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Edited Transcript of CL1.AX earnings conference call or presentation 19-Aug-19 11:30pm GMT

Full Year 2019 Class Ltd Earnings Call

SYDNEY Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Class Ltd earnings conference call or presentation Monday, August 19, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Russell

Class Limited - MD, CEO & Director

* Glenn Day

Class Limited - CFO & Company Secretary

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Conference Call Participants

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* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Jordan Rogers

UBS Investment Bank, Research Division - Director and Small Caps Research Analyst

* Jules Cooper

Ord Minnett Limited, Research Division - Senior Research Analyst

* Mark Bryan

Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Class Limited FY '19 Results Presentation. (Operator Instructions)

I would now like to hand the conference over to Mr. Andrew Russell, CEO. Please go ahead.

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Andrew J. Russell, Class Limited - MD, CEO & Director [2]

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Good morning, everyone, and thank you for joining us for the presentation of the Class Limited FY '19 Results. My name is Andrew Russell, and I am the CEO of Class. I'm joined on the call today by CFO, Glenn Day; Chief Strategy Officer, Glenn Poynton; and our Investor Relations Manager, Ebby Carson.

Today, I will present the following agenda: a summary of our full year results and business update, some insights on our reimagination strategy and some key takeaways and our outlook for the future of the business. I've been CEO of Class now for 3 months. It is clear the business has a solid return in revenue flow but the growth of the business has not accelerated over the past couple of years despite the underlying potential.

For Class to achieve accelerated growth and the potential that we believe can be realized, we need to execute a clearly articulated strategy and growth pathway and commit to invest in products and capabilities to deliver against our strategy. The key themes from today's presentation that we hope will resonate are: Product development must be faster and better, there needs to be focused and increased investment to deliver new features and capabilities in support of new products and markets. This includes refreshed marketing and sales approach to better communicate and articulate our customer benefits.

We must position ourselves to accelerate growth by entering new market segments that are adjacent to the core. We believe we can double our total addressable market by the entering into the trust space. And finally, we must invest in the business to build momentum and accelerate growth the business must invest in capability and product and either buy, build or partner to achieve our ambitions. The importance of these 3 themes is best illustrated in our financial results.

The business operating revenue and EBITDA for FY '19 have both tracked up 13% year-on-year. Operating revenue has been steady in the core with growth coming from strategic partner revenue. Partner revenue is increasing, albeit from a low base. The business has managed [the expense base] to the revenue growth. Some investment was delayed given the changes in the executive team and also waiting for me to join. The directors have declared a fully franked final dividend for FY '19 of $0.025, which will be paid in September 2019.

Now turning to our business update. Class remains a highly awarded product in a self-managed superfund marketplace and it's a credit that it continues to be recognized by both Investment Trends for client satisfaction, and the Fintech Business Awards for innovation.

Our retention rate has remained steady at an impressive 99.2%. A combination of customer satisfaction and retention rate create a strong opportunity for Class to develop and build new products which we'll deliver to our cost and time saving customer promise to our existing customer base and new customers.

Account growth on Class Super has slowed and the cost to acquire new business is rising. Despite this, we are still winning business and increasing market share. Based on conversations with prospects, our competitor has been pricing the whole market share. We believe that pricing trend will trend upward in the coming 12 months given their economic realities. We are watching this closely to realize those sales opportunities when discounting offers expire on some key accounts.

Strategically, the business is focused on holding ARPU. You will note, our ARPU has remained around the $215, $217 levels.

Undoubtedly, the growth in the self-managed superfund sector has been impacted by the noise on policy from the election. However the remaining addressable [SMS] market is finite and we must focus on 2 things: investing in our product development to ensure we win market share faster in Super and at the same time entering into new markets to grow our market place. It is pleasing to see that we are winning business from both desktop and cloud-based providers. With an improved sales and marketing approach over the next year, we're hoping to see that improve.

We measure our market share, we're following [agenda I have in ODM]. We take that number of verified accounts and divide it by the ATO published SMSF account number. Using those metrics, you can see the following on this slide.

Our market share is growing and continues to trend upwards at a steady rate. I'd also like to note in terms of revenue market share, we clearly dominate against our competitors, evidenced by their revenue comparisons. For us to accelerate our market share growth, we need to invest in product development to outpace our competitors, ensure a product pipeline for delivery in FY '20, '21 and '22. Our operational approach to deliver will be to refocus the business on the core fundamentals, which are to put the customer at the center of our product development.

Secondly, we need to focus on our competitive advantage, producing solutions to reduce pain points, automation efficiencies which cut costs in the back office for our customers. And also focus and leverage our competitive advantage which is building products to required complex rules-based coding and which deliver on our promise of saving customers time and costs in their back office.

Turning to our Class Portfolio product. We have not performed to our expectations. This is in part due to our product development approach that needs to change. The portfolio product has not addressed our customers' pain points successfully enough with the current features particularly in regard to investment reporting. Furthermore, we have not invested enough in the product development and engaged our customers to the extent of delivering a winning product proposition.

So what are we going to do? Well, we intend to improve and evolve the portfolio of product and launch a new product this year focused on the trust accounting space. We believe the trust market opportunity is similar or bigger than the self-managed superfund marketplace.

I'd like to now turn to our strategy going forward. In setting the strategic direction to enable Class to realize the potential of the business, there are a number of identity questions which we need to be aligned and agreed. We believe we now have answered those during our short tenure. Who are we? What is our vision of the business? What is our purpose? What is our point of difference in how do we win and how do we reimagine our business to drive growth and become a world-class technology solutions business, world-class in terms of business people, process, delivery and therefore results.

We believe we are a customer-focused business using smart technology solutions to help our customers automate their back office. Our vision will be to reimagine a more simple, automated world for our customers and they will love it. The answers to these questions formulate the Class 3-year imagination strategy. We must continue to leverage what is proven we can deliver in the past: automation efficiencies, removing pain points for customers in their back office, developing products that require complex rules-based code.

There are several considerations in our framing our strategy, which we have mentioned and are indicated in our financial results. The self-managed super fund market is clearly maturing and for us to deliver further growth, we must look for opportunities to expand to other markets. The business is underinvested in the [tech space] relative to technology peers in the past few years. The business needs to significantly increase investment and focus on [inspecting] our core platform. This will deliver improved efficiencies, enable the development of new features and provide the ability to launch new products into new markets. We need to build capability to deliver. We need to invest in people.

So very simply, our strategy is to refocus and put the customer at the center of what we do. The Findex partnership is an example of our customer-focused approach to product development going forward. We need to ensure we keep focus on the core with ongoing and faster feature improvement and develop into mature market share growth.

We need to increase our market opportunity through new products and new markets. And to accelerate our delivery, we need to look for strategic acquisitions or partnering opportunities to get us there faster. And finally, to be able to execute, we need to invest to improve. Our investment is in people and [upscaling] our capability to ensure a step change in delivering results.

So to successfully deliver the reimagination strategy, we are uplifting our spend from $9 million in FY '19 to $12 million in FY '20. This is a 33% increase year-on-year to ensure we invest in our core and keep ahead of our competition as well as to develop new products.

To help us get there, we have made a number of key hires of experienced executives. You'll see some very good-looking people coming up, and we've made some investments in product marketing in our core areas, with Jason Wilson joining us recently, and sales leadership with James Delmar joining us. We now have an energized executive team in place which has created a new level of excitement and energy across the business. So aligned by vision, purpose and Class values, the business now has a highly experienced and focused executive leadership team to deliver the reimagination strategy.

So I'd like to leave you with a number of key takeaways. The FY '20 financial results for Class is solid. But for Class to be considered a world-class technology business in terms of people, process and results, using that as a benchmark, we need a step change in performance. The vision requires operational change and investment to deliver the step up in results in the medium term.

Our reimagination strategy requires investment to deliver new products and ensure the core product is well positioned to grow market share and to deliver to customer needs. Our product development needs to be better, faster and more customer focused. We need to ensure we continue to improve our current products and at the same time enter new markets to increase our addressable market to drive revenue growth and EBITDA performance. To accelerate that delivery of the reimagination vision, we must invest now. The investment step up of $3 million year-on-year in FY '20 to $12 million is material. At the same time, we're targeting an increase in revenue of 10% year-on-year.

We expect as a result of the momentum building phase in FY '20, EBITDA margin of around 40% and that is comparable to some of our peers, including MYOB. Our approach will allow the business to build momentum and to deliver accelerated performance in both revenue and EBITDA in FY '21 and beyond. We will optimize our pathway to accelerated growth via combination of build, acquire, and partner. The future of Class is exciting and we are on our pathway to accelerate success to deliver value for our people, our customers and our shareholders. I'd like to thank you for your ongoing support.

And I'll now pass back to our host for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Mark Bryan with Wilsons.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [2]

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Just a couple of questions, if I may. Firstly, the drive for investment obviously makes, in my view at least, a lot of strategic sense. You've given us some clear commentary around the R&D guidance that's about $3 million of incremental spend per annum. But there's also a couple of points through the presentation around investment in the sales and marketing channel. Could you just give us a flavor for the level of investment going into sales and marketing as well, please?

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Andrew J. Russell, Class Limited - MD, CEO & Director [3]

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Well, in terms of our strategic approach, we've obviously brought in new capability in the leadership team with Jason Wilson. I think that we can simply note -- so there's investment there from a leadership perspective. So it's just doing some things smarter and better in terms of our marketing strategy in the way that we talk about our product features. It's pretty much the core of that investment in that space.

And similarly, in sales -- in the sales executive leadership, bringing James Delmar in, it's a significant change in capability to pool that resource. But then once again, in the short term, just focusing on the fundamentals of getting our sales strategy and our approach right [with our sweet spots] along with the team, to deliver an uplift in our sales performance which I think that can easily be achieved in the short term.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [4]

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Okay. And just if possible, the level of incremental spend, is that possible on an annualized basis?

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Glenn Day, Class Limited - CFO & Company Secretary [5]

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Mark, I guess, [in our sales], we've provided the indication of the revenue target of 10% growth and the overall EBITDA margin.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [6]

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Yes, okay. Overall EBIT -- so it was -- the line was crackling. I think did you say 40% EBITDA margins in 2020?

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Andrew J. Russell, Class Limited - MD, CEO & Director [7]

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That's right, 40%.

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Mark Bryan, Wilsons Advisory and Stockbroking Limited, Research Division - Head of Research [8]

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Okay. That's clear. And then just one follow-up, if I may. Just in terms of that revenue growth assumption, just trying to unpack and understand that a little bit more. You've positioned it for -- the business for 10% growth. Obviously, that's just marginally down on 2019, which I understand. I'm imagining that most of that will be coming through volume rather than pricing. So I'm just keen to understand what you're thinking about the market in terms of system growth. If I look at 2019 as a year and think about it on a quarterly basis, Q1 was pretty respectable. But then Q2 to 4 was a lot slower. I'm just wondering how you see the market for 2020 and just trying to understand the risks of getting to that 10% threshold.

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Andrew J. Russell, Class Limited - MD, CEO & Director [9]

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There's probably 2 parts to that question. My overall assessment is that -- and as some commentary, the market is finite, so we're -- it's -- we've got to look to other markets to continue growing out our marketplace. And the cost of acquisition is rising in the current marketplace that we're operating in.

But notwithstanding that, we still believe that there's quite a bit of room for improved sales performance and that's what we're going to focus on to drive that revenue growth. We're focusing on the partner revenue stream as well to continue to build that. And then in the back half of the year, which we're really focusing on, is looking for an accelerated performance in a new marketplace with the Trust product coming live and hopefully delivering some revenue results.

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Operator [10]

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Your next question comes from Jules Cooper with Ord Minnett.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [11]

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I noticed that the head count numbers have been dropped off the presentation. Are you able to sort of give us a sense for where that sits? And then just with the investment and the -- your objective to get better efficiency out of all the teams, what your expectation would be for potentially head count additions over the next year across all facets of the business?

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Andrew J. Russell, Class Limited - MD, CEO & Director [12]

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Well, obviously, to be able to do it with I guess the strategy we've got, we need to step up in capability across the business. And we've led with our executive appointments to begin with and they're about 4 weeks into operations so they're going to be making their assessment of their teams.

We're very focused on running a lean business but we also are very focused on if you want to actually drive an improved performance, we've got to get world-class people into that business. And it's probably too early for me to be able to say what change in personnel there will be, but I certainly, will be able to have better guidance later in the year as I become more entrenched in the business.

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Jules Cooper, Ord Minnett Limited, Research Division - Senior Research Analyst [13]

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Sure, sure. Okay. All right. And then just on looking at that very strong retention on the SMSF portfolio as you have and the comment that you thought that industry pricing was going to move up over the year, it was just sort of -- you made a comment that your objective is to maintain your ARPU in that segment. Is there not an opportunity to maybe increase that given the historical experience in the industry has been regular price increases sort of set by MYOB and Reckon, et cetera, for many years?

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Andrew J. Russell, Class Limited - MD, CEO & Director [14]

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My comments for this past year's results, there was a decision to try to hold the ARPU. I think that we're going to have a completely refreshed approach to being able to grow our market share and leverage out our strengths. We look at our customers from a lifetime value, so we will look and explore opportunities where we think that make sense to the business and also responsible. But certainly, there's an opportunity where we know that competitors have been discounting and those discounts will be running off. And we know that their -- some of their pricing is subeconomic, and I think that, that puts us in a strong position at the appropriate time to leverage that and that will be a cornerstone of our sales approach.

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Operator [15]

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Your next question comes from Ivor Ries with Morgans Financial.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [16]

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Just in terms of your decision to capitalize your -- some of your sales and marketing costs. I just wondered whether this will be an ongoing accounting treatment.

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Glenn Day, Class Limited - CFO & Company Secretary [17]

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Ivor, it's Glenn. Yes, under AASB 15 there's certain customer acquisition costs that get capitalized. If you were looking at the results for this year, it was about $600,000 versus items that were capitalized.

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Ivor Ries, Morgans Financial Limited, Research Division - Senior Analyst [18]

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Yes. So does that represent a full year impact that should we expect a higher number next year?

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Glenn Day, Class Limited - CFO & Company Secretary [19]

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It will vary based on the sales -- the volume of sales growth that you experience and the incentive structure of any sales team for the full year.

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Operator [20]

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(Operator Instructions) Your next question comes from [Hamish Byers], a private investor.

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Unidentified Participant, [21]

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My question sort of follows up on an earlier call. Obviously, ARPU has sort of been maintained for a few years and costs concurrently have been going up. So there appears to be a bit of margin compression if not at a so much an EBITDA level but certainly at an EBIT level. So I'd just like to know what cost out opportunities you feel there might be across the business, I mean just leaving aside head count for a moment, obviously, Class still faces a number of other external and procurement costs. So I'd just appreciate a bit of color in what you're doing in that space.

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Glenn Day, Class Limited - CFO & Company Secretary [22]

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In terms of where we're positioning the business, we're positioning the business to grow through our (inaudible) I think Andrew has already touched on in terms of the -- making sure that when we're spending money on the development team that we're spending it in an efficient manner and that's something we'll be focusing on as we go forward. But at this stage of growth, the business has been about growing and entering into new markets.

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Unidentified Participant, [23]

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Okay. Sure. So -- understood. So in terms of -- I know you haven't issued sort of EPS guidance or anything along those lines, but would you expect something similar to sort of a 3% growth on the back of, say, a 10% revenue growth would probably be fair considering the underlying investment in the business?

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Glenn Day, Class Limited - CFO & Company Secretary [24]

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I think what we've [singled in training] is provided guidance about the revenue target, we're aiming for 10% growth. We've also provided the EBITDA margin in terms of what we expect FY '21 [in the pack] that actually has the disclosure about the expected depreciation and amortization. So we are expecting to be lower next year than this year.

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Operator [25]

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Your next question comes from Jordan Rogers with UBS.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [26]

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Just one follow-up question on the launch of Class Trust. Can you just provide a little bit more color as to how this will launch? When and what it will offer? And then more generally, could you just touch on what your plans are more broadly in the wealth management space?

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Andrew J. Russell, Class Limited - MD, CEO & Director [27]

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First, a few things to unpack there. In terms of the product development and the NVP, we're working that through now as a business now that we've got Jason on deck. And also, we've said publicly that we're in a partnership with Findex. I expect that I will be able to give a little bit more color and flavor in terms of that product without giving too much away to our competitors at our Investor Day later in the year.

In terms of our ongoing strategy within -- with Class, that strategy on the page is our key area of focus. We are wanting to build a Class product suite, if you like, around the accounting administration adviser ecosystem.

And our vision obviously is to become a one-stop shop in that space. So we're going to leverage off the Super product. We're going to extend and involve the portfolio of product. We're going to launch a Trust product and we're going to explore other options that would naturally fit into that suite that would drive value in the ecosystem for our customers. And we're going to do that through build, buy and partnering options.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [28]

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Okay. And then around the portfolio product itself, it's sort of ticking along sort of relatively slowly, it's been growing. But when you say you need to -- you can extend that product, what's the biggest hindrance to that product getting high takeup?

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Andrew J. Russell, Class Limited - MD, CEO & Director [29]

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Well, 3 months in, the feedback that I've got from customers, we're spending a fair bit of time just getting that feedback and they've been very [good] to give it to me. The performance reporting module needs improvement. So that's -- we can't do everything, so one of the things that we are being, we're going to be ruthless in terms of ensuring focus on the big wins and that's one that our customers have said that they would like.

Secondly, I think that with just listening to them, listening to our customers in terms of how the actual product operates and we've been able to gather some intel from that. And now we have -- both having Jason and James onboard, the combination of improved product strategy as well as a sales approach, we're hoping to get an improved run rate for that product over the next 12 months and beyond.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [30]

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Okay. And just on your comments earlier, just to confirm, the launch will -- you're doing the development work with Findex but it will be -- will it be immediately available to any potential customers after launch or is there any exclusivity period with Findex?

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Andrew J. Russell, Class Limited - MD, CEO & Director [31]

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No, there's no exclusivity deal. What I -- in terms of our strategic focus, and we're talking about putting the customer at the center of everything you do, you may remember and it's become very clear to me in my time in Class now, that the success of Super came to market by partnering with leading customers and we're bringing back that approach to our product development. And when you're working with industry practitioners, it makes simple sense, doesn't it, that they're doing it every day so we're building product that's going to meet the market's needs. And I think that, that will put us in a very good spot to be able to offer that technology software to our other existing customer base and new customers.

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Operator [32]

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There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.