Change Financial Limited (CCA) Earnings Call Transcript & Summary

Good morning all, and thank you for taking the time to join us today for the Q2 FY '25 investor presentation. My name is Tony Sheehan, CEO of Change Financial and joined by our Executive Director, Tom Russell. Similar to previous quarterlies, we will just run through our formal presentation firstly, and then we will take Q&A at the end. Okay. So Change Financial. So what do we do at Change Financial? I know many of you would have heard this slide before, but anyone who is new to the call, we will run through briefly what we do at Change. So we provide innovative and scalable payment solutions for over 150 clients across more than 40 countries. So we are a B2B business with 2 core products. The first is Vertexon, which is our Payments as a Service offering, which provides card issuing, card management and transaction processing. Vertexon generated 80% of the group's revenue in H1. The second product we have is PaySim. And PaySim is software, which enables end-to-end testing of payments platforms, processes and scheme rule compliance. PaySim contributed the balance of 20% of the group's revenue in H1. And as a business, we are focused on growing both of these core products. With our Vertexon offering, our role in the payment process depends on the region, the client type and the services provided. So there are 2 main options for what we can do with Vertexon. The first one is processing. So Change provides the technology to enable card issuing, but the client is responsible for card issuing. So the client holds a necessary scheme and regulatory licenses. The second option there is processing and issuing. So Change provides the technology to enable card issuing, but is also responsible for the card issuing. So we hold the necessary scheme being Mastercard and regulatory licenses in Australia and New Zealand. So if we just go into the highlights for the quarter. So revenue for the quarter was $3.5 million, up 53% on prior year. We've delivered a record first half revenue of $7.2 million. So it's up 61% on prior year. So we did sign a number of new projects clients during the quarter. But we also signed a note a new PaaS client under the BIN sponsorship model in New Zealand. So that client is a personal wealth management platform, and they have over 0.5 million customers across New Zealand and Australia. So they're launching a debit card in New Zealand first, and they've actually registered a strong whitelist interest from their members there. So that's an exciting one for us to start in -- to start in New Zealand as our first BIN sponsorship client. Recurring revenue, 76% for the first half. This is up noticeably from the first half of FY '24, which was 59%. So it's great to see that recurring revenue proportion really increasing in our business, which is in line with what we expected as our PaaS revenues continue to grow. The number of transactions in our volume process continue to increase strongly during the quarter. Really, that's particularly driven by our New Zealand client base there. So we are actually on a run rate basis in New Zealand, if you have a look at it from sort of just over 12 months ago, we were at 0, now we're on a run rate basis of just over NZD 1 billion per annum, which is a great achievement for the business is where we want to continue to scale and grow those volumes for our business as well. Cash on hand, $3.5 million plus another $900,000 in cash-backed security guarantees. And Tom will talk more about the cash balance there. But the translation the translated value of our cash balance in U.S. dollars, was materially impacted by the significant devaluation of the Australian dollar and the New Zealand dollar relative to the U.S. over the quarter. So this is a translation reporting matter, and Tom will talk more around our sort of cash holdings in Australia and New Zealand and sort of the natural hedging with a lot of our sort of cost base as well. So just worth sort of highlighting that FX impact on our cash balance and being the translation matter during the quarter. If we have a look at our PaaS metrics, we now have more than 66,000 active cards on the platform. So that significant increase in the active card and volumes during the quarter is really driving that revenue growth. So we report on those active card numbers. It's those active cards that are being used that really drives volume, which therefore, drives our revenue. So great to see that continued increase during the quarter. As we announced at the end of November, the exit from the U.S. due to the sort of broader regulatory challenges, which are impacting the market over there. We've taken out any of the U.S. metrics out of our sort of global PaaS metrics. They have an immaterial impact on our metrics. And they will also have an immaterial impact on our revenue, but will deliver a material cost reduction once the exit is complete in H2. And again, Tom will really talk more around that in the finance section, and then there will be more disclosures around the impact of the U.S. exit when we do our half year results as well. So in terms of our sort of PaaS timelines and what does it mean for our business in terms of how long it takes to onboard a client and when we start generating revenue. I think when we first started on the journey with signing our PaaS clients and going live, there was that longer lead time at the start between when we'd announce a client and then when those clients would go live. And that was really because we were building the platform, the PaaS platform at the time. You can see on this chart now as the platform is live in both New Zealand and Australia, those periods or the time it takes between when we sign a client and when we start generating that revenue, is shortening. So what you can see here is the revenue continues to build at the right-hand scale there in terms of our PaaS quarterly revenue continues to increase as we add more clients onto our PaaS platform. So we're really focused on adding more clients scaling our platform, shortening that period as well from when we sign and onboard a client and really that improves that sort of client experience for us, but also means we're driving our revenue earlier as well. So we'll continue to improve -- drive those improvements in our onboarding to increase our revenue. But I think this chart really shows that, that sort of period of condensing it and what it does to our revenues as a result as well.

Thanks, Tony. So we'll just touch on a bit of the detail here from the finance perspective. So Tony has mentioned the revenue. We're very proud of the first half, USD 7.2 million rev, AUS 11.4 million, and that's up 61% on H1 FY '24. So we're obviously well on track to deliver on our target this year of the revenue growth, and that's obviously being driven by the PaaS revenue. And just digging into that sort of makeup of the revenue a little bit more. You can see down at that bottom table, we've broken out where the revenue is coming from. So quarter-on-quarter, PaaS revenue is up 30% from Q1 to Q2, which is fantastic. That's really where the growth is being driven. And I want to just take a moment to touch on the one-off revenue. So we've -- obviously, we've had a slightly smaller quarter in one-off revenues. That's our licenses and our professional services. It is in line with our expectations and what we sort of have the resources to deliver from our existing client base, that USD 3 million to USD 4 million a year, so that's on track. And most importantly, as Tony touched on as well, the recurring revenue base. So we've really grown that recurring revenue base from around 50% of the revenue from 12 to 24 months ago, and we're now up in sort of north of 70%, and that will move around a bit with the one-off revenue that moves around. But the business, in terms of PaaS and support and maintenance, it's very predictable and very forecastable revenue. It's very recurring revenue. So we're very proud of the sort of recurring revenue base we're building. Just turning to cash for a moment. A few key things to point out. So it was a record cash collection quarter for the business. Q2 is often one of our worst cash collection quarters. And we hit a record in Q2, that is primarily driven from the increasing PaaS invoicing. So a strong contribution from PaaS now being shown through the business. It's improving our cash collections. Importantly, the increase in cash costs is driven by fixed -- sorry, by variable costs, not fixed costs. So staff costs, you can see there, which makes up roughly [indiscernible] percent of our cost base, it's only up 2% on the prior corresponding period. As we've been talking about for a long time, we've had to employ the team and incur a lot of technology costs to make the platform operational. But as we add clients, we don't need to increase that fixed cost base. What we see increasing is the COGS, which we'll break out at the half for everybody. Just talking about the cash holdings. So USD 3.5 million. That has taken a reporting hit or reporting representation hit in the quarter, the FX moved 10% to 12% Aussie and New Zealand to U.S. dollar. What we do is -- most of our revenue is earned in USD and most of our COGS are in USD, but all of our fixed costs or the vast majority of our fixed costs are in Australia and New Zealand dollars. So we hold Australian and New Zealand dollars. So even though there's a reporting drop in the U.S. dollar reported cash balance, we haven't lost $0.5 million. So we just want to make sure that was very clear. We are hedged against our cost base, our fixed cost base. Importantly, during the quarter and over the half, CapEx is down about 20%. So we've been talking about the investment we were putting into the platform in previous periods, where we were getting the platform live and that we expected CapEx to start reducing, and we are starting to see that material reduction in CapEx. And then just touching on the U.S. quickly. So you'll see there that the last transactions in the U.S. up tomorrow for our cardholders over there, we'll go through a process over February of returning the funds to the bank and the bank getting those in the U.S., they still cut checks to people. So that will all wind down. We've seen a reduction in costs from January from the U.S., but particularly, we're going to see those costs drop off in February and into the rest of the financial year. We have incurred a few hundred thousand -- low hundred thousand dollars worth of one-off cost to exit the U.S. Some of that was recognized in December, and some of that will be in this quarter, but you'll really see in Q4, those costs are materially out of the business, which is driving a significant increase in our EBITDA and cash flow and the operating leverage in the business.

Thanks, Tom. So if we just touch on our key pillars to drive success. We've talked about these in Q1, the first really, and this is a key focus for us, is accelerating our growth and scale. So that's really driving increased sales across Vertexon and PaySim, deepen engagement with partners to increase our leads and opportunities and improving our sales processes and sales enablement. The second one there, operational excellence. So really, that's about improving our client onboarding to provide a seamless and timely client experience. We talk around -- I talked around it on an earlier slide, really shortening that period to onboard a client making it a great customer experience there. Automating tasks to improve efficiency and continuing to enhance our platform scalability as we grow the business. We -- now that we're doing that sort of NZD 1 billion per annum, New Zealand. We want to continue to grow that at a rapid rate and scale our platform. The third one is market-leading solution. So we'll continue with our pace in modernization project and then we'll further align our product roadmap with our current and future client and market needs. So we'll develop new features and applications that the market want and need as well. And the fourth one there is really about our people as a technology company. So powering our people. So as the business grows and evolves, we need to make sure our people do too. So really, that's about supporting our team with continual growth and development. If we have a look at what we're really focusing as our primary one at the moment, they're all sort of the key levers that we are focusing on, but our big one is we're in the commercialization phase of our business after that significant investment period to get our PaaS platform live and operational, is really on accelerating growth and scale. So how are we going to do that? So the first one is really our new client acquisition. So we've established that strong position in New Zealand now with the platform live in Australia, we want to replicate that success into this market as well. We're going to continue scaling the PaaS platform. That will drive margin improvements as we increase volumes given we've got a relatively fixed cost base in the business. Tom touched on it before. We've had the people in place for our PaaS platform for quite some time now. Now the revenues are all are increasing as our volumes are increasing. We've got the team in place that we can actually scale that. So what we would expect to see is our variable or volume-related expenses will increase as we're increasing our volumes, but our fixed cost base, we want to keep relatively stable. We want to drive growth in PaySim. So we've completed an external market scoping study with a market specialist in the payment space there. Really, the purpose of undertaking that study was to define our global opportunity and also to provide key roadmap -- product roadmap input and also to help us refine our sales and marketing strategies to drive growth. We have a sales and marketing strategy in place. What this report does is also help us just refine that, narrow down some of the sort of sales and marketing approaches that we want to take to really improve our chances of success of driving growth in that product. And the last part there is really focused on existing new partnerships for Vertexon and PaySim. That's an efficient and effective way to drive growth and acquire new clients. The second part there is cross-sell and upsell. So that's working with our existing Vertexon and PaySim clients to drive project work, and for our Vertexon clients, really continue the journey towards migrating to PaaS. We've talked about it at a number of quarterly updates there for some of our big clients that are on the Vertexon on-premises solution, migrating to a cloud-hosted solution is a multiyear process. There's a lot of change for a business they've got to get a lot of comfort around making that change as well. And the next part of that is really upsell our modern functionality and features to clients, which will drive that incremental revenue as well. So we talk around the digital pays to our PaaS clients and the pacing modernization program to drive increased interest from clients? The third lever there is inorganic growth. So that's really exploring inorganic opportunities that complement our strategy and our organic growth. I think our business is in a position now where we can start to explore and are exploring those inorganic opportunities that may arise in the market or that we can find to really drive increasing growth and profitability of our business now that we've got a very solid base of operations at change. So in terms of the outlook, so we are delivering on our FY '25 growth and financial targets. The first one, which was targeting revenue growth in excess of 30%, we are on track for that. As we've talked about through this presentation, that is underpinned by a significant portion of recurring revenue. So 76% of our H1 revenue from PaaS transaction fees and support and maintenance. So that gives us a good element of comfort around where we're heading and the more recurring revenue we can continue to generate in the business, the better it is and then we top it up with that one-off revenue. We're very focused on building that sales pipeline and winning new deals, particularly in Oceania and Southeast Asia as we look at delivering that sustained growth in the coming quarters and years. The second financial target for our business is increasing operating leverage. So we're targeting made an EBITDA positive result in FY '25. We remain on track for that as well. So we're scaling that PaaS platform to drive the margin improvement. We've talked around the exit from the U.S. So that is a loss-making operation. As Tom said, there will be some exit costs that we will incur in our financials. But once those costs are sort of fully removed as we wind down that operation, that will drive a material improvement in EBITDA and cash flow. It also removes or enables us, I should say, as a business to sort of focus more on that sort of significant PaaS opportunity that we have in Oceania and also into Asia. So overall, I think we -- again, we've had a really pleasing start to FY '25. We've had a strong first half of the year. There's a lot more that we need to do, but we are focused as a team, we are aligned and we are driving hard to deliver on our operating plan and our budget for the year. So I think we're well set to continue the momentum we have and have a strong second half to FY '25. So we might take Q&A, Tom -- oh sorry.

Yes. Thanks, Tony. Just to say before we do, I just did forget to touch on the U.S. exit actual impact of the cash from H1. So I just might do that quickly, and then we'll take Q&A. So typically, H1 for us is a worse cash collection half than H2. You can see that through the historical numbers in the business. But what we've done here is you'll see we've materially closed that gap, including the U.S. And if we hadn't have had the U.S. operations, it would have been $0.5 million cash flow -- operating cash flow positive for the half. And we will break more of this detail out at the half year, but a lot of those one-off costs will be incurred in H1, those low $100,000 we mentioned, and you'll see the cash sort of moved over Q2 and Q3. So just wanted to make sure I touched on that. Okay. We'll go to Q&A. I'll read them out, Tony, and I'll either take them or I'll put them to you as usual.

Okay.

So there's a few here, and I'll try and put them together if I can or where I can. What is the rough Australia and New Zealand split between the 500,000 customers? So it's about 80% New Zealand, 20% Australia, in terms of round numbers, that's for the new PaaS client win that's being asked about. And then there's another part here is how many cards to be issued in New Zealand? That's a great question and something that we're really looking forward to going on the journey with the client. So that's the total number of customers. They've had a whitelist open for a while. They've got significant interest on that whitelist. But like you and a little bit like them, we sort of need to see what the take-up is of the program. It could be significant or it could take them a little while, and we're going to see that happen over the coming quarters, basically. So that's -- can't give any guidance there, I'm sorry. Do you anticipate following successful launch in New Zealand, the client will launch a debit card in Australia? That is certainly the intention. What is the utility for debit cards on personal wealth management platforms? So I'll take this one as well. Sorry, Tony, I don't mean to hog them all. This -- we don't know yet either. What I can say is that we've obviously told everyone that the number of cards and then the transaction volumes is what drives our revenue. And the metrics for us around a transaction remain the same. We take a similar amount of revenue, and we have the same amount of COGS or a very similar amount of COGS. We are -- it is at a slightly lower margin than, say, our credit union clients would be at. But fundamentally, we're clipping the ticket on cents per transaction and bps per transaction. So -- what we want to see is this program launch, issue a lot of cards, encourage their clients to spend on the cards, and that will drive revenue and margin for us. This one I'll throw to you, Tony. How is the sales pipeline looking particularly in Australia?

Yes. So the -- so we've been -- we talked around the pipeline a bit. We've got -- we're getting some strong opportunities coming through on the Australian pipeline. We've talked around New Zealand before and the success we've had there as well. I think one of the things that we are -- that we are doing, we just hired a new outbound VP of Business Development on our Vertexon side, really to hunt more deals in Australia. And also we've got our BDM that covers Australia and New Zealand at the moment. We need that sort of additional focus into Australia, given the amount of deal flow that we see in New Zealand. So that Australian pipeline is looking good. It continues to mature. So some of those opportunities are dropping through to the bottom of the funnel there. We just need to continue to focus on closing those out. Ones like the new PaaS client that we secured in New Zealand during the quarter as well that has sort of a material member base in Australia as well. They're also very helpful for us to really sort of translate it across and pick up those Australian programs, assuming all goes well in New Zealand and sort of roll out in Australia. So in general, it's looking -- we're sort of -- it's looking positive into Australia. We just need to focus on closing some deals there and get those sort of more reference clients in this market. We have that referenceability into New Zealand, but we need a directly referenceable in Australia as well.

Thanks, Tony. And I'm just going to merge a couple of these. A few people are asking for a bit more detail on when we think -- I think you've answered it unless there's anything you want to add around when we might secure a material client in Australia and unpacking the Australian pipeline in a bit more detail? So I think you've answered that unless there's anything you want to add?

No, I was sort of trying to cover those off then.

Yes. Okay. What approximate portion of anticipated total cards that existing New Zealand clients will have on Vertexon currently issued and active? I might take that one. So if we're talking about the -- our clients that have been our financial institution clients, we're basically -- we're at full run rate. Unity was the last credit union to go live. In the last couple of months, they're sort of at full run rate. They might have some small incremental growth as they sign a new member or whatever, but it's about where we expect it to be and to sit, something like a HealthNow or the new client we signed or the client we signed in Q1 that launched in Q2, they've issued as many cards as they're currently expecting to issue. However, they've got growth plans to grow their businesses. And as they do that, they look to issue more cards. So we'll just -- we'll see them come through as they sign as -- HealthNow Extraordinary signs a new client and a new company, they might issue a 100 cards and other 1,000 cards, whatever it is, we'll see those come through. Can we get a bit more data on the BIN sponsorship, how revenue and gross margins compare to CCA issuing and processing? So I might just take -- I'll just take the margin part. I think I did touch on that. So it's very similar the way we earn revenue with our credit union or fintech. It's just we take a slightly lower margin. And Tony, then I might just give it to you why we take a lower margin is because of -- we're doing a bit less, and I might let you explain a few of those things.

Yes. So the difference with being sponsorship versus what we do, say, for our credit union clients in New Zealand. For the credit union clients, we are doing the processing and issuing, so they're using our technology for processing, under a BIN sponsorship model, there is a different processor. We are there really as the issuer underneath. So we're sort of more at that back end of issuing the card. So we're looking after more of the treasury, more of the compliance, legal, some of the fraud management. So where Tom talks around those margins. We are doing -- we do less under BIN sponsorship than we do under processing and issuing so a little less of our offering for those BIN sponsorship clients. Where you go for a BIN sponsorship really, the concept or what you ideally target for a BIN sponsorship client is those sort of large opportunities, so at scale. Now that's as Tom said, do we know where this client will go. They've got over 0.5 million members across their platforms. So they've got a big member base strong initial registration of interest. Do we know where it's going to go; no, we don't, but that's -- there's a strong opportunity there, but that's the -- that's sort of big scale for a BIN sponsorship opportunity.

Thank you. Is there a reason a New Zealand Wealth Manager would use a third-party processor and not use CCA-full-stack?