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Micro Focus Intl PLC (NYSE:MFGP)
Q2 2020 Earnings Call
Jul 7, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Ben Donnelly -- Interim Head of Investor Relations

Thank you, operator and good afternoon, everyone. This earnings call covers the six-month period to the 30th of April 2020. I'm joined by our Chief Executive Officer, Stephen Murdoch and our Chief Financial Officer, Brian McArthur-Muscroft. In a moment, I'll hand over to Stephen for some comments on our performance in the period.

Please note, for those of you already accessing the webcast facility accompanying this call, 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. The call will consist of a short presentation followed by the opportunity for Q&A at the end.

I would now like to hand over to Stephen for some introductory remarks.

Stephen Murdoch -- Chief Executive Officer

Thank you, Ben. In February, we shared with you our three-year strategic plan. We are making progress executing against the objectives laid out as part of this plan, and at the same time, dealing with the practical and macroeconomic impacts of COVID-19, which impacted operations during March and April. April is the second largest trading month in our financial year, and the largest within this results period.

Our revenue performance was consistent with the guidance given at the time of our preliminary results on the 4th of February when taking into account the expected disruption to new sales activity, which we highlighted separately in our COVID-19 update on the 18th March. I will talk about product group performance and the actions we are taking later, but in summary, we've made good progress in our Security portfolio, Application Modernization & Connectivity together with Information Management & Governance performed broadly as we expected. Our performance in our ITOM, IT Operations Management and ADM, Application Delivery Management portfolios has been below our expectations. The impact on our adjusted EBITDA and cash was largely mitigated through a combination of cost control and natural reductions in costs such as travel and strong working capital management. In addition, as a result of COVID-19, we've incurred an impairment of $922.2 million or approximately 8% of our intangibles and goodwill balance. Brian will discuss the rationale for this in more detail in his section.

Despite the challenging market conditions, the refinancing over $1.4 billion term loan facility was oversubscribed and completed successfully on the 29th of May. As a result, our next term loan is not due to mature until June 2024.

In addition, the Company has significant cash resources. Specifically, as of the 30th of April, the business had operating cash of $600 million and total available liquidity of $1.1 billion. We're five months into the execution of our three-year strategic plan. And within this, FY '20 is a transformational year. We're making solid progress and are seeking to build additional flexibility such that we can adapt our approach in response to the opportunities and the threats arising from continued macroeconomic disruption caused by COVID-19.

I'd like to turn now to our response to COVID-19. As a Company, we operate globally with significant development centers in the USA, China, India, Israel and the U.K., and we have business operations in 49 countries. As COVID-19 developed to have global impact on our Company, we reacted quickly in developing a comprehensive approach, focused on ensuring the health and safety of our employees, and continuing to deliver great service to our customers and partners. In support of this, our business continuity plans have been thoroughly tested, and are proving robust. I'm proud of the way our team has responded by acting decisively and being proactive in learning and adapting our ways of working to be as effective as possible in support of our customers during this very challenging time.

To provide some color here, I want to highlight an example from the healthcare sector of how our solutions are helping customers respond and adapt. Our Fortify on-demand solution allowed the health provider to scale quickly, while simultaneously improving the cyber security standards as they dealt with significantly increased demand. And more broadly within the healthcare sector, multiple organizations are embedding our predictive analytics technology to monitor and help track the spread of COVID-19.

Looking beyond an individual sector or customer, we've also changed our approach to customer engagement. For example, during the period, we hosted our key European and North American customer events, which we call Micro Focus Universe, in a virtual format for the first time. More than 4,000 customers and partners attended live sessions and thousands more accessed on-demand content, explaining how Micro Focus can support and help accelerate customers' digital transformation programs.

During March, we transitioned to remote working, and have more than 90% of our people working from home. Additionally, we have 11 of our 101 offices opened worldwide. Looking forward, we will take a considered approach to exactly when and how do we return to a more office-based environment. What is certain, however, is that we will not be returning to working as we did pre-crisis. Instead, we're taking the opportunity presented by what we've learned from this experience to rethink our approach to how we collaborate, how we innovate, and how we work, and this is expected to result in us adopting a more flexible hybrid model going forward.

Like most other organizations, COVID-19 has had an impact on our financial performance. We estimate reduction of at least 2% and probably closer to 3% on our revenue when compared to the same period a year ago. The majority of this relates to specific license opportunities, which have been delayed, and these were primarily weighted to sectors impacted most by COVID-19, including automotive, transportation, and retail. Some of these opportunities have already closed or will close in the second half, but there is obviously a risk of further slippage with these opportunities, and more broadly within the pipeline for Q3 and Q4. In addition, we also saw the delay to a number of maintenance renewals and examples of customers renewing, but for a subset of their installed licenses. Given the criticality of our software, in most cases, we expect these renewals to be delayed, not canceled, and are analyzing the examples of partial renewals to ensure the correct actions are taken going forward.

Looking now to the performance at the product group level, Application Modernization & Connectivity is a stable and highly cash-generative product group. This business will continue to trend flat over the medium term, and performance whether strong or weak in any single period should not be taken as an indicator of the longer-term revenue trends. The key area of growth within this portfolio continues to be our mainframe workload modernization products, and the solution we offer customers here is very well positioned to continue to develop further market momentum.

In Application Delivery Management, our performance has been below expectations, and was driven in part by inconsistent sales execution. The key solutions within this portfolio are well-positioned and already helped some of the world's largest organizations build an integrated, end-to-end software delivery process, focused on delivering speed without compromising quality. However, these trends are not been captured in our performance well enough yet. The corrective actions being taken as part of the transformation of our Go-to-Market organization are designed to address this inconsistency in execution. For example, the organization is being simplified and resources realigned to deliver better balance across our core revenue streams, and more dedicated focus on key products within each portfolio.

The underlying performance in ITOM needs to improve overall. The Go-to-Market improvements I discussed a second ago also apply to ITOM. But, in addition, we have taken initial corrective actions specific to this portfolio that are focused on -- primarily on maintenance renewal performance. In parallel, we are undertaking a more comprehensive assessment of any further substantive actions required in order that we drive towards our aim of delivering a strong core of stable revenue in this portfolio.

In Security, we're pleased with the progress we're making. The strategic investments in Go-to-Market hires are progressing as planned. And overall, the business is performing in line with our expectations, and on a planned path back to revenue growth.

Finally, in Information Management & Governance, a key within this portfolio are the investments in Vertica and Digital Safe and the repositioning of the latter product set to deliver a cloud-based solution. These are progressing well and at pace.

Moving now to an update on progress against our strategic plan. In February, we announced four initiatives, which when combined with existing programs, are designed to deliver on our strategic vision for FY '23, and create a business which is more efficient, agile, and better aligned to our customers' value proposition. Firstly, evolving our operating model to accelerate and improve the visibility of our product strategies and drive more differentiation. In the last six months, we've made a number of key hires, and the planned organizational changes required to drive more autonomy and effectiveness in our Security and Vertica product groups are progressing well. The changes we're making here are intended to support the delivery of revenue growth in these product portfolios.

Secondly, transforming our Go-to-Market organization to deliver significantly improved sales effectiveness over time. Since we last spoke, we've implemented a consistent sales methodology and overall approach to education and enablement. We've begun simplifying the Go-to-Market organization and realigning resources to ensure better balance across our different revenue streams and within each product portfolio. We now need to bed this in through multiple sales cycles and course correct to drive further efficiencies.

Thirdly, accelerating the transition to SaaS and Subscription to better align to the market opportunity we see where these models are becoming the de facto standard. The additional work to date in this area has focused on the planning and development of customer offerings for our Security and Vertica products. This transition will take place over multiple financial periods.

Finally, completing the core systems and operational simplification work that we need to do to deliver a robust and efficient operating platform. Key within this is the development of a single set of operational systems, which we refer to as Stack C. This is a global program being executed principally in the U.K., USA, and India, and in conjunction with our Systems Integration partners. As communicated previously, we had two possible cut over plans as we seek to balance speed and our compliance obligations on the Sarbanes-Oxley Act, which limits the time frames within which we can make substantive changes to our operational controls. The move of this complex program to remote working has been executed effectively, but the impact of doing this at a critical time in the project means that we have now moved to our alternative cut over scenario of November 2020 and February 2021 versus our original expectation of May and November 2020. This will clearly have a cost impact for the program, and the full extent of the impact is heavily dependent on lockdown restrictions in key geographies. However, work is already under way to mitigate any cost as much as possible.

In summary, we continue to make progress overall and looking to accelerate further within Security and in driving the changes we need within our Go-to-Market organization. As you would expect, the execution of these initiatives is now also being balanced with the new risks and opportunities, which have arisen due to COVID-19 such that we adapt our approach as required to deliver against our goals.

And I want to hand over to Brian to provide further detail on our H1 performance.

Brian McArthur-Muscroft -- Chief Financial Officer

Thank you, Stephen. Hello, everyone, and thank you for joining the call. As Stephen mentioned a few moments ago, the period we're reviewing has been one of significant change for our customers, partners, and employees. We've reacted quickly to minimize disruption to our business. To this end, our processes in the associated control environment prove robust and ensuring business continuity. Our ability to close our half-year while 90% of the workforce has worked remotely is a good example of this.

As a management team, our focus has been on protecting our staff, including our decision not to furlough any employees while maintaining service to customers as Stephen has said, but also seeking to manage discretionary spend on working capital in light of COVID-19.

I want to remind everyone that we adopted the IFRS 16 leasing standard from 1, November 2019 on a modified retrospective basis. As a result, a number of performance measures included in this presentation have been impacted by this change, and we have not restated prior year comparatives. As we go through the various measures, I will highlight these impacts. And, we've included in Appendix 1 of this presentation the estimated year-on-year impact.

The information I refer to on this first slide is on a constant currency basis, unless stated otherwise. And for further detail on the impact on the business of currency movements, please also refer to Appendix 2.

So, let me give you an overview of our financial performance. During the first six months of the financial year, the Group's revenue performance has been consistent with our guidance. Our original guidance was for revenue decline of approximately 9% on a constant currency basis in the first half of FY '20. This decline was anticipated due to disruption arising from the structural changes we're making to our Go-to-Market and product organizations. The changes made to the Go-to-Market organizations were not product-specific, so the impact was pervasive across all product groups.

In addition, we've estimated that COVID-19 reduced revenues by at least 2% further in the period caused by specific deals, which have slipped as a direct result of the COVID-19 pandemic. However, it is likely that the impact on trading performance was greater. Similar to most businesses, we've witnessed a slowdown in customer buying behavior in the quarter ended April 2020, which is unsurprising given the global lockdown restrictions imposed.

In order to provide context, April is our second largest traded month of any financial year. The table on this slide sets out revenue performance by stream. And, Stephen has already provided an overview of product group performance, and we provide further product group analysis in Appendix 3 to this presentation. License revenue declined by 21.3% in the period. This revenue is generated primarily through new projects undertaken by our customers. As such, license revenue has been impacted by COVID-19, as customers naturally seek to delay investment decisions until the impact of the pandemic is better understood. In addition, license revenue is the revenue stream impacted most by the transformation activities we've undertaken as part of the Strategic and Operational review. The remainder of the decline was anticipated and included within our original revenue guidance.

The majority of the maintenance revenue decline arose in our ITOM and ADM product groups. These declined by 16.3% and 9.3% respectively. Maintenance revenue within the other segments was broadly flat year-on-year. The disappointing performance in ITOM and ADM was compounded by the year-on-year impact of certain one-offs which were factored into the guidance issued by the Group in February 2020. The timing of these one-offs and the consequential impact on revenue phasing means that the maintenance decline is not indicative of the underlying trend within these product groups.

However, looking beyond these one-off factors, underlying performance does need to improve. Initial corrective actions have been identified and are in execution with more comprehensive assessments of any additional substantive actions required being undertaken in parallel.

The impact COVID-19 will have on our customers' investment decisions remains largely unknown. However, as a reminder, our software delivers mission-critical applications which our customers rely on to run their business. We are currently reviewing our customers by industry vertical and the potential downside scenarios which could affect each vertical. Micro Focus benefits from a highly diverse customer base, which is not concentrated by vertical or geography.

SaaS and other recurring revenue decreased by 12.7% in the period before the impact of the deferred revenue haircut. In February, we outlined our intention to transition certain areas of the business to subscription or SaaS revenue models, with the objective of achieving an excessive 15% of total revenue from these revenue streams by FY '23. We're clearly in the early days of this transition and the vast majority of work to-date has been focused on rationalizing unprofitable SaaS operations and adding SaaS capability to certain product offerings. This transition is intended to be a multi-period transition with FY '20 predominantly focusing on extending the capabilities within the products in the Security and Big Data product offerings.

Consulting revenue declined by 14.8% in the six months ended 30, April 2020. In the period, COVID-19 caused delays in certain projects where physical access to customer sites is required for delivery. Over the previous two financial years, we've continued to reposition our consulting revenue stream to focus on projects related to the sale of new licenses and retention of our installed base. This work is broadly complete, and we anticipate this revenue stream will stabilize in future accounting periods, obviously subject to the current impact of COVID-19.

The Group generated an adjusted EBITDA of $552.2 million in the period at an adjusted EBITDA margin of 38%. As a reminder, the Group adopted IFRS 16 in the financial period. And as a result, adjusted EBITDA benefited by approximately $35 million. We have not restated the prior-year comparative. We've reacted quickly to largely mitigate the COVID-19 negative revenue impact at the adjusted EBITDA level. This has been achieved primarily due to the close management of variable and discretionary costs, in addition to a natural reduction in certain costs as a direct result of the pandemic.

We have reduced spend further by putting in place a hiring freeze on headcount in all, but a few specific and high priority areas. And, costs have been reduced in obvious areas such as travel and entertainment plus other predictable areas as the vast majority of our workforce have been working from home. As the world begins to come out of lock down, it is expected that our employees will return to business travel only when this is absolutely necessary.

In March this year, we took the difficult decision to suspend the FY19 dividends in order to preserve cash. This dividend was approximately $190 million of which $143 million was subsequently used to reduce gross debt as part of the refinancing in May 2020. Given the heightened sense of macro uncertainty, we continue to believe it is right to approach the current financial period with a reduced risk appetite and a heightened sense of caution. As such, we do not intend to pay an interim dividend at this time.

This is not a decision the board has taken lightly, and we appreciate the patience of our shareholders in canceling this dividend through these unprecedented times. It is the board's current intention to propose a final dividend in relation to the current financial year if it is prudent to do so within the context of our business performance and the macroeconomic environment.

Moving now to some of the other key financial performance metrics. Firstly, exceptional items; HPE Software related exceptional spend in the period totaled $126.2 million, with IT systems spend totaling $71.5 million of this amount. The exceptional costs associated with the HPE Software acquisition are still expected to complete in the first half of FY21. The majority of the expenditures still to be incurred relates to the single IT platform. This remains a key strategic priority of the Group as Stephen set out earlier.

The delivery of this platform is a significant enabler of increasing operational efficiency and removing complexity from our business. It also represents the next catalyst for operating cost reductions. In the period, the Group recognized an impairment charge of $922.2 million. The impairment charge is attributable to the increased economic uncertainty as a result of COVID-19. Due to this uncertainty, it is extremely difficult to undertake an impairment review. As a result, our approach has been very much about undertaking the review as early as possible.

Ordinarily, we've not undertaken impairment review in the half, but the substantial change in the macro-economic environment is considered a trigger event from an audit perspective. And, we felt it was the right thing to do to assess the Group's assets for impairment at this stage. To-date, the only meaningful data point we have to assess the impact on the business is the 2% negative revenue impacts witnessed in the first half. As a result, we took a pragmatic approach with our auditors by reflecting this in our business planning model, while updating our weighted average cost of capital, WACC, to reflect the increase in risk in the wider financial markets.

WACC is a key assumption in the impairment model and the business is highly sensitive to small changes in the WACC. The impact of COVID-19 on economies and financial markets continues to evolve at pace and is without more than precedent. This impairment represents circa 8% of the Group's goodwill and other intangibles balance. And, we'll continue to monitor the carrying value of assets as the situation evolves, including as part of our annual impairment review in October.

Adjusted cash conversion in the period has been particularly strong at 131.5%. Our cash conversion is typically stronger in H1 where cash is collected from Q4 billings in the first half of the following financial year. Nonetheless, as you can see, the current year is 16.4% points higher than the comparable period for last year, and that's despite the current economic headwinds. Free cash flow for the period was $304.9 million. The year-on-year comparison of free cash flow is impacted by a few one-off, which I will discuss in further detail on the next slide.

The Group's net debt at 30th April, 2020 was $4.3 billion after including approximately $244 million in relation to operating leases following the adoption of IFRS 16. As at 30 April, 2019, we reported an adjusted net debt figure, which was restated to include the $1.8 billion return of value made to shareholders in May 2019. However, this figure has not been restated for the impact of IFRS 16 or the tax payment in respect to the SUSE disposal of approximately $260 million. Adjusting for these items on a like-for-like basis, the Group has actually reduced net debt year-on-year, and I will discuss this in more detail later in the presentation.

Turning to Slide 12, Micro Focus continues to be a highly cash generative business. The Group generated free cash flow of $304.9 million in the six months ended 30 April, 2020. The year-on-year comparison of free cash flow has been impacted by the disposal of SUSE in the previous accounting period and the adoption of IFRS 16. The six months ended 30 April, 2019 included four months cash generation in relation to SUSE. Due to the carve-out nature of the SUSE disposal, the exact impact of this is difficult to quantify, but is an indication SUSE generated $40 million of adjusted EBITDA in the four months before disposal.

The adoption of IFRS 16 means that the presentation of adjusted EBITDA, interest payments, and finance lease payments are not comparable year-on-year. In the period, we've elected to change our definition of free cash flow to include finance lease payments, and this change has been made to both financial periods. We have made this change in order to aid comparability. And as a result, total free cash flow is not impacted by the change in accounting policy year-on-year.

The Group had a working capital inflow of $99 million in the six months ended at 30 April, 2020 due to the strong working capital management and typical seasonality of our business I discussed on the previous slide. We continue to incur cash exceptional costs, which in the period reduced the free cash flow by $122 million. Excluding these costs, free cash flow would have been $426.9 million.

Then, moving to the final slide of the finance section, we turn to the Group's capital discipline and balance sheet strength. In May 2020, the Group successfully refinanced its $1.4 billion term loan due for repayment in November 2021. The successful completion of this refinancing was particularly pleasing given the 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. As a result of the refinancing, no term loan is due for repayment until June 2024.

In addition, at 30 April, 2020, the Group had $1.1 billion of available liquidity comprising cash reserves and fully committed revolver facilities. As a result of this financing, the Group also elected to pay $143 million down of the original term loan facility on completion of the transaction. On a like-for-like basis, the Group reduced net debt by $270 million in the six months ended 30 April, 2020 despite the headwind of COVID-19. Our leverage was 3.4 times at 30 April, 2020, which is in line with our original expectations. And finally, I will close by saying that our capital allocation policy is unchanged and our medium-term leverage target remains at 2.7 times.

With that, I'll hand back to Stephen to sum up before we move on to Q&A. Thank you. Stephen?

Stephen Murdoch -- Chief Executive Officer

Thank you, Brian. I want to turn now to our outlook. Historically, we've given forward revenue guidance within a tight 2% to 3% range for the current financial year. However, in the current environment, it's not possible to provide that level of forward revenue guidance, which is why we withdrew formal guidance with our trading update in May. In the main, our products are mission critical to our customers core business operations and a large part of our revenues are recurring and contractual in nature.

This dynamic was highlighted during the first half of the financial period, where we saw an impact in relation to COVID-19 of between 2% to 3% on revenue, despite the majority of the global economy entering lockdown in our second largest trading month. Although, we have some degree of resilience, we are obviously not immune. And, the ultimate impact of COVID-19 on the global economy remains unclear, as does the timing and extent to which that impact flows through into customer spending plans on enterprise software.

Our working assumption is macroeconomic conditions are unlikely to improve in the second half of the financial year to while we were originally anticipating a stronger second half to this financial year. And, some of the reasons for thinking that still hold true, we have to balance that against the second half, which includes our major trading month of October and that bears a full six-month impact of COVID-19.

The revenue streams, which are under normal circumstance is more predictable, and driven by bookings in the previous periods are Maintenance and SaaS. In Maintenance, we had a couple of the starting one-offs in H1, which will not repeat in H2. And so, all other things being equal, we would anticipate a better maintenance performance in the second half. That said, in H1, we witnessed a small number of customers delaying the renewal or partially, the smaller footprint. These are being investigated to ensure that we mitigate this in as many cases as possible, and therefore minimize any impact to Maintenance performance in future periods. In SaaS, we're completing the rationalization and refocus of existing offers and beginning our transition in new areas. As such, we expect the performance in this area in H2 will be broadly in line with H1.

The area we expect to be most heavily impacted by COVID-19 is our new project business, which drives license and consulting revenues. In terms of license, our most critical trading month is October, and we regularly do a meaningful proportion of our sales for the full year in the last few weeks of this month. Forecasting accurately in this area within the current uncertain macro environment is extremely challenging. Looking to longer-term trends, we believe the drive for digital transformation programs will continue to accelerate, as companies seek to rebuild and reshape their businesses, and our core customer proposition can be even more relevant looking forward.

In helping the organizations to bridge the gap between existing and emerging technologies, our customers are able to better balance the need to both run and transform their businesses, such that they deliver innovation faster with less risk. We believe these are key elements of a successful digital transformation program. In support of this, we're continually refining our approach and offerings to deliver sharper, more focused solutions for our customers.

In summary, our Strategic and Operational improvement plans are focused on creating value for our shareholders by stabilizing revenues, improving profit margins, and maximizing cash generation. Within this, our immediate priorities are to stabilize revenues through the execution of our plans in Security and Vertica and by driving improved performance in both ITOM and ADM, optimizing our cash generation through continued discipline in both cost and working capital management, and delivering our core systems transition as the key enabler for capturing productivity improvements looking forward. The executive team is fully committed to driving the successful execution of this plan, and we will course correct as required to adapt to changes in the macro environment as a result of COVID-19.

Thank you for your time today. I'll now hand back to the operator, who will open up for Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] And, we do have a couple of questions in the queue already. The first question comes from the line of Stacy Pollard from J.P. Morgan. Please go ahead.

Michael Briest -- UBS -- Analyst

Thank you very much. Three quick ones from me. First of all, I'm not sure if you gave it exactly, but can you give us an idea of the extra cost for the delay in the core systems transformation program. So, I mean we've seen the exceptional cost that come through, but is there sort of an extra amount or does that just continue for an extra six months because of the delay? And then also what kind of benefit would you get once that's completed? So the wrap there.

Second question, really just your commentary on H2 made it sounds like you're expecting growth to slow further. I'm not sure if you had to comment on that. I know it's nebulous and difficult to put an absolute tight finger on, but any further thoughts there?

And third question, what are you thinking on the disposal front? Is that even still a possibility or would you consider selling off any of the businesses? Just checking on that.

Stephen Murdoch -- Chief Executive Officer

Okay, Stacy. Let's do H2 first. As we said as we went through the numbers, we're unable to forecast as tightly as we normally do, given what's going on more broadly. What we're saying is, we expect the second half macro environment to be no better than the first half, and therefore, we've got a six-month window in which we are dealing with the impacts of COVID-19.

To offset that, we're working really hard to double down and concentrate on the recurring elements of our revenue streams and also to make sure that we're much sharper in terms of how we align the business cases on the project-oriented opportunities that we see such that the business case is robust and solid, and even if the customer is facing investment challenges, our projects get to the front of the queue.

On the extra cost, the -- we think it will be between $20 million and $30 million. We're working hard to mitigate as much of that as we possibly can. And the benefits are consistent with what we've said on multiple conversations previously. Stable platform, single set systems allows for both organizational effectiveness and efficiency. It's a huge drag running multiple systems at the moment. And then secondly, it gives us a platform for cost efficiencies as well.

And then on the disposal front, we conducted in leading up to February a really comprehensive review. At the -- and per that review, we concluded the best way to deliver shareholder value was to execute the plan that we've laid out and that's what we're doing. Now, having said that, our job's not owning assets, our job is creating value. But for now, we're executing the plan, and that’s the way we believe that we will deliver the best overall returns for shareholders.

Brian McArthur-Muscroft -- Chief Financial Officer

And just to add to the answer, Stacy, that Stephen gave on the additional cost around the platform, clearly, with some delay around being able to go to that single platform, the majority of the additional cost is the incremental cost of having to hold both platforms open for longer with some of the inefficiency that brings. But clearly, we have plans once we have brought everything on to that Stack C environment that we would be able to let go of some of the costs associated with two other stacks. Inevitably with some of the delays the world is just encountering at the moment, there'll be a bit more time there. What it doesn't do is slow down what we've previously disclosed in the actual program itself. It simply means that actually as well as that -- a bit of additional cost, there will also be a more of a waiting of the cost itself into '21, than '22. So the total exceptional costs associated with the Stack C transition will be impacted by about that $20 million to $30 million, but within that if you see a higher cost in '21, it is simply moving out of 2020, it's just substitution.

Michael Briest -- UBS -- Analyst

I see. Okay, thanks.

Operator

Your next question comes from the line of Will Wallis from Numis. Please go ahead.

Will Wallis -- Numis Securities -- Analyst

Afternoon. I wanted to dig into the revenue performance or some of the comments you made on revenue a little bit more. And firstly on Maintenance, you indicated that you think that the performance in the first half is not really indicative of the underlying performance. Can you give us -- are you able to give us a number for where you feel that underlying performance perhaps actually is? And on maintenance as well, are you seeing any change do you think in the attrition rates on that Maintenance? I know it's difficult with COVID-19. But are you -- do you think you're seeing any change there? And then secondly, on revenue, I wondered if you could give some comments on the geographical split and why North America looks to be so much worse than the rest of the world?

Brian McArthur-Muscroft -- Chief Financial Officer

Okay. Thanks, Will. This is Brian. Let me start with the answer to that in terms of just positioning what we have said in the past and what is old news and what is new news on that Maintenance. So, when we did the full year results back in February, we pointed to our first half guidance of minus 9.3%. Within that 9.3% at the time was some of the Maintenance commentary that we're repeating today. So, we were already aware of some one-off items within the Maintenance we called out then that we knew were coming through, and those, as I said, were within the 9.3%.

Since then, there has been some additional COVID impact and there is some maintenance within the 2% additional as well, which I'll ask Stephen to speak to in a moment. And then, of course, we can talk a little bit to what we think the future holds. But in terms of new news, the vast majority of that Maintenance number was already there when we spoke to you at full year. Stephen?

Stephen Murdoch -- Chief Executive Officer

Yeah. Will, there is probably 1 point to 2 points of the one-offs in that number that won't repeat. But then, we did see some element of delay and some element of not a full 100% renewal as customers quite understandably in many cases are looking to optimize the spend that they have as well. So, we're working really hard to understand and got really detailed plans against each of those points to make sure that we don't see that as a trend that continues. But it's kind of been with COVID-19 exactly whether the actions we're taking are working or whether we still have some of that to play through.

In terms of geography, basically, we've got a lot of work to do in North America. We've made some significant structural changes through both the leadership team and the overall sales structure. I'm encouraged by the early signs of that. There’s much more discipline already around the basics, particularly of pipeline generation. So I would say that we are more confident in our ability to execute in North America looking forward than we have been in the previous six months. We're now trying to rebuild some of that activity obviously into quite a difficult environment, but we do feel genuinely on a better trajectory for the longer term with the changes we've now made.

Will Wallis -- Numis Securities -- Analyst

Great. Thank you.

Operator

The next question comes from the line of John King from Bank of America. Please go ahead.

John King -- Bank of America -- Analyst

Hi, thanks for taking the questions. So just actually to follow up on the last question within the Maintenance. Just, obviously, we have seen new gradually -- the Maintenance's declines gradually getting worse. I'm just wondering if -- would you say that's really entirely a function of the smaller proportionate contribution of new license revenues or is there anything in the channel or maybe the mix perhaps that what we're seeing is some of the -- I guess the essence of some mix effects that are weighing on that? Just trying to unpack the underlying decline in the Maintenance.

And then another one was just a clarification on the outlook statement. So, I think, in there, there was wording essentially saying that well, you’ll take and look at the outlook and – or the macro and there may be further actions to react to that, is that essentially alluding to the idea you could basically cut further cost in order to protect the EBITDA? Perhaps you could give some commentary on how you might respond if the macro were indeed to be softer than perhaps we expect at the moment?

Brian McArthur-Muscroft -- Chief Financial Officer

Well, John, let me take the second one first. Yeah, you're quite right in the implication there. I think in a world we're all struggling a bit at the moment with the imperfections of it, we did get one break of timing. And, of course, we just finished the operational review in February that we announced part of the full year results. So we had, not of course that we were preparing for COVID and where we had had no idea, but fortuitously for us, we had just spent six months raising up the business looking at all the different ways we could react under various what-if scenarios. And, therefore, as you know, we had already put in place a whole series of cost actions in February just shortly before COVID broke. Ever since it did break, what we've been doing is going back and road testing all the things that we already had in place, if you like with something of a head start to know the areas that we can push on harder if we need to.

I think on top of that it's also worth saying that, look, some of the savings we're starting to experience are actually a direct result of COVID that we may be, if we're being honest with ourselves, wouldn't have gone after that hard if we hadn't realized it was going to be the case. And, obviously, I'm thinking about travel and entertainment in the first place. And what we're trying to do in those instance is load those in taking what might be perceived as a threat and actually turn it into an opportunity.

So, the challenge for us and for all businesses now, under a new way of working that we've all got used to is to take the fat and the inefficiency out of all that travel and entertainment costs that we were wearing and actually make sure that as we come out of this, we sort of land back a number multiples lower than the number that we went in on. I think another one way there is opportunity to come out of a threat is clearly off the back of that all of our locations around the world and looking at our facilities costs. So we’ve ramped up all of the work in those areas. And, of course, there is a whole layer of infrastructure and headcount costs and other expenditures that go around those items as well. So, we're -- I think it's fair to say that anybody at the moment, who is sensible will have ramped up all their cost work anyway, but I think we had a structure around it somewhat fortuitously, some might say, but we did having done the work of a bit of a head start there.

In terms of our ability genuinely to look at what the business is doing and therefore understand what that might mean for us, I think we do have strong financial discipline and very detailed forecasting to quite a granular level now. So -- and we've had that for at least the last six to nine months to enable us to really look in depth at the cost base to different parts of the business and we have our headcount by location, by individual, by task, by cost available to whichever way we want to look at it. So, our ability to manage our cost, I think, is in a pretty good place. What we need to make sure we do is that we see what we need to do fast enough to make it bite in time.

The other part of the question, I'll let Stephen to comment on that.

Stephen Murdoch -- Chief Executive Officer

Yeah. So, John, on the Maintenance, basically, there are four levers on Maintenance; the volume of license that you sell, the attach rate to that volume, the renewal rate or the churn rate, and the win back of customers back on to Maintenance. And so, in the current climate, the win backs are difficult. Customers are looking to minimize spend, not increase spend. And the attach rate is fine. So, all the emphasis we've got now, as you quite correctly say is fixing the volume, so getting the license correct in the first place, and then we've taken some pretty significant actions in terms of the resource deployment across renewals to make sure there is much more attention end-to-end on our biggest customers, and therefore our biggest customer renewals. So, we're still focused on all four. We believe the biggest leverage comes from arresting the performance in license of fixing the volume, and then ensuring that we've got more weight over the renewals.

John King -- Bank of America -- Analyst

That's very helpful. Thanks. Appreciate it.

Stephen Murdoch -- Chief Executive Officer

Thanks, John.

Operator

The next question comes from the line of Julian Serafini from Jefferies. Please go ahead.

Julian Serafini -- Jefferies -- Analyst

Hi, thank you. So, I have one more question on the Maintenance, unfortunately. So, in terms of the Maintenance, I guess the delays in the renewals, can you share, I guess, especially in the win back commentary you're just providing, can you share if you've had to do any sort of like discounting or just changing terms of customers getting approved, payment terms or something along those lines to help with the collecting the Maintenance payments?

And then, the second question I'd like to ask to is, talking about the FY '23 plan and you mentioned moving some products towards the SaaS or subscription model, can you share which products will be going to a SaaS model? Is that just Security and Vertica? And then, on the subscription front, could you conceptually just move everything to Subscription if the market wanted to?

Stephen Murdoch -- Chief Executive Officer

Okay. So, Julian, so with Maintenance, well, we typically don't offer discounts on Maintenance because our software tends not to be discretionary, yeah. And we focus very, very significantly on the quality of service that we deliver. We have had a few requests from customers in genuine stress for help in how they do that, and, wherever practical, we're looking to try and help that. But that's the customer service response rather than it being an impact on our performance.

In terms of win back, typically what causes a win back is that our customer has a mission-critical application and they've had an issue and they ran originally without maintenance and they know and feel they need to put maintenance back on. Clearly, everyone is pretty focused on the kind of core running of the business and we're seeing less of activity. We think it will come back. Just a question when it -- it's just a question of when it comes back.

On SaaS and Subscription, so in our Vertica portfolio, we'll offer both SaaS and Subscription capability. In our Security portfolio, we already have SaaS in our application business and we're building capability in our identity piece of our Security business and in our Security operation center. So, quite broadly across Security, we have SaaS capability already in ADM and are working hard to accelerate that. And we've rationalized most of the unprofitable and non-viable SaaS in ITOM. It's not complete yet, but we're working through that and we have a flagship SaaS offer already built there called SMAX.

In terms of your question on Subs. If I take our AMC business, we have a subscription offer in mainframe solutions. So we already have customers moving mainframe workloads, modernizing it, and then running it in Azure or AWS on a subscription basis. Unlikely that the whole portfolio would ever want to move that way. And some of the genuine legacy business, again, probably customers wouldn't want to move that way, but we're taking an offering by offering approach and we think we've identified where SaaS is the right answer, Subs is the right answer, and they offer flexibility where the customer wants the choice.

Brian McArthur-Muscroft -- Chief Financial Officer

I think just to add to that, it's definitely to the way you phrased your question that it does start with Vertica and Security and that's where the market-led move to Subscription or SaaS would come from in the first place. From our perspective, I think we made it clear when we did the full-year presentation that we felt that we were taking a fairly conservative and sensible approach at targeting 15% of Group revenues. And we said, if there was a market drive to it or we felt that we saw opportunity, we would go to close to the 19%, 20% of Group revenue. I'm pretty sure that there is nobody on the senior management team who would see that as revolutionary from our perspective. I think we see it as evolutionary. But, if for example, within Vertica, the market wants to move to Subscription and we feel that we can get a better competitive advantage by moving fast, then we just simply will. And, of course, some of the financial firepower that the business has will help us to do that.

Julian Serafini -- Jefferies -- Analyst

Okay. Great, thank you.

Operator

The next question comes from the line of Gautam Pillai from Goldman Sachs. Please go ahead.

Gautam Pillai -- Goldman Sachs -- Analyst

Great. Thanks for taking my questions. Three, if I may. Firstly, can I ask a big picture question on your mid-term transition plan? Appreciate that visibility is low at present, but to the extent possible, can you comment on the timeline where you expect sustainable improvement or stability in revenues? Previously, you had commented revenue quality improving from fiscal '21, has this now become FY '22 or is it beyond that?

Secondly, can I please follow-up on Maintenance revenues and linked to the -- to your impairment review? Have you made any changes to your renewal rates assumptions when you undertook the impairment review? And lastly, on free cash flow, most other software companies has been quite cautious on their free cash flow guidance in 2020, but you have delivered an above trend cash conversion in 1H, which benefited from some one-offs, but how should we think about cash flow developing into the second half? Thank you.

Stephen Murdoch -- Chief Executive Officer

Okay. The -- let's do the Maintenance one first, Gautam. No, we didn't model change in renewal rates when we looked at the impairment, and we continue to see upside in our renewal rates and more working aggressively to get after that as quickly as we can. In terms of the mid-term plan, in February, we laid our three-year plan through to FY '23, successful execution of which with delivered stable revenues and EBITDA margins in the mid-40s on a floor level of free cash flow generation. We're still committed to those targets. We're still executing with a balance of caution at the moment in terms of the macro environment and speed on the other hand where we can see opportunity to actually go faster. We're still committed to executing through that time frame. And obviously, we'll course correct in the event that the economic impact is deeper or longer than we all hope it is. But we haven't backed off at all in the plans we laid out in February.

Brian, do you want to cover the cash comment?

Brian McArthur-Muscroft -- Chief Financial Officer

Yes. So evolution of cash, you're quite right, our H1 cash performance was frankly outstanding. We did a cash conversion in the $130 million for H1. Actually, you would normally expect our H1 to be much better than H2, as we said before, because of course you're collecting the end of October of the prior year's revenues. So, you would expect to have a really good first half cash conversion, but even in the context of that, as I said on the presentation, our collection percentages this half year compared to the same half year last year in '19, we've actually outperformed last year to this year even into the current macroeconomic headwinds we're looking at.

I think we've done that via frankly a vastly improved operational performance within our own teams. We have a very joined up, very sophisticated working capital group, and we work all the particular levers of working capital very hard now. We still have probably 3%, 4%, 5% to go before we're truly world-class. But, I think, we're virtually there now. And that improvement, frankly, you can see it coming through in the numbers. So, for H2, just naturally you wouldn't expect to see the same level of supernormal performance, and if you go back and look at previous years, you will see the same kind of the trends intra-year and year-on-year as well.

My expectation is that we haven't seen anything since the end of H1 to suggest that our working capital performance is degrading at all as fatigue sets in or time goes by through the current crisis. I would say, from our perspective, from what I've seen in May and June, if anything, our teams are still outperforming every forecast we put in front of them. So, our cash collections are still exceeding the targets we set. But, just as importantly, we are still continuing to collect the rump of the very old debt that we have been talking about since sort of the beginning of last year, and we're heading into the final core of that as well. So, I think there is pretty much nothing, but good news from a working capital and a cash collections perspective, I'm pleased to say.

Gautam Pillai -- Goldman Sachs -- Analyst

Okay, thank you.

Operator

The next question comes from the line of Michael Briest from UBS. Please go ahead.

Michael Briest -- UBS -- Analyst

Great, thanks. Good afternoon. A couple from me as well. Just digging into the Application Delivery Management business, I mean if I look at the maintenance trend there last year, it was minus 2% in the first half or minus 3.3% for the year. So, let's say minus 4% in the second half, but it does seem to have deteriorated quite a lot and it would suggest that that's related to the one-off factors that were a feature in the second half of last year. So, can you maybe talk a bit more about that? And I'm assuming this is the Mercury, the Borland businesses, is this a sort of, I wouldn't say, jobbing community of software developers, but maybe task-oriented and therefore the renewal rates are naturally much lower. Can you say something on that?

And then secondly on the cost side of things, can you just say what the exceptional items will be this year and next and what level of savings that is expected to achieve and presumably after that there is no incremental savings that you're planning to bring there on the cost base? Thanks.

Stephen Murdoch -- Chief Executive Officer

Yeah. Hi, Michael. ADM, yes, there are some one-offs, the one-offs impact ADM and ITOM, and you are right is the Mercury, Borland businesses. I would put the issues that we have above and beyond the one-offs as being either planned for and understood, okay, so not new news or related to an inconsistent level of execution, which we are addressing through a more systematic deployment of resource across the renewals. So it's more a combination of things we understood to be happening and some execution rather than what we consider to be in anyway systematic.

In terms of cost, the -- we've modeled out the efficiencies and effectiveness savings. We believe we can get in the back office from deploying consistent systems, standard systems, where we think the bigger price than that is genuine organizational productivity. There is just an ongoing operational drag on the business. And, in February, I talked about the inefficiencies and the impact that had on sales effectiveness and what if we could get back to industry benchmark we could yield.

So that -- yes, there are cost savings, yes, we have modeled those out, but the organizational productivity benefit on top is if anything a bigger price, and that's what we're getting after.

Brian McArthur-Muscroft -- Chief Financial Officer

Yeah. Second part of your question on the exceptionals, I'll let Ben answer it with the indicative numbers. Just a quick health warning on those numbers at the minute. We are obviously in the light of what's going on at the minute rephasing the projects and so we have the latest version of what we think the split of numbers between the two years will be which we're happy to share. But just bear in mind, the important thing is that the total number is not expected to move apart from that $20 million, $30 million we talked about earlier.

So, I'll just hand to Ben. And then maybe, Ben, you can talk a little bit about indicatively the kind of savings that we are expecting to make once that [Indecipherable] is fully live.

Ben Donnelly -- Interim Head of Investor Relations

Yeah, sure. So, in terms of the exceptional spend to come and our current expectation is the second half of the year will be approximately $110 million and with the remainder to come in the first half of FY '21. And then in terms of the margin or expectations around cost savings, as we said, it's something that we're still working through. But it all comes back to the targets we saw ourselves and the EBITDA margin of 45% -- the mid-40s for FY '23. So, it's a gradual progression to that, but it all baked into those numbers, Michael.

Stephen Murdoch -- Chief Executive Officer

We probably got time for one more or maybe not actually. Okay. Apologies, we can't take one more. We have a requirement to be closed for the New York markets opening. So, I'd just like to thank everyone for their time and questions today. We very much appreciate it. Thank you.

Brian McArthur-Muscroft -- Chief Financial Officer

And if there are any questions that we didn't manage to get in today, please contact either myself, Brian or Ben. And we will do our best to answer them before close today. Thank you, guys.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Ben Donnelly -- Interim Head of Investor Relations

Stephen Murdoch -- Chief Executive Officer

Brian McArthur-Muscroft -- Chief Financial Officer

Michael Briest -- UBS -- Analyst

Will Wallis -- Numis Securities -- Analyst

John King -- Bank of America -- Analyst

Julian Serafini -- Jefferies -- Analyst

Gautam Pillai -- Goldman Sachs -- Analyst

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