Praemium Limited (PPS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Praemium Limited H1 FY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Anthony Wamsteker, CEO. Please go ahead.

Welcome, everyone to the call, as we present Praemium's financial and business results for the first half of financial year 2022. On the call today, we have our CFO, Paul Gutteridge; and myself, Anthony Wamsteker, CEO. Whilst I won't dwell on the slide with the disclaimer, I do ask you to note the disclaimer, which can be read at your leisure, when reviewing the release on the ASX website. Praemium's business consists of 3 major segments or product lines. Our proprietary Wealth Management technology sold as a Software-as-a-Service and which forms the basis of the other 2 segments, investment platform and portfolio administration. We continue to own and develop all the core essential elements of the technology required to serve the 3 segments. The full benefits of a platform to financial advisers and their clients are only realized, when the technology can administer all investment assets. Otherwise, the platform is only a partial solution, needing to be supplemented with other tools, that typically add significant and complex interfaces and manual workarounds. The breadth of our offering is a key competitive advantage. Another key aspect of our offering, is our market-leading managed account capability. Consistent with what we have stated for several years now, managed accounts are an essential component in the overall platform segment, delivering significant improvement in efficiency for financial advisers. This view is bearing fruit with managed accounts being by far the fastest-growing component in the platform sector. Looking at the agenda; today, I'll be providing a summary of the business highlights from the last half 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, including the outlook for the remainder of financial year 2022. Before we close, we'll allow some time for questions from analysts. This half year has seen a continuation of the shift, from old legacy platforms to modern independent platforms. We expect this shift has much further to run, which will continue to be a material tailwind for our business. We also saw the completion of what we regard as a one-off step change in our cost base. The largest driver of the expense growth in this half year, was the completion of an existing program to fill over 20 vacant roles, which aim to increase our service levels, and fast track our technology development schedule. Service level is the most important criteria in judging a platform. We have received consistent client feedback over the last 6 months, that our service has improved, as a result of successfully executing on this program, a fact that is also confirmed through our quantitative metrics. The service improvement was an important step in ensuring the sustainability of our long-term growth rate. The tight conditions in the labor market also led to a larger than usual increase in wage rates during the past 6 months. We are confident that our future revenue growth will be accompanied by far lower growth rates of expense growth, leading to stronger EBITDA and an expansion of our margins from this half onwards. The sale of the International business is proceeding according to the schedule, and the Board is considering the options for returning surplus capital to shareholders, once the sale completes. The growth we have seen, not just in the past 6 months, but a strong buildup over recent years, is a testament to a sales team that is achieving strong productivity gains, as their experience with Praemium grows. Whilst this slide focuses on the platform components, it is also pleasing that over $200 billion in assets is now administered on our proprietary technology. Looking at our development priorities for the last half year, it's important to note, what we're focused on, which is extending our areas of strength and competitive advantage. The developments mentioned on this slide go to our leadership in digital, reporting, non-custodial, managed account and interfacing capabilities. Importantly, the COVID, and hopefully, soon the post-COVID environment has increased the importance of these particular areas for advisers. I'll now hand over to Paul to go through the financial results in some detail.

Thanks, Anthony, and good morning to everyone on the call today. It's important to note that the results detailed on Slide 9, include the business as a whole, with both the Australian and International segments included for the purposes of comparison to the prior year. I will then cover the Australian and International segments separately on the following slides. The first half result can be summarized based on 2 key themes; the first being another half of strong top line momentum. And the second theme, is the business has continued to invest to support our accelerating growth rate, including a one-off step change in costs to recruit unfilled vacancies, as Anthony just referred to. So in terms of key financial results, you'll note on the table on the left, net revenue grew by 25% to $39.2 million, largely driven by platform revenue, which increased by 33% this half, as reflected in the product revenue graph on this slide. Gross margins increased 23% to $26.9 million and the gross margin percentage to revenue was 68.5%, a slight decline from the prior period, following the inclusion of a full half of Powerwrap and investments in operations to support growth and service. If we look at the key expense categories on the table, ongoing R&D investment and a reduction in R&D projects capitalized, saw IT expenditure increase to $5.4 million. We continued our focus on sales and marketing, which totaled $8.3 million, a 20% increase from the prior period. You'll note that G&A increased to $5.7 million, and while this was an increase in dollar terms from the inclusion of Powerwrap and one-off recruitment costs, G&A continues to leverage down as a percentage of revenue, from 15% in the prior year to 14% in this half. Therefore, underlying EBITDA was $7.5 million, an increase of 6% compared to the prior period of $7.1 million. Also detailed below is the underlying EBITDA of both the continuing and discontinuing segments, which I'll talk to in detail on the following slides. Below EBITDA, you'll note cost categories, including amortization, which includes amortization of software intangibles and lease assets, and higher transaction costs relating to the divestment of the International business. As a result, our reported NPAT was a loss of $2.6 million. If we move now to Slide 10, this details the Australian segment result, which includes the continuing operations of the Australian, Armenian and now, the Shenzhen operations, with the prior year results also restated to reflect this change. The current half also includes 6 months of results for Powerwrap, compared to 4 months for the prior reported half. So if we refer to the table on the left, the key results for the Australian segment were: revenue of $30.3 million, which is an increase of 21% with good growth achieved across all products. In particular, platform revenue increased 31% to $21.7 million. This was driven by a fuller growth of 28%. Platform margins, inclusive of fees and trading recoveries remain consistent for the Praemium platform at 34 basis points, with the overall platform revenue margin of 23 basis points, after the contribution of Powerwrap's 17 basis points. You'll note that portfolio services revenue achieved $8.5 million, up 7%, with VMA software up 5% and VMA administration revenue increasing 28% from continued portfolio growth. Segment EBITDA was $8.2 million for the half, with an EBITDA margin of 27% to revenue. EBITDA declined 6% from the prior half, with the key movements represented by the graph on the right. These include, you'll note continued revenue growth, as previously outlined and a further positive EBITDA contribution from Powerwrap, with the ongoing integration of the acquired business, delivering synergies. Some of this revenue growth has been reinvested back into the business, with a 39% increase in operations expenses to support client growth and to fill vacancies following the COVID disruptions. With an ongoing commitment to R&D, we saw increased IT headcount costs and higher IT support costs. This half also saw lower R&D capitalization from expenditure on regulatory projects that is unable to be capitalized. Finally, we continued our investment in sales and marketing, which continue to generate improving revenue results. If I now turn to Slide 11, which is our International segment, the International segment results include the discontinuing operations of the U.K., Jersey, Hong Kong and Dubai, with the pending completion of transaction conditions later in the [ year ] will be sold -- the business will be sold to Morningstar. As noted in the table, net revenue was $8.9 million, an increase of 41%. This comprised platform revenue of $5.4 million, which increased by 53% and planning software revenue of $2.1 million, an increase of 91% from WealthCraft license growth and the finalization of a Hong Kong-based contract. This revenue growth delivered a 94% improvement in EBITDA, which achieved a loss of $0.1 million for the half. This positive trajectory in the International business has underpinned the realized outcome for shareholders via the sale to Morningstar. If we now move to Slide 12, you'll note that our -- this table reflects our cash flow for the half. If we refer to the table on the left, the company has maintained positive cash generation, with an operating cash flow of $2.5 million at the top line. After income tax payments and divestment and restructuring costs, the net operating cash flow was a negative $0.1 million. And you'll note that our R&D incentives for the U.K. will now be received in the second half. The split of continuing and discontinuing operating cash flow is also detailed at the bottom table. Investing cash flows includes R&D CapEx of $2.9 million from continuing projects across Australia. But as noted earlier, was lower due to specific regulatory projects this half. Closing cash was $19.4 million, with strong cash reserves to support growth. As Anthony touched on, the proceeds of the International business divestment are also expected in calendar 2022, and we'll touch on that in a later slide. If we turn to Slide 13, the final slide from me highlights our strong and stable balance sheet position, that will enable it to pursue a pipeline of growth opportunities. The key change this half is the balance sheet of the International business is now disclosed as a financial asset or liability held for sale. As you can see, we continue to maintain strong cash reserves to meet our regulatory requirement across the Group. We also retained tax losses of $9 million, and franking credits of $13 million, which are able to be utilized in future periods. Finally, one-off costs are detailed on the bottom table, with the majority relating to legal and advisory costs from the International business sale. And with that, I will hand back to Anthony to cover our looking forward.

Thanks, Paul. So we'll look at our objectives for the following -- for the current 6 months and our outlook for the rest of the year. To summarize where we're at, our leadership lies in areas which are growing in importance as well as market share. The key areas that are starting to become more and more important in the platform market overall, are things like non-custodial asset management, managed accounts and the high net worth segment. We have been consolidating our leadership position, to ensure sustainable long-term growth. With the assets in our proprietary technology now exceeding $200 billion, we're also developing the artificial intelligence or machine learning capabilities, which are beginning to yield some important insights, which are very valuable for advisers. As I mentioned earlier, the structural tailwinds, which support our recent growth, look like continuing for some time. The numbers on this page illustrate the opportunity going forward. We believe that Praemium remains well positioned to benefit from these trends. On this page, we highlight some of the key growth numbers, specifically for the Australian business. We're excited by the ongoing momentum, and the ability to focus exclusively on the large opportunity pipeline for the Australian business moving forward. In terms of the International divestment, it's proceeding according to the previously indicated transaction timetable, with completion expected in the second or third quarter of calendar 2022. Following completion of the sale, the Board intends to return surplus capital to shareholders. Looking forward, we continue to see strong platform momentum in terms of flows and revenues, based on our leading technology and service offering. Based on the momentum we are seeing and the investment we have made to consolidate our business, we provide underlying EBITDA guidance of $16.5 million to $18.5 million for the full financial year 2022. The guidance is based on an expectation that revenue will increase faster than expenses in the second half. We envisage that the Powerwrap synergies will move from the current level of $3.3 million to $4 million annualized by 30th of June. The balance of $6 million in total synergies is expected to emerge progressively over financial year 2023, through a combination of staff departures from natural attrition, and not needing to grow staff numbers, as would otherwise be the case without the synergies. It is expected that Praemium will be in a strong position to introduce a dividend policy from financial year 2023. Thank you for your attendance, and we will now open the meeting to questions from analysts.

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

Good. Just a question around the Australian segment, probably a few questions around that segment. Just in terms of the cost step-up, can you just break that down for us, in terms of maybe what Anthony you saw when you came into the business and where that additional investment was needed, because it's obviously been a really significant step-up in rebasing of the cost base?

Sure. Thanks, Nick. Yes look, probably most of the over 20 staff operations, well, maybe about half of the 20 staff were in operations, and that goes to the service levels that I talked about before. Then in IT, there was quite a few in tech, and so they were the 2 major areas, a little bit in the other areas that spread reasonably evenly, sales, marketing and the general support services. But if you think of it as probably about half the total number came out of the operations area, and then maybe another half of the rest or a bit more in the IT area.

But I guess the reason for that step up, where were the efficiencies in that cost base to support the current level of FUA, and the growth in FUA has been -- I think it came as a [indiscernible] to analysts and investors, just how big that step-up was, so just in terms of the decision around pushing harder on that cost base, is it more around supporting existing FUA, or is it about leveraging growth, just to give us a sense of why that step-up in investment was made?

So first of all, part of it was -- a decent chunk of it was vacancies that had developed through the COVID environment, rather than absolute new roles. So there was a little bit of the new roles. Why we -- if I take the operations initially, we really felt that we had to make sure we were at the top of the pack in terms of service levels, client service levels. And some of the challenges we were having, we weren't top of the pack in terms of the service ratings, and when we looked at the difficulties, most of them came to, not having all the roles filled. And so when all the roles weren't filled, turnaround times were much longer than we aspire to, on responding to client inquiries. In terms of how much of that was supporting existing levels of business and how much was for the growth, there's no doubt that part of it is for onboarding and related activities. Every new client, every new adviser takes quite a bit of work. So there was that aspect that, we want the clients first experience when they join us to be a very positive experience. So of the total in operations, that was a decent -- a decent chunk of it, but some of it was also for the -- just managing the book, and making sure we don't have vacancies in the operations area, which leads to service difficulties.

And just in terms of the EBITDA margin, obviously, down a reasonable amount from last year. I think the second half implication by the guidance is that the margin obviously remains lower. Just around the longer-term profile, I think when you acquired Powerwrap and talked about integrating the businesses, there was an ambition to get well above 40%, which you were close to previously and within the Praemium business. Can you give us a sense of, is this step up in new rebasing of margins, or is it a sort of short-term reset with a longer-term trajectory of getting back to that -- well into the 40s?

Yes. So I don't feel like the longer-term trajectory is impacted by what we've done over the last 12 months. I think we are confident that we now have the scale, where the revenue growth that we should continue to expect to see, won't need to be matched by the same growth in expenses. And it was just the predominantly feeling vacant roles that led to it growing this time. So it gets back to the trade-off between clawing a few extra basis points in margin this time around or saying, well, if we leave the vacancies there for another few months, the margin looks a bit better, but we damage our reputation amongst the adviser community. Once you -- if you go too far down the curve of not being known for good service, it's very hard to recover. On the contrary, I think we're now -- certainly, the feedback we're getting, is that we're doing a great job for our advisers on service, and we want to maintain that. But longer term, I don't -- it doesn't feel like the business has to grow staff a lot -- this is not our forecast. But I think when I look at expectations of our revenue growth, it's in the order of 20% to 30% [indiscernible] for the full year, and I think they were expecting our growth anywhere between 15% and the same 30% growth. So there was a wide range of expectations on what might happen for the full year. And we're in the camp of thinking that longer-term full year revenue grows faster, not just in absolute dollar terms, but in percentage terms and expenses. But we had to rightsize to the scale that we had. Once we rightsized to the scale that we have now, taking the lower end of those sorts of expectations, 20% growth in revenue, we're in the camp of thinking longer term, our business will run at a much lower expense growth rate. As I said, not just in dollars, but in percentage, more like 10% to 15% for the next few years.

Okay. And then can you give us some color on the transition of clients from the Powerwrap technology and on to the SMA or the sort of go-forward technology architecture? How are those client conversations going?

The conversations are going very well. The practices, we have migrated the superannuation fund assets, and we've migrated the team, the Powerwrap team is now in the Praemium operations world, which was only in the second half of last year that we did it. The client conversations have gone well, but we haven't opened up the new IDPS for new investment yet. We're going through the rigorous testing phase that we would expect. But so far, the clients have been very supportive of the transition to the new IDPS, and we're not envisaging that, that will produce any difficulties. Although, obviously, it's a big step, and we won't be complacent about it.

Okay. And then just in terms of the tax positioning around the sale of the International business, has that changed or evolved since the initial announcement?

Yes, Nick, it's Paul here. It's still obviously being worked through as part of the completion requirement. Obviously, we're looking at a number of factors in terms of intercompany loans and how that then flows through in to proceed distribution. So it is being worked on as we speak. And certainly, once we have a view, we'll certainly be updating the market in terms of the most appropriate action going forward.

Cool. Sorry, just one question back on the IT staff growth, it was 77%. Can you give us a sense on how much of that was just an inflation in salary and pay expectations from the existing team versus the hiring of new teams and just trends around that?

Yes. So in terms of the split of R&D, there's a number of components in that 77%. Obviously, some of it is the fact that we have capitalized less than we have in previous halves. We touched on that. Obviously, regulatory projects, you're required to expense as opposed to capitalize. We did increase headcount costs, that was up 25%, as we noted in the slide, with about less than half of that being inflation based, the remainder is related to additional people. And then the other component you'll see, is there was an increase in IT support costs. So as we brought on more people, obviously, there's licensing costs, and there's obviously more cloud-based costs that are relating to total staff, that obviously flow into the IT component. So there's a little bit of step-up for growth of staff. But there is a few moving components, as opposed to -- as Anthony said, we certainly think R&D, there won't be any significant step-ups from here, it's really just some of the phasing of the R&D and some of the IT costs, when you're bringing Powerwrap and Praemium together.

Cool. Maybe just to underscore the point, because I guess it's the one that's quite topical today with people, is that glidepath back towards 40% EBITDA margins, do you have a rough expectation on when you think that's achievable in the current context of the cost base?

We haven't mapped it out in that exact way. So as I said, when we look at analyst expectations on our result for the full year, there's a gap between most -- not quite all, but most expected revenue growth, as a percentage to be stronger than expense growth for the full year. Some were relatively the same. And whilst that's not what we've delivered in the first half, we do expect that to continue in the second half. So you've just got to map out a gap and the sensitivity of that gap, if you're getting 20% and your expenses at 10% versus 15% growth, you've just got to map that out, when it hits the 40%. But it's -- that's still where we would expect to be, longer term, absolutely. I think my gut feel is that's probably 3 years, but I haven't mapped out the numbers right now, something I can do later in the day.

Yes, I think that would be useful maybe over time.

Your next question comes from Nic Burgess from Ord Minnett.

So just a couple of questions. So just on the Shenzhen costs that you've called out, what was the actual quantum of that cost? And just confirming, this is a reallocation of cost, not a new cost in the half?

Yes Nick, Paul here, that's right, it is absolutely a reallocation. Obviously, we've traditionally had Shenzhen in the Asia or International segment, but as part of the sale, we are keeping Shenzhen. In terms of the cost base for this half, it was just under $0.5 million, and if you compare that to this time last year, it was $400,000. So the movement is certainly not material, just under $100,000 movement. But in terms of your modeling, yes, you should factor in just under $0.5 million for Shenzhen.

But when the International business is sold, that comes out. Is that right?

No. So what will happen is, the Hong Kong entity will be sold as part of the deal. We will retain the Shenzhen office, as part of a transition project. So obviously, as we transition some of the IT services to Morningstar, and then we would expect over time, that the Shenzhen office would then be wound down, once that transition is completed. So that's probably still from today, probably just over 12 months. So it's Canada's continuing operations today, but it will be classified as discontinuing, once we move into the transition phase.

Okay. So I mean, the release read more like, it was going to be closed as soon as the International business was sold, but you're saying it's going to be more like a 12-month sort of phase down?

Yes. There is a transition component as part of the sale.

That's correct.

Yes. Okay. So just in terms of guidance, so you implied guidance for EBITDA of $7 million to $11 million in the second half. So just what are you assuming on the International sale in terms of a date? And I guess the broader question is, what do you -- given volatile equity markets at the moment, what are you assuming in terms of business momentum and flows in the second half?

In terms of -- maybe I'll start with the International business. Obviously, we have completed -- we've assumed that we'll have the International business for the remainder of this financial year. In terms of markets, obviously, our platform revenue will be moving up and down relative to markets. But I suppose the underlying flows, as you can see, have been strong. Obviously, there've been 30% platform growth in the Australian segment. There's been 40% to 50% growth in the International segment, obviously off a lower number. But we still are seeing a strong pipeline. We are seeing strong inflows. So obviously, our modeling, you can see -- that, I suppose, the lower end of the range is really on the basis of a conservative approach to markets, but should markets kind of maintain their current position, and we're comfortable with that guidance range as it stands.

Okay. So just in terms of flows then, you're saying sort of a continuation of first half trends, rather than necessarily another step-up in momentum?

Well, obviously, what you get in the second half is, you've got a higher FUA base, that flows into revenue. But in terms of flows, Nic, look, you can see the trend has been a consistent building of platform inflows. So we're not saying it's going to be like-for-like. We certainly do expect our platform momentum to continue.

Yes. Okay. Just back on the cost base, presumably there's some defense or advice costs somewhere in there relating to the takeover attempt by Netwealth. Just wondering where you've accounted for those, above the line or below the line?

Yes. So that's below the line in the -- you'll see that in the kind of one-off costs on Slide 13. You'll see there's a breakdown of the divestment-related costs, and then the second line is related to more acquisition or takeover defense related costs. So you'll see that on Slide 13.

Yes. Okay. And last question, just on operating cash flow. So operating cash flow of $2.5 million is halved from the previous half and EBITDA is 7.5%. So it seems low in terms of every comparison that you could do. So just some, perhaps explanation as to what's going on with some operating cash flow issues?

In terms of -- nothing too sinister, Nick. There's obviously some working capital movements. We do -- we have received some collections in early January, which obviously didn't flow into the half. So there's nothing of particular note. I suppose the call -- the main call out, is that second line on the cash flow table is the R&D incentive. We would traditionally receive that in the first half, but that's been delayed a couple of weeks. We'll expect that within either by -- in the March time frame. So nothing of particular note there, Nic.

Yes. Okay. And lastly, so what's the rough quantum of the R&D...

Similar to the number of last year, it's around $800 per annum, and we are looking to finalize the F '20 and the F '21 together. So it will be over $1 million, once we receive both.

Your next question comes from Warren Jeffries from Canaccord Genuity.

Guys, just most of them have been answered, but I was just going to -- with the R&D incentive payment, how have you treated that from the continuing operations point of view in the EBITDA, you've done on a continuing basis?

Yes, Warren, Paul here. You'll see it, it's in the discontinuing. So the U.K. incentive has traditionally been -- you'll see that as other income on that table for the International segment. So obviously, we've accrued the income, but we're just waiting on the cash to receive in the next few weeks.

Very good. And the guidance, just -- I think we touched on it, just then, the guidance is for the overall group at the moment, not a continuing basis in the second half?

Yes, it is, Warren.

Next question comes from Lafitani Sotiriou from MST.

Just a follow-up on that guidance. Are we able to get a rough split, as to what the continuing and the International business estimates are for that guidance that's been set?

Yes, Lafitani, Paul here. I don't have that at hand. Obviously, we've done it on the basis of a group basis, assuming the International business retains across the remainder of the financial year. So I don't have that at hand.

On to the Netwealth approach, for shareholders are a bit disappointed, that discussion didn't pursue. Are you able to give us some feedback as to what the key thinking of the Board was, during that period.

Yes. Thanks, Laf. Look, pretty much -- we've spelled out our view, which is, we understand the argument about scale, and we certainly understand why our business would be attractive to them, because of some of the segments that we provide market leadership, or we believe we're the market leader in. And so we've said that at the right price, we would engage. But it's not -- and it was a script offer, of course, so -- or a script indicative offer. And so at the moment, we feel that's giving our share price of about $1.30. We spend a lot of time even before, but after the approach, talking to our shareholders, particularly the largest shareholders -- and the feedback we've got is, certainly, we would expect at a higher price, there would be some level of engagement, but not at the -- as I say, the equivalent of about $1.30 that we're looking at, at the moment.

So the market environment has changed, and you haven't delivered the best results. So you're saying that, you would still expect a bid, in order to initiate discussions north of $1.30 equivalent?

Yes. Yes, we would and we feel, that's what our shareholders are asking of us as well.

Yes. Okay. And do you think it's the right decision to be selling the International business? I mean it's your best performing division this half, it's largely breakeven. Do you think it was the right quarter to sell it?

Yes, we still feel very comfortable with that decision, yes.

[Operator Instructions] Ladies and gentlemen, as there are no further questions at this time, I will now hand over back to Mr. Wamsteker for closing comments.

Well, once again, thanks, everyone, for your attendance on the call, and I hope you have a good day. Look forward to being in touch with many of you as we move forward. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.