Change Financial Limited (CCA) Earnings Call Transcript & Summary

[Audio Gap] I'm joined by Tom Russell, our Executive Director. We'll take you through the September quarter, including the growth in PaaS, our sales pipeline and the new PaySim release. Tom will cover the detailed financial results, and we'll take questions at the end. Please submit your questions through the webinar Q&A function as we go. I'll keep the company overview brief. We have 2 proprietary technology platforms, both developed in-house. Vertexon provides card management, processing and issuing services, while PaySim enables clients to test their payment systems. Across the business, we support more than 150 banks and fintechs in over 40 countries. In Q1, Vertexon accounted for 85% of revenue with PaySim contributing the remaining 15%. Now before we get into the results, we have changed our reporting currency to Australian dollars from 1 July 2026. All financial figures in today's presentation are in Australian dollars. So why have we made this change? Australia and New Zealand now account for more than half of our revenue and the Australian card issuing market is our key growth focus. We've also exited our U.S. operations and most of our cash reserves are in Australian dollars. This change also aligns our reporting with our ASX investor base. The FY '26 comparative figures have been restated in Australian dollars and are unaudited. So when we refer to growth at constant currency, we are removing the impact of exchange rate movements so that you can compare the underlying operating performance of the business. Okay. So the main highlights for the quarter was continued strong growth in our core PaaS business. We delivered a record quarter for PaaS revenue, active card transaction numbers and GTV. We also signed 2 new PaaS clients and have 4 PaaS clients in final contracting phase, including 2 additions in this quarter. PaaS revenue was $3.2 million, up 26% on the same quarter last year at constant currency. This growth is coming from new clients brought on to the platform and the continued expansion of existing programs. We also signed 2 new PaaS points and have a further 4 in the final contracting phase as I mentioned before. At a group level, we delivered revenue of $6.3 million and underlying EBITDA of $700,000. Recurring income accounted for 81% of revenue compared with 70% in the same quarter last year. The growth in PaaS was offset by lower one-off license and professional services revenue, reflecting delivery timing and a strong comparative quarter last year. I think we've gone into a lot of that detail previously around the strength of the Q1 professional services and license revenue that one-off revenue last year. Tom will explain the financial movement shortly. But firstly, I will take you through the PaaS operating performance. So we now have more than 172,000 active cards in our PaaS platform in Australia and New Zealand. So that's up 15% on the previous quarter and 92% in the same quarter last year. Hnry completed its Australian and New Zealand card migrations during Q1. We also saw growth in the New Zealand personal wealth management platform client and an employee benefit plan. So the increase reflects activity across several programs. We processed 6.5 million transactions during the quarter, which is up 33% on prior corresponding period. The total value of transactions processed or GTV was $272 million, up 34% on constant currency. September itself was a record month for cards, transactions and GTV. The revenue model explains how that activity translates into revenue. We've gone into it in a lot of detail previously, so I won't go into a lot of detail but we earn recurring platform fees and monthly minimums, transaction fees, fees for value-added services and interchange. So as clients add cards and their customers use them, we have more opportunities to earn revenue across these services. So this chart shows the growth in PaaS revenue as we have added clients and their programs have expanded. So we now have 9 live clients generating recurring revenue. We are also onboarding 6 contracted clients with their card programs expected to launch throughout FY '27. Those 6 include the 2 new clients we signed during Q1. The first new client is a New Zealand financial technology company, backed by an established lending group. It is developing digital lending and payment solution incorporating a prepaid card and Change will be both issuer and processor. The client is targeting to issue approximately 40,000 cards as the program rolls out. The second point is a global digital asset and wealth management platform, operating across more than 200 jurisdictions launching a card program in Australia. The client provides innovative financial solutions that enable individuals and businesses to manage exchange and leverage digital assets, including cryptocurrencies, Change then provides then sponsorship for that program. Beyond the 6 contracted clients, we have a further 4 has opportunities in final contracting phase. Our focus is to close these opportunities and get the contracted programs through implementation and transacting. Existing client growth in these future launches are the main driver of further PaaS growth. I'll hand over to Tom, and then he will take you through the financial results.

Thanks, Tony. So for the quarter, we delivered $6.3 million in revenue, down 3% on the same quarter last year on a constant currency basis, which Tony mentioned. Now there's 2 quite different stories in that result. Firstly, our Core PaaS business continues to perform very strongly. PaaS revenue was $3.2 million, a record quarter, up 26% on the same time last year on a constant currency basis. This has being driven by growth in our existing clients, particularly our fintech clients and an increasing number of transactions in GTV processed. As Tony touched on earlier, we have 6 contracted clients currently onboarding, which will support future growth as well as those clients go live. Secondly, our license and professional services revenue was $1.2 million, so down on last quarter. As we've said last quarter, Q1 FY '26 was a particularly strong result. We've got a very strong pipeline of AUD 3.9 million of fully scoped professional services work that is currently under consideration by clients. Our focus is on converting that pipeline into signed projects and ultimately revenue over the coming quarters. One of the things I particularly want to highlight on this slide is our increase in our recurring revenues, so up to 81% in Q1 from recurring revenue streams. And that's something we've been talking about for a number of years as the PaaS business continues to build, we're building an increasingly predictable base of revenue. So total revenue was slightly down on the same time last year, but the important distinction is that our core recurring PaaS business continues to grow strongly and the difference in the overall result is largely coming from timing of one-off licenses and professional services revenue, which can fluctuate for the quarter. As PaaS becomes a bigger part of our overall revenue, we expect to see more predictable revenue base and less reliance on the timing of individual projects. Okay. Moving to Slide 8. There's a couple of things I want to focus on here, particularly the continued improvement in PaaS margins and what that means to the scalability of the business. We've spoken for some time about the operating leverage within the PaaS business model and the fact that we have a platform infrastructure and team in place to support significantly higher volumes. PaaS gross margins have reached 36% in the September quarter compared to 35% in H1 -- H2 last year and 30% in H1 FY '26 that's the continuation of margin expansion we've been talking about. And importantly, we're still relatively early in scaling our Australian PaaS business. As our clients grow, we continue to process more transactions. We're spreading a number of our fixed platform costs and connectivity costs over a larger revenue base. We're also progressively rolling out additional functionality, including digital payments, which positively impacts both revenues and margins. So we're continuing to see margin expansion as we've been expecting, and we're moving towards our medium-term target of 40% to 45%. We delivered $700,000 worth of underlying EBITDA for the quarter. So down 38% on the same quarter last year on a constant currency basis, but there's a few factors contributing to that result, particularly the timing of one-off revenue, the stronger Australian dollar and lower capitalization of software development time. I'll go through them in more detail on the next slide. From a cash flow perspective, it was pleasing to generate another quarter of positive operating cash flow. Cash receipts of $6.5 million were up 18% on the same time last year, and operating payments were also higher, although this includes some timing differences around creditor payments, reimbursements and also the prepayment of payroll that land on the last day of the quarter for Q2. Importantly, our underlying staff costs remained broadly flat in local currency. As we've consistently said, we have the team in place to support significant growth in the business without needing to increase our head count at the same rate as revenue. And that's really where the operating leverage comes from in the PaaS business as we continue to scale. We finished the September quarter with AUD 4.2 million cash in the bank and a further AUD 2.1 million held in cash back security deposits with no debt. Overall, we're continuing to build a more scalable business with expanding PaaS margins at a relatively stable fixed cost base and an increasing contribution from recurring revenue. Okay. So to impact the EBITDA result a little bit more, we've included a bridge had explained the movements from the $1.5 million in Q1 last year to $700,000 this quarter. There's really 3 things driving the difference. The timing of one-off revenue, lower capitalized development time and the impact of a stronger Australian dollar. Importantly, the core PaaS business has made a strong positive contribution with revenue growth of approximately $800,000 compared to last year. That's really pleasing result and reflects the continued growth in cards and transactional activity that we've been talking about. Operating costs, including the cost of goods sold [ decreased ] by approximately $200,000, the largest negative movement was the $1 million lower license professional services and maintenance revenue. As I mentioned earlier, last year benefited from a particularly strong contribution from one-off revenue. And importantly, that revenue generally has a very high incremental margin. So we're delivering it using our existing team and infrastructure. So when you have a difference in the timing of that revenue, you can have a disproportionate effect on EBITDA in any given quarter. Again, we have that $3.9 million pipeline of full scoped work that we're focused on converting over the coming quarters. The other 2 factors are relatively straightforward. Firstly, we capitalized approximately $200,000 less in software development than the same time last year. Those costs are still being incurred, but a higher proportion of being recognized as operating expenses rather capitalized. Secondly, the stronger Australian dollar reduced our reported EBITDA by $300,000 compared to last year. So when you bring all that together, the lower EBITDA result is largely explained by the timing of high-margin one-off revenue, lower software capitalization and foreign exchange movements rather than the slowdown in the core PaaS business. As we've discussed, PaaS continues to grow, margins expanding, and our fixed cost base remains relatively stable. And importantly, as recurring PaaS revenues continue to become a larger part of the business, we expect the impact of individual one-off projects on the overall financial performance to reduce. With that, I'll hand back to you, Tony.

Thanks, Tom. So turning to sales. So we closed 12 opportunities during Q1 across new clients, expansion with existing clients and professional services. The pipeline continues to develop across both products. So for Vertexon, we have 35 opportunities of proposal stage and 15 in negotiation with another 61 in qualification. And for PaySim, we have 52 at the proposal stage, 6 in negotiation or trial license and 27 in qualifications. All those metrics are up on the prior quarter. A key opportunity is what Tom mentioned before, is the $3.9 million pipeline of fully scoped professional services projects currently under consideration by client. So we expect these projects to convert and to sign contracts and revenue over the coming quarters, subject to client approval and delivery timing. We are also seeing increased activity in the larger Australian [indiscernible] opportunities and have participated in multiple requests for information during the quarter. Our Q2 focus is to progress those opportunities, convert the later-stage pipeline and secure the professional services work. So in terms of the new pacing, so previous [indiscernible] as we've spoken about the Pain modernization project. So this slide shows the change we have made to pace in following completion of the first 2 phases. PaySim has always been a feature-rich technical product the modernization makes it easier to use, particularly for less technical users and brings the testing capabilities into a more unified experience. So Phases 1 and 2 introduce the new user interface and unified testing capabilities, which were released to existing clients during Q1. The new PaySim became available for sale globally in October. The modernized product now covers the vast majority of the existing functionality together with new features and agentic AI has helped us accelerate the upgrade and delivery of the product road map considerably. Our focus now is on commercializing that work. We want to increase adoption among existing clients and win new license sales globally through both our own sales and our partners. Making the product accessible to a broader set of users is an important part of that journey. So our priorities for FY '27 remains focused on winning and retaining clients, bringing new programs live and growing the use of those products. For PaaS, the priority is Australia and New Zealand with particular emphasis on the larger Australian opportunity. We are refreshing our sales materials and developing a new website to support lead generation and conversion. We continue to work closely with our 2 strategic Southeast Asian on-premises clients for professional services work and migration to Vertexon Cloud. These migrations are a multiyear process, given the size and complexity of the card programs, and over time, the single cloud version will reduce development and compliance costs and improve efficiency for our business. For PaySim, the priority is new license sales globally. Across both products, we want to convert more opportunities through the partner network as well as our direct sales team. We continue to expect change to be net cash flow positive for FY '27. So the quarter demonstrates the continuing growth of PaaS and the increasing contribution from recurring revenue. As a platform scales, we're also seeing gross margin improvement. The next step is to keep converting sales opportunities to bring contracted PaaS clients live and grow PaySim license sales following the new software release. So that brings an end to our formal webinar. We'll now turn over to Q&A that has been submitted. We've got a number of questions that have been submitted. So Tom, I'll hand over to you.

Thanks, Tony. Okay. I want to take these in the order they've come in. Guys, given the active card numbers have increased so significantly up 92% on PCP to 172,000 active cards. It's a little hard to understand why revenues have actually fallen 3% on PCP this quarter. Therefore, can you please give us the main reasons why revenues have actually fallen despite active card numbers nearly doubling. And do you expect revenues to now start to increase on previous quarters going forward. So I think we have talked through that. Obviously, there's a couple of different parts of the business, where the impact -- so PaaS business, which is the card and the transactions, particularly the number of transactions and the dollars through the platform. That's grown very strongly. Some of the one-off project work with our Philippines clients, for example, hasn't sort of fallen into this quarter, and we expect some of that work to start falling into Q2, 3 and 4 in our pipeline we talked about. So I hope that answers that question just with the different buckets. Okay. Next question. If revenues are down 3% on PCP and the higher-margin PaaS revenues are growing strongly, you have mentioned that overhead should remain fairly flat as you already have the staff to support much higher volume such revenue. Can you please let us know how the EBITDA figures are down 38% on the quarter versus PCP to just AUD 700,000? So yes, I think we've been through that as well on the EBITDA bridge slide. what's -- obviously, there's a currency effect there. As you'll see, the PaaS business has grown very strongly with quite small number of additional costs. So that revenue -- that EBITDA drop is really from that very, very high-margin one-off license and professional services work, just not being as high in the quarter. I hope that answers that one. Okay. Michael, from MST. On the delayed timing with one-off licenses and professional services revenue, is this more likely to drop next quarter in half 2 '27 and looking at the split in the pipeline of the $3.9 million is it weighted more to next quarter or half 2 FY '27? So the answer is we expect some of it to start coming through in Q2, assuming that it will get signed, but it will definitely be more weighted to H2, just given the fact that we're in October, those projects will take time to deliver and they have completion time lines during H2. Okay. Another one from Michael. Given the transition to AUD reporting, when can we expect to see full pro forma financials with all 3 statements that reconciles USD. So we'll release -- so we've been working with the auditor on the comparative numbers, but they're not audited at the moment. So they will audit FY '26 AUD numbers and H1 FY '27 at the half year and then I'll order the rest of FY '26 and H2. So the full year FY '27 at the full year. So we'll release our accounts in Australian dollars, which includes the prior period retranslated and audited. Sorry, Tony, I'm hogging all these ones because I have mostly financial. Another question here. In today's [indiscernible] report the cash receipts were strong at $6.5 million, but the total outgoing figure was also considerably higher than normal at $6.3 million. Most of this increase in cash outflows was due to admin and corporate cost expenses lifting to a large $3.2 million for the quarter, which is 2 to 3x higher than normal figure. Was there a reason for this large increase and the admin corporate cost in the quarter, is this level of expense expected to continue going forward? And do you expect to improve its positive cash generation going forward. So we talked through that a little bit. So there's a few things around creditor payments. Remember, our COGS are also in that line. We don't break the COGS out on the cash flow in the foresee. There's a lot of noise in the quarterly cash flow. Things to like the payroll, which goes into a prepayment doesn't get staff expenses in the quarter, they will normalize through so in staff expenses. So they're not up 2 or 3x either. They are up a bit, but there is some explanation in there and also the timing of some reimbursement that we used to get quarterly. We now don't get those quarterly anymore. So that will normalize as well. Okay. Nick from PAC Partners. There's a few questions in there. So I'm going to break this up as we go. Can you talk to the PaaS opportunities you're seeing as a business now versus 12 months ago, Tony, I'm going to throw that one to you.

Yes, I'll take that one. Nick, I think now that we're far more established as a business and we've got track record in [indiscernible] what we are seeing is some larger opportunities coming across our desk. I think I mentioned in the presentation as well. We participated in a number of RFIs throughout the quarter. They were Australian RFIs quite large ones as well. I think that presence that we're sort of starting to establish in this region in ANZ sort of starting to resonate more into market. So I would say what we're starting to see is some of those bigger opportunities that are -- that we're participating in to try and win. So that's sort of a real maturing towards those bigger ones coming through.

Okay. Can you give an idea on the growth shares you have seen over the last few months post digital card? I might take that one. Look, those shares is 1 client. They are growing strongly. I don't want to give specific details about 1 customer, particularly given it's their business and our business is a lot broader than just [indiscernible]. But the growth we are seeing in PaaS is coming from our FinTech clients in particular. So that might give you an indication that Shares and Hnry and others that have got big growth plans are growing. The next question, can you talk to Hnry and its growth since being fully onboard. I think I accidentally just answered that one at the same time. Okay. Tony, I will throw this part to you, how is the revamp pace in going? What opportunities do you see there from a potential gain in license revenue? Is there any of that in the $3.9 million works?

Yes. So the revamp PaySim, PaySim Plus, look, it's only just been released, Nick. So as I mentioned, it went to existing clients at the back end of Q1, we're now releasing that is the only product -- PaySim product that we are now selling to new clients as well. So you take our existing clients very well received in terms of the changes that we've made, and you would have seen it on the screen shots we provided that. In terms of what opportunity do we see from potential gain in license revenue, I think what -- where we're really sort of targeting is our is the core PaySim in product, of which we've sold for a number of years, but being able to sell that to new prospective clients? Because one of the things that does can sort of hold it back is that sort of that older look and feel. Yes, it's very powerful. It's quite technical. Tom mentioned the sales process, so that is now changing with a lot of test as being nontechnical. So I think that will take away a little bit of a block of new sales. What it also does is PaySim Plus now integrates our ISO 222 testing tool into the whole of PaySim as opposed to sitting separately outside that. So ISO 222, which is account-to-account testing. We see that as a good opportunity globally. We're seeing a lot of sort of movement with that account to account and adoption. So that's another area, Nick, where we'd be hoping to really push our sales. None of that is included in the $3.9 million of work that is professional services work that is fully contracted and with clients at the moment. It does not include PaySim.

Fully scoped, not yet contractors sitting with clients for contracting, just to be clear. Yes. Yes. Any news on LatAm and progress there, Tony, do you want to take this?

Yes. So look, on the LatAm client, there is no real update in terms of their migration timing. We have -- they have engaged us with some work around their migration. Timing is still uncertain from them as well. So no real update apart from where we are, we have been engaged to do some work to assist with that transition, timing-wise still uncertain from our perspective.