What you need to know about Praemium Ltd's results

Praemium Ltd (ASX:PPS) is on the right track.

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Yesterday, investment platform provider Praemium Ltd (ASX: PPS) released its results for 2016 and things are shaping up nicely. Revenue was up 23% to $30.2 million and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were $3.8 million, rising from $2.2 million in 2015.

The improvement on last year is better than it first seems because 2015 underlying EBITDA included $1.1 million of R&D income that the company was not eligible for this year. Furthermore, Praemium expenses all of its R&D investment and this increased by $2.1 million in 2016.

Operating cash flow fell by $3.2 million to $1 million for the year, but the difference was due to movements in working capital and because the company paid no tax last year. At 30 June 2016, Praemium had $10.4 million in cash and no debt versus $11.5 million in cash at the end of last year.

Praemium operates in two main markets, Australia and the UK. Australia recorded EBITDA of $9.7 million which was offset by a $3.4 million loss in the UK, but importantly both divisions improved on last year. The UK division is fast approaching profitability with revenues rising sharply from £2.8 million to £4.6 million in the last year.

Gross margins were 77% up from 74% last year as recurring revenues continued to climb and costs remained static. Such attractive margins combined with minimal capital requirements mean that Praemium has the potential to grow very quickly and generate high returns on equity.

This can be seen from comparing the company's half on half performance. Underlying EBITDA before R&D incentives was $1.8 million in the second half of 2016 compared to just $0.7 million in the first half.

Praemium's Separately Managed Account (SMA) software is its main growth driver. Global revenue rose 43% to $12 million and the product won International Platform of the Year for 2016 at the International Advisor Product and Service Awards.

SMAs are becoming increasingly popular due to their greater transparency and tax benefits compared to traditionally managed funds. According to Morgan Stanley's June 2016 Asia Insight Report, the Australian SMA market is expected to grow by 35% per year until 2020.

Hub24 Ltd (ASX: HUB) is another investment platform company that stands to benefit from the trend towards SMAs. It is growing more quickly than Praemium and so it is my pick of the two companies despite being a little bit more expensive. Its platform revenue grew by 90.1% to $15.4 million in 2016 and it recorded gross inflows of $688 million in the June quarter versus $432 million for Praemium.

Motley Fool contributor Matt Brazier owns shares of Hub24 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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