered by our adjusted profit after tax. And we will look to gradually progress this as we continue to stabilize the business. The Group's net debt at 31 October, 2020 was $4.15 billion after recognizing an additional $230 million in relation to operating leases, following the adoption of IFRS 16. On a like for like basis, net debt was reduced by over $400 million during FY ‘20. And I'll discuss this topic a bit later in the presentation. So turning to Slide 15. Micro Focus continues to be a highly cash generative business. In FY ‘20 alone, the Group generated over $1 billion of cash from operations and that is after cash spent on exceptional items. The year-on-year comparison of free cash flow has been impacted by the adoption of IFRS 16 and the disposal of SUSE in the previous accounting period. Firstly, the adoption of IFRS 16 means that the presentation of cash generated from operations, interest payments and finance lease payments are not comparable year-on-year. However, total free cash flow included on this slide is not impacted by the change in accounting policy. Secondly, FY ‘19 included four months cash generation in relation to SUSE. So now turning to the key drivers of our cash performance in the period. Free cash flow of $511 million was towards the upper end of our expectations. This performance reflects our cost control measures, a continued focus on receivables collection, and the phasing of both exceptional and working capital spend between FY ‘20 and FY ‘21. In total, we estimate approximately $80 million of the FY ‘20 performance relates to this phasing and will therefore reduce FY ‘21 free cash flow. In FY ’20, the Group had a $33 million inflow from working capital, compared to an outflow of $121 million in FY ‘19. The primary reason for the improvement year-on-year is the continued improvement in our collection of aged receivables. Today, our cash collections have not been impacted by COVID-19. And the team has continued collecting the remaining aged debt from the HPE Software transaction. The Group's working capital movements are driven by a number of individual movements. And as such, we provided some supplementary analysis in appendix three of this presentation. This working capital performance has meant adjusted cash conversion in the period has been particularly strong at 113%. As you can see, the current year is 17 percentage points higher than the comparable period last year, despite the current economic headwinds. We're now getting to the stage where the level of aged debt on the balance sheet are close to business as usual levels and therefore we do not expect a similar quantum to – of inflow next year. We continue to target and adjust the cash conversion of between 95% to 100% in any financial year, consistent with our previous guidance. In addition, the free cash flow was reduced by $48 million in FY ’20, due to the one-time costs associated with the successful refinancing of the Group's term loan facilities. As we think about free cash flow and FYI ’21, we anticipate a number of one-off impacts on our performance. A significant portion of these one-off impacts are timing differences, rather than an overall reduction in free cash flow. As previously disclosed and similar to a number of UK listed companies, we had a potential tax liability in relation to EU State Aid. The latest update on this case requires the British government to collect this amount in this financial year in line with the year requirements. As such, we have a cash outflow of $45 million in respect of this liability, with a maximum total liability of $60 million. However, we remain of the view that this amount will be repaid to the company once the case is decided in the courts. As such, we expect this to be a cash outflow in FY ‘21 with a corresponding inflow anticipated in a future accounting period. Secondly, there's the exceptional spend. In total, in FY ‘21, we have $80 million of costs relating to the IT platform, included in this amount is approximately $50 million that has moved out of FY ‘20 and into FY ’21, as a result of the phasing of this important program. In addition to this IT costs, we have the $50 million to $60 million of new exceptional spend, which I discussed on the previous slide. In cash terms, therefore, the total exceptional spend is expected to be approximately $130 million to $140 million in the year. Again, these one-time investments are being made to deliver out year benefits, but will suppress our free cash flow this year. As a result of these items, we've elected to give the additional disclosure of adjusted free cash flow, which is free cash flow as previously defined, but excluding the cash impact of exceptional spend. This adjusted measure is intended to present the cash generating policies of the business from trading performance only and excluding the one-time costs of delivering our transformation activities. In our view, this enables a better understanding of the underlying trajectory of the business, as we deliver on our plans. Clearly, the intention is the burden of ongoing exceptional costs will fall away, and the two measures will converge. So moving to my final slide, we turn to the Group's balance sheet strength. In May 2020, the Group successfully refinanced its $1.4 billion term loan, which was due for repayment in November 2021. The successful completion of this refinancing was particularly pleasing, given a strong demand for the Group's debt, at a time of significant macroeconomic uncertainty. The offering was substantially oversubscribed with approximately $2.5 billion in the order book at closing. In addition, in September of this financial period, the Group extended to extend our RCF and extending the facility, we took the opportunity to review the Group's borrowing requirements in the light of the strong cash generation of the business. As a result, the Board elected to reduce the size of the RCF to $350 million. These actions reduce the company's gross debt and both upfront and ongoing costs associated with the facility. On a like-for-like basis, the Group reduced net debt by over $400 million in FY ’20, despite the headwind of COVID-19. We're also electing to repay $80 million against our term loans in the first-half of FY ‘21. This is a continuation of our intention to reduce gross debt and interest charges. This does not impact net debt or leverage, of course. Our leverage was 3.5 times at 31 October, 2020, which is in line with our original expectations, following the actions taken as part of the strategic and operational review. Finally, I’ll close in saying, that we've made substantial progress in FY ‘20. There is a clear operational plan to deliver revenue stabilization, while we maintain our relentless focus on cost management over the remaining two years of our turnaround plan. We've successfully managed our aged receivables and built balances, which are backed down to normalize levels. We've also refinanced our credit facilities, meaning we now have no debt facilities due for maturity until June 2024. With that, I will hand you back to Stephen for comments on outlook and guidance before we move on to Q&A. Thank you. Stephen?

[Stephen Murdoch:]

Thank you, Brian. Turning now to our outlook. Revenue stabilization remains our most important business objective. We're committed to achieving this objective as we exit financial year 2023, despite the operational headwind, the pandemic created in the first year of a three year turnaround plan. To deliver against this goal, we're targeting incremental improvements in revenue trajectory annually. The second-half of FY ‘24 saw a sequential improvement in revenue performance, and we've continued this momentum into the first quarter of FY ‘21. Finally, I want to finish by summarizing our ambition for the business post-turnaround and what that means for the Group. Stable revenues, sable revenues for Micro Focus will mean we have a go-to-market organization which delivers consistently for our customers. Our growth products are well positioned in key markets and delivering revenue growth. Our Subscription and SaaS offerings are key parts of our portfolio, and again, delivering growth. Efficient cost base. This means we will have completed our internal digital transformation program, and now have an operating platform which supports a more efficient and agile business. Ultimately, this will mean we have the cost base to deliver operational leverage, as revenue stabilize and ultimately grow. It is a combination of all these factors, which will provide the opportunity for margin expansion and the sustainable generation of free cash flow. Thank you for your time today. Before I hand back to the operator to open up for Q&A, I want you to take a moment to talk about Brian. As many of you know, Brian has been offered an opportunity to take a new role outside of Micro Focus. And he will be leaving us in the coming months once we have found a successor. Brian has been CFO through a time of major change for the company, and on behalf of the Board, I thank him for his significant contribution to the company during this time. Operator, can you open up for Q&A now, please?

[Operator:]

Of course. Our first caller on the line is Charlie Brennan of Credit Suisse. Charlie, when you're ready, please go ahead.

[Charlie Brennan:]

Great. Thanks for taking my question. Can I ask two questions, please? The first is just on your maintenance trajectory. It's obviously an important components of getting back to revenue stability. Can you just give us a sense of where churn rates are for your maintenance portfolio? And behind that, where people are choosing not to renew with Micro Focus? Are they actually leaving Micro Focus and going to competitors? Or are they just choosing not to renew their maintenance contract? And then, as long as I can remember, I think Micro Focus has been talking about optimizing maintenance, what low-hanging fruit is left for you to go after to try and improve the maintenance rates? And then sorry, that was a long question. Just as a quick follow-up, as a financial question, it feels like there are ongoing investments to your medium-term targets in 2021. And I guess that means that EBITDA margins could be under pressure this year. Are you confident to say that 2021 is going to be the floor for EBITDA margins? Thank you.

[Stephen Murdoch:]

Yes, let's do the last question first, Charlie. Yes, we are. We - this year, we're making the right decisions for the long-term for the business. And we have less of the kind of normal tailwinds that we would have to offset through things like natural attrition, for example, in the business, plus we've got a major systems transition, as you know, there's no underway. And that means we're being cautious in terms of just how effectively we - we're able to run the business during this 12 months, whilst we make that transition. So yes, we are. And we actually believe we've got quite a lot of opportunity in front of us, ideally, for productivity capture, rather than cost optimization, Charlie, because we actually, we want to push the productivity and seek to generate additional revenue opportunities. In terms of maintenance, we don't disclose churn rates specifically for a number of reasons that we've discussed, most importantly, amongst them competitive positioning. I would encourage you to look at the trajectory as we exited the trajectory in the whole of last year, as broadly speaking, what we're looking to do this year. Within that we've got very specific actions on what I described in my earlier remarks as the hot spots in the portfolio. So those are areas where we have elevated churn rates. And those three or four places there that, if we can make material progress, we’ll have a significant impact in the total. And the type of activity we're doing there is everything from very targeted consulting offers on our expense to move customers to the latest versions of the product, where they're significantly back level through to the customer success organization, which is ensuring really effective usage of the product and optimizing customer value from it. So we've got number of improvement areas. When people don't renew, it tends to be any mix of reasons, like the one that you've just talked about. So it might be a shift in weight of their portfolio. So they might be doing more in a hosted environment and less on-premise, in which case they need less on-premise software to monitor and we need to capture that workload through new SaaS offerings rather than through our existing offerings through to - there's quite a lot of, as you know, to state the obvious. It's quite a lot financial stress in the system and a number of industries, and they're looking for opportunities to reduce costs. So, of course, there's a little bit of that. But in essence, I would say the churn improvement opportunities are more about our ability to execute against them than anything we see macro in the market. So hopefully, I covered all your points there, Charlie, but if I didn't, I'm happy to pick them up again offline.

[Charlie Brennan:]

Perfect. Thank you.

[Operator:]

Moving on to our next caller, we have Michael Briest of UBS. When you're ready, Michael, please go ahead.

[Michael Briest:]

Thanks, and good afternoon. Two or three for me, if I may. I think historically, Brian, the company disclosed the bonus and commission accruals 2019 with $75 million, down from $163 million. Understandably, that was a difficult year. And just wondering if you can give us a feel for how 2020 progressed? And do we go back to a more normal number and does that become a headwind to profitability expansion? And then just on cost this year, that’s something you have sort of control over. What should we be thinking about the rate of cost reduction in 2021 over 2020? And then I've got one for Stephen after that.

[Brian McArthur-Muscroft:]

Okay. Well, let me take the cost reduction question. Cost reductions, we intend to carry on roughly at the rate we have been generally through 2019 and 2020. But against those cost reductions, we've chosen, as I've said on the presentation, to reinvest quite a lot against those cost reductions. I think we mentioned earlier on the call, we pursue around $80 million to $90 million in 2021 is what we're guiding for those investments. And those are not exceptional spend items, they're items that are going through the P&L and therefore, will count against the cost reductions themselves. On a net basis, I'm looking for cost reductions of around $30 million to $40 million on top of that $90 million of reinvested spend. And I would expect actually then, they’re off the cost reductions to actually accelerate beyond 2021 into 2022 for two reasons. Number one, we'll have the Stack C completed and be on a single platform and be able to push on. And I think naturally, we’ll be able to also to go after significant additional costs on top of just Stack C system savings due to having a whole load of manual workarounds that the business has had to cope with, previously being able to be removed, and therefore continuation in a lot more productivity and efficiency.

[Michael Briest:]

Right. And so, just to be clear, your net savings will be $30 million to $40 million or $80 million to $90 million…

[Brian McArthur-Muscroft:]

Yes. Correct…

[Michael Briest:]

Okay, so that's…

[Brian McArthur-Muscroft:]

Also $80 million to $90 million, the net saving.

[Michael Briest:]

And on bonuses, I mean, have they normalized, was last year higher than 2019, can you say?

[Brian McArthur-Muscroft:]

Yes, on the bonuses, Michael, the year-on-year impact, which is like the way to think about it was negligible on the business. And you're talking kind of less than – that number is now less than 1% of the cost base kind of year-on-year impact, and it's even less on the commission side year-over-year.

[Michael Briest:]

Okay. Thanks, Brian. And then Stephen, just on the business transition, I mean, obviously, a lot of other software companies are talking about the move to subscription and SaaS, too. You still got $650 million of licenses. What's that going to look like in 2023 or even beyond? This is not a multi-year transition here, which is a headwind to that return to stable revenues?

[Stephen Murdoch:]

It is a multi-year transition, Michael, and we were looking at the business we got. In the immediate term, we've got new capability that we're introducing in pretty much every portfolio. And we've got improvements in the delivery infrastructure to underpin the quality of service improvements. We've also got pretty advanced now in terms of cleaning out the unproductive, unprofitable stuff that we've talked about a number of things before, got a bit of that to go, but we should hopefully be through it. As we look over a three year window, we - our objective is to be growing the combination of license and SaaS. Now the exact mix of how that will play out, we're going to evolve over time. And we're not going to do it in a whole scale switch, it's actually going to be key areas within each of the portfolios where we have a real strong permission to play with customers, we got really good IP and good capabilities. Yes, and it's actually the preferred model in a number of those markets. When you aggregate all of that up, we talked before about the 20% - 15%, 20% range. I think that will only ever creep up from the unknown as we go forward, because the world is moving a little bit more that way. For the short term its baked into what we've told you. And we don't think it's an additional headwind on the revenue stabilization for us in - in the 2023 timeframe, provided we can actually get the offerings positioned correctly to capture the growth that exists out there.

[Michael Briest:]

Okay. That's helpful. Thanks.

[Operator:]

Our next caller is Stacy Pollard of JPMorgan. When you're ready, please go ahead.

[Stacy Pollard:]

Thank you very much. A little bit of a follow-up on Michael's question. I had a similar question around SaaS and the percentage it would be. Sort of an extra piece of that, what is difference in retention or renewal rates between maintenance and Second question…

[Ben Donnelly:]

Stacy, I'm really sorry, but you’ve broken up completely? Could you try again, please?

[Stacy Pollard:]

Sure. I hope this - I move my phone. Hope this works. SaaS versus maintenance big pedicure. Second question, margin curve on ’22, ‘23? I'll be short. Last piece, free cash flow again, sorry for the adjusted free cash flow, if you don't mind.

[Brian McArthur-Muscroft:]

Okay. So I got the first two, we might need to do the cash one offline, because I couldn't hear you, unless we – we’re going to try again. But the renewal rate opportunities in SaaS, and in maintenance, we have range - we have a range of more than 10 points between our best and our worst. And we are - in every single piece of the business. We think we've got opportunities to move better towards the upper end of that, than the lower end. And some of the improvements we've been making in terms of rationalizing the offers in SaaS are because they're just - the ones that we were cleaning out, just don't have the architecture to deliver the customer service. We consider it to be acceptable. So we're either re-architecting or replacing. And then in our existing offers, we're continuing to make the investments through the P&L not as exceptional, through the P&L to improve the resilience and the overall standards of their delivery. So opportunity is everywhere. Stacey, I think your second point, forgive me, you really did break up quite, quite strongly. Your - I think your second point was around margin development?

[Stacy Pollard:]

Yes.

[Brian McArthur-Muscroft:]

Okay. So we are - we talked about this year to the earlier question being what we consider to be a floor. We've got a clear path to improve that, you know, into the 40s. And then up beyond that to our original ambition of mid-40s, has always required and continues to require the combination of revenue stability, and operational leverage from the systems and organizational efficiency that we're building. So we got an immediate term path, making the investments we believe are required for long-term health. We've got a path for this to be the bottom and then build. And then once we can do the revenue stabilization with the systems work, we get the operational leverage that we are showing from there.

[Stacy Pollard:]

Last question, free cash flow target, free cash flow target ’21?

[Brian McArthur-Muscroft:]

Same dynamic as EBITDA stabilize the revenue, get operational leverage, work through all the exceptions will be worked through. That's the point at which we can optimize the free cash flow. And we're still striving for the $700 million that we talked about.

[Stacy Pollard:]

Great, thank you.

[Operator:]

Okay. Moving on to our next caller, we have Gautam Pillai of Goldman Sachs. When you're ready, please go ahead.

[Gautam Pillai:]

Great. Thanks for taking the questions. I have a couple on the product portfolio and one on cash flow. Firstly, can you provide some color on the partnership with AWS on mainframe migrations, which was announced late last year? What segments benefits from this? And is it possible to quantify any financial impact? Secondly, on the Security and IM&G portfolios, which are currently your best performing segments, can you call out which assets are outperforming? You did mention Vertica in the presentation, any others to plan? Also, is there a scope for disclosing revenue and margin metrics for the growth assets, as you have done for SUSE in the past? And the cash flow question, I am actually following up from the previous question, can you comment on the free cash flow progression in 2021? As there seems to be some timing issues related to exceptional tax related expenses in FY ‘20, which may impact the FY ‘21? Thank you.

[Stephen Murdoch:]

Sure, thanks. So there's a - we believe, we've always believed, and is beginning to really ramp up that there is a latent opportunity to modernize mainframe workload. And we've been pioneering that modernization in a number of ways. One, we help people modernize and stay on the mainframe. Secondly, we've been the leading partner from moving mainframe workloads to distribute it and we know the leading opportunity, we believe, for moving mainframe workloads to the cloud. And we've got multiple proof points around the globe on that. We've been working with AWS and with Azure for quite some time now. And what you saw in the AWS announcement was actually an AWS announcement of their creation of a mainframe competency capability to accelerate that, and the workload support to their cloud. And we were one of their pre-approved partners for getting that done Gotransverse Its really an AWS announcement, and endorsement of our capabilities, rather than something that you know, something that we did. Security and IM&G, you're right, we did talk about Vertica. We also have other big data sets IDO for example, where we had good success last year. So lumpy business, we may or may not get similar success this year, but really good success last year. And candidly, in our security portfolio, pretty much every asset improved in the second-half. Now, it's still - we still have a week to go. I mentioned with real conviction that this is a growth portfolio for the Group. And we don't expect it to be a linear progression from here to there. But we do expect that this is a growth portfolio and a growth portfolio on a sustainable basis. Ben, do you want to take the cash question?

[Ben Donnelly:]

Yes, sure. So, Gautam, we performed really strongly on free cash flow in FY ‘20. And included in within that number was approximately $80 million of items that effectively relate to FY ‘21. So also the cash flow will come out in FY ‘21. So firstly, there's the $50 million of exceptional phase-in, which is basically replaced in the project. And the second piece is $30 million of working capital in respect of tax charges, which again, were outflow in FY ‘21. So you need to factor that into your model when you're building it. And then the last piece is actually the piece that you raised on the call, which was the $45 million an EU State Aid. So again, that's something that's going to be a cash outflow in FY ‘21. But the business expects to recover that asset in future accounting periods once it goes through the courts. So when you add all that together - if you're looking at the FY ‘20, and FY ‘21, free cash flow in total, you're not going to see much material shift between the two years, not in terms of the total. But there's a bit of timing and phase-in between the two years, which can pretty much all be explained by the $45 million of EU State Aid, which again, will be an LTA cash flow back to the business.

[Gautam Pillai:]

Got it. Very clear. Thank you.

[Operator:]

All right, excellent. Our next caller is Julian Serafini of Jefferies. When you're ready, please go ahead.

[Julian Serafini:]

Thank you. I just have one question. I think, Stephen, in your prepared remarks you'd mentioned changing how field representatives are incentivized on renewals, if I heard you correctly. Can you elaborate a little bit on that? What exactly do you mean by changing how to incentivize? Are you actually paying commissions on renewals now? Or can you just dive into that please?

[Stephen Murdoch:]

Yes, sure, we now have materially more focus, and materially more resources over the maintenance opportunity and challenges we have in the business, than we had in any prior period. Part of that is some of their most senior sales leaders on our - the sales teams that look after some of their biggest customers now have a large proportion of their annual compensation directly linked to a specific maintenance target, either that's the group of accounting or it's the country or is the geography that they're responsible for. But that's only part of it. The other part of it is investment in resources, in customer success, which is oriented towards recurring revenues stability, as a good example, and also some changes in overall leadership and improvements in systems and tooling to enable our teams in the renewals organization to do a better job. It takes some time for those to play through. But we're confident that the right actions to give ourselves the opportunity to improve the renewal rates, as we look forward.

[Julian Serafini:]

Got it. Thank you.

[Stephen Murdoch:]

Thanks, Julian.

[Operator:]

Okay. We have no further callers joining our queue. I will turn the call over to your host for any closing remarks.

[Stephen Murdoch:]

Okay. Well, I would like to thank everyone for joining us today. And also for your engagement and your questions today and in the calls we've had this morning, and I look forward to speaking to many of our investors over the next two or three days. And with that, I'll just close by thanking Brian again for his very significant contribution to the business and wishing you all a good day and please stay safe and well. Thank you very much.

[Operator:]

Thank you all for joining the conference this afternoon. You may now disconnect your lines. Hosts, please stay connected.