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Edited Transcript of IRE.AX earnings conference call or presentation 22-Aug-19 11:30pm GMT

Half Year 2019 Iress Ltd Earnings Call

Melbourne, Victoria Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Iress Ltd earnings conference call or presentation Thursday, August 22, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Leslie Walsh

IRESS Limited - MD, CEO & Director

* John Harris

IRESS Limited - CFO

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Conference Call Participants

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* Gareth James

Morningstar Inc., Research Division - Senior Equity Analyst

* Ivor Ries

Morgans Financial Limited, Research Division - Senior Analyst

* Paul Buys

Crédit Suisse AG, Research Division - Head of Research and Director

* Paul Fanning

Sunnyside Equity Markets Management Services - Investment Portfolio Administrator

* Russell J. Gill

JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

* Scott Lyndon Hudson

MST Marquee - Senior Research Analyst

* Shishir Prajapati

Contango Asset Management Limited - Investment Analyst

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Presentation

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [1]

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Thanks for joining us this morning for the presentation of our half year result. I'm Andrew Walsh, the CEO. I'm joined by John Harris, our CFO.

I'll begin by firstly providing an overview of performance at both group and segment level and John will take further detail on the financial results before I conclude. We will then turn to an opportunity for questions.

So starting on Slide 8, before I move into the financial result. We've made good progress during the half on our strategic priorities. Client demand and delivery of our software and services remains strong as technology continues to play an increasingly important role in financial services businesses globally. Clients are particularly focused at this time on data and automation as they seek to meet regulatory requirements, drive business growth while also enhancing client and customer experience.

We've continued to deliver to large clients in the U.K., Australia and South Africa across private wealth, financial advice and in mortgages.

During this half, we acquired QuantHouse, and I'll talk more about the importance of this to the acceleration of our data strategy and market data, in particular, shortly.

A major focus of IRESS is continuing to invest and innovate to meet current and future needs of our clients and users. I'll provide some detail on the work that we've been doing here also.

We also continue to focus on building scale through initiatives such as expanding our cloud capability and extending continuous delivery to clients.

During the half, we also launched XPLAN Prime into the U.K. and continued to deliver our mortgage sales and origination software delivery to clients in Australia.

On Slide 9. At the end of May, we announced the acquisition of international market data business, QuantHouse. Data is critical to all things that we do at IRESS. The acquisition of QuantHouse is highly complementary to what we already do and will improve our global scale and capabilities. For example, it does extend our MSCI coverage from just over 50% to 75% and this coverage is available to all clients globally.

Increasingly, clients are looking for single software vendors for as much of their local and international needs as possible, which also includes low latency. They want to receive data in a variety of ways and not only limited to terminals. QuantHouse will be reported as part of our relevant geographic segments. To date, integration and client response has been very positive.

Looking at Slide 10. Our ongoing focus on improving experience our clients and users have with the business IRESS and our software is continuing. We're seeing the benefits of this including improved support response and resolution times.

In the half, we introduced IRESS Open. We have always performed integrations with third parties but this development, resourcing and ongoing maintenance is required. Clients can now connect to third-party application, to XPLAN, without reliance on IRESS. This is making it easier for clients to access a broader range of applications, access an ecosystem of vendors around us and choose how they leverage and build on IRESS software.

IRESS Labs formalizes our approach of co-designing with users at scale. It has resulted in a major upgrade I've explained in the past month, which has seen simplification of the user experience designed to increase ease and efficiency. Several thousand users across the world have been involved in designing and testing this new experience.

Now turning to Slide 12. We have made changes in how we name our segments, these are set out in this slide. It follows the acquisition of QuantHouse, which has broadened our geographic presence beyond our existing segments. It also reflects changes we have made in how we position and market our software to ensure that it's clearer to current and potential clients.

Now to Slide 13. In the half, overall revenue growth was up 5% on pcp, in line with our own expectations. We continue to see the benefits of having a diversified client base as financial services undergoes continued change. On a constant currency basis, operating revenue increased by 5% and segment profit was up 10% pcp. Revenue growth was driven by underlying performances in Australia, the U.K. and South Africa across private wealth, financial advice, trading and market data. The addition of QuantHouse in the half also made a positive contribution for just over a month.

Operating efficiency and cost discipline were maintained during the half, and segment profit also benefited from the adoption of the new lease accounting standard, AASB 16.

In Australia, revenue in financial advice grew 9% pcp against the backdrop of significant change while Super revenue declined in the half, reflecting the timing of client projects.

Direct contribution in the U.K. and Europe grew by 14% in local currency reflecting ongoing deployments to clients, demand for private wealth software and the acquisition of QuantHouse.

Our South African revenue grew 6% pcp with the new JSE trading platform now live and deployment of our private wealth software to a Tier 1 institution progressing.

Fundamentals of the business remained strong with cash conversion at 100%, recurring revenues at consistently high levels and a conservative level of gearing.

The interim dividend is $0.16 per share, in line with 2018. There is further detail on these numbers in the next 2 slides. I won't go through these now, but I will leave those for John to cover shortly.

Now on Slide 17, we'll make some comments on each segment, starting with APAC. In APAC, operating revenue was $128.2 million, up 3% pcp. Direct contribution was 92.3%, up 2% on pcp.

International advice, we've seen ongoing demand for a broad range of software, with clients particularly focused on data, risk management, efficiency and compliance.

Data analytics software, Lumen, continues to attract interest and is now live at several clients.

Superannuation revenue was impacting the first half as clients and we focused on legislative change. The pipeline of opportunity in Super remains full, and we expect a return to growth in the second half.

Changing industry needs do require efficiency and advice offering in compliance. These are directly aligned with our strategy and what we have to offer. We are seeing increased demand for automation in Super, which we are actively responding to.

Trading and market data revenue remains resilient with continuing buy-side demand for investment management software and retail broker demand for private wealth software. During the half, a leading Australian retail firm made the decision to implement our private wealth software in Australia.

Revenue growth in Asia was driven by the successful rollout of our online trading software, ViewPoint.

Turning to Slide 18 for some additional comments on the current environment. We have a strong and diverse business across IRESS in Australia. The financial advice industry is undergoing significant change in response to the current trends and events, including the Royal Commission. We are well placed to meet the growing technology needs of clients as the advice industry changes structurally. As you can see from this chart, we are well diversified within advice where we have a strong representation of clients across independent, mid-tier and large organizations.

In the first half, we have been successfully meeting the technology needs and data needs of advisers who are leading larger businesses, and over the longer term, we expect this to continue. During this period of industry change, the impact on client decisions and timing will inevitably be less predictable than they have been in the past.

Now to Slide 19, talking to U.K. and Europe. Operating revenue of GBP 35.5 million and direct contribution of GBP 23.6 million were up 10% and 14%, respectively on pcp. Revenue growth reflects good progress on key existing client projects, the deployment of the first phase of a broad private wealth software project with a large U.K. private wealth manager and some contribution from QuantHouse.

XPLAN continues to be in strong demand with growth driven by clients seeking robust, scalable and independent software. Our scaled advice software, XPLAN Prime, was also formally launched during the half and is in production with clients. XPLAN now represents approximately 26% of total segment revenue, up from 24% last year.

In the half, a Tier 1 wealth manager selected our private wealth software and we continue to see growing demand for trading software. We also saw growth in our sourcing business based on additional data and distribution capabilities.

Slide 20 and mortgages. Operating revenue of GBP 8 million and direct contribution of GBP 5.3 million were both down pcp in mortgages. This reflects the timing of client projects and related revenue. On the prior half, operating revenue was up 4% and direct contribution was stable.

The transition to subscription revenue continues in this segment, with recurring revenue accounting for 25% of total revenue in the first half compared to 20% last year. New clients have been signed and currently being deployed. Yorkshire Building Society, which was deployed in the first half, is set to drive recurring revenue growth in the second half '19.

Australian implementations are proceeding with further opportunities as lenders seek more dynamic software to materially improve approval time frames, real-time service and in-customer experience.

Turning to Slide 21. It was pleasing to see South African growth return in the half. Operating revenue of ZAR 242.4 million and direct contribution of ZAR 189.4 million were up 6% and 10% pcp. Growth was driven by successful client deployments, ongoing demand for software and revenue from trading software and connectivity following the JSE launch, the new derivatives platform that went live in April. Deployment of private wealth software to a large financial services client is progressing well and expected to complete in the second half '19.

Turning to North America. Operating revenue of CAD 9 million was up 3% pcp with direct contribution of CAD 4 million, down 10% pcp. There was stable recurring revenue and a positive contribution from QuantHouse, which broadens our market data capability and creates further growth opportunity in both Canada and the U.S.

However, during the half, there was lower project -- client activity, which led to underlying revenue down by 10%. A project to deliver a broad retail trading system to a Tier 1 bank in Canada is on track for delivery in the second half and this will help to deliver a more positive full year result.

On Slide 23, we look at product and technology operations and corporate segments where we continue to invest in priority areas while remaining very focused on efficiency, cost discipline and scale. Costs were in line or less than pcp and they remain stable as a percentage of revenue.

I'll now hand over to John for some comments on financial detail.

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John Harris, IRESS Limited - CFO [2]

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Thanks, Andrew. I'll start on Slide 25. Andrew has provided detailed commentary on our revenue and segment profit performance, so I will focus on the items between segment profit and NPAT.

Share-based payments increased significantly during the half as a result of new remuneration frameworks for all IRESS employees that were announced in previous years. Total remuneration costs have only increased in line with CPI and head count, but the proportion of salary delivered as equity has increased and the accounting expense recognition for equity has been accelerated from 3 years to 2. Share-based payments expense has increased as a result. We expect share-based payment expense to continue at this level going forward and to grow with inflation-linked salary increases and head count.

Operational depreciation and interest expense also increased in the half, primarily as a result of adoption of the new lease accounting standard, AASB 16. As a result of this new standard, rental expense now flows through depreciation and interest expense rather than the operating cost line. We have included a slide in the appendix, which shows the impact of AASB 16 on each line of the P&L. The financial statements also include extensive disclosures on the implementation of this new standard.

As a result of the new leasing standard, the increase in share-based payments and the acquisition of QuantHouse, which was loss-making in the half, reported NPAT declined by 5%. Excluding the impact of AASB '16 and QuantHouse, however, NPAT grew 2% on the prior period.

Our effective tax rate was 27%, which is in line with previously guided operating range of 26% to 28%.

Turning to Slide 26. As Andrew said earlier, our fundamentals remain strong. Cash conversion was 100% in the half, reflecting customer collections and the timing of cash outflows weighted to the second half. We continue to expect our cash conversion to be in the range of 90% to 100%.

We remain conservatively geared with a leverage ratio of 1.3x segment profit on a net basis.

The main driver of balance sheet movements in the half were the QuantHouse acquisition and the adoption of the new leasing standard. The acquisition of QuantHouse was funded from our existing debt facilities, which increased net debt to $222.5 million. Current liabilities also increased from $58 million to $91 million as a result of the acquisition including the fair value of the earnout that is expected to be paid in the next 12 months.

And finally, the increase in noncurrent assets reflects the acquired software, goodwill and other assets that were brought in -- onto the balance sheet as a result of the transaction. Further details of how we have accounted for the QuantHouse acquisition can be found in Note 3 of the financial statements.

The new leasing standards -- the new leasing standard also resulted in a grossing up of assets and liabilities by $52 million and $57 million, respectively.

I will now hand back to Andrew to cover the financial outlook.

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [3]

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Thanks, John. Looking at Slide 27, we expect reported segment profit growth in 2019 of between 6% and 11% on a constant 2018 currency basis. This includes the impact of accounting changes, but before the contribution of QuantHouse. When including the acquisition of QuantHouse, reported segment profit in '19 is expected to be between $144 million and $151 million on a constant '18 currency basis.

Following targeted and elevated investment in recent years, our nonoperating costs excluding acquisition-related items are expected to be substantially lower in '19 and '18. Including the QuantHouse transaction and the related integration costs, total nonoperating costs for '19 are expected to be between $4 million and $6 million.

Period-on-period revenue and costs remain subject to the timing of client projects. And beyond '19, we expect a continuation of significant industry change and a climate of economic and structural uncertainty.

In summary, the client demand -- our client demand and delivery remains strong with technology continuing to play an important role for financial services businesses globally. Revenue growth in the first half has been driven by key businesses in the U.K., Australia and South Africa, and we expect that to continue. First half activity has established a solid foundation for future growth in the second half.

Thanks, and we'll now turn to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Russell Gill with JPMorgan.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [2]

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Firstly, just -- I can probably work it out by backing out all the different currency movements and the like, but it appears QuantHouse has gone into both the U.K., Europe division and the Americas division. Is it possible just to tell us what the organic growth in those 2 divisions is in local currency terms, on revenue?

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John Harris, IRESS Limited - CFO [3]

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Yes. So we talk about the Canadian slide or the North American slide, a revenue decline in that division. In the U.K., you still have strong single-digit revenue growth if you back out QuantHouse.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [4]

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So strong, above 5% revenue growth...

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John Harris, IRESS Limited - CFO [5]

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Yes.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [6]

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In organic terms in the U.K.?

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John Harris, IRESS Limited - CFO [7]

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Yes, pcp. And the number on -- I'm just turning to Slide 22, and in North America, we have revenue fell 10% ex QuantHouse.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [8]

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Yes. But...

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [9]

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Driven by one-off revenue.

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John Harris, IRESS Limited - CFO [10]

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Yes. And an increase -- a small increase in recurring revenue in Canada.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [11]

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Okay. Because I can back that out, because QuantHouse added 3 in Aussie terms. I can take it out of Canada and then I can take it out of the U.K. and Europe. It's not in any other divisions besides those 2?

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John Harris, IRESS Limited - CFO [12]

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That's where the bulk of it is. We've actually got a chart on the QuantHouse slide, which shows the split of their revenue. There is a small amount going into Asia as well. So if you look at Slide 9, Russell, there's a pie chart there, which shows the split of revenue across the different regions.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [13]

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Right. Just in regards to the tax rate, I was going for a much lower tax rate than what came through in the first half. Could you just talk through the tax rate implications for the remainder of the year and then sort of, I guess, structurally where you see it going forward?

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John Harris, IRESS Limited - CFO [14]

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Yes. So we've talked in the past about the normal range for the effective tax rate being in the order of 26% to 28%, which reflects the mix of the different geographies that we're in. We've had a few halves recently where we've been below that due to one-off items or some benefits that we have received in various jurisdictions, but we're back in the normal operating range for this half.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [15]

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Okay. And just going forward, regarding acquisitions and the like. Andrew, could you just talk through with the plan over the next 12 to 18 months if there's opportunities out there, if you deploy more capital on acquisitions or do you think you're stable and what you own now is pretty much full?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [16]

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No, I think we're always looking for new opportunities and there's a lot happening in the current climate, but we have a disciplined approach and have a strategy. Aren't tempted or rushed, but we're very considered. But there is a lot happening in the corporate segment.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [17]

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Okay. Then just 2 final questions. Just in Australia in financial markets, there's been a large broker that exited the market. Does that impact you? And should we see some slowing in the second half? Or is there any impact to your business from that?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [18]

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There's been a bit of activity in Australian institutional sell-side including the entry of an international broker. So I think the space is dynamic. We're not expecting that to translate to a significant impact in the second half at this stage. But clearly, we're very watchful.

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Russell J. Gill, JPMorgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [19]

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Okay. And then the final question, just on -- as we move into the second half, we do go through Brexit. Just wondering if you could talk through that. Now that you own QuantHouse, it has some European exposure as well, can you just talk through how you're prepared for changes post-October and where you see impacts to your business and the like?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [20]

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So unchanged from where we've been commenting on Brexit. I think that there is -- we think about it in lots of dimensions, and firstly is the operational aspect, that like the referendum that occurred, that we are very focused on making sure that what happens in markets in the following day, not just in the U.K., but globally, we are positioned and we would expect there to be a flow-through of market volumes the day after and the week after, maybe even leading into it. So we're well prepared for that.

In terms of the actual events, we've said that we're not directly exposed, but it's a question of economic climate. That remains true. The QuantHouse business has entities and has clients in Europe and in the U.K., I don't expect that to change. And very difficult to predict what's going to happen on the day, but it will translate to most people in the world as an economic aspect, I believe.

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Operator [21]

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The next question comes from Scott Hudson with MST.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [22]

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Just a couple of questions for me. Firstly, are you able to give us a sense of what the contribution of Lumen was through the first half? And/or what the growth of demand for that product is?

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John Harris, IRESS Limited - CFO [23]

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Lumen is still not a material driver of those revenue numbers at the moment, Scott, but we're happy from an operational point of view that we're now live with a couple of clients and we've got a full pipeline. So we're continuing to see a lot of interest in that, but it's not a material driver of those numbers.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [24]

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Okay. Great. I guess your guidance is calling for 6% to 11%. I guess you delivered 10% in the first half. Some of your sort of regional commentary suggests you've got some project delivery that either was deployed through the first half or should come live through the second half. Can I just understand what the headwinds have been to sort of see you only hit the bottom end of that guidance range?

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John Harris, IRESS Limited - CFO [25]

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So there are a number of projects which we're working on and the timing of those projects, as has been the theme over a number of years, is significant in terms of where that revenue will hit. We're confident that those projects will hit in a half, but we're not always confident in which half that will be.

We're also seeing a reasonable amount of change happening in the Australian market and so there's some aspects of that, which are harder to predict and that's kind of the determinant of the bottom to the top of the range, Scott.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [26]

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Okay. Great. So in terms of AASB 16, does it have a dilutionary impact on NPAT in its first sort of initial term of being introduced and then...

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John Harris, IRESS Limited - CFO [27]

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It does. It has a small negative impact on NPAT and we've got a slide at the back of the deck, which shows that it's $0.5 million, Scott. So Slide 31, we've broken that down by the different P&L components.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [28]

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And lastly, Andrew, any additional comments on the Midwinter acquisition announced by Bravura this morning?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [29]

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Well, I think it's a positive comment for the opportunities in advice in Australia, to be honest. And I wasn't looking for endorsement, but it feels like it.

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Scott Lyndon Hudson, MST Marquee - Senior Research Analyst [30]

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Any concern that they have, I guess, now paired with a bigger wallet to fund their growth?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [31]

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It's a long journey functionally, Scott, I think. I mean Midwinter is certainly a capable competitor, but of quite a different scale.

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Operator [32]

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The next question comes from Paul Buys with Crédit Suisse.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [33]

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Just one first on a follow-up on Russell's question earlier regarding QuantHouse. A little organic revenue growth in U.K. and Europe. Just want to clarify a couple of things. You called out, I think, that QuantHouse was actually lossmaking overall. I just wanted to clarify then if we go from operating revenue in the U.K., Europe to direct contribution and understand what the QuantHouse impact would have been there?

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John Harris, IRESS Limited - CFO [34]

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It will have a small negative impact at the direct contribution line as well. The negative at the segment profit level is higher because you have the development teams and corporate costs, et cetera.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [35]

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Okay. So it's implying then -- so if you're saying that the organic revenue growth was sort of high- -- mid- to high single digits and then that direct contribution growth that we can see in front of us of plus 14% probably therefore equates to organic revenue growth. Just interested to, I guess, get your comments on the interplay between revenue growth and margin going forward. Looking at the last sort of 4 or 5 halves now, it feels like you've moved beyond the period where your revenue growth, the noise translates to that margin growth but in more recent times, it seems to be that notwithstanding vagaries of timing, there's some margin expansion starting to come through at the direct contribution level in U.K. and Europe, is that a right, accurate observation? And what are your comments on how that progresses going forward?

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John Harris, IRESS Limited - CFO [36]

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Well, I think that is a correct comment and that applies across the group as well. I think we're very focused on managing operational efficiency on one side and driving revenue growth on the other and trying to avoid mismatches.

We have also said in the past, and it continues to be true that if we needed to invest ahead of revenue, then we would do that. But we are focused on managing growth and revenue in the same halves, to the extent that we can.

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [37]

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Worth adding that if we put the QuantHouse business back together and disassembled it for how we report, with synergies, we're expecting a strong profit contribution into 2020. So while we expect it to report a loss, when put altogether in '19, that will translate to net profit next year.

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Paul Buys, Crédit Suisse AG, Research Division - Head of Research and Director [38]

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Got it. And then just a final quick one. Just on your Superannuation business. Just interested, I mean, obviously, the total division got a very high proportion of recurring segment revenue. Just interested to know, within the Superannuation business more specifically, sort of the breakdown between recurring and nonrecurring revenue given you did call out a decline on the pcp on the back of lower nonrecurring revenue?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [39]

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Yes, I mean, if you look at the chart, you see the nonrecurring number. Most of that is coming from Super. And that -- not all it, most of it. And it was that that suffered a bit because of prioritization on some insurance industries -- not industry, but insurance changes within Super in the half.

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Operator [40]

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Your next question comes from Paul Fanning with Sunnyside Equities.

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [41]

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I'm calling from Melbourne. I've been a long-term IRESS investor. Look, I just want to get a little bit of color on -- a bit more color on the acquisition of QuantHouse. I gather for the FY '19, it will be a loss at segment level. I wonder if you're able to quantify that? You seem to be suggesting that [a return] QuantHouse will be providing positive numbers at the contribution level ones and then the segment profit level one.

Two other questions. The other question is can you just give me -- give us a bit of a quick color on the trickling through effects from revenue through the financial segment down to segment profit? And also, I noticed the franking credits for this period stand at 10%. If you can give me some response of each of those three, I would appreciate it.

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [42]

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So firstly, on QuantHouse, it's the loss this year will be not material. It's quite small. And part of that is from the effect or the contribution only occurring from late May. Next year, we expect that with revenue growth and access to synergies that we're very focused on, that that to be a profit contributor to the group.

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [43]

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Okay. Capital dollars or...

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [44]

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We -- to give you a feel of quantum, it is probably in the order of low single-digit million-dollar losses in this year through to higher single-digit profit next year.

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John Harris, IRESS Limited - CFO [45]

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Would you be able to repeat your second question for me, please, it was trickling down of revenue into...

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [46]

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That question was can you just give me a broad understanding of how the revenue line flows down to the direct contribution? And then the direct contribution flows down to your segment profit. I've been a long-term shareholder for IRESS and I've still never been able to quite get my head around the relationship between the 3 parts.

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John Harris, IRESS Limited - CFO [47]

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Yes, okay. So the -- so what sits in between revenue and direct contribution are other costs that are directly associated with serving the clients that generate that revenue. So we've got account management team, sales teams. There is, what you might call, cost of goods sold. So market data costs and those sorts of things that are direct and the associated costs of those teams. So salaries, on cost rental expense, et cetera, for those people that directly serve those clients and generate that revenue. So that gets you to the direct contribution level.

Between direct contribution and segment profit, you have central functions like product and technology, so our software engineers and product executives who are designing and building our software for the group, our operations teams that provide infrastructure both for internal and client purposes and in corporate teams such as finance and HR and legal, et cetera. And it's those 3 segments, which sit between direct contribution and segment profit.

I think your final question was...

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [48]

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I appreciate that there's a fair amount at the P&L line coming through from our offshore revenue sources. So therefore, the franking credit pool [increase], but I noticed this period is -- the franking credit has dropped quite considerably to 10%. What was this -- has this been an expectation? And likewise, what could it be in following periods as far as final frank credits?

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John Harris, IRESS Limited - CFO [49]

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So in February, when we presented the 2018 results, we flagged that the franking would fall to 10%. So it is something that was expected and telegraphed. And we have in our guidance statement, we've indicated that we expect franking to return to an operating range of 30% to 40% going forward.

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [50]

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Okay. So what -- just finally on that, why -- what was the reason for the considerable fall during the period? Was it the effect of the acquisition of QuantHouse or was it other factors?

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John Harris, IRESS Limited - CFO [51]

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No, it's unrelated to that. It's linked to the amount of tax we pay in Australia and you would have seen in some of our previous halves that our effective tax rate was below the current level of 27% and that then flows into the level of franking credits that we have available to us.

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [52]

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Okay. So the franking credit pool was somewhat depleted.

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John Harris, IRESS Limited - CFO [53]

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Correct.

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Paul Fanning, Sunnyside Equity Markets Management Services - Investment Portfolio Administrator [54]

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Or reduced. Okay. All right. That's all my questions.

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Operator [55]

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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 [56]

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Just a technical one on the depreciation. Obviously, there's a change there with the accounting standard. Just wondering if you could give us some flavor as to whether depreciation charge -- depreciation and amortization charges we saw in half 1 will be repeated in half 2?

And in relation to the U.K., you've got a new client there that signed up. Was there any revenue from that client in the first half or is it going to be a second half story?

And the last question is just the U.K. competitive landscape in the financial planning software space. Obviously, last year, your competitor was acquired by a private equity group. And I just wondered whether there's been any change in competitive behavior since that occurred?

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John Harris, IRESS Limited - CFO [57]

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So I'll talk to the first 2 and Andrew will tackle the third. We have a schedule in the deck, which gives a forward view of depreciation and amortization on Slide 21. The increase, as you pointed out, relates to AASB 16, which is a permanent change in our balance sheet. So our rental expense will continue to be amortized through D&A rather than through operating expense line. So that is a permanent shift, if you like, as a result of that accounting standard change.

The second question was around the U.K. client, and you're correct in that assumption that there wasn't a big impact from that in the first half and that we are likely to see that come through in the second.

Andrew will pick up the competitive landscape question.

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [58]

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Yes. Competition is alive and well in all our markets. Certainly in the U.K., there is a deeper pool of competition. The landscape has changed a little bit. I think there are clients certainly asking questions. We have seen the battleground being in the IFA segment, less so in the private wealth and trading segment. We have seen quite a lot of price discounting occur for some particular names to hold on to clients. So yes, the landscape has changed a bit, certainly no less intense.

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Operator [59]

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Your next question comes from Gareth James with Morningstar.

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Gareth James, Morningstar Inc., Research Division - Senior Equity Analyst [60]

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Just a question on Superannuation. Just regarding the strong fund flows that we're seeing towards the large industry superfunds and the consolidations that are going on at the moment. I was just wondering if that was likely to impact your Superannuation business going forward?

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John Harris, IRESS Limited - CFO [61]

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No, we don't expect so. In the situations where 2 funds merge, then there is clearly a question of what they do around administration and/or software and other services.

But fund flow is -- we're independent of fund flow. We're not remunerated based on the size of the fund. We provide software on a subscription basis. There is a proxy to the size of the fund and the complexity that, that brings, but not directly with funds under administration.

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Operator [62]

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(Operator Instructions) Your next question comes from Shishir Prajapati with Contango Asset Management.

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Shishir Prajapati, Contango Asset Management Limited - Investment Analyst [63]

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Can you please just talk about how you see demand for XPLAN evolving into the next few years, especially with the number of [other] advisers expected to come down?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [64]

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Yes, there's no doubt that there are headwinds from a number of advisers. I think the similar kind of discussion happened at FSRA and at FOFA. I think there are significant headlines being -- that are flying around. I think that the research into what adviser sentiment is and adviser intent is a bit different to some of the headlines.

We have a well-diversified client and user demographic in Australia and we have seen a transition of users from institutions to independent licensee arrangements. We expect that to continue. We don't see a situation where larger institutions won't require software of some form or some supply. So I think that the distribution of those users will change over time, and we've seen that occur. We expect that to continue to occur and well positioned to deliver a broad range of software to meet those needs.

Over the medium to long term, we see that the environment is stimulating more requirement for technology, that there is more focus on not just technology, but also the data that is essential to drive business automation and client -- and customer engagement and scale. So we think that they're all positive. We've seen that in recent results and the last result. What we expect to see will be perhaps smaller, but more numerous businesses that for efficiency and scale will be more reliant on technology.

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Shishir Prajapati, Contango Asset Management Limited - Investment Analyst [65]

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Okay. Sorry, just to follow on from that then. You don't expect sort of the overall marketplace of advisers shrinking to have any sort of material impact on the acquisition?

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [66]

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No. I didn't say that. I don't know the answer to that. I think it's -- things are unpredictable. What we do know is that there is more an increasing reliance on technology. And so there's no doubt that the topology will change and that will flow through to us and we'll respond, but we have a strong and capable functional set that will respond well to that. But there will be a change in shape and that may translate to a shaping -- shape in size.

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Operator [67]

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

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Andrew Leslie Walsh, IRESS Limited - MD, CEO & Director [68]

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Thanks, everyone. I'm sure I'll see you over the coming days and we'll talk more.