Praemium Limited (PPS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Praemium Limited FY '21 Annual Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Wamsteker, CEO. Please go ahead.

Good morning, and thank you all for joining today's briefing for our full year results of the 2021 financial year. Obviously, our call is different to prior years with much of Australia still in lockdown, such that Paul and I are coming to you from different locations. So please bear with us if there are any delays. We'll just move on to the disclaimer and then if we could just go through to the third slide. And if I could just talk about the -- our history and past developments, which are pretty much covered on this slide, mean that we continue to own our own technology, which is a source of enduring competitive advantage for us. If we go on to the fourth slide. Today, I'll be providing a summary of the year. Then I'll turn over to our CFO, Paul Gutteridge, for more detail on our financial results. I will then give a business update and talk about our focus for the year ahead. Before we close, we'll allow some time for questions from analysts. So moving on to the executive summary. The investment in growth that we've made over the past year delivered some outstanding results. The 2 Australian platform components, the Praemium Managed Account and the Powerwrap platforms, both returned to very strong growth after a relatively flat financial year '20, whilst VMAAS and the international platform continued their spectacular growth. Praemium had much stronger momentum into this financial year than at the start of FY '20. Moving on. Just to elaborate a bit more on that growth, the growth in FUA was a remarkable achievement. VMAAS was up 61%. Praemium Australia's Managed Account platform, up 22% compared to a decline of 18% in the previous year. It was actually up 52% year-on-year if the ANZ transition is excluded from the numbers. The Powerwrap platform was up 36% year-on-year compared to just 4% in the previous year, and the international platform was up 55%. So moving on to the final slide before I hand over to Paul. We firmly believe the fact that we own and control our own proprietary technology allows us to better meet our clients' needs in a rapidly evolving world. Some of our key client wins reflect this flexibility. There is a growing awareness that once advisers review in some detail the features and benefits of our VMA technology and managed accounts platform that they -- both they and their clients are likely to achieve their financial outcomes because of the way that our technology is structured. I think that is reflected in some of the industry recognition, which is on Slide 8. I won't talk to any of that in detail. Rather, I'll hand over now to Paul to go through our financial results for the financial year. Thanks, Paul.

Thank you, Anthony, and good morning, everybody. Thanks for joining us this morning. I'll start on Slide 10, and you can see that this year's results will be summarized based on 2 key themes: The first one being the inclusion of Powerwrap's results, which was included from September 2020; and that the business is continuing to invest and to invest in supporting our accelerating growth rate, which Anthony referred to earlier. So in terms of our key financial results, if you look at the, I suppose, the table on the left-hand side, you'll note that our revenue growth after product commissions increased 30% to $65.5 million. Our gross margin was up 15% to $45.8 million. Our gross margin was 70%, which you can note was a decline from the prior year due to the inclusion of Powerwrap, and I'll detail the gross margin further on the coming slides. Our underlying EBITDA was $14 million, which was down 1% relative to the prior year's $14.2 million with EBITDA margins of 21%. Now if we look at some of the key expense categories, I suppose I'll call out our cost of operations. You'll note that, that increased to $19.7 million. This was from investments to support growth in our service levels with a changing client mix to retail advisers. And you'll note, in terms of sales and marketing, we continued that investment up to $14.5 million for this financial year, a 26% increase relative to the prior year. Now for expenses below EBITDA, I'll touch on those in more detail on the next slide. But to summarize, with the acquired cost base and higher amortization and acquisition costs, net profit after tax declined to $1.5 million. So if we move to Slide 11, which is a comparison of half-on-half results, you'll note that revenue growth was up 11% to $33.9 million, and this was achieved across all products. The second half was the first full half with Powerwrap's results. Our first half included 4 months' worth, and the second half had more stable trading volumes from the previously higher cash and transaction volumes that we had seen during COVID in previous halves. You'll note that our gross margin of 70% remained consistent to the first half, and our EBITDA margin of 20% was slightly down from the previous half's 23% due to continued sales and marketing and the inclusion of Powerwrap IT expenses. If we look at expenses below EBITDA, you'll see that share schemes or share-based payments was consistent for each half at $1.7 million per half. Depreciation and amortization for the full year was $8 million. This included amortization of intangibles being capitalized R&D of $5.6 million, lease assets of $1.6 million due to the new standards relating to rental payments and previous acquisitions of $200,000. You'll note that there was an unrealized gain in the first half on Powerwrap shares of $4.5 million. And you'll note that the tax expense line, we had a lower tax expense in the second half due to the inclusion of Powerwrap's tax losses post the acquisition. If we move to Slide 12, I'll refer to the Australian segment in more detail. Now you'll note that there's a number of components in this year's results, including the acquisition of Powerwrap, so I'll refer to the graph at the bottom left to refer to some of the key highlight movements. If we look at revenue growth firstly, you'll see that total revenue of $53.1 million was a 37% increase on the prior year. This included Powerwrap revenue in that we called that out at $16.3 million. And Praemium's underlying platform certainly did grow. It grew at 15% per annum. That's excluding the ANZ transition. And if you refer to the graph, that first negative $3.4 million refers to the ANZ outflow. So you'll note that our revenue growth for both the Australian platform and our portfolio revenue was more or less offset by the outflows from ANZ this year. So I turn to portfolio services revenue, that was $16.1 million. That was up 6%. And if I break that down between our 2 core product lines within portfolio services, our VMA software was up 3%, and our VMA admin revenue was up 40%. And that's really representing that good onboarding and strong growth we've had during the year. Also to call out, we've segregated the portfolio services revenue we did earn from Powerwrap in the prior year. You can see that was $2.5 million. Obviously, that's ceased post the acquisition. And we recorded $400,000 in the 2 months prior to the acquisition. Now touching on Powerwrap acquisition. You'll see that the average basis points for our platform revenue was 22% for the year, and you can see that is segregated between Praemium of 33 basis points and Powerwrap of 19 basis points. Gross margins were 75% for the full year, and that was consistent with the first half. But again, breaking down between the Praemium platform, 80% on the Praemium platform and 65% on the Powerwrap platform. And that is really representing, obviously post the acquisition, Powerwrap's mix of high-net-worth clients. And obviously, at the time of the acquisition, Powerwrap was approaching profitability but not yet at profitability. EBITDA margins were 36% for the Australian business, again, 39% for the Praemium business unit, 29% for Powerwrap. And if I compare that to the first half, that is an increase from 33%, which is in the first half. So we are seeing EBITDA margin improvement into the second half. So I've referred to all the movements in the graph on the bottom left. You'll see that Powerwrap's contribution was $4.8 million, which is very positive. But at the same time, we've continued to invest in the business, both in service. You can see that we've invested in operations to support our increasing client growth, and obviously, record growth that we've certainly seen flow into the fourth quarter and now into July; and our continued investments in sales and marketing. If I move to Slide 13, I'll touch on our international segment result. And this year's segment result is based on reporting of all the regions under the proposed divestment of the international business. Now this includes the combination of the U.K., Asia and Dubai entities. So if we look at revenue firstly, at the net revenue line, which excludes product commissions, you'll see we had revenue growth of 6%. Platform revenues continued to grow strongly. That was up 30% relative to FUA, which grew 55% and obviously much stronger in the second half of the year. We've continued to have outflows from our fund revenue. That was down 47% because it effectively ended, and we've had consistent planning software revenue as Plum clients have upgraded to WealthCraft. So if we look at expense management relative to revenue, again, we've been able to manage expenses. And the international business only grew 2% relative to the revenue of 6%. And therefore, the EBITDA loss has declined to $3.9 million, which was a 7% improvement. If we look at each of the, I suppose, the segments within that, U.K. was a $1.4 million loss, which was a 27% improvement. Asia was a $900,000 loss, which was a 1% increase. And the inclusion of the Dubai cost center is $1.6 million. If I move to Slide 14 to just quickly refer to our cash flow. You'll see that operating cash flow, that first line, is consistent with EBITDA. Obviously, EBITDA is predominantly cash-based. And you can see that our $14 million EBITDA is only different to the operating cash flow of $12.6 million really from the timing of working capital flows. When you include tax payments and one-off costs, which I will refer to on the next slide, our total operating cash flow was $5.9 million for the year. If we look at investing cash flow, obviously, we did acquire Powerwrap, which had a positive cash balance. So the net inclusion was $1.2 million. We've continued our capitalization of R&D. You can see that was $6.8 million for the year. So total net investing cash flow was $6.5 million. Financing cash flow referred to the drawdown of the loan, which is obviously for the Powerwrap. We had a $15 million loan for the Powerwrap acquisition. At 30 June, we had $13.6 million remaining of that line, closing cash balance of $26.7 million. Final slide for me on Slide 15 is our balance sheet. You'll see that we continued to have a strong balance sheet. As we said, cash reserves of $26 million. Our regulatory cash requirement is $12 million, so obviously, strong cash reserves above our regulatory cash. We have increased intangibles following the acquisition of Powerwrap, which added $47 million to goodwill. And in terms of tax commentary, that we have around $8 million of remaining tax losses that we'll be able to utilize in future periods for Powerwrap tax losses. And franking credits stand at $12 million. Final table at the bottom is just calling out some of the major one-off costs during the year. Obviously, you can see the major one was the acquisition costs relating to Powerwrap. And we have had some restructuring costs relating to some of the -- since we've taken on Powerwrap's integration and some U.K. restructuring. And with that, I will hand back to Anthony, and we'll move on to Slide 17.

Great. Thanks, Paul. So looking forward, as it says there, gaining share of the Australian platform market. Both the strong growth in our market share and the number of top advisers using our range of service provide evidence of the quality of the Praemium offer. The flexibility of owning our own technology means that we can be very responsive to client feedback. The platform of everything is an accurate summary of what we offer to advisers, which allows them to better serve their clients. If I move on to Slide 18 and talk about the strong momentum. We do carry much stronger momentum into FY '22 than we did into last year across all of our platform segments. If we then move to Slide 19. And I'll just summarize this slide. We are confident that the past year, which we call a year of transformation, and I think it's an accurate summary of where we were this year, has seen us complete what I would anticipate to be a one-off jump in expenses when compared to our revenue. Obviously, the fact that EBITDA was relatively flat this year meant that we effectively added $1 in expense for every new dollar in revenue. Whilst we're not providing a forecast at this point in time, we certainly do not expect that pattern needs to continue in the coming years and that every dollar should generate -- should come less than $1 of expense. If I move on to Slide 20. And we've obviously announced the proposed divestment of the international business. We're still in the stage of preparing the information ready for release to those who have expressed interest, and then that more formal part of the process will commence shortly. We expect to be in a position to provide a further update to shareholders at or shortly after our AGM. As mentioned in our July release, we have received strong interest from a broad range of interested potential buyers. With that, I'll bring our -- the -- Paul and I to a close and open it up for questions.

[Operator Instructions] Your first question comes from Danny Younis from Shaw and Partners.

I've got 3 questions, if I can. The first one is around the expenses. So how should we look at expenses in FY '22? If I look at on an FY '21 basis, your sales and marketing is up $3 million, and your IT is up $1.5 million, according to Slide 10. Should we expect similar run rates in FY '22 in terms of incremental increases? And preferably an answer that splits out international as well, please.

Thanks, Danny, and I'll hand that one over to Paul.

Thanks, Anthony. And Danny, yes, I suppose what we've certainly seen in this year, Danny, is a step-up. We have called out our increase in sales and marketing in prior financial years, and we have seen that step up. But I think as Anthony just referred to, we would expect the expenses to move on a more incremental rate from here. So obviously, we've bedded down the acquisition of Powerwrap. We do have some continuing synergies that will flow into next year, and sales and marketing is certainly more at a stable level in terms of run rate going forward. So in terms of the international expenses, total expenses in international was just under $10 million for the full year, Danny. So -- and again, you can -- as I mentioned earlier, the expenses there have been reasonably stable at 2% growth. But the Australian business, in particular, has been supporting that accelerating growth in inflows and client onboarding. And obviously, particularly in -- the last quarter of the financial year was very strong, and that support will obviously flow into revenue growth into the coming periods.

Okay. And on the platform revenue yields, the 22 bps, it's down on your first half performance. If I remember correctly, it was around 28. So clearly, the factor there is Powerwrap. Powerwrap continues to slide from, a few years ago, it was in the mid-20s, down to, I think, 22 in the first half. It's now at 19 bps. Where do we see stabilization of those platform revenue yields for Powerwrap?

Yes. Sorry, Anthony.

No. Sorry, Paul, I was going to let you deal with that. Thank you.

Yes. No, thank you. I think 19, 20 bps, Danny, is probably more the realistic level. What we saw in previous periods was higher transaction volumes and higher cash borrowings during the COVID period. Obviously, there was a normalization of those levels certainly in this half. And I suppose all you see in this particular half is January, February are traditionally quieter months for transaction volumes. But otherwise, things are back to a normal level. So we certainly expect that low 20 bps for the Powerwrap platform is a reasonable number. And obviously, you've noted that our Praemium platform has remained consistent. The first half was 34 basis points. Full year has been 33 basis points. So again, we're not seeing pricing degradation on the Praemium platform as well.

Okay. And maybe one more, Paul, for you again just on the R&D CapEx. I mean, you pretty well flagged in the first half that it would double in the second half from $3.4 million going to $6.8 million. So how should we look at that R&D CapEx going forward? If you split out international over the next 12 months, what's the split between, say, platforms, Powerwrap, et cetera, et cetera?

Yes. So in terms of -- as we said, we did call that it would be around the $7 million mark, and it's just obviously just under that. In terms of the number, we expect it would be similar to that range, perhaps slightly lower going forward. Obviously, as we start to migrate some of the Powerwrap R&D on to Praemium platforms, that there may be a reduction at that point. In terms of CapEx for the international business, that was just under $1 million, Danny. So we'd expect that, that level would probably continue into the following year.

Your next question comes from Nic Burgess from Ord.

Just 2, 3 quick questions. So just Powerwrap, that $16.3 million revenue, Paul, I think in FY '20, Powerwrap reported $21 million revenue. So what's the annualized rate of revenue for Powerwrap over the 12 months?

Yes. Sorry, Nic. Yes. So $16.8 million was obviously called for the 10 months. So obviously, if you annualize that, you'll get more to the $18 million, $19 million levels. But they did certainly call out in the previous financial year accelerated transaction volume during COVID and higher cash balances. So that was certainly some feedback from the F '20 financial year. So in terms of where we see the revenue now, we see that certainly more at a normalized level. And Powerwrap is growing clients. So obviously, we've been reporting record inflows in the Australian business, both for the Praemium and the Powerwrap platform, and they are onboarding clients. So I think now that we're more of that normalized transaction volume level, we would expect to see revenue start to grow on the Powerwrap business as well.

Okay. That's helpful. Just for the gross margin of the group, obviously, there's a Powerwrap impact, and it's jumped around a bit. What's a reasonable expectation for the group moving forward, taking into account the investment that you mentioned and also the 2 sides of the business?

Yes. I think on gross margin, you can see that we have normalized half-on-half around that 70% level. But that has obviously incorporated some of the increased cost of operations as more as a step-up in this financial year. So I think as that revenue continues to scale now, we would expect to see gross margins starting to pick up again into future periods. Obviously, in the prior financial year, it was 79%. Now I think with the Powerwrap business, obviously, there will be a normalized range probably between those 2 numbers. But over time, we would expect to see margin improvement, certainly in gross margin, into the next financial year and beyond.

Yes. Okay. And if we think about the international versus domestic business from a gross margin perspective, is there a marked difference?

Not a particularly marked difference, Nic. So again, what we've seen in the international business is obviously its ability to grow the platform revenue strongly, obviously with 30% revenue growth off a reasonably stable cost base. And we think there's no reason for that profile to change into the future years. So if we can continue to grow revenue strongly and have incremental growth at the cost of operations, again, we would see margin expansion at gross margins for the international business as well.

Okay. And just lastly, so on that international business, total funds on platform, up 55%. Obviously, 30% revenue growth, and there's going to be an averaging impact. But is that revenue momentum perhaps a little bit disappointing in the context of that fund's growth? And are there any pricing -- underlying pricing trends we need to be aware of in that market?

No pricing trends, Nic. It's more about the timing of the inflows. So the third and fourth quarter of F '21 were certainly the strongest. So what you'll see is that revenue momentum will now flow into the future periods. So that's really as we average -- as our pricing is based on an average of monthly floor, as it's been building strongly towards the end, we'll start to see that acceleration into F '22.

Your next question comes from Lafitani Sotiriou from MST.

Three questions, if I may. The first is a follow-up question to the platform margin. Can you just clarify what the second half '21 exit rate is for both Powerwrap and your core Praemium platform? Are we talking 17 for Powerwrap and around 32 for Praemium? Or am I looking at that the right way?

Laf, yes. So obviously, we've said for the full year, Praemium 33, Powerwrap 19. And in terms of expectations into the future period, we think those levels are reasonable and consistent.

But the exit rate in the second half looks like it's -- so if you look at first half versus second half, there's a noticeable drop. So you've gone from 21 to around 17 for Powerwrap to get to the full year 19.

Yes. And the drop is really the timing of some of those transaction volumes in -- particularly in January and February. Once you look in -- once you exclude that, obviously, the transaction volumes in future months were consistent. So there's a bit of normal seasonality within that period. But into the next half, Laf, we would expect to be at that sort of 19, 20 range, as we've mentioned.

Okay. No, that makes sense. Just moving on to the international business. It's been restated. UAE is now included. The cost base and earnings -- the cost base is high, and the earnings has gone backwards. Can you just talk us through the level of interest that this loss-making rates in terms of pricing level? Have you got any indication at all that you can share with us at this stage? And also, what's the cost in splitting out the business? Is this a short-term thing or will it take a while?

Yes. Let's just -- sorry, I'll -- I won't comment on the -- obviously, Anthony has given an update on Slide 20 on the process. So I'll refer to him. But just to note that the segment results did improve. It wasn't worse. It was a 7% improvement. But obviously, still...

Sorry, it hasn't improved versus what you -- so financial year '20 has been restated, and it's gone backwards. So I imagine the trajectory of how you've included UAE at this time, and I haven't gone through it in detail. It looks like you've changed it around.

Yes. And if you refer to Slide 13, with the inclusion of Dubai, we've had a 7% improvement in the loss to $3.9 million. So that's the like-for-like reporting that you see there in the segment result. In terms of the actual process itself, Anthony has referred to some strong interest, and I'll hand to him to comment further.

So Laf, if I've got your question right, I think it was a bit about how -- what are the one-off costs going to look like in terms of splitting and then selling the business. And we would expect that they would be consistent with the transaction costs of divesting any part of the business. And that would include the splitting of the 2 businesses. The works -- there's been a fair bit of work going to how we would actually split the international from the Australian component of the business, and that today is not showing up any excessive costs as part of that separation.

Yes. And what about timing? Do you reckon that could be done in a reasonable amount of time?