Alfa Financial Software Holdings PLC

LSE:ALFA

Q2-2025 Earnings Call

[Andrew Denton, executive]

Hello, everyone, and welcome to Alfa's 2025 half year results. I'm Andrew Denton, Alfa's CEO; and I'm joined as always by our CFO, Duncan Magrath; and our COO, Matthew White.

An overview, Alfa has had an outstanding first half. We continue to focus on growing subscription, revenue, and we've seen that grow by 17%. We've also seen strong growth in subscription TCV at 12% versus the first half of last year. This year, for the first time and in the subsequent years, we will be publishing annual recurring revenue and net revenue retention. Duncan will outline the details behind this. But in summary, we've seen annual recurring revenue of GBP 42 million, which is up 16% on the first half of last year and net revenue retention of 112%.

I'm delighted with the growth in annual recurring revenue, and our net revenue retention figure shows that Alfa's industry-leading customer retention is just as strong in a SaaS-only world as we grow our customer base with new subscription sales. Subscription revenues now make up 34% of total revenues, and we have 23 Alfa Cloud customers, which is up from 20 this time last year.

More generally, we've seen strong sales and delivery momentum continue through from the full year. The late-stage pipeline is strong with 7 prospects. We are working under letters of engagement or equivalent with 6 of those 7 customers in the late-stage pipeline. And really importantly, we are seeing normal levels of activity in the early stages of the pipeline. From a delivery perspective, we've again seen a strong period, and I'm delighted to say that we now have 9 customers live on Alfa Systems 6, which underscores our messaging around this breakthrough new version of our software. Alfa Systems 6 is a frictionless upgrade opportunity for our existing customers.

As always, we continue to invest in product, people and planet. Our average head count is up 7% with continued high staff retention at 97%. We've invested a total of GBP 19.4 million into our software in the first half with particular focus on expanding our target addressable market with commercial finance and expanding our serviceable addressable market through developments in the areas of originations and automotive fleet.

From a financial perspective, our full year expectations remain unchanged. We continue to be confident in our future prospects. And as a result, the Board has declared a special dividend of 5p.

So on to the financial highlights. Revenue was GBP 62.5 million, which is up 22% at constant currency on 2024 first half revenue of GBP 52.3 million. We've maintained our excellent momentum in subscription revenue growth at 17%, being around the same level we saw last year. And as I've already said, net revenue retention was 112%, which demonstrates outstanding customer retention.

Our excellent performance in contracting new business is demonstrated by a total contract value of GBP 210.7 million. This is up from GBP 193.3 million this time last year. That's 9% growth in our TCV versus last year, with subscription TCV growth of 12%, as I've mentioned, the software engineering TCV growth of 12%. At GBP 21.6 million, operating profit was up 33% from this time last year. Our operating profit margin was higher than normal at 35% in the half, which was up from 31% in the first half of last year. This was driven by increased chargeability in our software engineering teams. EBITDA margin at 37% shows significant growth from last year's 33%. And finally, cash was at GBP 23.9 million, up from GBP 22 million this time last year.

I'll now hand over to Duncan.

[Duncan Magrath, executive]

Thanks, Andy. The figures really speak for themselves, and the first half of 2025 was a very strong financial performance. Revenue was up 20% at actual rates or 22% at constant currency, with growth across all revenue streams. There was particularly strong growth in Software Engineering, which was up 72% on the back of significantly higher chargeability than the first half last year. Improved chargeability improved the gross margin percentage up 130 basis points to 64.2%.

Operating profit grew even more strongly than revenue, up 33% to deliver an operating margin of 34.6%. It is worth noting that I estimate that the FX hedges that we put in place to protect ourselves from movements in sterling versus the U.S. dollar, added 240 basis points to the margin in the first half. The effective tax rate of 26.0% was in line with last year, and so basic EPS also grew by 33% in the half.

Diluted EPS was up 34% at 5.35p per share. Overall, a really strong performance and given our confidence in the future prospects for the business the Board has declared a special dividend of 5.0p per share.

Turning now to TCV. 2024 really was a standout year for our revenue and commercial teams which was demonstrated by the 34% increase in TCV in the calendar year. We said in March that we expected to work through the TCV during 2025, and we've seen a 5% reduction in total TCV since the year-end, but it is still up 9% from this time last year.

Next 12 months TCV is up even more strongly versus this time last year, particularly in delivery and software engineering due to the new contracts we won in the second half of last year. We have calculated TCV on a consistent basis for many years now, but a number of people have noted that because we only include 3 years of subscription revenues, which is a much shorter time period than our average customer life, but it may understate the impact of subscription on our business.

There is a benefit in consistent measures that you can view over time, but not if it misrepresents the growing importance of our subscription revenues to our business. So to help this and reflecting our transition to a SaaS business model, we've decided to going forward to supplement the TCV disclosure with the more traditional SaaS metrics on of ARR and NRR, which you can see on the next slide.

On the left, you can see our annual recurring revenue or ARR figures for the last 3 reporting periods. We calculate this using the average subscription revenues over the last 6 months and then annualize them. We exclude any revenues that we do not expect to last 12 months at the start of the contract. This picture shows what you would expect a very strong growth in ARR, up 16% versus last year, very much in line with the overall growth in subscription revenues.

The graph on the right shows our net revenue retention percentage or NRR and gives a financial metric, which represents the net impact of churn and growth in the subscription revenues. This is calculated by taking the percentage of recurring revenues from 12 months ago that we have retained, including where we have sold additional services. Whilst we are often asked by those new to the Alfa story about churn, in reality, those who watches our story know that it is in effect, 0. And this is demonstrated by an NRR figure for the last 3 reporting periods that is considerably in excess of 100%.

At 30th of June 2025, the 112% NRR was particularly high as we had some new subscription customers at very low levels this time last year. Over the last 12 months, these contracts have started to ramp up through implementation, a typical patent I explained in some detail at our last results presentation and hence, the 112% NRR. We would not necessarily expect to be at such a high level going forward with the figures in June and December last year, perhaps being better representative of a more normal level.

So looking now at overall subscription revenues. Subscription revenues continue to grow each quarter. For the first 6 months, they were up 17% versus the same period last year. The growth in our Alfa Cloud customers has been a significant contributor to our recent growth in subscription revenues. And you can see that we've increased Alfa Cloud customers from 20 last year to 23 this year. We now have 16 customers on v5 or Alfa Systems 6 who are live, but not on Alfa Cloud. We don't expect to convert all 16 to Alfa Cloud but would expect to convert the majority, and so this can continue to be a source of growth for the next few years. 12% growth in subscription TCV also underpins our confidence that this revenue stream will continue to show growth -- strong growth going forward.

Turning to Software Engineering revenues. Last year, we had a relatively low first half and a much stronger second half. The strength from the second half was carried through into H1 2025, and comparing this with H1 2024 gives a 72% increase in revenues. This revenue is largely off the same head count base and is simply due to changing the nature of the work being performed, resulting in much higher chargeability than last year. And this is a significant factor in the very strong operating margin percentage that we generated in H1.

The biggest contributor to this increased chargeable work was to new customers we won in the second half of last year, with chargeable development from new customers increasing from GBP 1.2 million to GBP 4.5 million. At the moment, we are anticipating this to ease off slightly in H2 but it's also potentially an area that we could outperform our expectations if we get client approvals signed off more quickly than we expect.

Perpetual license accounting, both one-off and customized license totaled GBP 1.3 million this year. slightly down on the GBP 1.6 million last year, so a relatively small drag in this period from the move to a SaaS model. TCV is up 12% from last year on the back of these new projects with good coverage for the next 12 months.

Turning to our final revenue stream, delivery. As expected, with the ramp-up of new projects, our Delivery revenues increased 10% versus last year. We have 11 projects underway where the customer is not yet live, and only when these contracts are live will they drive our part subscription revenues. Of course, as these projects come to an end, we would expect them to be replaced by new projects. Overall Delivery for TCV is showing as flat year-on-year. You can see that the coverage for the next 12 months has increased significantly, and this is driving our increased recruitment needs. The after 12-month element shows a drop but this is mainly a function of taking quite a cautious view of our largest implementation project where we have only counted up to the end of 2026, which is the first phase of a multiphase project and including nothing thereafter. We fully expect the project to continue beyond that date and generate further delivery revenues.

Turning now to expenses. Cost of sales grew by 15% over last year, largely on the back of increases in costs from head count and salary increases. Hosting costs increased with the growth in Alfa Cloud. Sales, general and admin expenses were up 11%. There's growth in salary costs, but more significant was the increase in profit share and share-based payments.

FX has been significant in the period. We had net transaction gains of GBP 1.1 million in the period. Within this, the impact of realized and unrealized gains on U.S. dollar FX hedges was GBP 1.7 million, offset by other transactional losses of GBP 0.6 million. Exchange rates at the 30th of June 2025 was $1.37, so we could see some reversal of these gains in H2 if sterling weakens against this level.

Other income was flat at GBP 0.3 million and this was the income from our R&D expenditure credit that is shown on this slide. I will cover it under modeling guidance, but the impact of not expecting FX hedges to repeat and the impact of higher head count and salary costs and depreciation and amortization in the second half will result in a lower operating margin in H2 compared with H1.

Turning now to cash flow. In March, I estimated that cash conversion for the year would be 80% to 90% for 2025 as a result of accelerated receipts in 2024 on 2 projects. Cash conversion of 88% for H1 was in line with this estimate. For 2026 and beyond, we would expect to be in the range of 90% to 100%. Dividends paid increased GBP 1.5 million on last year to GBP 11.2 million. Overall, there's a net cash inflow of GBP 3.4 million for a cash balance of GBP 23.9 million at the period end.

Now some words on capital allocation. Alfa remains a highly cash generative business. As we have transitioned to a SaaS model, this has reduced the upfront license payments we received under the perpetual license model, but this is making a cash flow smoother. We have a strong track record of returning excess cash to shareholders through dividends. Cumulative dividends paid in the last 5 years are now up to GBP 153 million on our overall dividend yield from ordinary and special dividends has been running between 3.5% to 5%. There are no immediate investment requirements for current excess cash, and so we have declared a special dividend of 5.0p per share up 19% on this time last year.

Next, a brief update on modeling guidance. This slide is largely reiterating existing guidance, which remains unchanged as regards to full year[ outturn ] investment, cash flow and currency sensitivity. So I will just touch on 2 things now. Firstly, to reiterate what I mentioned earlier that we expect to see a lower level of Software Engineering revenues in H2. And this, along with increases in salary costs and assuming no further gain on the FX hedges means we expect lower operating margins in H2 than H1.

So whilst we will see similar levels of revenue in H2 to H1, we will see lower operating profit. Secondly, a minor point but due to starting up some projects in new overseas territories, we expect a small increase in our effective tax rate for the full year to 26%, 1% higher than the U.K. statutory rate.

I will now hand over to Matt for an operational update.

[Matthew White, executive]

Thanks, Duncan. We've had a great start to the year in every team across the business. And the result is fantastic performance now and really good progress with our strategic objectives as we build for the future. We're strengthening our 3 differentiators: our team, our product and our delivery with sterling, as Andrew will describe later on.

We're scaling our capacity to deliver for the future and we're simplifying so that we can deliver even more Alfa's, even more efficiently. Everything starts with our fantastic team. So our people are always the first differentiator that I mention. Our team is growing with an average head count up 7% on H1 last year. In fact, we've recruited around 40 people this year so far to enable the delivery of that strong pipeline that Andrew will cover. And this head count growth will feed into our H2 costs as set out by Duncan.

And we put a lot of effort into making sure that we recruit very, very talented people, and because we recruit high-quality people and because we have a growth mindset culture and because we're always striving to achieve more as a company, developing talent within our team will always be a focus for us. Ensuring world-class leadership at all levels is a particular focus at the moment. And that's why our continuous conversations initiative is really important. We're giving our people the tools to make one-to-one conversations across the business even more impactful for performance in current tasks, but also for development, for career goals and for well-being.

And these initiatives like this that have resulted in us retaining our gold accreditation from investors and people, and we've seen improvements in our ratings in every area. We have always complacency, but we're really pleased with our engagement score and with our stellar retention rate. And people sometimes ask whether the retention of Alfa is too high. The answer for us is, no. Retaining our talented team is hugely important because we're building something special here. And the higher our retention rate, the faster we can build on the experience within the business.

Our Lisbon smart hub has shown that we can access talent beyond our long-standing office locations in the U.S., London, Sydney and Auckland. We've now started recruiting in the Gdansk area in Poland. We're finding some great talent. In Lisbon, we recruited software engineers only, and we did find great talent. In Gdansk, we are recruiting more engineers but also for our cloud hosting operations team.

Our Delivery track record is perhaps our most important differentiator. We delivered 11 upgrades in H1 and another 5 since then, more frequent customer upgrades is really important to simplifying and to ensuring quality delivery for our customers. And when we've spoken to you in the past, we have described Alfa Systems 6 as a low friction upgrade, and we contrasted that -- contrasted the move from v5 to AS6 with the upgrade from v4 to v5, and we already have 9 customers live on Alfa Systems 6, which clearly demonstrates the success of this strategy.

Progress on all of our projects remains excellent. Our software maintenance remains first class, and our cloud hosting operation remains both gold standard quality and super efficient. Maintaining the quality of our product and our delivery is hugely important in ensuring that we maintain our position as the premium provider in our industry.

Partner-led delivery will enable us to access new markets and enable us to do more in some of our existing markets than we can achieve by growing the Alfa team alone. A key next step in making partner-led delivering a reality will be to deliver a minimum viable product of a partner-led delivery project for a U.K. equipment start project. We're still waiting for the right project to come along here. Our pipeline as a whole is strong, but the right project, in the right region and the right industry is required for this particular next step. But we haven't just been waiting, we're working on our U.S. auto Start product. We're making sure that we use our existing U.S. auto projects to build our products for the future. And we're learning more about the lower tier U.S. auto finance market, which we believe will be key for partner-led delivery in the future. While we expect partner-led Delivery to contribute a relatively small proportion of our revenue, we do expect revenue for these customers to be weighted towards higher-margin subscription.

Our headlines strategy for delivery is simplification. Our market opportunity is huge and simplification will allow us to deliver more Alfa Systems implementations more efficiently. So we're investing in our Alfa Start accelerators for larger customers and Alfa Start products for smaller customers. And we're investing in migration tooling to enable legacy portfolios to be converted to Alfa Systems more easily. We're investing in automated testing to simplify the upgrade process for our customers. We're investing in our Alfa Cloud hosting operation to make it even more efficient as it scales.

And we're investing in AskThea, our large language model chatbot for system documentation. All of this means that projects today require considerably less effort from our highly skilled delivery team than in the past, and that allows us to layer on subscription revenue from more and more customers more efficiently.

And finally, we are extending our product differentiation. We're delivering new functionalities for our customers now with some really important product enhancements being carried out directly to customers for deliveries now. Our Alfa development model is bedding in and we're seeing the results in some great KPIs. And we're also investing for the future. Our focus here is on U.S. auto originations, fleet and commercial finance, all of which will increase the market that we can access. We're there with demonstrable products in all 3 areas, and we're making good progress towards our goals of sellable products by the end of the year. But really importantly, we're also working with -- closely with customers in all 3 of these areas. And this is always Alfa Start way of working. We're confident that this will result in a product that's a great fit for the market as a whole.

U.S. auto originations and fleet functionality allow us immediately to service an additional part of our existing target addressable market in asset finance. So they increased our serviceable addressable market. The commercial finance market is something we've been working on for a while, and investment in this area will continue into next year and beyond. At the moment, we're working with customers in the asset finance market who have commercial finance offerings. The longer-term goal, which may be a number of years away, is to open up a brand new addressable market and to sell to stand-alone commercial finance customers. The potential for the long-term prospects here are really exciting. In the short term, the late-stage pipeline is also really exciting. And I'll hand over to Andrew for an update on that.

[Andrew Denton, executive]

Thanks for that, Matthew. As I said at the top of the presentation, our late-stage pipeline is strong. With 8 new customer wins in 2024, our delivery teams have been fully utilized in the first half of this year and this has kept TCV high. Today, we have 7 prospects in our late-stage pipeline, and we are a preferred supplier with all 7. With 6 of these prospects, we are doing paid work under a letter of engagement or equivalent.

Returning to the theme of subscription growth, it's worth noting that 3 of the 7 have an annual subscription revenue of over GBP 2 million whilst they get to full run rate. And that strong late-stage pipeline is backed up by an equally strong and dynamic early stage, and I will discuss market demand on the next slide.

Our strong pipeline demonstrates that there is strong demand in our end markets and our exceptional sales performance in 2024 has driven growth across all our revenue categories. This is building our future performance in subscription. We continue to invest in our product to widen and deepen our competitive moat and to expand our target addressable market and our serviceable addressable market. Subscription will see growth in the mid-teens as new customers ramp up. And our expectations for this year, as I said, are unchanged with an expectation of double-digit revenue growth.

So in summary, we've had an outstanding first half and we are set there to deliver in line with our expectations. We continued our focus on growing subscription revenue, and we've seen that grow by 17%. We've also seen strong sales growth in subscription with TCV growing 12% versus the first half of last year. We've seen annual recurring revenue of GBP 42 million, which is up 16% on the first half of last year and net revenue retention of 112%. As I said, I'm delighted with the growth in annually recurring revenue, and our net revenue retention figure shows that Alfa's industry-leading customer attention is just as strong in today's SaaS-only world.

Subscription revenues now make up 34% of total revenues, and we have 23 Alfa Cloud customers, up from 20 this time last year. We've seen really strong sales and delivery momentum continue through from the full year. The late-stage pipeline is strong with 7 prospects and we are working under letters of engagement or equivalent with 6 of those.

From a Delivery perspective, we've again seen a strong period. And I'm delighted to say that we have 9 customers live on Alfa Systems 6, that reinforces what we've been saying about this breakthrough new version of our software. Alfa Systems 6 is a frictionless upgrade. And we've continued to invest in product, people and planet. Average Alfa headcount up 7% with continued high staff retention with 97%, investing in total of GBP 19.4 million into our software in the first half with particular focus on expanding the target addressable market and expanding our serviceable addressable market.

And finally, from a financial perspective, as I've been saying, our full year expectations remain unchanged, and we continue to be confident in our future prospects. So as a result, the Board has declared a special dividend of 5p. Thank you very much for listening.

[Operator]

[Operator Instructions] We'll now take our first question from Sven of Barclays.

[Sven Merkt, analyst]

I have 2. Maybe first 1 on AI, which is currently once again, a very heavily debated topic in the investment community. And I would really appreciate if you could just share your thoughts how it's impacting Alfa in the industry where do we see opportunities to leverage AI within the organization where it's perhaps less useful?

And then maybe secondly, on the growth outlook. I appreciate that growth every year is driven by slightly different factors. But can you give us some color how we should think about the main building blocks of growth going forward? How much, of course, will be driven by new wins versus expansion of existing customers?

[Andrew Denton, executive]

Sven, I think I'll pick up the first one, and Duncan is well placed to answer the second. On the AI subject, as you can imagine, we spend quite a lot of time talking to many stakeholders about it. Matthew mentioned in his part of the presentation, the work that we've done around our large language model which supports our customers, simplifies their lives and allows them to take more ownership of the Alfa application. And therefore, allows them to take control of the value that, that delivers.

And I think that's probably a good way to characterize AI for Alfa in terms of what we're doing now, it's a well-established strategy. Matthew talked about simplification every reporting period. And AI is very much a tool for us and for our customers across all of our delivery and indeed our business activities that allows us to simplify and therefore, puts us in a position to deliver more Alfas.

There is clearly an opportunity within AI to do more. And we continue to look at that within our innovation frameworks. And it wouldn't be right to speak about AI without talking about some of the [ tropes ] that are out there in terms of what it will do to software overall. I think that there is a really good opportunity that the large language models that are out there. Well, we know that they can write code. We know that they can create simple apps. But you have to know the question that you're going to ask the machine. And so we do not see any future where AI is going to be essentially replacing us and developing the kind of software that serves the asset finance market like Alfa. There is no 1 question, 1 succinct way of getting all of those requirements together and asking a machine to develop it. So we don't see it, in the very near future as a massive competitive threat. We do see it as a simplification opportunity for both us and our customers. Duncan, perhaps you can look at the second.

[Duncan Magrath, executive]

Yes. Sven. From a growth perspective, I think it's probably worth thinking about 3 categories because first of all, you're right, we've got expansion with existing customers, which may be an existing customer where we're already in, got an installed system, and we may be selling some extra modules, expanding -- they may be expanding and our revenues are increasing in that respect. I think 1 thing we've seen over the last couple of years is also expansion with existing customers getting into new territories as well. So there's not a sort of huge sales effort in that respect. We do a great job in 1 territory and increasing, we're seeing customers ask us to do work in a new territory. And that's definitely been some driver of the growth that we've seen and also we can see that in the late-stage pipeline.

We treat those as new customers because generally, you do have to win them. You do have to work [indiscernible] a different entity. It's normally a different entity's decision to take off or not, but obviously, we get great internal referrals. And then the third area, which is brand new existing customers that we haven't worked with before. I think from a headline perspective, you can see from our figures this time around, perhaps buried in the appendices, you may not got there yet of the slide deck, but you can see that actually the work from new customers, the revenue from new customers in the first half of this year was much higher proportion than last year. And that is a function of those 8 wins that we had. And as we said last year, those win starting up, and that's what's driven a lot of the revenue growth in the first half of this year, which is the growth of the implementation of those projects.

And I don't have any -- of the 3 buckets, I think the second and third buckets are clearly the biggest ones. I think the incremental sales to existing customers is -- it's extremely helpful, often it is all drops to the bottom line to help from a margin perspective but it's relatively small percentage numbers, we would expect our main growth to be coming from either new territories with existing customers or brand-new customers. And I don't have any particularly strong figures to give you, I will think about whether there's a better way of guiding on that.

But certainly, in our internal modeling, the way a significant contributor. The way we've modeled things internally, we would treat both of those last 2 buckets the same, be it a win with a brand-new customer or win with an existing customer in a new territory, and we look at small, medium and margin, obviously, they drive different levels of Delivery and Software Engineering and Subscription revenue growth. So I don't have any quantitative numbers to give you. I think about whether there's an easier way for us to present numbers in a way to guide the market going forward.

[Operator]

And we'll now take our next question from Carl Smith of Zeus Capital.

[Carl Smith, analyst]

Just 2 questions for me, please. The first 1 is on FX. Could you just remind us to what extent you're naturally hedged in the U.S.? And whether going into FY '26, you're going to sort of take out new hedging products? I know you said you haven't at moment, but it might be sort of close to 50% of the revenue. So just what your plans are for hedging FX in '26?

And the second question just around -- can you give any more details on the time line of Commercial Finance products, you said sort of medium term? Do you think the able to get coming out in the next couple of years? Or what's the time line?

[Andrew Denton, executive]

Sounds like you're up first, Duncan.

[Duncan Magrath, executive]

Yes. Carl. Our natural hedge is around 40% of our U.S. revenues half with U.S. costs. So yes, we are -- we do generate a lot of excess dollars, and we look to hedge. For the current year, we talked about, we are largely hedged last year when we got towards the end of the year, and we started to take out some hedges for this year. And they obviously proved to be very beneficial, as you've seen from the first half because generally, we took those out at about [ 1.25 ] dollars and pounds, obviously. There is a challenge for us. If we weren't public, and we were just thinking about the economics, then you would potentially just want to hedge away. The downside is that it actually what you're trying to do is protect your P&L.

You've got a mark-to-market hedges at the end of the year. So any hedges we take out this year to gain -- any gain or loss that you generate may come into the current year. So there's always a little bit of thinking we have to do around that, as I said, from an economic perspective, if you want to hedge, then you just go ahead and do it. So we will think about hedging for next year in Q4 this year. We may, because of that sort of accounting impact, we may do some this year or we may think about doing it in Q1 next year, which then avoids having to mark-to-market at the at the year-end. And so it might have been a longer answer than you wanted, but hopefully, that gives you a flavor for what our current attitude is.

[Andrew Denton, executive]

I think, Matthew, you're probably best person to talk about commercial finance.

[Matthew White, executive]

The first thing we should be clear on is that Alfa is being used by customers to administer commercial loan portfolios now. We have asset finance customers who are also playing in the commercial loan space, and they're using Alfa Systems for the administration of the commercial loans portfolio. So in a matter of speaking, where they are already. We're building on the existing functionality to enable us to better cater for customers or potential future customers who operate and tied in the commercial loan space.

In terms of time scale, as I said, we've got something that we can demonstrate now, we're beginning the process of attending specific commercial loan conferences and other events. We're increasing our understanding, we're deepening our ties in that industry. In terms of it, when could we sell something to a specific commercial finance customer? We haven't gotten involved in any sales process specifically for Commercial Finance yet. Might we do next year if something comes through perhaps for a customer that we have some connection to.

Yes, we might look to answer something next year. We might look to answer something a bit more speculative, we can always learn through those businesses and then we'll be into the year beyond that, and we'll be getting more confident as time goes up. So that's doesn't give you anything concrete but it gives you an idea of the sort of way that we're thinking about this and hopefully helps you to understand that movement into the Commercial Finance world. We think it's the right way to do it to start with something that's is a small jump in terms of the functionality and something that we can leverage existing customer relationships in terms of progressing that way.

[Andrew Denton, executive]

I think just to layer on a quick point, which was very clear in Matthew's answer. It's very much incremental, the work that we're doing to make Alfa work within that Commercial Finance arena. If you look at it based on the overall size of the Alfa products. And experience Alfa watchers, many of whom are on the call will understand that part of the investment case is that we have an incredible piece of intellectual property that we could use in a number of different ways. So a big part of this is making sure that we're in a position in terms of both our serviceable and new addressable markets of continuing to invest, to expand the reach of that intellectual property.

[Operator]

And we'll now take our next question from Harvey Robinson of Panmure.

[Harvey Robinson, analyst]

A couple of questions, pretty 1 for Duncan and 1 for the rest of the team. Just in terms of the bridge for the OpEx implications of your guidance, Obviously, you've got that stated currency gain on the hedge in the first half. If you could give us a bit more color about what other items are going to be driving that margin down because it does look like the guidance is pretty conservative, as framed today on that point.

And then just coming back to the TAM/SAM sort of conversation. I mean, I think historically, people have market commentators has suggested that the commercial loan market is 3x the size of your target or asset finance market. Do you still think that's a sensible number? And also, you've been pretty strong on how much of the originations opportunity is in the state. And I believe 1 of your key customer wins was driven by our increased capability there. Could you give us a feel what sort of quantum of that SAM is and maybe the fleet as well, if there are some numbers you can put some flesh to the bones on that. That's probably my question, maybe a follow-up.

[Andrew Denton, executive]

Brilliant. Thanks, Harvey. Duncan is in charge of bridges. So you start Duncan.

[Duncan Magrath, executive]

Yes, great question, Harvey. Yes. So perhaps just a bit more color on it. In terms of thinking about the cost base and how that moves between first half and the second half. We're continuing to recruit more people and particularly to help with a strong delivery side of the business. So additional people, along with additional work with partners that we're expecting to increase the user partners in the second half along with a 6-month impact of the salary increases that we gave on the 1st of April. All of that sort of is a GBP 2 million to GBP 2.5 million impact on salary and partner costs for us second half versus first half.

And you mentioned the FX of GBP 1.7 million, that was one-off in the first half. Going back actually to Carl's question. If you mark to market the hedges as of now, we have a GBP 300,000 loss in the second half at $1.34. So you're talking about a GBP 2 million impact on FX. Obviously, with the heavy investment we've done over the last few years, the amount of invested capitalized has gone up, slightly less this first half compared with first half last year. But nevertheless, the depreciation, the amortization rather is catching up. So we've got another GBP 0.5 million of amortization in the second half.

And there are some other sort of cost phasing things conference season, and Q3 is conference season, both internally and externally, and that drives some extra costs. And so all of that adds up with a significantly bigger OpEx for the second half compared to the first half, and that's really what drives the big changes.

[Andrew Denton, executive]

Harvey. I'm picking up your point about target addressable market and service addressable market. As we often do ask these questions more dramatically than in terms of hard numbers, but I'll certainly risk a kick under the table from Duncan by saying that 3x feels a bit conservative for the overall commercial finance market, but it's not something that we could give you precise numbers on.

I think we could be probably a bit clearer in terms of the serviceable addressable market initiatives that were going on. You're quite right. Originations is something that we're already working with the customer on. And actually on the fleet side, we're working with somebody within our late-stage pipeline. We said a number of times, Matthew reiterated that we absolutely love it when we do investment initiatives like this alongside a customer because you're going to get it more right, you're going to get that first referenceable customers. So it's a really, really good thing to be able to do.

If you look at originations, clearly, with originations, we've put a big focus on U.S. auto because of the secular characteristics of that part of our market. But originations is a cross-cutting initiative. Similar with fleet. Fleet very much about automotive fleets right now, but there are all sorts of fleets that are out there. And I think you could characterize it as a much bigger incremental sale. We know that an originations project in terms of both subscription revenue and delivery would be a reasonably large percentage of the servicing projects that we used to. Similarly, with fleet everybody who is involved in any kind of vendor finance, so the manufacturers and captives and other types of vendor finance will all need origination systems.

Certainly, every auto finance company has got some form of fleet capability or ambition. So the way to characterize, I think, the addressable market for both of those 2 in the first instance is definitely go resell it and resell a big incremental sale to our existing customers. And of course, going forward, it increases our competitive advantage, broadens our competitive moat by giving us even more of an end-to-end solution for those new sales.

[Harvey Robinson, analyst]

Just a high-level question. Could you -- is it -- is there a simple answer to this. What is it about Alfa that lend itself [indiscernible] to term loan structures? Is there a simple answer to that. Obviously the...

[Andrew Denton, executive]

There is an answer actually, and it comes from our heritage, but I do -- Matthew might want to layer some narrative on to this as another Alfa, I hate to use the word veteran, but when I turned up for work 30 years ago, everything that we were -- we're doing at that time was around, what you call -- what we call big ticket leasing, more structured leasing. And that involves some of the most complicated structures on the planet, widebody jets, shopping centers, nuclear power plants, all the things. So in terms of that clarity of the things that Alfa serves, that was very much in the complexity in the transaction rather than the business processes, whereas a lot of what we do today, the complexities of the business process because they're cookie-cutter transactions, about thousands of users, millions of contracts. That capability, 1 of the things we're most proud of is that capability still lives within Alfa.

So its heritage is actually being able to do pretty much anything that you could think of, and retaining that what you might call an engine is a real advantage of our true product approach and the way that we've evolved the capability. And I'm going to use the word simply and my colleagues in product leadership would probably give me just another 1 of those kicks. It's not simple, but it's a case of taking that highly fungible adaptable engine and just making it work in different markets with different vernaculars and different channels. But the building blocks are there because of our heritage. Can I get a tick in the box from you Matt?

[Duncan Magrath, executive]

Yes. Exactly what I can say, the bullet proved financials for the term -- for those base term loan structures, the other customer Andrew will remember this many years ago, he said, it adds up, and it takes away. And it always has and it will continue doing so. I'd probably though adding some other features of capability for volume scalability, the fact that a single platform for asset finance is extensible to other term loan markets. It's also advantage for us with the data resilience and the cloud security and the model platform probably wouldn't have been something we have been considering when we were just making an add-up and takeaway. But the other base answer is those bulletproof financials.

[Operator]

[Operator Instructions] There are no further questions in queue. I will now hand it back to the speakers for closing marks.

[Andrew Denton, executive]

Thank you First and foremost, thank you to all of you for continuing to watch our company and for your continued attention and of course for joining us this morning. Thank you for the entire Alfa team. It's been a great period. And as we said in the notes earlier, we're looking at the second half and beyond really confident in our end market. In our product as it grows and evolves in our delivery capability, as Matthew says, 1 of our key competitive advantages and actually more fundamentally in our culture and our company. So thank you again, and we'll see you at the next period.