Praemium Limited (PPS) Earnings Call Transcript & Summary

Welcome, everyone. Thank you for your interest in the Praemium quarterly update. It's nice to see so many people registered and joining the call. I'm joined today by James Edmonds, our Chief Operating Officer and so James who will be joining me in presenting some of the information that's already been released on the ASX and putting a bit more color on that. Once James and I have finished going through the presentation, which shouldn't take too long. As is usually the case, we have an opportunity for Q&A. I think everyone on the call is familiar with how to lodge questions into the Q&A. I note that there's a number of questions coming through already, which is tremendous. As is usually the case, we will curate the questions somewhat because that just allows us to deal with as many as possible where there's some repetition between the questions. So if I just move on to the disclaimer. First of all, acknowledge -- we acknowledge the Traditional Custodians of country and pay our respects to their Elders past and present and then the usual disclaimer. Because James has such a wide remit in Praemium, I'm going to ask him to deal with the strategy progress as often that's what I will talk about, but I'll leave that with James today because most of the areas of progress in James remit. Then we'll go on to the FUA and the flows and the detailed tables before handing over to you for questions. But I'll now hand over to James to talk about our progress on the strategy front.

Thanks, Anthony. Thanks very much. Good morning, everyone. Yes, as Anthony sort of said, I'm going to cover off a few key areas in our strategy progress over the last 3 months. It's been a really exciting quarter for us. Obviously, we've had a lot of focus on completing the OneVue integration over that time. There's a lot of work going on in that space for us, but really just sort of working across. So in the product space, in line with our product strategy that we've developed over the last 6 months, we are pleased to announce that we're actually starting to start work on the upgrade of our mobile application. This is something that our advisers have been really requesting over a couple of years from us to help really their engagement with their clients. At the same time, the launch of Spectrum at the end of last year has resulted in a lot of excitement and a lot of interest from potential clients. And the product team and groups are really focused on developing a number of white labels to groups that we're actually in the process of onboarding. We've had a lot of good business wins. And as a result, we're seeing a lot of changes or a lot of things that we needed to develop as part of that. And in line with our desire and efforts to be the leading in alternative investments, we've done a lot of work over this quarter in the structured investment space, most notably leading with webinars that we've been hosting with advisers to really help with the education and training and what our capabilities are in that space. One of the key initiatives that we've had over the last 6 months has been in service excellence. And both our operations and our customer service teams have been really focused on improving the overall levels of service that we're providing to clients. That's come in a number of different forms. So we've basically gone back and reset the KPIs and the expectations that we have in terms of delivery to clients and we've also done a number of initiatives to improve the service standards. So that includes better engagement with clients, being more responsive to their calls and to their queries and also increasing the amount of quality assurance that we're doing. We're actually just about to launch a pilot program to use AI to drive our quality assurance and having better insights into how we can actually improve that service going forward. As part of that service excellence program, we've also developed and rolled out a new adviser onboarding process. So this will dramatically improve the time-to-market that we have for onboarding new advisers cutting it down from weeks to days and there's further improvements that we're going to be making over that over the course of this year. In the superannuation space, we've been really focused on this because it is a core driver for our business. We've made significant improvements with the current administration provider that we have and we've really been proactively engaging with them to make sure that we're delivering a better service to the end investors. We've been working with our trustee as they complete a review of the administration options that are out there. And we've also been expanding our in-house administration capability and looking to take on more of the responsibility of delivering that service to our clients. And finally, in the inorganic space, I touched on it before, but a lot of the work and a lot of effort that is going across all of our teams, whether it be product, operations, technology has really been on focusing on completing the OneVue integration. We're really committed and driven to having that done within the time frame that we've laid out and within the budgets that we've set. And a lot of the heavy lifting for that is really beginning to kick off now and that onboarding process will take place -- will continue through the next couple of months. And obviously, in the inorganic space, we're always vigilant for opportunities. But obviously, the [ BLT ] and the business as a whole is really prepared to take a disciplined approach to that. And so with that, Anthony, I'll pass it back for the numbers.

Thanks, James. We'll come back to you with some of the questions. But if we just talk about the flows, first of all, talk about the platform side. And this quarter is really the beginning of starting to understand Praemium as a platform business in entirety rather than separate platforms. Now we're not planning to lower the level of disclosure that we give in the short term. But in the long run, I think shareholders should think about this as an overall platform business. And by that, I mean Spectrum is now our leading product. As much as we can, we will promote Spectrum to our prospects in our sales pipeline. One of the investment options in Spectrum is the managed account product. So we now -- when money comes into Spectrum and then goes into the managed account, we disclose that as a Spectrum flow. And we make sure, of course, that, that means that we avoid double counting in what we do. Powerwrap will still most likely continue to grow, but we don't try to sell new advice groups into Powerwrap, we offer Spectrum for new advice groups. And the same for OneVue. We don't try to sell new advice groups into OneVue, we offer Spectrum as a product. Now it's up to each individual advice group how quickly they might transition from Powerwrap or OneVue into Spectrum, not so much with the OneVue clients because that will be a force migration, thanks to the work that our team have done on that. We can manage that transition differently. But Powerwrap, we've never said that the Powerwrap adviser will have to transition from Powerwrap to Spectrum. That said, there is probably going to be some of that down the track. Although I hasten to add, that's not a big factor in the $0.5 billion that flowed in or that Spectrum now has. It's almost negligible, all the Powerwrap flows into Spectrum today. But overall, what you need to think about the business as an overall platform business with the $30.1 billion and the net inflows of $364 million. I probably won't cover anything else on that, but I think the only thing I do want to draw a little bit of attention to is the Powerwrap, the departed advisers. We've said for a while now that we expect that, that will gradually come to an end and that is indeed starting to happen. And I think we'll see how it goes next quarter, but it could well be that we stop worrying about reporting separately the amount of money going from the departed advice because you can see having averaged about $250 million a quarter for about a year or a bit more, it's coming to a much lower number. Then if I move to the non-custodial and obviously, with this slide, we give you a sense of the number of accounts in both Scope and Scope+, but we also give you the FUA in Scope+. Those -- I think everyone is attuned to the fact that the revenue is driven by -- more by account numbers. But you need to understand, we look at the FUA too because what we're doing is providing a service to our advice groups. And the amount of FUA is a good reflection of the level of penetration amongst our advice groups that we're getting. So even though the FUA doesn't really drive the revenue, it does highlight the important contribution that non-custodial makes for our advice groups. It's clearly when you look at it, Scope+ is the leading non-custodial administration service in the market. It has a market-leading position. That's different, as you all know, from our position in platform where we're not #1 in the market by any stretch of the imagination. Depending on how the different groups record the information, we're either the seventh or eighth biggest platform. But we're #1 in non-custodial administration service and indeed Software-as-a-Service for non-custodial portfolios. And that's very important because we have a view that the market as a whole, but particularly our segment of high-net-worth advisers will increasingly need to offer both a non-custodial and a custodial solution to their client base because of the complexity of the portfolios that they're advising on. And increasingly, our sales pipeline has potential prospects where the service needs to be across both for that adviser to be able to serve the needs of their clients. So a very important part of our business. Obviously, we don't cover the revenue and the flow information. But obviously, the impact in terms of the sales pipeline of having the market-leading non-custodial service is very important to us. So when we go to the more detailed tables, I put them up there. We're very happy with the progress that we're making for the platform business as a whole. Obviously, as I said earlier, we're not going to reduce the level of disclosure that we give for a while. But -- and so we do break it out into all of the different platform products that we have. But we would anticipate that at some future time, people will think of Praemium as -- the platform business as just a platform offering similar to what just about all of the other platforms are able to do and not go into quite the level of detail. So with that, I'll now start to deal with the Q&A because there have been a lot of questions and we're very grateful for the interest. As I say, if I miss a question, you're welcome to contact me later, but I will try to cover them off.

One of the questions is just around Spectrum and the pipeline clients. And there's quite a bit of interest in Spectrum. Obviously, we're pretty happy with the rate of progress in Spectrum getting to over $0.5 billion already. The questions are around number of clients, number of advice groups and some questions around do you think this is the beginning of that sort of rate of flow for the long run. And certainly, our aspiration for the platform is that we feel having got Spectrum into the market, we're confident with what we offer. We're confident with our sales team and the way they're working. We've got a high level of encouragement from our sales pipeline. We do expect that we can win a greater share of what is an ongoing shift. And I talk about the shift in market share from the older, more legacy platforms to the challenger platforms continues at a very rapid rate, something like 2.5% to 3% market share shift as well as strong organic growth as the size of the platform market increases. So we -- if we get what we think of it as our fair share of that, having now a complete product suite to offer to the market and one of the top 3 platforms in scoring on functionality and service and the like, we feel we should get a much greater share than we have in the past of that migration as well as the organic growth of the market as a whole. But I'm not going to forecast that we will get this much every quarter. We'll wait and see how it comes over time, but we're confident of where we're going. Around the lumpiness, it's inevitable that at the start of a new product, there will be some lumpiness in flows and we've observed that even within the quarter. Now I'm not going to get to -- we present to the market 4 times a year on flows. I'm not going to go to monthly flows, but that people would be aware, both because it's a new product and also because it's a high-net-worth client group that we're serving. And sometimes you win a client that's $100 million. Other times, you just get a consistent flow. So there's a bit of all of that going in, but there's quite a few advice groups that are now migrating funds on to Spectrum. We have got a question about the 2 products that are not really open to new business. We've got some questions around Powerwrap and some questions about OneVue. On the OneVue side, it's noticeable still that there's over $4 billion in FUA. And we're not -- at the half yearly results, we said we're not provisioning for an earn-out on FUA. Now there is still an expectation that we probably don't need a financial provision for an earn-out. And so people quite rightly say, well, doesn't that mean another $1 billion is going to flow off OneVue and that is likely -- it's not -- the earn-out is not 100% linked to the FUA being $3 billion. There is an element of the stated intent of the advice groups and a stated intent that hasn't yet migrated off is what is being reflected in the numbers today. So we do think eventually that the FUA from the OneVue clients probably heads closer to $3 billion, but it hasn't yet happened. It will -- that FUA will most likely occur over the next 6 months or so. Certainly, a lot of that starts to happen as we close the platform. And as James said, we've got an internal time frame and target for that and that's progressing pretty well. So we would anticipate closing the OneVue platform. But certainly, everyone knows we're going to do that before the 30th September. But internally, we would like to do that a bit earlier. Then there's a question about Powerwrap. And I've said already, we're starting to see the tail end of some of the departed advice. There is a question about advice who went to Koda and there has started to be some FUA shift. I'm not going to go into the private client information of those advisers who have shifted from one to another. But in our disclosures, we don't see that as an outflow because the advisers are still with Powerwrap. That Powerwrap is a platform is within the Koda stable and so the FUA doesn't have to roll off the platform. So that has been different from the advice group that the adviser have gone to doesn't use Praemium because of strategic decisions at shareholder level as I understand it within Crestone. There is a question about how we see the trade-off between portfolio numbers and price rises that we're putting through on Scope+ and certainly, when we took the decision around pricing, we're obviously sensitive to market pricing. As I've said, we're the market-leading offer. So we feel we can command a sensible price for the offering that we make. But we certainly were conscious that you might have some portfolios roll off with the price increase. But overall, you should see a lift in the overall revenue. And there's no -- there's nothing to suggest anything different as part of that. There is a question about the SMA outflows relative to inflows. And the outflows typically -- there's a pattern to outflows. There's obviously a seasonal pattern to outflows, but there's also just a pattern of outflows relative to the size of the FUA that they're typically relatively stable, not exactly the same, but relatively stable over time, whereas the inflows can go up and down more. And the managed account scheme, I know in the past, I've had some questions about its sales impact seemed close, which is the difference between 2 large numbers, the gross inflows and the gross outflows produce the net inflows. If the outflows are, as I say, typically relatively stable over time other than a seasonal impact relative to the size of the book, there's just a certain number of clients who are taking pension payments or moving money off the platform, but the inflows are more volatile and hence, the net flows are more volatile. Managed accounts, part of the reason we've built Spectrum is we were losing traction in the market because we've gone pretty close to saturating the market for those who wanted managed accounts only. The people who said, I'm going to run all my business on managed accounts and I don't need a full wrap service. There's a limited number of advisers like that. Most advisers say, I want to run managed accounts, but I also need the functionality of a wrap. So I need both. And we didn't have both. We only had a managed account. Now we've got both. But part of the reason we knew that we needed the full wrap was because we were noticing that we were reaching saturation of those advice groups who only needed managed accounts. And so there had been a trend over time prior to the launch of Spectrum that we were losing a bit of traction in the gross inflows. That was having an impact on the net flows and we feel we've addressed that with Spectrum and with the sales strategy that we've launched around Spectrum. There's a question about if OneVue does land at $3 billion in the long run, do we still get $3 million of synergies? The answer is yes, we will still target $3 million of synergies. Indeed, the challenge we have and we -- internally, we accept is that if the revenue declines, we should get more synergies so that we can ultimately aim for a $3 million EBITDA line from the OneVue clients and business that stays with us. And you might ask, well, if you can -- if your revenue drops by another $1 million, for example, how can you go from $3 million to $4 million. But the reality is what we have done with the OneVue clients is we've been very deliberate in the way that we've gone about that looking at that business. And the cost of running the FUA that's dropping off were roughly equal to the revenue that we're generating. So if we were generating $1 million of revenue that drops off, it's more than likely there's $1 million of additional costs, not synergies, just the cost of running that business. So we do feel that there will be more synergies if the revenue drops. But the other point I'd make that by a quarter, if the FUA landed at [ $3 million ], it's not like the revenue should drop by a full 25% just because the FUA has dropped by 25% because some of the FUA that drops off is lower-margin business. And some of the retained FUA will move to a higher overall revenue rate because just as we adjusted the revenue on the Praemium platform business, we have also adjusted the revenue to what we regard as the market rate on the OneVue business.

Want to cover off on a couple of those questions around the development.

Yes, I'll let you do that.

Yes. So there's a couple of questions, both related around our -- what we sort of see our R&D and the integration of our custodial and non-custody solutions. So as Anthony has sort of said that one of the strengths of Praemium and a real differentiator is the fact that we're now able to provide to an investor or to an adviser effectively an integrated solution when it comes to both custody investments and holding non-custodial assets. And so a lot of the investment that we're really going to be making over the next coming years is really how to make that an even more integrated and more seamless solution, whether it be through additional trading options and capabilities through the adviser platforms or our reporting solutions that allow for advisers to be able to provide really detailed insights to their investors across all the assets that they may hold. I think the other area that we're going to be making that investment is into the data integrations. One of the things that we're looking at is how we continue to build out the data feeds that we've already got to allow for advisers to bring in into the reporting packages that we have a one-stop shop, effectively a total wealth view for their clients. So a lot of the investment we're going to be making as we think about FY '26 is going to be into as we sort of already stated, the mobile app to allow for advisers to provide their clients with insights and views. But that will be an app that brings in all of that wealth, whether it be the custody or the non-custodial holdings.

Great. Thanks, James. There's a few questions around the volatility of the markets. And in the past, I've talked a little bit about some of the ups and downs, not of the market -- markets or ups and downs, of course, but there's positives and negatives of market volatility. On the positive side, market volatility typically leads to somewhat higher levels of trading and we obviously make a margin on the trading volume. And it sometimes leads to higher cash holdings. And both of those at the margin and I don't want anyone to read too much into it or just spreadsheets based on it. But at the margin, we have seen that in recent times, those 2 positives. On the downside, the FUA drops and some of the revenue is linked to the amount of FUA, some of the revenues more stable and just based on account numbers or capped or the dollars are capped. But some revenue is linked to FUA, so we have that impact. And then the other negative is that, obviously, if you're an adviser and the markets are volatile, you're spending more time talking to your clients about their portfolio composition and what the lower value of their portfolio means for their ability to draw down on the amount of money that they've got. So the conversations are less about shifting from one platform to another and more about reassurance. So all of that is in the mix with the recent volatility. As you all know, typically, once you have a period of volatility, except in really extreme events, it tends to go away. So we know that and we monitor what's going on internally, but we don't think it reflects any underlying long-term shift in the way the platform market is behaving at the moment and the composition of the long-term market. The -- we get questions about Euroz. And obviously, we -- some clients we do announce and Euroz was a client that was big enough client that we made an announcement. I'm not going to get into private information about Euroz and their business, but part of the inflow into Spectrum is Euroz. But is there more to come? We based on the relationship we've got with Euroz, we expect that, that will be part of the flows that we might expect into Spectrum for some time to come. Once an adviser moves to a new platform, depending on the size of the adviser, but you can see flows for quite a long time, 12 to 18 months. So it wouldn't surprise me if there's a long-term involvement in flows coming out of Euroz and the other clients that we've put into Spectrum. There's a question about Spectrum inflows and the impact on SMA. We do record the inflows that come into Spectrum -- in Spectrum. We had to make that decision and we've got to avoid double counting. So if $100 million flows into Spectrum and then it goes to SMA, we will report that as a Spectrum flow. And it's consistent with the desire that we've got, not to reduce the level of transparency, but ultimately to just say this is a platform business. And hopefully, in some future date, maybe a year or 2 down the track, we just can say here are the flows into the platform and here are the non-custodial assets. There's also a question -- quite a good question about should we think of Spectrum revenue differently to SMA. And the truth is one of the drivers and the most important driver of the revenue margin, which we're very transparent about and disclose that very often in our reports, the financial reports, our level of disclosure around revenue margins is, I think, exemplary in my view and transparent, which is what we try to do with our shareholders. The biggest driver of that margin, which has been as high as 40 points in SMA is the average account size. So we think the revenue margin probably drives down a little bit because we think the average account size in Spectrum will be higher than in the SMA and that will gradually reduce the revenue margin. But obviously, the dollars of revenue will go up because the 30 points times $1 million is more than 40 points times $300,000 for example. The other driver of it is, obviously, we get some revenue on cash holdings and some revenue on trading volumes and that may be different based on it being a wrap account rather than a managed account and that will emerge over time. So you should see something there. But the biggest driver will be the average account size. I think we're going to call it to a close. I know there's 1 or 2 other questions that we haven't got to. I'm sorry, but we have run out of time. But I will try to reach out to the 2 or 3 other questions individually that we didn't get. But very grateful for, again, your interest in our presentation and for attending the call, particularly last day before another long weekend. So thank you, everyone, for your interest. Thanks, James for joining me on the call. I'm sure you'll see a lot more of James in future calls. And enjoy the rest of the day, and I'll probably touch base with those 1 or 2 questions that we didn't get to on the call later in the day. Thanks, everyone.