Losing sales because of fewer clients is an understandable, although unfortunate, negative contributor for a business. But when employees taking more vacation days or leaving causes the business to all but fall apart—that is cause for concern.
Australian law firm AF Legal (ASX: AFL) was hit with this double whammy in Q3 FY24, as it suffered its first loss since H1 FY23. For FY25, its aim is to expand and retain.
In Q3 FY24, the Company’s lack of scale left it vulnerable to short-term fluctuations in profit due to a relatively fixed cost base. Its revenue was $4.9 million, a 5.2% decline on the prior quarter and a 2.1% decline on the prior corresponding period. Its net profit before tax (NPBT) attributable to the owners of AF Legal Group recorded a loss of $149k.
This marks AF Legal’s first loss since H1 FY23. It coincides with its lowest revenue quarter since then, too.
The Company noted that Q3 is seasonally its most challenging quarter each year. The drop was felt most in AF Legal’s Watts McCray division, where there was a decline in the volume of its largest matters, with the top ten matters down by $250k on the same period in the prior year. This can be an erratic number as some quarters benefit from an abundance of large matters whilst others can experience a reduced level.
Additionally, cyber security costs have significantly increased in FY24. To address these downturns, the Company is hedging its bets on its recent $3.7 million Armstrong Contested Wills & Estate acquisition. It has started well, with no loss of revenue momentum due to the ownership transition.
Moreover, it has now opened office premises in Bayside Brisbane and on the Gold Coast (both QLD) and in Frankston (VIC). In Q4, new offices will be opened in Canberra (ACT), Joondalup (WA) and Wollongong.
AF Legal saw a higher level of leave this year compared to last. Its current modest scale means minor fluctuations in revenue have a significant impact on its profitability.
The Company saw a 27% lift in leave taken relative to the PCP, the loss of two lawyers in Victoria and a Western Australian practice ramping up again after the appointment of two replacement lawyers. Q3 also included exit costs relating to former senior management, but AF Legal affirmed that this trend will not continue into FY25.
Q4 has seen some further staff movements, with most leaving for personal reasons, which, as per AF Legal, is not indicative of any negative view of the organisation or their time in it. The Company put a spotlight on these losses as well as a maternity leave absence in impacting financials.
AF Legal is ramping up its training expenditures in FY24, investing in one-on-one coaching for several practice leaders. Plus, its move to bring recruitment in-house with a full-time recruiter is proving to be beneficial and cost-effective.
FY25 will be the first time that the current board and management team have their desired structure and personnel in place, with legacy costs finally removed and the benefit of a new and expanded practice area implemented.
Alinda is a Business Reporter for The Sentiment
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