Bravura Solutions Limited (BVS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bravura Solutions Limited FY '20 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Klim, CEO. Please go ahead.

Thank you, operator, and good morning. My name is Tony Klim, and I'm Chief Executive Officer of Bravura, and I'm joined by Martin Deda, our Chief Financial Officer. I'm delighted to present to you today our full year financial results. We had another strong year, enhancing our product ecosystem with the acquisitions of Midwinter and FinoComp, while continuing to provide mission-critical technology infrastructure to some of the world's leading financial institutions during what has really been an extraordinary period. The support we're able to give to our clients during this time is a credit to the quality of our people and the superior technology we have developed after years of investment. Clients' needs continue to evolve and adapt to the changing industry environment. We are seeing clients' demand increase for digital solutions to connect with their customers, enhanced automation to drive efficiencies and a growing demand for what we call microservices. To meet anticipated market demand, Bravura has continued its history of investment and innovation by spending a further $36 million on R&D during the period with further R&D investment planned for this financial year. If I can now take you to the summary on Slide 4 of our results presentation. Bravura delivered robust growth in revenue, EBITDA and NPAT, accompanied by continued margin expansion. As we expected, recurring revenue has continued to grow as a percentage of total revenue, growing 7% during the period to contribute 77% of group revenue. As I mentioned earlier, Bravura continued its R&D program, spending over $36 million on our ecosystem of solutions and our core registry offering, Sonata, of which the majority of investment was client-funded and client-directed, taking the total cumulative amount invested to over $210 million. This continued targeted investment that directly meets the needs of our clients provides Bravura with a significant and sustainable competitive advantage. The results of our R&D efforts are reflected in the depth of product functionality that comprehensively satisfies the demands of some of the world's leading financial institutions. Midwinter and FinoComp joined the group during the period, expanding our product ecosystem in the areas of adviser solutions, digital advice and microservices. We have seen continuing demand for these products from existing Bravura clients as well as new opportunities in key regions. Bravura continues to evaluate a pipeline of acquisitive and organic growth opportunities, while maintaining discipline when deploying capital. We have a long track record of successful strategic acquisitions that have led to Bravura being in the competitive position it is in today. On Slide 5, we discuss the impact that COVID-19 has had on the group. Being a technology-led organization, we adapted very quickly to the new remote working environment. Given the importance that our technology plays in the operations of financial institutions, we have robust contingency planning in place for any unforeseen events. And I'm extremely proud to report that we continue to provide our clients with the high-quality support and services during this challenging period. And evidence of our innovation and ability to adapt to changing industry environments was our ability to quickly implement a solution that assisted our superannuation clients handle a huge influx of early release of super requests. All of our current sales opportunities continue to move forward, although we are seeing some lengthening of the sales cycle. Martin, over to you for some numbers.

Thank you, Tony. Let's turn to Slide 6 which sets out our FY '20 key highlights. Bravura enjoyed another year of top line growth and profitability growth, with revenue growing 6% and EBITDA growing 19%, highlighting the business operating leverage. Coupled with revenue growth, Bravura saw NPAT up significantly by 22% to $40.1 million during FY '20. We've also declared a final unfranked dividend of $0.055 per share, which brings the full year payout ratio to 67%. Turning to Slide 7, which sets out our performance during the period. We can see that Wealth Management delivered revenue growth of 2% to $180.4 million, with the segment's EBITDA margin decreasing slightly, reflecting higher license fees in the previous period. The underlying operating leverage in Wealth Management has continued to grow. We are very pleased with Funds Administration, where we've seen a number of opportunities develop in that segment of the market, and we anticipate opportunities to continue to develop in that segment, which drove the Fund Administration revenue to grow 16%, part of which was due to license fees recognized in the period in conjunction with a contract extension. If we turn to Slide 8, you can see that our revenue has grown consistently over the last 5 years, driven by our continued R&D investment and our strategic acquisitions. This has continued as you can see in the EBITDA numbers there. We've continued our growth in EBITDA and also the growth in underlying leverage. Slide 9 shows our recurring revenue. Recurring revenue comprises ongoing maintenance, managed services, SaaS and post go-live professional services fees. These revenues are underpinned by long-term customer contracts. Recurring revenue increased by 7% over the prior corresponding period, and now recurring revenue comprised of 77% of total revenue. This recurring revenue has a high degree of visibility and is driven by -- and that's the post go-live professional services by a pipeline of clients by multiyear contracts [indiscernible] over the coming 12- to 18-month period. Turning to Slide 10. We continue to have a robust financial position. Net cash at the end of the period was $99.1 million. And as mentioned earlier, we acquired Midwinter and FinoComp during the period. We continue to evaluate a pipeline of potential acquisitions that provide us with strategic growth opportunities. As Tony mentioned, we're also continuing to invest in R&D across our product ecosystem to meet the expected demand. Operating cash flow in the period, excluding taxes paid, was $32.4 million, representing a cash conversion of EBITDA of 56% versus 110% that we achieved in FY '19. That number in FY '19 was driven by significant early payments received in the second half of '19. $23.5 million of cash relating to FY '20 was collected in July 2020. Had this cash been collected in FY '20, the operating cash flow conversion, excluding taxes paid, would have been 97%. Tony will now take you through the performance of each segment and the outlook.

Thank you, Martin. If I can now take you to Slide 11, which sets out the performance in our Wealth Management segment in a little more detail. This segment saw revenue growth with a slight decline in EBITDA margin driven by lower license fees in FY '20 compared with FY '19. The Wealth Management division continues to enjoy a number of large transformational opportunities that are in progress across our key markets. Bravura's value proposition is our client's mission-critical technology platform continues to be further highlighted with our existing client base finding more ways to utilize our technology, which, in turn, generates significant additional project work and is becoming an increasingly important driver of earnings. The sales pipeline is underpinned by long-duration structural industry drivers, which include our clients' need to replace aging legacy systems to develop scalable digital technology platforms and to navigate increasing regulatory change. Now let's turn to Slide 12, which sets out performance in our Funds Administration segment. Funds Administration delivered excellent revenue growth of 16%, coupled with margin expansion to 46% during the period. The segment benefited from higher license fees in FY '20 compared to FY '19, driven by a contract extension. The segment also saw increased implementation and project work arising across the client base. Now the Funds Administration segment has a number of opportunities being driven by Bravura's strong reputation in providing digital solutions and straight through messaging capabilities. We continue to see clients expanding their market propositions more broadly into adjacent markets, which provides Bravura with further opportunities. Turning now to Slide 13, which provides an overview of the key market themes we're seeing. Firstly, client demand for enhanced digital solutions that allows them to engage more directly with the modern consumer has been accelerated by the global pandemic. Bravura's product suite is well placed to meet this demand with Sonata offering a compelling digital experience and Midwinter, in particular, providing a highly regarded digital advice solution. Automation continues to be a driving force behind efficiency with the pandemic accelerating the demand for less reliance on manual processing and outsourcing. Bravura's product ecosystem is well placed to deliver automation with Sonata Alta, our new cloud-based Platform-as-a-Service offering, in particular, being well received by the market. There has also been a growing demand for new software solutions called microservices that are highly modular and can be implemented quickly. This is a market that we believe will continue to grow strongly. Bravura is very well positioned in this space with FinoComp providing a number of registry-agnostic microservices to leading U.K. financial institutions. Bravura anticipates strong demand from the above -- all of those key market themes. Bravura will continue to emphasize R&D investment to meet this demand to ensure that we remain in our market-leading position. Let's now turn to Slide 14, which sets out our outlook. Bravura is well positioned in its key geographic markets with significant new sales opportunities and continued project work being demanded from our existing clients. Significant investment and strategic acquisitions provide us with opportunities across digital offerings, automation solutions and microservices. As we increase our penetration across markets, we are seeing opportunities increase in size and complexity. These transformational opportunities are being driven by regulatory change and customers looking to enhance their cost profiles. Now while these proposals are exciting for the group and underpin our long-term outlook, the timing of closure on these deals can be difficult to predict given their inherent complexity and the challenges arising from COVID-19. And while our new sales pipeline remains strong, due to the wider impact of COVID-19, there is a greater uncertainty in the timing of deal closures when compared to prior years. It is also possible that FY '21 NPAT may be similar to FY '20. So operator, Martin and I are happy to take questions.

[Operator Instructions] Our first question is from Matt Johnston of Macquarie.

So maybe if I just start with the FY '21 NPAT commentary around that will be similar to FY '20. Can we firstly start just how we should think about license fees, given the uptick in FY '20 of $16.9 million? Is that kind of a good base? Or do you think it will go back down to circle like a FY '19 license fee number?

Martin, would you like to take that?

Yes, I'll take that, Tony. So there is no regularity, if you like, in license fees. So I would be anticipating there that license fees would be more of the order of the FY '19 number than the FY '20 number. But they really depend on the structure of individual deals that are being done.

Okay. That's helpful. And then just trying to read between the lines. So with the FY '21 NPAT guidance, is there any new sales opportunities embedded in that guidance or that commentary?

Yes, there is...

There are. I mean -- sorry.

Go on, Tony.

Well, what we've tried to do is identify the base case, which has a number of new sales, but also a number of sales could be delayed as a result of COVID. Obviously, we'd hope that this will not be the reality. Just at the moment in the current economic climate, it's more difficult to give meaningful guidance than in previous years.

Okay. That's helpful. And so I guess if more of these transformational opportunities or bigger opportunities came through, that would result in, I guess, stronger results coming through for FY '21.

Most certainly. Yes.

Okay. Great. And then maybe just one from a cost perspective, in terms of employees, just trying to get to understand, has there been any adjustments in terms of rightsizing the business from a cost base? And how do you envisage utility for the employees over the next 12 months?

As we go forward, we will constantly monitor the cost base. I think at the moment, we're not looking at significant changes. I think utilization is holding up pretty well, and we think it will do. I think the fact that we have existing clients calling on demand or providing demand on our workforce means that utilization can remain pretty comfortably high. Martin, anything to add on that?

Yes. So -- and to the point, Matt, which Tony was referring to earlier as well, we are working on a number of significant RFP in various markets. Depending on the timing of those, we require resources to work those through. So I think whereas COVID-19 is adding some uncertainty to timing of when deals close and so on, it's continuing to be part of our management that we do all the time, which is to try and manage our resource pools in our locations to be ready to meet the project demand as they occur. We will be -- as Tony said, we are making, as we always do, adjustments to our resource bases across the various regions to manage our cost base in the optimal way.

Okay. Great. And then, Tony, you mentioned demand. It'd be great if you can kind of explore that a bit more around what the demand is and where about from a geographical perspective? And obviously, just maybe commenting on the increase in R&D investment, a bit more color about what the clients are demanding and where that investment is going?

Yes. Okay. So I think we -- if I were to look at our regions, the U.K. is probably more impacted at the moment in terms of delaying on new sales. But in the U.K., we have continuing demand from large existing client contracts. So we've always said that provides a very stable base for the business going forward. But I think if we're going to see more delays on new business, new client business, it's more likely to be in the U.K. Australia at the moment is actually reasonably buoyant. I think we're seeing quite a lot of activity and demand in the Australia and New Zealand region. South Africa, yes, we've still got opportunities, but obviously, the economy there and COVID is hitting it quite hard. So we don't have strong expectations out of South Africa over the coming year.

And if I can add to that, Tony, we are seeing some interesting opportunities in the Funds Administration space.

Sorry, Martin, yes, you're absolutely right. We're seeing more digital type of opportunities in the Funds Administration space. That's been reasonably dormant for a number of years. As you know, we never really projected it as strong growth. As you've seen from this year's numbers, it's looking quite healthy. So more and more individual fund managers are now looking to offer digital services almost in addition to selling their products through platforms. And I think also the other area where we're seeing strong demand, in the U.K. in particular, actually is in this area of microservices. So in particular, very strong interest in the FinoComp products and FinoComp themselves, well, with Bravura, obviously, have recently won quite a significant new deal in the U.K. market. So that aspect or that area of the U.K. market does seem to be quite active at the moment.

And to the other part of your question, Matt, on the R&D investment. So this year -- sorry, in FY '20, we capitalized approximately $9 million over the full year of development. In FY '21, we anticipate that, that will be around twice that amount, and it will be driven by some key aspects. One will be an acceleration of modularization within Sonata and the microservices suite build-out. There'll also be an acceleration of our Midwinter and Sonata integration. So the integration of the adviser sort of tools and offerings, making that a fuller integration into Sonata, as well as our Sonata Alta cloud offering that's coupled with that program. And thirdly -- sorry, fourthly, the Australian wrap. So as Tony has often spoken about in previous calls, we're now seeing greater demand for the next-generation of wrap solutions in the Australian market. So we are bringing a number of the wrap solutions that we have in Sonata in the U.K. and regionalizing those for Australia, which is largely work around the tax engine components of that, and we're accelerating that development. They are some key themes in our R&D program for '21, and they're driven by where we're seeing demand.

Okay. That makes sense. I will just ask one question and I'll jump back in the queue. Just around maybe, could you make a comment around, I guess, superannuation in the industry in Australia, what sort of demand you're seeing there? And then -- and I guess, making some comments around there's been some consolidation with -- which I suspect means multiple legacy systems coming into one organization.

Yes, that's an area that we find quite exciting at the moment. There's obviously a number of RFPs or adviser in the market. We think we're pretty well placed. In particular, our Sonata Alta proposition is generating quite a bit of interest in that sector. Sonata Alta, as Martin said, is a cloud-based Platform-as-a-Service. It seems to fit in a very interesting space between the sort of fund administration and the software on-premise type model. It seems to be the right product to market at the moment. So we have high hopes for Sonata Alta, in particular, in the Australian supermarket.

Sorry. Just had a thought. Is that where you see some of the bigger transformational opportunities in that super segment?

Yes, it is. Yes, that will be one sector that we think is very attractive for us going forward.

Our next question is from Scott Hudson of MST.

I was just wondering if you could maybe unpack the comments on FY '21 outlook as well. Is the sort of comment that you -- we could see a result flat year-on-year? Is that sort of the worst-case scenario? Or is that your base-case view of the year FY '21?

It's the base case. So because we can't give -- as I said, I think it's much more difficult to give meaningful guidance at the moment. What we've tried to do is look at a base realistic case. Clearly, we would hope that this would not be the reality and we'd overachieve.

And I guess, is that sort of -- is your comments around time frame, does that suggest that the -- you could see just revenue slipping into future periods?

Oh, yes. We're not seeing -- yes. Yes, sorry. We're not -- we've seen nothing fall off the pipeline. Everything that we've seen -- not everything, but where we have experienced delays, it is pure delays. They're just moving to the right as opposed to falling off the pipeline, which I think is encouraging. There's still a lot of interest. It's just that we're seeing more clients, which is almost inevitable, focus on BAU, business as usual, and ensuring their operational stability through the COVID crisis that the demand is not going away by any means.

Okay. In terms of the, I guess, comments around nonorganic growth opportunities, are you seeing more or less opportunity as a result of COVID?

I would say it's about the same. I don't think -- we're exploring -- we continue to explore opportunities. I don't think they are falling away, so about the same.

And given the U.K. regulator's view on the GBST, FNZ merger, are you sort of looking to revisit that if FNZ is forced to sell GBST?

I think we'd have to consider that quite carefully. Time's moved on. I think, clearly, we've been quite closely involved in that process. It's something we're monitoring closely, but we'd have to consider that carefully.

Our next question is from Ross Barrows from Wilsons.

I was just wondering if you could help me understand just the top line growth a little more. Looking at the accounts and the headline number as opposed to organic and acquisitive, so it looks as though the top line growth was around 6% and the total revenue growth was around $16 million. And I just note in the accounts that the combined contribution from the 2 acquisitions was in the order of $14 million, so in other words, represents about 80% of the total dollar growth. So is it fair to assume that of the 6% top line growth that's kind of 5% acquisitive and 1% organic? And if that's accurate, could you just talk about the second half organic, please?

Martin, would you like to take that?

Yes. So when you're talking about the second half organic, what do you mean?

I was just wondering if you could give some color around the organic growth in the business, either on a full year basis or a second half, if you have that at hand.

Yes. So the calculation that you just did is correct. So of the revenue growth -- the total revenue growth, about $13.7 million is what came from the acquisitions. The rest is the growth within the business itself.

[Operator Instructions] Our next question is from Michael Peet of Goldman Sachs.

Just a follow-up on the licensing fee comment you made earlier, when you said it depends on the structure of the deals. Just wondering, are you looking at changing any structures given what's going on with COVID?

Yes. So I'll take that, Tony. We -- not because of what's going on with COVID. We have, however, been moving to more of a member-based fee or a usage-based fee, particularly coupled with our Sonata Alta offerings. Sonata Alta being a cloud version of Sonata. There the pricing of that is aligned to a more subscription-type model, but we still do, based on the way individual clients want to take the solutions, we then price it appropriately. So we do still have clients that are looking for on-premise type solutions, clients looking for managed service hosted solutions and clients looking for cloud-based solutions. And we have always and continue to structure our deals to suit the way the clients are trying to buy and their particular CapEx and OpEx requirements. However, there is a trend towards more consumption-based, if you like, clients wanting to take our products in a consumption-based approach, which will lead to more subscription-type or SaaS-type revenues in our mix.

I guess, with that in mind, your recurring revenues have ticked up by 7%. Just, I guess, a background question, but how do you classify what's recurring and what's driving it?

Yes. So as we pointed out in that slide, so we take the annual maintenance support, managed service hosting, cloud, SaaS fees, they are fees that are contracted for the term of the contract, be that 5 years, 7 years, 10 years, whatever. And then we add to that, the post go-live professional services fees. So those professional services fees are not contracted for the term of the arrangement, but they are -- once a client is using the system, there is a relatively regular amount of professional services that they will also take, which is to deal with upgrades, changes to the systems and so on. And we report those as well or we consider those as well as some recurring revenue.

And just a little bit more clarity around your base case guidance there. Can we get a little bit more color on timing of new contract wins? Are you expecting it -- expecting some maybe in the first half? Or is it going to be second half weighted?

Yes. Tony, do you want to take that?

I don't think we're seeing any weighting towards first or second half this year. I think there's opportunities that could fall in both first and second half. We're working on a number of quite large strategic RFPs at the moment. So the base case, and it doesn't include no sales, it does include some sales. What we've just tried to look at what might happen is some of the deals that we currently think will be subject to COVID-type delays move to the right. So we don't see any particular pattern for the second half this year.

And just finally, could you give us a little bit more color on acquisitions, maybe? I mean what sort of jurisdictions you're looking at or product areas that might fit into the mix?

Yes. I think we've been very pleased with the way Midwinter and FinoComp have worked out. For different reasons, Midwinter has been a classic extension to value chain coverage. That's, I think, going to work out really well going forward. FinoComp, very much a technology addition to the ecosystem and represents a strong growth story around not just Sonata, but in fact, all of our product lines. And indeed, because it works with other registries, that works particularly well. I think we would look to work or identify and hopefully acquire similar add-ons, in particular, functional add-ons that give us greater value chain coverage in our key markets. I think when we've spoken to you before, we've talked quite a bit about Germany. It's still a territory of interest to us. We haven't quite found the right target yet. And actually, I think that's worked out reasonably well for us, because I don't think the market has moved on quickly in the direction we think it's going to. I think it still will be a good opportunity for us longer term. So we are still looking at that territory, both on our own and with clients. But I think, in the near term, it's more likely to be strategic add-ons, if you like, like both FinoComp and Midwinter.

Mr. Klim, there are no further questions at this time. Would you like to make some closing comments?

Yes. Thank you, operator. Yes, I'd be happy to. So well, thank you for all your questions. I think I'll just conclude by saying there are 5 key challenges facing financial services companies globally: Firstly, the need to address the demand for digital solutions; secondly, the need to cope with changing regulation; and thirdly, the need to drive out operating inefficiencies; fourthly, to respond more quickly to competitive threats; and then finally, the need to deliver outstanding customer value. And I think Bravura continues to address all of these challenges. And for that reason, I think we continue to be in a great position going forward. So on that note, thank you all for dialing in today.

Thank you. This concludes today's call. Thank you for joining us. You may now disconnect your lines.