Change Financial Limited (CCA) Earnings Call Transcript & Summary

Good morning, and welcome to our Q3 FY '25 results presentation. I'm Tony Sheehan, CEO of Change Financial. I'm joined today by Tom Russell, Executive Director. Thank you for taking the time to join us. We will follow the usual format of our quarterly and results updates that we normally follow. We'll go through a formal presentation first, and then we'll take questions at the end. Just a reminder, if you're new to these webinars, there's a Q&A function on this Zoom link, so please submit your questions through that and we will address them at the end. Okay. So what do we do at Change Financial? So 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 is Vertexon, which is our Payments as a Service offering, which provides card issuing, card management and transaction processing. Vertexon has generated 79% of the group's revenue year-to-date. Our other product 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 21% of the group's revenue year-to-date. The market scoping work that we undertook over the last 6 months has confirmed there is a significant market opportunity for both Vertexon in Australia and New Zealand and globally for PaySim. Some of you may recall, we presented and included in our materials, our half year materials, a lot of the market scoping work that we've done in terms of sizing the market and have some of that target segments. They are in the appendix of our presentation as well today, but there is a large opportunity there for both products. So we are focused on growing both of these core products and indeed appointed 2 new strategic BDMs in Oceania during the quarter. In terms of our key highlights, so PaaS clients made a strong contribution to Q3 revenues. We delivered a record quarterly revenue result of USD 3.9 million. That's up 30% versus prior year. We signed a new PaaS client in Australia during the quarter under the BIN sponsorship model. So they are a global payments company providing digital wallets, wearables and prepaid cards in over 100 countries, and they're launching in Australia. And this follows on from our first New Zealand BIN sponsorship client we signed in Q2. So it's great to get -- start to see some of those deals coming through in Australia. We've talked about them for a while and the pipeline and dropping through on the pipe. So fantastic to see that client signed in Australia as well. So we've now signed partnership agreements with 2 global processors, which will look to drive increased customer acquisition in Australia and New Zealand. Recurring revenue, 74% year-to-date. So this provides a very solid base of revenue for us to grow from. So it's still very important, though, for the business to continue to deliver our licenses and professional services revenue, but that recurring revenue gives us that strong base to continue to drive from. So together with that strong revenue result, very pleasingly, the company delivered Q3 underlying EBITDA of USD 400,000 as well, so a great result for the quarter. We've got more than 69,000 active cards on the platform. And just as a reminder, those active cards are key to driving transaction numbers and volumes and hence, revenue. And we're now processing over NZD 1 billion per annum on a run rate basis in New Zealand. So that's a -- we've got to that stage within that sort of 12 to 18 months after launch. In terms of our PaaS metrics, so the vast majority of the PaaS metrics reported on this slide relate to our New Zealand clients. We are now the largest nonbank issuer of debit cards in New Zealand. We are very actively focused on growing the number of Australian PaaS clients and scaling the platform in this region. We have the same platform that operates across Australia and New Zealand, which is also great for clients that operate in multi-jurisdictions. If they operate in both Australia and New Zealand, and is one platform that they use. It's one platform for us to maintain and scale as well. And so when we talk around scale, we want to scale across both jurisdictions and you get those benefits. So we've got our staff monitor the same systems. It's very easy for us to scale up there. The key drivers of the higher volumes and transaction counts in Q2 were really, firstly, seasonality effects from Black Friday, Boxing Day and other sales events over the holiday period; and secondly, movements in FX rates causing reporting or translation impacts. So a lot of our -- all the volumes that we're processing primarily are in New Zealand dollars. So it is just a translation impact there as well. So if we look at our PaaS time line, you can see that steady cadence of new client wins over time, but also a significant shortening of time frames between signing clients and launching programs. So with the PaaS platform fully live and operational in New Zealand and Australia, we really want to increase the number of client wins, particularly in Australia and continue to shorten the onboarding time frame. So shortening the onboarding time frame really improves the customer experience and also enables transactions and hence, revenue to be generated earlier. So we want to continue to accelerate those number of client wins we get there and shorten those time frames. There are certain constraints we're going to have with how far you can shorten it because you've got to get artwork for cards approved and the like. So there is only a certain amount of shortening you can do, but we are continuing to refine and improve that process. Thanks, Tom?

Thanks, Tony. So as Tony mentioned, we had another strong revenue quarter, a record for change. So that's fantastic. We did USD 3.9 million or AUD 6.1 million, which is up 30% on Q3 FY '24. That takes us to a total of USD 11.1 million in revenue for the year or AUD 17.3 million; in Australian dollar terms. Pleasingly, and where a lot of that growth is coming from, PaaS revenues from our Australian and New Zealand businesses are up 326% on the prior corresponding period. As we touched on and Tony touched on before, we've signed a couple of new clients in the last 6 months, and we are currently onboarding those clients. So we aren't seeing significant PaaS revenues from those clients coming through yet. We'll start to see those revenues come through in the quarterly over the next couple of quarters as they actually go live. We are -- there is some one-off implementation and things, but not that transactional revenue. What this also means is that this is the first sort of 6-month period where we've had a relatively stable client base. So we're seeing that seasonality from Q2. We saw an increase in volumes and spend from the holiday period. And our PaaS revenue does directly relate to the client underlying cardholder spend. So for example, the cardholders are buying groceries. They've got their Netflix subscription on there. They're buying holidays, they're buying gifts. So our PaaS revenue is very sticky, but we do see some of these higher spend periods in certain quarters. This is very much as we expected. And as I said, we've had our sort of ramp of our current client base live since October. So you're seeing a good look at how the seasonality goes, plays out over those 2 quarters. Again, this quarter, we're seeing a high portion of revenue coming from recurring sources. This will move around a little bit depending on the one-off revenue we're delivering, but we have taken this revenue from around 50% recurring about 12 months ago, 15 months ago to more than 70%. So this is great for us to grow from a higher recurring revenue base, which Tony mentioned. So now we're sort of run rating at circa USD 12 million in recurring revenue a year. In terms of that nonrecurring revenue, we continue to generate professional services and licenses. During the quarter, we hit our target and delivered USD 1.1 million. We continue to have a strong focus on this one-off revenue, and there are a number of key projects and late-stage pipeline opportunities to drive revenue from these licenses and professional services in Q4 and into FY '26. We continue to see a material reduction in the cost from our U.S. operations as well with the wind down now substantially complete. We stopped processing transactions in the U.S. during the quarter and all U.S. staff finished up in Q3 as well. So a further reduction in costs will be seen again in Q4. And then we don't expect to be talking to you about U.S. costs any further in FY '26. Very pleasingly, for the quarter, we achieved underlying EBITDA of USD 400,000. And excluding those U.S. specific costs, we achieved underlying EBITDA of USD 600,000, which is AUD 900,000. In terms of cash, so the cash receipts, it was a record quarter as well for cash collections, up 50% to USD 3.8 million versus the prior corresponding period, and that's really being driven from our PaaS business in particular. Cash payments from operating activities were also up 59%, which relates mostly to PaaS transaction COGS and also significant movements in the prior year due to the use of change funds for settlement obligations. Those change funds are no longer used for settlement obligations when we automated the client funding process in early FY '25, but it is distorting that percentage a little bit. As we have said before, we have all the key roles in place to significantly scale revenue without new hires, and we continue to see evidence of that with staff costs up only 3% on Q3 FY '24. CapEx is also moderating as expected and capitalized software development continues to track down around 20% lower versus FY '24. We have a healthy cash position of USD 3.2 million. That's about AUD 5 million and an additional USD 900,000 in cash-backed security deposits. On the bottom right-hand graph there as well, we've also shown the effect of removing the cash used in U.S. operations. You'll see there that the business is really now starting to generate positive cash flow from operations, especially with that U.S. operations taken out.

Thanks, Tom. So we've sort of talked around -- talked about this a number of quarters now, and you can get that sort of theme that Tom and I are talking around about scaling our business, scaling our platform. So the biggest focus we have in our business is really on accelerating our growth and scale. We've got 3 pillars to accelerate growth and scale. The first one being new client acquisition. So we have that strong position in New Zealand. We're very focused on replicating the success we've had to date in New Zealand, in Australia. So as we mentioned, we signed our first BIN sponsorship client in Australia during the quarter. And so we've got those partnership agreements with 2 global processors now. And we'll be looking to really work with those processes to drive increased sales opportunities in Australia and New Zealand through these partners as well. So they'll bring -- they can bring in different opportunities that are from overseas where those processes operate but need an Australian issuer. So it just opens up the opportunity pool for us further. Looking to drive growth in new PaySim license sales given the significant market opportunity. So it is estimated that there's more than 32,000 potential clients so card issuers, acquirers, ATM deployers, financial institutions and fintechs, representing a multibillion-dollar global market opportunity. So we only have a very small fraction of this market on PaySim as well. So we really want to start to drive into that -- drive that growth through new acquisition, new client acquisition there. So we will continue to focus on existing new partnerships for both Vertexon and PaySim. It's a one-to-many approach, which is an efficient way to accelerate the growth and acquire new clients. I've mentioned it earlier in the presentation as well, we have increased our focus on outbound sales hunting given the significant market opportunity for both products. So given we've got our -- particularly on the Vertexon side, the PaaS platform fully live and operational now, we've appointed out 2 new strategic BDMs during the quarter and really looking to aggressively sign new clients and grow revenue. The second pillar there is around cross-sell and upsell. So that's really working with our existing Vertexon and PaySim clients to drive project work. And for Vertexon clients to continue that journey towards migrating to PaaS or the latest on-premises version. So you may recall, this is a sort of fairly long-dated opportunity really with our major clients that operate, particularly in Southeast Asia to upgrade them. It's very sticky software that is fundamental to their business. So it does take a long cycle to get them comfortable with upgrades as well. So we'll continue to work with them on that. Also upselling modern functionality and features to clients, which drives incremental revenue across both Vertexon and PaySim. So on PaySim, there were 2 new module upsells during the quarter to our existing clients. We need to continue to raise the product awareness and look to increase adoption by our current or existing client base. On the Vertexon side, we have our first PaaS clients now live with Apple and Google Pay in Australia and New Zealand with further clients expected to sign in the coming months as well. And the third pillar really, which is complementary to pillars 1 and 2 is around that inorganic growth. So it's exploring inorganic opportunities that complement our strategy and our organic growth. So in terms of outlook, we are delivering on FY '25 growth and financial targets. We are confident that we will comfortably exceed our revenue target for the year. So you may recall that our revenue target was in excess of 30% revenue growth in FY '25. So we're very confident in exceeding that. We have a solid base of recurring revenue underpinning the business that accounts for 74% of our revenue year-to-date that we have a very strong focus on building the sales pipeline and winning new sales. We've talked around that quite a lot during this presentation and in previous market updates as well. We're also confident we will deliver a maiden EBITDA positive year in FY '25. The PaaS platform is scaling. It is not at scale. So we are focused on increasing the client numbers and volumes on the platform to drive margin expansion given our relatively stable fixed cost base that Tom's talked about, that focus really into the Australian market, replicating that success from New Zealand, getting those clients on and some significant volumes rolling through the system as well. So overall, it has been a very strong Q3, and we're very well placed to deliver on our operating plan and financial targets for FY '25, and we continue to drive profitable revenue growth. So I think we're in a great place as we look to close out FY '25 and then roll into FY '26 with momentum as well. Okay. So that's it for the formal presentation. Tom, I'll hand over to you for any questions that have come in.

Thanks, Tony. Yes, there're couple of that have come through. And just a reminder to everyone on this call, we are getting these webinars on the website now. So sort of later today or tomorrow, this webinar will appear on the website along with the other ones. All right. First question, Tony, is for you. Great to see Oz client win. Can you talk to the process leading up to the win a little bit more? Was it a competitive process? How long did the conversations take? And are they already live in New Zealand? So a few things there.

Yes. Okay. So in terms of the process, so in -- where we are in market, we talk to -- we've got a great relationship with Mastercard. We've got relationships with other processors as well. This was an opportunity that came through a relationship that we had with another processor. So just as a reminder, where they are a processor, they don't have the necessary issuing licenses or capabilities in region. So that's where we step in there. So we've teamed up with them as they had a client that was looking to expand from Europe and bring their product into Australia as well. So not necessarily -- not really a competitive process, more relationship-driven in terms of that client win. The conversations from memory took probably 4 to 6 months with that client and then going through contracting phase with the client, the underlying client who's launching their product in Australia, but also agreeing to [ play ] the partnership agreement with the processor as well. So now that we've agreed the partnership agreement with 2 global processors, we don't need to recontract or do new contracts as we bring on new clients with them. So it is a faster process of just going through contracts with the end program manager there. Are they already live in New Zealand? No, they are launching in Australia. So this is -- at this stage, that is -- their focus is Australia only. So we'll get them live in Australia.

Thanks, Tony. I'll take this next one. Two regarding financials, please. What is the PaaS gross margin at this stage? And what transaction volume will you achieve target gross margin percent at scale? So we haven't -- we won't release our PaaS margin on a quarterly basis as it obviously flows through the P&L. So at the half, for H1, it was 27%. So we're expecting in that 30% region to begin with is what we've always talked about. We do expect that to expand up towards into the 30s in the very short term and then closer towards 50% over the longer term. In terms of what the actual transaction volume is, I can't give you a clear answer on that. But what I will say is that every time we sign a new client, we get margin expansion because we have tiers in our COGS agreements -- but were not every time, but volume certainly helps with tier breaks, but also we amortize those fixed COGS we've talked about over a large number of transactions. So the more volume, margin expansion, there's also extra things we're doing as well. The launch of the digital pays. There were some one-off COGS to -- that sort of hurt margins, but in the long term, that improves margins. So in a growing business like we are now where we are scaling up and not at scale, you are going to see a little bit of movement. But overall, we're looking to expand those margins.

And Tom, just to add on to that, the importance of driving volume onto the Australian platform as well because you get connectivity fees, particularly from Mastercard as our scheme partner that apply in New Zealand, but they also apply in Australia. So we're getting that volume in New Zealand, which is absorbing those fixed costs across a bigger base. In Australia, much smaller volume base, but has the connectivity fees there. So that's where you start to get expansion as well.

Thank you. Would you give us some idea of what OpEx exit dollars will be at the end of FY '25? So look, I think it's fairly in line with what you're seeing across FY '24, remembering that we're taking the U.S. out, and we have disclosed previously those figures from FY '24. Tony, I'm not sure if you've got that number, but some of those costs that do come out are COGS and some of them are OpEx. So we'll obviously keep seeing COGS go up as the volumes increase, but we're not expecting to see a material increase in the cost base from FY '24, that is for sure. Another one here. Tony, this one is for you. What type of new license sales does PaySim target? Payment companies that use competitors' testing solutions you aim to win over to PaySim or the ones launching in new markets, hence, the need to put testing in place?

Yes. So in terms of PaySim, just as a reminder, it is software so can be sold globally as a testing solution. So a lot of our license sales are happening outside of the local region of Australia and New Zealand, particularly into the Asia market as well. So what we -- where we really target there is clients that don't have a testing tool manual. They use -- they do a lot of manual testing with their teams now or they're building -- they've built some in-house tools that are not as comprehensive as PaySim. So it's really -- as those clients are growing, they outstrip the need for their testing tools outstripping what they've currently got or it's an inefficient process. So there's those clients, that's where we're really targeting at the moment. Again, we do some -- we achieved some sales through our partners in that channel as well who have relationships in region as opposed to us sort of adding new salespeople in different regions. We've got our partners, and that's where we want to focus on driving further sales through our partners as well. We also do look to win clients from other competitors as well. But typically, where we're having sort of more of our success is that upgrade on the testing solutions, which are generally either manual or something that's been in-house developed that's not as comprehensive.

Thanks, Tony. Okay. Can you clarify current guidance of maiden EBITDA positive? Is it statutory underlying exit U.S.? Yes, I'll answer that one. So it's underlying. There's costs so the only thing we don't include in underlying is the share-based payments to staff and then there's also interest revenue that comes out. So it is underlying those share-based payments. I mean, they are for performance rights that are currently out of the money, and it's pretty typical to exclude those from your EBITDA calculation. We will -- we are fairly confident we will achieve a maiden EBITDA, including all U.S. costs, certainly excluding the one-off U.S. exit costs. I think that's probably as much clarity as I can give you there. That is the final question. I'll just see if -- wait 10 more seconds to see if anyone else has a question. That looks to be it. So thank you very much, everyone, for joining. Always great to update you on the progress, and we look forward to speaking to you next time.

Thanks, everyone.