Netwealth Group Limited (NWL) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Netwealth Group Limited Annual Results FY 2024. [Operator Instructions] I would now like to hand the conference over to Matt Heine, CEO and Managing Director. Please go ahead.

Thank you, Travis, and good morning, everyone. Thank you for dialing in. My name is Matt Heine. I'm the CEO and Managing Director of Netwealth, and I'm joined by Grant Boyle, our CFO. It gives me great pleasure to deliver today the FY 2024 financial results. Before we start, I would also like to acknowledge our country. We acknowledge the traditional owners of the lands that we work and live on. Our office here and where we're presenting from this morning is in Sydney on the lands of the Gadigal people of the Eora Nation. We celebrate the stories, culture, and traditions of the Aboriginal and Torres Strait Islander people of all nations and pay our respects to Elders past and present. Moving across to the business and financial highlights. Last year was a fantastic year for Netwealth. We finished the financial year with the funds under administration of $88 billion, which represented a record $22 billion of gross inflows and a net inflow of $11.2 billion. Pleasingly, and as a result of this growth, we delivered total income of $255.2 million, growth of $40.5 million, and 18.9%. EBITDA as a result for the year was a growth of $23.9 million or 23.8%, delivering an NPAT, net profit after tax, of $83.4 million or a 24.1% growth rate. We also were able to pick up a number of awards and given Australia's success at the Olympics, it would be remiss not to mention that we were the #1 platform rated by Chant West for Best Advised Product. We won the Best Product Offering & Best Transaction Tools in the Investment Trends report and we were named the leader in the high net worth segment. Whilst we also delivered a number of CSR outcomes throughout the year, I'm also really pleased to say that approximately 25,000 additional children went through our financial literacy program, taking the total to 125,000 since this program began 5 or so years ago. If we turn to Page 9, this is an important slide and really shows that the Netwealth strategy and also the tailwinds that support it have been very successful. We grew our market share to 7.7% at the end of March and as you can see, the dominance of the specialist platforms continues with both us and the specialist platforms continuing to lead the way, whilst many of the incumbents, despite their significant market share, have resulted in negative net inflows. This is further seen on Page 10, where you can see the trend which we believe will continue for many years to come. Turning to Page 11. We are really pleased also just with the continued diversity of the platform across all of our key market segments. Whilst there's a number of charts here, the takeaway is that our key segments being the Emerging Affluent, Established Affluent, and the Mass Affluent, continue to deliver. And the platform is now very evenly spread between our investment product, super product, and also our wholesale clients. From a product perspective, of the APIs in FUA that we recorded at the end of the financial year, we saw an increase in our Accelerator Core to 4.4%, which was the result of $476 million of new flows into the product subsequent to its launch. For the total year, it was a 179% increase. From a new business perspective and from a composition of the flows, looking at Page 12, also really pleasing to see that the bulk of the flow, so 83% of our inflows for the year or $9.3 billion came from existing clients. So, that is clients that were already on the platform. However, 17% of the flows or $1.9 billion, came from advisors that joined throughout the financial year. As many of you on the call would know, it is these new clients or the new financial intermediaries that actually paved the way and will deliver flows now for the next 2 to 3 years, giving us a very high level of confidence in our flows. On Page 13, I'm also very pleased to announce the accelerated acquisition of Xeppo. Xeppo has been a business that we've been working with for a number of years and own already 25%. We increased this to 100% as of yesterday and it's really part of our broader strategy, which I'll talk about shortly, and we believe will be critical as we move further and further into an AI-driven future. The Xeppo business provides us with significant data to now not only deliver fantastic services to our end clients but also to advisers to help them further improve their business efficiency and also data governance. Skipping across to Page 16, I'll just add quick recap on our strategy. As the platform continues to evolve, it's been really important for us to make sure that we've got a very clear focus on what it is that we're delivering to our customers and the earlier announcement of Xeppo feeds into this. We've built the business across 4 key segments. That is our Wealth Solutions for the financial products that we offer, the Investment Wrap, Super Wrap, and also the Managed Account, our WealthTech products, which is the Client Portal and all of the customer-facing technology, Insights & Analytics, which includes a lot of the Xeppo dashboards as well as a very detailed reporting on the platform, and Partners & Integrations which continue to grow very rapidly, including both data integrations, but also new partnerships, including the iCapital partnership that was announced earlier in the year. I won't spend a lot of time on the strategy and we can take questions on it after the -- during -- at the end of the call. However, if you skip to Page 21, you'll notice that across all of these core parts of the business, we've delivered very significant and meaningful enhancements to the platform. That included, as I mentioned earlier, the relaunch of our Accelerator Core product, enhancements to our new Non-Custodial offer, the launch of small bond service product, mobile app, digital consensus drive, advisory efficiency, as well as the iCapital announcements that I touched on. From a corporate sustainability perspective, again, it's a really pleasing year for the business. And as we've touched on earlier or previously, the main impact that we can have on this as a business is actually to continue to enhance our core business given the nature of the business that we are in. Outside of that, however, we are also very focused on fostering diversity, talent, and wellbeing. A number of major investments throughout the year, but we're also really pleased to have set measurable gender diversity targets of 40-40-20 for the Board and executive team. And in 2024, we met that Board target. We've also rolled out our inaugural 3-year inclusion and diversity road map. From a positive social and environmental impact perspective, we've continued to expand the range of ESG options on the platform. And across the various products, we now offer 76 themed funds and 200 funds with an above-average or high sustainability rating as assessed by Morningstar. We've also granted $116,000 to different charities from the Netwealth Impact Fund since its inception in 2021, and we'll continue to grow that and to make sure that we've got a positive contribution in the community. In regards to being genuine and transparent, this is also the first year that we've received our SOC 2 reasonable assurance from our auditors. And this really provides external assurance that the effective controls are in place for the network platform over the security, availability, process, integrity, confidentiality and privacy of customer data, which we know is so important to our customers in this day and age. We've also improved our human rights and modern slavery program and provided training to our employees and our Board. So, on that, I'm going to hand over to Grant Boyle, our CFO, who's going to run through the financial metrics for FY '24. Thank you, Grant.

Hey. Thank you, Matt and good morning, everyone. So, back to the numbers now. We'll go to Slide 26. Matt went through those highlights before, but just so they sink in how we had really good revenue growth of $40.5 million, which was 18.9% on the previous year. So, that, we landed in at $255 million. EBITDA was at $124.7 million, an increase of $23.9 million, or 23.8%. So really -- really strong growth for the year and we are very excited to hit those numbers. Moving through to Slide 27. The revenue growth of 23.8% was predominantly driven by the growth in funds under administration, which grew by 25.2% over the same period. We also had really strong transaction revenues, which were up 33% on the prior year. These were somewhat offset by the reductions in the cash balances and lower overall admin margins. But overall, we're very happy with the revenue growth we were able to achieve over that period. Increases in total operating expenses, on the other hand, grew at 14.5%. And that -- and this gap between the revenue and the expenses, obviously, contributed to an improving EBITDA margin, which was at 48.8% and for the second half was approximately 50%. Statutory NPAT was at $83.4 million, an increase of $16.2 million, or 24.1%. And no coincidence, EPS increased by 24.1% also. As usual, we had exceptional cash generation. We had very high pre-operating cash flow of $127.3 million. And that flowed through to a dividend that was declared this morning at $0.14 per share, which brings the total for the year at $0.28 and that dividend was again fully franked. So, to summarize the finances, it was another really good operating result, really strong profit growth and at the same time, we've been able to continue to invest for our future growth. Moving now to Slide 28. These are some of the operating metrics that we report at the quarterly. So I think it's important to highlight them again as they drive a lot of the profit growth that we've achieved. The FUA growth, again, was 25.2%. That was on the back of $11.2 billion of net flows. Non-custodial flows were $284 million. And that service, as Matt mentioned, is now at $448 million, which has been some really decent growth of [ established FUA ]. Market movement contributed $6.5 billion to the growth in FUA. And this is something we've highlighted in recent updates that market growth is definitely a positive contributor to our revenue, but it's much more muted impact than -- on our revenue than normal new flows due to the structure of our revenue model, which we'll touch on a bit later, if you choose. The cash transaction account is at 6.0%, which is down from 6.4% in the prior year. Moving now to Slide 29. It sets up the -- sets out the growth in our average fund account size. This is a really positive trend for us. The larger the account sizes deliver the next slide, which -- next chart across, which is the increasing revenue per account. We've been very consistent in being able to grow that metric. And that's, for us, the most important revenue metric in that if we can grow our revenue per account that the economics for Netwealth remain very strong. So, we grew the revenue per account by $117 per account this financial year. And the slide on the right shows the basis points, which is -- which on the surface looks like a disturbing trend, but you can see it's actually flattened out pretty nicely over the recent years. It did decrease in FY '24, and that's really on the back of positive market movements predominantly. The positive market movements actually have an inverse effect on basis points as some of the revenue streams don't move up with the market due to the fee caps that are in place. Also, we had lower average account, so we had lower average cash balances. So that had a slight drag on the basis points, particularly in the second half. So the second half, we had 31.1 basis points versus the average of 32 for the year. One other thing to highlight on the revenue, we reclassified 1 item which was outside platform revenue this year, the cost of capital recovery that we -- for the capital we provide for the Super Fund, we moved that into platform revenue. That's really probably where it always should have belonged. So, Matt now made that decision and all the comparatives that you see there are on the same basis. It had a about 0.8 basis point impact, a positive impact on the revenue basis points of the platform fee. Moving now to Slide 30, which is just a -- which shows the components of our revenue. We've achieved very impressive compound annual growth of 18.6%, steady improvement across all of the categories, and some demonstration of the diversification since we've progressed along the journey. The only major change for the year, not that major, but the transaction revenue did grow relative to admin fees over the last 12 months. And we're certainly off to a good start this year with transaction volumes due to volatility, showing some good signs. Slide 32. This sets out the changes in the -- actually we moved to Slide 31, apologies, back 1 slide. We've always been very disciplined in managing our costs. So, we sort of try and balance for long-term growth objectives that we have, whilst keeping the rate of expense growth under control. And this year, we had operating expenses, which were up 14.5%. A major driver of that was, as always, employee benefits expense, which was up $13 million for the year. We added 60 roles, which I can touch on in the next slide, which is Slide 32. Most of the roles historically have been in the technology area. We've got more of a mixture this year. We -- if you recall at the end of last year, we had a large number of -- an abnormally large number of vacancies in operations areas. So, we filled those during the early part of FY '24. So, that's why you see more roles hired in the SaaS and investment operations areas than normal. But we still added 15 to the technology team and several amounts to operations. So, 60 hires during the year. So, with that, we'll move to the final slide, which is sort of the summary, which is that we are in excellent financial position. We've got strong balance sheet. We've got low capital expenditure. We've got cash reserves. We're growing at a rapid rate, but we've got plenty of runway ahead. And therefore, we're very confident in our outlook and our growth opportunities. And with that, I'll hand back to Matt Heine.

Thank you, Grant. And just to build on that outlook, we're obviously in a fantastic financial shape, as Grant mentioned. We are very positive about our new business pipeline and also our conversion rates. And we're seeing really good growth and opportunity across all of our key segments. There has been several significant new client wins that have all begun transitioning at the start of the year and at the end of last year. And as you were seeing on the first slide, that's resulted in approximately $1.2 million of net inflows for July alone. We do plan to continue our significant investments in our people, product, security, and technology capabilities to ensure that we capture the substantial number of existing and emerging opportunities in the market, which we believe, in addition to the structural tailwinds, will continue our sustainable profit growth. This investment will result in a small percentage increase in the rate of expense growth in FY '25 compared to '24. All that said, we are very confident in our outlook and future growth, which we believe still remain extremely significant. And with that, we will open up to questions.

[Operator Instructions] The first question today comes from Siraj Ahmed from Citigroup.

I'll ask 3 questions, if that's okay. The first one, just on flows, and this got multiple parts. Just -- can you just confirm that July is seasonally a quiet month? Just wondering whether it's super strong because it's seasonally strong -- seasonally soft. And just in terms of the transitions, do you reckon this is -- it's front-end-weighted towards the first half of the first quarter? Just trying to understand whether this continues for the whole of the financial year. And lastly, on the flows as well, you saw the news from AMP. I've had a few questions on whether this could be another tailwind for you. I know it's a bit early, but just keen to understand how you're thinking about that.

Yes. Thanks, Siraj. You're a little bit muffled, but I think I've got the gist of it. Yes, so we obviously reported the flows for July, which is different for us, but that was really to stop the -- all the guessing games in terms of how much was market movement and how much was flows. So, we just thought that's -- we know what the flow number is for July. So, let's give it. It is diversified. It's not just any particular large group. But we did flag at the back end of last year that we had quite a few transitions that were lined up and some of those had kicked off, but they were at the early stages. So, that's just that pipeline that we've been calling out for a while is starting to flow through. In terms of how you think about for the rest of the year, we're obviously confident about the rest of the year, but we're not giving any particular guidance on whether that's a reflection of what the monthly flows is going forward because it's just too early to say.

Yes. But you are correct that July is typically slightly softer than other months and it has been a very strong start to the year.

And Matt, just on AMP, the changes announced last week, whether that's -- yes, I mean, you had mentioned one of the other group's change was positive, whether this has any impact at all? I mean, I know it's a bit early, but still.

Yes. I mean, the news is only less than a week old. But look, certainly, we're [ already ] working closely with AMP, and we were getting good support out of the group. But entirety Entireti and Fortnum practices are all very good supporters of Netwealth and we've got a good relationship with the new licensee. So, we would imagine, as with all of the major changes, that there should be some really good opportunities as a result.

And just one quick one. The mention of practice management and advice management is pretty interesting. That seems new. So, Matt, just keen to understand what you're trying to do there and what you see as the opportunity? And is this a new revenue stream or just more about supporting the platform business?

Sure, Siraj, just the first bit of that question. It's a bit difficult to hear.

Just advice management and practice management, the fact that you're heading into that area. Yes, just keen to understand the strategic reason for that. And is that a new revenue stream for you?

Yes, absolutely. So, it's certainly our real focus for the business over the last couple of years and moving forward is really around what we're sort of at a high-level of classifying as advice enablement, efficient so that they can see more clients. And you'll have seen us reference a number of times throughout the announcement, that ability to sort of multiply our existing client base by giving them tools such as records of advice and much better transaction tools on the platform. The Xeppo acquisition is a big part of it. That now allows us to further capture data from other pockets within the industry. So, for multidisciplinary firms, we can connect into data from around 40 different enterprise solutions that can be delivered by the Netwealth portal. So we will -- we can and we'll continue to develop the ability to show other platform information through our portals. But as a byproduct to that, we've also got very significant data sources to provide very detailed practice reporting. So, through the acquisition of Xeppo, we're able to move and offer a much broader solution to our clients without deviating or going into anything that's too -- or creates new adjacencies. As far as the new revenue stream, the business is effectively break-even at the moment and we will look to continue to grow the profitability as there are a number of services within the Xeppo business such as CRM, obviously, the data piece that we can sell to our existing client base. So, I wouldn't expect it to move the dial per se, but it's a really important part of the broader Netwealth stack because it's a key point of differentiation in the market.

The next question comes from Nicholas McGarrigle from Barrenjoey.

Can you just give us a sense of the type of adviser groups that are making up the $1.2 billion and maybe -- or just the kind of momentum in the pipeline? And if any of those types of groups maybe have changed in composition versus a year or 2 years ago, because it feels like you're making really great progress across a broader suite of clients now than you may be used to.

Yes. So Grant mentioned before, there's no sort of one-off institutional accounts within that $1.2 billion. It is extremely spread across those 3 key market segments that we talked about, being the Emerging, Established, and Mass Affluent parts of the market. And I think if you were to look at the makeup of the platform first, so whether that's Super Retail, Investment Retail, or Wholesale, the months would reflect that broadly. So, we think that that's going to continue. And whilst we will certainly, from past times, sort of those larger institutional flows, the flows achieved last financial year only included a couple of very sort of small institutional accounts, if you like. So, when you actually back those out, the growth on the previous financial year was significant.

Congratulations on your new role, Nick, too.

Thank you. No, my most passionate role is covering networks. So [indiscernible].

Well, we hope you stick on it.

Yes. In terms of the OpEx growth you've guided to, I think, the wording is usually very considered. I think it's kind of a slight percentage increase on the 15% rate. Can you just talk through the kind of types of hires and maybe even a head count number, if you've got that to hand, that feeds into that guidance?

Yes. I won't give a particular head count number. As we said, we have added 60 last year. If we're going to grow by more than -- in percentage terms, than last year, you've got to think that it's going to be a small increase on that. But we're not -- the reason for giving that was really, there is a lot of disparity amongst the analysts' ranges, just to try and narrow that out. We're not flagging a massive increase, or else we wouldn't have said a small increase. So, it's just -- don't get too excited by it, but we've always put these things in for a reason. So, just assume there will be -- the number will increase in percentage terms on what the increase was last year.

And I think as far as roles go, the usual split, a couple of additional IT head count and some small -- or some one-off IT costs as well.

They're pretty spread. Clearly, if we're growing at the rate that we expect to grow at, we're going to have -- need to add some more service-type people to handle that growth. But it'll be pretty much across the board, we would expect.

And just the last one for me. There's obviously been a bit of revenue margin compression from cash coming down and I guess account balances growing. The composition of new flows, does that look different in terms of the size of opportunity and hence, the pricing that you're doing? Like how should we think about the revenue margin compression moving forward?

I think the trend obviously has been that our account size is getting larger. We talked about that for years. So, you would think there would be some obvious compression. Revenue per account will go up, but there will be a increase in -- a decrease in revenue margin all things being equal. And in terms of how steep that is, just depends on how skewed the mix is. These groups, I mean, in the first quarter, and obviously early days, are very well diversified. But if we did have a success in a particularly high Netwealth Group, that could move the revenue margin more quickly than obviously if it stays diversified like it is currently.

The next question comes from Bob Chen from JPMorgan.

Just a follow-up on the cost guidance question. Yes, obviously a good step-up in second half EBITDA margins. Should we expect that EBITDA margins to maybe see a bit of pullback on this step- up in cost growth into next year?

Depends on whatever. So, revenue line, yes. We're not going to give any further guidance in terms of what we've provided today. So, that's kind of where we're landed. You've got -- you'll all come to a view in terms of what our likely flows are going to be and that will drive our revenue. Our expenses will be a small increase in percentage terms from last year's. That's as much as we're going to provide you today, Bob.

Okay, cool. And then just looking at your sort of cohort charts, it looks like the newer advisors contributed more this year compared to last year to your net inflows. Was that because they joined the platform earlier? Or are you seeing some new advisors accelerating their transitions onto the platform?

No, I think you might recall '23, a long time ago now, was a pretty tough year. So, while we recorded pretty good net inflows for that year, a lot of the transitions that had been won had paused or not started, whereas they really started to gather pace early in the FY '24 year. So, it was really, I guess, the backlog of opportunities and business transitions from '23 that kick-started early in the year.

And we had a very strong year, winning new groups. So, I think typically, you'd say that would be more 80%-20%, I think if you're -- or maybe even 85%-15%, positions that are a little higher than normal.

Okay. Perfect. And just a final one. Obviously, a fair bit of tech investment at the moment. I mean, how should we measure the success of this tech investment? Should we sort of look at your full growth accelerating on the back of this tech investment? Or is it more the revenue side with additional non-platform revenues coming on as well?

We've always invested into our tech as you know, it's effectively what our business is and our proposition. So, the success of the investment will be continued sustainable growth.

[Operator Instructions] The next question comes from Olivier Coulon from E&P.

Can you hear me okay?

We can.

Perfect. Just a question on Xeppo. Apologies if I missed it somewhere in the disclosure, but what's the size of that business at revenue, if you could? And then is the cost that will, I guess, get consolidated, is that included in the kind of cost growth guidance or is that on a like- for- like basis?

Yes. So, the cost guidance is not -- does not include Xeppo specifically. And as Matt said, it is break even, the revenue is approximately $3 million.

Okay. And then, I guess, on the cost growth, again, like longer term, do you expect -- do you expect to return to a significant degree of operating leverage? Or is the view that, well, as long as the revenue opportunities are there, you're going to continue to invest to maintain your gap between yourself and the other platforms?

Yes. So, I think we've always been hesitant to predict expanded EBITDA margins, although we've always been able to achieve very good EBITDA margins. So, at the moment, our second half was about 50%. We don't have a long-term target for it, but we have the ability to let that expand if we do slow down expense growth at any particular stage. At the moment, we've flagged there's going to be a small increase, but we're not -- we haven't flagged, like we did a number of years ago, that we were accelerating our expense growth in any significant way. So, I think the answer is it's there if we choose to let it expand. But at the moment, we see the opportunity more around building functionality so we can continue to grow into the future and make sure that our technology is in the best shape it can be to handle the level of growth that we think is available.

And it also allows us, which we've demonstrated over the years to absorb any pricing pressure that might come into the market.

Yes. No. Perfect. And sorry, just to follow-up on maybe Siraj's questions where he asked about the shape of some of those transitions from that backlog that started flowing through in the fourth quarter and in the first quarter. Is there a view as to how much of that backlog kind of delivers into first half versus second half? Or do you think it's going to be relatively even?

We've got good, strong flows, and we're very positive about the year.

It's always difficult to predict the exact time when it's outside our control, but we know that it's started well, which is great.

The next question is a follow-up from Siraj Ahmed from Citigroup.

Grant, can you give us an update on the cash balance? Just wondering whether that's picked up or staying steady.

We haven't reported that number. We'll report it again at the quarter. But in terms of the seasonality, as those who have followed us for a while, it always builds up somewhat in the first month or 2 of each financial year, and that's just on the back of the fund manager distributions and shared dividends. So it is typically higher at this time of the year than at other times and that's proven the case this year.

Okay. And just one last one. In the outlook statement in the annual report, there's a mention about you're taking control or doing more in-house development of the key platform features. Can you just expand on that? I'm just wondering whether you're moving away from IRS or something like that. I'm just keen to understand that bit.

Yes, just on that comment quickly, so, we've been lifting and building out a lot of our capability on the platform now for many years, and that includes some of the key features of Acurity. So we are going to continue to use that strategy and make sure that we've diversified any risk away, but also, more importantly, by building it in-house and developing a lot of those core capability, it gives us complete control and flexibility over the product into the future. So, where it makes sense, we will continue to lift capability out of Acurity and build it ourselves.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Matt Heine for any closing remarks.

Thanks very much. Thanks, everyone, for dialing in today. As mentioned, we're really pleased with the results that we've achieved for '24 and feeling very positive about the outlook for this financial year. We look forward to catching up separately.

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