Iress Ltd
ASX:IRE
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Iress Ltd
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Good morning, everyone, and welcome to this Q3 trading update. I'm joined today by John Harris, our CFO. On this call, we'll take you through our Q3 results and the outlook for Q4. We have released the presentation to the ASX, to which we'll refer during the call. There is a lot of information in that pack. So I'll focus my remarks on the first 2 pages, and then John will take us through the financials, and then we'll open up for Q&A. Before we get into that detail, let me first answer upfront, the question of why we're giving this update? Because simply we want to provide transparency given current volatile market conditions and also following withdraw of our guidance earlier this year. We have a strong business, and it's performing consistently through this period of heightened volatility. We are executing to our plan and doing what we said we would do. We're expanding our market opportunities and also affirming our growth strategies. Over 90% of our revenue is recurring. That gives us a strong base for an improved revenue and profit result in Q4, and we are reinstating full year earnings guidance. I'll now turn to Page 2 and call out some highlights. For the 3 months, from July to September, we delivered a consistent result. Compared to PCP, revenue is up 3% and segment profit is up 2% on a constant currency basis. This includes targeted growth investments. Secondly, for the first 9 months of 2020 in constant currency, revenue is up 8%. This includes 3% of organic growth. We've enjoyed strong performance in Australia, where revenue is up 8% and a good contribution from QuantHouse, which is now profitable and demonstrates our ability to deliver value through M&A. Thirdly, the proforma numbers give appropriate insight into the IRESS business. Segment profit in constant currency on a proforma basis is up 6%. Let me explain that. This metric assumes that we owned QuantHouse from the first of January 2019. The number is because it shows that the underlying earnings potential of the group as it is today without the noise of FX and timing. Obviously, this doesn't include one view, which completes on November 6. Fourthly, these are not peak earnings. Not everything has gone well. Some of the revenue growth that we called out in August for the second half has been temporarily delayed. COVID-19 did impact the timing of projects and business activity in the U.K. revenue was flat there excluding acquisitions. Following on from this, we've executed well. We're focused on controlling the controllables, putting our heads down and getting the job done. Our continuing priority has been to prioritize the health and well-being of our people and delivering service continuity and major projects for our clients. We've delivered over 500 client conversions to Xplan in Australia. It shows the strength of the ongoing demand as the industry fragments. The deployment of super admin to ESS super and gild are progressing well. These are major projects, and I'm pleased to say that they are on track. We'll deliver them in the first half of next year. Two lending clients went live in August and another 2 are expected to go live in the first half of '21. We're making good progress in increasing the share of recurring revenue in this business. Recurring revenue is now at 44%, and we expect that this will get to 70%. And finally, we are affirming our growth ambitions. We have stress tested our growth strategy over the course of 2020 in light of the volatile macro environment. We have asked the questions as to whether the growth opportunities are real, whether the timing is right, challenged our execution capability and ensure that the expected returns remain intact, and we are affirming our growth plans. We have significant opportunities in the U.K. in super admin and in data. We have built a detailed integration plan for one view. We will talk more about this when the deal completes, but the industrial logic of this transaction is compelling. We have a tremendous opportunity to deliver a disruptive, seamless and more efficient integration of advice and execution. And we're supported by positive structural growth trends. These tailwinds help we are seeing increasing regulation and business complexity driving demand for technology. COVID, too, has a positive side. It is accelerating the shift to digital advice globally. So bringing all this together, let's turn to Page 3 and our comments on outlook. First, we expect a good Q4. We have good line of sight on an increase in revenue growth and profit in the next quarter. We have more than 90% recurring revenue base that we've spoken about, and we expect some projects to complete before year-end. While we don't expect to see the growth in the second half that we envisaged in August, we will benefit from around $2.8 million in additional cost savings. For the full year 2020 on a constant currency basis, we expect segment profit to be around the same level as last year, that was $152 million. If you annualize the result for the first 9 months of this year, you can see the guidance implies growth in Q4. There are clearly risks in providing guidance in this environment. We expect the challenges around COVID to continue for the foreseeable future. As you will have seen, the U.K. went into lockdown for a month this week. But having said that, IRESS continues to trade consistently, and we are executing well. I'll now hand over to John to take you through the results in more detail.
Thanks, Andrew. Andrew has provided a high-level overview of trading to the end of September in his opening remarks, so I will turn now to the segment slide, starting on Slide 8. As you will see from the charts on this slide, APAC's financial markets has continued its resilient revenue performance over the course of 2020. We have also been making good progress with the private wealth implementation of J.B. Wear and remain on track for the delivery of this project in the first half of 2021. The financial advice and super businesses have also being steady over the first 3 quarters of this year. You'll see from the bar charts on Slide 8 that there was a small decline in recurring revenue in Q3, which reflects the unwinding of some institutional revenue as a result of adviser migrations to smaller dealer groups. This is consistent with the comments we made at the half year. The super administration project implementations that are underway of ESS and Gild remain on track for delivery in the first half of next year. In total, financial advice and super revenue was up 12% versus the same period period last year. Turning to Slide 9. U.K. revenue has been flat across the first 3 quarters of 2020. The second half growth that we talked about at the beginning of the year has been delayed due to the macro environment, but pleasingly, a number of client implementations have commenced or are scheduled for early 2021. Slide 10 shows the progress we have made with QuantHouse since the acquisition in April 2019. We have transformed this business from loss-making to a profitable enterprise on the back of revenue growth and the delivery of cost synergies. And finally, mortgages on Page 11. This business was hardest hit by COVID disruption earlier in the year, but activity has since returned with a strong third quarter, as you can see from this slide. Two clients went live in August, which will contribute to recurring revenue growth in the fourth quarter and beyond. I will now hand back to the operator to open the line for Q&A.
[Operator Instructions] Your first question comes from Scott Hudson.
Just a couple of questions. Andrew, maybe if you can talk about the U.K. environment and whether or not, I guess, this has improved or deteriorated through the second half of the current year?
So Scott, earlier in the year, we expected a stronger second half, and we have seen decisions be impacted by the pandemic and the economic situation. We don't believe that opportunities have evaporated, but have deferred. We look to the quarter 4 outlook and don't anticipate new sales contributing to that guidance. It is simply a matter of delivering what is already underway. Projects have continued, and we've continued to deliver to clients, but it's some of the new decisions given the environment.
So I guess in terms of those new decisions, I mean is there relative to maybe where you were in August? Is the clients sort of deferring more cautious in terms of willingness to deploy capital or less cautious?
I wouldn't say that there's absent strategy. And businesses are still making decisions, and we're working with a number of clients, and they have ambition. And I've spoken before about the reality of business still needing to continue. And their strategy needs to continue. And in the context of when we've spoken about uncertainty of Brexit, that what's in the political stratosphere is quite far away from business decisions that need to happen. And so we have decisions being made around how clients service wealth clients, how trading participants operate and have sustainable technology strategy. So those things are happening. And the best example of that is really the lenders that went live in August, and that was from from a complete standstill. So it's not that decisions aren't being made, but the progress and the pace into making large changes is definitely definitely for the capable right now.
Okay. And I guess, in terms of the domestic market financial advice, super administration revenue, I guess, down marginally as you sort of previously disclosed. Does the -- I guess the J.B. Wear wear contract going live in the first half. Do you expect to see, I guess, some recovery from that trend line level that you sort of see in the third quarter?
We've spoken about adjustments of client arrangements being time based and not in 1 single reporting period. So I think that we'll continue to see a bit of movement in that, Scott. But what we're seeing is that is an increased demand for efficiency in digitalization. And that goes to how wealth businesses are underpinning their sustainability. So I think that the technology story is pretty strong and particularly with what we -- what we have in mind for the comes from one view, but we'll leave that to talk in more detail later.
Maybe just last question on the, I guess, the outlook for the super admin space. What's the sort of the -- I guess, the underlying confidence or the underlying sort of sales opportunity in that evaluation landscape in the current environment?
I think the certainly lots of interest and lots of strategy around productivity and efficiency within super. I think that gets even more extreme with the stapling of SG. So we're involved in a number of funds that are emerging and thinking about what their future technology strategy is and looks like and how they engage with members. So I think it's very fertile, and I think we will see some acceleration in that. And that goes to our confidence in delivering and integrated and highly automated offering for core registry is being found.
[Operator Instructions] Your next question comes from Naveen Patney with E&P.
Just extending a couple of Scott's question there on Australian Cupa or Australian wells. I sort of back sold the third quarter for advice and [indiscernible] up roughly around sort of 5%. Just interested if you could give some color there between advice versus super in terms of growth in the third quarter?
John, do you want to jump in here?
Sure. So you're comparing the third quarter of '20 third quarter '19 and the change between those 2 quarters, Naveen will be projects underway [indiscernible]. So that's been a significant portion of that growth.
Okay. Cool. And in terms of -- I mean, you mentioned in the present [indiscernible] tendering activity in this [indiscernible]. You mentioned that there's a number of opportunities there that you're seeing and mergers of sort of funds and what have you. Can you talk about the size of these opportunities that you're seeing? Are they more of smaller end or the larger end of the industry super fund landscape? Just some more color in terms of size of opportunities that you have seen?
So it's a range of those, Naveen -- both significant and also down the scale. I think we have a view that the opportunity for funds to operate efficiently isn't restricted to those that are mega. I think that for some of the very, very significant decisions that are reflected in some of those tenders. I'm not all will proceed. I think that is a realism. But I think it points to the significance of the considerations before funds and what underpins our strategic targeting here.
And when you're going into those, Andrew, with those competitive bids, what do you see as the landscape -- the competitive landscape in that space?
I think that one of the most obvious ones is that the majority of funds continue to be in-sourced. And so the change management and strategic strength of a decision to change the way that a fund works is not immaterial. So I'd say that, that should be considered in a competitive aspects. And then once the fund has decided whether they're in-sourcing or outsourcing, then there are different technology and service provider solutions. And so on one side of that, third-party outsources, and they're not directly comparable based on what we're doing. And then there is just technology provision, which is -- which has a difference set, probably a smaller set of real competitors. The significance of what gets outsourced, I think, is really important. And and what funds are doing independent of the administration decision is taking control of their destiny strategically and in terms of investment management and in terms of member engagement.
All right. Excellent. And a question just on guidance. I saw that -- my maths could be wrong here but sort of back sold that flat items implied sort of 2% to 3% segment profit growth in the fourth quarter. So you assuming that that's right. And also your comments that guidance excludes any new deals. So is there a risk that your guidance in the fourth quarter is a little conservative? Or are you -- I guess, you're pretty happy the way it stands?
John?
Naveen, We're playing wih a straight bat , that's where we think we're going to end up. There's obviously some risk around the U.K. going into a lockdown. But the guidance statement is genuinely made. We're not [indiscernible].
[Operator Instructions] We do have a question from Charlie Kingston with Contact.
Sorry if you covered this in the first -- I jumped on a few minutes late, but just more of a basic question. When you say recurring earnings, what exactly does that mean? Is that a 3-year contract that gets paid annually, so to speak? When does it become not halt? When does it make that classification change from just one-off earnings to recurring? Is there a -- can you give any more color on how long on average your contracts are per region or just any clarity on that would be great.
So the contracts themselves have varying periods in terms. And and some of that will differ by the nature of the geographic region. We have incredibly long tenure with clients, and that's something that we're very proud of. And service to Protect. The recurring revenue is subscription revenue for software that is under contract. And so it's not conditional on term. When we talk about the other 10% that is nonrecurring or not even recurring like. They are services that go to delivering and supporting software. They are not unrelated consulting activities or volume-based. They they are necessary and are associated with the services around software that we deliver. So we think about them as nonrecurring maybe not as bad as one-off, but we're probably reading it down a bit, to be fair, but that's the difference.
But theoretically, if a contract has one year remaining, that's still deemed as recurring. Can you -- is there a -- I don't know -- so you don't want to give specifics, but just on average, sort of over the...
Most of our contracts are evergreen. So we actually don't think about the majority of contracts having term. There are, of course, some that do for price certainty or outcomes that the client is seeking, but we just don't think of it that way.
And we've demonstrated a very, very long period of time. The length of our relationship with the client extends well beyond the term of the first contract. And so we expect to have our clients, if not in perpetuity, and certainly pretty close to it.
So I might just wrap up now. Thanks for everyone attending this morning at short notice. The goal of delivering this update is to provide some clarity and certainty around what's happening at IRESS, given what craziness is going on in the world at the moment and also the fact that we haven't had guidance out there as things become a little clearer for the remainder of 20 so over the 3 months, July, September, we've delivered a consistent result, PCP, with revenue up 3% and segment profit up 2% constant currency. That result does include targeted investments that have been made in the business. And over the 9 months, constant currency revenue is up 8%. Importantly, the QuantHouse business is now profitable in a stand-alone sense and contributing to a greater extent, through broader cost synergies across IRESS. The guidance into Q4 is for a stronger profit result in Q4. We see that producing a consistent profit result year-on-year. And more importantly, we've reviewed carefully our growth strategies and ambitions and delivery of those, and we affirm them for you. So thanks for attending, and look forward to catching up.