Change Financial Limited (CCA) Earnings Call Transcript & Summary

Good morning, all. Thank you for taking the time, and welcome to our H1 FY '25 results presentation. I'm Tony Sheehan, CEO of Change Financial, joined today by Tom Russell, Executive Director. For today's webinar, we'll follow our standard format when we give our market updates. We will go through a formal presentation submitted to the ASX and then take Q&A at the end. If you have any questions, there is the Q&A function on the webinar. So please submit any questions that you have for Tom and I. So, we just start with a very brief overview of Change Financial for those of you who are new to the business. What we do at Change is, we provide innovative and scalable payment solutions for over 150 clients across more than 40 countries. We're a B2B business with 2 core products, our first being Vertexon, 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. Our second core product is PaySim, which is software that enables end-to-end testing of payment 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 core products. So, PaaS clients made up a strong contribution to H1 revenues. We delivered a record half-year revenue result of $7.2 million, up 61% versus the prior year. During the period, we signed 2 new PaaS clients, including our first under the BIN sponsorship model in New Zealand. That one was a personal wealth management platform with more than 500,000 customers across New Zealand and Australia. So, they're launching a debit card in New Zealand first, and they've had that strong waitlist interest from their members. They have also successfully completed their first test transaction, which is fantastic. We also secured new projects and license wins across Vertexon on-premises and PaySim clients. We now have more than 66,000 active cards on the platform. So, Unity Credit Union was a substantial driver of this increase as they migrated almost 20,000 cards to Vertexon during the period. Recurring revenue of 78% for the half. This is up from 59% versus the prior year. So that recurring revenue really provides us with a solid base of revenue to grow from. Tom will discuss it in further detail a bit later on, but we're now generating about $12 million of recurring revenue per annum on a run-rate basis, which is fantastic. So, it really lifts the base level of our business, and then we continue to grow our revenue on top of that. The number of transactions and volume processed continued to increase strongly during the period. We're now processing more than NZD 1 billion per annum run rate for our New Zealand clients. So, if you think back and it's just over 12 months ago, we just started off, so to get from 0 to over NZD 1 billion in that period is a fantastic achievement for our business. On the cash holdings there, we've got a strong cash position given the inflection point we're now moving through in the business. Just briefly on PaaS metrics, the PaaS platform is scaling with volumes increasing as the cards migrate to Vertexon. So, the active cards are driving the increase in transactions and volumes, therefore driving our revenues. Unity, As I mentioned, migrated all their cards, about 20,000 cards in the first half as well, at a full run rate, and then, new clients will continue to add volume onto the platform. So, given our significant client wins in New Zealand, we are now the largest nonbank issuer of debit cards in New Zealand. As we announced at the end of November, Change is exiting the U.S. business due to broader regulatory issues impacting the market. The last transactions were processed at the end of January. This does have an immaterial impact on the PaaS metrics and revenue, but it will deliver material cost reduction once the exit is complete in the second half. Tom will also give more details around the impact of the U.S. operations on our financials as well.

Thanks, Tony. As Tony mentioned, we had a strong revenue half, a record for Change with USD 7.2 million or AUD 11.4 million, up to 61% versus H1 FY '24. And with the PaaS exit now substantially complete in the U.S., we've shown the impact of removing the U.S. revenue, which is $31,000. It doesn't even change the rounding in terms of our overall revenue. And although the revenue is insignificant, it certainly does have a significant cost reduction. I will touch on that a bit later. Pleasingly, PaaS is now making up a meaningful contribution to overall revenue, 41% during the half and increasing our reference ability in our key Oceania PaaS market. This was 12 months ago and up 123% on H2 FY '24. As Tony mentioned, something we are very pleased with is the proportion of revenue coming from recurring sources. This will move around a bit depending on the one-off revenue during the period, but to have taken the recurring revenue from around 50% to 70% plus in less than 12 months sets us up for future periods to grow from a higher base. And as Tony mentioned, we're at circa USD 12 million now in recurring revenue per year on a run-rate basis. We also continue to deliver one-off revenue from professional services and licenses during the half at the lower end of our target range with $1.6 million, but we have a strong focus on this in H2, and there's a number of key projects in the late stages of the pipeline, which we're looking to drive H2 one-off revenue. Taking the summary of the P&L, we delivered a material improvement in EBITDA over the prior corresponding period. We were impacted, though, by our decision to exit the U.S., so a number of U.S. one-off costs were recognized in the half. And obviously, we carried a lot of those U.S. costs for the full 6 months. So, if you exclude the U.S., the underlying EBITDA was actually positive $361,000. So that's a key inflection point for our company. And with the last transactions processed in late January, we saw a significant cost reduction in February. We'll see another significant cost reduction in March, and then they'll continue to reduce over the next couple of months. So, we're at a really interesting point now. As we've said before, we've got all the key roles in place, to scale our PaaS business significantly without a lot of new hires. We're very focused on profitable growth. In the first half, we're getting a meaningful look at our PaaS margins now. We haven't released margins on the PaaS to market yet. So, I want to spend a little bit of time on that. It is important to note that we are scaling the platform. We are certainly not at scale as a size company changes, but we are headed towards scale. The PaaS margins for the half were at 27%, which is around where we expected them to be given the heavy period of upfront onboarding of new clients. Our 2 biggest credit unions went fully live in half, which brings in a number of lower-margin revenue items and one-off COGS. We also completed the certification and scheme projects to enable digital pay, that is Apple Pay and Google Pay. We've got some clients live with Google Pay and our first Apple Pay client will be going live in March. We do expect to see significant margin expansion in H2. We're aiming for circa 40% over the short term and pushing it higher from there over the medium term. expansion in H2. We're aiming for circa 40% over the short term and pushing it higher from there over the medium term. As we've said before, payment is a scale game and we are scaling up. We are not at scale. So, there's a lot of room for margin improvement now that we actually have some PaaS revenue coming in, which we didn't have 12 months ago. The balance sheet is pretty self-explanatory, but I'll just call out a few key points. We have a healthy cash position of USD 3.5 million and an additional $900,000 in cash-backed security deposits. You'll see we, in this half, we have split out the client settlement fund. So, this $1.7 million on the balance sheet as at 31 December is offset by $1.7 million in scheme settlement obligations, which is included in trade and other payables. This number will fluctuate depending on the day of the week and it will grow as our business continues to grow and directly relates to spend of cardholders of our clients. Also just calling out the $3.3 million in contract liabilities or deferred income. There is a healthy balance of work already to be delivered over the next 12 months before winning further professional services and licenses deals. This number is up over the last 6 and 12 months by about $0.5 million. Turning to cash flow. Cash receipts for the half of $7.1 million were up 64%. H1 is typically a higher cash usage period for us relative to H2 from an operating cash flow perspective and we expect to see that trend of H2 being significantly improved on H1 continue. In addition, I mentioned before that the costs from the US have significantly reduced in February, again, will again in March, and this is going to be driving a further improvement in cash flow. CapEx is also moderating as expected, following the launch of the PaaS platform with capitalized software development costs down 20% versus H1 FY '24. Tony and I are pretty happy with the level that the CapEx is running at now. There was a significant translational reporting impact to the cash balance during the half. This translation impact is not a real loss. We hold the bulk of our funds in AUD and NZD where the majority of fixed cost base is and acts as sort of a practical hedge against currency movements. Importantly, if you exclude US costs, we should have, we would have delivered $0.5 million of positive operating cash flow and total cash burn from OpEx and CapEx of $250,000. So, you can see that inflection point we're coming up to in the business. Back to you, Tony.

Thanks, Tom. So, this is a new section that we've included in our results. We've done a lot of work around the market assessment, the market opportunity. So, during the first half, we engaged a leading payments consultant that is the initiatives group to undertake market assessments for both PaySim and Vertexon. So really, what we are using these assessments for is to really build on our existing strategy and specifically for sort of 3 key purposes that's firstly, to improve our understanding of the competitive landscape; secondly, to provide market analysis and segmentation to make sure we are identifying and focusing on the most attractive customer segments for us. And thirdly, to assist with prioritizing our product strategy to make sure we deliver long-term growth. So if we look at, firstly, in the card issuing space in the New Zealand market, where we've had a lot of initial success. So, the market is dominated by the big 4 banks. It's estimated, and these are estimates according to TIG, that the small financial institutions make up just less than 10% of the market. That smaller end of the market has been somewhat unloved with limited innovation and service over a number of years and that's presented the opportunity for Change Financial, which we've really successfully seized on as we've won those new clients and brought them on. So, if we look at our position in the New Zealand market, we're processing less than 1% of New Zealand card market, card payments. Then in terms of the small financial institutions, so credit unions and building societies and the debit card market, we're processing about 15% of that market. So, where are we targeting to grow in New Zealand? So, we're going to continue to target the financial institution market. So, there's still plenty of scope for us to grow in this segment. As I said, we're processing about 15% of the debit card volumes in that small financial institution market. Prepaid cards. So, we've got Extraordinary, who's a client of ours and the prepaid gift client we signed in Q1, additional segments that we'll be targeting include insurance, gaming, government and health care. From the debit card perspective, we've won that recent personal wealth management client, which we signed in Q2. So, we're targeting further opportunities in the nonbank corporate lenders, embedded finance and other nonfinancial institutions. So, it's not just around those sort of financial institution clients, those credit unions and building societies, which have really contributed to the strong growth in volume. There's a lot of opportunities that we see outside of those sort of key anchor clients that we've secured. So, we still see attractive opportunities in the New Zealand market, and we'll continue to actively target the market. So, in terms of Australia, so the Australian market is naturally a significantly larger market than New Zealand. Card-based payments now dominate volume in Australia. As you can see from the bottom charts on the slide, debit cards have seen the most noticeable increase over the past decade. So, you've got double-digit growth over the last 5 years, and the projections are for the volumes on debit cards to continue to grow strongly at double-digit growth. The credit cards as well continuing to grow, albeit at a lower rate, but there's still growth in those credit card volumes as well. So, if we have a look a bit further into the Australian market. So as with New Zealand, the big 4 banks do have a significant position in the Australian card issuing market. However, their position is not as dominant as it is in New Zealand, and there is a materially larger opportunity in Australia. So, looking at the charts there for the addressable markets for Change Financial. So firstly, having a look at the debit cards excluding the big 4, addressable market is approximately AUD 146 billion. These are in Australian dollars, these amounts, by the way. If we have a look at credit cards, the addressable market for Change is about AUD 38 billion. So, under our Mastercard license, Change can now issue credit cards. So, we've recently expanded our license with Mastercard. That does not include doing the credit underwriting or the provision of credit, that is just the issuing of credit cards. And then if you have a look at the prepaid cards addressable market, it's about $2 billion as well. So, a lot of prepaid cards, those closed networks, if you think about major retailers having their sort of closed-loop cards or gift cards there. And then in the banking space, the sort of prepaid travel cards are a significant portion of that as well. So, in terms of where we are targeting to win market share in Australia, so we are looking to replicate the success we've had to date in the New Zealand market in similar but larger segments. So where are we targeting? We're looking at the small- to medium-sized financial institutions, so the credit unions, small banks and digital banks. We're looking at nonbank lenders seeking to add card functionality, nonfinancial institutions and again embedded finance opportunities looking at credit cards and also white label prepaid card brands and issuers. So, we've barely scratched the surface in Australia, as everyone is probably aware, a lot of success in New Zealand, but the opportunities are very, very strong still in Australia and also in New Zealand. If we then have a look at the PaySim market as well. So, as a reminder on PaySim, so it enables that end-to-end testing of payments platforms, processes, and scheme rule compliance. So, PaySim is the default standard and benchmark for FPOS testing in Australia and 5 of the top 10 digital payments companies globally use PaySim for payments testing. So again, TIG, our external consultant, when they're doing the market assessment for us, they estimate that the global payments testing market to be very extensive with more than 32,000 potential clients and a multibillion-dollar global opportunity. So those clients are made up of card issuers, acquirers, ATM deployers, and other financial institutions and Fintechs. So, think about anyone that's running on the payments rail, similar to Change Financial where, we issue cards so that's included as the issuers or if there's acquirers, there's a number of those globally. Now PaySim is written on a global messaging standard, ISO 8583, which means it can be sold globally. It doesn't just get sold in Australia or New Zealand or Southeast Asia. Given it's on the global messaging, it can be sold globally. We do have clients. We've got more than 140 clients globally with PaySim. It doesn't require any regulatory approvals or licenses in different jurisdictions. So, it is software that can be sold into this large global market. Those 140 clients, that means we have well less than 1% of the estimated global market. So, a large opportunity there for PaySim. So where are we focusing our efforts to grow PaySim? So firstly, the partner or reseller network. So that's really leveraging our existing partner network to drive sales and secure new partners and resellers as well. So that's that one-to-many approach to scale quicker. Secondly, we have direct sales. So that's outbound direct client sales, and that will be supported by marketing activities by our team as well. Thirdly, there's cross-sell upsell. So that's upgrading existing clients to adopt more modules and deepen the integration into the client system. So really, part of that is making sure our clients are aware of PaySim's functionality and capabilities. It's an extremely rich product. It's modular as well. So, there's additional modules that can potentially be sold to our 140-plus existing clients. The fourth limb there is really product development. So new products and features to meet additional payments testing requirements. So, this is part of our product road map to enhance PaySIM. So, we've just talked around the opportunity here with Vertexon and PaySim. So, what are we doing about that now that we're in the commercialization phase of our business with our Vertexon PaaS platform live and operational in Australia and New Zealand. So, with that, we've got a very clear product and sales strategy to drive our future growth across our both products, and to continue to build on our increasing sales momentum, we have appointed 2 new strategic business development managers. So those 2 new strategic BDMs will be focused on outbound sales hunting for Vertexon in Australia and for PaySim globally, and they'll both be joining the business in late Q3. So, to date, we have primarily been an inbound sales organization whilst we're building the PaaS platform. So now we're transitioning to an outbound sales hunting organization to drive the growth, given we're well positioned to scale the business and given the size of the market opportunity that we see in front of us for both of these core products. This reshaping really coming on the back of where we're at as a business and also the appointment of the Chief Commercial Officer almost a year ago, the change that we're sort of seeing flow through in terms of our approach to market for the growth there. So, the key focus areas to accelerate growth and scale. Look, there's sort of 3 key limbs. I'm not going to go through that in a lot of detail. The first 2 really are on the organic growth focus. So new client acquisition, we've talked around the appointment of new BDMs to be that sort of outbound sales hunting. The second element there is cross-sell and upsell. We've talked around that certainly from a pacing perspective, we talk around additional modules from our Vertexon clients. We've got a number of strategic on-premises clients continuing to work with those clients to drive project work and really take them on the journey to migrate them towards the PaaS platform as well. So, you've got elements 1 and 2 are focused on organic growth. The third limb that we're focusing on is the inorganic growth. And that's really exploring opportunities that complement our strategy and our organic growth. So, it's really about putting an acceleration on top of those sort of limbs 1 and 2. In terms of our outlook, so we are delivering on our FY '25 growth and financial targets. We are confident in our ability to deliver in excess of 30% revenue growth in FY '25. As we've mentioned, we've got first half revenue $7.2 million. And if we look at our recurring revenue that we have on a quarterly basis, sitting at about $3 million per quarter. We're very confident in our ability to deliver on that. Excluding the impact of one-off costs from exiting the U.S. operations, we remain on track to deliver a maiden EBITDA-positive year as well. So overall, a very pleasing first half of the year. All the hard work done to date in terms of building the strong foundations for the business has us well placed to deliver on our operating plan and financial targets in H2 and to continue to drive profitable revenue growth. So that marks the end of our formal presentation. I think we've turned it over to some Q&A, Tom. I think we've got some questions coming in.

We do, Tony. So, I'll start running through those. So, first one is nice update. Thank you very much. There was a question a more color around the market assessments, but then there's a follow-up saying, don't worry. So, you've obviously done a good job explaining that, Tony. One question here. Were the BDM hires a result of the learnings from the market assessment?

We had plans in place in terms of the BDM hires. I think what it did reiterate to us from the market assessments was the size of the opportunity, and it also helped in terms of refining some of the segments that we're looking at. So, we did have plans already in place to sort of appoint those sales hunters to accelerate the growth. I think, if anything, the external market assessments by TRG have reinforced that and actually will give both our new sales executives when they join in the coming weeks, a real base to actually work on in terms of targeting their outbound sales approach.

Sorry, the second part of that, too was, do they have prior experience in the space? Or are they new and require upskilling?

So in terms of the 2 BDMs, the first one that's selling that's focused on the tax on sales in Australia comes from the payment space, not necessarily from a card issuing perspective, but a lot in acquiring as well, so an adjacency, so an adjacency. So very well very much familiar with the payment space, which is helpful. In terms of PaySim, which is really, if you think about that more broadly, it's a software sales perspective, the BDM that we've hired for that role doesn't come from the payment space, but does come from sort of software sales as well. So, there will be a little bit of upskilling there, but I think that that's something that will happen pretty quickly.

Also in the pipeline, sorry, is the pipeline in Australia still looking good? How is the bottom of the funnel looking? And can you give any rough time lines on how long it talks can take before closing?

So, the Australian pipeline, we've still got some attractive opportunities down the bottom of the funnel. It does take time for them to move through. We are, as we sort of the new hire that we've made, we are focused on filling more at the top of the funnel to get them dropping through, but there's some attractive opportunities there that we are pursuing. Look, the conversations depending on, it really is, depends where the client is in their sort of cycle in terms of wanting card issuing capabilities. So, some of those conversations can take 3 months, some of them can take 6 to 9 months as well. So, it sort of depends on the nature of the client and where they are in terms of their decisioning with sort of card issuing versus other competing priorities they may have in their business.

Okay. Has the downturn in the New Zealand economy had much of an impact on your business? Have there been any trends such as an increase in the use of debit/decrease in the use of credit cards?

Yes. So, I can answer that, Tom. Look, it's, if you think about where we are, we've had card issuing, we've had our card issuing in New Zealand really sort of went, the first went live in October 2023. So up to the end of H1 FY '25, you're looking at a period of about 14 months. During that period, we've got clients migrating on. So, the volumes are continuing to increase. So, if you're looking at trends, it's a little it's a little challenging to tell whether there's been an impact because we're continuing to see it increase. But I think the important thing to note for those financial institution clients that we have, the credit unions and the building societies being debit cards, they are everyday essentials. So that's at the grocery store, it's at the fuel store, it's a public transport and the like as well. So, we haven't seen any impact. We see some seasonality around December, around that Christmas period with spend, which is what you would expect in the broader market there. But I'd say it's difficult for us to tell because we are continuing to grow our volumes as those clients come on. In general, there is a move towards debit cards. We saw that in Australia on those market reports that, or the market assessments, which I just ran through, debit cards are growing faster than any other payment type in terms of cards. So, I think we'll continue to see that in both Australia and New Zealand in terms of debit card prevalence.

Okay. Have you been able to identify when many Tier 3 banking institution agreements? I'm assuming this is in Australia with their existing card service providers expire? And are they part of your plans to target them as new customers?

So, in terms of those Tier 3 banking institutions. We now have a very clear list of who they are and what software they are using. So, it's not necessarily those providers that you've just talked around there. So, without having a conversation with the specific, with those specific sort of target clients, you're not going to know their expiration dates, but we know who their providers are. We know what our points of difference are versus those providers as well. So, the first stage for us is to go in, is to go outbound to those clients and establish contact and sort of take it from there. So, it's very difficult. No one sort of publishes when their agreements are up, but we do now know who all those sort of providers and players are in the market and where we want to be targeting.

Okay. Program expenses are 10x larger year-on-year, which suppressing gross margin. Is there a path forward to gross margin improvement? So, I'll take this one, Tony. I mean I think I did touch on this. Yes, is the answer. We've sort of always indicated sort of that low -- that sort of 30% was at the lower end of the margin range for us at starting out. As I said, there's a number of one-off costs. So for example, all those 66,000 cards that went out, and it's actually more than that. But the, we earn revenue, and we also have a COG on the card production. And those, that is a very low margin item for us. You've also got what we're calling COGS, which sort of is a one-off COG in some ways is the enablement of the digital pays, for example. So, there's some Mastercard fees and things that come up to set up the digital pays that it's very hard for us to break out of COGS. So, as we said, around that 30% margin at the moment, we expect that to expand to 40% in the short term. And then in the medium term, we want to push it higher as well. We are scaling the platform and with scale becomes margin improvement. We get tiering benefits. We get; we amortize those fixed COGS over a large number of transactions. So, you will see margins expand. Are the opportunities you are citing in the insurance space in health or travel insurance or general or life insurance? I'll throw that to you, Tony.

Yes. So, look, we're sort of, the insurance space will sort of put that as a general bucket there, but it is health. So, if you think about where we, our first prepaid card program was HealthNow, which has been rebranded as extraordinary, that was in that sort of employee benefits, which was focusing on health, but has now expanded out to be more general as they become Extraordinary rather than HealthNow. But the sectors that we sort of see health, as you're saying, travel insurance as well and potentially general insurance. I wouldn't say life insurance though.

I could be proven wrong there, but I don't think so. It's a bit of a follow-up question on my answer to COGS before. So, can you explain exactly what's in program expenses, which is COGS? So, card production fees, the fee that we get charged with Mastercard or the domestic rails every time there's a transaction. So, we make sense per transaction and bits on transactions, but there's also a corresponding COG. There're different project costs with the schemes to enable certain features and things. So that's all the sort of things that are in there. And hopefully, that provides a bit more clarity for you. What on average are the fees earned on each transaction running through the payment platform? I'll answer this one, Tony. So, we've started putting out, we've had a few quarters and halves now of people seeing the transaction volumes and the revenue. I'll let you calculate your own averages, but it really does depend. So, for example, an ATM transaction might be lower margin. It's often a lot larger. People don't take out $5 from an ATM. They might take out $100 or $200, $50. And so therefore, the margin is different on each transaction versus an Apple Pay transaction for a $5 coffee, higher margin, but a much smaller fee and smaller COGS. So, what you need to do is sort of have a look at a bit of an average. We can't, that will change, too. So, an extraordinary customer who's buying health benefits versus a credit union client who's buying their daily coffee, it does change, and you're just going to see that sort of blend out as we release more data and more periods. Tony, first one to you. Who do you see as your main competitor in the market you are chasing? And you talk maybe broadly about that without specifically.

Yes. I won't go into specific names there, but you'll probably be aware if you're invested in Change Financial that there are some other listed card issuers that are in the market as well. So, you can probably deduce who that would be. New Zealand, there is, look, there's a fairly limited number of competitors in market there. There's a couple of competitors the other side that are similar to us. The other side of that is the banks, the big 4 banks that provide sort of agency services. Again, when it's providing the agency services, what that means is there's sort of limited innovation being offered to clients, hence, why we've picked up a number of the credit unions and building societies moving away from banking agencies so that they can actually receive sort of a more innovative and digital product and offering to their cardholders. Bring it back to Australia, as I said, you'll be able to deduce who some of our listed competitors certainly are. So, they're sort of the ones that we would see in the market as competitors with the client base that we're targeting.

Yes. And one key difference, I think, there, too, is our debit card offering versus others that focus on prepaid.

Yes.

Okay. And last question, I'll answer this one. Could the company start publishing these recordings, please? They are very informative, but not all investors can make the call. Yes, we actually plan on doing that after this one. So, we'll publish -- the plan is to publish the last quarterly and this one, and you'll see those up on the website. So, give us a moment to get that up there, but the plan is to get this one on the website. And that's all the questions.

Excellent. So, it's great. As always, great to get some questions. Thank you for taking your time to join us and for taking the interest to ask the questions. I think that's probably, Tom and I, that's our favorite part of the presentation as well as when we get to answer some of the questions. So, thank you again for joining us today and look forward to updating you at our next webinar, which will be our Q3 quarterly results as well.

Thanks, everyone. Goodbye.