Iress Limited (IRE) Earnings Call Transcript & Summary

Welcome to the IRESS Limited '19 Financial Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Walsh, Chief Executive Officer. Please go ahead.

Thanks for joining us this morning for the presentation of our full year result for 2019. My name is Andrew Walsh. I'm the CEO of IRESS, and I'm joined by our CFO, John Harris. In today's call, I'll provide an overview of performance at a group and segment level. And John will provide some further detail on the financial results before I conclude with some commentary on 2020. There will be opportunity for questions. Before I turn to financial results, I'll briefly touch on 2 acquisitions for IRESS in 2019. Slide 11, I'm referring to. It's important for IRESS to provide accurate, timely and cost-effective data and insights. This is a strategic priority for us. Our acquisition of QuantHouse in 2019 accelerates our data strategy. QuantHouse is highly complementary and strategically aligned with IRESS' needs and the evolving market data needs of clients globally. In 2020, in January, we acquired BC Gateways, a fintech start-up, with an established blockchain platform that allows data to be published and distributed in a timely, accurate and auditable way, representing a shared source of truth. Our initial focus is on helping Australian financial institutions, fund managers, registries and custodians to reliably share large volumes of pricing, tax and regulatory data across the investment management value chain. Demand from financial institutions for cost-effective, automated, compliant technology continues to rise and BC Gateways platform meets this demand. Financial institutions have no shortage of data. But without the right systems and levels of automation, data risks can be inaccurate, difficult and expensive to manage. In today's environment, neither outcome is workable for financial institutions. The application of the BC Gateways blockchain is not limited to Australia. And now turning to financial highlights on Slide 13. In 2019, IRESS delivered a 10% increase in both operating revenue and segment profit, driven by strong underlying performance in Australia and the U.K., and the contribution from QuantHouse. Reported NPAT was up 2% on 2018, impacted by the lease accounting standard, AASB 16, and the acquisition of QuantHouse. However, excluding these, NPAT was up 11% on 2018. In the U.K. and Europe, revenue growth was 20% or 16% on a constant currency basis, with strong sales and positive contribution from QuantHouse. In Australia, revenue from financial advice software was up 10%, reflecting ongoing demand for software by advice businesses amidst changing demands. South African revenue grew 6% on a constant currency basis with strong sales. IRESS' business fundamentals remain strong with strong cash conversion, high recurring revenue and conservative gearing levels. The total dividend in 2019 of $0.46 per share is in line with 2018. Further detail will be provided in the next 2 slides that John will cover in a moment. I'll now go through each segment in a bit more detail, starting with Asia Pacific on Slide 17. Operating revenues saw a 5% increase on 2018 with direct contribution also up 5%. Growth in advice software was driven by new Xplan implementations and software uptake in response to clients' compliance and data needs and focus on business efficiency. Having said this and notwithstanding our confidence in the need for technology into the future, industry change within wealth and wealth management broadly exists, and uncertainty remains elevated in the short term. There was continued strong demand for a broad range of software, including expanded data solutions across data with QuantHouse and analytics and risk management with Lumen. Trading and market data revenue remains resilient with continuing buy-side demand for investment management software and ongoing interest from retail brokers for IRESS' private wealth software. In 2019, 2 leading Australian retail firms made the decision to implement IRESS' private wealth software. Superannuation revenue growth was impacted by a substantial focus by clients on legislative change during 2019 that impacted the timing of discretionary investment by clients. A focus on business development has resulted in 2 significant automated superannuation wins. In Asia, there was strong revenue growth driven by the successful rollout of online trading software ViewPoint at 2 regional brokers. On Slide 18, you can see the continued strength in the diversification of our financial advice and superannuation client base, all retail segment. There is movement between licensee types, namely from large to small. There has been a re-weighting in our client base over the past 12 to 18 months, but the financial profile of this segment remains sound and diversified. On Slide 19, now looking at the U.K. and Europe. Operating revenue and direct contribution was up 16% and 13%, respectively. Underlying revenue growth reflects strong momentum for both new and existing client projects, including the deployment of private wealth software with 2 large investment managers and the implementation of order management systems. Initiatives in sourcing for insights and efficiencies have also been a highlight. There was positive contribution from the acquisition of QuantHouse. In the U.K., Xplan is solidifying its strong position in the financial advice market with footprint expansion, new client signing and underlying growth of our client businesses. Our scaled advice software Xplan Prime has gained momentum in the U.K. as businesses seek to deliver more efficient financial advice and at scale. On Slide 20, operating revenue in mortgages was down in 2018 as well as direct contribution, simply reflecting the timing of certain client projects. This result, however, doesn't reflect the strong operating momentum underway in the business, both in pipeline and in implementation. Four client deployments are progressing well currently. These point to quality, near-term growth. Transition to subscription revenue continues with recurring revenue accounting for 31% of total revenue in 2019, which compares to 20% in 2018, a strong result. In South Africa, on Slide 21, operating revenue and direct contribution were up 6% and up 9%, respectively. Growth was driven by continued demand across the product range as well as successful client deployments, which included the first phase of private wealth software to a Tier 1 financial services business. South Africa's largest online stockbroker deployed ViewPoint to its retail customer base, buoying revenue growth in 2019. A key source of revenue growth in 2019 followed the JSE's derivatives platform going live in April. In North America, on Slide 22, operating revenue was up 26% on 2018, reflecting positive contribution from QuantHouse. Direct contribution was up 3%. Underlying revenue that excludes QuantHouse was down marginally with stable recurring revenue offset by lower nonrecurring revenue due to reduced project activity. A project to deliver retail trading systems to a Tier 1 bank will go live in 2020 and is leading to other client opportunities. Now some comments on product and technology operations and corporate costs on Slide 20. We do continue to invest in priority areas, while also remaining focused on automation to achieve efficiency, scale and quality. In operations and corporate costs, these were flat in 2019, excluding QuantHouse and AASB 16 impacts. In product and technology, increased costs reflected deliberate investment decisions around product, people, capability and capacity. I'll now hand to John to provide some more information around the financial aspects of the results. Thanks, John.

Thanks, Andrew. I'll start on Slide 26. As Andrew has provided detailed commentary on our revenue and segment profit performance, I will focus on the items between segment profit and NPAT. Share-based payments increased from $10.4 million to $17.7 million during 2019 as a result of the previously announced changes to IRESS' remuneration strategy for all employees. As a result of these new equity schemes, the accounting recognition of share-based payments expense has been accelerated. This was the main driver of the 2019 increase. In addition, the new remuneration arrangements increased the proportion of remuneration delivered as equity. Total rem was not increased as a result of these changes to remuneration strategy. We expect share-based payments will increase again in 2020 as we continue to transition to these new structures, add headcount and implement inflation-linked salary increases. In 2020, share-based payments expense is expected to be in the order of $20 million to $22 million. Operational depreciation increased by $9.7 million, largely as a result of the adoption of the new lease accounting standard, AASB 16, and the acquisition of QuantHouse. Excluding these items, operational D&A increased by $3 million in 2019, reflecting investments in IRESS' cloud strategy and new offices. The increase in interest expense also reflects the adoption of the new lease accounting standard. Underlying interest costs remained in line with 2018. We have included a slide in the appendix, which shows the impact of the leasing standard on each line of the P&L. Financial statements also include extensive disclosures on the first time implementation of this new standard as they did at the half year. Reported NPAT increased 2% from 2018 to 2019. However, as Andrew said, excluding the impact of the new leasing standard and the acquisition of QuantHouse, which was loss-making in 2019, reported NPAT grew by 11%. Our effective tax rate was 26%, which is in line with last year and the previously guided operating range of 26% to 28%. Turning to Slide 27. As Andrew said earlier, our fundamentals remain strong. Cash conversion remained strong at 87% in 2019 and reflects a significant supplier prepayment late in the year in relation to our cloud strategy. Excluding this payment, cash conversion was 90%. We continue to expect cash conversion to be in the range of 90% to 100%. We remain conservatively geared with a leverage ratio of 1.3x segment profit. The main drivers of balance sheet movements in the year were the QuantHouse acquisition and the impact of the new leasing standard. The acquisition was funded from our existing debt facilities, which increased net debt to $194.9 million. Current liabilities also increased from $58 million to $85 million, largely as a result of AASB 16. And finally, the increase in noncurrent assets reflects the acquired software, goodwill and other assets that were brought on to the balance sheet as a result of the QuantHouse transaction as well as the adoption of AASB 16. Further details on how we have accounted for the QuantHouse acquisition can be found in Note 3 of the financial statements. I will now hand back to Andrew to cover the financial outlook for 2020.

Thanks, John. 2020, looking at Slide 28, we expect reported segment profit growth this year to be between 3% and 8% on a constant 2019 currency basis. This includes the net impact of recent acquisitions: QuantHouse and BC Gateways. The execution of medium-term growth opportunities, particularly in super, trading and data and further scalability across our business will bring 2020 investment ahead of revenue from these objectives. Growth in 2020 is expected to be heavily weighted to the second half, reflecting the timing of this investment, revenue and projects. The role of technology and financial services is increasingly important. However, industry change continues in Australia with uncertainty elevated in the short term. Nonoperating costs in 2020 are expected to be in the order of $3 million to $6 million, reflecting workplace investments in the U.K. and integration costs. So in summary, this strong financial result in 2019 was underpinned by delivery success, both strategic and to clients, much of which was invested in periods prior to 2019. Sales success in '19, particularly in automated superannuation admin and mortgages will be reflected in coming periods. We continue to focus on organic growth and inorganic growth to augment underlying business strategy. Thank you for attending. And I'll hand back to the operator for any questions that you may have now.

[Operator Instructions] Our first question today comes from Paul Mason of Evans & Partners.

Just a couple of questions from me. The first one on your guidance range, could you give us a bit of color about how much synergy levels you're expecting to have achieved from QuantHouse in 2019 because I think your original guidance was that it was bought for less than 10x EBITDA, and that implied about $6 million or $7 million of EBITDA for the business once the synergies were extracted. So I just wanted to understand how that's expected to track this year.

Paul, it's John here. Look, I think the main steer I'd give you on the synergies we're expecting from QuantHouse this year is that it was loss-making to the tune of about $2.5 million at the segment profit line, $2.3 million in 2019. And the successful implementation of synergies in 2020, we'll take that into profit as well as growth in the underlying business. Not all of the synergies will be at full run rate in 2020, but we would expect that in subsequent years.

Yes. So things worth adding that, that plan for accessing those synergies is on track.

Okay. Great. And just the second one for me is on the share-based payments. Obviously, your guidance for 2020 is extremely clear, so it's great. But could you give us a bit of color around sort of the longer-term trajectory. Like in 2021, should we expect that to sort of normalize back to your historical levels more? Or is it sort of longer-dated before that will renormalize?

When we get through 2021, we will have got through the accounting acceleration impact of transitioning to a new scheme. But over the 3-year period that we would transition to that full accounting run rate, we'll obviously see salary increases and headcount increases, and so that will affect the ultimate place where share-based payment ends up. But the accounting transition, we'll be fully through that within 3 years, being '19, '20 and '21.

Our next question is from Paul Buys of Crédit Suisse.

Just wanted to chat a little and a little bit more color about your investment in the medium-term opportunities that you're calling out, perhaps start with trading, if you wouldn't mind, just to get an understanding of the opportunities you're seeing there? And I guess, what region and what the main drivers are?

I might run through all of them, Paul. We've spoken about our strategy in superannuation and the opportunity there with a fast-changing view of requirements by superfunds. And we've announced a client. Late in 2019, we've signed a second client that we haven't yet named, and that will involve activities to take on those clients. And so we will have some level of cost there before the revenue flows through and particularly, as we're handling multiple implementations of those clients. So that's one aspect. In terms of trading, trading is a fundamental component for the evolving wealth management landscape. And so for our private wealth solutions and in our retail wealth solutions, it's critical for execution connectivity through to destinations such as brokers or platforms or fund managers, so it's important everywhere. The specific thing that we are looking at here is around order management capability in the U.K. and Europe. So that is where some focus is going. We continue to see opportunities for the automation of our client businesses, whether that is through comprehensive use of compliance data or efficiencies. And so we see opportunity coming from that. We already do provide insights to our clients around the data that they have to present opportunities. We see more opportunity there to monetize that and also deliver efficiencies to clients in respect of automation. They're the main areas that we see as directly requiring something to do, but we see revenue on the other side.

Got you. Just to kind of follow-up. On the trading one, kind of U.K., Europe, I mean, any change in the sort of competitive landscape there that is kind of opening that opportunity up to a greater extent than you might have otherwise thought of is kind of -- has that been a catalyst? I know this was a key focus, as you said. Has there been an additional catalyst there?

Yes. I think that the competitive landscape there is what has been changing, and that's creating opportunities for us. And I think it's fair to say that the broad sell-side environment has challenged, as I spoken about, for a long time. But competitively, there's opportunity to grow and that's what we're jumping on.

Okay. And then just in terms of your announced client win. And obviously, on the super side, you've got another one unnamed to come. I mean just, I guess, trying to get an understanding, I suppose. So yes, that's already announced. To get an understanding, I suppose, of the timing. Is this sort of a 1-year rollout, then the revenue starts flowing thereafter to more than offset the costs? And so timing and also just kind of a broad-brush idea of the kind of quantum of that client win maybe in the context of, I don't know, other wealth clients, just to get an idea of how meaningful it is here?

It's meaningful. We aren't waiting that project to go live for revenue. We'll be paid for the services involved in taking clients on, but it will be project-like and we'll read that down as being nonrecurring, although I think it's high quality. And the recurring revenue will start once that client goes live. On its replacement, in particular, we expect that will be a 12- to 18-month project, and our goal is to have that much closer to 12. Not all clients will be in that time frame, some shorter, some even longer depending on size. But we're talking about meaningful strategic steps in the superannuation segment and meaningful clients.

Last one for me, just on South Africa. I guess, just -- obviously, you had the boost from JSE platform during the year. Just, I guess, want to understand, I suppose, the growth outlook following what was obviously a good boost in FY '19, how that leaves you placed for FY '20 if there's [indiscernible] consolidation? If you like, from a profitability perspective or if there's enough going on there to drive growth of the higher base?

As it has been for the time that we've been involved, there is a sophisticated market. The similar levels of complexity exist in South Africa as they do elsewhere. We're seeing opportunity in integrated wealth solutions, and we have a range of activity with clients in all aspects of retail, whether that's in integrated investment management, online trading or advice. And we see clients -- client brands. They're using a whole range of our products. So there is a lot going on. I think that some of the levels of growth that we've seen in previous years are probably not sustainable forever, given our positioning in South Africa, but we think that it still has quality growth there.

Our next question is from Scott Hudson of MST Emerging.

A couple of questions for me. Firstly, BC Gateways, is that going to have a -- there will be a drag on earnings through calendar year '20?

Yes. It will be a minor net loss, Scott.

And then, John, just in terms of the accelerated share payment scheme. There's no, I guess, reallocation of employee expenses from above the second profit line to below the second profit line in that process.

There is some of that, Scott. And so -- but that's only in relation to the executive scheme. So the executives are no longer receiving cash bonuses, which would have been booked above the line and there's an increased weighting towards equity as a result of that change to a new rem structure. But the bigger weight of the rem schemes with the broader population of employees, there wasn't that trade-off.

And then, change in amortization, so it's not a large-scale change in quantum.

Yes. The bigger driver is the accounting recognition.