Iress Limited (IRE) Earnings Call Transcript & Summary

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

Thanks for joining us today, and welcome to Iress' 2021 Full Year Results Call. John Harris, our CFO, is on the line with me. We've released a detailed presentation to the ASX this morning. And as usual, I will concentrate my remarks on this call to the opening page of the deck, and John will take you through the financials. As we've done before, to give you a clear understanding of business performance, we'll be focusing predominantly on pro forma results and constant currency. There is a full reconciliation in the deck but, in simple terms, the pro forma numbers remove currency, material one-offs and assume that we've owned OneVue for the entire 2020 year the prior corresponding period. Following the presentation, we'll be please open the line for Q&A. So starting on Slide 4, there are some overview points that I'd like to make today. Firstly, we delivered a strong set of results for the second half of the year and delivered on full year segment profit and net profit guidance for FY '21. Pro forma '21 segment profit was up 6% and pro forma NPAT was up 14% against 2020. The momentum that started to build in the first half accelerated in the second half of the year with pro forma revenue increasing by 6% on PCP and pro forma segment profit increasing by 10%. With disciplined underlying cost controls, margin in the second half expanded to 29.5%. Revenue growth and high levels of client retention, reflecting the importance of our software to users, led to the lifetime value of our total portfolio increasing to $28 billion. Clearly, this materially exceeds the company's market capitalization. These are encouraging results. Page 6 summarizes the results for the year. I'm especially pleased with the progress that our team has made in overcoming challenges and disruptions to continue to execute on our growth strategies. We've made solid progress in superannuation, private wealth in the U.K. and investment infrastructure, and we're executing major client projects in multiple markets. We have begun the transition to a more efficient single technology platform, which will underpin our future growth and improved returns. In superannuation, Guild Super went live in the period. ESSSuper is now in live transition. With these positive use cases, we are well placed to benefit as the industry continues to consolidate, increasing reliance on technology and creating new sales opportunities. We are in advanced discussions with several new prospects. Mortgages is performing well, too. Another 2 projects were completed in the year. We are progressing with opportunities to maximize shareholder value, as we've disclosed, but we are also growing the sales pipeline. In investment infrastructure, we've integrated Xplan and OneVue and place live including a fully integrated, highly efficient new offer. The commercial launch is planned for '22. Sales discussions with prospective funds management and private wealth clients are underway and early responses are positive. In the U.K., our headline result was slightly up in 2021, which was driven by strong performance in private wealth and trading, offset by a reduction in nonrecurring retail wealth revenue due to significant projects in 2020. Importantly, we have started our transition to the new single technology platform and operating model. While the market for talent is very competitive, we are on track to invest $30 million over the next 2 years for its execution. With the new platform, we will be able to bring new products to market faster and decouple revenue growth from cost growth to drive further operating leverage. Meeting these milestones, despite macro challenges and other disruptions, shows Iress' capability to execute. Our focus is on doing what we say we'll do and delivering on stakeholders' expectations. And that takes me to my final overview point. 2022 promises to be another year of growth, heavy lifting and progress. In 2022, we expect to deliver 7% to 10% growth in segment profit in constant currency. Excluding earnings from mortgages, FY '22 guidance is for $160 million to $165 million of segment profit in constant currency. Underlying net profit after-tax, adjusting for the $11 million post-tax of growth investments in the new single platform, is expected to increase by between 30% and 43%. With scope for significant capital management, including the completion in 2022 of the $100 million share buyback, high dividend payout ratio and the distribution of potential mortgages net sale proceeds, we expect to reward loyal shareholders with substantial distributions. Importantly, 2022 will take us closer to our 2025 growth targets of delivering more than 2x net profit with upside. These targets were far more than a defense tactic. We've aligned our remuneration schemes to them, and we are committed to transitioning to a simpler, faster Iress with higher returns and sharing the benefits with shareholders. I'll now hand over to John to go through the financials.

Thanks, Andrew. I'll start on Slide 20. Pro forma segment profit grew 6% versus 2020 driven by the U.K. and Europe, North America and mortgages. In the U.K. and Europe, revenue grew 3% and direct contribution grew 5%, with the contribution margin increasing to 63%, which is up 200 basis points. The key drivers of revenue growth in the U.K. were the strategically important private wealth business, which grew revenue by 18% during the year as a result of ongoing client implementations; trading, which grew 9%, reflecting opportunities in market-making and trading software more generally; and the Market Data business, which came from the QuantHouse acquisition, which grew revenue by 7%. Offsetting this was a decline in retail wealth revenue driven by elevated nonrecurring revenue in 2020 not repeated in '21. We see plenty of opportunity to grow in this market but we have more work to do to fully capitalize on the potential for this business with work underway to achieve this. Mortgages grew revenue by 10% as a result of 2 further clients going live in 2021 and the full year run rate of clients that went live in 2020. Segment profit grew 34% as this business continues to scale. It was also great to see good growth from North America in 2021, with the Canadian business growing revenue strongly off the back of a retail trading implementation going live and a significant amount of project work to help clients respond to regulatory change. In APAC, we saw strong growth in trading, which grew [ 7% ], in part as a result of a successful private wealth implementation. Financial advice was up 1% for the year, but you will recall that the first half of 2021 was down 4% versus PCP. So this result reflects good growth in the second half. Recurring superannuation revenue grew 7%, in part as a result of Guild going live with our automated super administration solution. As noted earlier in the deck, the headline reduction in total super revenue was driven by the timing of nonrecurring project revenue. The $5.1 million increase in corporate costs that you can see on this slide were driven by the increasing information security and compliance costs as well as the profit share scheme achieving targets, resulting in a payment to people across the company in relation to last year. Product and technology costs were flat year-on-year. The growth in segment profit translated to 14% growth in pro forma NPAT. I'm now on Slide 22, and I'll focus on some of the significant NPAT movements shown on this page. Share-based payments were $3.6 million lower than 2020 as a result of staff departures. This was partially offset by an increase in depreciation and amortization, with new office space coming online in [indiscernible] in the U.K. and Sydney. There were also a significant number of one-off items in 2021. The largest of these related to the release of earn-out provisions linked to the QuantHouse and BCG acquisitions. This led to one-off pretax income of $22.3 million in the year. Offset one-off items also included the closure of the Warrick office, which resulted in $5.5 million of lease assets being written off. Our effective tax rate on a reported basis was 21% as a result of the earn-out releases being nontaxable. On a pro forma basis, the effective tax rate was 27%, in line with 2020. Turning now to Slide 23. We continue to generate a significant amount of cash and make large distributions to shareholders. Although the level of free cash flow generated in 2021 was less than in 2020, this reflects the timing of prepaid expenses and tax payments. You can see this flowing through the cash conversion numbers also, which were above the long-term average at 108% in 2020, and the unwinding of this drove an 82% cash conversion rate in 2021. The 2021 cash conversion rate normalizing for the timing of invoices was 90%, and the 3-year average free cash flow is $89.4 million. 2021 also saw us execute approximately half the announced $100 million buyback and acquired 20 million of shares on market to minimize the dilution impact of employee share schemes. As a result, our level of leverage increased to 1.4x segment profit, still below our neutral setting of 2x. I'll now hand back to Andrew to talk more about the outlook for 2022.

Thanks, John. I'll cover 2 more pages before we open for Q&A. Let's move to Page 25 and the outlook. As I outlined at the start, we expect 2022 to be another year of growth, heavy lifting and progress to our 2025 targets. Our guidance in constant currency is for segment profit to grow by 7% to 10% this year. On this table, we've tried to be very transparent and show you how we build up guidance. We show RSX mortgages and the combined results with mortgages as if we will own it for all of 2022. We are in an active process to divest mortgages. The business fundamentals continue to improve and the sales pipeline is strong. Given the improving fundamentals, we are disciplined on price and timing to ensure we achieve the best outcome. In the past, we've provided guidance on a pro forma basis to normalize for the full year impact of acquisitions. With no acquisitions in 2021, pro forma metrics will not be as relevant in 2022. However, you will see that we are providing guidance on a reported and an underlying basis. Underlying adjusts for significant one-off items which, in 2022, is the $11 million of post-tax investment in the new single technology platform, which you will see we are intending to expense. That's half of the $30 million pretax spend over 2 years we spoke to at Investor Day. Removing the $11 million post-tax cost to NPAT gives us the underlying NPAT range ex mortgages of $61 million to $67 million. That's 30% to 43% growth on the PCP. I called out in August that our performance is accelerating, and you can see that here. Let me reconcile this outlook with the forecast that we gave at Investor Day. We then expected the FY '22 range for NPAT to be $65 million to $70 million. The adjustments to the new range of $61 million to $67 million are due to applying a new year's currency rates, given our constant currency methodology, and the inclusion of the cost of a new REM scheme to align incentives to 2025 targets. We remain committed to more than doubling NPAT by 2025. And finally, on Page 27. This sets out [indiscernible] as a sign of any change in our growth ambition. That would be incorrect. We will continue to leverage our technology to build scale in large addressable markets. The ability to distribute these large sums, as we show on this page, simply reflects execution of our strategy as outlined in July to become a simpler, faster Iress with higher returns. The significant level of cash generated by our business allows us to self-fund growth investments and reward shareholders with $160 million to $165 million in distributions. This includes the buyback of $50 million of shares on market, but it is also before any potential additional distribution from the sale of mortgages. And on this basis, we'll close the year with a conservative debt leverage of 2x at the target range. Thank you. And on that, I'll hand back to the operator to open the line for questions.

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

Just a few questions for me. I mean just firstly on the MSO sale. I think previously, you guys were expecting it to be complete maybe in the first half of this calendar year. Has there been any sort of changes to that expectation? And then the other thing would be just around valuation for that business. I mean we've obviously seen tech business valuation sort of changed materially over the past few months. Does that sort of change any of your expectations around value for that business as well?

So the timing is largely unchanged. We are awaiting final bids as part of that process. As to when that transaction might close, that is less clear in the immediate term until we get to negotiations. What is happening in the background is the pipeline is developing strongly. And so we are both focused on operating and growing the current business, and that pipeline is very positive, probably the most positive we've seen MSO over its lifetime. And we're balancing that with the process to divest. And so we want to make sure that appropriate value is ascribed in it by bidders, and that's where we are right now. So we want to make sure that we are disciplined on price, which we are. We were certainly more flexible on timing. But that broad description of time line, Bob, is what it is.

Okay. Great. And just across sort of the different segments. I think you've provided a bit more clarity and sort of juxtapositioning the actual revenue growth versus the medium-term targets. But there still seems to be a pretty big gap between sort of where you want to get to. I mean what gives you confidence that you can actually to achieve some of these medium-term targets?

So there is a bit of noise in the revenue line as it relates to what are one-off characteristics of revenue and what is recurring. And you see that there was an acceleration in the second half of '21, and so that goes to confidence. But it also goes to what we're building to support that fast revenue growth and the changes that we've made in our sales organization to pursue that growth. So that is what we're doing, but we're operating in markets with material TAMs, and we're confident in the competitive product.

Okay. Great. I mean I guess just looking out to Xplan, I think you've provided a bit more color on have a number of users and advisers as well as module usage as well. I mean that seems to decline a bit over the past couple of years. I mean what's sort of the outlook there in terms of user numbers.

There is a lot of talk about what is happening in the topology of advice in Australia. And against headlines that talk about what retail advisers registered with [ ASIC ] doing, what we're seeing in software usage doesn't follow that, despite lots of change that's happened in the makeup of Australian advice over the last few years. And while there is movement, there is still software demand, and, in fact, there's still a very large unmet need for advice. And so as we've said for a long time, the demand and the reliance on technology to respond to this is increasing, and that's what we see here that despite the changes that have occurred in registered advisers with ASIC, the user numbers have been reasonably mild at the top line. The change that we've seen occur through banks exiting advice has been significant on the shape of the advice industry, and what we're seeing here in total user numbers is not that kind of volcanic change.

I think it's important to also focus on the 2 charts on the right of that slide, Bob, which show that the lifetime value of our customer base is increasing, and that reflects a very low churn in that customer base and the increase in the ACV as well.

Yes. I mean is that likely driven by maybe pricing or just lower churn? Is that what's really driving [indiscernible] churn?

It's not driven by pricing. We do have a have a large position in Australia. And so we've spoken about change in shape and movement of advisers, and that's what we see in those charts. We're not seeing software decline that follows the registration of advisers at ASIC.

[Operator Instructions] Your next question comes from Brendan Carrig from Macquarie.

Just 2 questions from me. Just the first and sort of backing out the guidance at a segment profit line. It looked like in the second half is sort of just over $90 million, and then you're guiding at the midpoint to $180 million in segment profit. So can you just talk to some of the things maybe that's in the second half of the 2021 period that are dropping out in the FY '22 guidance at the segment profit line?

Probably the main swing factor, which we talked about at the half year as well, I think, in 2020 and in 2021 as the level of annual leave being taken in the second half versus the first half, which has been much more skewed towards the second half over the last couple of years. And you recall in the half year deck, we had a walk between first half '21 and the final guidance at that point. And there was a big swing factor of leave, which is around $7 million to $8 million. So that's probably the main one to call out. We do see, outside of that leave phasing, we do see momentum build over the course of the year. And in a number of our markets, particularly in the U.K., we see growth higher at the back end and front end of the year.

To that point, so we should still expect the second half skewed. But given the hope that we don't enter lockdowns again and a leave will be taken on a more novel straight-line basis, would you expect the second half skew to be not as material as it was this year?

I don't -- I think we'll have to wait and see what -- how leave behavior changes over the course of the year. I think it's been very, very skewed over the last 2 years. Whether that starts to normalize now that people can travel, I guess, we'll see how that plays out. But the important point is that it does normalize over the course of the year, even if there is a first half, second half phasing difference. So in other words, people took the same amount of leave in the year, which is what drives the full year financial impact, but they took more of it in the second half.

Yes. No, that's great. And then my other question just on super, Andrew, you did touch on that there was a few, I guess, tenders that you're participating in. Can you just provide a little bit more color maybe around some of those tenders and what are the sort of participants that you're coming up against? Is there anyone new out there? Or is it just sort of all of the sort of same incumbents that you would expect to see applying for those [ superannuation ] tenders?

Not materially different in terms of the landscape of competitors. But now we're through proving the benefits of what we offer to Guild and ESS is in live transition, will be live this quarter, they're very, very prominent use cases in what the benefit of an integrated admin and tech solution offers. And the differences to what operations in those funds looks like is material. So the nature of super in its future is intrinsically linked to how technology can be enabled and entwined in that forward strategy. And so that's what we expect the model of operational core to be for super funds. And alongside lots of merger discussion that there is also a heavy foot on what does the future look like and how does that service, service members, whether that is in core superannuation offers or the advice that's alongside that to make sure that they're making the right decisions for retirement.

And if you were successfully any of those tenders, would any of them sort of start implementation in this half? Or would they be more of a second half of calendar year 2022?

At this stage, they would start in '22. So I won't pick the timing.

[Operator Instructions] Your next question comes from Scott Hudson from MST.

Andrew, just give me an update on, I guess, investment infrastructure. I guess you've got that medium-term revenue growth target of greater than 10%. Can you give us some sort of sense on the time line to, I guess, hit that sort of cadence in that division?

Yes. So we are very focused on pursuing our platform strategy. Our platform strategy starts with a thin slice through an entire stack that leads to investment infrastructure. We've performed integration around trading. We're now focused on automated account opening to OneVue. That doesn't exist anywhere in Australia, and we're very excited about ensuring that, that is there. We see that as one of the important gateways so that we can we can both pursue the opportunities that in near-term while we are headlong into what we're doing around our technology platform. We expect that, that will be available this year. There is certainly demand for a subscription-based service that goes to the efficiency of how advice operates. And if we again link that to the importance of unmet advice in Australia and digitally-delivered advice, it's a critical component for that stack to be there. So there is certainly a convergence of what we are doing for our 2025 platform goals and how we accelerate what's happening for investment infrastructure. We have a team that's established around leading that platform technology. And we also have sales teams that are building up to engage with both pilot users and those that are interested in getting the benefits from that.

And I guess it sounds like '22 is still obviously a build phase. I mean commercial or significant revenue growth from that sort of project more likely into '23, is that how we should think about it?

So we have an operating investment service now, and there are opportunities to pursue in the immediate term. And that leverage is what we're doing around integrating [ Xplan ] through it. The investment infrastructure and the way that we will unbundle that retail investment workflow are certainly continuing and will be prioritized based on what the opportunities from that appear. So I'm not sure that it's a negative message, Scott.

Okay. There is an announcement by Colonial today is sort of choosing KKR. I mean FNZ next platform [indiscernible]. Are you involved with them in any discussions in relation to your invest infrastructure solution?

I think everyone was involved in those, Scott. So I understand the decision that they've made and, to me, presents logically. So they're executing their plan and the time line that they're pursuing. And so that's been an open discussion that we've had with them.

Your next question is a follow-up from Brendan Carrig of Macquarie.

Just one more for me. Sorry, if you just mentioned that. But on the $30 million of investments, so I said that at $15 million this year, can you just confirm that the second $15 million is expected in FY '23 as previously guided.

That's the plan.

[Operator Instructions] There are no further questions at this time. I'd now like to hand back to Mr. Walsh for closing remarks.

Thanks, everyone, for joining this morning. In 2021, we delivered a strong set of results in the second half and for the full year, the momentum that we saw build in the first half certainly accelerated into the second, and I'm especially pleased that of the progress of our team over the course of the year overcoming challenges and disruptions to continue to execute on our growth strategies. And importantly, '21 is not just about these results, but the critical foundations laid for our '25 goals. Meeting milestones despite these macro challenges shows our ability to execute. And this year, we'll see another year of growth, heavy lifting and further progress of those goals. Thanks, everyone.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.