Novatti Group Limited (NOV) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to this morning's webinar. Today's session is being recorded, if you just heard that, and it will be available from Novatti's Investor Center later today. It's just turned 11:00. So I'm going to start today's investor briefing. My name is Beth Moylan. I'm Head of Growth at Novatti, and I'm joined by Mark Healy, who's CEO of Novatti. Mark has been leading Novatti's transformation into a market-led customer-focused organization, delivering seamless payment solutions that help businesses across Australia and New Zealand to grow and succeed. With 20 years in the payments industry, he has a proven track record of driving successful turnarounds as well as helping businesses to grow, adapt and thrive in a fast-changing digital world. We would love and encourage you to submit questions, which we're going to address at the end of the webinar. If we don't get to cover the questions that you want answered in this Q&A, then please feel free to send those questions directly to the investorrelations@novattti.com, and we'll ensure that each one has responded to. So now let me hand over to Mark to lead today's session.

Thank you, Beth, and good morning, everybody, and thank you for joining the Q3 update today. So we're now into the second year of our turnaround under the new management team at Novatti. And I'm really pleased to share today that we have achieved the initial key financial goal to get the company to a cash EBITDA positive position. This is a really exciting and really important milestone that demonstrates our systematic execution is getting results and that we now have a sustainable business. We are continuing to work on many initiatives in parallel to take advantage of the many opportunities in an evolving and very dynamic payments market, particularly across Australasia. We've got a very clear strategy. We're executing strongly, showing consistent results quarter-on-quarter, which I'm pleased to talk to today. So firstly, as always, just a quick recap on the company and what makes us different and our competitive positioning. So Novatti is a B2B payment solutions business focused on the Australia and New Zealand markets. Our strength and our point of difference is we've built an ecosystem of licenses, technology and partnerships that straddles the end-to-end payments value chain. We enable businesses to both receive payments and to make payments, be they online, in-person, account-to-account, embedded in software across, international borders, through card programs and across the full diversity of all payment types. For those that know the payments industry, it has many different service providers of different shapes, sizes and specializations. Novatti is different through the breadth of our proposition and capabilities. We offer a single destination and a single relationship for payments. And importantly, we do that in equal measure in both Australia and New Zealand, which is unique amongst nonbank payment providers. So in a single relationship, we solve the problem of the [indiscernible] different providers for different types of payments across different sales channels in our customers' businesses. In simple terms, we enable our customers to operate their businesses more efficiently with our multisided solutions and support for all facets and types of digital payments. If you've been following our history across the turnaround, you'll notice that all of our financial metrics, be the revenue, OpEx, EBITDA, cash use are all moving in the right direction. In terms of our specific Q3 quarterly performance and numbers, we've achieved a record revenue number in the quarter, which is an 18% increase year-on-year. And while still growing that revenue, we've now delivered 7 consecutive quarters of reduction in operating expenses, which are down 30% year-on-year, highlighting the clearly diverging paths between revenue and costs. In our core Australia and New Zealand business, we've increased our gross margin to a new record of 52%, which is up from 37% post the initial strategy reset 18 months ago. Our net operating cash reduced by over $1 million quarter-on-quarter. And as a result of all the above, we've now achieved a positive cash EBITDA for the first time. When we set out the new strategy, our immediate key financial goal was to put the business on a stronger foundation. Achieving positive cash EBITDA and that milestone follows a really intensive period of simplifying our business and optimizing our operating model. Through our restructuring, we've removed nearly $10 million of annualized expenses across calendar 2024. And notwithstanding that expense reduction, we've also found new ways to increase revenue with our market-led customer focus. We also continue to address and remove non-line assets as well as low margin or complex offerings across the portfolio, and we'll continue to do so over the course of 2025. All of these measures and our actions to date help underpin the achievement of this quarter's milestone, but we're not stopping here. There is much more to do, and we have the strategy, the capabilities, the team and the energy to keep executing and delivering on the turnaround. Through the ongoing restructure, we've been able to bring the business to a sustainable position. And moving forward, we are now repositioning for growth with greater confidence. The graph here on the right-hand side highlights and shows the relationship between OpEx and revenue. Note this is OpEx and excludes COGS. The key point to note here is that when I stepped into the role, there was almost a 1:1 relationship between revenue and OpEx. That nexus has now been clearly broken, and you can see the operating leverage opening up for 7 quarters in a row. So to repeat again, all of our financial metrics are heading in the right direction. Revenue is increasing, and our OpEx continues to come down as we get more efficient. In our core future growth area, our gross margin in the Payments AU/NZ business has increased to 52%, which again is a new high for that business. And we have initiatives underway to continue that growth to our FY '27 target of 70%, which we remain committed to. While accepting there's more to do, the new team is demonstrating a consistent and systematic execution and a commitment to delivering on our road map of change and improvement. I've spoken for a couple of quarters now on the work underway on our brand business and the brand as well. For those that know the old Novatti brand, it was dated, it was bland, and it lacked alignment with our core business, our go-forward strategy and our value proposition. The refresh went live during the quarter as well as a completely new corporate website with a changeover delivered flawlessly. We've already had some great feedback from clients, from partners. And most importantly, we've started to see new sources of leads derived from the new website and the positioning. The refresh is a vibrant new look in direct support of our value proposition and targeting a medium-sized businesses and the software platforms that support them with guided payment solutions. With a refresh in play, we can reposition and position the company with more confidence and build greater brand awareness across all of our target verticals. Our strategy remains very clear and drives everything that we do, simplify the business around our core, introduce a market-led customer focus in our go-to-market and continue to lift our financial performance. We've achieved a major step forward this quarter in our financial performance, and we now have a sustainable business and a foundation to drive for growth. We'll continue to methodically improve our operating cash flow and drive towards 7% gross margin as we pivot back into growth. One of my personal mantras as CEO is continuous improvement every day, every week and every month. Our brand is reenergized in market. We're laser-focused on our value proposition of Total Payment Solutions. We have a very clear view on our ideal customer type and the whole business is focused on consistent execution. So to summarize and conclude on that point of execution, we're now deep into our turnaround. Novatti today is a vastly different business to the company I took over in Q1 of FY '24. We are making good progress, growing revenue and reducing our costs, demonstrating 7 quarters of continuous improvement since the strategy reset and the new management team. We are streamlining the portfolio of noncore assets, for example, the divestment of the IBOA. The AUDD stablecoin business is now self-funding, and we are continuing to step away from low margin or complex services such as wholesale cross-border services to lift our performance. We've achieved a critical milestone this quarter in bringing the company to positive cash EBITDA. And looking forward, as we reorient to growth in our core, we'll continue to simplify and streamline our portfolio. We're improving our infrastructure and our vendor supply chain to continuously innovate and provide a better customer experience. We'll leverage the brand refresh to boost awareness and support our targeted go-to-market in education, real estate and health. And we'll continue to improve our cash flow to reinvest back into our core to fuel that growth. Also, at the right time, we'll consider accretive acquisitions to also help achieve a scale position in the Australasian payments market. We're now a very focused company. And moving forward, as we pivot into growth, we'll follow the same methodical execution that you've seen over the last 12 to 18 months. Continuous improvement and execution discipline is now a driving force of the culture inside Novatti. We have a vibrant new brand in market. We're laser-focused on our value proposition and the whole business is focused on delivering against our strategy. And with that, Beth, I will hand over to you, and happy to take some questions.

Thank you very much, Mark, for your presentation. We've had a few great questions already, but this is just really a reminder to anybody that haven't submitted a question that wants to, please type them in the Q&A at the bottom of the screen abd we will respond to as many questions as we can. and those that we don't get to, obviously, if you send them to investorrelations@novatti, we will make sure that we respond to them there. So the first question that we have actually, Mark, is around the margins. Your margins have improved to 52%. Is this improvement sustainable?

Okay. So the first point there, just to repeat, this is in our Payments AU/NZ business, which is our core focus, an area for future growth and is really the centerpiece of that drive to 70% plus gross margins. The thing with margin is it's really a reflection of the customer price mix right across the contracted book. But our approach here is targeting multiple levers to drive continuous improvement. So things across our pricing strategy on the forward book, structure of our sales commission and also our supplier COGS in terms of our key supply chain costs. So there are lots of opportunities to keep improving here. And yes, we remain committed to that methodical improvement towards that 70% plus target.

Thank you, Mark. I have another question, which is, is the brand refresh resulting in commercial traction?

So the refresh really provides a platform to chase new opportunities and large opportunities. And we've seen that play out already in the last sort of 5 or 6 months with some key logos like Telstra and Cathay Pacific and extended contracts. But it's really only 2 months in. So it's very early days. But we are seeing the brand reach new corners of the marketplace and also provide new sources of leads than we've had previously. So the early signs are really quite positive, and we are confident that it will underpin our go-to-market in our targeted verticals in our commercial growth.

That's very exciting. And the $1.4 million drop in cash use, is this sustainable? Or is this a one-off?

Look, yes, there was a very strong reduction quarter-on-quarter in terms of the 4C cash movement. The operating cash movement on the 4C is shaped somewhat by our European Voucher-based Payments business where we are in the money flow. And so that product line effectively works a bit like a trade debtors and creditors mechanism on the 4C position. Notwithstanding, if you really step back and you look at the last 18 months of history under the strategy reset, you can see a very clear and very consistent reduction in the use of our cash. Ultimately, our success here will be underpinned by our ability to consistently improve our revenue and our gross margin position in the operating business and as we progressively clean up our legacy liabilities, which are all now in a manageable state, being addressed and no longer an anchor on the balance sheet.

Thank you. There's lots of great questions coming through. So thank you, everyone, for contributing. Has the cost-out program impacted growth, Mark?

So we -- just to recap again, we executed just under $10 million of OpEx savings in calendar 2024 across 3 tranches. So that program is effectively completed. We did that in a very planned and deliberate manner across a range of areas and activities in the business so that it would not impact customers and/or future revenue opportunities. So our experience so far is no, and you're seeing that with continued revenue growth and that disconnection with the OpEx profile of the business. So we're now pivoting back into that drive for growth of a much more sustainable position.

That's good. We've actually had a few questions around this topic, about will you need to raise capital further?

So I would just say 2 things here. Firstly, to repeat again, if you look at the use of our cash over time and even in recent periods, the use of cash is coming down very rapidly and a significant number in Q3 alone. At the same time, we're also seeing really strong and sustainable improvements in our core business. So we're making very strong progress on the overall turnaround to continue to drive revenue and margin. In terms of capital management itself, our priority is actually on divesting noncore assets. So outside of our Australasian Payments business, we have 4 assets that are in various stages of conversations with potential acquirers. So that is our priority at this point in time in terms of capital management alongside also removing those low-margin and complex offerings that are a potential drain on capital for the business going forward.

Thank you. You mentioned the pivot back to growth. What does that mean in terms of the next steps?

That's right. So that's a very exciting pivot in the business after a lot of hard and intensive work in 2024. So to repeat again, we now have reached a position where we've got a stable foundation on which to grow and to continue to improve our cash flow. So we will continue to streamline the portfolio outside of that Australasian Payments business, which is really the focus area for that future growth. So inside that business, our card issuing and our acquiring product areas will be the prime movers of that growth. And in those areas, we're currently switching out and changing our supply chain partners to improve the customer experience and reduce costs. We will clearly leverage the brand refresh to lift awareness and drive top-of-funnel growth into that business area. And then in terms of our focus on go-to-market, both across our target verticals in education, real estate and allied health for new customer acquisition alongside greater account-based marketing and cross-selling into our existing portfolio.