Novatti Group Limited (NOV) Earnings Call Transcript & Summary

Good morning, everybody. And thank you, and welcome to joining this morning's webinar. Today's session is now being recorded for those of you who heard the message, and it will be available later in our Investor Center on the Novatti website. It's just turned 11:00 now, so I'm going to start today's webinar briefing. Thank you very much for joining us. My name is Beth Moylan, Head of Growth at Novatti. And today, I'm joined with 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 survive and grow. We'd love and encourage you, as always, to submit questions, which we're going to address at the end of the webinar. To do that, just simply type your questions into the Q&A box at the bottom of your screen. And if we don't cover a question during the webinar, we'll make sure that we cover them directly if you e-mail us directly at investorrelations@novatti.com, and we'll respond to you there. Over to you, Mark.

Thank you, Beth, and good morning, everybody, and thank you again for joining us. Today, I'll take you through our June quarter and then spend some time on what comes next because the June quarter completes the financial year. FY '26 was the year we completed the reset and FY '27 is the year we push forward with growth. I'd like you to take 3 things away from today's session. First, the turnaround is done. 4 consecutive quarters of normalized positive operating cash flow and group margin now at 50%. Second, our core Australasian payments business is growing and growing profitably. And third, we have a clear stage road map that positions Novatti for where payments are heading. We're building unique Australasian payments infrastructure sitting across both the current and future payment ecosystems. Let's get started, and then we'll finish with some questions. The world is changing and the digital economy is on the move, and money is changing form. Stablecoins or regulated digital cash and tokenized deposits are now moving real value on new payment rails. And this is no longer a crypto story. Around USD 390 billion of stablecoin commerce moved globally in 2025. And the majority of it was business-to-business. Closer to home, the Digital Assets Framework Act passed in April this year and brought those new rails inside Australia's regulatory perimeter. Novatti is developing a leading position into the rapidly advancing digital asset economy. Anchored by our investment in the AUDD stablecoin and the growing use cases around tokenization, we are very well positioned for the adoption of regulated digital finance. Our view is that stablecoins are not a disruptive strategy, they are an efficiency strategy. They won't replace the existing payment rails, rather becoming a complementary optimization layer where speed, liquidity or finality resolve friction in many areas of money movement today. Now Australia already has instant domestic payments through the NPP, the New Payments Platform. So in a mature market like ours, the prize isn't necessarily speed. Rather, it's programmability, atomic settlement and offshore reach, the flows that the NPP cannot carry. And importantly, that demand is real today with a clear pipeline from live through the Horizon use cases. This includes licensed digital asset platforms, importers, exporters and remitters, platforms and marketplaces paying gig workers and knowledge workers across borders, real-time settlement for merchants in our own acquiring book and beyond that, tokenized assets and agent-initiated commerce. So adoption is no longer the question as business flows have started already crossing over. The real question is who will businesses trust to transit both worlds? And that's where Novatti position is genuinely hard to replicate. We are a principal member of Visa and Mastercard in both Australia and New Zealand, an AFSL holder, PCI-DSS and ISO 27001 certified. We're a stored value platform for wallet and alternative payments. We hold a key position in the issuer of AUDD, Australia's leading AUD-backed stablecoin and with an ASX listing and 30 years of history of moving money safely and securely. In short, one regulated bridge across every form of money, cards, account-to-account, wallets and stablecoin. And that's the company we're building. Essentially, we're creating an interface across the traditional and digital ecosystem. And this slide shows what that bridge looks like in practice. On the traditional payments franchise, we already service many leading Australian and international companies across card issuing, merchant acquiring, Asian wallets and cross-border payments. These are household names placing volume through our infrastructure every day. Last quarter, nearly $1 billion settled across our AU/NZ payments infrastructure. On digital infrastructure, we're connected into the emerging ecosystem through our stake in AUDD's issuer and through the product work we're doing to connect our payment rails to stablecoin networks. In a rapidly changing world, new blockchain rails and programmable digital finance are innovating around the traditional rails. Looking forward, our thesis is that the real value in payments is moving from execution to decision and future success is not just moving data or money around a single payment stream, but to provide interoperability. In other words, to determine and then orchestrate how payments get made for clients. What payment type, what identity is trusted, which rail it uses and what system authorizes the transaction and increasingly without a human in the loop. Why is this important? Because companies need simplicity across their payments infrastructure, not even more complexity and as forgettable relationships as payments diversify. For shareholders, the point is this, you don't have to pick a winner between the old rails and the new. Novatti will sit across both, regulated on each side with the traditional business funding the journey and the digital side providing the upside as the market evolves. Now to the quarter and to the statement that I open with that the turnaround has been sustained, here is the data. In the June quarter, we've achieved 4 consecutive quarters of normalized positive operating cash flow. Group margin 50%, whereas a year ago in the same quarter, it was 26%. Group cash EBITDA was $0.3 million, up $0.4 million on the prior March quarter and $3 million of cash available at 30 June, which doesn't include the $1.2 million from the AUDC share sale that settled in early July. It's actually worthwhile discussing the cash movement number that you'll see in the appendix 4C today. The headline operating cash flow for the quarter was negative $1.8 million, but that was a deliberate choice. We've used the improved profitability of the business to pay down some historic liabilities and to strengthen relationships. Paying down the past is part of finishing the turnaround and not a departure from it. Strip out payments against historic liabilities and the underlying business generated $0.3 million of cash in the quarter, the fourth quarter in a row that it's now been positive. I also want to acknowledge something else directly. It's obviously been a hard 12-plus months for the share price. Some of that is fintech sentiment, which we can't control. But some of it reflected very fair questions about this company. Can Novatti cut costs and still grow? And can it sustain positive cash flow? At the time, they were the right question to ask, but we now have 4 quarters of consistency and sustainability. So the rest of today is about what we do with that foundation. 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. Payments AU/NZ is where the pivot back to growth shows up first. Revenue of $3.9 million, up 8% on the March quarter, gross margin of $1.9 million, up 26% and cash EBITDA of $0.9 million before corporate overheads, up 95% quarter-on-quarter. In aggregate, AU/NZ now generates the largest revenue, gross margin and EBITDA within the group. And underneath all those numbers is transaction volume. Gross transaction value for the quarter was $975 million, up 16% on the prior quarter and up 39% on the same quarter last year. Volume is the engine, as it compounds revenue and margin follow. It's also worth being really clear about who we win. Our target customer is the mid-market, medium-sized merchants, corporate groups, software platforms and other fintechs. These entities want an engagement around payments, local accessibility, tailored design and advice and a relationship built on trust. That is deliberately the segment that global payments giants find underserve. And these customers are not motivated by price alone. It's a big segment that's underserved and it sees exactly what we're good at. To continue to press this advantage, we've recently appointed a new commercial leader for the Australasian business, focused on new customer acquisition, accelerating our acquiring business and relaunching business-to-business cross-border services on improved platform functionality. I want to provide a recent live example to make the targeted growth model concrete, the University of New South Wales. Our journey ran through 6 stages. First, we embedded our capability in Nelnet Xetta enterprise software platform. That enabled an introduction to UNSW where Asian wallets were then pitched for international tuition payments. We signed a commercial agreement, completed a technical integration onto the university's payment pages and finance systems and went live with Alipay on tuition flows in October of 2025. We're now in Stage 6, extending the same integration to WeChatpay, giving students a second payment wallet option and limited incremental overhead on both sides of the relationship. Why does this work? Well, for international students and their families, they pay directly via the mobile app they use every day. So there's no unfamiliar card entry, no FX friction and no fail cross-border payments. UNSW with fewer failed payments, faster receiving and a much better student experience. And for Novatti, it's a percentage of every settled transaction. As a result, since the October launch, more than $60 million of gross transaction value processed growing quarter-on-quarter and more than $0.9 million in revenue to Novatti. That's what one customer can contribute once fully deployed and adoption starts to compound. And a key point to focus on, UNSW is the first Australian university to deploy this integration with Novatti. Through the embedded distribution channel, more than 30 additional tertiary institutions can implement the same solution by the Xetta API. One working customer, a validated distribution model and a scalable channel to repeat it. So that same arc convert, sign, integrate, launch and drive adoption is now running across a pipeline of new customers spanning every key product line in our Australasian payments infrastructure. For example, in issuing, we're working with Visi Money, a new AI-powered spend platform to issue globally accepted Visa debit cards under our Visa Principal Membership. We've also signed a rewards card program where our issuing stack runs the program end-to-end, a sponsor, processor, ledger and settlement. In merchant acceptance, an airport retail chain across Australian airports is adding Asian wallet acceptance, capturing spend at one of the highest converting touch points there is. Also an Australian subsidiary of a major Asian fintech will distribute our card-present terminals and our e-commerce acquiring. And we're embedding real-time account-to-account payments into a local subscription platforms product suite. Actually, a little more on that last customer. The RBA's review of merchant card payment costs and surcharging is changing how merchants think about payment acceptance. As we previously announced, we expect no material impact on our existing card acquiring book, but the RBA review has generated a strong line of inbound interest for merchants testing the market for non-bank payment options. And our expanding account-to-account product suite gives customers an alternative or a complement to card payments. So this is a regulatory change working in our favor. The comments thread around all these opportunities, they run on Novatti's own payment rails and revenue is driven by end user adoption after go live. It's the UNSW curve repeated. So where does this go from here? When I arrived in early FY '24, we set out a 3-phase road map with a promise of discipline and a simple rule that each phase must be earned before the next begins. That's the execution discipline I have set as our internal bar. Phase 1 was about clarity and simplicity, reset the strategy, streamline the business, address the P&L and get to operating cash positive. We took $10 million of cost out of the business. We divested non-core assets, including International Bank of Australia and Emersion, and we exited several low-margin revenue streams. And we delivered 4 quarters of positive normalized operating cash flow. Everything on that list was a commitment before it was a result. So Phase 2 commences in FY '27, and it has 4 parts. Scale the AU/NZ payments business with the same discipline, with growth that supports margin, not growth at any price, reinvest into the core business to improve the flywheel, continuing the work you saw in this quarter's numbers, deepen our connectivity and leverage into the emerging digital payment rails we covered at the start and examine a targeted and EBITDA accretive acquisition, deliberately modest in scale to prove the playbook and integration discipline before we go further. And Phase 3 is acceleration, organic and inorganic growth on top of a proven engine. The destination is local leadership in hybrid payment infrastructure. Traditional and digital rails working together, focused on emerging and underserved segments with customer relationships deep enough that Novatti effectively operates as their commercial operating system. Along the way, incremental progress towards our 70% gross margin target and risk management as a core capability at scale. Payments is a highly fragmented industry ripe for consolidation. M&A activity within the Australian payments market is already underway and will accelerate as the treasury reforms to an activity-based payments licensing framework roll out over the next 12 to 18 months. Many smaller or privately held DSPs will choose to opt out of the required uplifts and investment across product, compliance and governance. So potential M&A is a key focus area for me this year. In summary here, we're now at Phase 1 complete. Phase 2 is commencing and Phase 3 unlocks only when Phase 2 is delivered. That sequencing is deliberate. It's how we've rebuilt credibility over the past 3 years, and it's how we intend to keep it. So let me close where I started with the 3 things I want you to take away. In summary, the turnaround is complete. 4 quarters of normalized positive cash flow and 50% group margins say that credibly. Our core business is growing profitably with a proven, repeatable customer model behind it. And the road ahead is staged, disciplined and pointed at where payments are going with Phase 2 beginning now. To all our shareholders, thank you. For the last few years, I have asked a lot of your patience. Our job now is to convert that foundation that we've built into growth and shareholder value, and that's exactly what FY '27 is for. Thank you also to the Novatti team whose hard work sits behind every number you've seen today. And with that, Beth, let's take some questions.

Thank you very much, Mark. Thank you for your presentation. We have got a number of questions, and I'll start with the first one. The share price has fallen heavily over the past few years. Why should investors believe FY '27 should be any different?

Why different? Well, because the big questions that investors were asking of me 1 year ago and 2 years ago, like can this company grow after removing such a large chunk of the cost base? Can it get to positive cash flow? We now have evidence behind it, not just promises. 4 consecutive quarters of normalized positive operating cash flow, group margins doubled from 26% to 50% and EBITDA from the core engine is also nearly doubling in the June quarter. We can't control fintech sentiment, and I won't predict the share price, but what we can control is execution. And our record over the last 3 years is that we deliver what we commit to. As I mentioned, the digital economy brings incredible new dynamism and opportunity to payments. We have an exciting vision for the company and its place in that world and FY '27 is about continuing to execute in growth mode.

Thank you. Another question here is, you call it positive cash flow, but the 4C shows an operating outflow of $1.8 million. What's the reality?

Yes. Look, this is important. So it's worthwhile stepping into this again. Both numbers are real, but the difference between them matters. Again, the headline 4c number includes payments we made against historic liabilities, legacy debt and older creditor obligations built up in prior years. These are payments made against the past, against the legacy company structure, strategy and operations, not the cost of running today's business. Exclude those and the business generated $0.3 million in cash in the quarter, the fourth consecutive quarter that has been positive on that basis. And I'll add that every business line in the company across the group now generates positive direct EBITDA, which is a dramatically different position to the business that I inherited. We define the normalization in the footnotes to all the reports, I can track it quarter-to-quarter because that's what we can control.

Thank you. This question actually leads on from that. How much historic liability remains? And when will it be cleared?

So the creditor group we're referencing are all being managed very strategically. Historically, the largest and the most important is the ATO, the Australian Tax Office. And the legacy debt here has reduced from what was over $5 million at its peak to circa $1.3 million today and the final debt payment of the ATO is scheduled for April of next year. And I'll just say completeness that we're up to date with all ongoing forms of tax obligation at this point. The key point here really is trajectory. We're using the improving profitability to work these balances down deliberately quarter-on-quarter, and this quarter's outflow shows real progress. With our pivot to growth and the Phase 2 road map I walked through, you should expect continued progress for FY '27 in this area.

Thank you. Cash at $3 million. Will you need to raise capital, should investors expect dilution?

Yes, the cash is $3 million at the quarter end, plus the $1.2 million from the AUDC share sale that was settled and received in early July. More important, though, is the direction of travel. The underlying business again is now cash generating, which is a fundamentally different position to 12 months ago, 18 months ago. That growth generates cash and that cash funds more growth, effectively the flywheel is turning in the right direction. We also hold real value in assets like our remaining AUDC stake, which gives us options without touching the register. Our Phase 2 road map prioritizes our structural improvement, but I won't comment on any future or potential scenarios at this point.

Thank you. There is a question about AUDC. Why sell AUDC shares if it's so valuable? And then another question is, what is the remaining stake actually worth?