Change Financial Limited (CCA.AX) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the Q4 quarterly update for Change Financial. My name is Tony Sheehan, CEO of Change, and I'm joined by Tom Russell, Executive Director. Tom and I'll run through a presentation and then take Q&A at the end. Similar to previous webinars that we run, if you have any questions, please submit them through the Q&A function on the webinar down the bottom left. . Okay. We'd like to start with a brief overview of Change Financial. For those of you who are new to the business. So what do we do at Change, we provide innovative and scalable payment solutions for over 150 clients across more than 40 countries. We are a B2B business, with 2 core products. The first one being Vertexon, which is our payments as a Service or PaaS offering, which provides card issuing, card management and transaction processing. Vertexon generates 78% of the group's revenue in FY '25. Our other product is PaySim, which is software, which enables end-to-end testing of payments platforms, processes and scheme rule compliance and PaySim contributed to the balance of 22% of the group's revenue in FY '25. Importantly, it's worth noting that both Vertexon and PaySim are proprietary payments technology platform. So they are owned and developed in-house by Change. So it's important from a value and control perspective for us as a business. We are focused on growing both of these core products given the significant market opportunity for Vertexon particularly in Australia and New Zealand and globally for PaySim. If we look at some highlights for Q4. So during the quarter, we signed a new PaaS client which has established programs in Australia and New Zealand. So this client is in the embedded finance space, which is a sector we are actively targeting. We've spoken about that in previous webinars as well. The programs will be digital only, so they'll be utilizing our Apple and Google Pay capabilities in both countries. We're targeting to launch the card programs in early H2 FY '26, and that will then be followed by a migration of existing cards in market to Change. We also continue to sign new projects and licenses with existing Vertexon's on-premises and new PaySim clients, which is great. And PaaS clients made a strong contribution to Q4 revenues. We delivered another record quarterly revenue result of $4 million, up 26% on prior period. So with the strong finish to the year, our full year FY '25 revenue was $15.1 million, up 42% on prior year. So that's a great result for us as a business to get that strong growth momentum and maintain it throughout the year. 76% of revenue was derived from recurring sources. So this provides a really solid base of revenue to grow from. It's still very important, though, for the business to continue to deliver one-off license and professional services revenue. Also, very pleasingly, the company delivered a maiden positive underlying EBITDA result of $200,000. So this is unaudited and also includes the U.S. operations for the year. Tom will talk in a little bit more detail around that result as well later on in the presentation. In terms of our PaaS metrics, the PaaS platform continues to scale with volume, increasing as card numbers continue to grow. So we now have more than 73,000 active cards on the platform. As a reminder, active cards are key to driving transaction numbers and volumes and hence, revenue for the business. If we look at FY '25 as a whole, we processed 17.8 million transactions for a total value of USD 545 million. So we've mentioned this before, we are scaling the platform. We are not at scale. So as we continue to grow our PaaS client numbers and volumes, we will get scale benefits as well. So we have a relatively fixed and stable cost base across the business. So the more revenue we're generating on our PaaS platform the costs are staying fairly stable apart from volume-related expenses and more of it drops through to the bottom line. We are now the largest nonbank issuer of debit cards in New Zealand, which is a fantastic achievement for our business in a relatively short period post go-live. We're currently onboarding 3 clients, which will start to contribute to our PaaS metrics and volumes once they launch. We are focusing on growing the PaaS client base to drive revenue and deliver those scale benefits that I just mentioned, and we're continuing to build on the early success in Australia, given the significant opportunity in Oceania as well. So if we look at our PaaS time line here, you can see a steady cadence of new client wins and a significant shortening of time frames between signing clients and launching programs. So this is driving the strong growth in PaaS revenue that you can see on the chart below. With the PaaS platform fully live and operational in New Zealand and Australia, we want to increase the number of client wins, particularly in Australia and continue to shorten the onboarding time frame. So shortening those onboarding time frames really improves the customer experience and also enables transactions and hence, revenue to be generated earlier. Tom, I'll hand over to you.

Thanks, Tony. So we had another great revenue quarter, as Tony mentioned, a record for Change with USD 4 million or AUD 6.2 million of revenue, which was up 26% on Q4 FY '24. That's taken us to $15.1 million or a little bit over AUD 23 million for the year. Pleasingly, our PaaS revenue was up 142% quarter on the quarter versus the prior month -- prior year, sorry, 12 months ago. And as Tony mentioned, we are onboarding 3 PaaS clients at the moment, which are yet to contribute to our PaaS revenues in a significant way. We'll start to see those already signed clients that are onboarding contributing to our PaaS revenues over the coming quarters as they launch. As a reminder, PaaS along with our support and maintenance revenues are our recurring revenue streams. Now these do have some seasonality in them and can fluctuate, particularly PaaS. But because underlying cardholders of our clients are buying groceries, they're paying for their streaming subscription, their gym memberships, playing for holidays, et cetera, using Change issued cards, revenues are reasonably predictable. For the quarter, our recurring revenue totaled USD 3.2 million or AUD 4.9 million, which is approximately 80% of our revenue. So we have taken our recurring revenue from around 50% 12 to 18 months ago to around 70-plus percent of our business as we sort of enter FY '26 is a very good achievement. In terms of that nonrecurring revenue, we mentioned before, so we continue to generate this from professional services and licenses. And during the quarter, we delivered USD 700,000 in one-off revenues. Last quarter, I said in my update that we continue to have a strong focus on one-off revenue, and there was a number of key projects. We continue to -- in the late stage of the pipeline. And I'm pleased to say that this webinar that the sales team did a great job in winning a number of those opportunities in Q4 and have continued to build the pipeline with further opportunities. So as we enter FY '26, we have a very large amount of contracted work for the team to deliver over USD 2 million, significantly more than we had at the start of FY '25, which helps us build confidence on top of our recurring revenues and being able to deliver on our guidance in FY '26 as well. In terms of EBITDA, so very pleasingly, we delivered that maiden EBITDA positive result of a couple of hundred thousand dollars. But also of note, excluding the U.S., we would have -- all those costs are now out of the business on a go-forward basis. And if you had to excluded those U.S. operations specific costs, we would have delivered EBITDA of USD 1.3 million in FY '25 or AUD 2 million. In terms of the cash flow, so the cash receipts for the quarter were USD 4.3 million, up 21% on the prior corresponding period, and that is by far, in a way, a record cash collection quarter for us. That's mostly driven by our PaaS business and the increasing size of that business. Cash payments from operating activities were broadly in line with Q4 last year, up only 1%. As we've said before, we have all the key roles and the staff in place to add significant revenue without a lot of new hires, and we can continue to see evidence of that with staff costs also relatively flat, down 2% on Q4 FY '24. CapEx is also moderating and expected to -- and has tracked down about 20% lower than FY '24, which is where we see that sort of maintaining through FY '26 around that USD 1.5 million mark. We have a healthy cash position, which increased USD 700,000 in Q4 to USD 3.9 million or AUD 6 million, and we hold an additional USD 1 million or AUD 1.5 million in security deposits, that's our cash that is tied up in security deposits to support our PaaS business. And on the right there, you can see that graph. We have delivered operating cash flow positive for the whole of FY '25 including all U.S. costs. But again, if you exclude those U.S. cash costs, you'll see that we're starting to generate significant operating cash flow. Back to you, Tony.

Thanks, Tom. So I just want to talk around the market opportunity. We have presented again some of this material previously. But -- just to sort of recap here. So during FY '25, we engaged a leading payments consultant to undertake market assessments for both PaySim and Vertexon. And we use these assessments to build on our existing strategy and specifically to do a couple of things: one, improve our understanding of the competitive landscape; two, provide market analysis and segmentation to identify and focus on the most attractive customer segments for Change to target; and thirdly, to assist with prioritizing our product strategy to deliver long-term growth. So a hugely valuable piece of work that we undertook during the year. If we look at the PaaS opportunity, so unsurprisingly, banking in Australia and New Zealand dominated by the big banks. If we look at our position in the New Zealand market, we are processing less than 1% of New Zealand card payments. And then in terms of the small financial institutions, so the credit unions and building societies, et cetera, where we've had a lot of our early success and the debit card market, we are processing about 15% of that market. So we still have a lot of scope to grow in New Zealand. In the Australian market, we really have not yet scratched the surface. So we're currently onboarding clients, but our volumes are very small. So there's a significant opportunity in this region. So we're looking to leverage our success in the New Zealand market to target the sizable Australian market into small and medium sized financial institutions, nonbank lenders seeking to add card functionality, nonfinancial institutions and embedded finance opportunities. So we are gaining traction in the embedded finance space, which is some -- which is a sector we have been targeting, particularly in FY '25. Also credit cards, but we will not do underwriting or provide credit. And then the last one there is white label prepaid card brands and issuers. So a very sizable opportunity for us to pursue in Oceania for our PaaS platform. In terms of PaySim, we have over 140 clients, which is less than 0.5% of the estimated global market for testing solutions. So where are we focusing our efforts to grow PaySim. Firstly is the partner reseller network. So we want to leverage our existing partner network to drive sales and secure new partners and resellers. So that's really a one-to-many approach to scale quicker. Secondly, direct sales, outbound direct clients are supported by marketing activities. Thirdly is our cross-sell and upsell, so upgrade existing clients to adopt more modules and deepen integration into the client systems, and part of that is making sure clients are aware of PaySim's functionality and capability. It's extremely rich tool. Some clients are on the user portion of that. So it's really about educating them about what the tool offers and opportunities to sell more modules because it is a modular based platform. The last one there is product development, so new products and features to meet additional payments testing requirements. So that's part of our product road map is to enhance PaySim. So we have a clear product and sales strategy to drive future growth across both products and to continue to build on the company's increasing sales momentum. We did appoint 2 new strategic business development managers in late Q3. So the new strategic BDMs are focused on outbound sales, hunting for Vertexon in Australia and also for PaySim globally. So historically, the business really has primarily been an inbound sales organization, but we are quickly transitioning to an outbound sales hunting organization really to drive that growth, given we're well positioned to scale the business and also we have the PaaS platform fully live and operational in Australia and New Zealand. So if we have a look at a recap of the FY '25 results and our outlook for FY '26, which we released to the market a few weeks ago. Very pleased to say we exceeded FY '25 revenue guidance, and we expect to deliver maiden positive underlying EBITDA result upon finalization of the audit. So FY '25 revenue, as I mentioned earlier, grew 42% on prior year. So that is significantly higher than our guidance that we provided to the market of in excess of 30%. On the back of that, that means we have delivered a 3-year revenue CAGR of 22% to the end of FY '25. We want to maintain a target revenue CAGR in excess of 20% over the medium to long term. We've also delivered that maiden positive underlying EBITDA result of approximately $200,000, which includes the U.S. operations for the full year. Tom has talked and covered what that means in terms of the U.S. operations and the drag that was on the numbers, that is now substantially complete and won't be there in FY '26. In terms of our outlook and guidance, so revenue expected to be in the range of $16.5 million to $18 million. We expect a significant increase in underlying EBITDA expected to be in the range of $2.5 million to $3.5 million. So costs out from the U.S. scaling up the business revenue growth as well. So we're getting those efficiencies and we expect to be net cash flow positive as well. So if we look at where we are now, we enter FY '26 as a far more streamlined and efficient business with sales momentum increasing. We are focused on building the sales pipeline, winning new deals across both Vertexon and PaySim and driving operational efficiencies to deliver top and bottom line growth over the coming years. I think we're in a very exciting period for the business. We're in the best shape we have been as a business as well. We are very focused on what our goals are in executing on our strategy and operating plan as well. So that brings the end of our formal presentation. I think, Tom, we might have some questions that have been coming in as well.

Yes, we do. I'll throw a few of these to you first, Tony, and I'm going to collate a couple because as you'd imagine, there's a few people asking about the RBA and the impact of some of those decisions. So I'll break this up into a few. So what are the potential impacts of the company on the RBA's proposed changes to card fees, start with that?

Yes. So look, it's very topical at the moment, particularly in light of cost of living challenges. I think if you have a sort of step back on card payments and the fees that are in the market, it is one of the very few costs of doing a business that is actually charged on top of the ticket price as well. So there's a cost of providing these payment services, including fraud protection, and this will continue, right? So if surcharging is banned, some businesses may absorb the cost, but I suspect the majority will increase the cost of goods for all sales to recoup the cost of payment acceptance like any other input cost. The impact on Change Financial as a card issuer is limited to interchange fees as in our role. So the RBA has suggested or recommended reforms, which is lowering the interchange. There is a cost of doing business to ensure that we continue to innovate and provide great service like any other competitor in market. So our pricing would be assessed holistically. You just got to remember, interchange is a component of the fees that -- or the revenue that we generate, we also generate transaction fees and other volume-related fees from providing our service at this stage, given the relatively low volumes that we have in Australia, minimal impact on our business. But as we will continue to monitor that with the RBA going into a consultation period which we have also seen happen in New Zealand, which I think there's a question that's coming around New Zealand, which I'll talk to in a moment as well. So we will continue to assess that minimal impact now, but we will -- any changes to interchange fees in the sort of sectors that we operate in, in terms of debit cards or prepaid cards and the like, we will be assessing that holistically like other card issuers.

Okay. Thanks, Tony. And you have jumped ahead a little bit there. But so the impact on us in Australia is fairly limited as you've touched on from interchange. And then the next part of that question is, are there any proposed changes in New Zealand?

Yes. So New Zealand is going through or has gone through a similar consultation period, the Commerce Commission or ComCom set out a while ago, a paper where they were looking to regulate and lower interchange fees and other fees for payment acceptance. So they went into a consultation period where they were -- where they put out their proposed reforms on interchange. Let's focus on interchange for us for a minute here. The interchange on debit cards, they were proposing to decrease us, along with a number of other participants in the payment system, put in a submission to ComCom. ComCom has come out last week and actually changed their views on some of the reforms on interchange. Pleasingly, the interchange on debit cards and prepaid cards aren't impacted. So there is no change to that. So they did actually take the views that were presented by Change Financial and others. We were actually cited in the final outcome by ComCom. So they are going through -- they have sort of gone through that at the moment. No change on interchange for us in terms of where we operate. There is some impact on credit, the interchange on credit cards. That is not a space that we operate in currently. So that's a good result for us. What they're also coming out with and have announced this week is they are banning surcharging. So particularly in New Zealand, you've got the domestic FPOS rails and you've got the Mastercard Visa rails, the international rails there on the card schemes. Where there is an option, a lot of people will take the domestic FPOS rails because there's no cost to the purchaser as opposed to surcharging for using Mastercard or Visa there. So the banning on surcharging in the market over there, I think, will also be beneficial for card issuers like us. Yes, we operate on both rails, the domestic rails and through Mastercard as well, but I think that's going to see a volume shift more over to the Mastercard rails, which is a sort of higher revenue stream for us. It may also reduce the sort of cash usage further amongst our clients, particularly in the financial institution clients as there is no cost differential for using sort of tap and go, which tap and go always runs through either the Mastercard or Visa rails as well. So very similar sort of processes that they're running in New Zealand and in Australia, but some good outcomes there for us in New Zealand.

Thanks, Tony. Okay. I'm going to put a couple of questions together here again. What is an embedded finance company? Can you give us an example of one? And then another question is, congratulations on the new PaaS win. As an existing card program, are you able to add some color around the number of cards in Australia and New Zealand? And what would you say were the reasons you won versus your competitors?

Okay. Can you...

I know you can't answer some of that.

Can you just start with the first one again?

What's an example of an embedded finance company. Can you give an example?

Embedded finance typically is where you have a company will offer -- will have a core offering and it might be, as we've done before, a personal wealth management platform where you do trading, manage your wealth as well, offering an ancillary product in there and for our client that we signed in Q2, they're offering a debit card. So what that is, is expanding -- really expanding their offering and controlling more of the sort of funds flows and ecosystem for a customer within their sort of core offerings. So instead of doing the sort of the trading or wealth management part where you can trade your shares and buy and sell, but then you also have separate bank accounts with another company. What the example here is you can do your share trading with this business, but you can actually have your bank accounts linked here with the debit card that runs out of that company. So they're just expanding their offering. You may find it with other sort of software where it's expense management as well. So it offers. You can offer a card that is linked into your accounting software for argument's sake that does auto reconciliations and it manages your finances. So it's really about taking the core offering and sort of expanding that offering and sort of capturing more of the end consumers activity and hence share a wallet there.

Great. Okay. so we've obviously announced the client win in the quarterly. Can you talk to the size of the client, which we might not be able to do and you can sort of talk about why? And then what are some of the reasons we won versus our competitor?

Yes. So I won't go into specifics on the client nor the size there because it is commercially sensitive. They do have card -- their card programs in Australia and New Zealand currently in market there that will be transitioning over to Change Financial. But if we talk around why we were successful, really, it is around our product offering. So stability of our platform, so the availability of our platform and the features and functionality on the platform as well. But the key thing that really separates us here in terms of winning this business was the sort of reliability and stability of our platform and our service offering to complement that and support our support the customer.

I think as you said, Tony, in the presentation, because we own our technology, we do have more control over those outcomes. So been a lot of work and investment put into the product, but we're certainly starting to see some of the benefits of that. Okay. It looks like PaySim sales are mostly in license sales. Are the targeted clientele not interested in subscription offerings? Throw that one to you, Tony.

Yes. So we do offer and we have for a while, the subscription offering. Typically, with the size clients that we are signing on the PaySim side, there is a preference for the upfront license sale for them. So they will buy that license and then pay the ongoing support and maintenance. We do have the subscription offering there available, some clients taking on a short-term basis, it might be 3 months or it might be 6 months while they're doing things. But in general, we're still seeing most of our clients, which are sort of large financial institutions, preferring the outright license purchase?

Okay. I'll take this next one. So regarding the currently onboarding 3 clients, includes the new ANZ embedded finance client plus the Aus FinTech in the Global Payment Digital Wallets and the third -- and what's the third client? So there's the client we signed in Q2, which is the personal wealth management platform in New Zealand. So that's the third client. They're in pilot now. So they are -- they've issued their first few hundred cards to friends and family and they're going through the process. Any indication on how close the group can get to FY '26 guidance range with the 3 onboarding going as to schedule? So we we've put out a range and as some people have pointed out, the lower end of that range, there's not -- there's -- it looks like we're almost hitting that on a run rate basis. The thing that we have to remember is we do need to deliver a one-off revenue, which as I mentioned before, we've got a very, very strong pipeline and a lot better pipeline than we did 12 months ago. So we're feeling very confident about that. But we do need to deliver that one-off revenue again. So we're focused on that. And then the thing with the clients we are onboarding is, they are established businesses. Well, one of them in particular is established business with quite a large number of users, over 500,000 in New Zealand. What we don't know is the uprate -- the uptake of the card usage. So depending on how that rolls out. So things are going to schedule from our perspective and from the client's perspective, from an integration perspective. But the client uptake is what we sort of need to wait and see. And that has the potential to sort of really drive revenues for us in the back end of FY '26 in particular, and certainly into the future '27 and '28 years. But we kind of all need to wait and see how that goes. And we put our guidance early, and we'll keep the market updated as we go throughout the year. Okay. I think that's all the questions.

Okay. Thank you for the questions. It's always great to get the interaction from you as well. So thank you for taking the time to join Tom and I today. We will be presenting our annual results in late August as well. So we'll have another webinar then. So hopefully, you can join then. But thank you. Thanks for taking the time. Have a good day.