Summer Series: Bravura Solutions (ASX: BVS)

Bryce Leske: [00:01:28] Welcome to the Equity Mates Summer Series of 2020, brought to you by superhero offering, five dollar brokerage and also zero dollar brokerage on all ETFs over the next 12 episodes, we're going to be diving into some of Australia's largest and most well-known companies as selected by you, the Equity Mates community. We'll be unpacking the company, its industry, the outlooks and key financials. And in some instances, we'll also be taking the tough questions straight to the CEO. As always, to do this, I'm joined by my equity buddy Ren how's it going, bro? [00:01:59][30.8]

Alec Renehan: [00:01:59] I'm good looking forward to talking about this company, a company that we were struggling to pronounce. Yeah. Luckily, we've looked up a YouTube video and listen to someone from that team pronounce it. So today we'll be talking about Bravura. No, what was it? Bravura. Well, that's what I said. Bravura. [00:02:21][22.4]

Alec Renehan: [00:02:23] Proview. What did I say? Bravura. Oh, I just combined some letters to grab your brother. [00:02:28][5.2]

Bryce Leske: [00:02:29] Solutions? Yes, it's ASX ticker is B V S, and this is one of the top rated companies in the Equity Mates community for us to talk about. So I hadn't heard of it before bravura solutions. But it's certainly one that has piqued our [00:02:42][13.9]

Alec Renehan: [00:02:43] interest and has it has. So as always, we will be doing this in five parts. We'll be starting with the company summary will then be talking about the industry more broadly. We'll be touching on their future plans and their outlook. Then we'll touch on some financials and finish with a valuation. Good news is this company is profitable so we can talk valuation. So price. Yes. What does bravura. Yes. [00:03:09][26.0]

Bryce Leske: [00:03:09] So other than create difficult name to pronounce, they develop technology solutions for some of the world's leading financial institutions, primarily in the administration. For the funds management sector. [00:03:21][12.4]

Alec Renehan: [00:03:22] Yes, sort of [00:03:23][0.7]

Bryce Leske: [00:03:23] sounds boring, sounds [00:03:24][1.2]

Alec Renehan: [00:03:25] boring. But as I've learned, boring companies are sometimes actually the sexiest. [00:03:29][4.6]

Bryce Leske: [00:03:30] true. The ones that tick away. And I mean, we've had plenty of instances where we've had fund managers come in and pitch companies that we would never think about looking into. And you're right, are the ones that get market share in a niche area, plug away and give great returns. [00:03:44][14.0]

Alec Renehan: [00:03:45] Yeah, boring companies create sexy numbers. Maybe that is what we could say. So. All right, let's do a bit of a sane setting. I guess the problem that bravura really tackling is that fund management and wealth management in the 21st century is a complex business. The regulatory compliance is quite complex and it's difficult to manage. There's so many different regulators and different laws that they have to comply with. And there's really no margin for error when you're managing other people's money. So you have to be really on the ball when it comes to regulatory compliance. And the other thing is there's a really heavy administrative burden. A lot of these organizations are managing billions of dollars, sometimes hundreds of billions of dollars for thousands, tens of thousands, hundreds of thousands of customers, a few probably millions of customers. And to manage that administrative burden, make sure, you know, they're really on top of where people's money is, is quite complex. So for the fund management business, there's a clear problem and bravura have come in with what they think is the best solution. Bravura is a software business. Their key product is a software platform called Sonata Esso and IATA. And basically what Sonata does is it's centralizes a lot of the regulatory compliance and administrative functions that those fund managers are required to do. And it's centralizes on one apparently easy to use software platform. It allows fund managers to develop financial products quickly, has a single customer records that shows all of the interactions with the customers in one place. And basically, in a nutshell, what this software platform is designed to do is to reduce complexity and cost, and it allows for these managers to scale quickly and to act flexibly. [00:05:39][114.0]

Bryce Leske: [00:05:40] I guess it's a good one in that software as a service space. [00:05:44][4.2]

Alec Renehan: [00:05:44] Yes. Yeah, no, that's one thing that we haven't touched on too much throughout this series, but is important to go back to occasionally is when we're talking about these pieces of software that we don't use and that, you know, we don't have a ready-Made way to use it. You can go online and there's plenty of information there. So I did I did a bit of Googling before this and just went to see how well their platform has been received in the community of fund managers. I guess there was a review website that had thirty three percent of its users giving it five stars, thirty three percent for stars and thirty three percent three stars. Sixty seven percent of respondents would recommend the. [00:06:25][40.1]

Bryce Leske: [00:06:25] Which it's not a knockout, no, it's not a knockout. [00:06:27][2.1]

Alec Renehan: [00:06:28] Yeah, I feel it's not bad. I mean, yeah, if you think about some of the best software platforms in the world, I would hazard a guess that between 98 and 100 percent of users would recommend Google. So if that's the high watermark, then 67 percent isn't great. But I feel 67 percent isn't bad to three users would recommend it. I don't think that's bad [00:06:50][22.1]

Bryce Leske: [00:06:51] in terms of a bit about the company history, when a bit of an interesting one established in 2004 and then listed pretty soon after that on the ASX in 2006. It was then acquired by a private equity firm called Ironbridge Capital, and as a result of that, they delisted from the ASX. I'm assuming that was because they then wanted to rejig the business somewhat and potentially rip out some costs, do what private equity do. And then the result of that is generally to sometimes relist the business once it's back up and running, you know, I guess a more formidable manner. It relisted again on the ASX in 2016 and since then is up one hundred and seventy five per cent. So we've been plugging away. [00:07:36][44.8]

Alec Renehan: [00:07:36] Yeah, not bad. Whatever that private equity firm did must have been too bad. We've seen some horror shows from private equity acquired companies, relisting Dick Smith Electronics being the most famous example of a company that was acquired by private equity real estate and collapsed soon after. But this company not so much. A bit later, we'll talk about its numbers in the financials. It's had some pretty strong, steady growth over the four years since its listed. But to give you a snapshot of the company today, it's worth about eight hundred and fifty million dollars. That's its market cap. It has had a difficult year in twenty twenty so year to date. Its share price is down about a third, which isn't great. And to give you an idea of its size, it has 4500 employees across eighteen offices around the world and its systems. This software that it develops has two point eight trillion dollars in assets entrusted to it. So 2.8 trillion dollars worth of fund manager and wealth manager, superannuation funds and stuff like that, 2.8 trillion dollars worth of their assets is managed by behavior's software. [00:08:45][69.0]

Bryce Leske: [00:08:47] So if you turn attention to industry and competitors, then I would imagine that the industry itself is an interesting one. It's servicing businesses that are playing in the management of money, particularly, I guess, for retirement savings, which means that they have a long term focus which would suit the business of bravura. [00:09:07][20.0]

Alec Renehan: [00:09:08] Yeah, yeah. I mean, it's an industry that is sort of stable and steady and growing a lot of the time because of government mandates. And I mean, the obvious one, as Australian speaking in Australia is superannuation. The pie of superannuation just gets a little bit larger every year as everyone contributes at least nine percent of their salary to the super funds. So in terms of having a tailwind, an industry tailwind, an industry that's growing, the funds under management of the industry are just growing year after year after year. Yeah, yeah. [00:09:44][36.0]

Bryce Leske: [00:09:45] So it's not a business that I've actually heard of before, so I couldn't tell you any major competitors off the top of my head. But going through the ASX, there are a number that do compete directly with bravura and I guess the companies that provide software solutions for their superannuation funds. So you've got your link admin, I think, although Link is a registry, isn't it? [00:10:05][20.8]

Alec Renehan: [00:10:06] I think they offer some superannuation software as well. [00:10:08][2.6]

Bryce Leske: [00:10:08] Yeah, right. So that's ASX Airlink Hub. Twenty four is another one premium. [00:10:13][4.6]

Alec Renehan: [00:10:14] Yeah. Yeah. And that's not a typo. That's, that's how the his [00:10:17][3.0]

Bryce Leske: [00:10:17] premium Pape's another weirdnesses. Now the industry like cybersecurity and what was one we did recently. [00:10:23][5.6]

Alec Renehan: [00:10:24] I think the fact of the matter is most companies these days have weird names and the main reason being it's tough to get a new RL out there. I think so, yeah. Yeah. It's lucky we didn't have to do Equity Mates no val. Yeah. Good. Yeah, that's not bad. [00:10:41][17.2]

Bryce Leske: [00:10:42] And then also the big banks offer similar super platform superannuation platforms. So you, Westpac, ANZ and those [00:10:48][6.3]

Alec Renehan: [00:10:48] sorts of things. Yeah. I don't know if all of them do. When I was writing about its competitors. Westpac definitely do. Yeah. Just before we go on, we just mentioned a bunch of Australian companies there. Yeah. This isn't an Australian business like this is a globally focused business that's trying to capture wealth and fund managers from around the world. And there are a bunch of overseas companies that are also trying to do similar things. So it's a global market funds management and software. [00:11:13][24.8]

Bryce Leske: [00:11:14] Yeah, nice. Before we jump into future plans and some financials will take a very short break to hear from our sponsors. So we've touched on a bit about the company history, its de-listing, then relisting its pretty strong performance over the last few years. So what's to come for Rbravura? [00:11:30][16.4]

Alec Renehan: [00:11:31] This is probably not unique to bravura. This is probably quite similar to a lot of software businesses. And so there's really five key things that the business is trying to do. So the first thing that we need to establish is that as a software business, selling to these large and I guess long term focused funds, they have quite long contract length. So the average contract length is six point three years. That's per year, average contract length. So really, the first thing they're trying to do is sell to new customers and find new clients. And the company has been reporting that covid has affected the sales cycle and has affected this sort of pillar of their future strategy. I guess in their earnings call, I was writing one of the transcripts. The CEO was saying that the sales pipeline has lengthened, but nothing has dropped out of the pipeline. I mean, that's a pretty hard thing to, I guess, assess as an everyday investor. But what they're saying is they still expect to be able to sell to new clients. They still expect to be able to tender for new business and respond to a request for pricing from those superannuation funds and stuff like that. But the length of those sales cycles is a little bit longer. At the same time, they're working to expand to new geographies. So new countries where they don't really have a presence, they're going to try and sell to the fund managers in those countries. One big thing that they did, an F 20 in terms of selling to new clients and finding new customers, they landed a where super, which was first state super, which is actually Australia's second largest super fund with 130 billion dollars in assets under management. I didn't realize they were the second largest super fund. I wasn't aware of aware first state that it used to be colonial. First State. Yeah, yeah, yeah, yeah. The first bit is trying to sell to new customers. The second bit, as with most software businesses, is they're trying to up sell existing customer. And so, you know, there's a whole bunch of features and add ons and, you know, extra support and bespoke stuff that the software businesses can offer their existing clients. And in the length of these longer contracts, you know, six years, 10 years of these contracts are a big part of our viewers business is to try and sell their existing clients. A big part of that up sell is the cloud based platform classic. We'll get to that under the third tenant, which is they want to develop new products. And so I mentioned at the top that their key software product was senator. I don't believe that was a cloud product or a software as a service product because in F 20 they launched Sonata Ilter and that's their cloud version of this product and their software as a service version. And, you know, it's got all the bells and whistles that all the software businesses talk about, powered by cloud computing, artificial intelligence and automation. Yeah, the buzzwords. [00:14:22][170.6]

Bryce Leske: [00:14:22] So the old school sonata may have arrived on the same day run. [00:14:25][2.4]

Alec Renehan: [00:14:25] Yeah, yeah. Maybe a server. But we do USPI in terms of developing new products more generally in NY. Twenty thirty six million dollars was invested in product development. I think over the life of the Senada product. They've invested about 210 million dollars in its development and the company reported that of its fourteen hundred employees, eighty four percent of them were software engineers and consultants. So this is a business that understands that it's a software business and is working and investing in improving its software. [00:15:03][37.9]

Bryce Leske: [00:15:04] It's a classic software as a service blueprint for growth, which also I guess extends across many different businesses. But it's your classic improve existing customers by new customers and also build new products. [00:15:17][13.2]

Alec Renehan: [00:15:18] You have a pipeline product. [00:15:19][1.4]

Bryce Leske: [00:15:20] And then what we're saying at the moment, you know, the sales forces of the world is acquire, acquire, acquire. [00:15:26][6.2]

Speaker 1: [00:15:27] Yes, it's bravura acquiring. [00:15:30][2.6]

Alec Renehan: [00:15:31] Yes. Bravura are acquiring. So in NY twenty, they acquired two companies, one called Midwinter and one called Pheno CompE, two companies that I believe are extremely well known by you. Yes. [00:15:42][11.8]

Bryce Leske: [00:15:43] Yeah, lots of [00:15:44][0.6]

Alec Renehan: [00:15:44] names even in EFSI. Twenty one by the time they were actually reporting their EFSI. Twenty results so early in the financial year. Twenty one they'd already acquired another company, Delta Financial Systems. So acquire, acquire, acquire is definitely part of their strategy, a key part of their strategy. Are they [00:16:01][17.6]

Bryce Leske: [00:16:01] acquiring competitors or add ons a [00:16:04][2.4]

Alec Renehan: [00:16:04] lot of the time that add on. Yeah. So they're acquiring these companies that have, I guess, complementary products that can be added to the senator ecosystem. I guess. I mean at an all time. Well, yeah, yeah. I mean for me in terms of an analogy, I just keep thinking of Salesforce. Yes, yeah, I'm a software business that has a platform that has a bunch of customers and I just keep rolling up other software businesses that can bolt on additional functionality, i.e. Salesforce acquiring Slack recently in terms of the new acquisitions in F.I. 20, their revenue grew six percent. Of that, 80 percent of their revenue growth came from their acquisitions. So five percent came from acquisitions and one percent was organic growth. So I think that's an important thing to keep in mind. You want to say companies that can acquire companies and that can add revenue from those acquisitions, but then can still continue a strong organic growth trajectory as well. So I said there would be five things and we've really covered it in four. But to recap, sell to new clients up, sell existing clients, develop a product pipeline, acquire complementary businesses. The final one, which we've kind of touched on throughout, is just invest in improving the existing products. And the company reported that in FY twenty four, it's, you know, existing Senada platform, it improved its digital functionality, tax capabilities, legislative program and capacity to serve its diverse income stream. We should mention that Senada isn't the only platform. It's just they're their big donors. Major one. Yeah, yeah, yeah. That's really what the company says is its outlook in terms of the industry outlook. I think we all sort of understand where the fund management and especially the superannuation business is heading. There's a legislated increase in superannuation that's currently being debated in Australia. Should it go from nine percent to 12 percent? There's more focus on retirement savings around the world. More and more governments are looking at 401. KS in the US and other retirement savings programs around the world. And so I think in terms of the industry, the industry is growing. There are new managers that are being started to manage this money. And so Brbusiness is to just try and increase their market share in that market. [00:18:19][135.2]

Bryce Leske: [00:18:19] Yeah, nice. So in terms of the financials, FII 20 delivered two hundred and seventy four million in revenue, up six per cent, forty dollars million profit, which was up 22 per cent. Now when it comes to software as a service businesses, there are two key things to consider when looking at their revenue structure, and that is recurring revenue as well as operating leverage. Operating leverage is Ren's new buzzword. So I will I will let him talk to that. But in terms of recurring revenue, pretty straightforward. You're looking for the ability for these companies to lock in revenue that is going to continue consistently over a period of time. And that's where the length of these contracts come into play. Their recurring revenue has grown seven per cent in FY twenty and contributes 70 per cent of group revenue 77 sorry, 77 percent. The reason recurring revenue is important is because it removes the lumpiness and the risk when it comes to your revenue numbers. If you're looking at a business that is driven by commodity prices or not being able to, I guess, lock in longer term contracts or subscription businesses is a great example of recurring revenue. It's a lot easier to forecast businesses and the discounted cash flow model with businesses that generate consistent and good recurring revenue. So this is one of those businesses. [00:19:31][71.2]

Alec Renehan: [00:19:31] Yeah, it's a reward for effort play. I would say, like if you have a sales team of three people and they can go and sell three contracts that create five years of recurring revenue, and then those three salespeople can go and try and sell to three more customers, that's a lot better reward for effort than, you know, relying on those three salespeople to continue to go back to the same companies and try and sell to them again and say, you know, 12 months is up when it sell to you. Again, they [00:19:59][27.6]

Bryce Leske: [00:19:59] love that bottle of wine last week. [00:20:00][1.2]

Alec Renehan: [00:20:00] Yeah, yeah, yeah. Don't talk to my competitors. Yeah. So, yeah, like long term contracts in almost any industry are critical and suffer as a service is just this beautiful technological innovation that really facilitates recurring revenue. So as investors, that's a really good thing to say and as a company that makes your life easier. So yeah, recurring revenue, number one. And number two is operating leverage. As you said, it's one of my favorite buzzwords ever since Microsoft reported recently. And for every incremental dollar of sales they made, 70 percent of that was just pure profit. Like you just say, the power of these businesses, once they get to a scale and because they have you know, they have a lot of fixed costs, but once they cover those fixed costs, they are very minor variable costs. The cost to distribute software over the Internet is marginal. It's low. And so, you know, once you've developed your software, the most customers you can sell it to, just you start to say that money just flow straight from sales to profit. So if we look at I've forgotten the name of Europe, I knew I would do that at some point. [00:21:13][72.6]

Alec Renehan: [00:21:14] Just pronounced the EU as a Europe of. [00:21:16][2.2]

Alec Renehan: [00:21:16] Yeah, yeah, yeah. Let's have a look at their numbers since they released. So between financial year 17 and financial year 20, they've increased their revenue from one hundred ninety two million to two hundred and seventy one million, which is an annual growth rate of twelve point two percent. In that same time, they've taken their profit from 14 million to 40 million, which is an annual growth rate of 42 percent. And so you can say that the profit number is growing a lot faster than the revenue number. That's what you want to say. It means that for each incremental dollar, more is flowing straight to profit. If you look at what that means in terms of profit margin, over the past four years, their profit margin has gone from seven percent to 12 percent to 13 percent to 15 percent. And that's, again, a really good indication of operating leverage. If you just look at the difference between NY 19 and 520, they added sixteen point five dollars million in revenue, and of that, they added seven point three dollars million in profit. Wow. So that's what you like to say. Like, as they add more revenue, their costs aren't scaling at the same rate, which means more of that money is turning into profit, which is what you'd expect to see in a software business. But it's great to say in the software business. [00:22:35][78.1]

Bryce Leske: [00:22:35] Nice. So pretty solid in terms of a valuation room. [00:22:38][2.7]

Alec Renehan: [00:22:39] Before we do, there's one final thing we have to say about the financials, and that is analysts are expecting their numbers to be down for 420 one. So not just the growth rate to be down, but for their the actual revenue and the actual profit to be lower than it was in the previous year, which isn't a good sign. The analysts expectations are that then they will return to growth in two and be higher than they are in 20. But that's probably an important call out because the last four years have looked good, grinding that revenue number up, increasing that profit number. But analysts have expectations that the numbers may be or will be down for 420 one. [00:23:19][40.1]

Bryce Leske: [00:23:19] So then if we just quickly turn our attention to a valuation for this one, then the DCF currently trading at, what, three point forty six, thereabouts, assuming all other inputs have been the same. So, what, 10 percent? [00:23:34][14.5]

Alec Renehan: [00:23:35] Well, what we've been using throughout this 10 percent discount rate, three percent growth right after the initial period, [00:23:41][5.9]

Bryce Leske: [00:23:42] which is a classic. So assuming what a growth rate of forty one point nine percent. [00:23:45][3.5]

Alec Renehan: [00:23:46] So forty one point nine percent is the profit growth rate for the last four [00:23:51][4.3]

Bryce Leske: [00:23:51] years pretty significant. [00:23:52][0.8]

Alec Renehan: [00:23:52] If you extrapolate that out over the next five years, you get a scratch under six dollars. Yeah. If you take the revenue growth rate of 12 percent and you say that continues over the next five years, you get a value of two dollars 13. And so that's probably the range that you'd be looking at in terms of bullish and bearish cases. I mean, you could call it a more bearish and say I expect them to actually not grow or to get smaller. But given the nature of this business, long term contracts, recurring revenue, you wouldn't expect that. So you'd probably say depending on how bullish or bearish you are, that might be the range you're looking at between sort of two dollars a share and six dollars a share is fair value. Then, you know, if you want to take the next step, you can start assigning probabilities to each of those and then come up with fair value. But it feels like the market is pricing in this FII twenty one slip. But then we'll see what happens after that nice one. [00:24:54][61.5]

Bryce Leske: [00:24:54] So another good company to put on the watch list. It's great doing this series to get companies across our radar that we've never heard of. So thank you to the Equity Mates community for putting this one in front of us. It was good fun to deep dove into so bravura solutions. ASX Beeves, a massive thank you to our sponsors for the Equity Mates Summer series of 2020 superhero. They are offering five dollar brokerage and also zero dollar brokerage on ETF. So if you're looking to buy a bravura or any of the companies we've spoken about in the summer series, or build your core portfolio of ETFs, whatever it may be, head across and check out their state of the art platform and sign up at super hero Dotcom today you today. So that's a wrap. Yep. We'll leave it there and close it out next week with a company that I don't think we've spoken about before, but looking forward to it. [00:25:48][53.7]

Alec Renehan: [00:25:48] Sounds good. [00:25:48][0.0]

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