Iress Limited (IRE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Iress Limited 2023 Half Year Results Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Marcus Price, Iress CEO. Please go ahead.

Thanks very much. It's a pleasure to address investors again and to present our first half results for the 2023 financial year. It's also my pleasure to introduce our new Group CFO, Cameron Williamson. Before going into the details of our performance, I'd like to talk about my observations of where Iress, how the market is positioned in a particular experience of the markets at this point in time. And in particular, and crucially, how we're progressing against our transformation program. And I'll be referring quite frequently to our April 20 Investor Day just to bring you back to what our program is all about. So moving on. First of all, there is very much a new, I guess, era of leadership in Iress at this point in time with the new CEO, myself, our new CFO, Cameron only weeks old, but also the new CEOs who've appointed to the divisional heads. And that has been a significant piece of work. We've got very significant new eyes looking at this business and very much thinking about what the future holds for this company. We're not encumbered by the past and we are really taking this business as we see it and taking it forwards into the future. Our focus is on renewing and improving customer experience and a real commitment to transparency. And you're going to see that come through today, I think, certainly in Cameron's presentation and in mine. You might recall back to the Investor Day, we have 6 big jobs to do and we'll be going through those in some detail and they are largely on track. If anything, I've been emboldened by what we've been able to achieve in the first few weeks of that, but we certainly have an ambitious program ahead. Our strategy in a nutshell is to focus on the core businesses of Iress and build a much simpler, more transparent Iress to a Rule of 40 performance. Our view is still that the core businesses are capable of that level of performance and in fact, almost at that level of performance today, but that the Group is encumbered by a lot of parts of the group that are not performing. The transformation program is well underway and we're doing this in a measured way. We're not just doing everything at breakneck speed, although I have to say a lot's been achieved in a short time. We've achieved a $7 million annualized cost reduction and we have further efficiencies to come, certainly in the 2024 year. The MFA business has been sold for $52 million to SS&C. The platforms business sale is well advanced and there'll be many in the market who are aware of that. We're already in market with NDAs and people are well engaged on that process. We in fact expect that business to be sold in this calendar year. The first half results represent a point in time and in a market cycle and in a challenging year. They're not really reflective of where we see the business at today, even on a run rate basis or what it can actually produce. In many respects, we're obviously a little bit disappointed with the results. We don't think they're reflective of Iress' long-term earning potential. We'll go into them now, though, just quickly. The reported revenue is up 2% year-on-year, up to $315.3 million, although we have underlying EBITDA margin decline down to $59.5 million. That is largely driven by cost pressures and we'll talk a lot about cost pressure on this business in the course of this presentation. Underlying NPAT is down 31% to $24.4 million and of course this is driven underlying earnings per share down 29% to $0.134. Reported EBITDA and margin down 55% to 29.4. The reported NPAT is obviously at a loss of $139.8 million, largely driven by the revaluing of the assets and the impairments of -- that we announced in the April 20 Investor Day. So Cameron is going to take you through those in a lot more detail and give you much more flavor of what those cost pressures are that's driving that level of performance, and we'll take that into the next section. The half year OpEx is up 8% and is a very significant step-up in third-party technology costs, up 15%. That's been driven by input costs, people charging us more for our software and our infrastructure. Our base staff costs in this first half arising as an inflationary environment were up 3%. And as you might have noted earlier, these cost out has occurred, but of course, that cost out hasn't really taken effect yet. That was from April 2020 when that started happening, and only just concluded at this point in time. So what we're really saying is we haven't really seen the effect of transformation in these 2023 results. The price increases on the revenue side have been offset by quite a subdued market. Our overall churn remains low, but customers are operating in a challenging environment and seeking to reduce costs. And I think there's quite a lot of signposts of this. For example, our core Xplan licenses are actually up 4.2%. So that's the number of people with a core Xplan installation but they've actually sort of rationalized their use of ancillary modules, and they're down 8.7%, and I think that's reflective of cost pressure. And I think it's cyclical, not structural. We are seeing cost pressures operating on all of our customers. They're reporting the same input cost pressures that we're reporting and are obviously responding accordingly. You can see the same thing again in the markets and trading business where we have trading volumes down 38% year-on-year and obviously, a consolidation in the broking sector, which is affecting that particular segment. That is driven by a shortage of IPOs, of course, and that's affecting -- I'm sure it's no secret to anyone on this call, affecting the entire market. That again is cyclical, not structural, and we see those levels of performance ameliorating and getting better into 2024. In terms of the strategy update, we're pretty pleased by what we've been able to achieve in transformation even up until this point in August. We set up a transformation office and obviously, when you're trying to change a company, the size of ours, the complexity of ours, it's not a small task. So setting up a transformation office is quite critical. We're setting it up with execution, rigor and discipline. We have third-party partner in there to actually keep that on track and execution is underway. That transformation program lasts until the end of 2024. And you'll see later on, we're very focused on the exit 2024 run rate as the end state of that transformation. But even now, in these early days, we've been able to achieve an awful lot I think. In terms of structuring for accountability and performance, one of the things -- one of our number one big jobs. We've been able to appoint an entirely new leadership team. And those leadership teams, you'll remember, are sitting on top of business units focused on customers and products. We're doing that in trading and market, in advice, superannuation and in what we call the managed portfolio or the private equity portion of the portfolio. We've been able to transition 2,000 people to the new product-led structure with that new leadership in place, and each of those leaders will have P&L ownership. I think the 2023 priorities or the remaining half is really about delivering those new company metrics and to start getting rubber on the road with that new structure and start to get some performance in the marketplace. It's obviously been a transitional time. It's structurally challenging to move that many people and to get performance to come through, but we're pretty confident with the green shoots we're seeing even now, but that's going to be very successful. In terms of the resets on costs and assets, obviously, the cost-out exercise, we've been able to achieve $47 million in annualized cost reduction from the business. The full year effect of which will really only be felt in 2024, of course. And these numbers don't have a very marginal impact on the first half 2023 results, but that represents a 15% group headcount reduction. We don't think the cost story is done yet. There are further cost efficiency measures that we can put in place. And indeed, we've got ambitious targets on cost and efficiency. We are looking to produce a much leaner business, which is more efficient and could focus on delivering better results. We're also going to be resetting the capital management plan, and Cameron will take you through that in a little while as to what we intend there. That's the reset part. The refocusing is really about focusing on our core markets, particularly the Australian markets. We've got 54 growth initiatives underway to improve technology and customer experience. We've got new client wins in superannuation. Indeed, that part of the business did grow quite considerably by 20% in the first half 2023. And we also have further new client wins with Spirit Super and CareSuper as a merged entity. The Xplan Affinity project, we're still working on that one. Really, we just want to get the go-to-market sorted out for that because we think that actually is part of our pricing review, which was driving a lot of our value in the second half as well. So that industry connectivity initiative, though, is ongoing. The business units are really going forward is all about executing growth plans and delivering on new products and delivering customer experience. As I said, we're going to get rubber on the road, I think we'll start to see that in the second half of 2023. In terms of managing our portfolio for value that really is about trying to work out which parts of the business are performing well in which we want to keep the core businesses in those, which we want to restructure or take a private equity lens too, if you will. The first part of that has already occurred with the MFA business being sold for $52 million to SS&C. We're very delighted with that transaction for our customers and for ourselves. We think it's a great new home for that business. Platforms are also in active sales process. We have -- we've got a large number of parties already engaged in that process. Some of you will already know that. But yes, we expect that business to be able to be realized in this half this first -- the remaining of the calendar 2023. Workers commenced to separate out the U.K., South African and Canadian businesses. And we're in particular working with the leadership teams there to focus on that. It's very much about taking a private equity lens and empowering the local teams in each of those markets to see what can be achieved. We have -- that's quite a tough process. Some of these businesses have been in the group for quite a long time, and that disentanglement process takes a little bit of time. We've got to get that right. We want to understand the full potential of those businesses and think about what is the best future for them. So you'll see in the second half of 2023, a continuation of the separation of that portfolio. Obviously, the MFA divestment will be concluded, and we will be able to conclude the platforms business in the second half as well. In terms of our building programs, we work to finalize our technology uplift program, which is really about platform architecture and the cloud optimization programs that have been going for a number of years in here. That program is will conclude by the first quarter of 2024, and we believe will deliver quite significant value to customers in the trading and advice businesses. In particular, I think some of our customers and some of the people on this call probably will have already experienced some of the IOS uplift. There's a lot more to come on that in the second half of this year. The Xplan uplift is going well as well. We will be people who have seen that and experienced it, you're probably just seeing what I would regard as the beginnings of that at this point in time. And we are delivering the global FIX hub in the second half of this year, which we think is quite a significant product as well. So again, that focus on core products, core markets, customer experience is really where we're at and that is going well and is on track. In terms of the innovation and build programs, this is really building the next generation of growth vectors for Iress. Iress Ventures has been established. We're doing quite a bit of work in our markets in both Australia and overseas, in particular, in Asia. We have 14 new product and market extensions to come in the second half of this year. And we're looking to embed really the innovation principles across the business units. In focusing on our core businesses, we're also focusing on innovation and working with customers to produce new value-adding services for them. And again, I think our customers may have already started to experience some of that, but you're going to see a lot more in the second half and going forward into 2024. Right. So, on to the next slide. I'll introduce Cameron Williamson, who's going to take you through our financial results. Cameron, we're delighted to have Cameron join a very experienced CFO. Some of you will know him from previous lives as well with 25 years' experience leading financial operations in Australia and around the world. He was the CFO of course, at Pendal Group from 2009 to 2023. And prior to this, he served as -- has been in financial services for his entire career, I think, Cameron. I'm delighted to have Cameron here. His fresh eyes, fresh perspectives, it really is part of the new team at Iress. He has a commitment as we all do to transparency and clarity, and you'll see, I think, even in his presentation a commitment to that. I'm delighted to introduce Cameron and over to you for the results.

Thank you, Marcus and nice to be here today presenting results with you, what is a transformational period for the business in terms of what's being done. Notwithstanding, there are some challenging conditions out there that we're finding ourselves in today. So just take you through the results. Just in terms of the underlying result, we are looking at underlying EPS of 29%. That's down 29% on underlying EPS rather of $0.134 per share, it's down 29% on the same period last year, and that's on the back of cost pressures that I'll take you through. At the revenue level, we are seeing below trend revenue growth. Revenue for the first half of $315 million, up 2%. Now that growth largely coming out of the APAC region, which was up 5% and mortgages up 9%, and that's been offset by some detraction in revenue with the U.K. business and also South Africa, which has been hit by some currency effects with the traction there, largely FX driven. From an OpEx perspective, we are looking at operating expenses up 8%. Notably impacted by higher input costs across the chain, increased tech infrastructure costs, market data and fees also up and inflationary staff costs driving that part of our business and cost pressure is sort of flowing through to that. And what that means is, overall underlying EBITDA of $59.5 million for the half is 17% down on the same period of where we were 12 months ago and a contraction in our overall margin, underlying EBITDA margin 4-percentage points down to 19%. Now this is all before the cost-out initiatives that have been recently enacted. And they are really taking effect from June through to September, where $47 million in annualized costs have been removed from the business. We have got a small benefit in the first half of $1.9 million flowing through to the bottom line from the first half, and that's largely through activity in June, an additional $17.3 million that will come through in the second half of this year, with the full benefit of that cost-out program really coming through in 2024. So that will be in the full exit run rate for 2023. Just turning to the next slide on the transformation investment. Now this is a table that effectively takes you through our underlying EBITDA headline level down to our reported result. Our reported result, clearly, that goes through the financial report and the audit process. Underlying EBITDA of $59.5 million, as I said, is down 17%, and half-on-half. The big area of focus is around those nonrecurring items and very transparent around where that's being spent. These are significantly as a result of the transformation and technology uplift costs, that we've incurred in the first half and a notable uplift on last year. The 3 main areas captured in this bucket. $13.4 million was incurred as part of the technology uplift in core trading and advice software which included the cloud migration. We still have further activity to go in this regard, much of which is targeted for completion in Q1 of next year. And an additional $7.6 million that was incurred as part of the broader transformation program, including the establishment of a transformation office and the engagement of some specialists to help with execution, and that is taking place over the course of the back end of this year and into 2024 when that program will come to completion and $5.3 million in redundancy costs and effectively a cost to achieve in getting the $47 million cost out as Marcus has already alluded to. Other key areas as part of the reported result include the write-down in intangible assets of $142.9 million in terms of an impairment there. 130 -- a touch over $130 million of that was in relation to our U.K. assets where we've taken a charge against the goodwill there, and that was flagged at the April Investor Day and $12 million in software development write-downs as projects are discontinued, no longer considered core as part of the Group's strategy and part of the transformation program underway where we're just stopping doing things that we don't believe are going to be core to the Group going forward. I would just flag also net financing costs have doubled, they're up to $10.3 million. That's a result of an increase in interest rates, which you'd all be aware of and our overall net debt levels, which has also increased year-on-year. So just turning to the cost bridge. First half operating costs up 8% to $245.6 million. We have had an $8 million increase in our cost of sales about half of which was due to an increase in the technology platform, including cloud architecture, also market and data fees, also significant pressures there in our supply chain feeding into that. $3.9 million in regards to platform interest charges, and that's on the back of higher interest rates. Now we do pick up that in revenue as well. So where we do take a clip along the way. Employee costs $7 million higher than they were same period last year. On an average basis, you can see headcount is 4% higher than the same period last year. That's $3.6 million and $3.4 million increase in contract staff supporting product initiatives. Both of these remain in the area of focus for the business as we look to provide further efficiencies going forward and it is before the cost-out program, as I said, $47 million overall cost out in the last period, only of which $1.9 million fed into this first half result. Now that should all be completed by end of September. And the non-wage OpEx, we have had an increase in costs associated with these costs. $3.6 million of that is in regards to higher software and licensing charges and another $1 million increase in travel-related spend as things started to normalize in a post-COVID world, all of which has contributed to an overall increase in our OpEx for the first half. Just turning to the cash flow and the balance sheet. You will see there that free cash flow in the business has seen a decline of about 50% half-on-half. I'll take you through the key areas of that. The big area where we have seen is around our transformation and technology uplift costs, where you can see $7.3 million in the first half of last year up to $30.6 million this year, notably up on the same period of last year, largely due to the costs I've just alluded to in terms of all the work that's going on in terms of the replatforming of the business. On the balance sheet, you will see overall net debt levels, approximately $50 million higher than where we were 6 months ago. The leverage ratio is up to 2.8 times. Now that's the leverage ratio as defined in our banking covenants and overall debt-to-equity ratio has also increased. Now all of this is obviously putting some level of pressure on the balance sheet. We are taking steps to address this. As we look to reduce debt, we will be using the proceeds from the MFA sale to reduce our overall gearing. And there's more to come in that regard, particularly with the platform sale towards the back end of this year as well. From a liquidity perspective, no real change. A lot of our debt is longer dated. So no issues there, but there is an element of conservatism that's being applied and as a result of all of that, we are pausing on the dividend at this point in time. Just turning to the capital management plan as we see it, you will see there that the overall free cash flow has been declining in the last 3 years, particularly this year on the back of transformation and technology uplift spend. At the same time, the dividend has remained static at $0.46 per share. Net costs approximately -- well, it doesn't cost it. It actually is a distribution to $84 million to $88 million per year back to shareholders. And since FY 2021, effectively, we have been paying out more in dividends from free cash flow, then free cash flow generates. Now that's clearly unsustainable going forward. You will, at the same time, have seen net debt increase steadily over this time up to $375 million. Now that will come down with the MFA proceeds. What that means at the moment is we are reviewing the capital management plan or we'll be having a very much a closer look at this and redefining a capital management plan with the Board and will come back in 6 months' time with what that looks like. As part of that, we'll be looking to address the business's underlying earnings and methodology around disclosure, a revised dividend policy the target debt levels and acceptable leverage in the business that we're comfortable with as part of R&D investment capital as well and what we put back into the business to provide for future growth and shareholder returns and what forms that may take all of which will form part of a plan that we will share with you in 6 months' time. So as a result of that, the interim dividend is being paused and suspended pending finalization of this plan with the overall debt levels, a target to get down in the short-term with these asset sales. With that, I'll just hand it back to Marcus, who will take you through the rest of the presentation.

Thanks, Cameron. In terms of the outlook, the 2023 guidance, we do think it's prudent to consider the revenue outlook will continue to be soft. And the cost pressures do continue in the second half. Of course, that will be starting to be mitigated by the full year effect of those cost measures coming into the results. The transformation initiatives that we're working on are yet to be realized. And so, when you balance it all out, we end up with guidance sort of lowering expectations with a broadly flat second half. In other words, we expect the second half to be very similar to the first half in terms of performance. We are suspending the interim dividend, pending a refresh of our capital management plan, and we intend to present that later this year or into early next year. I would say though that we are focused -- this is very much a point in time. We have very strong ambitions for this business and believe it can perform at a much higher level than is currently evidenced by the results. By the end of 2024, we believe the transformation program will be completed and our revenue and cost initiatives will have been voluntarily done and dusted and we are being supported by specialist consultants in this. We do see an underlying EBITDA growth of 5% to 10% and in FY '24 underlying EBITDA exit rate of -- which is 20% to 30% higher than 2023. Oh sorry, the FY '23 result. The objective really, though, is to create a much leaner and more efficient Iress and a much simpler Iress, which will also be transparent and easily, I guess, evaluated by everyone. We believe there are core Iress businesses operating at the Rule of 40 at the moment, and we believe we can certainly do it in a sustainable way going forward. We believe there's a capital release possibilities from the managed portfolio. You've seen that already. We're only at the beginning of that process. So we see more of that. And we do see a full rebasing of costs. I rethink of how costs operate in this business. And we think that's going to be an ongoing process through '23 and '24. And that will drive significant debt reduction. So we see a leaner Iress with much less debt, more efficient and I guess a much more transparent and accountable in terms of its structure. We've been emboldened by what we've been able to achieve so far, even at the early stages of this transformation program. And I guess it's we obviously are disappointed in the first half results, but we believe they're not reflective of our potential. And we believe they reflect just the point in time that we're in. We've got very ambitious customer-centric plans and execution, I guess, mechanisms to drive that. We are very, focused on our exit run rates in '23 and '24. We're involved in by what we've achieved. Where we're headed, we're laser-focused on our '23 and '24 exit run rate. That's the metrics that we're using to drive this business. We've aligned our remuneration structures around that and there'll be more on remuneration structures another time, but they're really around driving performances, which are directly aligned to the performance of the business and a Rule of 40 outcome. We also have customer metrics in our remuneration as well to make sure that customer experience is front and centering in what we do. We intend to provide in that spirit of transparency, further updates. We will provide an investor update in the second half of 2022, in and around November when we have more-and-more -- we have a little bit more visibility on how our progress is going. And we intend to provide another Investor Day in 2024 as well to keep you fully appraised. There will be a full presentation on what we see going forward in '24 and '25. So in summary, thank you for your time. We are -- as I said, it's a point in time these results. We are emboldened by what we've achieved. We're very confident in this business going forward, and I think there's a lot to come. Disappointed, obviously, in this round of results in the first half, but believe there's a lot more positives ahead of us in this business. Thank you. I think we're open for questions now.

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

Just a few questions for me. Just firstly, on guidance for 2024, I think you're looking at underlying EBITDA growth of 5% to 10%. Does that include the $47 million full run rate cost savings?

Hi, Bob, yes, it's Cameron here. It does. Yes. I mean, look, part of the 47% is offsetting -- a significant part of it is offsetting the inflationary pressures that we've got in 2023. And in many respects, also offsetting some of the growth that came into the cost base at the back end of 2022 that really wasn't reflected or hasn't been reflected in this year's numbers. So not all of it is straight off the bottom line, but it's all captured in that guidance.

Okay. I mean it just seems like given you've pedaled really hard to take costs out of the business, it seems to seems like all that hard work is being offset by those inflationary pressures. Like how do you sort of think about those inflationary pressures more longer term?

Well, I think that's a fair point. I have to say it feels like that too, sometimes. We are certainly taking out costs that are both above and below the line that also has an effect on this in that some of those costs were probably not affecting underlying EBITDA so much. I think the cost pressures are certainly going to be -- this is -- has been a reset in cost pressures. I don't think they're going to continue on at that trajectory. So I think they will moderate. I think there's a lot of work we can do on those costs as well, which we haven't really got to yet in our second half, we certainly have a very clear focus on those. And also, I wouldn't underestimate the fact that there's more cost to come out of the business yet. We see efficiency both for non-wage OpEx and even within our structures to be able to deliver a much more efficient Iress going forward. We're not done on our cost work yet. So I think, yes, we've got a bit of work to do on the supplier side, but we also have work to do on efficiency internally.

Okay. And just that additional cost down, is that being captured by that exit run rate you're talking about, that plus 20%, 30% on FY '23 run rate?

Will -- there is some cost out factored in there, yes. But we believe there's a lot more that can be achieved there yet. So we're being conservative in what our view of that at this point in time. But yes, it has been captured.

Okay. Great. And then just a final one. You obviously sold the MFA part of the one view business. Can you just break out what contribution is left from the platform business that will still be retained?

Contribution? What do you mean by that, sorry?

What does the revenue…

And obviously, expectations were in a sale process.

So just in terms of the revenue or segment contribution of the platform business, just so we can serve ballpark estimate, how much you could potentially sell that platform business?

Yes. No, I don't want to speculate on that at this stage, because we are literally in a sales process. We've got I think, 14 interested parties or something on that, and it really is – that's – it will be commercially not something we should do. Look, we've got – we believe there's some good – they certainly are significant, but that's about all I'd like to say about it.

Your next question comes from Nick McGarrigle with Barrenjoey.

Just a question around revenue run rate, I guess, you've had I think some explained users maybe reduce modules in order to mitigate some of their costs within their practices. Should we think that part of the paring back of FY '23 guidance is both revenue run rate reduction and costs stepping up?

Absolutely. That's exactly what it is. Yes, that's exactly what it is. We've got essentially – we did have – and we often get what I would call a cyclical uplift in revenue in the second half, and we've seen it in many, many years. But all the reports from our commercial teams are they don't expect that this year. So we've got a very flat expectation on revenue in the second half baked into this guidance. Yes. So we actually are on track in terms of the expectations that we're expecting for FY '23 revenue. But as we said, we are expecting a softening in the second half, and that's what's driving that guidance.

Yes. And I assume that some of the cost increases that you've experienced in the June half year will be annualizing they occurred partway through and so you're annualizing an increase in costs again into the second half and then you don't get the full annualized benefit of those – of the cost out that you've enacted until next year and into the full year.

We've got about AUD 17 million of the effect of that cost out this half, but the full effect isn't until next half, and you're absolutely right about the costs.

And just in terms of Super, I guess it looks like there was a reasonable step up there in nonrecurring. Is that just related to CSC? And is that part of the direct cost in the wealth segment as you reported as a whole, attached to the nonrecurring costs related to Super?

The cost. No, the Super business is more than one contract in there. There's been quite a lot of client uplift there. It's not just one, but numerous wins and the superannuation business continues to grow pretty strongly. And there's a decent pipeline there as well. So again, we're pretty pleased with the superannuation business. I didn’t quite follow a bit about the Xplan bit there. If you want to just repeat that question, sorry?

It was more about Super. It is part of that cost uplift related to engagement in project-specific work within Super, or is that not an individually reasonable item to that drilling cost up?

No, it hasn't driven, no. Its own business. It's a slightly different business in superannuation where you do get increases in revenues in the billable charges, unlike the rest of the business, which was driven by licenses. So you do have a somewhat different characteristic in the superannuation business. So you do see margin on when we're doing installations, for example, we charge – when you have a margin on labor. So when you're putting on a new fund, you do get an uplift in revenue, but of course, you get an uplift in cost that we make – we obviously make a margin on that. But our real focus is on superannuation is building an annuity-style business over time. So to kind of – particularly at the moment in superannuation, there's quite – there’s bit of lumpy stuff going on. There's a lot of fund mergers going on, which generates work for us, which is profitable. But what we're really looking for is the annualized on the annuity rates, if you like, that we get from the license fees ongoing. That can be a 10-year or longer revenue stream.

Yes. Okay. Just clarifying that. Maybe just another last question on the MFA and platform sale. Should we expect the net impact of the sale of both of those businesses combined, which hopefully you execute by December this year that that's an increase in EBITDA net because those 2 businesses combined were losing EBITDA?

Yes. I wouldn't say, you'll see a notable increase in the bottom line. But conversely, I don't think you'll see a notable decrease either. I think, they’re quite marginal business.

They're quite marginal businesses. So there's not going to be any -- there will be a negligible EBITDA impact of those 2 businesses being disposed of here.

And I'm not sure if you haven't disclosed it, I think, for a while, but I might as well ask that the current funds under administration within the platform business, do you have what can you give us a sense of what that stands at?

Sorry, again, you want to know what was the question? Can you repeat the question, please? Sorry.

Under a mean within the platform.

That, yes, yes, yes. Again, that's part of the sales process is in all the sales documentation. So we don't want to be drawn too much on that because we've got an active process. We've got a very large number of parties involved in that. So, yes. But we'd expect the people who are operating platform businesses where they already are deeply engaged in that process. There's -- obviously, it's a fund-based business, and they will be bidding on that basis.

Your next question comes from Olivier Coulon with E&P Financial Group.

Just on MFA, just to clarify, that definitely didn't get reported as a discontinued operation, correct?

It was only sold over the weekend.

Yes, literally concluded over the weekend.

Okay. And I think I had understood that used to make about 4 or so of segment profit and obviously quite a bit less of that EBITDA once you factored in D&A. Is that kind of roughly ballpark?

Not correct. Not really. Probably it may well have been at one point, but we -- it ended up being breakeven or even loss-making at some point because of the additional resources that had to be applied to it. It's pretty neutral in terms of EBITDA to the group level.

Yes. And then just on the guidance. I know that you've run through some of the factors. I'm still a little bit surprised at the extent of the guidance reduction in the second half? Because typically, you have a reduction in your staff costs driven by annual leave timing. And then to your point, you've obviously usually get an uplift in your cyclical revenue. So it sounds like you've excluded the uplift in your cyclical revenue. Have you seen that, that typical seasonality of annual leave kind of occurs again? Or haven't -- because it seems like a very large move considering that you updated in April, I would have thought most of the underlying cost increases were kind of understood at that point?

Yes. Most of the underlying cost increases were understood. I think that's a fair call. In fact, we're on track in guidance as at July. But what we're hearing, and this has been quite a dramatic and significant, I guess, headwind, if you like, coming from the market and coming from our commercial teams that are just reporting our customer base, particularly in advice, a really tightening up, and they have much lower expectations than we've seen previously in regard to the second half of this year. So a large part of that guidance has been just a flat lining, if you like, of revenue in the second half as opposed to, as you've said, we often do get a cyclical uplift in the second half. We are basically not expecting to see that this year.

Okay.

Just on cost side the recent -- with the annual leave, right, which is baked into this guidance number. What you're not seeing is some of these run rate headcount that came into the business back into 2022, right, quite material is probably somewhere between $11 million and $12 million in the overall cost base that came in through that, that's part of the part of the mix of the $47 million coming out. We've also got some inflationary staff costs that are also baked into the second half that weren't in the first half. And thirdly, we are moving and shifting our remuneration framework to more SDI based reward structure, which has got a cash element. And so there's an element of all of those that's baked into our guidance numbers and all of it's moving at the same time as we're doing the cost out. So -- you put it all together, there is definitely a staff reduction in the second half and even a bigger one as we head into the run rate 24, but it's also being offset by these other moving factors, which I've just mentioned.

Yes. I suppose, I guess the question I have is when most of those factors apart from over the SKI LTI change in remuneration structure kind of understood in April?

I think somewhere, but the full effect of it is sort of being felt now. There's a few things. I think the softening market was a big change between April and now. No doubt about it. That's the biggest single change. Cost-wise, I think there's been a -- we had projected cost increases, but even those were probably a little underdone, frankly. We didn't have full visibility of all of those things. There's a couple of things that have happened since then. We've responded, of course, by, as you can see, taking a tougher line on the cost out. We had initially anticipated $32 million, and we've actually executed on $47 million, which is giving you some reflection of that. So yes, I think there's a couple of things that are shifted around since April, in particular, the market sentiment probably is the largest one. That's the largest single effect in the guidance.

Yes. Okay. And so I might have missed it, apologies if I did a guidance for non-recurring expenses in the second half. Is there a view on that?

On the transformation line, it's going to be pretty similar to the first half. The big lift in the transformation spend is this year, right? So it started in the first half. We do have some technology uplift costs that were in the first half as well. They will start to decline as we head into -- that will complete by first half 2024. But in terms of non-recurring element of our -- of that line that we've disclosed in our EBITDA rec, it will be a similar level to first half, second half with the transformation ramp-up that is -- we've got 54 initiatives that are in play at the moment. A lot of things going on, both at the cost level and the revenue level, and that will continue for the back end of this year.

Okay. And any -- it sounds like your technology has been kind of telling us as you complete that program in the first quarter of 2024. Is there a view that, that transformation spend now on cost-out initiatives continues into 2024?

Yes. The transformation cost will -- in terms of those charges, we see transformation costs going through to the end of 2024 and the program does conclude at December 2024, and the focus is on the exit run rate of 2024 as the key milestone of that transformation program.

But probably not…

That we're seeing this year. No. Right? So this definitely moderates. There's big first half, second half, and then you'll see a drop-off in the first half of next year and even bigger drop off second half.

Your next question comes from Brendan Carrig with Macquarie.

Marcus and Cameron, just on the additional cost out, are you able to just provide a bit more color as to where that sort of $15 million uplift versus April came from? I'm just trying to get a bit of a sense on revenues are going to be at risk a little bit in terms of the medium term? And is your hand being a little bit forced with the other sort of operating condition environments that are forcing you to go a bit more aggressively on the cost than maybe you would like?

Not really. I think, first of all, it was headcount. We think there's -- when you look at the size of the cost this business carries, it's just high. We think there's a more efficient model and more efficiency available throughout the business. And frankly, we looked at it and thought it was -- it doesn't have a revenue effect. We've got very high recurring revenues at – at 92%. The costs are not directly connected to revenue in this business. There's quite a difference what it's a license-based revenue model. And we're looking at better and smarter ways of actually delivering our service to customers. Also, we are restructure – we spent a lot of money on cloud transformation as well, which is also driving some efficiency. So it's more about just what the business is actually what does an efficient and lean Iress look like. And I think there's a probably a business, I guess, to be fair to say, a process of successive approximation as we get closer to that. You look at what we've restructured the business. We haven't really looked at each individual business unit yet and what's the most efficient model for each of those individual businesses. At the CEOs have got a P&L accountability for that and will be remunerated to produce the most efficient outcome they can. So yes, I think it's a new lens and a new look at the business and what the true cost base ought to be.

Okay. That's helpful. And then just, I think, putting together your commentary just around the sale of MFA and pending sale of platforms based on the combined EBITDA contributions, it sounds like it's fair to say that this will reduce the leverage ratio, just given the limited EBITDA contribution from both of those businesses on a combined basis. Is that a fair comment to make?

Yes, that's a fair comment to make.

Okay. And then just my final question to make sure I'm reading it properly. It is just on that FY '24 outlook comment. So is the way to read it that EBITDA is going to be up 20% to 30% in FY '24 versus FY '23 and then the gross in FY '25 and beyond. So at the end of FY '24, the underlying EBITDA growth of 5% to 10% is expected or am I misinterpreting that?

Yes. Brendan the, yes, the FY '24 numbers move 5 to 10 on FY '23, but we're trying to get people to focus on the exit rate because there's a lot of activity going on transformation-wise, both cost and revenue as we head through 2024. So the exit rate of FY '24 is actually quite important to going forward. And what we're guiding on is 20% to 30% uplift on that exit rate with FY '25 number is going to be considerably north of that as well. right? We're just not trying to get too far ahead…

So the FY '25…

Is an important date for us as we execute through this plan.

Yes. Okay. So FY – I chipped it on the wrong way then. I mean FY '25 underlying EBITDA essentially is 20% to 30% higher than FY '23 based on that exit rate.

Exit rate – exit rate, FY '25 is going to be higher again.

Your next question comes from Scott Hudson with MST.

Just one quick question. Can you just -- is the guidance constant currency base? And can you give us a sense of FX assumptions -- your second half 2023 and FY '24 guidance?

Yes. They're down on currency levels where they sit today. There's no forecasting of where the A-dollar is going based on these numbers.

So, that's, I guess, a currency headwind into the second half of the financial year.

Yes.

[Operator Instructions] Your next question comes from Nick McGarrigle with Barrenjoey.

Just a couple of follow-ups. You've obviously suspended the dividend for the half year. Is there any intention to reassess that at the full year? Or is it you'd expect that you'll take a pause on dividends as you did?

We want to get that -- the dividend policy is going to be informed by the capital management program, Nick. We want to understand the underlying earnings potential of the business after we've done our cost outs and done all -- had a better look at revenue in the second half of this year. We have been -- yes, the view we need to make sure we're actually paying a maintainable dividend which is coming out of cash flow. And so Cameron's -- one of Cameron's big jobs is to actually sort that out and we'll be quite transparent about that policy. We'll tell you exactly what it is our intention is, how we intend to manage capital, what we intend to do with debt as we go through and exactly what we expect dividend-wise. So, we don't want to make any announcements about that, but we are obviously intending to have a maintainable dividend policy going forwards based on earnings.

Yes. Okay. And so I guess that will obviously need more earnings base as opposed to divestment of the managed portfolio--?

It's more about just being prudentially I think, conservative at this point in time, given the number of moving parts that are going around this business, including asset sales and other things, some of which we don't have entire control over, of course. We actually need to just pause and regather reappraise what is the earning potential of this business and how can it support a dividend and what level of dividend going forward. And that's really all it's about.

We are going -- orderly divestment program, right? So at the end of the day, we want to make sure that the process that sits behind the deleveraging of the business is actually quite laid out very clear around where we're going and over what time period so that you're all -- you can price, I guess, the state of the balance sheet as we -- as it transitions over the coming years.

Yes. Okay. And I guess the -- I just added another question around the guidance, which obviously is the focus for everyone for the next couple of years. But in terms of the -- you mentioned that you are on track for guidance of July. So, it obviously implies a reasonably sharp revenue downturn for the second half, what's your sort of revenue?

Yes, it's not a revenue downturn, Nick, it's actually a flat lining. We just -- we normally see an uplift in the second half with licenses, particularly more activity in the second half of the year. It's just we're not getting that feedback from the commercial teams right now. So, we're just again, taking maybe it's a conservative view, but we're seeing a very negative sentiment coming from our customer segments and our commercial teams. And it's hard to see from a guidance perspective, being again conservative, making sure we don't factor in growth that we can't -- that our sales teams aren't reporting at the moment. So, it's not so much about declining revenue, it's actually flatlining we're just expecting a fairly flat second half.

Flat revenue half on half and flat EBITDA half on half?

The revenue that we're seeing is still below our expectations. It is trending at the moment below. We've got some cushioning on the cost side there's some seasonality in that. So we're just working through that at this point in time. But certainly, revenue trend is not where we were 3 or 4 months ago.

Yes. There's been quite a dramatic shift in sentiment in the market in 3 months, I can tell you and obviously, it's the effect of interest rates biting and so other costs, other input costs affecting our customers. And the fact that their markets themselves are down as the trading market down 38%, I mean that's a pretty significant downturn, I would think.

Yes. And I mean, obviously, trading volumes have picked up into the first couple of months of this half year, but that you haven't sort of seen early signs of that supporting any bit of a stronger view?

Yes, not at this stage. We're just being, again, we're saying flat for the second half. That's all.

Yes. And just as an extension to that, I guess, in the guidance that you've got for '24 and '25, what's the implicit revenue growth assumption embedded in that '24 -- in the exit rate '24 assumptions?

Again, what we've done there, we've got a fairly flattish view of the current market. But what we've got is a whole bunch of revenue initiatives is what we called and we talked about those 54 initiatives in the core business, which drive significant revenue growth over and above what would be a trend. So the revenue figures we've got going out are really based on those transformation initiatives starting to drive a better performance in the market, including being more customer focused, bringing things to market, pricing, a real root and branch look at pricing and how it's actually done in Iress as well. I think we've got a real opportunity there. And what we're trying to do is really to give you just a flavor of it, just to diverge for a second, I suppose. We've got to get make sure our revenues line up better with customer value propositions. We want to think about how customers generate value from products and how we line up with that. At the moment, we're sort of per seat type billing. Now that we're in cloud, we can do things much differently and we can actually think differently about how customers use our products and how they experience them. So we are looking at a full review of how we partner with our customers in terms of when they get value and when we get -- when we support that and get paid ourselves. So it's quite a significant program. I wouldn't like to say it's just a matter of -- we're not talking about increasing prices per se, we're actually matching pricing to customer value, and that's the work of 2024.

The next question comes from Cameron Halkett with Wilsons Advisory.

Marcus, Cameron, one quick one for me. Just reflecting back to the April update versus the published guidance today. Is the $24 million net interest expense still expected, just reflecting on the rate moves over the last 6 months and the degree of debt that's fixed in Iress today?

I haven't got those numbers in front of me. So I might have to circle back with you. But given we had $10 million in the first half, and the fact that our net debt is slightly higher, we expect a higher net interest in the second half, so it's probably not too far out, albeit the proceeds for MFA will delever some of that. We will be looking that transaction is looking to complete towards the back end of the September quarter, probably early October. So there might be a little bit of shaving off that '24 number, but it certainly feels from where I sit it's in that ballpark.

That has been factored in there.

Yes, they've been factored in.

Next question comes from Bob Chen with JPMorgan.

Just a quick follow-up. I think you mentioned for Xplan, the core licenses were up 4%, but then ancillary modules sell off a fair bit. Can you talk a little bit about what module sell off? And was it due to competition or was it just a reflection of the market environment?

No, it's not competition. It's just sort of add-on modules, things that are -- in terms of expanding the license base. So the core module, which is the CRM component of Xplan is the core. You have to have that to run the next plan. We just found the bells and whistles reporting modules, things that are not as essential, perhaps to the advisory business were just returned. Also, it was the adviser in some cases had slightly fewer numbers with people not doing as many things. So there's been quite a lot of I guess, change in that adviser market, they've been under a lot of pressure cost. And what we're hearing from them is all about competitors. It's about their own cost pressures. They're experiencing the same license increases from other suppliers that we are. They are experiencing just day-to-day cost pressures just in interest rates, utility charges, everything. It's not actually a -- it's just a generalized cost pressure that's operating on those businesses. And they're doing what we're doing, which is trying to rationalize their costs and modules that are not -- they don't consider essential they hand back. ultimately, that comes down to us as well, getting better at matching our clients' product set, if you like, to our product offering, and we're actually looking to do quite a lot of work with our clients on that to make sure they've got the optimal configuration of Xplan.

Your next question comes from Olivier Coulon with E&P Financial Group.

So, just on the change to the STI/LTI structure, is there any net additional cost in this calendar year versus us the previous expectation from that change?

Nothing that hasn't been baked into the guidance. It was part of the thinking around it. There was a shift and markets can probably expand on the thoughts around the REM structure because it's kind of predated my joining, but certainly moving from a full equity structure and share-based payments to an STI structure, whether there's a cash element was all baked in as part of the thinking and is in the guidance numbers that I've shared.

And we're looking to shift that at above the line here was previously sitting below the line. We are trying to remove below-the-line charges unless they're absolutely true one-off transformation type or redundancy type charges. So it's part of trying to create more transparency in the accounts as well.

Yes. I mean, obviously, that's appreciated. But is there any -- so was it -- just to clarify, was the change in both the April number and the current number or has there been a change that's impacted the current number relative to the April number?

We are looking to move the STIs above the line in the future in expectations of our future models, yes, that's certainly…

Yes. The STI is in the guidance, the cash number is in the guidance number that we're providing -- was it…

No, I don't think -- it wasn't in the…

So I think this is new activity that has come about in the last 3 months since the April day. There's more work done around the remuneration framework and I guess, targets and things like that in terms of new structures.

Well, we did target -- I mean, just to let you know in terms of the REM structure, we are looking to have a much more transparent REM structure, a performance-linked [ REM ] structure. One where short-term payments, short-term incentives are linked to direct deliverables, and you saw the exit run rates, those are the sorts of things we're connected to. So if we produce results, then we get rewarded as a team, we get rewarded for them. There will still be a long-term incentive program, which will be equity based. But the short-term program, we're looking to as much as possible, pay that as a cash payment and come out of the run rate of the business as it should -- so it's a much more REM structure, which should be more in keeping a more applicable to a business like Iress, I think.

Okay. Now I guess put it really simplistically, in April, you had $22 million of share-based payments below the segment profit line in your guidance. Do you still have $22 million of effectively share-based payments, whatever you want to call it, that's impacting on the new underlying guidance for EBITDA?

Those share-based payments are awards have already been made, right? And so a significant part of those awards that will roll off. This is the last year of those awards. They will be replaced or being part of a different REM structure going forward, and we will be working through what that looks like with an STI lens. At the moment, the only changes that have been made -- have been more at the leadership level, and we're working through those. They are all part of our guidance. But over time, some of those share-based payments line items will move above the line into more of a run rate salary plus bonus type line item that will be captured as part of our employee cost run rate.

Yes, there is a bit of an unwinding that's necessary here. I mean, as I said right at the very start, this is a point in time these results. And a lot of the things we've done and are working through are, when we look at them today, they're quite different than what they were even in April. So there is -- I mean I know it's difficult because we are in a transitionary moment as a listed company, we're forced to report at a point in time that may not be in line with what's going on in the transformation program. And I think you're seeing that here where you've got a REM structure that's still present in the accounts, but it's actually an unwinding of last year's awards. So that is -- there's going to be a few of those sorts of things going on in the accounts over the next few months.

There are no further questions at this time. I'll now hand back to Mr. Price for closing remarks.

Thanks very much. Look, I know it's a tough first half 2023, and we're expecting a flattish second half. But I would say that we are -- the transformation program that we're engaged in is designed to deliver a much simpler more transparent and efficient Iress. We think this business is capable of a lot better performance than it's currently evidenced on those results. And we've got very deliberate and well-articulated targets to deliver that. In particular, the exit run rates of 23%, but especially the exit run rates of 2024, we believe would make this company a well in truly a Rule of 40 business, and that's what we're really targeting. This is a point in time. We have a lot ahead of us, but we've been embolden what we've been able to achieve. And if anything, our horizons are expanding rather than diminishing as we go through this transformation. So thank you for your time today. We look forward to seeing many of you in the roadshow and speak then.

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