Bravura Solutions Ltd

ASX:BVS

Earnings Call Analysis

Earnings Call Transcript 2020-Q2

[Anthony Brian Klim, CEO, MD & Director]

Thank you, Rachel, and good morning. My name is Tony Klim. I'm the CEO of Bravura, and I'm joined here today by Martin Deda, our Chief Financial Officer. And I'm delighted to present to you today our half year financial results. We had a good start to the 2020 financial year with our clients continuing to use Bravura's market-leading technology as their mission-critical infrastructure. Clients' needs are driven by evolving regulatory change in the financial services industry and the growing demands from financial institutions for digital solutions.Furthermore, clients are placing a greater emphasis on procuring an ecosystem of solutions. This shift is supporting Bravura's increased focus on greater product modularization and a market proposition that involves a broader product portfolio across all our offerings, including our strategic acquisition.If I can take you now to the summary on Slide 4. Bravura delivered strong growth in revenue, EBITDA and NPAT, accompanied by continued margin expansion. Funds Administration delivered an outstanding results for the half, with revenue up 19.3% and EBITDA up 43.5%. R&D investments continued in the period with nearly $18 million invested, of which the majority was client funded and client directed, taking the total cumulative amount invested in Sonata now to over $175 million. This continued targeted investment that directly meets the needs of our clients, provides Bravura with a significant and sustainable competitive advantage. The results of our R&D efforts are reflected in the depth of product functionality that comprehensively satisfies the demands of the world's leading financial institutions.We were excited to have the Midwinter and FinoComp businesses join us during the period. Both businesses continue to perform as we expected and provide us with long-term strategic growth opportunities.Bravura is in a strong financial position and continues to evaluate a pipeline of acquisitive and organic growth opportunities to deploy capital towards. We have a long track record of successful strategic acquisitions that have led to Bravura being in the competitive position it is today. And our guidance remains unchanged from where -- when it was provided at our AGM in November 2019. For FY '20, we expect mid-teens NPAT growth, excluding the impact of acquisitions. Acquisitions are expected to make an additional contribution of approximately $3 million to NPAT.Let's turn now to Slide 5 for further detail on our first half results. Group revenue increased 6% on the prior comparable period to $135.1 million, while group EBITDA increased 7% to $25.5 million. The result was driven by continued margin expansion across the group and strong growth in Funds Administration. The Wealth Management result was flat at the revenue line and EBITDA decreased 11%. This was a function of lower license fees earned during the period compared to the prior corresponding period. And excluding license fees, the segment saw EBITDA growth and margin expansion.The Fund Administration results was strong again, delivering revenue growth of 19% with an EBITDA margin of 44%. And this result is driven by higher license fees in the period and also from increased implementation and project work from the existing client base.The Board has declared a final unfranked dividend of $0.055 per share, and that represents a payout ratio of 68% of net profit after tax. I'll now hand over to Martin, who will take us through the details of our financial results.

[Martin Deda, CFO, Company Secretary & Executive Director]

Thank you, Tony. Turning to Slide 6. Pardon. We've set that out, financial performance. Before I go through these numbers, I'd like to point out that although, as required, we've implemented IFRS 16 in our financial statements in our financial report, we have the view that occupancy costs are operating expense, and we continue to reflect occupancy costs within EBITDA as we've done in prior years. So the EBITDA that we are reporting here today, and the EBIT is calculated in the same way as it has been in previous years. With that in mind, you can see that group revenue increased 6% to $135.1 million, and group EBITDA at 7% to $25.5 million.Bravura was again able to deliver top line growth, combined with EBITDA margin expansion, highlighting the natural operating leverage that continued strategic investment in the business has delivered. We saw modest growth in corporate costs, driven by increased investment to support the growth across the business units as well as acquisition-related expenses. NPAT was up strongly by 21% to $19.8 million. Moving to Slide 7. Here, we've laid out the impact of the acquisitions in the half. The Midwinter and FinoComp businesses were acquired in August 2019 and October 2019, respectively, and have made a modest contribution during our short period of ownership.Midwinter enjoys a strong pipeline of opportunities in the Australian financial advice market with the market going through a period of significant change post the royal commission.FinoComp is currently progressing with a number of sales opportunities in the U.K. with its market-leading microservices solutions receiving significant interest. FinoComp's product range enables Bravura technology to be introduced into a new market of clients without the need for significant replatforming projects. Combined, Bravura offerings and cross-sell opportunities with Midwinter and FinoComp, provide us with a number of meaningful long-term strategic opportunities.For the full year, as Tony mentioned, acquisitions are expected to make a contribution of approximately $3 million to FY '20 NPAT.Slide 8 describes our continuing long-term revenue and earnings growth and highlights, in particular, our continued R&D investment and strategic acquisitions over time have led to strong and sustained growth in revenue and earnings. The business has delivered revenue growth and margin expansion in Wealth Management and Funds Administration over time.Turning to Slide 9. Recurring revenue, and this half we've included the half-on-half comparison as well as the full year comparisons for recurring revenue. To remind you, recurring revenue comprises ongoing maintenance, managed services and post go-live professional service fees, which are underpinned by long-term customer contracts. Against the prior corresponding period, recurring revenue increased by 7% and now recurring revenue comprised 78% of total revenue. This recurring revenue has a high degree of visibility and is driven by our pipeline of client needs and contracted client work. These multiyear contracts give us a good line of sight on revenue and cash flow expectations over the coming 12 to 18 months. Turning to Slide 10. This slide sets out our balance sheet and funding position. We ended the half in a strong financial position with net cash of $100.3 million. As I mentioned earlier, we acquired Midwinter and FinoComp during the period. We continue to evaluate a pipeline of potential acquisitions that will provide us with strategic growth opportunities.We are also continuing to assess a number of potential organic growth opportunities which would require R&D funding. Operating cash outflow during the period was $3.8 million. The negative cash conversion was as expected, driven by early payments that were received in the preceding period.This cash flow profile continues to be in line with the long-term trend of the business and the previous half-on-half trend. Tony will now take us through the performance of each segment and the outlook.

[Anthony Brian Klim, CEO, MD & Director]

Thank you, Martin. If I can now take you to Slide 11, which sets up the performance in our Wealth Management segment. The segment saw flat revenue growth and an EBITDA decline of 11%. The lower EBITDA and margin result reflected lower license fees in our first half compared to the first half '19. Excluding license fees, the segment saw EBITDA growth and margin expansion. Now there are a number of large transformational sales opportunities in flight across our key markets. And the result was impacted by temporary delays in some of these programs. However, during the period, we also closed 5 sales across the Wealth Management portfolio.Bravura's value proposition as our client's mission-critical technology platform continues to be further highlighted with our existing client base, finding more ways to utilize our technology, which generates additional project work and is becoming an increasingly important driver of our earnings.The sales pipeline is underpinned by strong duration structural industry drivers, which include our clients' need to replace aging legacy systems, develop scalable digital technology platforms and navigate increasing regulatory change.Now let's turn to Slide 12, which sets our performance in our Funds Administration segment. Funds Administration delivered outstanding revenue growth of 19% with EBITDA also up 44%, representing a margin of 44%. The segment benefited from higher license fees in H1 '20 compared with H1 '19. The segment also saw increased implementation and project work arising across the client base. The Funds Administration segment is experiencing more opportunities than we had previously expected, and this is largely been driven by clients as they seek to expand their market propositions more broadly in the retail investments markets. Accordingly, we are converging our Wealth Management and Funds Administration product groups and operational groups to align our internal organizational structure with the change in the market. Turning now to Slide 13. We provide a little more information on Midwinter. Now Midwinter operates in the Australian financial planning market, which is characterized by high regulatory burdens and is under increasing compliance obligations post Royal Commission. Midwinter has developed a best-in-class cloud-based SaaS offering that supports traditional advice delivery as well as the digital advice. We expect continued strong revenue growth from Midwinter over the medium term, driven by the high functional and differentiated product offering. Now the market that Midwinter operates in is well known to Bravura, and there's considerable product overlap across the client base. The experience and knowledge that Bravura has gained in the market will assist Midwinter increase their market share.Now Slide 14 provides additional information on Midwinter's market offering. Midwinter's market-leading AdviceOS software is used by financial planners to deliver advice and manage client data. The deep functionality of the AdviceOS platform allows organizations to significantly improve operational efficiencies and develop meaningful relationships with customers. Midwinter has developed a compelling digital advice solution that allows organizations such as superannuation funds to provide scalable and self-directed online advice.The business is well placed to capitalize on the changing Australian financial advice landscape and has received significant interest from other geographies that Bravura currently operates in. I'll now turn to Slide 15, which provides an overview of FinoComp. Now FinoComp is an Australian software company that builds registry agnostic and highly flexible software solutions to support some of the leading institutions in the U.K. wealth market.FinoComp software adds functionality to Bravura's current offering and provides significant cross-sell opportunities with a number of proposals currently in flight. Following significant R&D investments in the FinoComp product range, we expect robust EBITDA growth to be generated over the next few years.Slide 16 provides further information on new FinoComp's market offering. Now they've developed a broad offering of plug-and-play solutions that supports the U.K. wealth market. And the strategic acquisition of FinoComp further deepens Bravura's technical capabilities and enhances the group's addressable market. The implementation of FinoComp's microservices solution carry significant less risk than the replatforming projects. The demand for this type of solution is growing, and it is a trend that we're seeing continue.Okay. Let's now turn to Slide 17, which sets out our outlook and guidance. Bravura is well positioned in its key geographic markets with significant new sales opportunities and continued project work being demanded from our existing clients. As Bravura increases penetration across our markets, we're seeing opportunities increase in size and complexity. These transformational opportunities are being driven by mergers and acquisitions, competition activities, regulatory changes and customers looking to enhance their cost profiles. And while these proposals are hugely exciting for the group and underpin our long-term outlook, the timing of closure on these deals can be difficult to predict given their inherent complexity.Bravura and its clients continue to invest in our product suite, which enhances functionality to support increasing client demands and creates additional barriers to entry for our competitors.Midwinter and FinoComp provides the group with compelling long-term growth opportunities. The full year 2020 NPAT growth, excluding the impact of acquisitions, is expected to be in the mid-teens. Acquisitions are expected to make an additional contribution of around $3 million of FY '20 NPAT. Now this guidance is unchanged from the guidance provided previously at the AGM in November 2019. Martin and I would now be very happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from Matt Johnston from Macquarie.

[Matthew Johnston, Analyst]

Just maybe the first one, could you just sort of talk around expectations of project work for existing clients for Wealth Management, Funds Admin through into the second half and maybe on a 12-, 18-month view as well? Just maybe a bit more color around that.

[Anthony Brian Klim, CEO, MD & Director]

I think it will -- it continues to move very strongly. As we've said in the past, it's a driver for growth. On most of our major programs, we're seeing clients want to put additional product lines onto the existing platform. That position hasn't changed. I would see that certainly going forward into the first half and medium and can be longer term. So as we bring on newer clients, particularly, as I said in the presentation, we seem to be working on some very large and complex transactions at the moment. And if this -- we had -- they go forward, that will, again, be an engine for growth as those new clients add further product lines.

[Matthew Johnston, Analyst]

Okay. Great. And then maybe secondly, it's probably a 2-part question. Just maybe just conditions in U.K. and Europe posted some significant macro events recently over there. And then the second part around the -- just around the regulatory status between FNZ and GBST. If you could provide any detail on those 2 topics would be quite helpful.

[Anthony Brian Klim, CEO, MD & Director]

Yes. The U.K. environment is still -- the sentiment isn't that great. Whilst the -- there's one milestone passed with Brexit. Obviously, the big date is end of the year, knowing really where the business stands. And as I've said before, whilst Brexit doesn't really impact our business directly, it does in terms of market sentiment. And I think if you look across, say, the U.K. investment platform market, the business inflow has been down quite significantly. I think in 2019, they were down around 34%, I think on '18 and down even further on '19. So the fact that our clients and prospective clients are experiencing a bit of uncertainty and pain and that's reflected, I think, in personal investors placing funds on platforms, holding more money and cash and so on. This just does create a slight negative sentiment. But as I say -- that said, in the pipeline we have, has never been stronger. I think it's more about timing issues than anything else. Oh, Sorry. And the other question was about the FNZ, GBST transaction, which is currently under consideration by the Competition and Markets Authority in the U.K. So they are gathering information, I understand, at the moment in relation to that. So there is no update on that. Obviously, clearly, there's still a fair bit of uncertainty as to where that will -- what the outcome will be.

[Matthew Johnston, Analyst]

Is there any short-term implications for Bravura?

[Anthony Brian Klim, CEO, MD & Director]

I think the level of uncertainty is probably positive, in general. So I think it's also put a marker in the sand, I think, for the fact that there's fair bit of concentration risk, certainly, in the Administration side of the business. The FNZ address that, in general, should be positive for us, but I'm not calling out there's some significant change or that impacting our numbers in any significant way.

[Matthew Johnston, Analyst]

Okay. And then just maybe last one for me. Just on the acquisition. So I think from memory and correct me if I'm wrong, there wasn't a big plan to rush an integration with Midwinter acquisitions? I was just wondering now that you've had Midwinter with Bravura for more than 6 months, is there any plans to -- integration plans. Or is it still sort of run and grow the business as is?

[Anthony Brian Klim, CEO, MD & Director]

It's still mainly that run and grow the business as is. What we are doing is injecting or providing them support. I think obviously, the larger company has got quite a lot of capability in terms of finance reporting controls and so on. So it's an entrepreneurial business that we want to support rather than fully integrate. I think what you will see over the next 12 months, is you will see greater product technical integration. But our intention is still maintain the Midwinter brand and provide it with support rather than full integration.

[Martin Deda, CFO, Company Secretary & Executive Director]

We have integrated the back-office functions of finance, human resources, internal IT, and the Midwinter business will be moving out of their premises later a couple of months time, and moving into the Sydney office of Bravura, which will be an added component of bringing the businesses closer together in that sense.

[Operator]

[Operator Instructions] Your next question comes from Aaron Yeoh from Goldman Sachs.

[Aaron Yeoh, Equity Analyst]

Congrats on a good result. First question for me, just with regards to the impressive margin expansion we're seeing in the Wealth Management segment, can you just talk about what's driving this? And I mean should we be expecting that same pace of margin expansion to come through in the coming periods?

[Martin Deda, CFO, Company Secretary & Executive Director]

The things that we've been doing in our organizational structures across the Wealth Management group as well as the project mix and hence, Sonata, quite frankly, becomes more and more mature and the ecosystem of systems around Sonata become more mature, then our costs of servicing and providing our Wealth Management services will continue to decline, driving the operating leverage. There is some degree of pricing that's coming into that as well, but it's largely operational efficiencies. I think we will continue to see operating leverage expansion. It won't necessarily be linear because we still do have large projects with clients rather than a whole range of smaller projects. That means that our progression can be somewhat -- it's not many original activities. Well, the short answer is yes, we expect to deliver further operating leverage expansion in Wealth Management.

[Aaron Yeoh, Equity Analyst]

Right. So on average, what were the sort of benefits from the price increase side of things from the -- and the flowing into the margin?

[Martin Deda, CFO, Company Secretary & Executive Director]

That's a small part. So it's -- again, it is the -- us charging for more of the work that we're doing than we were previously rather than increasing our prices.

[Aaron Yeoh, Equity Analyst]

Right. If I look longer term, I mean the Funds Admin segment sort of through the cycle has done a segment EBITDA margin of around 40%. Do you expect the Wealth Management segment to reach this level? Or do you think that -- when it sort of matures over the time, the margins within this segment can be greater than that 40% that you see with the Funds Admin segment?

[Martin Deda, CFO, Company Secretary & Executive Director]

Yes. So I -- we think that we will be able to achieve margins of the order of 40% in Wealth Management as well.

[Aaron Yeoh, Equity Analyst]

Okay, great. And then just with regards to Funds Admin, can you talk about the strong performance within this division? Also the nature of the license fees you've booked in this first half there, what were they in relation to? And are they, I guess, would you say, a bit more one-off in nature?

[Anthony Brian Klim, CEO, MD & Director]

Yes. Okay. So the business unit, in general, is thriving, it's been pretty steady for a number of years. But I think what we're seeing is more and more investment managers, particularly the clients of that segment, that division, are broadening their proposition. So it's been pretty static over the last 10, 15 years, mainly sort of registry systems and so on. We're now seeing more than look at actually distribution options now as digital opens that up -- that possibility up. We're seeing more than look at subregistry and distribution options, which is almost leading to a convergence of our Fund business and our Wealth businesses, it's something I've called out over a number of years that I expect it to happen. So that business that we're doing is typically professional services around digital, taking on new clients, new types of clients and so on. And I think, as I said, it's very encouraging. Interestingly, what we're doing is aligning our business, something I mentioned, aligning our operating units more. So converging the Wealth and Funds Administration business units because those markets are effectively coming together. In answer to your question about revenues, I think that the license revenues were primarily around contract expansions, which is encouraging that these are all very long-term contracts. It really is a stabilizing part -- stable part of our business, and secondly, as I mentioned earlier, the professional services. So we would see that's carrying on or being -- running at a similar level to report it, although, as I say, you might see some blurring as to what is -- we categorize as Wealth Management and what we categorize as Funds Admin. And I think it's been a great asset of our business that's absolutely complex with those divisions. One is slightly up, the other one can pick up the slack and stuff. And I think that's the trend you'll see continue.

[Aaron Yeoh, Equity Analyst]

Okay. Great. And then just a question on your guidance. You've obviously reiterated your full year earnings guidance. I'm just wondering whether there is any, I guess, new client win assumptions in that guidance for the second half.

[Anthony Brian Klim, CEO, MD & Director]

Yes, there are. Yes.

[Aaron Yeoh, Equity Analyst]

Okay. Great. And then sorry, just a third one -- oh, sorry, last question for me. Just with regards to the acquisitions, Midwinter and FinoComp. Why did they make an EBITDA loss in this first half? Were there some one-off costs that were not called out?

[Martin Deda, CFO, Company Secretary & Executive Director]

No. We weren't anticipating anything other than what's been reported. And you might recall that at the full year result, when we announced Midwinter, I said that Midwinter wouldn't have a material impact on the group's earnings. And that was because of what we were anticipating, that result that we've seen here in the half.

[Aaron Yeoh, Equity Analyst]

Sure. And I guess, sorry, my next question is just more around -- were there some costs that you put into this business such that at the EBITDA line, it's roughly sort of neutral to sort of overall group EBITDA? Or what will be -- I guess in the second half, how should we think about the EBITDA contribution?

[Martin Deda, CFO, Company Secretary & Executive Director]

The EBITDA contribution for both of those -- both Midwinter and FinoComp will increase. There were I wouldn't say one-off costs, but there are -- these are quite small businesses. And so $200,000 here or somewhere else makes material difference to their results. These are very small numbers that we're talking about in this stuff.

[Operator]

Your next question comes from Mark Bryan from Wilsons.

[Mark Bryan, Head of Research]

Just 2 questions from me, if I may. Firstly, I missed the main part of the course. Apologies if you covered this, but the Slide 11 in Wealth Management talks about some delays, some transformational deals that were delayed at clients. Can you just talk about when your expectation is for those revenues to kick in? And secondly, please, as you look into the second half in Wealth Management, in terms of license sales coming through, would you expect those to be early or back-end loaded during the half period?

[Anthony Brian Klim, CEO, MD & Director]

We would expect them to come through in second half, but more so into first half '21, I think, these -- as I said, we are seeing the -- on both sides, well, actually, the size and complexity of the sales opportunities is increasing. And whilst that's good in many respects, it does mean that sometimes the deals, it does -- takes slower to close those down. So -- but we certainly see them coming through in second half and more so in FY '21.What was the other question? Was about...

[Mark Bryan, Head of Research]

Maybe they're interlinked, but it was -- one was the transformational deals that had delays, when do they kick in? And then secondly, was the actual new fresh license fees in terms of timing, which I think you've just answered.

[Anthony Brian Klim, CEO, MD & Director]

I'd say, yes. I mean we would see new -- hope to see new license fees in the second half as well. Timing of those, at this stage, I would say, mid- to second half of the -- the second half there.

[Operator]

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

[Anthony Brian Klim, CEO, MD & Director]

Thank you, Rachel, and thank you for the questions. Just to conclude, there are 5 key challenges facing financial services firms globally. Firstly, the need to address demand for digital solutions; secondly, the need to cope with changing regulation; thirdly, the need to drive out operating inefficiencies; fourthly, the need to respond more quickly to competitive threats; and finally, the need to deliver outstanding customer value. Bravura continues to address all of these challenges. Thank you for dialing in today, and thank you for your continuing interest in our business.