Cerillion PLC

LSE:CER

Earnings Call Analysis

Cerillion Posts Strong FY'23 Results

Cerillion reported a robust financial year 2023, with top-line revenue up by 20%, maintaining a 3-year growth trend from around 10% to over 20%. The growth was mainly fueled by larger customer engagements and increased acceptance of the software-as-a-service model among telecom companies. Adjusted EBITDA rose by 32%, while adjusted profit before tax (PBT) soared by 41%, highlighting significant operating leverage and improved margins from higher software content in revenue—54% compared to 37% the previous year. New orders pushed the order book up to GBP 52.5 million, an indicator of strong future performance. The sales pipeline grew by 16%, signaling resilience amid industry downturns. Sales to existing customers spiked by 85% to nearly GBP 31 million. With approximately 70-75% of 2024’s revenue already covered, the company anticipates continued growth, underpinned by a solid balance sheet with net cash of GBP 24.7 million, up 22%, and an increased dividend payout of 11.3p per share.

Broad Market Reach and Competitive Edge

Cerillion, likened to being the BT of Belgium, has carved out a niche in supporting challenger brands, with successful engagements such as with the UK's 3 and Denmark's largest power and internet service provider, Norlys. Their broad range of telco partnerships reflects opportunities in various telecom business models. Cerillion's comprehensive solution, favored against larger vendors like Oracle and network equipment vendors such as Ericsson, caters to an array of telecom needs with advantages like lower cost, faster implementation, and flexibility. These competitive strengths are underscored by positive analyst ratings from firms like Gartner.

Robust Financial Performance

Fiscal Year '23 marked a continuation of substantial growth for Cerillion, with a 20% increase in top-line revenue, maintaining a three-year trend. This growth results from larger customer contracts and reflects a shift from a growth rate of around 10% to more than 20% annually. Earnings have surged with even greater momentum, with adjusted EBITDA up by 32% and adjusted PBT up by 41%. A key factor has been a higher software revenue proportion, making up 54% of total revenue and boosting profit margins. The company's strong financial position allows for a generous dividend policy, with a total dividend of 11.3p per share for the year.

Customer Diversification and Pipeline Growth

The company continues to diversify its clientele. It has secured a new EUR 12.4 million contract with a Tier 1 European customer, significantly bolstering the order backlog. A proactive approach in sectors with potential consolidation or emergence of telecom players like energy companies manifests resilience against market dynamics. Expansion in the U.S. through the addition of sales staff and participation in more events suggests an anticipatory move in capturing fresh opportunities, which bodes well for new business pipeline growth.

Capital Allocation and Market Strategy

Cerillion's capital allocation strategy prioritizes organic growth without the need for significant cash investment, sticking to a cautious dividend policy aligned with free cash flow, and strategic M&A opportunities. Given the high EBITDA margins and the need to showcase a strong balance sheet for credibility with large telcos, the approach to acquisitions is meticulous, targeting product businesses that complement the existing suite. Share buybacks are limited to fulfilling internal schemes, emphasizing a commitment to increasing market liquidity over reducing equity volume.

Challenges and Future Outlook

The company faces industry-specific challenges such as contract timing affecting back order books and dealing with competitive retaliation, mostly on pricing or narrative fronts against larger vendors. However, the company's track record, sustained growth, and a robust balance sheet position it strongly against such competition. There is also an insightful acknowledgment of the potential for being an acquisition target due to the company's attractive multiplicative trading, although no immediate moves in that direction are indicated.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the Cerillion Full Year 2023 Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Louis Hall, Co-Founder and CEO; and Andrew Dickson, CFO. Louis, over to you.

[Louis Hall, executive]

Thanks very much, Tamsen, and good morning, everybody. Welcome to the presentation, and thank you for your time in joining. So very quickly, for those of you who haven't met us before, I'm Louis Hall. I founded Cerillion way back in 1999 as an MBO from a company that was then called Logica, a big U.K. software services business, what we used to call Software House. It had 8,000 people at the peak and was very big in government and all sorts of bespoke software contracts.

So Andrew Dickson, CFO, also on the call. He joined us in '22. So been with us maybe 2 years, replaced the CEO, who was there from the very early days, back in the early 2000s. He is now retired. So that's us.

Moving on. So what I'm going to do is speak, first of all, about what Cerillion is and what we do, and then I'll come on to highlights of the results of '23. So I appreciate there are quite a few people on the call who have not come across Cerillion before. So looking at what Cerillion is, where we are, what we do. We're essentially a provider of what we call BSS and OSS software to telcos all around the world. Telecoms is a very globalized business. The standards are the same in every country that telecoms exist. So we're able to deliver the same software solution to telecom's customers in whatever country. And we do have a global customer base, so around 80 customers in I think where we are at the diagram, up to 45 different countries.

We're headquartered in London. We have about 100 people, so 100 people now. We have operating bases in India, where we have about 210 people today; and in Sofia, in Bulgaria, where we have around 30 people. So those are my operating bases.

Looking in detail what we actually -- what does this mean, what do we do? So we provide the software -- the enterprise software layer, so BSS and OSS software is business support systems, operations support systems, but essentially, this is the software that sits between telecom businesses' network infrastructure and their customers. So this software is everything from enabling telcos to define the products that they sell to those customers. And typically these days, those are bundled products where telco is selling a mix of broadband service, fixed wire to the home, mobile and TV packages. So that's what we call quad-play in the industry.

So defining those products is quite complicated. We have a sophisticated software that does that, which then connects to the sales software that allows telcos to sell to those customers, whether that's online with customers buying -- selecting themselves or buying products online all through mobile apps or through call centers or -- call centers, there are our CRM systems, or through retail outlets. So you see shops in the high street offering mobile service or whatever.

We also then have the software that connects those services to the networks once they've been sold. We have to get those customers on to networks, and we have a workflow engine that manages that quite complicated process and the order in which those things have to be done. Once customers are on the network, we monitor their balances with a chart over a complicated real-time charging engine.

The charges overage when customers are over their balances allows them to make calls or not if they are within their balances depending on what kind of package they're on. At the end of whatever the billing period is, we generate bills, we collect payments. We manage receivables. We deal with what happens when customers don't pay and so on.

So this is a vast range of software that touches most departments of a telco. And as I said originally, enables telcos to monetize the investments they made into their network infrastructure. And we do this through a set of product modules that can be sold separately, but mostly in our case, sold most of them together.

These modules are all designed to work together from day 1. Our strategy is very much that we provide 1 product -- the same product to every customer. We have 1 product. We don't have multiple versions for different types of customers or different customers, and that's a key differentiator for us.

So the additional vendors in our market provide different solutions with different types of customers and they've tended to provide quite heavy bespoke solutions, albeit built from some kind of product framework. But that approach involves a lot more services, it's a lot higher risk, it's a lot more expensive and it takes a lot longer to implement.

So in Cerillion's case, we are providing this solution as a service, Software-as-a-Service, and typically, today, we're providing the whole Software-as-a-Service wrapper. So we're providing customers a subscription service where they pay a quarterly fee to have access to all the software, but we are hosting our software for them. We're managing that software. So we're operating the system for them. We're providing support and maintenance and so on within that wrapper.

As well as that, we're also providing the services to put those solutions into service in the first place. So once our product works out of the box on day 1 and customers can get access to that immediately, we have to populate that system with their products, with their workflows, with their business processes and so on. And those can be quite large projects that will often take 12 months or longer to complete and will involve multiple millions of dollars of services effort.

Okay. So what is the market? So our market is telco businesses, but all kinds of telco businesses. And there are lots of different kinds of telcos. So there are the traditional BT-type telcos that you see replicated all over the world, but there are also MVNOs, what we call mobile virtual network operators, who don't have a network, but have a brand, and they're able to sell other network infrastructure owner's or operator's network capacity to their end customers. There are messaging businesses, there are power companies that have got telcos within them and so on. So there's a vast range of different types of telcos out there, not just the traditional network operators.

We tend to look at the market in terms of these 2 main groups. There's the sort of Tier 1 as in the biggest telcos in the world, and the larger Tier 2s, and then Tier 2 and Tier 3. We're increasingly winning business with the larger Tier 2s and Tier 1s. When we first started out, most of our customers were relatively small, but a big progression that's really in the last 5 years has been the ability to break into some of these larger accounts. Traditionally, we've worked in the Tier 1s. We have had Tier 1 customers, but we've worked in niches. So we've supported 1 of their brands, but not all their brands, or we've worked with 1 of their properties in a multisite vendor -- sorry, multisite operator like Liberty Global for example, but have not worked across all of their brands -- sorry, all of their territories.

And I think what's interesting is that the contract we announced a couple of weeks ago with a Western European Tier 1 is an example of Cerillion doing all of the brands in that country for that Tier 1 operator. So that's another progression in our ability to work with the larger telcos in the world. That's very important from our point of view, because the industry prices subscription for this kind of software and license fees, if you like, on the basis of the number of end customers that telcos have. So a telco with 1 million customers pays 1 million times x subscription fee a quarter, a telco with 2 million customers pay 2 million times x a quarter. So that's quite a significant material difference.

We also have some customers in other verticals still, but this is not a particularly large part of our business. So for example, our network inventory products is sold into power, water, gas, and so on. And we also have some customers in industries like financial services, health care, and so on, where we're providing a pure subscription billing service. But this is a very small part of our business these days, so one we don't tend to major on.

We work in -- from a sales point of view, we have a direct sales team. These days, most of our business is direct sales. That's just the way the market has gone. Telcos increasingly want to buy from the vendors, not the integration partner or whatever. But we do work with Nokia quite closely because Nokia don't have all of the modules in the bundle that you need to have to address the BSS/OSS market. So we support Nokia in some of their markets, particularly the deal we signed with Nokia recently where we're providing the software or the new induction capital, the new car, if you like, working with Orange and Orange Business Services through Nokia. And that's a good example of a deal where partners are still important. In that particular Middle East region, it's very difficult to do business as a small company. Nokia enabled us to get into that market.

So as you can see from the logo wall, there's a very broad range of customers, all kinds of different telcos up here, some big, some small, some you'll have heard of, some you wouldn't have heard of. So you've got Proximus here in Belgium, for example. We're the BT of Belgium where we support their challenger brands targeted at mainly the sort of [ use ] market. A good example of Tier 1 moat in a niche. We're in a niche in 3 in the U.K., for example, Norlys down here. Probably, not many of you will have heard of Norlys. They're now Denmark's largest power generator, electricity provider, also now the largest Internet and broadband and TV service provider in Denmark.

So they've gradually been buying up telco brands, initially starting out from having a business built around their fiber network that they had running around the electricity network. They've now expanded that to become the largest provider of internet and TV services in Denmark, and we're supporting them in consolidating all those brands onto a single Cerillion platform. So that's a telco that wasn't really a telco until quite recently that has become quite a major telco. And I won't spend -- in the interest of time, I won't go into more detail, but the point here is very broad range of telcos. There's lots of opportunity in this market because there's all kinds of different telecom businesses that we can work with.

Just on this slide, very briefly, I won't go into detail, but what we're trying to show here is the value of the base on an ongoing basis. So if you look at customers that we won before 2016, this is the revenue that's still being derived from those customers over subsequent years. And in the early years with a new customer, there's a lot of implementation work going on and migration of different bases and so on. That all sort of calms down and we go into business as usual made where we're providing the services wrapper to operate the system for the customer, et cetera. But over time, that will build again as more new projects come on stream for those customers. So existing customer base is very important and I'll come back to that. Let me talk about the highlights from this year. Really, I'm conscious of time.

We do have competition, obviously, and the competitive landscape we break out into these 3 main areas. So we compete with, what we call, large independent software vendors. So Oracle, for example, have a product suite in this space. And then the, what we call, network equipment vendors. So that's Ericsson, Nokia, and the 2 Chinese vendors, ZTE and Huawei. ZTE and Huawei are not in our main markets right now in Europe and North America. So for all the reasons that we're all aware of, telcos in Europe are racing to get out of their technology. And that's not only making it less competitive, it's also created an opportunity to replace the Chinese vendors still. So that's a positive for us.

Nokia are a partner, so not there to compete with us. And so the only player in this space that's really a competition in a true sense is Ericsson. Ericsson do have a product sweetness area. And although it's a bit of a beast, they do have a very strong customer base on the network side, so they are a competitor. And then there are some smaller independent software vendors more around our scale, but they tend to be targeted on the emerging markets or specific segments of the market rather than the whole breadth and depth of the market and the larger players.

So that's a quick summary of competition. Why do we win against these people? So we win against the larger ISPs because we have a 1 product fits all approach. It works out of the box on day 1. As I was saying earlier, we're not offering a bespoke solution, which is much more expensive and takes longer to implement. And the larger independent software vendors do have that approach and that does give us an advantage in many scenarios.

And similarly, against the network equipment vendors as well, mainly Ericsson, we have a product that we've built from scratch to work together from day 1. The Ericsson product set is put together through multiple acquisitions over a period of time. And again, it's a bit of a big beast to implement. It takes a lot of bespoking to get it to work in a particular customer situation. So again, we have that advantage, so its time to market, its cost of ownership and flexibility to upgrade the solution going forward. We're also well covered by the telco community. Analyst, Stephanie, Gartner, rates Cerillion quite strongly. So we consistently score well with these analysts, and that obviously helps RFPs make their way to our door.

All right. I'm going to jump back now to the highlights for the financial year. Apologies for racing through this, but I'm conscious we've only got 35 minutes.

So the key points about financial year '23. So first of all, we were able to increase our -- sorry, to grow our top line revenue by 20%, and that maintains the pattern we've seen and the trend we've seen for the last 3 years of moving from a company growing at 9% or 10% to a company growing at 20% -- or 20% plus. And that's being driven really by our success with larger customers winning larger contracts. And I think the reason for that is twofold. One is that the Software-as-a-Service approach that we champion, where the report [indiscernible] in our market is gaining more ground and is seeing more acceptance from larger and larger telcos, but also, we're gaining credibility by winning all other deals.

So if we win the next largest deal that gets the next largest deal, if you like. So I think those are the main factors there. Earnings were up significantly more than 20%. So our adjusted PBT -- sorry, adjusted EBITDA was up 32%, adjusted PBT up 41%. And the main reason for that is that this year we had a much higher license content in our revenue, much higher software content overall. So software as part of revenue was 54% as opposed to, I think, about 37% last year. And that was driven by higher license content in revenue.

So we had a few new customers who were being implemented over the year, and in that year, we were then recognizing some of that license revenue because, even though we're signing 5-year subscription revenues, basically, we have to take the license revenue upfront once software is made available to the customer, and that's just a restriction of IFRS 15 accounting standards, which will be different under U.S. GAAP.

Also, we're particularly pleased that the sales pipeline also grew by 16% in the year, GBP 243 million, which is a new record high for Cerillion. And I know there's been talk about downturns in telecoms and technology software in general, but I guess, we can only report what we're seeing. We're not really seeing that. And I think, possibly that's because, in a downturn, and if you look at where our software sits, telcos, if they're looking to swap the existing network infrastructure assets more whilst they slow down new investment, then it's back to the software there to do that. How do we rebundle the services we already have to customers in a more creative way to drive more revenue from what we already have invested in. So relatively small amounts of spending over here compared to hundreds of millions of billions over here on the network side can help with that process.

And equally, when you're into an OpEx reduction cycle and looking to cut costs, consolidating multiple brands on the single platform is a great way to do that in terms of saving on your IT costs, because if you've got 5 different vendors in there, all with their own platforms, that's much more expensive than having 1 vendor with all the brands on the same platform. And that's 1 thing we are known for and have a lot of experience of doing that. So that I think is helping us.

So perhaps also in terms of the existing customer base, we're also really pleased that we saw a big uptick in sales to existing customers in '23. So sales to existing customers were up by 85% to nearly GBP 31 million. And that demonstrates the strength of demand in the existing base as well as increasing pipeline of new business opportunities for new customers. So I think that's really important. And that was a mix of renewals of subscription agreements for new terms, additional services to migrate more base to the different customers, additional services to different integration into new network upgrades and so on. So a very broad range of different things, but very strong demand from existing customer base.

And then finally for me, I think if you do the math based on the disclosure we've given, with the order book we now have, so lower, our order book was flat at year-end at GBP 45.4 million. We signed a new customer contract a couple of weeks ago with a Tier 1 customer that I referred to earlier in Western Europe. And that EUR 12.4 million contract added into our backlog, and whatever else happened between end September and last Friday, our backlog is now up to GBP 52.5 million, so significantly ahead of last year now.

And with that backlog in place, with the potential to sign some renewals for existing subscription agreements that isn't in backlog, but it's not signed yet, some managed service contracts that will need to be renewed this year, plus obviously, the strong amount of the business we would see from the existing customers, the analyst view is that we're about 70% to 75% covered in terms of '24 revenue. So I think we're in a pretty strong position going forward.

So I'm now going to -- conscious of time again, I'm now going to hand over to Andrew to go into some more detail on those numbers.

[Andrew Dickson, executive]

Thank you very much, Louis. So as Louis has said, FY '23 was another very strong year for the group with record performance across most of our KPIs. So here you can see a list of our KPIs that we reported over the past few years. Starting at revenue at the top left-hand corner, you can see that up to 2020, the business was growing at around 10% a year. And then we reached an inflection point. And since then, the business has been growing by at least 20% in each of the years.

Looking at the graph over to the right-hand side, you can see that 1 of the drivers behind that has been the increase in recurring revenue that we have seen over time. So from 2018, up to 2023, the recurring revenue run rate has actually increased by 28% a year. So overall, much faster than the overall growth in revenue. One of the key drivers of that in 2023, with the increase in the managed service run rate that you can see in the graph on the right-hand side there, and that is because a greater number of customers are taking up that service, which is clearly very beneficial for us. And it's really why over time Cerillion is becoming a much higher quality business.

Louis already talked about the new orders in the back order. So you can see the back order would have been flat year-on-year, but taking into account the impact of the new deal we signed a few weeks ago, the back order increased up to GBP 52.5 million. In terms of net cash, you can see net cash increased again in 2023, increasing by 22% up to GBP 24.7 million. And I'll talk about cash generation in a bit more detail in a later slide. In terms of adjusted PBT and adjusted EPS, you can see these increased by a much faster rate than revenue in 2023. So adjusted PBT was up by 41% and that just demonstrates our high operating leverage as the incremental revenue drops through to profit at a very decent rate.

And finally, on this slide, you can see continued progression in terms of our dividend policy with a total dividend for the year up to 11.3p per share. So this slide shows more of our financial highlights. As Louis said, revenue for the year was up 20% to GBP 39.2 million. You can see that this was mainly driven in the table by the increase in software revenue, which in 2023, accounted for 54% of total revenue. So this was really driven by a higher element of license revenue recognition during the year. You can see the benefit from license revenue in terms of the margin. So the gross margin up to 78.6% and the adjusted EBITDA margin up to 46.2%.

So clearly, any incremental license revenue drops all the way through to profit at pretty much 100%. So that's very beneficial in terms of increasing our margins. At the same time, there was some increase in operating expenses. So operating expenses increased by 17% on a reported basis, albeit after stripping out the impact of unfavorable FX, operating expenses increased by 12%, so well below the increase in revenue that we saw.

In terms of our cost base, we continue to manage our cost base very closely. We have invested in heads during the year. So overall headcount increased by around 10%. But we've actually continued our strategy by focusing on recruitment in India and Bulgaria versus the U.K. And so doing this strategy, we've actually managed to minimize the increase in the average cost per head. So that has increased well below the level of inflation overall. Finally, you can see net cash up to GBP 24.7 million, which has enabled us to propose a final dividend for the year, bringing the total dividend to 11.3p per share.

So the next slide looks at cash generation in a bit more detail. The table at the top shows a reconciliation of profit through to free cash flow. I guess the thing that stands out here is that there has been an increase in working capital during the year. This has been driven by a higher level of accrued income on the balance sheet, which is due to the high proportion of license revenues that we recognized. So to explain that, the way we recognize our license revenue under IFRS 15, license revenue has to be recognized upfront once it's been installed on the customer's systems and the customer is able to benefit from using it.

But typically, the customer will pay for the license revenue on a straight-line basis over the term of the contract. Therefore, when we recognize the license revenue, we typically have accrued income being recognized on the balance sheet, which then unwinds over time as the customer pays it. In terms of the other balances, they're pretty much in line with the prior year. There has been some increase in tax paid for the year, and that is due to the increase in the tax rate, which I'll explain on the following slide.

But really, the graph at the bottom, which shows a reconciliation from opening that cash to closing that cash just demonstrates that overall free cash flow was significantly higher than the cash outflows on dividends, lease payments, being a very small amount from favorable FX. In terms of the detailed income statement, a couple of additional points to note here. First of all is that we continue to invest in R&D. So over the year, we invested around about 11,000 days into R&D. This was up by over 20% on the prior year. We did capitalize GBP 1.1 million of development costs in line with the accounting standard, but that was broadly offset by the amortization charge, which was GBP 900,000 during the year.

In terms of depreciation and amortization balance, you can see there was a fall from last year. This really reflects the fact that amortization of acquired intangibles became fully amortized at the half year, hence there was a slightly smaller charge in FY '23 versus FY '22. And again, looking forward to 2024, we would expect the amortization -- depreciation and amortization charge to be again, GBP 400,000 to GBP 500,000 lower. Finally, as we anticipated, there has been an increase in the tax rate during the year. So this increased from 14.2%, up to 19.7%, and this was driven by the increase in the U.K. corporation tax rate from 19% up to 25% from the 1st of April.

So next slide looks at the balance sheet in a bit more detail. I think the key point here is that the balance sheet remains incredibly strong. You can see net cash there of GBP 24.7 million. To reiterate, we do not have any borrowings at all. These are repaid a couple of years ago. And over the period, there was an increase in our assets -- our net assets balance of 38%. Finally, as expected, there has been an increase in accrued income. So you can see that within the receivables lines. And as I explained before, this was due to the high proportion of license revenue that we recognized during the year. And this should unwind in future periods.

Finally, the detailed cash flow statement. Again, this demonstrates continued growth in net cash, so net cash increasing from GBP 20.2 million, up to GBP 24.7 million despite the increase in working capital that we saw during the year. But I think the main points have already been covered. So I wasn't planning on saying anything additional on this slide. Back to you, Louis.

[Louis Hall, executive]

Thank you, Andrew. So really just to summarize, I think the record back order book we now have does give us a lot of visibility looking at '24, particularly with this new contract, new customer win very early in the new financial year. And again, looking at the pipeline, new customer logo pipeline has increased and it's still growing. So we're positive about that in terms of potential prospects for more new logo wins, and we have a very strong existing customer base that we expect to drive more demand as well. So I think all in all, as Andrew said, we are well positioned on balance sheet and cash. We're pretty well placed for '24, achieving consensus forecast. And looking at '25, I think we're well placed for continuing the trends.

[Operator]

[Operator Instructions] First question, can you tell us more about the Tier 1 telco that you've just won?

[Louis Hall, executive]

Yes, good question. So we're not allowed to disclose unfortunately the name of this one. There's pretty strict confidentiality around that and it's often the case with larger telcos. They want to see project delivery before they're prepared to go on record. So I can't reveal the name, but it's a Western European telco that is across mobile and fixed wire, and initially the contract is to deliver the mobile solution, well, to deliver a solution to migrate mobile. There will be more work to do in the future on delivering the fixed wire -- migrating the fixed wire business.

There's a very tight time line for this one. They're in quite a bit of a hurry to get this implemented into market. We are replacing 1 of the large ISV vendors that had a much more bespoke solution. So I think it's an important proof point of the fact that the SaaS model is preferred over the traditional bespoke model. So that's a positive, but we're very excited about it and work has already started, we're already well into this project.

[Operator]

Fantastic. And does it cover both its mobile and fixed networks or just mobile?

[Louis Hall, executive]

Yes, I was just saying that initially we're doing mobile, but then we're expected to follow immediately afterwards with the fixed line migration. So the initial implementation will put the solution in place to cover both fixed and mobile, but they'll migrate the mobile base first, and there'll be another subproject to migrate the fixed wire base, which we'll get underway probably in early 2025.

[Operator]

Tremendous. Can you give us a feel for the mix of customer types in the pipeline?

[Louis Hall, executive]

There's a very wide variety. I mean, we've got big ones, small ones. We've got traditional network operators, MVNOs, MVNEs, a really broad range. And then that's one of the great things about our market. There is such a diversity of telcos, and we're able to work with any of them, whether it's wholesale, retail, whatever.

[Operator]

And the question here says, thanks for your presentation and congratulations on these results again. Could you please comment on capital allocation and how you intend to use your net cash going forward?

[Louis Hall, executive]

Yes. I mean there was a slide on that on the presentation, which we didn't actually get to, at the back of the presentation. But essentially, first of all, it's really important, as we work with larger customers, to have -- here we go, you'll be able to find it, there we go. So these are the main areas we look at in terms of capital allocation. On organic growth, we're not really seeing the need to invest cash into that, in that we're expensing most of that growth -- all of that growth really at the moment. So although we do capitalize some R&D, we amortize about the same amount each year. So that's pretty much neutral.

We've added more sales resource last year. But again, we covered that in the operating expenses. Dividend policy is still to pay 1/3 to 1/2 of free cash and dividends. And I think we're now up to that level this year. It has taken us a little while to get there.

We have grown dividend again, and we are now paying about 1/3 of free cash out in dividend, so that's obviously important. And then on strategic side, yes, we are still looking at M&A opportunities. And the strategy that we follow there is to look at product businesses that would sit alongside our existing product set. So we're not looking to buy overlapping businesses, but this is how products that we could upsell to existing customer set that we don't have today. And they would also bring onboard a new set of telco customers that we could upsell our existing product set to. However, the challenge we have is that we do have quite strong margins now.

And if you're trading on a 46% EBITDA margin, there aren't many businesses out there that are at that level. So the problem then is that you're eventually going to dilute your own margin by making an acquisition. So that's not a prohibitor as such, but it is a challenge. It's a factor in our thinking when we approach these opportunities. But at some point, we will find the right business, at the right price, that's generating the right margins, and we will get that.

And obviously, having cash on the balance sheet is important for that. It means we haven't got to raise as much debt as we would do or potentially as much equity capital as we would need to do. But as I said in the beginning, a big consideration for us, as we work with larger telcos, is there is a need to demonstrate a strong balance sheet. So if you were a part of large telco, betting your business on the fact that we can deliver, which is where we're at, we are very strategic in these accounts in terms of software we provide, it's important that they see we have a strong balance sheet. And I think that is a factor. So it doesn't mean to say we need all of that cash on the balance sheet, but it is important to have a reasonable amount of cash available.

[Operator]

And last year, note 3 expected 75% of GBP 37.4 million orders contracted, not yet recognized in the next 12 to 18 months. This year, 45% of the GBP 36.7 million, so GBP 16.5 million in the next 12 months, not quite a like-for-like, but it suggests a much higher reliance for 2024 on new contracts won and booked in to hit targets.

[Louis Hall, executive]

Yes. I'd just say, it is almost like, but we've changed the period that reduced the percentage to make it more accurate. And so for the analysts it's better because they can do their math more easily. But Andrew, do you want to cover that?

[Andrew Dickson, executive]

Yes, sure. So you're absolutely right. If you take the 45% of the GBP 36.7 million backlog, we're sort of saying that around GBP 16.5 million of revenue we expect to be recognized that's in the backlog as of the 30th of September. Of course, there's some extra things we have to add on, on top of that. So first of all is the impact of annualized support and maintenance revenue. So that was running at GBP 8.6 million -- sorry, GBP 8.7 million as at the end of the year. So we would expect that sort of level of support and maintenance revenue to be recognized potentially higher than that as we win new contracts.

On top of that, we've got the impact of the contract that we signed a few weeks ago. So we expect to generate a significant amount of revenue from that contract. And then there's a couple of other elements on top. So first of all, our accounting policy is to recognize term license renewals when the contracts have been signed. So clearly, the fact that those haven't been signed as at the end of the period meant that it wasn't in the backlog, but we do fully expect a certain element of licenses to be renewed. And therefore, that revenue should be recognized during the year. And finally, there will be some impact from a similar perspective on managed service revenue, where those contracts would have been coming to an end at the end of the year, we fully expect those to be renewed and hence, there will be some additional revenue from renewal of managed service contracts as well.

[Operator]

[Operator Instructions] At the moment, we have no more questions, but I'm very happy, we've got a little bit more time if anybody has a question. I think you've talked about this a little, but I will ask this question. Can you talk about the relatively big increase in working capital due to the increase in receivables. Where does this come from beyond just increasing sales?

[Louis Hall, executive]

Yes. So the increase in accrued income is really tied to the way we have to recognize our license revenue. So we have to follow the accounting standard IFRS 15 revenue recognition. And under that, it means that we have to recognize license revenue upfront when the license has been installed and the customer is able to benefit from using it. However, the customer will typically pay on a sort of straight line basis over the term of the contract. So what that means is when we recognize license revenue, we typically see an increase in accrued income on the balance sheet, which then unwinds over time as the customer pays for it.

[Operator]

Great. And you also covered this, but the questioner obviously would like you to talk about it. Excluding the new EUR 12.4 million contract with the new European telco, your back order book was flat for the year at GBP 45.4 million. Since this is usually a good point to where your revenue is going, what made it remain flat year-on-year? Is it just timing of contracts?

[Louis Hall, executive]

Yes, absolutely. That was down to contract timing. So the deal that we announced a couple of weeks ago, EUR 12.4 million with the European Tier 1. That was really 1 in 2023. But we had a long contracting process and to actually get a contract signed, that drifted into the start of the new financial year. What we did do, as I was saying earlier on, is we published in the results, our backlog as at last Friday, the last business day before results came out. And it was up to GBP 52.5 million, which is a new record, a long way ahead of the GBP 45.4 million at the previous year-end.

So if you look at the position today, as Andrew was saying before, that new contract will obviously play into backlog this year. And because this is a customer that's in quite a big hurry, quite a good proportion of that revenue will get recognized in '24. So that backlog effective at the start of the new financial year is not flat, it's ahead.

[Operator]

Great. And is consolidation in the telecom sector risk to you? So that some of the clients would get acquired by larger Tier 1 telcos and that would terminate the agreement with you?

[Louis Hall, executive]

There is some consolidation going on, but there's also a deconsolidation going on. So if you look, for example, at Zegona, a U.K.-based investment vehicle buying Vodafone Spain recently. That's a very interesting transaction because there's Vodafone divesting businesses. And again, it's not all 1 way. But sometimes, we win in those situations as well. So when Liberty Global bought the cable wireless business a few years ago, we actually got more business in the end in the Liberty Global Group than we had, to start with. So that was a benefit. But I think there are always different kind of telcos bringing up. If you look at the number of telcos that have come out of energy businesses, 2 of our more recent customers are actually really energy companies. So there's always a new place that the market will go to, to find different kinds of competition. So we're not too phased about that.

[Operator]

And you added salespeople in the U.S. this year. Any comments on your intentions there?

[Louis Hall, executive]

Well, we've always had U.S. customers and North American customers. I think we had a view until quite recently that the prospects in North America were either very big, massive, biggest in the world type telcos, the Verizons and so on, or they were too small, they're typically small rural carriers. And there wasn't much in the middle. I think we sort of have a different -- I think things have changed and our view has changed. And we think there are more varied types of telcos to go after now in North America. And we're already seeing more opportunity in the pipeline from that region for new logo wins as a result of having someone on the ground and we're going to a lot more shows because we've got people in country compared to what we were doing before. And it's sort of a vast market and having people in 1 place doesn't necessarily solve the whole problem, but it gives us a better access into that market. So we do think that there's more opportunity to come and we will win new logos there.

[Operator]

Is there any consideration of stock buybacks instead of dividends?

[Louis Hall, executive]

The only time that we were really doing stock buybacks and we've done that before is to satisfy the LTIPs. The management team have an LTIP scheme. And we're talking about relatively small amounts of equity, but we've bought shares in the past to fund that, because we'll obviously have more equity when we've got all this cash on the balance sheet. And equally, we have Save As You Earn staff schemes, which requires small amounts of equity to satisfy those option agreements. So it's really only for kind of internal share options, staff share options that we would do share buybacks. At the moment -- I mean, who knows what might happen in the future, but we don't really envisage a point at which, in the near future, we'll be doing significant share buybacks. If anything, we're keen to get more liquidity and to increase the volume of equity in the market rather than decrease it.

[Operator]

And how are our bigger competitors reacting to us winning business often?

[Louis Hall, executive]

Yes. Well, I think we're starting to annoy some of the big beasts. And it would be interesting to see how they react, particularly this latest one. So I think that it will become an issue and we probably will see some reaction. I mean, they obviously fight very hard to keep the business and not to be beaten. Yes, there's not more to what I can say on that unfortunately, but I think we will see some more violent reactions, if we say, than we've seen in the past as we keep winning these winning deals away from these bigger competitors.

[Operator]

Do you have a view on how they'll retaliate? Whether it'll be price or whether it'll be whatever?

[Louis Hall, executive]

I think they always play the price card, and of course, a lot of vendors will sometimes attempt to do cheap upfront, but on the basis of longer term, they'll have much higher returns, but it's quite difficult because they're offering solutions that are very services heavy, and they're just expensive. So they're really quite constrained into how far they can go with that. So I think that's less likely.

Obviously, there'll be a narrative around small company, why would you buy from them? Why would you trust the business of this size to provide your most important software layer, et cetera, and all of that stuff. But I think as we keep winning more of these customers, and we've been around a long time and we keep growing and the balance sheet is strong, that arguments harder as well. But yes, I mean, and then who knows what else might happen in the future, but I think in terms of trying to buy Cerillion, that's a bit of a challenge because of the multiples that we're trading at. And it's not a no-brainer even for the larger vendors. But obviously, that may be something which we see in time to come.

[Operator]

You've taken the words out of the questioner's mouth, who wrote exactly the same. "Someone will have to buy us." Thank you very, very much indeed. That's the end of questions. Do you have any closing remarks?

[Louis Hall, executive]

Other than to say, thank you, everyone, for joining. Much appreciate your attention, and we hope we can keep pleasing you all shareholders. We're very pleased to have you as shareholders, and hopefully, we can carry on delivering for you.

[Operator]

Well, thank you very much for a brilliant performance, and thank you both very much for your presentation. To everyone listening, you'll now be taken to a web page to give feedback on today's presentation. If you can't complete it now, you'll receive a follow-up e-mail. We'd be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.