Netwealth Group Limited (NWL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Netwealth Group Limited Annual Results FY 2023 Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Matt Heine, CEO and Managing Director. Please go ahead.

Thank you very much, and good morning, everyone. Thank you for joining us this morning for our FY '23 business and financial highlights. My name is Matt Heine, I'm the CEO and Managing Director of Netwealth and I'm joined by Grant Boyle, our Chief Financial Officer. This morning, we're going to be going through the full financial year '23 business results. We'll be giving a brief strategy and product update, an update on corporate sustainability, and then I'll be handing over to Grant Boyle to go through the financial performance in detail. We'll finish with a brief outlook statement and also be handing over to questions at the end. So please make sure to jump in the queue. Before we start, however, I would like to acknowledge the traditional owners of the lands that we work and live on. We are presenting today from Sydney on the lands of the traditional owners, the Gadigal people of the Eora Nations. We celebrate the stories, culture and traditions of the Aboriginal and Torres Strait Islander people of all nations, and pay our respects to the elders past, present and future. If we turn to Page 7, a quick summary of our results for the year. I think it's fair to say that the last financial year was certainly challenging in many regards. We had market volatility, uncertainty and persistent inflation, which led to increase -- rapid increases in interest rates. There was definitely poor investor sentiment throughout the year. However, despite all of this, we are really pleased to have delivered what we believe is to be an excellent result. It was a year of many milestones, and we surpassed many key metrics along the way. Our revenue for the year was $214.7 million, an increase of 21.6%, or $38.1 million. And for the first time we exceeded EBITDA -- exceeded $100 million of EBITDA, recording $100.7 million. Again, this is an increase of 18.4% with growth of $15.7 million. We reported $67.2 million of NPAT, a growth of 20.9% or $11.6 million. And the number of accounts that we onboarded on to the platform grew by 10.3% to a total of 127,507. We'll talk about our position as #1 platform in a few slides. But from a funds under administration perspective, we had a great year despite many of the headwinds that we just touched on. Our FUA grew by $14.6 billion for the year, which included $9.9 billion of net inflows, and finished at $70.3 billion or 26.3% increase. As has become customary, our current FUA as of yesterday was $72.2 billion, which shows a strong start to the year. Our total funds under management, so that is our managed fund products as well as our managed account, exceeded $16 billion with $2 billion of inflows. And as of today, our managed account, which is a primary driver of current and future growth, has exceeded $14 billion. We've delivered on a range of our strategic initiatives that we set out and talked about 12 months ago, and our service levels continue to be very strong and, as you will see, consider the best in industry with phone calls, et cetera, being answered rapidly and customer service being a continued focus. Also something that I'm very proud of, and I certainly know that the business is very proud of, Banqer Primary, which is the financial literacy and financial capability program that we support, has just surpassed 100,000 kids going through the program, which is fully funded by Netwealth. It's a fantastic achievement for the Banqer team, and we think making a real difference to those children that have been through the program. On Page 8, you'll see that we've again won a number of accolades. So Netwealth is not only the leading specialist investment platform that is, in fact, the leading platform in Australia. We were ranked by our clients and by advisers as #1 for overall satisfaction, #1 for value for money and also #1 for adviser satisfaction with mobile access for clients, all areas that we've been investing in heavily and that we pride ourselves on. At the end of March, we were the #1 platform for inflows with $9.4 billion, and our market share increased again to the end of March by 1%, taking our total share to 6.7%. If we play that trend out over the last 5 or 6 years, on Page 9, you can see that this is a structural shift that is not going away. In fact, it's very much continuing. While it's a little bit busy, the chart on the left shows the growth or the continued growth of specialist platforms at the decline of the incumbent platforms. There's some interesting information on the right-hand side. But in particular, I'd like to draw your attention to the fact that over the last 12 months, again to the end of March, Netwealth represented 66.2% of the total industry net flows compared to 45.6% in the prior year, which again just shows how well we're doing and gaining market share, bringing in new clients and ensuring that we continue to grow with our existing clients. Also worth highlighting that all of this growth is purely organic and has come from the efforts of the team. On Page 10, whilst we've now covered growth considerably, one of the highlights really is around the diversification of our business. We've talked about, and we'll delve into the diversification of our revenue streams, but we've also been very focused on making sure that we can diversify across client segments, as well as market segments. So in addition to our retail book, we're continuing to push into the institutional and family office space, which now accounts for 5.8% of our total FUA. And with the successful launch of our noncustodial product back in March, you'll start to see that [ slightly up ] -- increasing, and it currently accounts 0.2% of our total FUA. From a platform or retail perspective, 66.1% of our business is sitting in a Wrap account, which includes Family Trust, SMSF, as well as individuals; and our Super product at 33.9%. And even within the superannuation side of our business, it is a relatively young book, with less than half of that being in our pension products. We've also called out for the first time the difference between our core and plus products. So that is core, which we'll come back to in a moment, which is our cutdown baby wrap, that is plus, which is our full-featured, full investment menu. And we've got some exciting news to announce in a couple of slides' time. On Page 11, we've also provided a little more detail just around the vintages of our clients as well as where the business is coming from. As we look forward into this financial year, really important that we do highlight that our transition pipeline remains extremely strong. It has been a good start for the year. And whilst last year was slightly below where we would like to have seen new business coming in, we have got great confidence in those clients starting to transition on mass. From a vintage analysis percent perspective, currently 23% or nearly 1/4 of the advisers that are now using the Netwealth platform have come on to the platform in the last 3 years. Why is this relevant? It's because these advisers are very much at the beginning of the transition and migration journey. And as they become -- continue to mature, we would expect significantly more business to arrive from those existing clients that are now on the platform and using us, in addition to the clients that have joined in the last 12 months. We can take any questions on that at the end of the presentation. But by way of strategy and product update, if we just move to Page 13, I think the good news and certainly something we're very focused on is that despite where markets have been and the very poor investor sentiment, the industry remains extremely dynamic and fluid and incredibly interesting, as always. We see a huge amount of opportunity in the market, which is driven by a number of macro factors, which I won't go through in significant detail today, but worth just touching on. On Page 13, we've sought to just summarize a couple of the key areas where we see a huge opportunity. And as such, we've been thinking about and designing our strategy and strategic initiatives very much around these, what we call, mega trends. So seeing significant ongoing changes in customers and what they're looking for. The demographics are changing, the wealth of those demographics is changing and people are expecting more from not only their technology but also from their service providers. Technology continues to move at a rate of knots, and it's very difficult to have a conversation these days without ChatGPT or something similar being discussed. There is significant opportunities within our own business and within the industry, where we believe AI will make a big difference moving forward. Investment landscape continues to evolve whilst digital assets certainly haven't been talked about for some time, it continues to rise. ESG, exchanges of platform assets, noncustodial assets, our foreign currency capital call alternates are all things that we're looking to bring to Australia and help advisers implement via the platform. And finally, QAR, much greater clarity around what that looks like. There is no doubt that the current legislation or proposed legislation is there to assist consumers to get more advice or better advice and for that advice to be delivered to more customers. And again, we've been looking at our broader product set to understand exactly which part of the market is going to impact to make sure that we've got competitive and relevant products for each of those client segments. And on that point, on Page 14, you'll see that we've specifically called out, I guess, the 3 key segments that we are focusing on at the moment. In the past, we've talked about the emerging affluent, under 45 or millennials with money as well as the established affluent over 45. Whilst we've had a very compelling product for the established mass throughout our journey over the last 20, 23 years, we believe the time now is to refocus on this particular market segment, and we'll be relaunching our core product with an expanded investment menu, which I'll touch on shortly. Between these 3 key market segments, we are now building, offering and delivering services and solutions for 65% of Australian adults. So it's an incredibly large addressable market and one that we're extremely focused on. All of this, though, does take focus and also investment. And we've been building out our product set for many years now, but with a real focus on those key segments of late. With our new strategies that we've been implementing over the last 3 years, it's really pleasing to now say a lot of the strategic initiatives around client engagement, investment, noncustodial and also managed accounts really starting to come together to deliver a very compelling and market-leading product to the market. We'll talk about the investment access, and we'll touch on some of the technology and administration innovations that we've delivered. Everything that we do, though, at the end of the day is designed to improve customer engagement and satisfaction, create greater staff satisfaction and productivity and advice practices and also increase operational efficiency and profitability to help them build better businesses and to deliver better advice and more advice to more Australians. If we turn to Page 16 now, some of the things that we've done in regards to the investment platform, recognizing some of those mega trends that I just touched on earlier. The reality is that investment portfolios are getting far more complex these days and the advisers that are servicing both the smaller end or smaller balance clients as well as high net worth got to deal with greater complexity than ever before. We're also seeing that with the emergence of off-platform assets that advice firms currently, around 20% of assets are administered or held off platform that is in a noncustodial environment. These are traditionally administered via an Excel spreadsheet, planning software or some other administration solution. Having built out the infrastructure and to assist advisers, administer off-platform or more complex assets over the last 5 or 6 years, we've recently launched MAPS or our non-custodial multi-asset portfolio service to effectively offer not only the technology solution to manage with these non-custodial assets, but also to deliver the admin. And that was very successfully launched in March after a 6-month trial and pilot phase. We're also continuing to connect into a range of different data sources so that clients can truly get a whole of wealth for you, whether that's Netwealth data, other platform data, property data or banking data, and that's all available now through the client portal, both through the mobile and also desktop apps. And managed accounts, as I mentioned earlier, continue to go from strength to strength in our key business efficiency and client engagement tool for many advice firms across the country. On Page 17, you'll actually see how important this product is to our continued growth. In the IMAP Managed Account FUM, there's currently around $144.5 billion sitting in managed accounts today, which is significantly up or double since December '19, just pre-COVID. Netwealth's market share of the total managed account industry currently sits about 8.5%, and the industry is growing at a CAGR of 22%. Pleasingly, Netwealth's CAGR is 33%, so well above the industry growth rates. And waiting for the launch of our new product in the core market, we can accelerate that even further. So, Page 18, I've now mentioned the core enhancements a number of times. What is it that we're actually doing? As I touched on earlier, the Mass Affluent is a really important market for us. It is large. It is well serviced by advisers and having researched their needs, and also the needs of the advisers that service them, we've come up with and we'll be relaunching in the next 6 weeks at our core product. The 2 key aspects to the core relaunch are a considerable expansion of the investment menu, where we'll now be offering an additional 48 well-supported model managers, offering a range of different investment strategies ranging from ESG, index, multi-asset and also standalone equity portfolios. In addition to that, we'll also have our current range of assets available, which include a range of active multi-manager funds, index funds and also core satellite index options. Importantly, we'll also significantly reduce our pricing on the core product to make sure that it not only meets market, but it is highly competitive. From the first week of October, our core pricing will be 15 basis points, which will be capped at $750,000. So for a balance of over $750,000, there will be no basis point admin fee. It will be $60 fixed fee, which is lower than current as well as a minimum fee per account of $225 per annum. This really will allow us to drive much deeper and wider into our existing client base as well as make us very competitive as we go into new pitches. Importantly, however, also we want to highlight that the incremental revenue or the margin will be very similar or above that to what the current basis point earnings on the platform products. On Page 19 and beyond, there's a fair bit of information just around what we've delivered throughout the year and also what we're working on. Given time constraints, and no doubt the desire to get to Q&A time, we will fast forward, but our key areas for us this year and that we have been focusing on in group data, data aggregation and reporting, a huge focus on driving adviser efficiency, and a big focus on client engagement through things such as the client portal. Happy to take questions on any of those initiatives in Q&A or afterwards. If you now turn to Page 28, the last section from me before I hand over to Grant Boyle, is just a brief comments on our corporate sustainability. Really pleasing, again, as a business to see this continue to mature. As a business, we're clearly very focused on delivering great customer service, great products, to our adviser community and also to the clients that they serve. And ultimately, that really is the biggest impact that we can have externally on the community by helping people drive better performance, ultimately live better lives in the future. In addition to that, however, we are also very focused, and this is something that we're getting loud and clear from our customers but also from our staff, is that desire and also want to be more active in the community. And we've set up and delivered on a number of initiatives throughout the year, including a very significant number of volunteer days, fundraising efforts and also investment into our talent and broader staff well-being. A couple of key highlights throughout the year. We were ranked in the top 6, so we ranked 6th in the top 10 Best Places to Work for Women by Work 180 back in March; and we achieved 77% employee engagement score, which is top quartile for our industry. And the other area on Page 30, which we may dive into a little detail now, just the success of the Banqer Primary program, which we will continue to fully fund for kids in schools and looking to grow considerable. 100,000 students through the program is just an outstanding effort over the last 5 years. So on that note, I will now hand over to Grant Boyle to walk through a detailed analysis of our financial performance. Thank you, Grant.

Thank you, Matt, and good morning, everyone. So if we move ahead now to Slide 32. So this is a slide that summarizes and demonstrates that we have been successful in delivering consistent growth with our various revenue streams, demonstrating some decent macro resilience. Our full year compound annual growth rate for revenue is just under 21%. And for EBITDA, it's 18%. As mentioned earlier by Matt, EBITDA exceeded $100 million for the first time, which is a significant milestone for us. And the EBITDA growth rate has been achieved whilst also making a significant investment in the platform roadmap, system scalability, security and our service capability. The EBITDA margin percentage, excluding share-based payments, was at 48% for FY '23, which is also a very solid result given the investment we've made. Moving on to Slide 33, this slide summarizes the FY '23 financial results compared to 2022. Total revenues increased by 21.6%, and that was, as usual, primarily driven by the growth in our funds under administration, which grew by 26.3% over that same period and also improvement in our cash margins. These were -- these increases were partially offset by lower average cash balances, which we'll discuss a bit more later on, and also transaction revenues, which were down 11.6% on the prior year. Netwealth operating expenses were 24.5% higher than the previous year. And pleasingly, operating expenses are only up 1.5% on the second half, which I can also discuss further on in the presentation. So those 2 things contributed to an improvement in our EBITDA margin, which increased from 46.1% in the first half to 49.8% in the second half, and those numbers are excluding share-based payments. As usual, we continue to extend all of our internal IT development costs. And as reported in the first half, we did capitalize some third-party software. Statutory NPAT was at $67.2 million, an increase of $11.2 million or 20.9%, and the earnings per share increased by 20.2% on the prior period. As usual, we had exceptional cash generation with very high preoperating cash flow of $106.3 million. Today, we declared a final dividend of $0.13 per share, which brings a total dividend for the year to $0.24, which is fully franked. So in summary, a really good operating result. We had strong profit growth. We've been investing for the future and whilst also, in this year, we managed to improve the EBITDA in the margin in the second half. Now moving to Slide 34. This sets out the metrics that we've seen in July, which some of these Matt also touched on before. Our FUA growth is obviously the key milestone, grew by 26.3%; $9.9 billion of net flows, which is obviously just under the $10 billion milestone. The other key callout that I discussed before around the cash transaction account that was slightly down on the prior year, it's down to 6.4% as a percentage of FUA. We were at 7.9% in the prior year. The major driver of that was just the increase in term deposits held by clients, both on platform and we suspect off-platform, which has led to increases in that FUA cash account. Moving ahead to Slide 35. This slide sets out the revenue margins and revenue per account for our business. It's the first time since we've listed we've actually seen an improvement in all metrics. In past, we've been very focused on highlighting the revenue per account, which we think is a key metric to -- which drives our profitability. That again has increased to $1,710, which is a $90 million increase for the year. But this year, our basis points also increased from 32 basis points to 32.8 basis points. And that was mainly driven by more normal cash margins, which is up, which is somewhat offset by the lower transaction fee earned. But overall, it's proving relatively stable. And in recent years, it hasn't had the trajectory in terms of basis points that we previously experienced. Moving now to Slide 32 (sic) [ Slide 36 ]. This slide sets out the core components of our platform revenue. We've always had a high level of recurring revenue and a focus on revenue diversification. And that's proven resilient through the various market cycles. As I mentioned, the cash revenue was up this year. Transaction revenue was down. Prior year, it was the opposite. So it gives us a natural sort of softens the impact of some of the market cycles. So that's certainly proven the case over the last 3 years, which is useful and that [ finds ] the diversification strategy that we've had. Moving to Slide 37, just on the expense side. We've always been very disciplined in balancing a focus on investing for long-term growth, while ensuring that we kept the rate of expense growth under control. And we sure ensure that the -- we continue to deliver profit and growth to our shareholders. For FY '22, we had a step-up in our investment to support some of the growth and innovation and some strategic investment across IT, infrastructure, people and software. Much of that investment flow through into our run rate, which contributed to an increase of 26.1% on our expenses. But pleasingly, the -- as I mentioned before, the operating expenses in the second half were only at 1.5%. So we've seen that growth stabilize. Technology and people have been the biggest drive as usual at the annual increase, but we've also had increases this year in T&E, marketing, advertising costs, which have risen as the economy reopened after COVID-19. So we only added 38 roles in FY '29 (sic) [ FY '23 ] and that was compared to 113 roles in the prior year, and non-headcount-related expenses were lower -- were slightly lower in the second half than the first half. So in summary, we're really pleased with how our costs have been tracking despite the difficult inflationary environment that most of our community has experienced. Moving to Slide 33 (sic) [ Slide 38 ]. This slide sets out the -- where the head count has been added. As I mentioned, we only added 38 roles this year, 30 were in technology, reflecting our ongoing investment in enhancing that the platform capability. One point to highlight was -- there was an unusually high number of vacancies at year-end, which we would expect to normalize in the first half. So that 38 role head count number obviously was impacted by the vacancies at year-end, but it was still a significant decrease on the level of growth in head count that we've had in recent years. Moving now to my final slide, which is a summary slide. Netwealth remains in a very strong financial position, remained highly profitable and an attractive EBITDA margin, [ with a ] strong revenue growth. We still got a very high level of recurring revenue despite the increasing transaction fee revenue that we've had in recent years, which means that we've got really predictable recurring revenue, which is becoming increasingly diversified. The exceptional correlation between EBITDA and cash flow, we've got a really strong balance sheet, we've got low CapEx, we're debt free. And where we have cash reserves. We're continuing to invest for the future with an ongoing strategic upgrades to our IT infrastructure and software. We remain the leader in the high net worth and private wealth sectors. And as Matt mentioned, we're now increasing our focus on the mass affluent and emerging affluent segments. We are the fastest-growing platform for the last 12 months and remain the #1 platform to customer satisfaction and managed accounts. And with that, I will hand over to Matt, who will provide an operating outlook before moving on to questions.

Thank you very much, Grant. I think that was a great summary at the end. So I won't repeat what Grant has already gone through. On Page 41, from an outlook perspective, we do enter FY '24 with a really strong pipeline and a very high win rate for new business across all key market segments. We're feeling very positive about this year and believe that it should be another good one. We've successfully secured several new important licensee relationships and including a number from last year that have now gone transitioning and funding new accounts. As Grant said, we remain in an excellent financial position, highly profitable, strong EBITDA margin, very high correlation between EBITDA and operating cash flow, very predictable recurring revenue, scalable and predictable expense base and also significant cash reserves. I'd like to thank the Netwealth team for an absolutely huge effort and a big year, the Board and the executive team. And now open to questions. Thank you very much.

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

A couple of questions from me. I think historically, you've provided some guidance and flows into the new year, but it looks like you haven't today. I mean what's feeding into that sort of conservatism? And how should we think about net flows, given your comments earlier about good visibility and a really strong pipeline.

Yes. Look, I think you probably summarized it pretty well there. We are very confident going into this financial year. And as mentioned, we've got a fantastic pipeline and strong conversion rate at the moment. As you would have seen, we've provided quite a lot of additional detail in the full year results this year, and we always seek to provide a lot of information in our quarterly results updates, and we think that's appropriate moving forward.

Okay, cool. And then just in terms of the margins for the business, it's obviously stepped up with that cost control, lowered hiring. How should we think about that sort of going into the year as well given you've got 38 vacant roles open at the moment?

Yes. So we obviously haven't given any guidance in terms of where the market is going to be. We have historically tried to avoid the market getting excited with expanding EBITDA margins with -- if anything, try to keep a lid on expectations at the moment where last 2 years we've seen it creeping into the low 40s. It's -- the second half, we were up in the high 40s. We're not going to give a number in terms of where it's going to be going forward. But at various stages it's going to go up and down. So I know that doesn't give you any particular answer, but we're pretty comfortable where it is, around about that 50% plus or minus. And at the moment it happens to be around about 50%, but there's no guarantee it won't go up and down in the future.

And I guess just to understand how you guys think about that reinvestment, is this sort of reactionary to how you're seeing flows come into the business or the growth coming into the business?

No. I wouldn't have thought -- we've got a range of initiatives that we've embarked upon. We'll always make sure to keep costs under control. But we're certainly seeing a very big opportunity ahead of us, and we want to make sure that we maximize it.

But as I said, we've been very comfortable seeing that margin go into the 40s in the past when we saw the -- saw that we needed to invest in certain initiatives and where our focus is always around long-term profit growth at various stages, that margin is going to go up and down. But the main thing that I think our shareholders are after is profit growth.

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

Congrats on the results, strong second half. Just had a question on the average cash balance because it did seem like given where it finished 6.4%, I think it was 6.8% at the first quarter. Ancillary revenue was quite high, so either suggested a knockout result ex the cash margin or maybe the cash kind of balance wasn't just the numerical average of those couple of quarters over the full second half. Can we have a bit of clarification on where the average cash balance was over the second half?

Obviously, we give a cash percentage each quarter, so obviously, for those metrics as well. It does fluctuate. Typically, it does start increasing towards the very end of the financial year with the pop-ups for superannuation and it gets another kicker after the fund managers distribute after year-end, and then that gets invested. But there hasn't been massive fluctuations apart from that. There are other items within the ancillary revenue that aren't cash clearly. It doesn't represent the whole balance. So some of those -- we've seen some good increases in some of those other ancillaries that we don't disclose separately.

Yes. Okay. And I mean, obviously, transition -- sorry, I guess, transaction revenue was down. That other ancillary revenue seemed like it offset it in this second half. Is that expected? Is that like high level of ancillary revenue expected to be kind of consistent going forward? Or was there an element of perhaps nonrecurrence of some of that?

Typically, most of the items in the ancillary are, by their nature, more recurring. There's not -- the things that are volatile typically sit within the transaction revenue line because they're volume related. And obviously, cash has some volatility in it, which we're all very aware of. But the remainder of the items that sit with our ancillaries are generally more recurring.

Okay. And then just on the core pricing changes, obviously, you've got fairly low penetration of that segment of the market. Do you have a view as to how much you need your volumes there to at least to offset I guess, your existing base, which presumably is taking a price cut? And then I guess the second question on a similar track, just on the new cash product, what your thinking is there in terms of how much you need to win on that new cash product or TDs back from off-platform to offset any impact on the FUA cash product.

Yes. So we obviously don't know the impact of the REIT price. And our belief and view for this year is that we should be able to make that back plus our incremental revenue over the next 12 months. So the way that we've constructed the product and priced it now, the margins are good despite a very low headline rate. As far as the cash product goes, we're looking to launch that in the next 6 to 8 weeks, I believe, and that will be a 31-day cash fund where clients can park money in that fund. And if they need access to it, they just need to give us a 31-day notice, and the current product will -- sorry, the view is that will pay 25 basis points over RBA and we think will be very attractive for people looking for a medium- and long-term cash vehicles.

Not anticipating much cannibalization, if any, of the transaction account -- by its nature, it's not an investment option. So I think if people are taking an active view to manage a cash there, [ don't know ] the user tend to deposit or they use our new product, I don't think it's an alternative to that core product. And term deposits still continue to be extremely high on very short term, so the bulk of them would be 3- or 6-month terms. And we would expect, hopefully, as markets start to turn later in the year. That's not a forecast or prediction. But as things improve, we start to see that money moving, i.e., back on to platform. So we know that a lot of the withdrawals over the last 12 months were actually partial withdrawals going into the cash flow and term deposits, and we would expect that to come back on the platform to be invested in the future. So a lot of money sitting there waiting on the sidelines.

The next question is from Siraj Ahmed with Citigroup.

So the first thing, Matt, you sort of mentioned a strong start to the year for flows. I mean, see, I know it's sort of danger in terms of estimating flows, but we are seeing around $1 billion for the first few weeks, which seems to be down year-on-year. I mean, can you just comment with the flows down year-on-year growing, would be helpful.

Yes, we haven't provided flow guidance, for information, just a bit of a starting figure, a fuller update. I think when you look at the activity and the start of the year as far as it's been a strong start to the year, there is -- the investor sentiment seems to be improving. There's a lot more activity. And we're seeing just a much more buoyant environment compared to the previous 12 months, which was tough.

Secondly, in terms of the core products, there's a couple of questions, right? First thing, where do you reckon your share of flows from the core could get to over what's your target? And secondly, who is the main competitor here? And third thing, in terms of pricing, I mean, you've reduced pricing, but if the product is quite good, so pricing is quite rational right now, so why reduce pricing?

Yes. So as you'd be well aware, we've got a very broad feature and product set on the Netwealth platform. And at different times, we've invested into different market segments. Over the last couple of years, there's been a big focus on investment into the high net worth, ultra-high net worth space with the launch of products such as MAPS and the non-custodial and a lot of the reporting that we've delivered over that period. Throughout that time, lost out, I guess our share of mass affluent has continued to grow. We've recognized that it's below where it needs to be and should be, and that's as a result of some of the broader menu available on core products on some of our sort of traditional peers. We think that there's a really big opportunity given our feature set, the Netwealth technology and Netwealth service proposition to deliver a great product into that mass affluent space. And having researched the market, the way that we've gone about that is through reducing our pricing on the core. That's not the key value proposition. That's more about expanding the investment menu to provide a very diversified range of excellent managers and model managers with very diversified strategies. So we have seen through some of the industry stats that a couple of our peers have done better than we have in our retail managed account space. And I guess, in many ways, this is our response to that, and we're very confident about the growth of it. Clearly, it's a part of the broader flow story. It's not the only story, but we think it's an important one moving forward. From a fee perspective, we -- the way that the product is structured is that there's multiple revenue streams that come out of that product. It's not just about the admin fee. All of the new models have got equities and ETFs, as an example. So there's brokerage income as well as model and ROE income. So from a total basis point perspective, as I touched on earlier, it's the same or above our current basis points.

Just last one, just for Grant. See, in terms of margins or cost for next year, I'm assuming you're not giving guidance, but it's interesting you've removed that you mentioned a focus on operating leverage. And especially given you had a lot of vacant spots and looking at hiring activity, it's still pretty low. Is it fair to assume that margins should be quite good in the first half and maybe there's [ reinvestment ] in the second half?

You cut out slightly. But I think the key is that we actually haven't provided any guidance. We're comfortable with how the current margin is and how the operating expenses have been managed over last year, and we'll continue to look at the opportunities that's in front of us. And there will be times, as I said, when that margin might go -- margin might reduce and it might increase. So we're not going to give any sort of statements around commitments to certain expense growth. We're just going to play what's in front of us, Siraj.

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

Just a question around that cash product that you're talking about. Is the view that you cannot have that be a bank guaranteed product, given it's got a bit of a lockup and it's more of a fund as opposed to an account? So therefore the spread can be reasonably good because you can take a bit more risk on the investment side of that?

No, not at all. It is a very, very basic cash product. Literally, dollar comes in will be down-invested straight into an ANZ account.

So what's the advantage of offering that lockup? Is it you're getting -- the higher rate for the client is attractive and keep them out of the TD?

Correct. So what we've tried to do is to basically create a product that we think is going to be attractive for that medium to long-term money, which isn't as restrictive as a term deposit, but also provides good rates. So it's sort of part of the cash and fixed interest ladder and sort of be positioned from a pricing perspective to sit somewhere between a 1-month and 3-month term deposit.

And just to clarify, around the newly sort of redesigned core products, the expectation is margins overall will be at or above the existing level for that same product. And I assume that the offset of that is lower admin fees, but more integrated FUM style margins to offset the lower admin.

Yes. So there's a number of different ancillary fees that we earned through that new core product and through a restricted menu, we are largely in control of what those revenue streams are. When I said at the same or above revenue, it's actually across the platform as opposed to just for that product. So current basis points are sort of circa 30, 32 basis points, and we would expect the core contribution to that to be the same or higher.

Yes. Okay. And then just Grant, you mentioned costs. I mean I think previously you've given kind of an exit rate in terms of new hires and the way to think about that, I guess, we can obviously annualize the second half. But there's a run rate from the hires that you've made and the roles getting filled. I'm not sure if you can provide us any of that style of commentary at this result.

Yes. We did that last year for a particular reason, Nick. That was -- because we've done so much hiring in that -- towards the end of the year. We thought it was going to be useful for the market to know what the exit run rate was. Clearly, this year, we don't have that situation where the first half and second half are pretty consistent. So that apart from the salary increases that have gone through, which you can make some estimates around, we think that we've got enough information to work out where the year starting. Whereas last year, that information wasn't really available. We sort of upped our -- we've had some initiatives around technology that we're kicking in. We had some large number of hires that were needed to be included in that run rate. So we thought that was required last year but not this year.

Yes. Fair enough. And I mean in terms of the tech road map that you got for this year, would you describe it as more intensive than the road map that you had last year? Or is it sort of those investments can be maybe in the envelope of the existing kind of tech team? And then I guess as a stage 2 to that question, there was $4.9 million of sort of external IT build costs, how should we think about those cash flow items going forward?

Those capitalized items are very project related. So it's difficult to provide any sort of long-term guidance because it's around the work that's being undertaken and the software that we've added on this year. There's certainly going to be some in FY '24 as well. But in terms of the future, I can't really provide any further guidance because it's around specific pieces of -- or specific projects that are underway currently. So as I said, we haven't -- at this stage, we've expensed all our people costs. These are third-party software that we're adding in. What we do in the future in relation to the third-party software development is really hard to predict because it's -- as I said, it's all project-driven. So there's no pipeline for the future around those developments.

The next question comes from Kieren Chidgey with Jarden.

Apologies if this has been covered, I joined the call a little bit late. But just on the core product enhancements, just wondering if you could put in context kind of how much core FUA you actually have today?

Well, there's a slide in the pack, which will show the percentage. I don't have an absolute dollar. But if you look at the retail component of the platform, so the custodial component, it currently accounts for 4.1% of total FUA.

Okay. And Matt, what is the strategy to sort of grow that from a distribution point of view, given I imagine a lot of that potential client set is not being serviced through your current adviser relationships.

It's probably a dual strategy there. So there is certainly a number of advisers that will have a dual platform strategy, where they'll use sort of Netwealth for their higher end clients. So $350,000, $400,000 plus and then another product for their smaller balance clients. This is really a recognition of the fact that there is an increasing segment within the market that is cost conscious, but that is looking to adopt managed accounts and provide good quality access to a wide range of model managers. So we think there's excellent opportunity within our existing client base. And we think as we go to market and start to obviously talk to broader key accounts, RFPs, et cetera, this will be an important part of the Netwealth story. So yes, it's in recognition of the fact that we've -- that we need to do better in the retail managed account space. And we probably left a little bit on the table in the last couple of years given focus on some of the other segments, and we'll now look to aggressively go after that market.

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

Thank you, everyone, for joining our call this morning. As I mentioned, we're really pleased with the results and looking forward to a strong 2024. Thank you.

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