Iress Limited (IRE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Iress Limited 2021 Half Year Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Walsh, Iress CEO. Please go ahead, sir.

Thanks for joining us today, and welcome to Iress' '21 first half results call. John Harris, our CFO, is also on the line with me. We released the presentation to the ASX. And as usual, I'll concentrate my remarks on the opening pages of the deck, and John will take you through the financials. As you know, we held our Investor Day on July 29 where we pre-released the interim results, and so there are really no surprises here. But we do think it's worthwhile to recap on our growth strategy, affirm our financial targets and give you another opportunity for questions. Hence, the call today. And as we did in February, we've provided detailed disclosure in the pack. To give you a clearer understanding of the underlying business performance, we will be highlighting pro forma results in constant currency. This is done to capture the noise of FX changes and the timing of acquisitions. In the deck, there are full reconciliations as well. Before we get started, I also note that we released details of the latest NBIO on 11 August. There's not much more to add than what we said in that announcement, and I can assure you that we're focused on running the business well and executing on our own growth strategy. So let's make a start on Page 4. There are some key points that I'd like to make today. Firstly, we're pleased to deliver on solid results for the first half in '21. This shows headline pro forma results. In constant currency, segment profit increased by 3%, net profit was up 9%, EPS up 6% and ROIC was consistent at 9%. As we show on Page 6, the improved performance was driven by growth in Trading & Market Data, a full period contribution from OneVue and good progress with new client implementations across Super, Private Wealth and in U.K. As we talked about at the Investor Day, the integration of Xplan on OneVue is underway with a pilot of this integration planned for the second half of this year. A great deal of work has gone into that, and we're excited about the opportunity. Separately, we've outlined plans for investment infrastructure, which will begin to come on stream in 2020. The deployment of our highly competitive automated super admin offering is also progressing well. Guild went live in the first half, and ESS Super is due to go live in early 2022. These use cases are major proof points for us in an industry that desperately needs a solution such as what we offer. Our U.K. results are improving. The sales pipeline is good, and margins are expanding as activity levels rise and markets reopen following COVID-19 and successful vaccination programs. As we expected, revenue in Australian [ national buyers ] declined a little. This was a result of resizing of enterprise client contracts. Underlying demand for software remains resilient as reflected in higher levels of [ expenses ]. I'm happy to talk more about how we are well positioned for the trends and shifts in that market that underpin demand. Overall, at the end of the first half, we are where we plan to be and on track for the full year. Secondly, the Iress business model has very attractive features. These can get lost in a 6 months' results summary, but they're worth highlighting. Over 90% of our revenue is recurring. We have over 10,000 clients with around 99% client retention. And cash conversion, another positive feature, is 90%. We've summarized these attributes and some software unit economics that may be useful to you. Across a growing client base of more than 10,000 clients, Iress features an ACV run rate of over $600 million. Based on the high level of recurring revenue and very low levels of churn, Iress is characterized by a lifetime value of over $20 billion. And when taking into account client acquisition costs, the LTV on CAC is more than 25x. That is a high ROI model. With our pro forma return on invested capital consistent at 9% and conservative balance sheet, we're well able to self-fund technology investments to support scale and to reward shareholders. You will see that we've declared an interim dividend of $0.16 per share, franked at 80%. Thirdly, earnings are accelerating. With our strong operating business and rising returns on growth investments, we entered the second half of the year with a positive outlook and accelerating growth when compared to the first half. Guidance assumes 16% to 21% growth in segment profit in the second half. The second half will include an improved contribution from OneVue; a full half contribution from Guild, which has gone live in super admin; and 2 new clients who just started in U.K. mortgages. And as I said, our U.K. business has a strong revenue pipeline and scope for significant growth. The second half results will also benefit from the timing of annual leave, which John will unpack. Finally, we have a clear and highly achievable ambition, and I'd like to remind investors of what we're building at Iress and our earnings potential. Our focus is on delivering a simpler, faster Iress with higher returns. We spoke to this in detail at the Investor Day. It is clear that the opportunity for Iress is greater than previously anticipated. We have announced plans to accelerate growth and returns for shareholders with a new medium-term target to more than double net profit after tax by '25 with potential for further upside. In completing the transition to a single platform, this will bring greater operating leverage and speed to market. We have purposefully built solid foundations at Iress, enabling us to capture more market share in large addressable markets. Regardless of any other corporate activity, we are focused on executing this plan and are working to deliver the benefits to shareholders and our clients. I'll now hand over to John to talk through the numbers in more detail.

Thanks, Andrew. Given that Andrew has gone through the headline results, I'll start with Slide 15 and business performance. Here, we show the financial performance by segment on a constant currency basis. We're happy with the growth we've seen in APAC. It has delivered an impressive result with revenue up 16% versus the pcp. Within this, recurring revenue grew by 15%, accounting for 93% of total revenues in APAC. Direct contribution increased by 14%, both against the pcp and the sequential half. Trading & Market Data performed strongly, and OneVue has made a positive contribution. Revenue in Financial Advice declined by 4% versus the pcp due to the rightsizing of certain institutional contracts as advisers move from larger institutions to independent firms. This is a timing impact with user numbers for Xplan remaining steady. We have been telegraphing this shift in our last 2 results announcements, and it is worth noting that advice revenue grew 1% versus the second half of 2020. While the shape of the market has changed, this does not reflect the change in market share. As Michael Blomfield discussed at Investor Day, Xplan is the clear advice software of choice for advice groups. We are seeing ongoing resilient demand for our software as advisers continue to focus on operational efficiency, client engagement and compliance. Our focus for superannuation in 2021 is the implementations at ESS Super and Guild, with the latter having gone live in April. Revenues will be lumpy as we progress with implementations, and we were down $1.7 million in the first half versus the pcp. These implementations give us critical proof points to build client support, market awareness and revenue growth. OneVue contributed $24.5 million of revenue in the half. This compares to pro forma revenue of $23.5 million in the second half of 2020 and an actual contribution of $7.9 million for the short time we owned it in 2020. As well as integrating the business and developing our new investment infrastructure offer, we grew the funds registry FUA to $872 billion, which is an increase of 74% since 1 July 2020. In the U.K. and Europe, revenue in constant currency was up 2% versus the pcp. Market data revenue grew by 10%; wealth delivered 3% growth; trading, 6% growth; and sourcing declined by 4%. Once again, over 90% of revenues are occurring in this segment. O&M, which was acquired in 2020, contributed for the full half as well as new and ongoing projects with key clients to deliver Private Wealth software. Significant milestones continue to be delivered for wealth clients, unlocking new users and revenue opportunities. Our first market-making client is progressing well and 2 further clients are in implementation. The direct contribution increased by 5%, and the margin increased to 61% compared to the pcp. We remain confident of our opportunity in the U.K. and are encouraged to see activity improve and our sales pipeline increase. Finally, I'll call out mortgages. As we have said, we are reviewing our strategic options here, including divestments. Encouragingly, we saw a good improvement in revenues in the first half versus the pcp with 23% growth. The direct contribution increased by 42% on the pcp. The growth was largely driven by the full period impact of 2 clients that went live in the second half of last year and another successful deployment in this half. Turning to Slide 16, which show the pro forma cost waterfall. The key call out here is that we demonstrated strong cost discipline, and we're able to hold pro forma people and OpEx costs flat compared to the pcp. And as you will see on the next slide, we also held costs flat versus the second half of last year, excluding annual leave. Including annual leave, costs increased by 5%. I'll take a moment to unwrap the seasonality of annual leave as it is also a significant factor in our second half guidance later in the deck. The $8.1 million cost increase in this waterfall reflects the timing of when leave is taken, which is contrasting between the halves. We expect this cost to unwind in the second half to effectively net off for the year as a whole. Turning to Slide 20. This slide shows the results down to earnings per share. On this page, you'll see adjusted net profit in constant currency. We adjust for share-based payments, nonoperating items and the acquisition-related depreciation and amortization costs. Adjusted EPS is up 7% versus pcp. You can also see the impact of annual leave coming through in the adjusted EPS comparison to the second half of last year. Normalizing for leave, adjusted EPS grew by 2% versus the second half of '20. Adjusted EPS also includes the impact of the capital raise in 2020. The weighted average number of shares on issue was around 9% higher in this half versus the pcp. I'll finish on Slide 21. Here, we show the progression of our cash position over the year. The key metrics on this slide are cash conversion, which was strong at 90% and free cash flow of $34.3 million. As you can see on this slide, our largest single outflow was the payment of the final dividend of $55 million. Net debt at the end of the half was $184 million. We are comfortably inside our neutral leverage ratio of 2x segment profit. I will now hand back to Andrew.

Thanks, John. I'll pick up again at Slide 23. As I said at the beginning of the presentation, we are halfway through this year, and we are where we thought we'd be. We have good line of sight in the second half. And therefore, today, we are reaffirming guidance for the full year. We continue to expect segment profit in '21 to increase by between 7% and 10%. That is $164 million to $168 million in total. This guidance is presented in constant currency as usual. This implies growth of 16% to 21% in the second half compared to the first half base of $76.1 million. That is guidance of between $88 million and $92 million in segment profit. We expect $11 million to $14 million of organic profit growth and an additional $1 million to $2 million from OneVue. And as John indicated, segment profit will also benefit from an $8 million reversal of the annual leave provision, which is in these numbers. Taking that $8 million of annual leave provision from the [ required segment ] profit of $90 million using the midpoint of that guidance shows that the underlying segment profit goal in the second half is $82 million. That is an underlying growth rate of 7.8%. That's achievable. Now let me make some concluding remarks, and I'll take you to Page 27. We started this call by saying that we are pleased with the results for the last 6 months, but there is something [ bolder ] and more exciting going on at Iress. Over the last several years, we have carefully and selectively assembled the pieces for accelerated growth and higher returns. We are now ready to accelerate, and the 5-year guidance shows you our confidence. We expect to at least double net profit in '25 with the upside potential. The Board review was detailed and reinforce our ambition. The execution of our strategy is to leverage our technology, add more value to our clients and build scale across geographic markets will deliver accelerated earnings growth and improved returns. Thanks, all, for dialing in, and I'll now hand back to the operator and open the line for questions.

[Operator Instructions] Your first question comes from Quinn Pierson from Crédit Suisse.

I guess just firstly, can you comment on if there's any expected impact on the Australian businesses from the lockdowns? I guess, in particular, are there any projects impacted? Or can they all continue as BAU [ for those sites ]? And is there a potential risk that some of the annual leave, I guess, tailwind [ as we ] cycle pcp, is there some risk that some of that doesn't quite play out in the way expected?

So I don't think that there is any significant risk in the second half as a result of lockdowns than -- that we've been experiencing over the last 18 months or so, Quinn. We're continuing to deliver where needed, and there are some projects starting -- there are projects underway that are all progressing. And while not at the same intensity of lockdown, Guild going live in the first half is an example of that. The annual leave is skewed to the second half like it was last year. We've encouraged people for all sorts of wellness reasons to continue to take leave over the course of the year, and people are taking leave while we are where we are. So we don't expect that, that -- that will not reflect the same kind of shape as 2020.

That's helpful. And just secondly, if we look back to when you [ first set ] the CY '21 guidance, I guess that was given at the CY '20 results, I guess, can you just talk us through what areas of the business are tracking ahead of expectations and what areas are a bit behind expectations?

So Trading & Market Data is tracking ahead of expectations. The -- we've been successfully delivered to Guild in Australia. The overall revenue shape in Super is slightly behind where we might have thought but not materially, and [ quasi ] progress is still progressing with our work with ESS Super.

Just lastly for me. I'm sure there's not much you can say in terms of the [ pending ] takeover offer. But just, I guess, firstly, just to clarify, so the 30 days start from the day [ about its last announcement ]. And then I guess just secondly, is there anything you can comment or update us in terms of progress in that respect?

So yes, it started on the 10th or 11th of this month, and we're engaged in diligence discussions, and it is progressing. There's not a whole lot more to add to that, Quinn.

Your next question comes from Bob Chen from JPMorgan.