Novatti Group Limited (NOV) Earnings Call Transcript & Summary

Good morning, everyone. We have just hit 11:00 a.m. So we are going to get started with today's investor briefing while a few more people are logging in. My name is Alfred, and I'm part of the Investor Relations team at Novatti, and I'll assist with running today's quarterly investor call. We're joined today by Novatti CEO, Mark Healy, who will provide a detailed update on Novatti's activities and progress on the business transformation started 12 months ago, for which investors are now starting to see the financial milestones being achieved. With each quarter, Novatti has progressed through each stage of transformation. So Mark will be able to discuss in more detail as well as answer any questions you might have. [Operator Instructions] It is obviously a very busy day on the ASX. We have plenty happening around June quarterly. So I won't take up any more of Mark's time. Mark, let me hand over to you.

Good morning, Alfred. Good morning, everybody, and thank you for joining the Q4 update today. It's a very exciting time at Novatti. We are working through a period of major change and opportunity. For those that are following us closely, we're now deep into a significant transformation and turnaround under the new management team, which is very structured. It's well underway, as Alfred mentioned, and in Q4, showing some particularly strong results, which I'm very pleased to talk to today. However, for those new to us, perhaps just a quick recap. So Novatti is a B2B payment solutions business. In short, we enable businesses to pay and to be paid, that is to both receive and to make payments. This is a really simple, but really important statement of position and difference to other payments businesses. Our industry has many payment service providers, but they are largely monoline and offer 1 or perhaps 2 products, whereas at Novatti, we've built a full payment stack built around an ecosystem of licenses, partnerships and technology. To my knowledge, there is not a comparable payments company with the matching breadth of capabilities in Australia. As I inferred, payments is a very crowded and noisy marketplace. The language, the technology and the choices can be very confusing for business owners. Our value proposition is the simplicity and the completeness of an end-to-end offering through a single relationship. We offer a full range of payments processing and acquiring services across all business sales channels, online, in-store and mobile. We offer a range of alternative payments from vouchers and top-ups, which is where the business started to real-time pay by bank using the NPP platform and future payment methods such as our stablecoin. Many businesses now have some form of cross-border trade, either importing or selling overseas, and we offer global currency accounts and FX services along with payments direct from a range of Asian wallets such as Alipay. We're also an issuing principal member of Visa and offer a range of digital, physical and virtual cards across many different use cases, both directly to businesses and also to other fintechs. Our challenge and opportunity is to bring this ecosystem of process, product and platform capability into a seamless experience aligned tightly with our target markets. The company that I took over nearly 12 months ago now was effectively 12 independent businesses without any effective strategic cohesion or synergies. The strategy was reset in mid-2023 when I took the role to leverage our strengths to reorganize and reduce down into a payment solutions business with a specific focus on the ANZ market. The strategy itself has 3 simple and overlapping elements. First is to simplify and streamline the company around Payments Australia and New Zealand and over time, to remove the distraction of everything else. Second is a shift from a sales-led product-focused mindset and a mode of operating into a market-led customer-focused business. Previously, each part of Novatti and each business unit went to market directly without overlapping direction and without a cross-selling culture or an integrated approach. Thirdly, a pivot away from a singular focus on growth and revenue growth to a profitability focus and to reposition the company's governance and operations towards operating profitability as a primary goal. The business is now very focused on payments at our core. We are positioning in market around the value proposition of end-to-end payment solutions and the whole business is focused on lifting margins and operational efficiency to support the drive to positive operating cash flow. This is a little busy slide, but it's worthwhile understanding just the range and depth of the work underway on the strategy. There is a very extensive set of initiatives, some completed and many still underway to execute around the strategy. In terms of simplification, payments are now at our core. And as I mentioned, there is a specific focus on ANZ market penetration. We're currently consolidating a range of critical processes that interface the customers, particularly around sales and customer onboarding. We've restructured and reorganized around a new functional structure and operating model to support the sale of integrated solutions. And we continue to undertake a strategic review of all areas in the portfolio, and the results of that can be seen through the sale of the Reckon stake, which was used to pay off the corporate bond and the recently announced sale of our interest in IBOA, both as noncore assets. The second element is the switch from a sales-led product-focused mindset and operating model to a market-led customer focus. We have established a marketing function and a strategy and now have a clear line of sight on our target verticals and our specific customer types. We've integrated the multiple payment sales team into a single payment sales team for Payments Australia and New Zealand. We've also established a product management function for the first time and streamline access to different products across the ecosystem of our capability. We've initiated a brand refresh to reposition our messaging around our core value proposition and our key strengths. In terms of our financial performance, this is both an input and an output. The new management team operates very differently to the previous management team with different systems, mindset and culture. We are making planned and considered changes to the business to realize value for shareholders and not to disrupt our core growth drivers. There has been a very significant H2 of FY '24 focus on reducing costs, resulting in a $1.8 million net operating cash outflow reduction in Q4 versus Q3 and that's been driven by 2 phases of our cost reduction program. Phase 1 was implemented in Q3 to drive a $4 million annualized OpEx reduction. And the second was implemented in Q4 to drive a further $3 million annualized OpEx reduction, which will be seen in the Q1 FY '25 results. We've also made and continue to make changes in process, reporting, goals and sales incentives to continuously work on lifting margin in our core growth engine of Payments ANZ with a 3-year target of 70% gross margin previously set and moving on our horizon. Okay. In terms of Q4 more specifically, we can see the progressive outcomes of all the work and those initiatives on our turnaround strategy. We've now fully implemented the $4 million annualized cost reduction program deployed in Q3. And our cost reduction to date has contributed to a 41% drop in net operating cash usage versus Q3, as I just mentioned. Group revenue grew slightly again to $12.5 million, which is a 23% uplift compared to the prior comparable period of Q4 in FY '23. Our Q4 OpEx, excluding the bank OpEx, reduced by 29% versus the prior comparable period, again, Q4 of FY '23. And you can see very clearly here in the graphs on the right-hand side, the operating leverage now being improved inside the business. We acknowledge that we're not done yet and accept there's more to do. However, the new team has delivered 4 quarters of consistent execution of concurrent revenue growth and cost reduction and demonstrated solid progress towards our goal of becoming cash flow positive -- operating cash flow positive by the year-end. More broadly stepping back and looking across the full year of FY '24, we've seen a 19% increase in revenue versus FY '23, lifting to $46.5 million. We've reversed the prior very tight coupling of revenue to OpEx. You can see it's almost 1:1 here in FY '22 and FY '23. There's been a 21% reduction in OpEx from the prior year. And again, most importantly, breaking that tight alignment of revenue growth and OpEx growth, opening up that operating leverage, which we expect to continue through H1 of FY '25. And with the significant restructuring and expense control in the business during H2 of FY '24, the Q4 operating cash usage has dropped 38% again on the prior comparable period of Q4 of FY '23. Looking ahead into Q1 of FY '25 and that pathway to operating cash flow positive has essentially 2 primary drivers. The first is ongoing actions on the cost base. We will see the impact of the Phase 2 cost reduction program of a further $3 million annualized reduction in expenses through Q1 of FY '25. That additional program is driven by a combination of actions, some of the key ones being a contraction in our cross-border services. This is a conscious decision to retain a focus on our B2B customers, but step away from providing wholesale services to third-party money services businesses, which have a high cost to serve and low profitability. There's been a reduction in the size of our offshore technology team and a reduction in our office footprint, both onshore and offshore. I'll also mention and state again, there are additional activities underway flowing from the ongoing strategic review, and we expect to make further optimization and divestment decisions of various business activities as we flow through H1 of FY '25. The second element here is to continue to drive actions to lift our margin. Our commercial strategy is now targeting midsized businesses in ISV and software partners specifically. Both of these customer types require a high-trust operating partnership, shared commercial success and tailored payment solutions. All of that can be handled via a single relationship through and with Novatti, and this is a very powerful offering in the market. In our customer back book, we're also working more actively now to ensure appropriate margins through more regular review and benchmarking against performance and the customer risk profile, a process which has already seen some onboarding of customers through the second half of FY '24. A little more detail on the underpinning marketing strategy in support of that. Our initial target verticals can be seen here, and we launched into the education vertical in Q4. In Q1 of '25, we commenced a Property Tech market entry campaign. These selected verticals build on some pre-existing brand awareness and several key clients we have in the education sector, particularly. But more broadly, each of these verticals that we're targeting are large, they're growing and they're complex markets where we have the ability to cross-sell products and services over time to our customer base. At present, I'll call out we're finding that the acceptance and processing of Asian wallet payments is a real advantage for us and a wedge solution, both assisting in our market entry and customer acquisition, particularly in that merchant acceptance arena. Across FY '24, we've seen a 15% lift in our merchant acceptance customer numbers, and we expect this to further improve across FY '25. And the early results off the back of our recent go-to-market campaigns in education and Prop Tech have already built a confirmed pipeline of 500 merchants that are currently onboarding over the next 6 months. Stepping back a little just around the macro opportunity. The business is very well positioned to benefit from the future structural and behavioral changes that will play out in the Australian market in digital payments. I think we'd all accept that software is now creeping into every aspect of our lives. We're moving into a world where all SMB payments will be sold and embedded by integrated solutions. B2B particularly has a lot of complex logic around the AR and AP workflows in size, midsized businesses that require tailored solutions for any midsized business. Most SME businesses in Australia and New Zealand are still very early in their own digital transformation and enabling digital payments technology. This has been proven out from some research last year that showed nearly 50% accept the need to improve their payment systems and 80% of medium and large businesses believe that payments are a critical enabler of their own digital transformation. But what does that mean? It just means that we are now facing into a market that's ready for change and adoption, and that's a big tailwind for Novatti. We can help our customers transform using a single relationship and platform. We enable our customers to operate their businesses more efficiently with our multisided solutions and support for all facets and types of digital payments. So how are we positioned in and around this opportunity? Well, we're now organized around 4 pillars, 2 pillars in payments, the core engine being Payments Australia and New Zealand and then Payments International, a third pillar centered around our software solutions and the fourth around our investments, historically at IBOA and now AUDD, which is our stablecoin. The core focus and the future business strategy is centered around that first pillar of Payments Australia and New Zealand. This is the absolute bedrock of the strategy. It's where we're making product investment and building out and integrating a full digital payment stack. The 3 domains to the right of Payments Australia and New Zealand all remain under strategic review with optimization and divestment activity underway to streamline the portfolio. Some key themes just to call out here quickly. The Payments ANZ business is still very young. It's effectively only 2 years old. It is our core and already contributing the largest in gross margin. This is the area of accelerated performance and our future growth vector. The growth here is ahead of any other part of the business, and this will only enhance over time as we focus our marketing, our product road map and our customer aggregation in this area. Our International Payments division comprises what we call alternate payments, which is our EU-focused payment vouchers and ATX, which is our Malaysian bill payment and top-up service. This is the largest contribution by revenue, but the lowest by gross margin. Gross margin growth here is slightly negative. However, this pillar is consistently delivering a positive bottom line given its maturity. Tech Solutions is a suite of software businesses, mainly centered around Building Solutions and our legacy tech implementations that we are not investing further in. Basically, they're in maintenance mode, but we have a very sticky client base here, again, with contribution to a positive bottom line. The mandate around our investments pillar or businesses that we've incubated is they must be self-funding or provide a suitable economic return. I was mentioning the bank. And so like all business units at Novatti, our interest in the bank was subject to the ongoing strategic review, and we determined earlier in the year that were no longer aligned to Novatti's long-term financial targets. Following that conclusion, we undertook a substantial process to identify options to create value from our interest and ultimately landed on the recently announced sale, which completed yesterday for AUD 2.87 million. AUDD or our stablecoin has recently completed a seed round for $306,000 and is expected to be cash flow neutral moving forward. And at this point, we retain a 73% shareholding post the recent raise. We believe the new strategy, the initiatives underway and the continued turnaround will begin to unlock value from within the group, and there's ample opportunity for this value to be recognized in the future share price. Okay. To summarize now and conclude, to repeat again, we're now deep into Novatti's transformation. We are working on and demonstrating clear improvements quarter-on-quarter to simplify, streamline and lift our financial performance. Our Q4 results highlight the cumulative impact of the turnaround measures we put in place across FY '24. Novatti today is a vastly different business to the business that existed at the end of the last financial year. We are making good progress. On top of the list, we can demonstrate that our quarterly operating cash consumption was down 41% on the prior quarter. While we get our cash use down, we are still proving we can continue to grow the business. We had $12.5 million in quarterly revenue in Q4, a new record again and slightly ahead of Q3. We will continue to focus on the core elements of portfolio optimization, growth in margin, improving efficiencies and reducing our expenses. And as an example, we have a further $3 million in annualized costs already earmarked for renewal in Q1 of FY '25. And further from Q1, we'll see IBOA costs also removed from the group's business and consolidation. But we are not done. More work needs to take place, and we remain committed to positive operating cash flow by the end of H1 FY '25. And with that, I'll hand over to you, Alfred, again, and we can take some questions.

Thank you, Mark, for the detailed presentation. We have had quite a few come in already. So we might try and get through as many as quickly as we can. If anyone does have any more, please type them in, and we'll get a live response. Otherwise, we'll come back to you by e-mail. Mark, first question is from Ian. Following the change in control of the bank, will Novatti remain a supplier of payment services? Or do you anticipate a change in strategy at the bank?

Well, the bank is now under new ownership. And so the go-forward strategy of the bank will remain subject to what the new owners decide and the direction they decide to take. However, we would expect that just given the close historical relationship and the complete breadth of payments capability that Novatti can bring, there would be some opportunity here for us to engage in the dialogue and potentially work with the bank on a close basis going forward around delivery of payment services. So that would be our goal.

Question from Anthony. Can you talk more about AUDD's July raise and also the major increase in payment volume through AUDD, $25 million in 2 weeks?

Sure. So AUDD, as I said, sits inside our investments pillar. It's our expectation over time that there will be in part or in whole, a reduction in our stake in that business based around the opportunities available to the business and the opportunities to liberate economic value out of the AUDD business. The AUDD business is, as you mentioned and called out, starting to gather pace and momentum. It's a blockchain-agnostic business. There are limited options for an Australian dollar one-for-one fiat-backed stablecoin in the market here. And so I think that's starting to resonate as the demand for digital currencies and using digital assets to pay and be paid becomes much more prevalent. And so the use of AUDD in terms of its integration across now 4 or 5 different blockchains, you're starting to see the payments volume grow over time. I can't speak to the last couple of weeks though in terms of the particular volume. If you have a particular question around that, just drop it into the Investor Relations e-mail box.

Mark, combining questions here. Can you explain the reduction in wholesale cross-border service? What does this mean? And does this have anything to do with the Novatti clients removed due to risk profile?

That's a great question. So no, in terms of the risk profile reduction, I wasn't specifically referring to that. That's a separate area. That's more kind of broad and macro. That's probably taken the risk profile and negative some clients. It is more specifically focused on our merchant acceptance business. But getting back to the cross-border side. So historically, we've had 2 customer types in our cross-border line of business: one, through our wholesale offering, money service businesses or third-party businesses that provide remittance services to end customers; and then our own service, the second line of business being our own service direct-to-business, where we provide effectively a global currency account and the ability to make international payments in foreign currencies for midsized businesses. It's the former that we have pulled back on in terms of that wholesale offering to money services businesses. It's an incredibly price competitive market. It's dominated by some very large global players. It's very hard to drive margin into that line of business that has a high cost to acquire, high cost to serve and high compliance costs. So based around the results of our strategic review, we just didn't fit into a mid- to long-term delivery around our financial targets. And so we've made the decision to pull back from that customer type and that line of business.

Thanks, Mark. A question from John. Product manufacturing operating costs accounted for 85% of revenue. Is there any capacity to reduce cost of goods sold?

Yes. So there's always capacity to reduce our cost of goods sold. As I said, our key driver around the business or one of the key drivers around the business and getting to positive operating cash flow is to drive gross margin. Gross margin and the components of our cost of goods sold is quite different by nature of the various lines of business as the core focus around that business and that gross margin is in Payments Australia and New Zealand in terms of volume or payments volume and our market penetration and customer acquisition. So that's where our focus will be. As we grow in scale, our supply costs should reduce over time. And also the other flip side of that is just getting better at our pricing strategies inside the market itself. And as our product road map matures, we don't have to rely on price as the prime lever of customer acquisition.

Thanks, Mark. Another one from John. The quarterly 4C report does not break out Board member or senior management costs. It appears to be wrapped up in the admin and corporate costs. What cost savings were achieved and planned for future operational periods?

Yes, another good question. So sort of on a macro level, our people costs historically represented circa 60% of our operational expenses and a further 15% on contractors, both on and offshore. And so a big part of our Phase 1 and Phase 2 cost-out programs have had to necessarily focus on people, and there's been significant sort of double-digit reductions in people through both of those percentage reductions in our headcount as part of that process. So we topped out, I think, at circa 170 in the later part of -- headcount of later part of 2023, and we're now down to 122 as at the end of June. And so those -- we've been able to make those reductions in a planned and considered way off the back of our restructuring reorganization and that kind of fusion of our operating model and go-to-market into more of a functional structure.

Mark, Anthony is asking, can you provide any more information around the Proptech connection? I think that's the first time we've included them?