Below are some notes with a 1 on 1 call with Nathan Jacobsen, CEO of Diverger.
Accounting Businesses
What is the business model here? Revenue and costs?
Membership services - small firms. Pay membership fee 500/mth. Can turn on or off. Experts in tax centres to answer questions (1000s)
BDM pitches to accountants. Does 8m of total in memberships
Rest of rev is online and face to face training. Transactional in nature.
Knowledge shop 25% share. Focused on suburban firms
Taxbanter. Same thing in-house w/ mid tier. 90% face to face. Troubles due to online training.
In summary about sort of 60-70% recurring monthly and 30-40% transactional based. Paid on an annual basis
What margin is online training vs in person? Seems similar to me besides travel costs? Surely it can't be that much.
Variance in having to book a suitable venue. I.e. could book a 50 person venue and only have a few show up.
Tax expert teachers paid less due to not having to pay them to show up etc. Travel and the like.
Is the recent 2 years demand for training cyclical or sticky? I can imagine there would have been a lot of demand due to the influx of new policies around both COVID response measures and the like.
Definitely a sugar hit, were talking about some seminars getting 1k viewers and stuff as jobkeeper/cf boost and the like. Wonder how stable this could be, hard to tell
This is known primarily to provide nuanced technical training for accountants. What is your view on providing more business operations work where there is a skill gap for Accountants such as marketing and business development.
They are keen to remain on what they do best. Technical webinars and the like rather than filling skill gaps. They would need to hire new professionals in areas they aren’t as familiar.
How do you attract members? How do you retain them?
Knowledge shop grows basically organically, there is no need to raise fees or anything here. Sounds like a good business!
FASEA seems to be available for training in the Knowledge shop business?
Yes, there was a initial demand as FASEA education requirement hit recently but it’s for the most part past. The next sort of hurdle here is in 2026 where they need a degree to advise.
Wealth Businesses
Paragem
Paid for with 3.33m shares ($3.66m), received $1.3m in cash. So $2.3m consideration.
74 (full?) AR - ~80 FULL advisers. No Limited AR
What is the pricing model, does it need to be transitioned as well?
already has. Process started 18 months ago and just finished last month. Nathan has been in the paragem business for all that time, well before he started as DVR CEO. He also noted CARE and Merit are all done too. Differences in how it was implemented. Upfront in CARE but done slowly over the period for Paragem
Are you seeing churn here as a result of the M&A?
Didn’t ask, he did say stable in general though
How does this operate in co-existence with GPS Wealth, will the 2 be merged in some way? Any cost synergies?
Hub and spoke model where there is 1 operational base for all 3 licenses (CARE, Merit, paragem) but each of them has their own sort of sales team and value proposition. I.e. combination of centralised opex and decentralised sales
CARE
What is the business model here, how does it work? Generate revenue and what expenses? Variable or fixed? To what extent is there operating leverage here? Seems to me like the FUM is still very low at ~$2bn
This is a managed account business, they hire investors to do the investing for them. Says that there is a % based fee of FUM so it’s highly scalable/operating leverage.
How do incentivise newly acquired AR’s to use the CARE IMAP service? Is this a conflict of interest or can you truly prove this is acting in duty of care?
As expected, it is a COI to incentivise. They just grow through the merits of the service. This is primarily offered through the GPS Wealth business rather than the other 2. It is accessable on Hub24 & Netwealth
FUM are up +41% YoY, revenue up +21%. But platform rev is only up 4%? License fees payable were removed, why?
Fee was not illegal but they took a conservative approach and decided to remove it as it had the ‘smell’ as if it was. Seems like a pretty bold approach, kind of impressive.
Are you expecting the next few years to be significant growth for Care?
Yes expects sort of 20%+ growth here with continual inflows.
Merit wealth
Will this business be phased out as Limited AR exits the industry? At how many advisors does it remain viable? How do you grow it?
Nope, there is an allocation of Limited AR across all licensees, and they believe the decline has all but come to an end. Said there are about 30 Limited AR that double failed the FASEA exams and they are likely to grow. The remaining have passed so likely to continue to be AR.
Allocation is like 130 in GPS, 30 in Merit and 80 in Paragem of FULL AR.
Impact of the FASEA rule changes broadly for the business?
Explained above on knowledge shop section
Who are the main competitors here? Seems like Centrepoint alliance is quite similar to the Wealth side of the Diverger business now given the recent clearview acquisition and existing licensee services.
Didn’t ask this exactly, but did ask about the pricing model. He confirmed that rising fixed licensee costs are an industry trend and that their business was largely already transitioned. Centrepoint alliance was almost entirely revenue share (commission) previously so their transition was major and they handled it well.
Strategic (Growth strategy)
What is the dividend payout policy? 30-50% of Stat NPAT still?
Said to view it in terms of cents rather than %. Said that they will keep stable but make deliberate decisions to increase the dividend periodically on an absolute basis rather than a % of profits. So no real policy here, just opportunistic.
Do you need capital to grow? Can you grow the existing businesses organically rather than require spend on M&A led growth?
Broadly agrees that existing business can grow organically, but admits that they need to do M&A to get the rights targets. Seemed to elude towards an upcoming transformational deal coming up. When asked on M&A discipline, he said yes kind of uses EPS/ROE hurdles but also said the business was too small to be strict about it, they want a business that can grow revenue and profit ‘over time’, and that could be ‘year 1 loss’ or whatever.
What is the view on using debt to fund growth?
Was a good question. He said something along the lines of them having a 10m facility but also that they didn’t want to go debt heavy as a small business.
What is the view on using equity to fund growth?
Another good question, said that they are aware of impacts of low price on dilution and the like, but can't remember the nuance of detail here he said. sorry.
I am of the general view that the existing businesses can broadly grow organically and you *could* just buyback shares or payout large dividends to enhance shareholder value immensely?
Yes he agrees in theory, but also thinks that to grow the share register, growing the business size would do more for shareholders rather than reducing the share count. Seems to think that making it more illiquid would do more harm than good. Debatable really but the reasoning was *sound*. TSR targets we have to remember.
I note that you show shareholders an ‘underlying profit’ which is effectively pre-tax profits. Why do you exclude tax despite the group clearly paying ‘current’ tax? It is likely a common critique by many investors
Didn’t get time to ask.
4 strategic priorities
Triple net revenue
This is led by majority M&A led growth? Will you dilute shareholders, use debt excessively for this? Do you need to eschew dividends?
Kind of answered above but in several parts. M&A strategy is basically a wealth only thing, accounting will grow entirely organically it seems, eluded to tax education businesses having potential for expanded geographic coverage. Taxbytes only in brisbane or something etc.
What is your discipline on m&a, does it need to be a minimum upfront earnings yield/PE ratio or do you track estimated returns on capital deployed? Do the acquired businesses need to grow or will you attempt turnarounds or acquire assets?
Explained above
Client base +40% accounting
This seems reasonable, how do you intend to achieve it?
Volume, price stability. Some synergy between advisers needing the same training as accountants etc. Knowledge shop offering fasea etc.
Contribution margin of wealth to 40%
Biggest point of interest to me is the pricing model change. Centrepoint Alliance also talked about this. Do you think the business model will be much more lucrative for dealer groups over time given the fixed revenue model taking over? Is this an industry wide trend of pricing power in effect?
Confirmed that this would drive a lot of growth in the margin. I was correct.
How does Hub24 increase margins, what costs will benefit? Does Care have op leverage, is it price increases, is it pricing power?
They were developing automation in licensee services. Such as automated compliance etc. reducing operating costs. E.g. having someone sit down and fill out a compliance document, just get automation to do a lot of the leg work for you.
Said that the technology partnership will allow them to benefit from this as a preferred option over others when it releases commercially as they are helping develop a lot of it.
It’s called HubConnect. Netwealth is doing this too pretty much. Reminds me a lot of Myprosperity (An early one that was quite successful)
Leading non-institutional provider of services to both self-licensed and licensed advice practises
As far as I'm aware there are little to no self-licensed advice services yet. What do you intend to do here?
Correct in assuming no self-licensed advice yet. They are looking to shift towards an agnostic service offering and provide services to both such as CARE, Knowledge shop education and so on. Will be interested to see how this develops.
How long do you intend to remain with the business?
Ran out of time
Does the business have a competitive advantage or moat?
Ran out of time
Do you see any headwinds over the long term
Ran out of time
Why is management fixated on the share price, if you continue to execute the share price will follow. If it’s low, buybacks become more attractive. If expensive equity becomes more attractive. Can’t you be flexible either way?
Asked above