QuickFee Limited (QFE) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. I can see there's a bunch of people just entering into the webinar room now. But thank you for joining us this morning for QuickFee Limited's FY '22 Financial Results Presentation. [Operator Instructions] So again, thank you. I'll hand over to our presenters today. Delighted to have Executive Director, Dale Smorgon; and Chief Financial Officer, Simon Yeandle, here. So over to you, Dale.

Thanks, Eric, and thanks, everyone, for joining for the FY '22 results call. Obviously, I firstly want us to acknowledge Eric Lookhoff's recent departure from the organization for personal and family reasons. And we share it well for what lies ahead with him and take the opportunity to also thank him for his tremendous contribution to the organization over the past 18 months. It's important to note that in Eric's absence and as we search for a new CEO and both Bruce Coombes, Simon Yeandle, and myself are assuming the CEO responsibilities. And Bruce, currently on leave, can't be on this call today and sends his apologies. And so Simon and I will walk you through the FY '22 results. We'll talk more about our search for the interim CEO as we get to the presentation. But let's commence with kind of what's been achieved and what's been a good year and a strong year for QuickFee. We certainly remain on track to achieve run rate profitability by the end of FY '23 and within the existing cash reserves that the business has. Importantly, we saw strong revenue growth, up 23%, driven out of the U.S. primarily in our Pay Now and financing products. And our Pay Now volumes up 44% to just under USD 1 billion, reflecting the tremendous investment that we've made in infrastructure and payment services and systems that we provide for our merchants. So that was really pleasing, and we continue to see strong growth through both ACH and credit card transactions. Financing too grew up 11% in the U.S., and we think the tailwinds in the current market conditions certainly suit a business such as ours with a strong merchant retention and offering a range of payment options directly into our core market of professional firms. So there's record volumes in the U.S., which is very exciting. Australia too saw a really strong recovery up 24% to $38.1 million in lending through the 12 months. And obviously, we've come through the bad COVID and the business has seen a particularly strong demand and inquiry. And I think it's again hitting its straps and to someone who's been involved in the business for coming out obvious and has seen the business grow on a journey in Australia, I'm particularly pleased to see the Australia lending environment continue to strengthen for QuickFee. We have seen solid growth in our BNPL offering and our channel to market there have being successful, TTV of USD 3.5 million and just under $1 million in Australia. The Aussie BNPL business primarily driven by growth in the Jim's Group. Of course, Jim's with some 4,500 franchise merchants represents a tremendous opportunity. We're actively engaging and signing up new merchants across the Jim's network across a range of different categories, and we're certainly optimistic about the continued growth that will give to the business. In other highlights, I think the reflecting on the Northleaf credit facility and the headroom that gives us continue to grow. It is important and special mention to Simon for the great work and the team on what's been an outstanding result in securing a Tier 1 lender of that note. Successfully raising capital throughout the course of the past 12 months to further strengthen the organization with the $4.4 million capital raise that certainly enables us to be able to have competency going forward to continue to grow and invest in our business. And finally, importantly, we reaffirm our known path to profitability. Just turning over to the page and then having a look at some of the strategic highlights. In some reform again briefly we really renew our focus on our core Professional Services market. We continue to drive adoption across multiple payment options. So when you think about creating an infrastructure technology layer in QUBE, which effectively is the heartbeat or the backbone of what QuickFee delivers from a client experience and a merchant point of view, we're giving merchants an opportunity to provide their customers with the ability to pay by card, ACH or our innovative financing solution. So a real focus in the renewed energy in relation to our core market, given the size of that addressable market, particularly in the U.S., is what continues to motivate us in relation to the excitement of the opportunity that QuickFee has in front of it. Throughout the year, we have also seen some significant improvements in margin. So from an economic model perspective, relationships with both BlueSnap and indeed with Payroc have yielded us greater margins on card and ACH. In terms of ACH, I mean -- and some of the nuance around our relationship with BlueSnap, we've managed to improve our working capital cycle as a result of changing the fund flow where QuickFee sits within the processing of those ACH transactions, which has indeed another benefit for our business. From a risk management point of view, we're very comfortable with the level of bad debt without recourse model in relation to financing, which is completely unique and doesn't suffer from some of the other well publicized organizations that are facing headwinds in terms of the current economic conditions and business conditions. Our recourse model gives us a great degree of comfort and confidence around the management of bad debts. And throughout the course of the year, we saw very minimal write-offs. And lastly, our team. Notwithstanding Eric's departure, we've got in place a terrific and talented and experienced group of payments and professionals that understand the business that we operate in. It is very much business as usual. We have a remote workforce in the U.S. specifically, who all continue to go about their jobs as they normally would under the guidance now of both Bruce, Simon, and myself, and we continue to be optimistic about their ability to deliver for the business in FY '23. Simon?

Thank you, Dale. Good morning, everyone. I'll just run through some of the financial highlights here, and we'll get into some more detail later on. All the financials that we've presented are denominated in Australian dollars. We do talk about volumes in the U.S. in U.S. dollars, but the material all Aussie. And we split our revenue into 2 main revenue streams: interest revenue from our lending products and then revenue from our payments products, and that payments revenue also includes some ancillary application and setup fees as well. So interest revenue from financing was up 9% to $5.1 million, and revenue from payments was up 39% to $5.7 million, bringing total revenue to $10.8 million, up 23% on FY '21, and this is consistent with the growth that we've seen in the lending and payments businesses in FY '22. Gross profit was $7.6 million, up to 21% in FY '21. Our gross profit margin declined slightly from 72% to 70%. It was really due to the cost of sales increasing. It's up 47% to $2.2 million. Our cost of sales is comprised mainly of 3 things. Firstly, expenses to operate our payments platform for ACH/EFT card, and more recently BNPL. Secondly, interchange fees for credit card processing. And lastly, a lot of costs in terms of credit checks and underwriting expenses, including credit staff there. Overall, operating expenses increased $5.9 million as investment in growth peaked in the first half of FY '22, but then reduced in the second half. In fact, operating costs in the second half were $0.8 million lower than the first half. And we'll talk a little bit more about that. Adjusted EBITDA was negative $12.6 million, again as a result of that increased level of investment. And as I mentioned, OpEx has peaked and will continue to reduce in FY '23. The definition of adjusted EBITDA is basically the usual statuary definition, but we deduct interest expense on our loan book borrowings, and that's shown directly below revenue, if you look at our statutory P&L. Because that interest is one of our core operating costs to profile a meaningful operating profit number, we have to call EBITDA adjusted because we've taken interest away from that. And pour NPAT was negative $13.5 million after depreciation and some net finance costs. Overall, our loan book grew 27%, and that's faster greater than the growth in interest and that's because the interest revenue is recognized over the full life of the loans, but the loan book balance clearly reflects immediate increases in lending. So you do see a longer tail when it comes to the interest revenue and you see lending increasing. As we scale back our sales teams and stepped down certain technology resources across FY '22, we saw our average monthly cash burn reduced by approximately $300,000 a month in H2 over H1. This will continue to reduce as we now are extremely focused on achieving profitability and have plans in place to reach run rate positive cash EBITDA by the end of FY '23. We have sufficient cash flow liquidity to do so. While cash flow liquidity decreased in FY '22 due to the investments we've made, we refinanced our loan borrowings and raised capital such that total liquidity and growth capacity increased by AUD 11 million to AUD 44 million. So we're very well placed in terms of heading into FY '23 to achieve that goal of profitability without needing to raise any more capital. I'll pass back to Dale to talk a little bit about our Professional Services.

Thanks, Simon. I think it's important just to spend a moment just on the focus of the organization and what we can see our core business when we look at our core market and professional services firms. And just to summarize what it is that we believe we deliver and why from a product perspective, our product strategy and road map is very clear around delivering a deep set of services and products into the professional service world, namely CPAs and attorneys. Ultimately, what we're looking to do is harness the strong tailwinds in relation to the digitization and the modernization that's occurring on payments and payment platform within these firms. We clearly are providing a range of online payment options and financing solutions to our merchants. And that remains the core focus of the business. So ultimately, we're selling cash flow improvement. We're selling working capital improvement and receivables management improvement. The addition of the Connect product, I think we'll start seeing the real benefits of through FY '23. Our Connect platform provides an integrated accounts receivable dashboard and management capability that's embedded and integrated within the practice management system of the firms that we serve. Ultimately, this enables firms to better manage their receivable cycle to better manage client communication and ultimately with the goal of reducing their working capital cycle and collecting invoices outstanding in a far greater and speedier manner. And we're doing so by better servicing their customers. So we think it a real win-win in terms of what we deliver and QuickFee Connect will become an even more important part of the business as we move forward. Simon?

Thanks, Dale. We're looking a little bit more in the U.S. now and how we performed over the course of FY '22. And the numbers here are in U.S. dollars, as we're talking about volume. As we've said in the past, U.S. does represent the largest opportunity in terms of markets for us. It's already generating more revenue in Australia, about 40% more revenue coming out of the U.S. and in Australia. In the U.S. Professional Services sector, which what these charts are about, are Pay Now total transaction volumes grew 44% to USD 961 million. We continue to benefit from those structural tailwinds. We're going to shift to online invoicing, online payments and an increased focus on CPA firm sign-ups, CPA account management and marketing activities. The CPA conference back up after COVID, and we are heavily invested in our presence at a lot of the CPA events in the U.S. Financing levels also rebounded as the impact of the COVID economic stimulus measures in the U.S. anticipated with 11% growth versus FY '21 to USD 16.8 million. Active customers were up 30% to active merchants up 39%. So the U.S. payments market continues to modernize, will make more volume online, as I've mentioned, and the Professional Services sector is a prime example of this strategic partnerships with BlueSnap and Payroc, our ACH and card processes. They've been made possible as we completed the build of our payments platform queue, and they've really improved our operating metrics and transaction margins, and we'll see the full benefit of that in FY '23. Specifically on margin improvement, we moved all our merchants, some of which were on a fixed fee from some time ago in terms of ACH pricing to a percentage of volumes. And now all merchants are being charged for ACH based on the volume they generate. So as that grows, that our revenue will grow there. Through our relationship with Payroc, we increased our card surcharge on our Pay Now card volume from 3% to 3.5%, and we get to retain and keep that full 0.5% surcharge we get 100% of that. And that will drive almost the 3x kind of tripling of our margin on cards in the U.S. And late in first half of FY '21, we increased our interest charges on the financing product. We're looking at doing that again soon. The economic climate is prime for us to increase rates, and they're certainly going up in the economy. So we'll continue to review those. But that's really going to lead to greater interest revenue and margins on the financing product. So we've really made some very position action and that will translate into increased margins in FY '23. We're seeing continued growth across all the products in Professional Services. To say we focused on signing up new merchants, but really refocusing on servicing the clients we have through more personalized user experience in our platforms as well as a lot more site visits and some junior account managers who can actually spend their lives traveling around the country, getting in front of our merchants. So really focusing on how we can drive usage and retention in the merchant space as well. And we've continued to focus on financing and we've probably got a group for a greater focus on driving selling financing in the U.S. I think it's an area where we can certainly improve and got more attention to actually the sales efforts in selling financing. The market, as I said, is right for that. So it's our highest margin product, and it's an area that we'll continue to focus on. In Australia, again financing volumes saw impressive growth throughout FY '22. June '22 would be an all-time record, taking the highest previous months that was June '20, pre-COVID. And furthermore, the number of active customers and merchants are showing sustained signs of recovery as we've increased our marketing and customer service focus in the Australian accounting of all sectors, and that's certainly delivering more engaged merchants. The number of active merchants only grew 1% to 495. That's really a factor of the fact that they didn't drop during COVID significantly. The FY '20 number, numbers are really only down about 3.5%. So we didn't lose many merchants through COVID, which goes to just point out the mature nature of the business in Australia, but also how sustainable it is. Active customers were up 17% to 35,000, down from 30,000 in FY '21. And again, it underlines the growing demand for prefunding solutions across our accounting and law firm client base. The financing TTV for FY '22 was $38.1 million, up 24% on FY '21. And those results, as Dale said, give us great confidence that we'll see further growth in FY '23 and get back to those pre-COVID levels. We've got a stable and experienced team in Australia led by Bruce. Our founder still runs the Australian business. We've recently recruited some new account management staff to maximize the opportunity and particularly for a period of inflation and rising interest rates, the opportunity is there for us to capitalize on that and continue to grow the financing business in Australia. On our Buy Now, Pay Later product, FY '22 volumes fared USD 3.5 million in the U.S., and AUD 0.9 million in Australia. Active merchants roughly doubling in both markets. Our independent sales organizations, about 217 of those now, the sign-ups have started to level off. As you can imagine, there are only a finite number of those. We are seeing some large merchants to increase their usage of the product. And again, the merchant accounts become less relevant as total volume becomes more relevant. In Australia, the Jim's Group franchise is growing steadily. We're signing up new franchisees pretty much on a daily basis doing some pretty extensive marketing into that franchise world. And we're broadening the offering to more and different franchisees outside the Jim's Group in sort of homeowner services, anything from pest control to remove lists. So looking at ways we can grow that in a very low credit risk way. Now we're on some of the financial highlights, a bit more detail on P&L review. We've spoken about revenue growth of 23%. You can see the operating expense lines in more detail here. They're all growing over FY '21. But importantly, they're all lower in the second half of FY '22 than the first half, and we expect further reductions in total operating expenses of between $3 million and $4 million in FY '23 over FY '22. After building out the sales and technology teams, we did conduct a moderate reduction in force in December '21, which eliminated 10 positions, which were redundant as we pivoted away from our direct sales model to that more scalable ISO distribution strategy in the U.S. and the franchise opportunities with Jim's in Australia. And in April, we stepped down some more product development expense as the QUBE platform was completed. So we have managed to reduce our cost base quite significantly and for the first half of FY '22. Product development expenses, they consist of both employees and offshore contractors such as product managers, product engineers, front to back-end developers, database and PI engineers as well, and sort of software costs in there to run the development function. Particularly, I'd like to point out that we continue to see industry-leading low levels of bad debt. Our bad debt write-offs in FY '22 across all products was 0.06% of lending and the average for the past 5 years has been 0.2% of lending. So that would rank very favorably with most lenders in the market. And we continue to responsibly offer low credit risk products to low credit risk borrowers and they're part of our DNA, and that's something we'll continue to do. Our balance sheet continues to remain strong. The headline cash of 8.2% is not the whole story about liquidity. I've got a slide on liquidity we'll talk a little bit about following this. But we saw a strong loan book growth and reduced our outstanding settlement liabilities, which is that merchant settlements outstanding in the middle of the balance sheet, down from AUD 10 million to AUD 3.1 million. And that was a function of moving our ACH processing out of QuickFee's own bank accounts over to the BlueSnap platform. So previously, we're in the funds -- we had all the funds on our ACH business flow through our own bank accounts. That is now being removed and creates efficiencies, both internally as well as freeing up working capital. And it also accounts for you'll see third-line bond payment processing receivables has gone from 0.9 to 0 because there's no timing difference on the ACH because we're out of the funds flow there. But encouraging to see both loan books growing. So on liquidity. We've already stated this, but I will state it again. We do have sufficient total cash and available borrowings to reach run rate profitability without raising more money by the end of FY '23. We keep our cash balance at a reasonably low level because with our facility, if you draw more, you pay more interest on it. So we don't draw any more cash than we actually need to. Our total liquidity, which is the available borrowings we can draw on today based on our loan book and the cash that we have in the bank is $16.3 million. As I said, that gives us adequate liquidity to execute on our growth plans throughout the course of FY '23. I'll now pass it over to Dale to talk a little bit about our facts on our technology platform and operations.

Thanks, Simon. Again, just to highlight slide here, I think it has been, certainly as the sub-header suggests, a transformational year. I think characterized by the fact that the vast majority of the heavy lifting from a technology perspective has been done and completed with the launch of the QUBE platform and the launch of Connect. That's not to say there is not continuous improvement in maintenance that's always required. Having run a software business for a bit more than 10 years, I'm certainly well aware that the software development never stops. But ultimately, you do reach a pick and then you do have a smoothing of what's required to maintain and manage the technology. But we do see we have a competitively strong position in the marketplace, improving automation and enhancing the user experience for our merchants and for their customers is critical. And we've been able to deliver that throughout the course of the past 12 months. The launch of Kepler has been another highlight as well, which is our merchant direct onboarding platform. It enables automation in underwriting and onboarding, and that allows us to create scale merchants and bring them on board. That will be launched in Australia as well to enable us to even better and more speedily bring on more Jim's franchises into the future. So certainly, from a technology and operations perspective, the message is that we have built out a robust infrastructure, a highly scalable infrastructure, and processing a little under $1 billion of payments through FY '22 is just the beginning. And we certainly believe that our platform is well and truly placed to continue to enable us to grow. Over the page on the subject of Integrations. Integrations are critical when we're dealing with professional firms. Clearly, professional firms operating practice manager systems that are the lifeblood and the heartbeat of their firm of their time and billings of their invoicing system. And we've got a terrific team of experts who have been able to manage integrations with some of the leading vendors in the marketplace. That certainly gives us a strong proposition. It certainly allows us to be embedded in the workflow of practices that we serve, and that can fit the ecosystem of us and it providing a range of payments and financing options to our customers. So you'll see more from us on integration moving forward as we identify critical practice management systems that will allow us to grow and scale and talk directly to clients of those systems. That brings us to the outlook and priorities for FY '23. And I think let me commence with the top line growth strategies, what are we really focusing ourselves on to continue to grow. And that's really identifying that we need to be narrower and deeper in our vertical of choice being professional firms. Certainly, we know there's momentum that we've developed in the U.S. Professional Services market. We can see that from the merchant growth and from the growth in payment volumes we're seeing. And we've got to continue to do more of the same and do it better and faster. There's really no secrets to any of that. We're certainly designed to increase our market share. The post-COVID conference circuit has opened up and is well and truly alive. Our teams are attending a broad range of conferences across the country in the U.S. And the reports coming back are they're well attended, that delegates are there in force and everyone is absolutely out back into a pre-COVID mindset in the manner in which they're identifying solutions and services and offerings that can help enhance their practice going forward. As Simon mentioned, we certainly will renew our focus on offering our financing solution and ensuring that our sales teams, given the market conditions and economic conditions, have our financing products top of mind for our clients. We feel like we have a huge amount of growth that can still be achieved out of the financing solution based upon where we are in the cycle. Within Australia, clearly our merchant base is solid and strong. We see very little attrition, but we see new opportunities to leverage the relationships we already have. One of those is by family law and disbursements funding where we see a range of opportunities that we look to as we move forward. Together with that, of course Bruce is very focused on extracting maximum value added with Jim's relationship, and we believe that can contribute strongly to our top line growth in Australian market. And then lastly, to what are the important strategic priorities and the outlook. Certainly Simon, Bruce, and I and the Board are focused on the search for a new CEO. And that remains our #1 priority as we sit here today. And clearly, that search has already begun. I'm heading off with Simon on Saturday morning to the U.S. to meet with a range of recruiters. And we've really developed a short list and we're excited about the prospect of bringing a new senior leaders into the organization to capitalize on the great work that Eric put in place in building a payment infrastructure and payments technology that supports where we've gotten to today. I think it's fair to say we will be looking for a very strong sales and marketing oriented CEO. Given the modest size of our business relative to others, we still need a very hands-on CEO, someone who understands the Professional Services market and someone who understands the payments landscape, and someone that can come in and capitalize on the investments that we've made to date. Clearly, reaching profitability is top of mind for us all. And naturally, we've invested heavily. And with a clear path to profitability now evident, we intend to remain focused and rigorous in terms of our expenditure going forward. And as Simon alluded to, our reduced cash burn will persist through FY '23. And we don't see any reason for deviating off the course that we're currently on, which will see us deliver run rate profitability by June '23. So with that, I think we'll pass back to Eric and open the floor for questions, if there are any. Again, I thank the shareholders for their support throughout FY '22 and we look forward to continuing to update you on our progress through FY '23.

[Operator Instructions] There are a bunch of questions that are coming through. We've got 20 minutes, so we'll do our best to get through them. A couple of questions coming through just around the increasing interest rate environment and how you see that impacting the business.

I can jump in there, Eric. That's a great question. We do see 2 things happen when interest rates in the economy go up. One that is that our offering, because we have a very pretty healthy margin on our financing product, we were able to move rates up and down very, very quickly and still make good margin, which makes our products very competitive against alternative borrowing, particularly for small, medium enterprises whose alternatives, maybe some cash flow lineal going to the bank. Those competitive loans are the ones that increase probably the quickest. So we have a lot of flexibility around staying competitive. It also becomes harder for SMEs to borrow through other lenders, whereas one of the real attractions about our business model is that it's very, very easy and quick for clients of accountant layers to basically take a loan to pay their fees. There's no type of check required for the actual client themselves because the firm is guaranteeing that loan. So a lot of loans can actually be approved there and then online. So given the flexibility we have in competing products, interest rates generally, when they arise, benefit us. The economy in general, there is a downturn in the economy. We tend to find that accountants and lawyers businesses do not suffer as much as others. In the U.S., in particular, the IRS does all the marketing we need in terms of accountants because every year, everyone needs a tax return done. Occasionally, you'll see a little, a small amount of discretionary sort of accounting work or legal work not happening. But generally, a lot of legal work is unanticipated and a lot of the accounting work is repeat work year after year. So we have a very sustainable base of merchants. And with the move to online more invoicing and more online payments, we really don't see any impact at all from a downturn in the economy, if anything. Business is struggling, thus the increased demand for borrowing.

Yes, you covered our further question there around do you expect lending to grow, but you've obviously covered off that in that current environment. You would expect that hopefully to be the case and to be a tailwind to the business. A question, just you talked about the U.S. How has the U.S. sales team going in getting traction in expanding market share in the professional market? And what are some of the marketing programs that have been undertaken to continue to grow the business?

Yes. One of the challenges we have when COVID first hitting the U.S. was the conference circuit stopped as overnight conferences cancelled. And the CPA conferences and events is a very, very active circuit in the U.S. There are a lot of CPA conferences, CPAs love going to them, and it's a very first hunting ground for our sales team to not only cement relationships, but generate new leads. You can go spend 3 days on the events and come away with 150 leads and then follow them up. So that is an area that we are really enjoying getting back to.

A question on the QuickFee Connect asking if it's proprietary software or if you license IP?

We've built that all ourselves. It's -- whilst it is a software, the way it works effectively, it goes into the databases of, say, CCH access and automatically then generates the invoice via e-mail with a link to clients. So they are served up to 100% of all the invoices. And that is our goal with that product is to get every invoice being issued by an accounting firm to be issued through the Connect platform and thus directing every client to a QuickFee payment portal. So every invoice can get paid either in full or through a payment plan, but we own all that software.

Next question I'll direct to you, Dale. It's in regards to your remuneration for key management personnel. Questions come through around remuneration has increased while net losses have increased. I guess, how do you marry those up? Maybe you can talk through some of the achievements made by key management as well.

Thanks for the question. Look, I think it's always a tricky one, right? I mean, we're operating in a well-publicized environment currently where the search for great talent is becoming more and more challenging, and more and more expensive. And that's not limited to QuickFee and it's not limited to our industry. I think we're seeing that across the board. And so our approach towards this is that we need to attract the very best talent in the door to enable them to deliver the results that we're seeking. Now ultimately, we've also made some significant investments in the future, and that's why you've seen the widening of some of those losses over the past few years. We see those as necessary investments, i.e., that of a CTO to be able to develop Connect and our Q platform, which don't come cheap and an IT development team, which doesn't come cheap. But ultimately, once we've achieved the milestone of delivery of those technology sets, we've been able to step down the expenditure and reduce the level of exposure on -- within those technology groups. But look, I think the challenge remains for us like all businesses, is to try to attract and retain the very best talent. Simon and the team have put together a wonderful share options plan as part of an incentive package, which I believe is benchmark through favorably against others. Again, as part of our alignment of interest of our staff with our shareholders and all of our collective objectives. So look, we don't shy away from the fact that you've got to pay to get good talent in the door and we hold those people accountable for their performance. And that's what we've got to do as we continue to search for the interim or the new CEO rather is put someone in place who's got the capabilities for us to deliver.

Maybe an extension to that question is you talked about the challenge in retained talent. There's a question here around the attrition level in the business. How have you gone in terms of retaining talent? And what sort of turnover have you had? And maybe on the flip side of that, you've obviously talked about lowering costs going forward. What does FY '23 look like in terms of headcount?

Simon…