Novatti Group Limited (NOV) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this morning's investor webinar. Today's session is being recorded for those of you who had the beautiful recording there, and it will be available later in our Investor Center on the Novatti website. It's just turned 11:00 just now. And so I'm going to start today's briefing. Thank you all for joining us, and we really appreciate you joining and contributing to our webinar. My name is Beth Moylan, Head of Growth at Novatti, and I'm joined today by Mark Healy, CEO of Novatti. Mark has been leading Novatti's transformation into a market-led customer-focused organization and delivering seamless payment solutions that help businesses across Australia and New Zealand to grow and succeed. Now we would love, as always, and encourage you to submit as many questions as possible. Thank you to those that have submitted questions already, and we're going to address those at the end of the webinar. [Operator Instructions] If we don't get a chance to cover the questions that you want answered, please e-mail us at [email protected], and we'll make sure we respond to you directly. Over to you, Mark.

Thank you, Beth. Good morning, everybody, and thank you for those jumping on the webinar this morning. I'm very pleased to report that we continue to progress and deliver on our Novatti's strategy. Following the simplification of the group in the last 6 months, we have reoriented to growth by applying a market-led customer focus to lifting our financial performance. Our March quarter shows the early signs of commercial traction across our focus area of Australasian payments, and we are delivering on this within the constraints of the current balance sheet without losing focus on our bottom line and the use of cash. As a reminder, we are building a business to occupy a unique position versus competitors in the local payments landscape with an end-to-end payments infrastructure. While doing so, we are continuing to execute strongly with demonstrable improvements quarter-on-quarter. Specifically, in the March quarter, we've made solid gains across a number of areas. We initiated a step back into the acquiring market. We have grown our processing volumes, revenue and margin quarter-on-quarter. Commercial traction is building, notably in our ANZ market. We continue to progressively dissolve the legacy liabilities on balance sheet. And on a normalized basis, excluding those liabilities, the core business is posting positive operating cash flow. We built a platform for growth. We have positive momentum, and we are demonstrating a consistent track record of execution. As usual, I'm going to rest on this slide a little and explain our point of view on the market and how we're positioned. The Novatti value proposition is built around our complete payment stack and our product depth. We are a payment solutions business as opposed to providing a monoline payments offering, which is the norm in the industry. That does provide challenges as we have a broader remit, a broader tech footprint and broader product demands than other local payment service providers. We provide businesses, software platforms and other fintechs with the ability to accept card payments from their customers across any sales channel and payment type, both cards and non-cards. The ability to design and launch both open and closed-loop card and wallet programs, the ability to make and receive international payments in local currencies; the ability to connect directly to a range of Asian wallets and the ability to use vouchers in a range of different use cases across loyalty, wallets and payments. As consumer preferences change and the industry adapts, Novatti intends to build and develop a leading position bridging into the rapidly advancing digital asset economy. Anchored by our investment in the AUDD stablecoin and the range of use cases around tokenization, we are well positioned for the adoption of regulated digital finance. The essence of our view is that stablecoins are not a disruption strategy, rather an efficiency strategy. They won't replace card networks or bank rails, rather becoming a complementary optimization layer where speed, liquidity and finality resolve friction in many areas. In fact, our broader view on payments generally is that interoperability, not efficiency, is a real value, especially for medium-sized businesses. These companies need simplicity across their payments infrastructure, not more complexity and spaghetti ball relationships. In a rapidly changing world, blockchain rails and digital products are innovating around the traditional centralized payments rails. We intend to build around this innovation and provide a bridge across these ecosystems. In short, we believe the value of payments is moving from execution to decision and successful payments companies will not just move data and money following a single payment stream, but actually determine how payments get made for customers. So in very simple terms, we enable customers to operate their businesses more efficiently with our multisided solutions, helping them deliver new ways to serve and engage with their customers. Under the strategic reset, our focus has been to build a sustainable business positioned around the 3 pillars of simplification, a market-led customer focus and lifting our financial performance. In terms of Q3 specifically, for the group, we posted $7.2 million in revenue with gross margin now stable at the new operating level of circa 50%. Post the FY '25 streamlining, this reflects the first major step change on our journey to the target of 70%. Payments ANZ represented $3.6 million of that revenue and $1.5 million in gross margin contribution, representing 9% revenue growth quarter-on-quarter and 14% margin growth quarter-on-quarter for Payments ANZ. Group EBITDA was consistent with Q2 at negative $100,000 with a cash flow of negative $400,000. However, on a normalized basis, the group has now posted 3 quarters of positive cash flow across FY '26. Our operating position is now progressively dissolving the largest legacy debt, which only has 12 months to run on current trajectory. I indicated at the start of the financial year that we would bump slightly above and below the breakeven line for the next 3 to 4 quarters as we adjust to the new direction and move across the yearly business cycle. We're confident in the trajectory we're heading. Momentum is building, and we're doing that -- we're doing what we can with the balance sheet that we have, selectively pulling levers to lift our growth in keeping with the underlying profitability goal. Most importantly, our core business, Payments ANZ is building momentum, benefiting from the slow burn brand refresh, and we are now working into new opportunities as we uplift our capabilities across a very diverse payment stack. The ANZ business is posting continuous positive direct EBITDA being led by our issuing business with a pipeline building while we continue to grow account transaction volume. Our focus here is to continue building a compounding organic growth engine, replicating the relative success of our issuing business into and across acceptance and then in time to international payments. As I mentioned, Phase 1 of the strategy was to build a sustainable business. Our restructuring was largely completed last year. And for FY '26, we announced a pivot back to growth. We have continued to undertake revenue reform to drive to our 70% plus gross margin target and our focus will not shift on the bottom line as we make this pivot. Within the core ANZ business, the 2 near-term levers of growth are card issuing and card acquiring. Issuing and acquiring are 2 very large markets that effectively back into each other. Novatti has principal membership of card schemes as both an issuer and acquirer, enabling maximum autonomy on how we go to market and how we manage our customer base. These businesses are still relatively new to market for Novatti, and we have a very small market share measured in single-digit basis points with a great opportunity to increase our share in both as we concentrate around payment solutions with multiple products and services. As I mentioned, the payments ANZ turnaround is intentionally being led by Issuing Solutions with the quarter-on-quarter P&L showing very clearly the turnaround story and performance improvement across FY '26. In issuing, we've needed to make less changes at the product level and had less of an internal focus, but we've grown revenue, margin and EBITDA consistently. And we're seeing good opportunities continue to open up, including for multicurrency solutions, which is a new product and area of opportunity for us. With stability in platform and people, we expect to replicate this performance in acquiring, payment acceptance and agent wallets. While being very early in market reentry to acquiring, we've seen several new distribution-led customers sign up and expect them to start transacting in Q4 to progressively drive processing volume. We're a B2B business and our commercial strategy specifically targets medium-sized businesses, software partners and other fintechs, including internationals entering the local ANZ market. Each of these require a high-trust partnership, shared commercials and tailored payment solutions, all possible via a single relationship with Novatti. This is a very powerful offering. It's central to how we have repositioned the brand refresh, and we know it's working as prospects are attracted to us because they want a solution that works with their tech. They want access to both the Australian and New Zealand markets simultaneously and/or they want access to Chinese customers, which we can provide via our direct licenses with all the major Chinese wallets. A couple of quick callouts that exemplify this from the last quarter include a partnership with Vivi Money for the issuance of globally accepted Visa debit cards and support for cross-border payment functionality, solution expansion for a major international airline to enhance their underlying technology to facilitate their global digital rewards program; and specifically from the acquiring business, a partnership agreement with the Australian subsidiary of a major Asian fintech to distribute Novatti in-store and e-commerce payment acceptance solutions within both Australia and New Zealand and a pharmacy group with Australian operations rolling out Novatti payment acceptance into its New Zealand business. Our goal is simply to keep building velocity on the flywheel to build a compounding engine. Across the last 2 years, we have consistently demonstrated the ability to execute on our strategy, and you can expect continuous improvement in our organic flywheel. Any repeat attendees today will probably recognize this slide, and it's an important one as everything we set out to do when I reset the business thus far has been done. Our turnaround strategy has repositioned and strengthened the business. The reset has been completed. The scale of this turnaround has been dramatic, but the execution has been highly effective. We now have a stable business, a business situated at the epicenter of what is a very dynamic industry and market opportunity. In our pivot back to growth, we will retain a focus on profitable growth and unlocking the latent potential that we've built. We have a strong and consistent track record of execution. We have significant acquiring experience in the business to leverage as we focus on this product domain. We have a very clear view on our value proposition and target customer. We have a unique position bridged around the traditional and evolving digital finance ecosystems to meet the needs of growth businesses. Our improving cash flows now provide flexibility to reinvest into growth. And we are starting to face into inorganic growth opportunities in a very fragmented local market, providing an ability to accelerate our market position. M&A within the Australian payments market is already well underway and will likely accelerate post the looming regulatory changes. This will be a key focus area for me this year. In summary, I'm well aware there is still much to do to achieve our goals in this new phase for the company, but we are eager for the task. We continue to work on initiatives to take advantage of the many opportunities in front of us and do so with the same relentless execution mindset that's delivered the turnaround to date. And with that, Beth, I might open up for some initial questions.

Thank you, Mark. We actually have had some questions before the webinar, and we've got some during the webinar. I'm going to kick off -- actually, before I do that, if anybody does have any more questions, please feel free to put them in the Q&A, and we will go through those too. The first one is, can you explain the normalized cash flow metric and what does that represent?

Okay, sure. Getting to a cash flow positive position was the initial objective of the financial pillar of our strategy, and we have been making major improvements against this through the last 18 to 24 months. The raw baseline cash flow for Q3 was negative $400,000 -- the normalized view excludes the main historic liability from years past. Specifically, the company accounts capture a historic debt with the ATO that peaked at greater than $5 million several years ago, and we have been progressively paying that down on an approved payment plan alongside maintaining current payments. As a general status update, that balance is now less than $2 million and only has 12 months to run. So the normalized view shows the current operating posture of the business, excluding those historic ATO payments. FY '26 has seen the current business post 3 quarters of positive operating cash flow and continues to improve.

There's another question here around you continue to maintain 70% as gross margin target? Is that still achievable?

Yes, I do. And yes, it is. It is fundamental to how I want to position and reposition the business, both internally and externally. Important to note that the best payment companies in the world deliver a margin above this level, so it is achievable. As a primary lever, we're building a business and a brand that delivers deep value to customers as they digitize their payment experiences for their customers through our integrated payment solutions. Margin will follow that strategy, and we are certainly not here to win business and clients by competing aggressively on price nor do we need to. As a secondary lever, as we grow our GTV or processing volume, then our variable costs also come down over time as most of our supply contracts are built on a tiered volume to cost basis.

Thank you. Are there any more customers signed by issuing and acquiring that are not included in the announcements? Or is that the total that have been signed? What's your threshold to warrant inclusion?

Interesting question. There's no specific threshold that we apply. But yes, there are more. We don't cover smaller customers or additional outlets from an existing customer or integrated partner, say, for example, in our Motion Acceptance business under an integrated software solution. I would say as a rule of thumb, we would typically include something or call it out if it's projected to deliver around $100,000 in annual revenue or greater or where the customer has significant potential to scale for us into the medium term through GTV distribution or product extensions.

Thank you. This is an interesting question in the current market. And how viable is the acquiring business with the up-and-coming changes to card surcharging?

So I'll give 2 answers to that, a short and a longer one. The short answer is we are not expecting any significant impacts to our current business, and we are very positive -- remain very positive on our ability to grow the acquiring business following the changes we made across calendar 2025. The slightly longer answer is that, in fact, there are 2 regulatory changes after the recent RBA decisioning. One further question is the removal of surcharging and the second is the reduction in card interchange fees. On the first related to surcharging, our acquiring portfolio is quite small at this point. And within that acquiring portfolio, there's a very small number of customers that surcharge. So there will be no significant impact for our current customer base nor any material impact to revenue for Novatti. I'll just add as a general statement on policy outcome. I, like many other industry commentators and participants will simply say that the most likely outcome from that change is that processing cost will simply be worked into the retail merchants pricing as is the case in other jurisdictions. On the second change around interchange, there is a significant reduction in the maximum interchange rate for credit card transactions. So this will have more of an impact on large credit card issuers who will see reductions in the pass-through income that's generated by interchange. Yes, Novatti is a card issuer. However, we do not issue credit cards and not support any card programs. So we also don't expect any impact from this shift in the economic value chain either.

Thank you. The next couple of questions are around ATX. What is Novatti claiming in its counterclaim against the ATX vendors?

Okay. Just taking a step back for those not familiar, ATX is a small bill payment and gateway business in Malaysia that was acquired in 2021 before I took the CEO role. I would just say there is a dispute underway regarding payment and timing of deferred and earn-out consideration linked to the post-acquisition performance of the business. There is a legal process underway, and I'm not able to make any further comment other than to direct anybody interested to a specific announcement that we issued in mid-February on the matter.

Thank you, Mark. And then can you talk about how ATX is performing following how it's going following the lawsuit?

Yes, sure. The business is performing really well. It's returned to profitability in FY '26, and it continues to post small incremental EBITDA growth each month. We've also put in a lot of effort to stabilize the business and integrate it more closely into the group this year. And several structural changes in ATX have also had a positive impact, but I won't comment any further while the legal matter remains underway.

Thank you. Now to AUDC. What's the AUDC stake currently valued at?

Again, just taking a step back, AUDC is the issuer of the AUDD stablecoin, which was incubated in and through Novatti, but which is now an independent stand-alone company and is being deconsolidated from Novatti's accounts. AUDC has not raised any additional funds since its last round, late last calendar year, the pre-series A at $0.80 per share. So the math is fairly simple. Novatti retains 20 million shares. So our stake at that valuation is worth $16 million. And I've made the point before, I'll make it again, that if you look at the Novatti capitalization, it's around that figure. So I believe the core payments business remains intrinsically and materially undervalued.

Thank you. How are the new Board members contributing? And what change, if any, have you seen?

So again, late 2025, the Board composition changed with 1 Board member departing and 2 new members joining. Both of the 2 new members, Tom and Chris, are very experienced and have made an immediate contribution. One is working very closely with me on M&A opportunities and the other has a very extensive commercial network, which we are starting to make joint connections into. I obviously interact with Board members frequently. I will say the Board has -- the new Board has a very good dynamic, highly complementary skills and very positive energy. I enjoyed the interactions and the reconstituted Board is very supportive of the next phase of our journey, including addressing the balance sheet and lifting shareholder return.

Thank you. I have a couple more. What are you doing around AI? And how do you see the impact?

Again, a very, very topical question. So the one thing I'd say about AI is that it's obviously moving very rapidly, and I don't think anybody has a crystal ball on where it's going to be in 12 or 24 months' time. Our intention is to use AI as a -- effectively as a force multiplier for our strategy, lifting the customer experience, removing friction, accelerating outcomes. It's not really a cost reduction strategy that you see being implied in some of the larger firms very publicly. We are much smaller and leaner than that. From an internal perspective, we had deployed Claude for Work some time ago, and it's already being deployed and utilized day-to-day across most functions of the business from tech, finance, marketing, legal and compliance to great effect. From an external perspective, the -- within the industry, we're already starting to see AI agents in the wild and starting to transact autonomously, particularly in a B2B context. So we will need to adapt our front-end capabilities, our brochure website and our production APIs to adapt to that context and for that transition and translation from human decision-making to machine-to-machine interaction. And that thinking and road map is underway.

And then the final question I have is, are merchant touch points growing partnerships, et cetera? [indiscernible]

Yes. So I would just -- in fact, I would go back, if I can, to this slide here, yes. So again, our issuing pipeline is the 2 core drivers of growth for us right now where we are investing time, effort and resource are in the ANZ business in Australasia. Issuing and acquiring. Issuing continues to build a very healthy pipeline across the touch points, both with existing accounts to grow volume and new accounts. And we're already seeing a couple of months in on the go-to-market reentry for acquiring several really promising high-value distribution deals. So yes, is the simple answer to that question, and it's brought out just through some of the material in today's commentary.

Fantastic. Well, thank you, everyone, and that concludes our webinar and our questions. If you do have any further questions that come to you post this webinar, please feel free to again e-mail us at [email protected], and we'll contact you directly from there. But thank you for your time, Mark, and thank you to everybody that's joined. This now concludes our webinar.

Thank you. Good morning.