Qliro AB (publ) (QLIRO) Earnings Call Transcript & Summary

Welcome to Qliro Q4 Presentation 2024. [Operator Instructions]. Now I will hand the conference over to CEO, Christoffer Rutgersson; and Interim CFO, Mikael Rahm. Please go ahead.

Hi, everyone, and welcome to Qliro's Q4 presentation. I'm Christoffer Rutgersson, CEO of the company. And with me today also have Mikael Rahm, our CFO. So the agenda for today, I will give a quick strategic update on the business. We do a summary of the Q4 and the year-end report, talk a bit about the business model and then our financial update and then outlook for the year, and we finalize with a Q&A. So in regards of the strategic update, we see a big opportunity to build a new European leader in composable payments. We want to deliver a wording experience for merchants and a customer journey. And we have the ambition to build first kind of a leading position in the Nordic market. We currently see an accelerated growth momentum in payments volume with more than 35% volume in new signed agreements that we expect to go live in 2025. We have a strong growth of connected merchants with more than 200% growth in Q4 versus last year. We also see that our launch of, our sales office in Norway is above expectations, and we're planning the launch of in Finland during the first half of this year. We're also kind of capitalizing now on the new products we launched in 2024, both our new checkout with did in conversion. We opened up our solutions also for Pay Later in the in-store environment. And we launched a new consumer experience with special features on loyalty drivers where we guide the consumers back to the merchants in contrast to local competition. We also we have a uniquely scalable business model with high margin and return on capital, which makes it very attractive at this point in time, push on growth and invest in kind of expanding further. So overall, strategically, our vision is to build a European leader in composable payments. And we're starting in the Nordics, but we have global capabilities. We enable our merchants to sell across the globe. Our mission is to deliver a wording experience for our merchants and their customer journey. And this is important that we see the consumers as the merchants consumer, and we guide the consumers back to the merchants they come from. We're not selling other services. We're not selling loans or other financial services like many of the niche banks. And we divested the Qliro loan portfolio during 2024 and we're now focusing fully on payments. We're also not selling other kind of price comparison sites or cash backs or whatever, but focus on the merchants' customer journey. And this makes our kind of solution very different from competition and it's a good reason for why many merchants are upgrading to Qliro. And our ambition is to become first kind of the local market leader in the Nordics within the next 3 to 5 years. So kind of why are leading merchants upgrading to Qliro? And looking at our position, we want both to develop a very good merchant experience but also the consumer experience that we control on the Pay Later. And this makes us quite uniquely positioned both versus local niche banks that are not investing as much in the experience but also versus other players like the marketplace and price comparison solutions that are also offering Pay Later, but only now focusing on the consumer experience and not on the full merchant offering, including the checkout. So we're more positioned like some of the global leading kind of companies that are very strong on the merchant experience, but we also have the consumer profiles and the consumer journey guiding back the consumer to where it comes from. So overall, this leads to that we have a leading conversion in the Nordics, the Qliro Checkout 0.0 that we launched in 2024 has now been AB tested across kind of all local competitors, and we see we are leading in conversion. And that means merchants are selling more when they use our solution versus others. Secondly, we have upsell features in the checkout and after the checkout, helping merchants drive a higher kind of gross margin. Third, our solution is very modular, and we have a lot of new integrations. So we open up more kind of features with kind of within composable payments. Fourth, we are very driven on kind of by performance. So we're investing in product analytics and supporting our merchants in optimizing the performance in the checkout. And our consumer experience is focusing on driving the consumer back to the merchant they came from, which is kind of increasing loyalty and kind of customer lifetime value for the merchant. Last but not least, kind of summing up all the different kind of values from the product, we typically deliver a business case of 10x to 20x the return on investment for the merchants that are upgrading to our solutions. And that's why we see an increase in kind of the merchant inflow. Looking at the growth, we're processing 16% growth in Q4. And on top of that, we have signed new agreements and recently onboarded merchants that we expected to drive an additional 35% in total payments volume going forward compared to 2024. And looking at the merchant perspective, that's even more. So we're growing around 200% in merchants in Q4 versus the year before and primarily driven by a number of merchants by the SME segment that is now taking off as we're reaching kind of a good product market fit for most of the kind of the larger SME platforms in the Nordics. And we expect this kind of growth to continue going forward. If we look at the kind of geographical perspective, Qliro have historically only sold to Swedish e-commerce merchants, even if we have supported them with their sales on a global perspective. We have our own pay later solutions also in Norway, Finland, Denmark. And we are now establishing local sales offices in Norway and Finland. So Norway was launched during the autumn. The team is now fully in place. Until this report, we signed more than kind of SEK 400 million in new volume from Norwegian merchants and kind of more than 20 merchants in the period have kind of signed agreements with Qliro and are now kind of going live on our platform. We're also setting up sales office in Finland. We recruited a new country manager coming from one of the current kind of local market leaders that are kind of joining Qliro in Q1, is now getting onboarded and the team is hired and getting started in kind of during the first half of the year. So before summer, we expect to be at full speed also in Finland. Looking at the product perspective, 2024 was a year of a lot of kind of product-driven innovation that we started up in 2023 and then we launched a lot of the products in 2024. And that is with ambition to deliver kind of a world-leading experience for our merchants and their customer journey. So it was both the checkout, which was a big launch kind of around the summer, where we upgraded our checkout not only to include more payment methods than any local competitor in our unified payments offering and in the checkout but also optimized for conversion in all the Nordic markets. We have been AB testing this during the autumn with a lot of the new merchants coming in. We did a big campaign in Q3, Q4 around kind of conversion guarantees. We haven't failed a single AB test. We're very kind of proud of the product performance and that's also the reason we see kind of more and more merchants kind of are upgrading to our solutions. On top of that, we look at the consumer experience. We've upgraded the full kind of digital consumer experience, both in the app and web, but also from a communication perspective with the ambition to increase our consumer retention, both for us and our merchants. Looking at the results from that, we see a continued kind of increase in Net Promoter Score over the kind of the last 2 years. We're now around 40. And we see also that some of the improvements we've done on the consumer side as well as from our credit underwriting with new credit models that we launched in the autumn 2024 is also now kind of reducing reminder fees, impacting income a bit, but we expect that also kind of decreased credit losses going forward. So even if that reduced income a bit in the short-term, that's very positive, both for retention, customer experience and kind of long-term development of our credit losses. Last but not least, I think our business model has a very high marginal return on capital. We have a very scalable platform. It's already launched with products across the Nordics, and we're already supporting Nordic merchants selling outside the Nordics kind of on a global level. So we see there's an opportunity to scale up the platform even further over time. Secondly, we see kind of a large growth potential in the Nordic market. We still have a very small market share. We are less than 5% of the market. We see that our segments are in kind of our addressable markets in the Nordics is at least SEK 300 billion to SEK 400 billion in volume. We processed SEK 13 billion in kind of 2024. We see a large growth potential of kind of continue to help merchants upgrade to our solutions. We also expect the market momentum to come back when the macro perspective from a consumer perspective increases consumption again in the Nordic market. Last but not least, looking at the business model and giving them 1 or 2 levels, we see a very high marginal return on capital employed for the loan book we build up from new volume, around 100% return on capital employed on the margin, which means it's very attractive to invest in growth and drive more volume on the platform. To summarize the full year 2024, we another successful year for Qliro towards our vision to build a new European leader in payments and then in the midterm establish a leadership position in the Nordics. We are doubling down on our payment transformation. So we have now launched a lot of new products. We're now investing in growth as the next step. We have divested the loan portfolio and digital banking service kind of during 2024, which means we are much more focused now on our core business in payments. We see a good strong growth momentum with more than 35% volume signed already. And then we have all of 2025 years ahead of us. We expect more merchants to continue to upgrade to Qliro during the year. We have a strong merchant base growth as the SME sales are taking off. laying the foundation for long-term growth and profitability. We are now capitalizing on the new product launches we did during 2024 with both our focus on leading conversion experience for the merchants, and also on creating a very good consumer experience, guiding back the consumers to the merchants they came from. And our ongoing Nordic expansion just from an addressable market perspective is roughly doubling our addressable market compared to Sweden only. We will continue to focus on improving our operational efficiency and digitalization, especially in onboarding to ensure we can scale fast and quickly also going forward. With that said, I will hand over the word to Mike, who will run through the financial update and perspectives on our business model. Thank you.

Thanks, Christopher. We walked through this last time, but just to repeat a few of the key points. Once the merchant is onboarded, transactions are processed and we start generating revenue, but with different timing. Now payments are generating instantly for us, but they have a lower take rate, whereas Pay Later is accumulated over time in our loan book and then generates revenue over time. So it takes up to 3 years to get full impact from a new merchant. But the key is that higher payment volume generates higher profit over time with reliability. And if you see in the middle, since we've moved into a period of higher growth, we have introduced 4 new KPIs. While take rate remains sort of one of our central KPIs, it doesn't give the full picture during a period of higher growth due to that revenue delay in our business model. So there, we have introduced the GP1, which is basically operating income minus credit losses, basically risk-adjusted income. That has the added benefit of being an easy benchmark against competitors as well on the market. And then GP 2, which is basically GP1 minus variable expenses, and that reflects sort of the contribution to cover fixed costs. And then these KPIs are then divided by the loan book to see what margin can we generate from our loan book. And these are sort of key KPIs for us to track going forward during this period of growth. If we move on to Q4, as we said before, we moved now to shifting focus on profitable growth and are investing in growth. So our operating profit decreased by SEK 10 million to SEK 14.8 million adjusted in Q4, primarily due to the expansion in growth initiatives, also combined with interest income coming in minus 2%. That is mainly due to changes in the base rate, which generates sort of impacts our revenue faster than our cost is being impacted or adjusted. If you look at operating income, commission income increased by 11% due to a faster movement to unified payments, whereas despite reminder fees declined by 15%. The operating expenses level, grew by SEK 13.9 million to SEK 85.2 million, primarily due to investing SEK 7.6 million in sales and marketing and sort of new markets but then also due to higher depreciation as well as accrual adjustments in the previous year. Credit losses saw a decrease of 0.16 percentage points. This is mainly due to the divestment we did in our portfolio in the last year, which resulted in change reserves in that quarter. So if we look at the nonfinancial KPIs, Christopher touched on this before but we see strong growth in volumes, in number of merchants and also number of consumers. On the volume side, it's primarily Pay Now that is driving the increase. This is more of an illustration of the 4 KPIs. So I think this is more how they are built up. So I think we can move on. Moving on to the cost side. Costs have increased deliberately because of a shift to growth, where we have invested in sales and marketing by SEK 7.6 million, primarily in Sweden, Norway, and also in marketing. Depreciation has increased by $0.9 million and then other expenses have increased by $5.3 million, primarily because of accrual reserves adjustments in the previous year. So underlying cost is very stable. And then last, in terms of our capital situation, both capital and liquidity position are really strong, both to regulatory levels and including P2G guidance. We raised new capital in October, which obviously has strengthened our position. So with that, I'm handing it over to Christopher.

Thank you, Mike. Looking ahead, we will continue to focus on accelerating our growth momentum across the Nordics. We will both accelerate in SME and enterprise with our new kind of sales engine that we are expanding into Norway and Finland. We are prioritizing growth to capitalize on our current opportunities in the market. And we will continue to invest in our payment capabilities and the consumer experience to guide the consumer back to where they came from. We are expanding the addressable market by the launch also in Finland. That's not fully live yet, but we expect the team to be fully up and running before the summer. We will continue to optimize our onboarding to handle the kind of increasing inflow of merchants to make sure our merchants get live quicker and smoother than before. We are expecting more than 35% volume growth from the new contracts we have already signed and the recently onboarded merchants that did not have a full effect in 2024. So 25% more growth compared to 2024. We expect that to materialize into revenue during the year, leading to 15% to 30% growth in income from these contracts only in the second half of the year and getting full impact into kind of 2026. That is excluding additional new volume from continued sales during this year, which, of course, we kind of expect momentum to continue, and it's also excluding the kind of organic development of the existing portfolio. But to give a sense of kind of how we expect this growth to materialize into revenue. Overall, we will continue to deliver a market-leading experience for merchants and their customer journey. And with that, I thank you for today and open up for questions.

[Operator Instructions] The next question comes from Ermin Keric from Carnegie.

So maybe if I just start on where you kind of round it up with the expected income growth in '24 and H2. Maybe if you could just kind of help us how do you expect the organic growth to be underlying? I just see that we see your volumes up 16% year-over-year in Q4, but the Pay Later volume is actually down 5% is that a change you're seeing in consumer preference? Or is that driven by the merchant mix? And do you think that improved macro could actually put further pressure on kind of that composition? So consumers have more or less in their wallet, and therefore, they part pay less going forward?

The reduction in Pay Later volumes is also kind of partly driven by our new credit models and stricter underwriting, also leading to the reduction in reminder fees that you see in the quarter. We expect this to materialize in kind of lower kind of credit losses going forward, which is very good from a kind of gross profit perspective, but may limit kind of the growth on the kind of operating income level a bit. Looking at the guidance, we have not given a guidance on kind of the organic portfolio. We expect that to continue to perform in line with the market. And we have not kind of given a guidance on additional sales in 2025. But of course, we kind of expect our growth momentum to continue as kind of more and more merchants are upgrading Qliro and our pipeline is larger than before. But the volumes of merchants already signed and the merchants that recently online, but didn't have a full year effect in 2024 is expected to deliver an additional 35% volume compared to 2024, and that's leading to those kind of contracts leading to 15%, 30% operating income growth in kind of the second half of the year kind of accelerating into kind of 2026. That a good answer to your question?

It was maybe the only thing left outstanding was more just on the kind of consumer preference. Do you see any difference there, especially with macro shifting that you would have more Pay Now and less part payments?

We see 2 trends in the portfolio. One is some merchants that historically have only used us for Pay Later in certain markets and kind of upgraded to use our full Qliro Checkout during 2024. One of those merchants we announced also kind of early kind of 2024 was Nelly that was not using us in all markets before. So that is driven kind of part of the shift as we were not processing their full Pay Now volumes in the past, but they are now kind of fully live within our Unified Payments. So that's more kind of driven from the merchant perspective. Looking going forward, we kind of expect kind of Pay Later to increase again as we are kind of launching new features into our Pay Later offering.

Okay. That's clear. And then moving over to the cost side. You've spoken before about the scalability of the platform. But if we look now, your fixed costs are up 17% year-over-year and the variable 39%. So I suppose you've had some start-up costs to launch in Norway and preparation for Finland. Should we expect fixed costs to kind of plateau from here and move more in line with the kind of 30% up for every 100 increase in income? Or kind of when can we start seeing that kind of scalability coming through in the numbers?

Yes, that's a good interpretation of kind of our communication on the matter. We, of course, have some start-up costs for Norway and Finland. Looking at the increase in fixed costs versus last year, that's roughly kind of SEK 11 million, SEK 7.5 million of that is driven by 76% is driven by kind of the new investments in kind of sales and marketing. Then we had some accruals for kind of last year. So the cost was slightly lower than the kind of underlying for 2023. But kind of going forward, as we kind of double income, we don't expect fixed cost to grow more than 30%.

Very clear. And the variable one, that's also growing more than volumes currently?

The variable cost is also kind of partly driven by certain kind of one-off items. But overall, we kind of expect the kind of variable cost to stay at this level for volume or decrease going forward as we optimize the business.

Great. And then one final question. Just if I take the interest expense you had in the quarter and I just divide it by the average deposit volume you've had, it looks like the yield has actually increased in Q4. Can that be correct? Or is it something I'm missing here? Because I understand that you said you'll have interest expense coming down with the lag with market rates, but I was a bit surprised to see it coming up on kind of yield terms in Q4.

Not sure how we're calculating the yield, but it's true that the lag in kind of funding cost versus the market rates is impacting operating income slightly negative from a growth perspective in the short term before we kind of expect that to kind of even out.

That's right. We can take the exact numbers offline.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you for today. Looking forward to discuss during next quarter.