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Edited Transcript of HUB.AX earnings conference call or presentation 25-Feb-20 12:01am GMT

Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Hub24 Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 12:01:00am GMT

Ord Minnett Limited, Research Division – Head of Institutional Research & Small-Caps Industrial Analyst

Evans & Partners Pty. Ltd., Research Division – Executive Director of Diversified Financials

Ladies and gentlemen, thank you for standing by, and welcome to the HUB24 2020 Half Year Results. (Operator Instructions)

I’d now like to hand the conference over to your first speaker, Managing Director, Andrew Alcock. Thank you. Please go ahead.

Good morning, everyone, and welcome to HUB24’s results presentation for the first half of financial year 2020. It’s a pleasure to be here today with you all to outline some very pleasing results. And with me today is Mark Goodrick, our Chief Financial Officer. Mark and I will be presenting today, and there will be an opportunity for questions at the end of the presentation.

Just turning to Slide 3. And I think it’s important to reflect on what we do at HUB24, and we talk about this quite often. But we do make a difference in our customers’ lives by connecting them to innovative solutions. And it’s about creating better outcomes or opportunities. Absolutely, you’ll see through this pack today that we are continuing to lead change in this market. We’re doing what we’ve done already, and we intend to continue to lead change by building solutions and working with our customers to create opportunities for the future in what is a very shifting landscape where opportunity abounds for those of us who actually are able to innovate and move quickly and flexibly in the market.

So to that end, we’ve got on the slide here, our 4 operating brands. And that represents a capability that we believe is quite unique in the HUB24 group, and we intend to continue to bring together those capabilities to solve problems and create opportunities in this marketplace as we continue to lead and grow our market share.

Heading to Slide 4, which is our key messages for the half and for the presentation, it’s absolutely very pleasing to give you some highlights. For the first half of FY ’20, we’ve had record net flows. Our profit margins are expanding. And as we said at our last presentation, we intended to leverage or capitalize on the investment we’ve been making in OpEx to grow the business. And that would reflect in expanding profit margins. That’s happened, and we’ll talk about that through the pack. And we’re absolutely delighted to be presenting dividend growth and providing growth in the order of 75% to our shareholders in terms of dividend. So those key metrics are a great testament or a great summary of what’s happening in the business at a macro level. But if we look at some of the themes for the business through the half, we’ve had, obviously, strong growth in funds under administration and our market share is continuing to increase. We’ve been able to do that, delivering on our strategy and making a difference with the initiatives we’re rolling out and the technology and the solutions we’re building and expanding our distribution footprint.

We’ve been able to do that at the same time as maintaining momentum and having such growth — strong growth in flows and not skipping a beat in terms of strategy execution is a real testament to the team and the quality of the HUB24 business. We are continuing to lead in managed portfolios and there’s further innovation to come, and we’ll talk about that throughout the pack. And all those things together are creating new business opportunities. Our leadership in technology, our product focus and our customer focus is causing us to create opportunities. And you’re seeing that reflect through in our flows and the absolutely strong pipeline we have moving forward.

In summary, in this marketplace, there remains very, very favorable conditions for us to continue to grow. We said at the last results that we felt there was unprecedented opportunities for growth, that hasn’t changed. We’re actually focused on delivering growth for our shareholders and creating value and growth for our customers as well.

So skipping over to Slide 7, which is some of the business highlights. I’ve got the financial highlights for the first half year on this slide. And as we said, there’s strong growth, we’re continuing to deliver reliably and consistently as we have half-on-half with a reliable trend in growth. So our platform revenue is up 38% at $35 million. Our platform underlying EBITDA is up 73%, and that’s on PCP, so the first half ’19 at $13.8 million, underlying NPAT of 5.4%, also up 75%. And interestingly, our underlying EBITDA profit margin is up from 31.3% to 39.4% over the first half. Now that includes some AASB accounting standard changes, which Mark will outline. But even normalizing those out, you’re seeing the scalability of the business come through in expanding profit margins.

And that’s the key message today, our positioning, our growth, the trends, the reliability in the business. We are generating returns for our shareholders at the same time as creating value for our customers. Our FUA at 31 December was at $15.8 billion, that’s up from $12.9 billion at June 30, FY ’19. And as we stand today, that 15.8% at 31/12 is now at $17.4 billion as at Friday evening. Recognizing that it’s been a bit volatile in the market since Friday evening. But at that point in time, we were at $17.4 billion. And as I said earlier, we are absolutely delighted to provide shareholders with a dividend for the first half of $0.035 per share. It is unfranked, and that is up 75% on the dividend we provided for the first half of FY ’19. So all in all, solid financial results, which Mark Goodrick will go into further in the presentation.

Turning to the next slide in terms of business highlights for HUB24. We are continuing to excel and receive awards across our business and the recent investment trends, platform competitive analysis and benchmarking report has ranked us in first place for our managed account solution, first place for our overall product offering and first place for our integration capabilities. And reflecting back on my opening comments about our role or our position about connecting clients and customers to innovative solutions and our technology leadership in managed accounts, that’s a great accolade for us to win the awards. They’re absolutely aligned with our strategy and our position in the marketplace.

We’ve made second place — sorry, maintained our second place overall for platform functionality in that investment trend survey as well. I’ve mentioned the $2.5 billion of net flows. That’s a record for the first half. And from an annual and quarterly flow perspective, we’ve consolidated our position of being second in market share for that for some time now. Interestingly, our market share is up to 11th position from 14th at this time 12 months ago, which is September, 12 months ago. Let’s say September FY — sorry, September 2019 [step], which is the latest market share data available. But it is an increase of 3 places, which, again, is representative of our success in the marketplace.

We have 1,841 advisers using the platform. That’s 26% up on this time last year as well. It is a good indication of growth for the business and our success. And our adviser NPS, according to adviser ratings, which is the preference of platform overall is in second place in the marketplace. Adding to that, we are continuing to innovate for the future. We are continuing to walk in the path we’ve already started, which is about building capability solutions and services for the future of this industry, which is continuing to shift. And so we intend to keep leading in the marketplace and creating those opportunities in terms of our platform functionality. HUB connect (sic-ConnectHUB), which we’ll talk about later. Our approach to enabling advice and supporting the advice industry, which is critical to wealth management and our enabling of data services for the industry as well.

Taking a deeper look at managed portfolios on the next slide, our leadership in managed portfolios has been confirmed for the fourth year running. So we’re ranked #1 for the fourth year running in investment trends. We now have $7.1 billion of our FUA as at 31/12 on — in managed portfolios, which is a healthy percentage in the market leadership position. It’s a great statistic compared to some of our peers, and we intend to increase that moving forward as well. Similarly, we have 468 managed portfolios available on the platform and 60 of those are managed investment scheme options. So speaking to the flexibility of HUB24 being able to manufacture solutions in different ways, we’re continuing to do that.

We — during the first half of FY ’20, added 61 new portfolios, including 8 MIS portfolios. And we delivered a range of enhancements for advisers and investors as well as enhancements to help investment managers who use MANAGERHUB, which is a unique proposition in the marketplace to actively manage their portfolios on behalf of their adviser. So we added some security enhancements and so forth in MANAGERHUB.

But what does it mean on an industry context, the licensee and adviser demand continues to grow for managed accounts. It’s been the fastest-growing part of the industry for some time. It’s continuing to grow. And now we’re seeing specialist investment managers emerging and traditional investment managers also seeking to implement managed account solutions. We are winning business in that space as solution the flexibility offers and our leadership, and that is seeing us actually ranked well against competitors in winning that business from specialist asset consultants and new investment managers as well.

So we’re absolutely in the right place for that part of the market, which is growing rapidly. And we are also investing further to extend our lead. There’s more to do. We see more opportunity for investors and for this marketplace to unlock value with the use of great technology and great product solutions. Hence, we have a new managed portfolio development team, which we flagged to you last time we spoke as well on board to help us do that.

Turning to Slide 10. As I said earlier, the latest market share data is September data. And in that data, we continue to achieve as a business way beyond our current market share. So it’s our share of new business or net inflows is punching way above our position in terms of market share as it is for most or many specialist platforms. The chart on the left-hand side outlines that with HUB24 there, showing the ratio of our new market share to our underlying market share. And you can see specialist platforms are doing well in that space because they’re providing great solutions for clients, innovation. And they’ve not stopped in terms of how they deliver outcomes and the investment they’re making in the marketplace and HUB24 leads in that regard.

And on the right-hand side of that chart, you can see declining market share for some of the institutional or incumbent market participants. Also in that data, we’ve actually consolidated our ranking in terms of dollar terms, not just percentage terms. So our ranking for annual and quarterly net flows in dollar terms is now firmly in second place on an annual basis and a quarterly basis. We’ve maintained that position. We were in that position 3 months ago as well. And you can see the trends, they’re up from fifth 2 years ago to third to second as we stand now on an annual basis.

Overall, our market share has increased 1.1% to 1.6%. And as I mentioned earlier, we’ve gone up from 14th position to 11th position in overall market share as a platform.

I’d now like to hand over to our Chief Financial Officer, Mark Goodrick, who will give an outline of some of the key points in our financials.

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [3]

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Thanks, Andrew, and good morning, everyone. On Slide 12, we present the group financial results. The group results for the half year to December 31, 2019, show an increase in revenue of 12% to $52.7 million in comparison to the prior year. This increase is being driven by our largest segment being our platform business, which was up 38%, and we will talk about this in more detail in a moment. Revenue from our licensee, Paragem, was down on last year due to some large practices moving to self-licensing. This is offset by a corresponding reduction in direct costs. However, so far this year, Paragem has brought on 13 new practices, primarily transitioning from the institutional space. Because of the offsetting reduction in Paragem direct costs, Paragem’s underlying EBITDA is only slightly down on last year.

Our IT Services segment, Agility, had a continued focus on HUB24 strategic initiatives during the year. Like HubConnect and our new innovation lab in order to deliver value to the group. This saw a reduction in external revenue generation. After direct costs, group gross profit has increased 28% to $28 million, increasing our gross profit margin from 46% to 53%. Our group operating expenses for the half were $16.4 million, up 9% from last year’s $15 million. However, as Andrew said earlier, this year’s figure includes the impact of AASB 16 leases, which was implemented on 1 July, 2019. This new accounting standard sees operating leases removed from the operating expenses and instead it capitalized on the balance sheet. This reduced group operating expenses for the first half by $0.9 million. The result of this is a group underlying EBITDA of $11.7 million, up 71% from the prior year. This has been driven by the platform segment. Underlying impact of $5.4 million has resulted in the announced dividend of $0.035 per share, in line with the Board’s previously disclosed target of 40% to 60% of annual underlying impact.

Moving now to Slide 13. You will see the platform segment results on a stand-alone basis. Funds under administration grew from $10 billion in the prior year to $15.8 billion at December 31, 2019, with record semi-annual net inflows of $2.5 billion. At the close of last week, on the 21st of February, funds under administration stood at $17.4 billion.

Platform segment revenue increased 38% to $35 million. Platform revenue margin as a percentage of average FUA was 49 basis points, down from 55 basis points in the prior corresponding period and 50 basis points in the second half of last year. Gross profit for the Platform segment was $25.8 million, up 38%, in line with revenue. Platform operating expenses for the half were $12.1 million, up 12% from last year. However, this also includes the impact of AASB 16 leases, which reduced platform operating expenses in the half by $0.7 million. The result of this is an underlying platform EBITDA of $13.8 million, up 73% on the prior year. The EBITDA margin has increased from 31% last year to 39% this year, with our opening run back being the second half of 2019 EBITDA margin being at 35%. Adjusting for AASB 16, these measures stand at 37% today.

Turning to Slide 14, you can see the consistent and strong growth trends of platform revenue and underlying EBITDA over the last few years. This unbroken trend has been maintained now since 2013. This performance is resulting in increased EBITDA margin over time as the benefits of scale are achieved. You will see that the investment made last year has been leveraged in the first half of this year, with EBITDA margin for the first half expanding. It is this consistent performance of the platform segment that has allowed the Board to declare our first half dividend of or $0.035 per share. This is up 75% on last year’s first half dividend.

And with that, I’ll hand back to Andrew for HUB24’s strategy and outlook.

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Andrew Alcock, HUB24 Limited – MD & Director [4]

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Thank you, Mark. Turning to the next slide. And I just wanted to outline some of the trends that are happening in our industry and the market context and how HUB24 is positioned favorably to take advantage of those trends and build our business and create value for customers and shareholders. So the first one there is the demand, as we said earlier, Management Portfolio is growing from advisers, clients and now from investment managers themselves. We are the market leaders, and we are targeting further growth in that area. There is more to do when we consider things like the opportunities of global assets, the ability to put smarts in our portfolio or if you like some intelligence in our portfolio, some personalization — or further personalization than we have to date, which might be about sector [tiles]. It might be about tax preference as [original] consumers.

We think there’s opportunities there to create further value in mass personalization of those portfolios for customers whilst they still get the benefits of individual tax parcels and so forth with holding direct assets. It is a key part of our strategy and a key part of our business, and it is the fastest-growing part of the marketplace, which we are continuing.

The access we have to advisers is also increasing. The market of advisers that are moving to self-licensed away from aligned licensees or emerging in boutiques and third-party licensees is expanding, and our leading market position with great service, great technology and great product is allowing us to win market share and benefit from that shift. So the market that we can access is increasing. And with our current position, we stand well to benefit from it.

Steady integration and efficiency is becoming critical for advisers and licensees, our group capability with our technology services business and in that Agility, our expertise in Paragem and expertise in HUB24 and HubConnect is really uniquely positioning us to build solutions, find ways to integrate data to create efficiency, to lower cost to serve, to serve, advise and then help licensees with compliance. It’s an industry trend, which we stand uniquely in place to deliver further benefits and keep innovating.

There are, of course, new advanced models emerging in the marketplace and new product ranges for the shift that’s going on in terms of the cost to serve, the emerging of high net worth markets and net affluent markets and lower balanced clients leading different product solutions and different levels of advice. HUB24 has exceptional flexibility and connectivity as a platform, we are able to integrate in different ways, very, very rapidly with investment managers, the ability to build MIS, non-MIS managed portfolios, ability to launch investment manager white labels, targeted for specific segments, to integrate technology with maybe advice tools or front-end tools or integration of other data sources. Our flexibility and our capability is allowing us to do that and support that market. And hopefully, help advisers and customers reshape their business and move forward in what is a shifting landscape, where opportunities exist for those who actually want to make a difference and think about focusing on their customer and what the new world will bring.

And advisers, of course, are reshaping their businesses and value proposition. They’re needing to do that for a range of factors. Our licensee subsidiary, Paragem, which is growing and has grown significantly in the first half, is enabling this transition and focusing on building a community for advisers and a center of excellence, helping those businesses shift and transform. So there are some trends there that HUB24 is well positioned to succeed in.

We take a deeper look on the next slide at some of our strategies. And in particular, we have advice enablement there on the left-hand side. We are working with a range of licensees to develop some new technologies and services that will assist licensees with compliance and practice management. If you think about the outcomings of the Hayne Royal Commission and the need for licensees to have up to date, real-time data on what their advisers are doing and their clients, being able to supervise. We’re absolutely innovating in that space, and we have a range of licensees collaborating with us to do that. We’re leveraging our new innovation lab and our technology Services segment to build those solutions. And hopefully, creating a new product opportunity for that segment or creating new products and services that will generate more revenue in that technology services segment at the same time as building solutions that our customers will find valuable and have them wanting to work more closely with HUB24 in the future.

Additionally, we’re working with Aberdeen Standard Investments to build a self-service and bionic advice platform. Bionic, we mean an instrument that Aberdeen Standard Investments use as opposed to robo advice, human interaction as well as technology being used to deliver a holistic outcome to clients. If you think about the need for self-service, the ability for advisers to provide enough service to clients for the fees and raise more fees for different segments and the growing number of orphans or clients without advisers in this industry, the applications of this type of technology in this integration with HUB24, there’s quite a few applications in terms of helping advisers serve their clients, helping us serve clients who have chosen not to have an adviser but also helping to grow the market and take on new segments. So we’re very excited about that, and we see that as key for the growth of the platform and growth of our industry in support of the industry.

We are strengthening the Paragem value proposition with the new practice development executive. That’s going to allow us to bring together our focus on technology services and advice and start thinking strategically about how the technology services business can further support the overall advice industry and bring the strategy of those 2 businesses together as we move forward. And finally, on that, we are utilizing some AI to prototype — or artificial intelligence. We have a machine learning lab and capability inside our innovation lab, looking at how we prototype advice delivery tools, the compliance and customer service. It’s an investment we’re making on creating further utility and adding benefits in terms of efficiency and compliance oversight.

Absolutely, we want to deliver on our strategic objective of growing our FUA and reaching further into the marketplace. And there’s 2 points there to talk about here. Our expanded distribution team is already yielding results, but there’s more benefits to come from that. That team is in place. We’ve had some of our training managers on the ground, and that’s been helping us to increase flows from existing clients. And so that distribution team involves our ground field force around the country, the training managers who work with the state managers and the business development managers, our key account function and a dedicated strategic sales function so that we can be in the right place and focus on the right opportunities with the right skill set. And that covers the segments around boutique licensees, self-licensed, mid-tier licensees, brokers and also now pursuing opportunities with institutions. So we’re seeing the benefit from that arise now. We expect to see more benefit from that in the future.

And once again, on managed portfolios, we’d like to increase the uptake of HUB24 managed portfolios. And that will be achieved in a number of ways by the ongoing development, which we talked about to extend our market leadership. We absolutely intend to actively build advocacy in the marketplace from licensees, advisers and investment managers by demonstrating the additional value that our technology can create for clients in terms of outcomes and why managed portfolios can play the better outcome for clients and satisfy their best interest needs, and make a real difference in their retirement as opposed to just being a different legal structure or an efficiency tool for advisers. And some of the capability of our technology and how it can make a difference over other managed account solutions in the marketplace.

So you’ll see us building advocacy and demonstrating that value and talking about that more in the marketplace. And to do that, we’ve actually hired an executive to work in that space, a well-known person in the [middle] marketplace to help provide education and help advisers and licensees implement our managed portfolio solutions at the same time as building that advocacy and explaining the real value to the marketplace of how much HUB24’s leading solution can create opportunities.

And finally, on HUBConnect, we are in the process of rolling out our latest release to our existing pilot users, and then we’ll be rolling that out to the broader marketplace. There is a new investor app, which is being launched, which has been designed with clients and by clients and provides customers their own ability to personalize how they view their accounts, and who they share their account information with, wouldn’t that be accountants, or our family members, the ability to actually look at their financial well-being through their eyes, not through the eyes of a product manufacturer. And so that new app is coming out as we speak as well.

We’ve completed the application infrastructure to support the integration of new data providers in a robust and scalable way. And why that’s important is it’s not just screen scraping technology, it’s actually application interfaces with other providers with proper permissioning and proper interfaces that give you a reliable source of truth and integration that will allow us to build on our vision to create portfolio views across a number of [providers] for customers. So that’s now complete in hub connect, and we obviously intend to leverage that in a way that we have Challenger, AMM, Macquarie and other data providers with links to their data through those APIs or those interfaces available for portfolio views. We intend to enhance the range of product providers and continue to add ongoing functionality to help connect in the future. And you’ll hear more about that over the course of the next few months.

So moving on to the final slide in the pack before we take questions in terms of outlook for HUB24. We intend and aim to create customer and shareholder value as we have been moving forward. And to do that, we are aiming to accelerate our growth in market share. That’s through our existing relationship with advisers and licensees. We’re still a relatively young platform. We still have relatively low averages per adviser in terms of funds under administration on the platform, and yet we’re a market-leading solution. So we intend to actually use our distribution team, our expertise and our field force to help work with advisers and licensees to grow and accelerate our growth in market share with existing clients as well as converting new opportunities from what is a very, very strong pipeline of opportunities that we have to date. And the investment in our distribution team, as I said earlier, is expected to deliver further benefits in this coming half and beyond, given the team have roughly been on board since December. We will, of course, also continue to innovate constantly to support our ongoing growth.

In terms of the group capabilities that we’ve touched on and leveraging those to solve problems that are existing in the shifting landscape to create opportunities, to build advocacy for us as a wealth management provider and to unlock value for customers through technology and product innovation. And if I can pause there, that’s really been the success of HUB24 today. Our solutions are aimed at creating additional value, value that couldn’t be harvested in previous iterations of wealth management platforms, and we will continue to do that with innovation and technology to create that real value, and you’ll hear us talking about that in the marketplace as I mentioned earlier. So we will create solutions that enable success, and we hope to increase reach across different segments and emerging business models with that capability and with those various solutions. And of course, aiming to continue to deliver strong financial results by levering this growth that we’ve been experiencing and the scalability of the business to deliver strong results that translate into financial results, increased profitability and deliver growth in shareholder value.

And so we are tracking well towards our stated target of FY ’21 of $22 billion to $26 billion, and we’re absolutely committed to achieving that and delivering these outcomes for shareholders and customers. Thank you very much for your time and listening to the presentation.

I’d now like to hand back so we can take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [2]

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Congrats on the good results. First question from me, just with regards to the platform segment. I’m just wondering, is there any sort of seasonality with regards to what drives the gross profit margin? I was just wondering why it was lower this half relative to the second half of FY ’19?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [3]

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Darren, it’s Mark here. I’ll take that question. Look, there’s no material amount of seasonality. And if you look back over the Platform segment over the last few halves, you’ll see that gross profit within the Platform segment has been reasonably consistent over the last 4 halves, and where we’re seeing our margin expansion is actually coming through in our operating expenses. And so that’s our expectation going forward, is that we’ll see that margin expansion come through in terms of operating expenses, and you’ll see it has hovered around that level over the last 4 halves.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [4]

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Right. So in terms of the gross profit margin, I can assume that’s fairly sort of stable, relatively speaking?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [5]

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That would be reasonable. You can see that through the history. We…

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [6]

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And then just — sorry, go ahead.

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [7]

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I was going to say, we do and traditionally, more so in the past, market cycles and adviser business cycles have actually created some seasonality, but that’s ironing out as we reach a service cycle and we’re seeing less of that in terms of inflows towards in the financial year and inflow into cash. We’re actually seeing more stable results. Hence, the results between our last announcement and where we are today, we’ve seen a strengthening of flows in December and January. So that seasonality is ironing out now.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [8]

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Yes, sure. And just on the operating expenses front. I know it’s been adjusted for AASB 16. And in the Platform segment, I guess, half-on-half, it’s increased from $11.6 million to $12.1 million. What –of that sort of $500,000 increase, what is sort of attributed to the sort of new hires that you’ve made? And how should we think about operating expenses next half as you sort of annualize the sort of new hires you’ve made within the business? And I guess, how do we think about, I guess, more of the medium-term sort of leverage on that OpEx base?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [9]

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Thanks, Aaron. So obviously, we don’t give guidance as to that OpEx growth into the future. But as you indicated, we have highlighted to the market the additional team that we brought on, both in terms of distribution and an additional IT scrum team here in Sydney working on the platform. We provided an update today in terms of the hiring of those teams, and you’ll see that all of the distribution staff have been brought on during the half and the majority of the IT staff are now with us. There’s just a couple of roles to go.

So obviously, we haven’t had them for the whole half, and they will be in place for the second half. So you would expect operating expenses to reflect that investment in those additional teams. And we highlighted that, that was an investment that was over and above our normal operating expense growth. So you expect to see that in the second half.

In terms of then operating expenses more broadly, obviously, you can see over time, we have increased our spend in operating expenses as the business has got larger, and that will obviously increase. You’ve now got a fair history of data in terms of trying to predict what that reasonable increase in operating expenses will look like going forward. But you can see it has been leading to the expansion of EBITDA margin as we discussed earlier.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [10]

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Yes, sure. And then just one last question for me. On the revenue margin itself, it’s probably half-on-half. The decline was far less than what I had envisaged. How should we think about sort of the drivers behind that? And similarly, into the next half, is the sort of half-on-half trend this half relative to last half a good comparison for how we should be thinking about next half? Are there any sort of material changes to your business that are somewhat different that would impact that revenue margin assumption?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [11]

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Look, as we’ve said in the past, there are elements of our revenue generation that are exposed to cyclical activity, and those primarily are transactional activity on the platform, so trading activity as well as cash that has being held in clients’ cash administration accounts, and we’ve indicated that that cyclical part of our revenue generation can move both up and down.

Now in terms of the administration phase, one of the things that we’ve said in our materials today as well as in our December quarterly update is we are seeing our strong FUA growth, our strong net inflow growth coming from licensees with large balances, who have access to competitive rate cards. So one of the functions of growing as quickly as we are is that a portion of that growth is coming from large customers. And so if we continue growing at the rate that we are, then you will also see the impact of that flowing through.

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Operator [12]

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Our next question comes from Simon Fitzgerald from Evans & Partners.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division – Executive Director of Diversified Financials [13]

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With regards to the $2.5 billion of inflows. I was just interested to know whether there were any larger transitions involved there, if there’s anything you can share with that in terms of, say, what the largest possible business might have been? I’m trying to think about what the spread is there. And then a sort of follow-up just on that. Is there anything you can talk to in regards to the contribution from existing clients versus new clients that weren’t with the business in the prior period?

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Andrew Alcock, HUB24 Limited – MD & Director [14]

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Sure. In terms of the $2.5 billion, there’s no significant transitions or large one-offs in there. It’s basically inflows from new clients and from existing clients. And I think it’s the result of the — sorry, I believe it’s a result of us having expanded our sales team and delivered some great product and great service. So we’re starting to see that fire. And it’s the result of opportunities that we won in the second half of FY ’19 with large licensees, mid-tier licensees. It’s those agreements starting to fire, and I’ve seen flows come through from those arrangements, including Fitzpatricks and including some institutional flows as well.

So there’s no notable one-offs or large lumps in that $2.5 billion, noting that if you normalize the PCP out because the first half of FY ’19 had $700 million from Fitzpatricks, it’s a growth from good organic business results for that perspective.

In terms of the percentage, I’ll make a comment, Mark may have more details. But from our analysis, because we’re a younger platform and we have had such a growth profile in a number of advisers, there’s a lot of runway left in terms of the average FUA per adviser on the platform. And anecdotally, we believe that the productivity we have from our existing client book is superior to others and our peers in terms of statistics, in terms of how much growth we’re getting from existing clients in percentage terms, and that’s partly because of the age of the platform and partly because of our focus on servicing those clients, and we also do have a fair share of new business as well. But it would be a higher percentage roughly from our existing clients because of our age and because of our focus, which is good. And we have the same new business opportunities as others. Mark, is there anything to add on that?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [15]

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Nothing to add. I can go with what Andrew said. And we don’t publish the figures, but that’s correct.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division – Executive Director of Diversified Financials [16]

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Okay. Second question just relates to revenue margins. At 49 basis points, it did sort of held up a little bit better than what we were looking for. But are you able to share with us in terms of what the expectation is or the trajectory going into the full year in terms of maybe an exit run rate or what we’re sort of looking at there. I mean, Mark, you did sort of hint at it before in terms of the faster the full growth, we need to think about that in terms of implications of the basis points or average revenue margin, but hoping you can help us a bit more there?

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Andrew Alcock, HUB24 Limited – MD & Director [17]

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I might make one comment, then hand over to Mark. It’s very difficult to predict or give guidance on this given the cyclical nature of some of the elements. In fact, it’s conceivable that it could have gone up, had factors like cash on platform stayed where they were in July and August. Having said that, counterbalancing that is the fact that there are flows coming from large licensees that do get scale benefits. So it comes down to the mix of business, and it’s very difficult for us to predict that.

Overall, you should see some compression, but it’s not — the factors may outweigh each other or counter balance each other. It’s very hard for us to do that. But having said that, I’ll hand over to Mark.

The upside of the scenario is the position we have and the growth we’re getting is more than we expected in terms of fuel growth and inflows. And so I appreciate that you might be modeling that, at the same time as looking for how do you think about margin. Very hard. There’s a lot of factors in it. We absolutely will work hard to make sure we manage cost, to make sure we maximize growth and get the best outcome for shareholders.

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [18]

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He hasn’t left me much. He’s done a good job. So I’d highlight, yes, I’d reiterate what Andrew said. Obviously, with key rate cards, as average account balances go up, as you’ll see in our analyst pack, they have revenue as the basis points of FUA will come down, and that’s one of those elements that goes into that mix. But you’ll also see in the analyst pack that revenue per account has continued to increase as well as revenue per account has — sorry, cost per account has continued to decrease. And so, yes, we’d like to see that, that will continue.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division – Executive Director of Diversified Financials [19]

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Okay. Just one final question then on FUA that you mentioned as of last Friday at $17.4 billion. I just noted in the presentation pack that market movements weren’t substantial contributors to that movement from December 31, ’18, to today in both those half buckets. But anything you can say in terms of the contribution of market movements from the movement of December 31, ’19, to that last Friday?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [20]

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So obviously, you can see in terms of that December 31 position exactly what the breakdown was because we published those flows. At this point, we don’t give a breakdown of that flow information, but you will know that the market has been very strong across January and February. So a large portion of that increase in FUA has come from that market movement. And as Andrew alluded to in his presentation, it was a number that was struck at the end of Friday last week, but some of that will have come back in the last couple of days.

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Andrew Alcock, HUB24 Limited – MD & Director [21]

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I’d say, and I said earlier, seasonality [signing out]. The flows, excluding market movements, have not been remarkably different. They’ve been consistent with the trends before, December moving so far into the year. So — but we’ll update that when we do our quarterly for the quarter.

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Operator [22]

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Our next question comes from Matt Johnston from Macquarie.

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Matthew Johnston, Macquarie Research – Analyst [23]

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Maybe just a quick one from me on the ORFR loan increase and the 15% interest on that. Can you just explain to me who’s actually paying that? Is it Diversa or the super members? And just a bit more detail about where that revenue goes through the P&L?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [24]

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Sure. So it’s ultimately the superannuation members who are paying the interest on that loan, but that is through the trustee, which is Diversa. Diversa as trustee has the requirement to ensure that the offer account is funded, but the interest on that offer account is essentially being funded by members. Where you’ll see that come through our results is in interest income, which we show as part of the corporate segment. We don’t show it in platform.

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Matthew Johnston, Macquarie Research – Analyst [25]

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Okay. Great. And then just on Diversa. Like obviously, there’s been a lot of noise with its parent entity Sargon, and I know you’ve made comments that Diversa still is a running business. I was just maybe after any comments about what you may think of superannuation trustee going forward for HUB24 Super Fund?

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Andrew Alcock, HUB24 Limited – MD & Director [26]

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Thanks, Matt. It’s Andrew here. Look, we, and no secret, have been reviewing all of our business partners over the — and we continually do that.

So look, we have been looking at our superannuation trustee [chip] for some time in terms of different strategies and approaches, given the size of the business, the opportunities in the marketplace. So I’d like to leave it at this, that we actually have given notice to Diversa. But unrelated to any of the issues that have occurred with Sargon or the Sargon group, it’s been the result of a long-term strategy. We’ve been working on it for over 12 months. In fact, our decision and business case to do that was prior to any of the issues that are currently occurring. But we’ll have more to say about that when we finalize agreements with our new arrangements. But our view is that we absolutely value having a third-party trustee. We think it creates independence, creates a lack of conflict. It means you can leverage from the expertise and best-of-breed expertise of a third-party trustee who does this for a living and it’s their core competency.

At the same time, the arrangement we’re coming to will allow us to have some flexibility for the future, and it’s an arrangement effect that has a standalone trustee license for the HUB24 Super Fund, so that we have the ability to have a trust — one trustee for our fund, but it’s operated by a commercial trustee.

We’ll make some more statements about it later. Today is about results. But given you’ve asked the question and it is inconsequential or it’s coincidental that it’s happening at this time. But from our perspective, we have an effective operating trustee relationship right now. It has been and it continues to be, and there’s been no impacts on our business at all.

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Matthew Johnston, Macquarie Research – Analyst [27]

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Okay, understood. And then just moving to a couple of the other things. Just on the corporate cost and the other 2 divisions. Obviously, the combination, there’s actually increased losses. I’m just trying to understand, do you start — should we start seeing that moderate? Or are the trends likely to continue from a — if you bundle them all up?

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Andrew Alcock, HUB24 Limited – MD & Director [28]

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It’s probably easier to break down those segments, Matt, and think about them individually. I think starting with the corporate segment, yes, we would expect that those corporate expenses will increase as we get larger, and that will be a function of our size.

In terms of Paragem, as we highlighted earlier, Paragem is going through a period of growth in terms of new practices joining, but it’s also going through a period of transition in terms of some of the larger practices that have moved to self-licensing. But as you say, it’s not a material impact on the group.

Turning then to Agility, which we highlighted in the presentation has been spending more of its time on group activity and really driving group value. That has been a shift in its business model. It is also shifting towards more recurring license-based fees. So more akin to HUB connect that we’re building for the platform. And so that part of our business is going through a period of change, but it is driving value in other segments at the same time.

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Matthew Johnston, Macquarie Research – Analyst [29]

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Okay. And then maybe just one quick one for me. Obviously, a lot of change in rate cards over the past 24 months — sorry, 18 months. Just wondering if there’s any plan for HUB24 given that most of the big guys and some of those more closer peers in the SPP market have either prepriced or announced?

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Andrew Alcock, HUB24 Limited – MD & Director [30]

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Thanks, Matt. It’s Andrew again. Look, we’re very comfortable with how our business is operating. Some of the others who’ve changed their rate cards have just made comments that all they’re doing is changing their published rate card to bring it in line with how their business is operating. We have no need to alter the way we operate in that space. Our business is growing. We’re winning more than our fair share of market regardless of what the card is, rate card is. And so we’re not going to be distracted by that.

If we need to look at that at some point in time in the future, it will be in the light of other things like RG 97 and other regulatory disclosure guidelines, we’d actually wrap it up together with that. But right now, we’ve got no issues or no concern with our current published rate card versus how we operate the business.

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Operator [31]

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Our next question comes from Nick McGarrigle from Ord Minnett.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division – Head of Institutional Research & Small-Caps Industrial Analyst [32]

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All the really smart questions have already been asked, so I’ll have to ask some of the less insightful ones. I might kickstart with the question around cash and what kind of trends you’ve been seeing there in terms of the proportion of FUA. And then as an extension, what the trends might be going forward in terms of the cash spread?

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Mark Goodrick, HUB24 Limited – CFO & Joint Company Secretary [33]

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Thanks, Nick. It’s Mark here. Look, it’s — we have seen cash balances as a percentage of FUA trend down over the half, and there’s a number of factors that go into that. Partly, it is the denominator effect of the FUA increasing substantially, both due to market movement as well as strong net flows. That denominator effect, obviously, has a calculation impact when looking at that measure. But it is also driven by advisers deploying their clients’ cash into the market as the market has been performing so strongly. It’s also a reflection of our flow profile. We’ve continued to focus on transitions being a core part of our flows. And those in-specie transitions have assets coming across as they are in-specie rather than as cash going through the cash account. So there’s a number of factors in that, but we have seen cash as a percentage of FUA trend down as the half has progressed.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division – Head of Institutional Research & Small-Caps Industrial Analyst [34]

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And just any trends around the margin that you’re earning on cash?

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Andrew Alcock, HUB24 Limited – MD & Director [35]

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I don’t know if there’s any trends, Nick. I think it’s a macro level about what’s going on in the marketplace. At this point in time, we’re generally not impacted at all by the current arrangements in terms of the fee we charge for the cash account, which is obviously a very functional account. There’s no changes at this point in time. However, it’s alive in the market depending on what happens.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division – Head of Institutional Research & Small-Caps Industrial Analyst [36]

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So in terms of the — there was a rate card update, I think it was last year, where you were entitled to potentially a larger spread than you’d historically earned. And I mentioned that some of those spreads have been tightened up to ensure that those accounts are not negative. Is that fair to say?

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Andrew Alcock, HUB24 Limited – MD & Director [37]

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Look, there’s been a little bit of that from that perspective. Absolutely, in terms of the rate card, we gave the clients the option to mix and match certain fees, and there was one component that actually increased the cash spread for us at this point in time. There’s a little — a small insignificant amount of impact in the business at this point in time where rates currently stand from the result of those changes.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division – Head of Institutional Research & Small-Caps Industrial Analyst [38]

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Okay, cool. And I mean, the OpEx didn’t seem to increase as much as I had expected. Is that a function of the base of — the employment base being higher now and the incremental change doesn’t have the same sort of percentage impact? Or was there sort of a conscious effort that you’ve reinvested in the business into taking advantage of the opportunities in FY ’19 and FY ’20 was — is purposely maybe not as big a relative investment year?

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Andrew Alcock, HUB24 Limited – MD & Director [39]

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Look, I think we’ve honored our promise that when we did make that investment, we intended to leverage that investment operationally and build scale, and you will see the business do this from time to time. In terms of what we can get out of our cost base, we’re absolutely focused on good cost control and creating expanding margins, but we’re not shy to invest in these opportunities. So there’s nothing remarkable there other than we made an investment. We’re running with that at this point in time. We’ve got most of the key roles in the business in place. Barring a change of strategy or an acceleration of market opportunity for us, we’d like to keep that trending the way it’s trending. So — but it can move around based on the balance of wanting to invest for greater opportunity versus managing costs to get margins, I think it’s — we’re true to what we said in the past announcements.

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Operator [40]

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Our next question comes from Scott Hudson from MST.

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Scott Lyndon Hudson, MST Marquee – Senior Research Analyst [41]

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Just a couple of quick ones from me. Firstly, in relation to, I guess, rates within the markets, are you seeing, I guess, any moderation to the pace of price discounting that we’ve probably seen over the past 12 to 18 months?

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Andrew Alcock, HUB24 Limited – MD & Director [42]

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We’ve not really seen — I mean, from our perspective, our price is our price, as Mark said earlier, where we’ve had larger clients, we might have actually afforded them a scale benefit. But from our perspective, but not much has changed. We’ve seen competitors change their pricing, but they’ve been coming to markets. There’s less of that occurring because most of them have done that. So at this point in time, I suppose you could say it’s moderating, but I’m not sure that it’s had much of an impact on the business. I think the question about revenue margin is driven by other factors that we’ve discussed before as opposed to slashing of price across the market.

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Scott Lyndon Hudson, MST Marquee – Senior Research Analyst [43]

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That’s helpful. Secondly, in relation to, I guess, end of grandfathered commissions in this calendar year, your strong FUA growth, has that been positively impacted by that legislation as of yet? Or do you think that’s still to come?

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Andrew Alcock, HUB24 Limited – MD & Director [44]

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Look, I think advisers were looking at their clients’ accounts and choosing the right platforms and investment form has been happening since 2013 with regard to rebates. There might be a hard end date now that we’ll see the tail of that accelerating, but the vast of that’s already been moved.

Yes, there’s an opportunity. We will be experiencing benefit from that, and there’s probably still more to come as we get towards that end date. It’s hard for us to know what that is, but I think it’s been happening for some years now.

The good thing is, from HUB24 perspective, is we have a great solution, and we’re ready and waiting to help advisers do that. And we will, of course, benefit from that as they rush towards that end date.

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Scott Lyndon Hudson, MST Marquee – Senior Research Analyst [45]

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And then, I guess, in terms of your cost base, you’re pretty happy with the cost base in anticipation of that end date?

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Andrew Alcock, HUB24 Limited – MD & Director [46]

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I don’t see a need to radically change our cost base in terms of that. We would — we’re actually leveraging our cost base very well with the growth we’ve had to date. So to have $2.5 billion in the first half and to have the cost base growth that you’ve seen, I think we’re doing very well. So I’m not anticipating a need to change that for that particular reason.

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Operator [47]

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Our next question comes from [Ashida Darawash] from Citi.

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Ashida Darawash, Citi – Analyst [48]

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Maybe if I can circle back to the FUA of $17.4 billion. Our calculations estimate that it’s about $1 billion in net flows for the quarter. Can you tell me if that’s accurate?

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Andrew Alcock, HUB24 Limited – MD & Director [49]

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Look, I can’t confirm that. But obviously, you’ve got access to market movement, and it would be — it’s not an unreasonable assumption. And — but just to clarify, it’s not for the quarter. It’s for 8 weeks ’til 21st of February.

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Ashida Darawash, Citi – Analyst [50]

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Yes. Okay. And just any color on what you’re seeing in terms of the adviser activity?

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Andrew Alcock, HUB24 Limited – MD & Director [51]

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In terms of adviser activity, I think it’s mixed depending on where you are in your business, you’ve still got some advisers shifting licensees and looking at how they operate their business moving ahead. But you’ve absolutely got advisers taking opportunity in the marketplace, writing new business, dealing with clients because there’s a lot of movement around. There’s a lot of clients reassessing their adviser relationship, maybe because of factors that came out of the Hayne commission. But we’re seeing some advisers doing very well. And if you’ve got a great advice proposition, advisers aren’t necessarily slowing down, and that’s in our numbers and also looking at their business as well.

So advisers are continuing to look for homes in some cases, if they need a new home. But they’re absolutely focused on their value proposition and creating great outcomes for their clients, which hopefully HUB24 can assist.

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Operator [52]

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Our next question comes from Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [53]

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Just a follow-up question on Nick’s question earlier. I was just wondering if you could comment on cash as a percentage of FUA over the period relative to the last half. I mean, you said it’s come down during the half. But I guess, seasonally, you would expect the sort of first part of the half to be usually at a higher level. So over the half itself, what was the sort of cash balance relative to second half of ’19?

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Andrew Alcock, HUB24 Limited – MD & Director [54]

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I might make a comment on some of the patents there. Yes, you may have expected it to be higher at the start of the half versus the end of the half. We do have a lot of people piling money into the market. Hence, the market’s up at heavy levels or high levels. We saw that a year ago as well. That if cash — if people are investing in markets and market prices are going up, people have less in cash. Look, it is trended down, and you had Super contributions in June that go into cash. So you do try and find those cycles.

So in terms of relative [multiple] debt, it’s down at low historic levels. In terms of relative movement, that’s not something we necessarily disclose. But it could equally change through those cycles in any event quite rapidly. And I don’t want to speculate on that. But you’ve now, all of a sudden, got markets dropping. Will people move to defensive assets? I don’t know. These are some of the things that we can’t control in terms of how those balances move.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division – Equity Analyst [55]

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I guess, the sort of question I’m trying to work out or what I’m trying to work out is, do you think it sort of benefited the revenue margin during the half relative to the previous half? Or didn’t really have much of an impact?

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Andrew Alcock, HUB24 Limited – MD & Director [56]

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Look, I think as the cash balance went down, it probably didn’t benefit the revenue in actual fact, overall. So if you’re talking about relative in terms of that, overall, I think it’s resulted in some decline in revenue, which you’ve seen borne out now in our margin of 49 basis points versus 50 in the previous half. It could have gone up. But I think, overall, it’s probably detracted, but not significantly.

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Operator [57]

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That was our final question in queue. So I’ll pass back for any closing comments.

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Andrew Alcock, HUB24 Limited – MD & Director [58]

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Thank you very much, everyone, for dialing in and listening to us today. We look forward to meeting those of you we can in the next couple of weeks. Thank you for your questions, and thank you for your support of HUB24. Cheers.

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Operator [59]

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Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.

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