Change Financial Limited (CCA) Earnings Call Transcript & Summary

Yes. So there's 4 Vertexon PaaS opportunities in the final contracting stage throughout FY '26. So the sales team continued to strengthen and expand the pipeline with a number of additional opportunities entering the pipe during the year and progressing through the early stages of the sales cycle. Across FY '26, the broader company sales pipeline has delivered a historical sales conversion rate of approximately 70% while the Vertexon pipeline has achieved a conversion rate of about 62%. So that's Vertexon on-premises opportunities. So the project work and licenses that we do plus our PaaS offering. So opportunities that progress to the final contracting stage have historically converted at a higher rate than the broader pipeline. And so while the timing of execution remains subject to client procurement, legal review, internal approval processes, et cetera, we are actively working with each prospective client to finalize agreements as soon as possible.

Okay. With the exit of the legacy on-prem LatAm client Vertexon, how many more of these legacy on-prem preferred clients are still in the client base potential for churn.

Yes. So by the end of FY '27, we now expect to have 3 on-premises clients remaining the 2 larger banks in the Philippines that we talk around and 1 of which is partially migrated to Vertexon Cloud. And 1 other smaller bank, which we have already end of life, and that's worth a couple of hundred thousand dollars a year. And we expect that they will migrate away in sort of the coming 24 months, but they are a much smaller clients.

Okay. With respect to the 4 clients in the final contracting phase, what type of industry clients are these.

Yes. So they're all fintech clients across Australia and New Zealand. So we are continuing to see traction in what we call that sort of embedded finance space, where -- for example, there might be a credit provider who's looking to embed a card into their broader offering or a card linked to a loyalty program, for example. That's similar in that similar vein embedded finance is what we would sort of classify the Sharesies in the Hnry's of the world. So that's what we're sort of seeing a lot of that -- a lot more of that traction in that fintech space around those sort of offerings.

Okay. With respect to the comments about exploring M&A opportunities, how actively are you in the market? And what types of opportunities are you looking at?

Yes, look, we've always kept an open mind to M&A. But I think with the business now being in the position of relative strength based on what we've delivered over the last few years, I think we see a real opportunity to enhance our business through a strategic acquisition. So in terms of opportunities, I think a potential acquisition might have an adjacent product offering that complements our sort of current product offering and provide an opportunity to accelerate growth. We want to be selective in terms of the business we -- any business that we would acquire and make sure that there is a strategic fit and alignment for our business, but I think we're in a good -- really good position as a business overall to be actively pursuing M&A. But that is something that we have been looking at and continue to look at.

Okay. Thanks, Tony. So that's all the questions we've received from before the webinar. We've had another dozen or so come in as we've been going. So I'm going to flip screens here and go to those. Some of them we may have already answered, but Tony, I'll throw them to you, and we can go from there. Can you give us an idea of PaaS card growth that is organic from underlying part, this growing book versus transitions in -- I mean I can even take this actually first probably. So we've talked about -- those credit union clients are a very stable base of cardholders and transaction volumes, they sort of moved somewhat with probably inflation, but they're just a fairly stable base, and there's obviously some seasonality depending on the time here because they're everyday cards. So at Christmas time, people are shopping the sales in the January to March quarter, people generate spend less money, but they're putting their groceries, their net for subscriptions on. The growth is coming predominantly from the clients we're transitioning in. So Sharesies was a net new program, but with a large customer base that they're rolling cards out to, right, they continue now to try and activate and embed the card across the broader business more and more as we go. And Hnry, they are -- they brought across a book of clients, which we've talked about. So that's they will be fully across by the end of July. And then there also you've probably seen, if you're in Australia, you've seen their marketing everywhere when you're watching the Rugby League or you're at the bus station or whatever it is, they're sort of trying to grow very quickly, and the card is a core part of that offering. So that's the growth coming from those fintech clients. I don't know if you have anything to add to that, Tony?

No. No.

Okay. I'll take this next one, too. Can you talk to what a more normalized quarter for Hnry and Sharesies what digital might look like in terms of PaaS transactions and volumes. So look, again, they've got very sort of ambitious large growth plans, which we really hope that they achieve. We really hope that even a part of them, to be honest. So it's hard for us to give a normalized quarter. What we've done there is we have provided that June number for PaaS revenue, which we feel comfortable providing that on the basis that you can probably look at that at a typical base month going forward. And then any growth from there will be on top of that from the new clients coming on board and the growth in the existing client base. Okay. Tony, I will throw this 1 back to you. Has there been much progress with paymentology? Can you talk to any opportunities there?

Yes. So we continue to work very closely with paymentology. There is some early stage opportunities that we have. Paymentology is actively expanding its presence in the Australian market as well. So the opportunity there is paymentology clients that are overseas looking to launch card programs in Australia and New Zealand, where we can be the bin sponsor or there's net new opportunities that may arise as well. So there are a couple of opportunities that we are talking to with paymentology at the moment. but nothing progressed further enough to report on, but there is positive progress there. And as I mentioned, there's a couple of good opportunities that we're in discussions with.

Okay. I think we've probably -- we'll probably answer this as best we can. Are you able to give any further color in terms of user and/or card targets for Hnry or any other new clients. We can't, and we're not going to talk to those client-specific targets that are their internal targets, not necessarily what we use for our forecast. But what I would say is they are fairly typical fintech companies that want to grow rapidly and have some big ambitions in market. Richard, I won't read out your comment, but thank you very much for the support. Still -- okay, just resetting what I said before, okay, we haven't seen this one, so apologies. If the 2 big Southeast Asian clients fully migrate to PaaS model, how much has ARR should we expect? How much project revenue do we generate from those 2 clients in FY '26. Okay. So maybe you answer this one, Tony.

Yes. Just to give Stella probably a little bit more clarity on that as well. So the Vertexon on-premise is the professional service work. I think I mentioned it was $3 million of revenue in FY '26. The vast majority of that would have been earned from our 2 major clients in Southeast Asia. Too hard to -- it's too early to know what that PaaS ARR would be. I think I mentioned as well that we would expect to sort of maintain our revenue from those clients. When I say that, that's the maintaining the sort of combined professional services work and annual maintenance, but you wrap it up into a sort of a -- into a PaaS offering. What I would expect from moving across to PaaS is sort of higher recurring revenue because they're getting continual upgrades of the software as we release it for all our clients. So higher recurring revenue, but the sort of the one-off development work would probably drop down because I would expect there would be less sort of bespoke work being done for the clients. Look further work and discussions need to happen with those clients, which we are doing before we can fully answer, but I think that's probably my -- that would be my feeling, stellar as to where it would head. Hopefully, that helps.

Okay. I will talk to this one. So last year, you spoke about targeting mid-30% margin for PaaS, you've hit that already, and it seems to be accelerating. Hypothetically, if you saw a doubling of cards and transaction volumes, what margins would you expect to see from here? So it's hard to exactly say and I'm not dodging the question. There's a few factors, right? So one is the accounting standard treatment. So our bin sponsorship clients, given the accounting standard are they do drive higher margin for us. So a bit lower revenue relative to the volumes of other -- the full processing issuing clients, but a much, much higher margin. What we have said in this presentation is we do expect now to see those margins pushing towards 40% to 45%. That is our medium-term target. We will see or we fully expect to see that sort of 32% to 35% where we've exited FY '26 increase over FY '27. And push up to a longer-term target of towards 50%, which we have sort of disclosed before. So the timing is not exactly linear or clear, but certainly, we expect to see that margin expectation to keep happening and sort of keep happening this year as well. Okay. Given the rapid advances in technology on the -- in the recent months, are their competitors emerging who might such will overtake changes products.

Yes. Look, when you think about the industry that we operate in, particularly from a Vertexon perspective and to a lesser degree, to a degree as well on the PaySim side. It's still a very highly regulated industry that requires licenses. So even though there's advances in technology, that doesn't give you an AFSL. That doesn't give you a financial service provider registration in New Zealand. It also doesn't give you principal membership with Mastercard. And what comes with that is the trust of the scheme as well there's relationships that are built over a number of years with schemes in our instance. That is Mastercard and where we are a principal member. So in terms of the sort of the advances in technology, I think -- similar to what Change Financial is doing, I would be expecting a lot of other companies out there, competitors about now, existing competitors that will be deploying Agentic AI to speed up their development cycles like we are doing as well. So I don't sort of -- I'm not sort of seen it as sort of new competitors coming to market. I think it's similar to what it always is in any technology space. I think it is how fast you can release new products and features, and that's where our focus is. Similarly, on the PaySim side, if you look at it from a certification perspective, for example, to be admitted to the [ EFTPOS ] scheme in Australia, you've got to use Change -- you've got to use PaySim for certification as well. So rapid advances in technology that's sort of helping us with our modernization. And as I mentioned, the time frames have compressed hugely for that. which has enabled us to release Phase I to our clients this week. So I think there's sort of acceleration. We certainly are adopting at scale across the business. It is on our operating plan for FY '27 as sort of an Agentic AI business as well. So that really to speed up and increase efficiency in our business.

Okay. Are you still selling on-premise licenses? Or is cloud the only option for new customers, how many legacy customers in total are there? So I think we've answered part of this, Tony, but I'll just let you touch on that quickly.

Yes. So I think we've answered that around the legacy customers in there. So we've given a response to that. Are we still selling on-premise license? Look, not -- that is not an active sale process. We've got 2 sort of key clients up in the Philippines that as we've mentioned, looking to migrate them across to the cloud. On-premises, is not the easiest process to be involved in. And there is a reason why a lot of leading technology companies globally move away from that model and move to that sort of cloud-based version similar to what we are doing and have been doing for a number of years. it can create challenges and inefficiencies in the business, maintaining different code bases that I said earlier. Look, if there was a huge opportunity that came up in Southeast Asia that was around -- that was on-premise license, would we pursue. Yes, we most likely would. Is it likely to happen? I don't really think so. I think the world has changed. The move there is to cloud-hosted solutions for all the reasons that I've sort of covered off on.

And I think I'll just add there that although it might not be an on-premise license, some of the clients, particularly up in Southeast Asia still prefer a license and support and maintenance model. So it might be still revenue that we class as license and support and maintenance being more akin to some sort of a subscription from our perspective, but it might be structured that way but being in cloud deal if that makes sense. And that's just because of banks procurements and the way they do things, you might sound really simple, but for -- sometimes for a bank to change the way that they're used to doing things to even the way that they build, like that's a roadblock. And so it's easier just to structure something up that achieves a similar thing, but it might still be a license revenue. Okay. Imagine you're presenting a webinar to shareholders 5 years from now in 2031. What would you like the business to look like? In other words, what would success look like to you. I'll let you go on that Tony...

You'll have a view on this, too, Tom. Look, I think if we look out 5 years from now, I'd like to see, firstly, just talking about our current core business I would like us to see be a dominant player in that sort of processing and issuing space, certainly in Australia and New Zealand, but also pushing further up into Southeast Asia as well. I think Australia is a key target market for us. We are subscale here. We are still very small. It helps with the with the Hnry's of the world live in Australia. We've got other clients going live in Australia, build that scale up, get to a very scalable business in Australia, secure some additional clients in Southeast Asia for processing only because we're not licensed up there, and I don't think that would be an intention to do that as well. I think where else I would like to see is our business would be -- the product offering that we have would be expanded through attractive M&A. I think we -- as I mentioned earlier, I think we're in a good position here to be able to undertake M&A. I would like to see us bolt-on some businesses that have some complementary offerings that make us as sort of a broader or more holistic payments company as well that we can push out into really the core market of sort of Southeast Asia and Australia and New Zealand. And naturally, be a much bigger revenue business and a lot more profitable and a lot bigger share price. As a result of those corporate activities, but that's sort of the outcomes of some of the activities.

Yes. Okay. I don't have anything else to add to that. Obviously, other than that we would -- that on-prem business would be a much smaller part of even still part of the business by then. Okay, why did the LatAm client not want to migrate to the cloud option?

Yes. So for that client, look, Latin America is not a core region for us. So different language than what our business really operates in, in terms of the Spanish-speaking region. There was a lot of additional functionality that they wanted to have built in, which would have needed to be built by us, and that would have been very costly as well. So the functionality of what they currently use is not what the -- they're not doing a sort of like-for-like we're moving from a card processing or a card management solution to a very similar card management solution. They were looking really to move from a CMS card management solution to CMS++. There was other things in there, of which we didn't do we would need to have invested a lot of time and money to develop that for a client that is 1 client in Latin America, we don't have that as a core region. It's a very fragmented market and difficult for us to really penetrate and grow in, particularly when we don't have, in my view, senior management, senior presence in that region, in that time zone very hard for us. So to invest a lot in that to actually be a competitive pricing proposal to get in there. It was not really going to be viable for our business. We are better to focus in our region here. Tom, I don't know if you want to add anything to that answer?

No, I think that's the Tony. And there's another language in that region that we also have to factor in that would be unique for 1 client. And so we talk about these efficiencies and the scale benefits of having everyone on the same platform. Massive customization for 1 specific region for 1 client, even if they did move doesn't necessarily create the efficiencies where we don't have that factor in the Philippines. Yes, there is some small customization. But the credit card, the bank that's got their credit cards on the cloud already. They're using the same version of the software now for credit cards only, but as our Australia and New Zealand PaaS clients, and there's a few features turned on and off, but it's the same software. I will read it out. There's a comment that says this might be even worth reading out, but I'll read it out. It might be hard to tell this early, but Hnry could have more seasonality towards the end of June and the financial year tax, et cetera, and maybe slower towards Christmas ending insights. You could be right. It's too -- we don't know that yet. That would make logical sense. I think sometimes seasonality too, and we saw this with -- when our credit unions were scaling up, which happened over a period of time. It's very hard to see seasonality when you've got a growing base of customers. So it distorts what is seasonality and what is growth. So it's very hard to see. So it's too hard for us to tell. Again, thank you, Richard, [indiscernible] thank you. I won't read those out, but thanks very much. Okay. So assuming flat revenue from 2 Southeast Asian clients, the gross margin will be lower in terms of dollars terms due to lower gross margin percentage compared to the on-prem model.

I think, Stellar, I think I know where you're going with it. So the difference here is for our PaaS business, we are the issuer. So we incur in Mastercard scheme fees, every transaction that processes through the system, we incur transaction fees or domestic EFTPOS in New Zealand. If you take the clients that we have in Southeast Asia or up in the Philippines there and you move them to cloud, we are the processor only. We do not -- we are not the issuer. They are the issuer of record, particularly given their size as well. So when we say that revenue, the profile would be the same the margin. When we look at gross margin, that will be 100% drop-through because there's no COGS, direct COGS associated with us moving them to the cloud because they are still the issue of record, which is different from our PaaS business. So hopefully, that clarifies that for you, will not be at a lower gross profit margin than what they do now because it is the same. We don't have the direct COGS. It's just a rebalance between sort of that support and maintenance and professional services to a different sort of recurring revenue stream because they get those upgrades.

Okay. We've had another question come in. You've touched on M&A for CCA. Given the strategic platform you've built, has there been interest from larger players in acquiring CCA. I think as Tony said before, there's often conversations that happen or inquiries that are made. There's nothing at the moment that has progressed past that sort of initial inquiry. But it's definitely something that we are open to and definitely something that I'm sure some other people are thinking about. That's -- thank you -- thanks again for those for your extra comments there, just come in. That is the end of the question. So we will stop there. We've obviously taken a fair bit of time there to answer the question. So hopefully, that's been very helpful. We do appreciate everyone taking the time to jump on the call and support, and we look forward to providing you further updates. Tony, I don't know if you have anything you'd like to add.

The only thing I'd add is just as a reminder, if you haven't seen it, we are at the Techno conference in Melbourne on Monday and Sydney on Wednesday, if you would like to attend, Tom and I will be there, I'll be presenting, and then we will also have a booth there. If you'd like to attend, you can register through us and get a free pass. More than happy to answer any more questions and sort of engage directly as well. But for everyone who took the time to join the webinar and ask questions as well. Thank you, thank you very much.

Thanks, everyone.