Beforepay Group Limited (B4P) Earnings Call Transcript & Summary

Good morning and welcome to the Beforepay First Half '25 Investor Webinar. My name is Danny Younis and I help with investor relations for Beforepay. With me this morning we have the CEO of Beforepay, Jamie Twiss, and the Acting CFO, Elena Chan. Before I hand over to Jamie, just a note that we will be having a Q&A session at the end. [Operator Instructions]. I would now like to hand the webinar over to Jamie, please go ahead.

Thank you, Danny, and good morning everybody. Thank you all for joining us as we present our results for the first half of the financial year 2025. As Danny said, I'm Jamie Twiss, the CEO of Beforepay Group and I want to start by apologizing that I'm not in the usual location. Normally, Elena and I do these results webinars together from our office. I'm actually in the U.S. right now on Carrington Labs business. I'm in Silicon Valley and so I just wanted to explain I'm not having a working-from-home day while I do results, I'm just overseas, so thank you for your understanding. So the first half of FY '25 was a fantastic half for us. It was our strongest half in my opinion that we've ever had by some margin and I'm really pleased as to our progress basically on all fronts. The performance of the core business was very, very strong. I'm very pleased our two growth initiatives are going and we'll go through that in more detail but at a high level, the business is firing on all cylinders, the numbers are headed -- every number is headed in the direction that we expect, and would like it to and we feel very confident for the future. So that is the short summary of our results is that I think we're delighted that everything keeps going in the way that we would expect and hope. I'll start just by calling out some of the key highlights from the half and the first and perhaps most important one is that profit before tax number of $2.8 million for the half. So we're obviously very, very pleased with this number. It's up significantly 27% from the comparable half-on-half number last year but indeed it's not that far off the entire FY'24 profit before tax number of $3.9 million. So just the core economics of the business are very healthy and even as we invest in growth, we've been able to maintain good profitability while simultaneously growing the core business as well as pursuing our strategic growth initiatives. So the bottom line for me is that attractive first-half profit before tax number of $2.8 million. We're very pleased with that. A few other highlights I'd call out on this page. So obviously it's always very pleasing to be setting volume records. So you can see there, pay advance is almost $400 million in the half, that's up 11% year on year revenue to just shy of $20 million, we're hoping to break over the $20 million mark, it came in at 19.7, that's 12% up year on year. The active user number continues to grow well. So we broke through the $250,000 number recently and then previously and then reaching $257,000 as of December 31. So that top-line growth, is very healthy, and I am very, very pleased with all of those numbers. And then of course, when we look at it on a margin basis, the net default's 1.1%, that's an astonishing figure for the half. And I think we were very pleased and perhaps even a little surprised that we were able to bring defaults down quite that low. That's significantly down on last year's first half, which at the time felt like a very, very remarkable number. So really pleased with how the unit economics on that core pay advance product are progressing. Now obviously with that top-line growth, with that attractive unit economics that flows through to net transaction margin, which is up 18% year on year. And then as we flagged previously operating expenses, we are investing in the business as well. So we did see those coming up a bit. I think some of that was also due to a one-off non-cash adjustment around some long-term equity incentives. But we did see that gentle cost rise that we've been talking about in the half as well. I think that's more than justified by the overall growth of the business as well as our progress on those strategic initiatives. So very pleased with the performance in this half. All of that of course rests on a very, very strong balance sheet. So $18.3 million in fully unrestricted cash as of December 31, supplemented by additional cash held in our settlement accounts, and the business continues to be extremely well capitalized and in good shape for the future. So again, just a very strong half for us, great top-line growth, great margin performance leading to great profit outcomes, and all resting on that very strong resourced balance sheet. Elena will go through the details of some of those numbers shortly. I'll briefly step back, and just for those of you that may be newer to the group, first of all, welcome. It's good to have you on the journey, and it's been nice to see a lot of new shareholders joining us on the journey. We really appreciate the noticeably increased levels of interest and engagement that we're seeing across the market. So for many of you, you'll be very familiar with this, but perhaps as a reminder for those of you who are new, Beforepay Group is of course the listed ASX entity, and it has two businesses under it. Beforepay being that Australian domestic lending business, the pay advance is our flagship product. We also have the tax refund advance and personal loans, and that business is the heritage of the business. We've been doing that since inception, and that still powers the economics of the group overall. Then alongside Beforepay, we have Carrington Labs. That's our enterprise offering in which we have productized and commercialized the risk analytics IP and the broader platform that we use for Beforepay, and we offer that to lenders around the world, primarily in fact outside Australia. So those are the two parts of the business, and as a reminder, they do both sit on that same platform. They share that core technology stack, that core IP, that core analytics capability. So it's fundamentally one underlying capability and platform that has two different go-to-market channels. As many of you would know, Beforepay's roots were very much a mission-driven organization. Our goal has always been to provide safer and more affordable lending options to Australians, and particularly in that shorter-term and smaller space, our pay-advance product we believe compares very, very favorably from a customer point of view to anything else that's available on the market. And so the core of our pay-advance business is indeed that ethical, short-term lending, and to make that work, we are enormously efficient with our highly automated platform, currently writing approximately 40,000 loans every week with a small team, as well as that automated but highly sophisticated risk assessment system. We built that in order to make that core mission-driven lending business sustainable and profitable. The level of sophistication and the quality of the IP that we have there is also what ours Carrington Labs. Once we built it, we realized there was much broader applicability for it. Just a brief profile of the customers on the Beforepay side. So we've mentioned this in the past, but we haven't actually provided updated numbers in a while. Fundamentally, our customer base looks like Australia. So an average pre-tax income of just shy of $64,000, geographically comparable to the Australian distribution of the population. And then when you look across the employment industry, some of our customers, you can see the breakdown there, again, quite a diverse space, construction coming in at the top, hospitality, retail, healthcare, shortly behind that as well, and so on out through a wide number of sectors. So it is a diverse customer base that really represents all of Australia. And indeed, when you look at that average income number, it is essentially the average Australian. The average age is 35, so it's a little bit young, but it's not a millennial-focused product. It is a product for indeed people at all stages of their working lives, but with that kind of center of gravity for people in their 30s, a lot of young families, a lot of people who are really starting their financial journey in earnest as they reach their 30s. Now finally, Carrington Labs, again, many of you would be familiar with this. But once we had built this pretty remarkable set of capabilities this quite advanced platform for the core business to enable us to issue loans on a fully automated basis, including a quite sophisticated alternative data credit risk assessment. We realized there was broader applicability and broader demand for that from other lenders. And so Carrington Labs takes that capability, puts a new product wrapper around that, and offers it to lenders primarily offshore on an as-a-service basis. This is a really exciting part of the business, and I'll talk more about it later. We continue to think that this is tremendous potential in terms of the nature of what we're able to do, how it compares to other options that lenders have. And indeed, I'm speaking to you from Silicon Valley because that opportunity feels quite concrete right now, and that's obviously out here. So I'll come back to some of those at the end as I talk about where we stand in each of our businesses and where we do next. But for now, I'm going to hand it over to Elena to talk through the numbers in more detail.

Thanks, Jamie. I just want to say that I'm also very pleased to see the great results of our last half. Really, our solid performance was driven by the strong growth in our net transaction margin. And Jamie, on the next page, you'll see that our net transaction margin, which is essentially the margin we make on our total revenue less our direct costs such as net defaults, funding and other things like fees for direct debits and KYC checks. You'll see that, that net transaction margin has really increased to 18%, reaching $11.8 million in half 1 FY '25. And that's up from $10.1 million in half 1 FY '24 and translates to a 3% which is up from the 2.8% from last half. This result is really driven by the growth in our top line, our advanced volumes as well as a lower net default. You'll see on the other line, the coral line or orange line that our operating expenses has also increased in the last half to $8.8 million from $7.7 million in the prior period. And that's primarily driven, as Jamie mentioned, by the one-off share-based payment adjustment that reported in Q1. It also represents the continued investment in our operating activities for our growth initiatives such as the personal loans and the Carrington Labs business. You'll see when I look at sort of the net transaction margin drivers, really, the top line driver, if you flick over to the next slide, Jamie, is the total and average pay advances. And you'll see in both senses, we've seen a steady and healthy growth. On the left-hand side, our total pay advances reached $397 million in half 1 FY '25, and that's an 11% increase from $359 million in the same period last year. On the right-hand side, we've seen a slight increase in the average pay advance, up $393 from $387 from the prior period. We're quite pleased with that healthy growth and that sort of success, I'd say, in the ethical lending model that we have. And you'll see that again in the active users, right? When you look at our active users, we've grown 9% to 257,629 in half 1 FY '25. That demonstrates the effectiveness of our customer acquisition strategy, which we've deployed in the last half. But actually, when you think about it was since May, June last year, where we really quite got it and we were seeing that growth. And then we also had continued demand -- organic demand for our ethical lending model. Another driver of our NTM was really our loan defaults. And I'd say that this is one of our key achievements. And you'll see on this slide that declining trend in both our net and gross defaults. Our net defaults have decreased to 1.1% in half 1 FY '25. And as Jamie said, when we looked at half 1 FY '24 at 1.3%, we thought that, that was quite a phenomenal result. And so we're quite pleased to see the continued improvement in our numbers, which demonstrates that our strong risk management practices, our AI-powered models, which also, as Jamie mentioned, powers our Carrington Labs business models and engines does really work. This is a really important metric for us, defaults because it demonstrates not just the viability of our business model, but also the responsible nature of our lending and the quality more generally of our loan portfolio. If you look at loan portfolio and funding costs, a lot of people ask us what does that look like? And if you look at an average duration of 29, so as you know, our pay advances have a fairly short duration, that keeps our funding costs fairly low. Our third-party funding costs are approximately looking at this formula, 87 basis points based on the average duration of 26 days. This is quite an efficient and effective funding structure and enables us to be competitive in the market whilst maintaining healthy margins. In the direct service costs, what you'll see there is that we continue to be disciplined about cost management. Direct service costs, which includes things like data collection, transaction categorization, payment processing, things like that, KYC costs, they have been further optimized over the period. So you see that graph kind of coming down and then tapering off, but we continue to make minor like optimization and continuous improvement efforts to improve those things. Then on Slide 15, that really is the summary and all of the things that we've talked about to date, which culminates into our net profit before tax number of $2.8 million for half 1 FY '25. I won't go through this slide in detail. But as you can see, this is a healthy growth number, which is a 25% increase from the $2.2 million net profit before tax last year. Turning to our balance sheet and cash flow. I'll talk about them both at the same time. Our balance sheet and cash flow remains strong. We maintain a healthy cash position of $18.3 million that Jamie mentioned and a very solid equity position of $35.6 million. You'll see our receivables have increased, and that reflects the growth in our loan book. Our total debt facilities are $38.4 million undrawn -- sorry, $38.4 million drawn with undrawn facility of $16.6 million, which adds up to the $55 million facility that we have. As I said in other quarters and halves and this continues to hold true, the strong financial position does really support the growth and investment that we continue to have in our business and our strategic initiatives. And with that in mind, I might hand back to Jamie to talk through those strategic initiatives.

Thanks, Elena. I think -- and just to finish off, one other point on this slide that I think is worth noting. So our cash does move up and down a little bit each quarter. And sometimes people ask sort of how does that work and kind of should we care if it's going up or down and what does it mean? If you look at this page, you'll see that receivables over the period went up by $4.1 million, but our borrowings only went up by $1.4 million. So sometimes our cash moves because we're working that cash harder. So the loan book and the other receivables may grow meaningfully, but we don't necessarily borrow fully to cover the full 80% that we're able to in order to cover growth in the loan book. So what's happened in this particular case is primarily that we have sent some of that cash that we had at June 30 out into the loan book in order to reduce our interest burden. Elena has covered the cash flow already. So I'll move to where we stand on the core business and then our 2 growth initiatives. So in that core business, that Pay Advance business, that's working well. I think we're very happy with the growth. We're very happy with the margins. And of course, we are always looking to optimize it, and there's always more that we can do. I don't think we'll ever run out of things that we can do to kind of accelerate and improve that business. Fundamentally, we want to accelerate and optimize. It doesn't need big changes because it's working well. So our priorities there, of course, to continue growth. And at the same time, not just to support the margins that we have, but I think we do have opportunities to continue to improve those risk models potentially quite significantly. Every time that I think we've run out of tricks in our bag, we find something new. I think we have some pretty exciting stuff underway on that risk side. Of course, there is always seasonality in the business. Second half of the financial year tends to have higher defaults in the first half because you have those holiday loans coming back in. I think trading to date has been broadly consistent with the seasonal patterns that we've tended to see in the past. But I think if you look over the medium and longer term, we do believe that there is always more to do. And certainly, there's more to do right now on risk models and limit management. And then finally, it's a highly efficient, highly optimized business. We would like to keep it so. And so even as the business continues to grow, we always look for ways to keep it very, very lean and make sure that automation is really firing on all cylinders. And you can see by the fact that the cost base has generally not grown at anything like the same rate as the top line, we've been successful in doing so. So that's the core business. We're very pleased with how it's going, and we want to do even better by optimizing it at the margins. But fundamentally, we're pretty pleased with it. On the personal loan side, as many of you would know, we launched this new product, which is our first regulated credit product in October. We said at the time that we would do a long thin period of testing in order to, first of all, pressure test it operationally, but then probably more importantly, get the risk modeling where we wanted to get it to. I think we're working through that process now. It's proceeding essentially in line with expectations. We will be guided by the data as to when it's ready to really start scaling that. And when it is, of course, we look forward to that date, but we'll take it out of the when it's ready. And we're not going to rush that until it is ready. In due course, as we do that, we do expect the balance sheet will grow, and we will look to get appropriate debt funding and arrangements to support that growth when they are necessary. So I'd say on personal loans, we're pleased with how it's going, and we will be preparing to scale that at the right time as guided by the data. And then finally, Carrington Labs, you've heard us express -- you've heard me express a lot of enthusiasm and excitement and confidence for this in the past. I continue to do so as evidenced by the fact that I'm doing this from the U.S. right now. We are investing to accelerate growth there. So we feel good about the pipeline. As I said in the past, these can be slow sales cycles, but I think we're pleased with the progress. As we noted in the release, we have brought on board a dedicated salesperson in the U.S. to help accelerate that process. More broadly, we expect that the clients will start coming out of the end of that funnel and sign as the natural rhythm of those sales cycles reaches the appropriate place. And of course, we are always continuing to work on and invest in the product. I think what we have is very distinctive. And I think what we have compares very favorably to other options that are out there for loan decisioning. But we can always do better. We can always do more. I've been spending my flight over here working on some quite intricate technical details of how the models work. So we will, of course, continue to enhance and upgrade both the core risk analytics themselves as well as things like the platforms that we integrate into to make them easier to stand up for clients and so on. So to finish where I began, the core business is going very well, the best half we have ever had. Our 2 growth initiatives are absolutely on track, and we feel quite good about them, and we remain very confident in the future. With that, we're happy to take your questions.

[Operator Instructions]. We do have several questions coming through, which is good. So I'll kick off with a couple of questions. So Larry Gandler at Shaw and Partners has a question around Carrington Labs. With regards to Carrington Labs, does the company have numerous LOIs now? And what are the steps of converting those LOIs into full contacts?

So just LOIs are letters of intent for those who are wondering.

Yes. Yes, sort of a nonbinding expression of interest. So let me answer the second part first. So there are -- I think we found there are many different paths from initial conversation through to commercial completion of the deal in Carrington Labs. It can run through an LOI, a letter of intent, and we have used that at times to clarify indicative commercials and things like that. I think -- my guess is not as many of our future deals will necessarily have an LOI along the way, especially if you're able to move through a proof of concept directly into documentation, the LOI may not actually be as necessary. So I'm not sure LOIs themselves would be as meaningful a metric as where our different clients -- prospective clients in that overall conversation. I think I probably shouldn't kind of talk more about the pipeline than what we've already disclosed other than to say that, while, of course, clients will move through that at different paces, and banks, in particular, can be faster at times and slower in times. As I said before, we wouldn't be talking about it nearly as much if we didn't feel quite confident about where it's headed.

Thanks, Jamie. The second question is also from Larry at Shaw and Partners. It's around the personal loans product. So Larger for longer has now been in the market for, say, 4 months. He believes the pilot was originally involving about 500 users. Do you have a good sample size? And can you determine whether the product is likely to be at least net interest margin neutral?

So I'll take those 2 parts. So we do have a good sample size. I think as with everything in our line of work, the bigger the sample size, the more detailed granular and reliable, the conclusions you can draw from it. So I think we now have enough loans that we can see a number of things and kind of confirm that they're essentially working as we expect them to. I apologize, there's a bit of background noise where I'm right now. So we do have a reasonable sample size. Of course, you always want more data. We've done more than 4 million pay advances. I still want more data there as well. So yes, but there's lots more to do and more data is always more helpful. In terms of net interest margin neutral, so there are probably a couple of ways to interpret that question. So the way we have structured that product is to make sure that neither we nor the customer has any strange incentives around whether they should use a pay advance or a personal loan. So we don't want them to have radically different experiences. It's just under or just over the threshold where a pay advance at $2,000 or a pay advance moves to a personal loan. And we don't want to give ourselves strange incentives to try to steer customers one way or another. So broadly speaking, it, of course, depends on how the customer uses the Pay Advance product versus the personal loan product. Do they take out multiple advances versus one loan and so on? The personal loan is priced with an additional interest charge in addition to the 5% fee. So the Pay Advance product has a 5% fee. The personal loan is 5% plus a 1.5% monthly interest charge. And so while we don't have firm conclusions on what the longer-term margins are and particularly the volume effect as you move someone from that pay advance world to the personal loan world. Again, depending on the interpretation of the question, I certainly don't think it will harm our economics in any way to have the personal loan product. I think we feel pretty good about how we structured and set that up and how the risk is going to work.

The next question is a return to Carrington Labs. What are the biggest barriers so far you are finding with Carrington Labs when speaking to potential clients?

So I'd say there are 2 challenges we face. One is just the nature of selling to often pretty large organizations that may be I don't want to say anything bad about our clients, but they may be a bit sort of traditional, maybe a bit slower to make decisions, maybe some unclear decision-making authority. So selling into those larger organizations that may be a bit more like that and doing it from another time zone, I think, of course, is always going to be a challenge. And I think that's been a big driver of bringing on board a dedicated U.S. sales capability, someone with the experience in working with those institutions and obviously, just better geographic and time zone proximity. So I think that's sort of I wouldn't say it's a barrier as much as a slowing factor. And I think we've taken steps to speed that up. The other barrier is just our own capacity. So we are a small company, particularly our analytics team is essential to the custom creation of models for proofs of concept and implementation. That team is small. And of course, they're also doing some really important stuff on the Beforepay-specific version of that overarching Carrington Labs model. And so I think it's our desire to generally grow Carrington Labs revenue at or above the growth rate of the cost we're putting into it. So we haven't hired in advance of need. Our plan is to invest with the business kind of as it succeeds as well. The flip side of that is that there are times when we just have a capacity squeeze in terms of our ability to kind of move someone through a proof of concept or towards implementation. So I should add, I think there's no obstacle whatsoever in terms of product market fit or product quality. So I think it's very rare that a banker if we explain to them what we do and how we do it, the value to a banker or any lender of having a better way of making loan decisions is immediately apparent. So it's not the case that we need to kind of convince them that they have a problem and then try to tell sell the solution for it. They completely understand the value of what we do. And I don't think it's really ever been questions about the quality of the product or does it work. I think we are very convincing on that score. I think the ones that haven't proceeded have more been in that sense of sort of trickles out into the sand with sort of a large and somewhat cumbersome decision-making process. But it's never a question of whether they understand what the product is for or value it or think the product itself is good. That has been very straightforward and confidence on our side.

[Operator Instructions] The next question is around the debt facilities. What is the LVR percentage limit under the debt facilities? And if you are under that LVR today, does that mean incremental loan growth can be 100% debt-funded?

Yes, so the answer to the first question is 80% with some minor restrictions about what's an eligible receivable and things like that, but it's 80% for whiteboard math purposes. And of course, the answer is yes, that if we are in surplus, meaning the advance rate or loan-to-value ratio is below 80%, we could simply borrow more and fund that fund growth completely through debt until we reach that 80% limit. In practice, it's our preference generally to use our own cash. It's just a more efficient use of capital. So especially with the significant cash levels that we have, our preference will often be to use more of our own equity instead of debt funding advances. It is nice to know though that capacity will be there as the loan book grows, if indeed, when we see that balance sheet growth reach the point when that becomes a relevant consideration.

The next question, do you believe that you are well protected from any potential cyber-attacks?

Yes. I think anybody who says they feel completely comfortable with cyber risk is probably somebody who has grave cyber risk because they probably don't understand it. I just think the very nature of cyber is that you should absolutely be paranoid and worried at all times, and that's what you need to do to keep yourself safe. So I would put us in that category. We take this stuff enormously seriously. I think we've done a very credible job. But could there be unknown unknowns in the future? Absolutely. One of the things that does give us some comfort is the nature of our business. I think it is because we are doing very large numbers of relatively small payments, and we have some reasonable controls around that and the way that customers are onboarded and what they have to do to qualify, and where the money gets sent. And there are a number of technical reasons why every organization has a risk profile. We might be somewhat less at risk than others because of that. But I don't think we take any particular reason for complacency or attention in that. I think in this day and age, I think cyber should always be at the very top of the priority list. And again, if someone is comfortable, we're probably not paying attention.

Okay. It doesn't look like we have any further questions. So that concludes the Q&A session. I will now hand back to Jamie for any closing remarks.

I just want to repeat what I said at the beginning. Thank you all so much for joining us. Especially thank you to the many of you that are new to the Beforepay journey and story. It's great having you coming on board at what we think is a very exciting time. Delighted, obviously, with the results from this half. I think we're certainly looking forward to the next half, but more broadly to this year and the years beyond. I think the combination of how the core business continues to perform so strongly as well as the progress on those growth initiatives, I think that gives us great confidence in the future, and we're delighted to be making that journey with all of you. So thank you again.

Thank you.