Bravura Solutions Limited (BVS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bravura Solutions FY '21 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Klim, CEO. Please go ahead.

Thank you, Darcy, and good morning. My name is Tony Klim, I'm the Chief Executive Officer of Bravura, and I'm joined here by Martin Deda, our Chief Financial Officer. In addition to our FY '21 results this morning, we've also announced that I'll be stepping down from the CEO role. After 10 years as CEO and with the business now well positioned to navigate current emerging market trends, now is the right time for the business to be taken forward under renewed leadership and for me to consider next step in my career. So we're also joined here by Nick Parsons, Bravura's incoming CEO and currently a senior member of my management team. Nick has played an essential part in making the business as strong as it is today. With a broad range of senior leadership roles at Bravura and having worked closely together with me in developing Bravura's strategy, I have no doubt he is the right person to take Bravura to the next level. So thank you for joining the presentation of our full year financial results. Bravura has achieved its guidance despite the impact of the COVID-19 pandemic and its related lockdowns in all our markets, and particularly so in our largest market in the U.K. There has been significant market uncertainty that has affected business confidence. And the workplace restrictions have impaired the ability of our clients and prospects to engage and collaborate on major projects. The result of this environment is more evident in our first half with a significant improvements seen in the second half. The business has pushed forward and experienced a number of impressive achievements during the year. We have signed 1 of Australia's largest superannuation funds, Aware Super, as our maiden clients for our game-changing new digital-first proposition Sonata Alta. And with Delta Financial, we have acquired a market-leading software business in the U.K. to broaden our coverage of the pensions market. And we've extended our market leadership through a targeted R&D program that provides clients with the solutions that they are looking for. Now while markets have been tough, our business is resilient. As the COVID-19 vaccines rollout and confidence improves, the business continues to position itself to take advantage of the subsequent release of the latest client demand. Bravura is emerging stronger as the pandemic eases. The pandemic has highlighted the greater need for robust technology and automation in a digital-first world and the long-term drivers of our growth are as strong as they've ever been. So with those opening comments, if I can take you now to the summary on Slide 4. Our full year result is a tale of 2 halves. The first half saw lower project work in the U.K. arising from the impact of COVID-19. The second half benefited from an improved operating environment, client wins and targeted management initiatives. Total recurring revenue now stands at 84% of group revenue, and I'm particularly pleased that contracted recurring revenue is up 15%. The Aware Super contract is a landmark deal for Bravura and for the Australian superannuation market. It has generated significant interest from other superannuation funds, and we expect to see further wins as a result. We've made excellent progress on our R&D initiatives, spending $50 million on the development of a suite of micro services, Australian wrap functionality, Sonata Alta, enhancements to GFAS funds administration platform and the extension of our digital advice capability. This continued targeted investment directly meets the needs of our clients and provides Bravura with a significant and sustainable competitive advantage. And we welcomed digital financial to the group during the period, expanding our U.K. market offering into complex self-invested pensions. The acquisition complements Bravura's core Sonata offering and broadens Bravura's growing ecosystem of products and services. I'll now ask Martin to take us through the financial results in more detail.

Thank you, Tony. If we turn to Slide 6, which sets out our FY '21 financial results. As discussed earlier, group and segment revenue and earnings were down, reflecting the impact of COVID, particularly in our U.K. business. Although revenue was down $31 million on prior period overall through cost control measures, the impact on EBITDA was $8.5 million. Corporate costs came in lower, 4% lower, also benefiting from tighter cost control and lower acquisition costs in FY '21 compared to FY '20. There are 2 specific items that we have called out separately in this result, neither of which were assumed in our guidance. The first is the remeasurement of contingent consideration. Midwinter's performance has not met its vendors ambitious earn-out targets. Consequently, Bravura recognized a $4.6 million gain so in addition to the P&L arising from the remeasurement of contingent consideration. The second is a change in accounting policy. In April 2021, IFRIC announced that certain cloud-based software implementation costs cannot be capitalized and must be expensed, July 2021, as it made this change mandatory for the FY '21 reporting period. Accordingly, $2.4 million has been expensed and recognized as a change in accounting policy. That was a debit to the P&L. Turning to Slide 7. The Delta acquisition, which Tony highlighted, contributed $10.2 million in revenue and $2.3 million of EBITDA to our result. We closed the Delta acquisition in October. So that was an 8-month contribution to the period. The Delta revenues and contribution are recorded in our Wealth Management segment. And Delta pleasingly has a high proportion of recurring revenue at about 80%. If I move to Slide 8, revenue by geography. You can see that the impact of the decline in revenue year-on-year was entirely in the U.K. part of the business. Pleasingly, we saw growth in the Australian market, delivered strong revenue growth. Turning now to Slide 9. Notwithstanding the most recent period and the extraordinary circumstances caused by the pandemic we found ourselves in, Bravura has consistently delivered revenue growth and margin expansion over the last 6 years. As vaccination rates rolled out across the jurisdictions that we operate in and business confidence returns, we expect the operating environment to improve and in particular, we expect our business in the U.K. to recur to growth as well. Slide 10 sets out our recurring revenue. Contracted recurring revenue was up 15% during the period compared to the prior corresponding period. As discussed earlier, COVID-19 has impacted attached recurring revenue, where we have seen some project work being reprioritized. It's important to highlight that we anticipate that this work will appear in future periods. The decline in nonrecurring revenue is almost all in the U.K. The lack of new significant deal wins has seen a decline in implementation work as implementation work from earlier deal wins has been completed. Implementation work from the Aware Super client win continues to ramp up. Turning to Slide 11, our financial position. Bravura is in a healthy financial position with cash of $74 million and no debt. During the period, we completed the acquisition of Delta, the maximum possible purchase price of GBP 23 million comprised GBP 14.5 million which is approximately $27 million upfront, and this was paid in October and an earn-out of GBP 8.5 million, $16 million is contingent upon meeting certain financial targets over the next 2 years. Our balance sheet is well positioned to continue our program of R&D investment across our product ecosystem to meet anticipated client needs. In FY '21, we capitalized approximately $20 million of R&D, which was the figure that we had guided to. Operating cash flows, excluding taxes paid were $51 million, representing a cash conversion of 105% for the full year compared to 56% in FY '20. That's operating cash flow to EBITDA conversion. As you can see in the chart, our cash conversion metric appears lumpy on a 6-month view, but sits at around 97% over time. In addition to our significant cash balance, we have also, on the 20th of August, signed a new $30 million unsecured 3-year working capital facility with JPMorgan and are moving our global transaction banking and treasury activities to JPMorgan. The facility is currently undrawn. I'll now hand back to Tony, who will take us through the performance of each of the segments and the outlook.

Thanks, Martin. If I can now take you to Slide 13, which sets out the performance in our Wealth Management segment. Now this segment saw revenue and earnings decline during the period. Most of this decline came through as COVID-impacted professional services work in the U.K. Pleasingly though, our contracted recurring revenue rose 30% during the period. Along with the Aware Super contract win, additional new or renewed contracts were signed in the U.K., Australia and New Zealand for micro services, Sonata, [indiscernible] Approximately $41 million of R&D was incurred in the Wealth segment, of which 47% was capitalized. The spend related predominantly to developing additional micro services, wrap functionality in Australia and extending our digital capability. Now let's turn to Slide 14, which sets out performance in our Funds Administration segment. Now this segment also saw revenue and earnings declined during the period. As with the Wealth Management segment, much of this decline came through as COVID impacted professional services work in the U.K., although to a lesser extent. Contracted revenue for -- contracted recurring revenue remained broadly stable during the period. Excluding license fees, which are less consistent in nature, segment EBITDA margin is in line with FY '20. R&D spend in this segment was all expensed and focused on enhancing Bravura's GFAS product. I'll now ask Nick to introduce himself and take you through our strategy and outlook. Over to you, Nick.

Thank you, Tony. Good morning, everybody. My name Nick Parsons. And I'm honored to step into this role. Tony has been an exceptional leader for the business and it will be a tough act to follow him. By way of background, I have over 30 years of experience in IT with a specific focus on the financial sector. I have held a number of senior leadership roles in Bravura, including leading the sales team in EMEA and leading our operations globally. I have 1 key message during this leadership transition. In the context of the business and our strategy, I intend to lead and drive the strategic evolution we've devoted together in the last 12 months. With that key message in line, I'd like to step through the following slides on our strategy. Moving to Slide 16. There are 3 primary developments taking place in the market. First, there is a reduced interest in Big Bang implementations; second, there a need for lower operational costs; and third, there is a need to improve end customer experience. In response, we've evolved our technology strategy to focus on [indiscernible] micro services, cloud, digital and automation. I'll touch on these more on the following slide. And moving to Slide 17, in addition to the 3 primary developments I touched on in the previous slide, there are 2 additional relevant trends. Individual fund managers and adviser groups are increasingly moving towards providing their own digital wealth management capability as an incentive to traditional retail platforms, opening up additional sales opportunities. We're also observing middle tier clients that are under serviced compared to the top tier clients. Delving a little deeper into the evolution of our technology strategy as well as developing and acquiring new micro services, we're transforming our existing products in smaller individually salable and deployable microservices. All of our products are or will be delivered as cloud services and increasing degree of automation our technology provides and ensuring a world-class digital experience. Together with the evolution in our technology strategy, our commercial approach is also evolving. Going forward, we anticipate having more client contracts underpinned by subscription and consumption-based approach. And then said, the structure of our contracts will allow clients to smooth their fees over the terms of the arrangement. We see our strategy supporting the outcomes that clients are asking for as well as delivering enhanced longer-term value to shareholders. Turning now to Slide 18. I'd like to highlight some of the steps we've taken on these initiatives. With our focus on cloud, Sonata has now delivered its cloud service, more and more clients now sell through the cloud. Our AdviceOS and [indiscernible] and all of our FinoComp market services [indiscernible] our account as well. With our focus on [indiscernible] all of our FinoComp products are microservice components, and we have an R&D [indiscernible] underway to build more. We're also gradually comparing sites on Sonata. We've launched a new micro service, Stanza, which is currently in deployment with its first customer. With our focus on automation, Sonata Alta is being implemented Aware Super in the fully automated superannuation fragments compelling alternative to an outsourcing. [indiscernible] Stanza, which also focus on automation are now also in deployment with one of our funds administration clients. Turning now to Slide 19. The 5 key trends of our overall strategy are to transition our existing clients to cloud services who use our technology platform to drive scale, flexibility and differentiation to expand our total addressable market, to deliver an ecosystem of offerings across the value chain and to ensure that we communicate a clear value proposition for all clients. Turning now to Slide 20, the developments in our strategy, also see an expansion in our total addressable market. Bravura's market opportunity in our 2 biggest markets, the U.K. and Australia, is significant. In the U.K., we estimate the total addressable market of more than GBP 1 billion of revenue per year for our products and services. The market comprises retail and institutional funds administration, retail investment in life insurance platforms, discretionary fund managers, corporate defined contribution pension schemes, self-invested personal pensions and small self-administered pension schemes. In Australia, we estimate the total addressable market to be about AUD 1 billion of revenue per year. The market here comprises superannuation, platforms, advice, life insurance, investment management and asset administration. I'll now ask Martin to take us through the financial implications in more detail.

Thank you, Nick. Let's now turn to Slide 21. Our commercial strategy result in 5 key changes. More of our client contracts will be subscription and consumption based. This is already the case with the bulk of our Funds Administration clients and contracts. Secondly, we expect to see contracted recurring revenue rise from about 50% currently to about 70% over the coming years. Upfront license fees will still exist but will be a smaller contribution to revenue and earnings. The revenue and margin profile of each contract and therefore, in aggregate, will be more consistent over time. And as Bravura's total addressable market expands, our products and services will cover more of the value chain and overall client contract value is expected to increase. I'll hand back to Nick now for the outlook.

Thank you, Martin. Let's turn now to Slide 23, which sets out our outlook. The industry structural drivers for our strategy are strengthening, and COVID-19 has emphasized the importance of digital first. We're increasing our total addressable market through the real life microservices. The COVID-19 pandemic continues to impact Bravura's key markets. The near-term outlook remains uncertain. However, the sales pipeline remains strong. Demand in the U.K. is beginning to improve, and there are significant opportunities for Sonata Alta in Australia. Bravura currently expects the FY '22 NPAT growth in the mid-teens relative to FY '21 adjusted NPAT of AUD 32.3 million. I'll now hand back to Tony.

Thank you, Nick. So Martin, Nick and I now will be very happy to take your questions.

[Operator Instructions] Your first question comes from Naveen Patney from E&P.

Firstly, Tony, congrats on an excellent career, I mean what Bravura has been able to do in terms of innovation for the -- particularly the platform market in the U.K., I think has been sort of unprecedented. So congrats on a fantastic career, firstly. The first question I had was just in terms of just reconciling the statements around guidance for '22. Clearly, there was quite a big uplift in second half '21 and improvement across the business, particularly in the U.K. But if you sort of annualize your second half NPAT of $23 million, you get the $46 million. You're guiding those for roughly around $32 million of NPAT into '22. So it's quite a big delta there. So I was just trying to understand what are some of the offsets that you expect relative to that second half run rate going to '22? Is it sort of license fees, staff cost inflation that we're sort of hearing about occurring in the U.K. or anything else?

Okay. Well, thanks, Naveen, for your kind words. I really appreciate that. I'm going to hand that one to Martin, I think. Martin, you have to pick that up.

Yes. Thank you. Naveen, yes, so th`e $23 million of NPAT in the second half was a strong second half, which we guided to, I think, at the half year. There were license fees in that result, which helped improvement. There were also other project items in there. We're expecting FY -- the first half of FY '22 to not continue with that run rate. As we expect the business in the U.K. and the current view to pick up more in the second half of FY '22 than in the first half. So that's why our guidance isn't simply the second half multiplied by 2. It's more of a balanced structure.

Okay. Great. And just in terms of the R&D, sort of stepped -- that you capitalize anyway. It sort of stepped up from sort of $8 million in the first half to $12 million in the second half. Just thinking about how we should think about that profile into '22 and also into '23.

Yes. I'll take that one as well. We anticipate that the level of capitalization in '22 for the full year will be approximately what it was in FY '21, so about $20 million. Then we expect that to come down in FY '23 as these major programs, particularly the microservices and the further work in digitalization, Sonata Alta, come through to completion in the course of FY '22 going into FY '23.

Okay. Excellent. And in terms of your balance sheet, clearly, in a cash point of view. Just interested in how we should think about your M&A pipeline at the moment. Are there any areas of priority? And just a point of clarification, the $30 million debt facility that you've signed, can that also be used for acquisitions? Or is it more of a working capital facility?

We continue to have a pipeline of opportunities for M&A. We are considering -- continuing to consider opportunities. We have nothing imminent at this stage. And yes, so the relationship with JPMorgan, we do have access to a facility for R&D CapEx funding in that working capital facility.

Your next question comes from Sophie Carran from Goldman Sachs.

Just a couple please, maybe just on the guidance. If you could give us a bit of color on what you've sort of assumed for the number of new Sonata contracts coming through? And then also how much is the Sonata Alta versus the traditional on-premise product, please?

I think it would be fair to say we would expect to see further Sonata Alta sales particularly in Australia. And as I mentioned, I think there's a lot of interest in the Aware Super deal. So over the next year, I would say, at least 1 or 2 more Alta sales. I think if we look at the U.K., what we're seeing is significant interest in the more modular replatforming models, and we're already providing microservice modules into a number of the big wealth platforms. And indeed, we're actually replatforming 1 of the major U.K. retail platforms. We can't name it. I'm afraid, using this incremental microservices approach. So the sales are slightly different. The incremental sales in Volvo microservices can still be of the scale of the Sonata sale when aggregated. So it will vary according to markets. So as I said, the main interest at the moment in Sonata Alta is in Australia, but we would also like to bring that proposition into the U.K.

Excellent. And then just on the recovery in the U.K. I mean, you've mentioned a strong pipeline. But can you just maybe quantify how this sort of compares to last year? And how much of this do you think reflects a bit of pent-up demand versus new demand coming through?

I think in relation to existing clients, we're seeing that pent-up demand because that's really where we saw the major decline where we have very large-scale implementations with big players who were typically spending several million pounds a year with us. That was the business that was potentially just put on hold. It didn't go away, but just moved to the right. So that's coming back. We're not completely out of the woods yet. People aren't returning to the work in the office at the rate, perhaps some of those organizations might hope. So I think in terms of new opportunities, I think we're already seeing that back at the level pre-COVID. So the pipeline is strong with new RFPs and new RFIs coming to market. So that will be the split, as I said.

Your next question comes from Scott Hudson from MST.

Just a couple of questions from me. Martin, in terms of the Delta acquisition, I think at the Macquarie conference in May, you highlighted that the Delta acquisition would contribute sort of $3 million to $5 million of revenues. Did that eventuate? It looked like the NPAT outcome was maybe a little bit light relative to those expectations.

For the -- in the second half, it contributed about $5.5 million of revenue.

In terms of the license fee expectations for FY '22, I mean, do we expect to see a sharp drop off on that? Are we seeing that the shift in the commercial model, I guess, play out in those license fee expectations for FY '22?

We won't see a sharp drop-off. We will see perhaps a different mix. I think there might be more licenses in Funds Administration and less in Wealth Management. But overall, I think that the license -- overall license amounts will be roughly the same as what we did in FY '21, which was lower than FY '20, if you look at the numbers plus low double-digit license fee revenue, yes.

And then in terms of that, I guess, that sharp drop off in, I guess, U.K. project work, I mean is it -- I guess, is that recovery happening slower than maybe you would have anticipated given the reopening of the U.K. economy?

Sorry, go ahead Martin, you go ahead.

Yes. I was about to hand it to you, Tony, but yes, so what...

Yes. And I think a little [indiscernible] as I mentioned. We're already just really getting back to normal. There were changes in July. And as I said, we're not seeing the return to work at the same -- at the level perhaps that some of our clients might have expected. And as I mentioned before, one of the key point about these very large-scope projects is you do have multiple teams that need to work together, sit around white boards, demonstrate software and things like that. So those face-to-face meetings are quite important. So we're not out of the woods yet, but I think there's a significant upturn on certainly where we were 6, 9 months ago. So it's a gradual improvement, I think.

So does the -- I guess, do you think calendar year '22 is, I guess, a more robust period in terms of, I guess, some of that project work that was deferred?

Yes, very much. Yes.

In light of that, Martin, what are you sort of anticipating for first half, second half split with regards to your FY '22 NPAT guidance?

Yes. So that comes back to the comments that I made to Naveen's questions. Yes, we're expecting that the second half of FY '22 will be stronger than the first half. And yes -- based on exactly that point. We certainly think that as we currently look at the profile of the pipeline and project opportunities, that looks like it will be stronger in the U.K. that will be picking up in the second half.

Similar split to FY '21 or is it...

Not as extreme, but I think it will be more of a -- yes, so the first half will be lower than the second half to get to our guidance, won't be as extreme as the NPAT split that we had in FY '21, but it will be...