Bravura Solutions Limited (BVS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Bravura Solutions Limited Fiscal Year 2022 Financial Results. [Operator Instructions] I would now like to hand the conference over to Libby Roy, CEO and Managing Director. Please go ahead.

Thank you, and welcome, everybody, and thank you for taking the time to join us today to discuss Bravura Solutions FY '22 results. I am delighted to be with you today in my new role as CEO of Bravura having started a week ago after finishing up a Managing Director business at Optus. I have been on the Board of Bravura for the last 2 years. And based on the current state and future opportunities for Bravura, I am excited about stepping into the CEO role. Bravura is well placed to serve the wealth management industry globally with technology solutions that leverage cloud, AI and machine learning to deliver to our customers cost effectively in an increasingly competitive industry with a high level of regulation. If you can go to the next slide, please. Today, I will cover off some key highlights and some top-level results and then hand to Brent, who will take over and deep dive into the results and answer any detailed questions you have on the numbers. I will then share my initial thoughts on the priorities for Bravura going forward. Over the next 3 months, I will be conducting a strategy review with the executives and Board and will provide an update at the AGM and half year results. If we can go to the next slide. So I'd like to take a moment to focus on the highlights for these results. EBITDA and NPAT have delivered within guidance at $45.3 million and $25.7 million, respectively. Pleasingly, you can see a return to revenue growth of 10% over the last year to deliver $266.7 million. I'd also like to share a couple of highlights in terms of strategy execution over the past year. In FY '22, we delivered our first transition of our Sonata Alta implementation with a [ wearer ]. And we've had strong feedback from the customer on the resulting productivity improvement. We also increased our penetration of micro services into both EMEA and Australia markets. And we continue to make progress on our cloud transition across multiple products in the portfolio. As you will see, we also have a strong balance sheet and operating cash flow that is driven by high-quality earnings that are both visible and recurring, and we continue to make progress on our ESG initiatives. Over the course of the year, we've implemented a global D&I leadership team. We've increased our female leaders from 28% to 31%, and we have acquired our ISO 14001 certificate in environmental management system. Brent will now take you through some of the details in the results. Thank you, Brent.

Thanks, Libby. It's fantastic to have you on board as the new CEO of Bravura. From a revenue perspective, the business delivered 10% revenue growth to $262.7 million. Pleasingly, our recurring and attach recurring revenue of 81% of the total group revenue with contracted recurring revenue up 8%. EBITDA reduced 8% to $45.3 million with a group EBITDA margin of 17%. NPAT reduced 20% to $25.7 million. Our EPS came in at $0.121 per share, with a final dividend declared of $0.032 per share. That resulted in a full year dividend of $0.069 per share. In FY '22, total revenue increased 10% as previously stated, driven by Wealth Management, which was up $9.4 million and funds administration of $14.2 million. The Wealth Management segment's EBITDA reduced year-on-year due to global wage costs driven by localized resource shortages, the global resource mix between high and low cost countries and our overall staff attrition that was in line with the market at just over 20%. We also invested in key delivery and technical resources to deploy a major contract and generate long-term annuities revenue stream. Funds Administration pleasingly, EBITDA grew 27% driven by the renewal of a major contract for a further 7 years. Our corporate costs increased 6%, driven by an increase in travel post the opening of international borders and various licensing costs. Depreciation and amortization increased $1.3 million compared to previous periods arising from the amortization of intangibles from recent acquisitions. As previously stated, our EBITDA came in at $45.3 million or a margin of 17%. EPS was $0.121, with the second half dividend declared of $0.032 per share. As you're aware, we've been targeting increase in recurring revenue across the business. The improved revenue result was achieved through an 8% increase of the contracted recurring revenue, highlighting the value of long-term client contracts. Project fees increased 32%, reflecting the continued progression of major works throughout the year. This will result in long-term annuity revenue stream for the business. Long-term revenue growth will allow the business to focus on an improved operating leverage as we continue to experience a challenging labor market and higher costs. The EBITDA result was driven by continued wage pressure driven by resource shortages and the global mix, staff attrition and delivery resources we've invested in across APAC and EMEA. Bravura continues to build highly visible revenue stream across our products and our portfolio. We break our revenue into 4 key components for the market. Recurring revenue comprises revenue that is contracted for the contract term plus project work close implementation. The majority of revenue had contract terms between 7 and 13 years. Contracted recurring revenue comprises revenues contracted for the contract term and typically includes maintenance, managed services, hosting, cloud and Software as a Service. Attached recurring revenue comprises system upgrades, enhancements and in production professional services from ongoing client demand. These are attached services as part of the contract with our customers. Project fees comprised professional services from initial implementation and development requirements. License fees are earned on a one-off basis inside contracts with customers. Contracted recurring revenue was up 8% in FY '22 compared to the prior period, highlighting the value of long-term contracts. Our tax recurring revenue declined 1% compared to prior period with work being delayed and reprioritized by clients, predominantly in the U.K. Despite this decrease, attached recurring revenue still accounted for 20% of the total revenue base, highlighting the strong relationship we continue to help with clients. Project fees are really a proxy for future contract revenue, which is positive for the business. Nonrecurring revenue increased by 36%, driven by project fees resulting from new client wins and licenses on key renewals. From a research and development perspective, the group invested $53.9 million, of which 41% was capitalized or $21.2 million. Bravura's current R&D program is focused on outcome-based services predominantly for the development of micro services, Sonata Alta, pension dashboard in the U.K., Australian wrap functionality, cloud and the extension of our digital advice capability. The R&D program strengthens Bravura's product functionality relative to competitors together with its competitive position. The trend you see in capitalized R&D spend from second half FY '22 will continue into FY '23. Bravura continues to have a strong balance sheet even with the macro-level challenges experienced in FY '22. While cash flow of $48.7 million is lower than last year, we are still in a robust financial position, and we have headroom to invest in further R&D as well as organic and inorganic growth opportunities. You will see a very strong cash flow conversion in the second half of FY '22. Operating cash flow, excluding taxes paid, was $47.2 million, reflecting an operating cash flow to EBITDA conversion of 104%, which is consistent with our long-term trend. Our cash flow statement reflects a strong operating cash flow and quality of earnings with a large proportion of recurring revenue. Overall, our financials are demonstrating strong revenue growth, a focus on cost management in a challenged environment and a return of value to shareholders by the continued payment of dividends. I'd now like to pass back to Libby to take us through our strategy moving forward and outlook for the business.

Thanks, Brent. Before I speak to our plans on the strategy review, I want to emphasize the strengths and assets that Bravura has today that will help inform and provide the foundation for the future strategy. Bravura has a strong suite of products that cover the breadth of the wealth value chain from funds administration through platforms and distribution. Bravura has a global footprint with significant opportunity for expansion, both within its existing customers as well as new markets and geographies. As Brent has already spoken to, Bravura's revenue growth is underpinned by long-term contracts with high levels of visible recurring revenue. And I think it's important to point out that historically, a significant proportion of Bravura's R&D has been achieved in concert with its clients. Underpinning all of this is our talent. We have strong software development, engineering and maintenance capabilities that are able to work globally to deliver in partnership to our claims. If we can go to the next slide, please. I think it's important to detail out just how strong Bravura's footprint is both across the wealth industry value chain as well as globally from a client base perspective. Across the product suite along the wealth industry value chain, we've always had great strength in the funds administration and transfer agency business through our Rufus GTAS and GFAS products. You saw that in the numbers that Brent took you through. This is an area of the business that I will be devoting effort to in looking at how we can further leverage. Sonata is our flagship product in the platform space. And with Alta that we've been investing in, in the last couple of years, we are expanding this to deliver business processes as a service. We have also extended our product suite across distribution and customer engagement with our acquisitions of Delta, FinoComp and Midwinter. I think it's important to point out that in the markets that Bravura is focused on, the industry is more similar than different, which enables us to leverage our investment quarterly, and we will be exploring greater geographic expansion of our existing products in the next phase of the strategy. From a global customer base, the list of customers that you see on this slide is not exhaustive, but designed to give you a feel for the strength of our existing customer base in our major markets. And our long-term contracts with these global financial institutions is what underpins our circa 80% highly visible recurring and recurrent revenue. We know that there are opportunities to partner more deeply with these existing customers, both across the value chain as well as geographically. If we can go to the next slide, please, Frank. So in summary, as you can see from the results that Brent took you through, Bravura has delivered a solid result in a difficult environment. In addition, Bravura has an incredibly strong set of assets and capabilities from which to take the business forward. As I said at the beginning of this presentation, I am excited about the opportunity for future growth of Bravura. Having just got my feet under the desk as CEO, I want to share with you my plans to refine the strategic focus for Bravura over the next 3 months, and it's laid out here on the slide. The #1 priority is to increase our partnership with our existing customer base, which presents significant opportunity, both cross-sell and increased penetration locally and internationally. Our second priority is to identify opportunities that have significant scale against customer needs and the key customer needs across our client base are to drive cost reduction and achieve regulatory compliance. Technology is a core enabler here, and we have the solutions to meet these needs. To achieve this, we will be doing a deep dive on all in-flight initiatives to determine the right sequence to deliver on the highest value opportunities. The third area of strategic focus is accelerating our existing cloud implementation work across major products in the portfolio, which is already underway. As we saw in the results earlier, the difficult operating environment of the last 2 years has impacted our cost base. I will be taking a close look at the cost base as part of the strategy review process to ensure it is closely aligned to the targeted areas for growth. I'm very confident that this can be achieved. Alta, which is our BPaaS offering that we have been investing in over the last 2 years has been built in a standardized way that is applicable globally. And in reviewing our R&D spend, we will be optimizing and future-proofing our architecture across the suite of products. And of course, we will also continue to take our ESG responsibilities seriously, particularly in the areas of inclusion, carbon reduction and ISO accreditation. If you go to the last slide on outlook. In terms of outlook, we are confident in the quality of our global pipeline, particularly in Australia, where consolidation in the wealth industry is driving large-scale opportunities. The recovery in EMEA has been more subdued. However, we have a strong register of existing global customers that we continue to serve and expand. And while we expect the labor market to remain difficult to manage in the near term, we do expect that, that will be over the next 12 months. The trend in capitalized R&D spend that you saw from the first to the second half in FY '22, we will continue into FY '23. And despite these macro headwinds, I am confident that with the existing assets and capabilities of Bravura, we have a strong future. I trust this gives you a good understanding of our focus going forward alongside the results that we presented today and we will update you further on the market outlook on completion of the strategy process at the AGM. And I will now open the floor to questions. Thank you.

[Operator Instructions] Our first question comes from Bob Chen with JPMorgan.

Just a few questions for me. Just in terms of the commentary around the high-quality pipeline, are you able to give any color on the mix of that pipeline, whether that's Australian or U.K. opportunities between the Wealth Management business? Are they sort of larger implementations you're looking at? Or is it microservices that you've been talking about recently?

Thanks, Bob. So I think I've already given some color on that pipeline in the outlook slide, where I've indicated that it is particularly strong in Australia that is driven by the consolidation in the wealth industry. And that is where our BPaaS offering of Sonata Alta is particularly relevant at this point in time in the industry life cycle. And as I said also in the outlook, EMEA is more subdued in terms of large-scale opportunities, but we have great strength from a global financial institution perspective, and we see significant opportunities to expand in that customer base.

Great. And then just a comment around the labor market has been challenging. I saw that sort of license revenues have sort of picked up over FY '22, but then the margins are still down quite a bit. Can you give some guidance or maybe some maybe quantify like what sort of wage pressure that you're seeing across the business?

Maybe I'll just start that, Bob, and then hand to Brent for more detail. As you will see in our cost base, 80% of our cost is labor across 5 different countries globally. And there's definitely been wage pressure across multiple markets. So that is a significant contributor to what we're dealing with at the moment. And we will be putting in place a number of creative solutions to look at our global labor mix going forward to address that as well as looking at our hiring practices and other things. So maybe I'll let Brent answer any more detail.

No, I think we're not immune to the attrition that's taking place in the local market demand for key technical resources, which comprise 80% to 85% of our resource base. And as Libby said, globally, there's continued resource pressure in certain markets, which means we're needing to hire roles to fulfill customer requirements and obligations. So we'll need to look above it at that reshaping as we go forward as an organization.

Okay. Great. I mean in terms of that sort of margin then, is that sort of -- can I sort of assume that sort of going forward, just given that the pressure is still there?

I think what we stated is that we -- it's a challenging market and may well be for the next 6 to 12 months. But through the strategic process, we will respond with a plan to review our cost base and manage that moving forward to allow us to drive operational leverage across the existing customers.

I think, Bob, what I would say there is multiple levers that we can leverage to improve margin. Cost is just one of those levers. There are other -- I spoke specifically to the fact that we'll be looking at scale opportunities against customer needs. And that is another way that we can address the margin challenge. I also spoke to the fact that we would be reviewing our R&D and future-proofing our architecture and again, improving the scale and the standardization of our development is another lever to address the margin challenge. So I think there's many levers at our disposal that we will be looking into over the next 3 months.

Great. And just a final one for me. In terms of that, capitalized R&D spend. I remember you guys have been on that sort of journey with moving towards more micro services. Like can you give an update on -- is that now complete and you serve spending on other different types of projects now going forward?

If you look at our capitalized R&D spend from FY '22, it's actually spread across our investment in Sonata Alta, which is our business process as a service offering, also moving to the cloud as well as micro services. So micro services is only one element. And I think I can't give you any more detail at this point, Bob, because we will be doing a complete review of in-flight initiatives to determine sort of ongoing prioritization. But I would stress that, that capitalized R&D investment is actually across many more things than just micro services, which is really just componentizing and enabling us to work with our customers to sell in smaller components rather than large-scale enterprise software. And that's certainly the strategy that will continue.

The next question is from Matt Johnston with Jarden.

Good morning, Libby, good morning, Brent. Hope you are well, can you hear me okay?

We can.

Okay. Maybe just first one for me. Just thinking about the second half EBITDA. Is that a good base for us to think about annualizing into FY '23?

I think it's a reflection more so of the challenging market we're operating within. And so as Libby rightly fully said, there's a number of levers for us to look at margin improvement right across the business. So potentially as a baseline, but we need to look at driving that operating leverage going forward. But at this point in time, it would be probably an appropriate baseline.

Okay. And then maybe just in terms of, I guess, the labor with the cost base on the labor side. Can you talk to, I guess, utilization -- and I understand it's probably difficult just given the geographic diversification, but are there areas where you can look to optimize, i.e., are the costs too high in certain geographies given the demand profile?

So I think that's exactly one of the levers that we will be looking at. When I spoke to our sort of global mix across markets, I think one of the strengths of Bravura is our ability to operate globally and leverage resources from around the world irrespective of where the client is. So I think that's the strength that we have. I think what we have to do is optimize the location and the cost base of our resources as we go forward. Does that give you some clarity?

No, that's helpful. And Brent, just in terms of the currency, was currency headwinds in the second half, repatriating the pound back to Aussie dollars?

It has been at the moment, the pound has weakened over more so July, but we -- given we're in multiple jurisdictions, currency always vary in that respect. But I wouldn't say it was a huge move up in terms of the final NPAT result, no.

Okay. And then just on the comment around capitalization, the trend in second half. Can I just clarify, is that the trend to step down half-on-half? Or is $9.9 million?

It's a step down trend that will focus our investment on the 3 areas that Libby mentioned and also what comes out of the strategic review, and we'll bring more color to light at the AGM.

Okay. And then -- sorry, I'll try and squeeze one more in. Just around Australia. So obviously, you did talk to, I guess, the consolidation story in Australia, especially around industry super funds or super funds. The Mercer BT super, does that create -- without winning the new Sonata Alta contract, is that a revenue driver into '23, '24?

Yes, there's workloads there that would potentially come across on the Sonata, but nothing a given, but yes, it does create, given Mercer as a current customer, it could create an opportunity for us moving forward to manage those members on a Sonata platform.

The next question is from Chris Gawler with Goldman Sachs.

High Libby, hi, Brent. Can you hear me, okay?

Yes.

We can.

Excellent. Maybe firstly, just on EMEA, I mean, you've called out that as being relatively soft versus Australia. I mean what are you hearing from your customers over there? Has that been improving or deteriorating in the last few months? Just interested in a bit more color on EMEA, please.

I think it's not something that I could quantify as something that's happened in the last few months. I think what we've seen in the EMEA market is increasing sort of vertical integration in that market and a lot of private equity investment in that market. But that's been happening in the last 24 months. That's not new. And as a result of that, what we're seeing is a lack of interest in large-scale enterprise technology implementations. And again, that's the trend that's been there 18 months, 24 months. And that's why we will be focusing working with our existing customers where we have relationships where we understand deeply their needs. And there are significant expansion opportunities to leverage from where we already are. So I don't think anything has changed significantly in the last few months, if that helps.

Yes, that helps. So it sounds like it's more market dynamics rather than geopolitical inflation concerns in Europe. Is that a fair comment?

I think that's a fair comment.

Yes. Great. And just looking on Slide 8 between your different revenue sources. I just noticed that in the second half versus the first half, contracted recurring revenue actually declined. Just interested to sort of understand what drove that? Is that FX? Was there a churn event, something else?

Yes, definitely wasn't FX. There was one customer that moved platform, as you'll see historically, we've seen and focused on driving contract recurring revenue growth. We're not immune to a churn event, and that's driven that. But going forward, we expect to continue to build that contracted revenue to drive an annuity revenue stream across the contract term of 7 to 13 years and allow us to build operational leverage on a number of fronts within the organization.

And what I would draw your attention to is the project revenue, which is really, as Brent highlighted earlier, indicative of working with new customers. So we will aim for very high retention of our customers, and that's usually the way as a very long-term contracts. But as Brent said, we're not immune to an attrition event. But what you should take comfort from is that increase in the project revenue, which is new customers.

Yes. That makes sense. And maybe just lastly on that, are you able to give us a sense for what part of the business that customer was in and sort of who you might have lost that contract to?