Iress: Result 2016

Iress and Australia's financial markets go together like peas and carrots. After the office lights, Iress products are often the first to be turned on, and the last to be turned off, at many Australian fund managers and wealth advisors.

But Iress's dominance of Australia's mature market has meant growth has been hard to come by, and the 2016 financial year reflected that. Group revenue increased 7.8% for the year, to $390m, but after stripping out the contributions from acquisitions, the core business is barely growing. Earnings per share increased a respectable 5%, largely a result of a few hundred million dollars in acquistions over the past few years.

We have often wondered how Iress will revive organic growth, outside of a boost that a bull market usually provides. It has been unclear. But following the acquisition of Financial Synergy, which we consider to be a great strategic move, it is becoming clearer.

Synergies from Financial Synergy

Iress dominates the Australian and New Zealand wealth management market. Well over half of all advisors are customers of its flagship XPLAN product and this contributes the lion's share (34%) of Iress's operating earnings. If margins are any indication, this is the strongest business in Iress's stable.

Here, customers are highly sticky, which is both gift and curse. It makes for very resilient revenue, but it's also hard to poach your competitor's clients. Despite having a greatly inferior product, Coin, owned by Rubik Financial, recently re-signed two of the big four banks and AMP in multi-year contracts.

Out-innovating Coin is not working, so Iress needs to find another approach. This is where Financial Synergy comes in.

Iress paid $90m for Financial Synergy in September 2016, as discussed in Iress's super acquisition. Its flagship product, Acuity, is the core registry system for industry and retail super funds and third party administrators. Collectively, its customers serve 4 million members that hold $250bn of combined assets.

Iress's strategy is to integrate XPLAN, its flagship wealth management product, into Acurity. This will allow tailored, scaled advice to be provided through these superannuation platform channels.

The acquisition made sense in itself. Acurity contributed $4.4m of revenue in 2016 from a few months of ownership. A full contribution in FY17 should see it closer to the $27.5m of revenue and $8m of operating earnings (before depreciation and amortisation) expected at purchase. But by offering XPLAN to Acurity customers on a modular basis, successful cross-selling could see growth return to Iress's high-margin wealth management division.

We think the acquisition of Financial Synergy could improve Iress's growth prospects. However, we would need to see some evidence of this before we upgraded our recommendation guide. We are not interested in buying at current prices, but this could change if the stock fell below $10. HOLD.