Credit Clear Limited (CCR) Earnings Call Transcript & Summary

Good morning, everyone. Apologies for the delay. We had a few more questions than we were expecting, but we've got Andrew Smith and Victor Peplow here to give us a brief business update following the AGM this morning. Andrew, over to you.

Welcome, everyone, and welcome Victor Peplow, our CFO, to this call. We'll be running through the Credit Clear update in terms of where we're going. We're obviously 1.5 quarters into the FY '25 financial year and there's some exciting news ahead. Headlines, obviously, in this profitable growth theme that we're going to present today, some headline points that we'll obviously repeat throughout the presentation is revenue run rate year-to-date is tracking at $48.8 million and is up 20% on prior corresponding period, which is positioning ourselves really, really well in terms of our guidance. And considering we've got 8 potential Tier 1 clients that have either been signed or are developing through onboarding, it gives us a very good confidence in our back Q2, Q3 and Q4 results. So very positive there. The other thing that's tracking really well is our profitability. Our guidance once again of $7 million plus in underlying EBITDA is well and truly on track to certainly achieve, if not exceed. So some great results coming out from a numbers perspective and also strong leading indicators. Now for those who are relatively new to the stock, this would be very interesting. For those who've seen a few of these in the past, I'll be repeating myself. But it's always good to share exactly why Credit Clear is doing such a great job and winning so much business in the digital debt collection space. And it's got to do with the fact that we've got an end-to-end solution that looks at Software as a Service into a digital-led third-party solution and we've even got late-stage collections through Oakbridge Lawyers. So that's broken down into 3 brands, the Credit Clear brand, the ARMA Debt Resolution brand and the Oakbridge Legal brand as well. So what that does is deliver up to 22% performance in terms of recovery rates, which, as you would know, in today's society is very, very important to our clients. It's also around working with more and more of Australia's largest companies, which you'll hear later around the energy sector, the utilities, the telecommunications sector and the insurance sector. We're also growing our market share due to that performance, and that's all underpinned by very strong customer engagement feedback through a Net Promoter Score, which is still sitting above plus 40, which is quite extraordinary within that debt collection space as well. So that's effectively what gives Credit Clear advantage in the market and is driving a lot of that success in terms of tender win rate at the top end of town Tier 1 credit providers.

Okay. I'll talk to this slide. So just looking at the graph to the right, which measures revenue over the last few years, you can see that continues to increase at a very good rate. And in fact, for the month of October, we achieved another new high of just shy of $4.3 million in revenue, which gives us a good start to the financial year. On a year-to-date basis, we're at $16.3 million, which annualized amounts to $48.8 million, as Andrew has just said. And it's gross profit margin I'd like to elaborate a little more on. You can see that for this year-to-date, we were at 56%, which is quite a bit higher than what we achieved last financial year, 53%. And again, it's our digital collection platform, which continues to assist this growth in margin and the flow-through to the bottom line, which I'll touch on in a moment. So with that, digital payments continues to grow at a rapid rate. We continue to get really good feedback from our clients and in turn, their customers who we're collecting from. NPS scores are still in the 40s. and we are winning clients on the back of that as well. So that investment in technology over the years is certainly returning very well. In terms of FY '25 guidance, again, tracking well, revenue within our range. Underlying EBITDA, we're not reporting today and we will when the half year accounts are completed other than to say the executive and the Board are very pleased with how that's flowing through. So when you consider the revenue growth, combined with the growth in gross profit margins, it's implied that there is flow-through there to underlying EBITDA. At this stage, no revision to guidance, but we'll certainly come out and comment on that again in February when we release the half year accounts. And lastly there, onboarding of clients. The acquisition of new clients, particularly Tier 1 and Tier 2 has not let up. We continue to onboard clients, very busy in that respect. It's great for business and that sets us up well for the second half of the year and beyond. So if you look at October year-to-date revenue and where we think the second half might be, and traditionally, second half has been around 10% higher than first half with all these clients coming on board, it certainly sets us up quite well. But I'll stop there on this slide, other than to say revenue is looking good, financials are good, gross profit margin is heading in the right direction. So we're well set for the next couple of years.

Yes. Look, all I'll add to that is that whilst Victor has been with the business for just about 5, 6 years now, Victor.

7 years.

Over 7 years. That's without a doubt the most positive I've ever seen Victor in terms of standing in front of a set of numbers. So the thing we almost get asked every investor relations meeting is our operational leverage and to see that to accelerate from 53% to 56% whilst we're investing lots and lots of money on onboarding really sophisticated Tier 1 clients, which is front-end cost heavy, I think, is extraordinary and an endorsement to the performance of the technology component of our business, driving huge operational efficiency and giving us really strong operational leverage. So good to see that being reflected in the numbers. And whilst some of the analysts might jump on top of these numbers and start to sort of calculate what we could be targeting at, we're just about into December, January, which traditionally can be a slower period for us. Things have changed a little bit in terms of our customers. Some customers are more active over that period of time. But I'm still keen to see how that sort of works out when we sort of come back and look at the numbers in February. The other really positive thing, I think, that we can reflect on in the last sort of 3 or 4 months is the attraction of some really sophisticated institutional investors. It's really been a positive experience that certainly Victor and I and the team at Credit Clear to attend roadshows on behalf of the various brokerage firms that cover us. And a lot of the analysts are saying that we're one of the most popular stocks that they're having meeting with. And that's reflected a lot in terms of new institutions that have jumped on the register. There was a very large amount of stock changed hands over the last 3 or 4 months' period, I think in excess of sort of 50-odd million shares, which were exchanged. There was a very large pre-IPO founder who's transferred nearly all his stock to 5 sophisticated institutional investors, which once again shows just what the market is seeing in terms of our future aspirations in terms of price and performance. I think it's an endorsement to the fact that we're doing work with more stable customers. We've got a spread of revenue across a large amount of markets, no focusing on one particular sector that gives us risk. And the proportion of revenue of our top 20 clients becomes smaller and smaller and smaller, which naturally delivers a reduced risk profile to our business. And lastly, what we're seeing is a very strong amount of reoccurring revenue coming from those clients. And whilst people don't see Credit Clear as a Software as a Service business anymore, we're more of a digitally led business or a digitally enabled business. It's good to see the reoccurring nature of the revenue being very, very high, which is once again another question that we tend to get over those meetings. So, last point, we've seen a number of directors add to their shareholding. And hopefully, that's further endorsement that we're on the right track. All right. This is just sort of reinforcing once again that as we've sort of punched through that sort of -- that Tier 1 customer within sort of insurance, utilities, energy telecommunications, banking, finance, what we've observed, and no doubt this is similar to other companies, is that it doesn't take long for other organizations in that sector to follow suit. Off the back of not just the reputational risk of having someone already having done work for a big 4 bank or a large telecommunications company or a large energy provider, what you see is more and more of those organizations within that sector follow suit. You will appreciate that the hardest customer to win in the sector is the first one and then it gets much easier after that. And so what we've seen in spaces like energy, utilities, water, gas, electricity, telecommunications, banking and finance and insurance, which are obviously very big sectors in this market, there's been a huge amount of secondary Tier 1 companies following that suit. So what gives us, once again, confidence in our FY '25 number, FY '26 and beyond, is we've got 8 potential Tier 1 clients that have already signed with us and are onboarding, which we're estimating between $8 million and $10 million worth of uplift in terms of revenue. So very, very strong outlook and once again, gives us confidence to our guidance, not just in FY '25, but beyond. Now, those again who have been to a number of these presentations will hear me repeat myself here, but we've seen the competitive landscape continue to be consolidated. Business values in the industry have certainly improved their prospects of picking up new work. The merger and acquisition of Recoveries Corp and Milton Graham, followed by the transition from Recoveries Corp or from Transaction Capital and Archer Capital to Allegro Capital, having taken place in the last sort of 6 to 12 months, followed by administration of Collection House and Panthera, who both have contingent parts of their business that we compete with, have created opportunities for us to take larger positions with clients that we work with or in fact, new positions doing their work. So it's opened up in terms of market consolidation. Economic factors still remain very positive. Consistent inflation, cost of living pressure, very full employment have not -- and flexible approach to clients supporting more repayment rates have also contributed well to us. Inflation, if we've got a customer debt through an energy retailer, and we're seeing that debt increase by 20% or 30%, which is obviously ahead of inflation, and we're charging a fixed commission rate, then naturally, our fee per file is going up, and that's contributing dramatic -- greatly towards our margin uplift from 53% to 56%. We're also seeing less debt still being sold across the market. There's very -- there's fewer debt buyers operating in Australia. And once again, with the likes of Collection House and Panthera in voluntary administration means that there's less debt being sold and there's actually less incentive for people selling debt now because prices have come down substantially. So it's meant that credit providers have been looking to partner with organizations like Credit Clear to support their ongoing cash flow. So I'll summarize some of the key points from the outlook. Trading conditions are very supportive. Australian companies are strengthening their debt resolution capabilities. It seems like even the companies like -- or even the organizations like government bodies like the ATO have reintroduced third parties doing collections on behalf of them. If you remember from previous presentations, I said the Albanese government said, at a federal level, we're not using third-party collections businesses to help us recover overdue debt. It might be the $54 billion worth of tax debt that sort of prompted this. But they've now reintroduced third-party collections businesses to start doing third-party collections. That's a very good sign for organizations that are almost quasi-government, like Transurban, who we work with, who have been more proactive about collecting it and the opportunity to sort of grow them as a customer and others in that market are very, very strong. We're also seeing continued win rate in terms of the share of work we're getting, and that's linked very strongly to compliance, service and almost most of all, our performance in terms of recovery rates when being compared to other organizations. I'd like to say that's been strongly delivered by artificial intelligence and deciding what the next best action is when we take in terms of collection strategy. We're also seeing continued strong new business pipeline, including tenders with large banking and finance organizations, more utilities companies, insurance companies and a very strong potential for growth of margin and operational leverage because our overhead costs are remaining pretty stable, yet the revenue is growing, as we've seen, by 20% prior corresponding quarter. So to link that all back to an outlook, whilst we're not in a position to sort of upgrade our guidance, probably due to the fact that we're looking at sort of December, January period, and we're not necessarily 100% sure on how that could affect us, we're well on track to sort of meet and exceed both the revenue and EBITDA guidance.

Thanks, Andrew. Thanks, Victor. We've received some questions in writing. Let's go through some of those quickly. If the company stops signing new clients, how much revenue growth roughly could we expect to gain from existing clients?

Well, we've highlighted there's about $8 million to $10 million worth of additional revenue to come from just Tier 1 clients that we've signed and onboarding. I still think there's about 20% of growth that could come from the existing client base quite comfortably, let's say, another $8 million. So anywhere between $16 million and $18 million worth of revenue that we could see the business just to sort of grow without signing any more clients. And as you know, that would accelerate the gross profit margin uplift, because we wouldn't invest necessarily in sales and marketing quite as strongly as we would. But at the same time, there's a lot of runway in Australia. And one of the comments that I was planning to make is that's why we've sort of parked any sort of international expansion strategy at the moment, because there seems to be -- our hands are very full with not just new clients, but existing clients looking to expand the amount of work that we're doing with them.

Thank you. A question on the capital development for the coming year or FY '25. Any expectations around what -- where that will be?

Yes, sure. Look, the current run rate is to capitalize around $100,000 per month, so $1.2 million per year. Tech development and specifically what we capitalize is reviewed constantly. Jason Serafino, our CTO, sits with the executive. Monthly, quarterly, we refine the road map. But again, although that's a material investment, let's not forget the returns that I mentioned earlier. We continue to see returns increase, hence the maintenance of -- maintaining that investment. So currently, to answer the question, $1.2 million for FY '25.

Thanks, Victor. A question from James just regarding our guidance and noting that if you look at where we're run rating and assuming a stronger second half, we could already be sort of over our guidance. Could you provide some thinking around the decision to leave as is?

Yes. Look, I mean, Credit Clear, I think, has only just regained our reputation as an organization that makes promises that we deliver on. I still remember 2.5 years when I sat in front of lots of shareholders who all gave me the same advice, which is make promises that you can confidently deliver on and people start to believe in what you're saying. And whilst when we just map the numbers moving forward, surely, everyone could calculate that we're well and truly in the zone where we could increase our guidance. But there's still some unknowns over Christmas. And traditionally, larger clients can take longer to onboard and then longer to ramp up. So I'm very confident that we'll be able to upgrade our guidance next year. But like in 2024, where we upgraded our guidance 3 times, it was all done in Q4.

Got you. Thanks, Andrew. Question from Michael. What are you seeing in terms of competitive pricing for Credit Clear services? So what's the debt ledger market like in terms of volumes?

Yes. I suppose 2 things. Credit Clear compete in 3 areas, the software component of the business, the hybrid offering, which is the digitally enabled collections, third-party collections and obviously, the late-stage legal space. So I'll give you -- yes, in terms of the Software as a Service, there's not a lot of comparables. There's industry-specific software players that price very differently. We might price a fee for service or a licensing fee or a commission rate. But where we're seeing our competition pricing in terms of commission, there is obviously those that price below us that are trying to win the contracts based on pricing. There's organizations that will price similar to us, but we're not seeing a huge amount of pressure in today's market to reduce commission rates due to our large amount of digital engagement. In terms of pricing on debt that's being sold, whilst we don't buy any debt at all, we do have an insight in terms of the pricing on debt. And we're seeing prices on utility debt almost being reduced by 50% and that's been driven a lot by organizations like Panthera used to buy a very large amount of utility debt. Now they're not buying any. And therefore Credit Corp and small private companies that are emerging as a big player in the space are effectively driving down the price. So what we're seeing is less demand for debt being from a fewer number of debt buyers and lots more debt being available to sell. So you can just look at macroeconomics there.

Another question just regarding cash at bank. What are the plans at the moment?

Yes. Look, this is always an interesting topic of discussion with various shareholders. Do we pay a dividend? The answer is no. We've still got $18 million worth of tax losses we can use to generate free cash before we're paying out franked dividends. Do we do a share buyback? That's an interesting argument as well, being proposed by some very smart people that understand how return on investment could work in that space. But we're certainly not in the realms of buyback at the moment. The third is to leave it and generate good interest in fixed term deposits, which have been great over the past period. But I still strongly believe that once we start to embed and build a strong cadence of onboarding clients in Australia that we can look elsewhere to acquisitions and build some really strong synergies in areas that sort of fit right within our wheelhouse. So for the first time in the company's history, we're very, very strongly positioned in terms of our balance sheet. We've had 6 consecutive quarters of cash flow positivity. And I think that there's lots that we can do with that money. But at the moment, there couldn't be any place better to focus our time and effort than sort of growing the Australian business.

Just to add to that, too, if you look at the history over the last 5 years, we've made 3 acquisitions. I'll say that that strategy has not changed too much, but it's a question of timing and what's going on onshore before we consider anything else.

Yes. Question about the sales pipeline. How is it looking compared to 12 months ago? And what's the decisioning time frames like?

I'll talk numbers and then maybe Andrew can talk a little more specifics about the type of client. In terms of numbers -- and we measure new client signings each year, so for the last 2 years. We sign clients, we try and forecast revenue -- expected revenue from new signings. And over the last couple of years, that estimation or forecast has been between $8 million and $10 million, okay? Now where does that revenue generate is the next question. And I've mentioned in the past that generally in the first year of signings, we achieve 30% of that forecasted revenue. But then by the second year, it's 80%, remembering the lead times, the integration periods and then the ramp-ups. So to give you numbers, it's $8 million to $10 million per year, 30% achieved in the first year, 80% in the second. But that's a financial aspect. I'm not sure, Andrew, whether you can elaborate.

Yes. I mean, in terms of prospects, there's still lots of new prospects in the pipeline. We've only really won 1 big 4 bank, which is contributing next to nothing to our revenue, but we're doing incredibly well in terms of performance and compliance. So there's naturally going to be 3 or 4 major financial institutions in our pipeline. If I look at the sort of overall pipeline as a whole and understand what the outlook is, it's very feasible that we're going to achieve above $50 million in revenue this year if things keep going at the same rate they are. Could we get to $60 million the following year? And if 56% of that is dropping through the bottom line and then it drops down to maybe 45% in profit. We can see it probably going from sort of 50% to 60% to hopefully 70% the following year before things even start to slow down in terms of market share. So I'm very bullish on the outlook of this company, as is -- as are some of the shareholders that we heard from today at the AGM. And naturally, I'm the salesperson, and Victor is going to water down a little bit of what I think the outlook is going to be. But I think we're in a transformational period as a business and as an industry. We're leading that transformation certainly in Australia. And people are really, really responding well to our engagement in terms of digital engagement strategies. So -- and that's measured by the Net Promoter Score. So we're very positive about where the company is positioned. I think we've got through a lot of the challenges over the last sort of 2 or 3 years. And for the most part, it should be undisrupted future growth.

We've got a few more questions, so we'll keep on running through them. The -- where are you spending your IT spend at the moment in terms of your competitive advantage? And have digital collections exceeded traditional collections? Question from Michael and Larry.

Yes. Look, we're still investing heavily in terms of product and feature development. A lot of that is focused around the deployment of Credit Clear's technology within the ARMA Group. So we've obviously got over 1 million customers that we're pursuing for overdue invoices. And there's no better customer than an internal customer like ARMA that really sort of drive improvements in operational efficiency, engagements, feature improvements. So a lot of it's been invested in that part of the business. We've got some very large Tier 1 Software as a Service clients like IAG and Suncorp in their insurance arms. So we've got a big part of the team that's working on those projects, which naturally have good synergies into the insurance part of what ARMA does and continues to improve the product to sell to new customers, not just within the insurance space, but all markets. And what that is contributing to in certainly the consumer space, I'm talking about the high-volume, low-value space, whether it be banking and finance, telco, utilities, we're seeing the engagement rate of digital exceeding traditional collection methods at the moment. Now we usually have a slide that talks about digital payments versus traditional payments. And what we're seeing is the growth of digital payments outstripping the growth of the company in terms of the percentage. So more and more people, as you'd probably expect, are choosing to pay, set up payment arrangements, lodge disputes digitally rather than through the call center, which naturally flows through to that improvement in margin. So all those indicators are strong and I think there's still quite a long way to run in terms of uplift there.

The next one question, perhaps for the Board and without notice. Paul, I'm not sure if you wanted to perhaps take this one. With the consolidation in the industry underway, has the Board mandated any corporate adviser either for M&A offense or defense, if not, why not?

[indiscernible] question for investment bank [indiscernible].

I can answer it if Paul doesn't jump up. Short answer is no. Just to give some color, it's nice to have approaches from private equity. We're now in sort of the black, obviously, in terms of profitability and the outlook is very strong. But there's been no aggressive approaches that would warrant us engaging a professional third-party adviser to help manage that.

One from Mark. Given the expanding verticals from insurance into energy and telecommunications, which segments, industries do you think are delivering the most growth?

It changes. It was insurance early last year, then it was utilities and now it's telecommunications. So it's been a battle between the teams. We set up the teams within the business as insurance, utilities, banking and finance. And it's amazing to see the individual teams compete for overachievement of their targets. So when I talked about having a spread of revenue across multiple sectors and no one single dependence, what we've seen is each of the team grow substantially. Even the legal team started to grow substantially this year off the back of 3 or 4 years' worth of very low amount of companies and organizations taking legal action. We're even seeing that part of the business grow substantially, which is very nice.

Okay. And last one for today from James again. One for Victor. Victor, do you think there's room to improve with the gross margin? Do you expect to start to stabilize at the current levels? Or is the improvement due to stability in OpEx?

No. Look, there's certainly still room for upside for 2 key reasons. The first is we continue to win Tier 1 clients. With that, comes higher levels of revenue and the benefits of economies of scale. So that's the first point. The second is a lot of these Tier 1 clients have a consumer-based -- a consumer customer base, meaning they are low-value, high-volume debts, which is very, very conducive to our digital collection platform for which we achieve much higher gross profit margins. So as we continue to win those clients that have consumer debts, low value, high volume, being collected by digital means, that gross profit margin should continue to improve.

Andrew, perhaps just a word to sum up.

Yes. Look, thanks to those who have stuck with us over the journey. It's wonderful to see an improvement in the share price over the last 12 months to 85% up on where it was at Christmas. That's an extraordinary turnaround in terms of where we were as a business 12 months prior. I think that, that's an endorsement once again of really hard work within the executives, within the business, all the way down to the sort of frontline operators. Everyone's got a commitment to sort of driving profitable growth, not just growth for growth's sake, not just signing customers that we want to work with from a namesake. We're happy to say no to a [indiscernible] bank if they're not going to give us revenue that's profitable and we've earned the right to do that. So I want just a quick shout out to all the team and all the hard work that they've done to get to this point. And to those new shareholders that are new to the story, I think that once again, we should strap in because we're doing a continued good job. My confidence is building in terms of what I know is happening in the business now. And if I think I compare it to where I was this time last year, I wasn't exactly sure what was going to happen at the back half of the year. And sure enough, we did better and better. This year, we're really confident in where we're going to go next 12 months.

Thanks very much, everyone. A recording will be...

[indiscernible]

Yes, go ahead.

The only thing I want to say for those who are on-premise for the AGM, there will be a light lunch downstairs and you are welcome to join us to give us some further questions, hopefully, some pointed questions at Michael and other directors, not me, but it would be great to see you and have a chat.

Thanks very much, everyone. Enjoy the rest of your day. Bye.