QuickFee Limited (QFE) Earnings Call Transcript & Summary

[Audio Gap] everybody, and good evening to those joining from the U.S. Welcome to the QuickFee first half FY '24 business update webinar. On our call today, we have Simon Yeandle, CFO and Jennifer Warawa, President North America to run through the presentation. And my name is Katie Mackenzie, Investor Relations for QuickFee. The presentation will run for about 30 minutes, and then we'll open up for Q&A. We won't be using the hand-raising function. So if you have any questions, please type them into the Q&A tab at the top of the screen. If we don't have time to get through all the questions today, then we'll reach out to you directly after the webinar. And now I'd like to hand over to Simon Yeandle.

Thank you, Katie. Good morning, everyone. We're pleased to announce solid half year results. All key metrics are tracking upwards. We delivered strong revenue growth, a significant expansion of our higher-margin finance product, yield improvement and improved profitability in both Australia and the U.S. These are all great outcomes separately, but taken together, it really shows there is positive momentum in the business. Specifically diving into the numbers revenue was up 35% on pcp to AUD 9.3 million. In particular, revenue from our finance or pay-over-time product was up to 57% in Australia and 58% in the U.S. Gross profit was up 27% to $5.7 million. Operating expenses were up 4% after an additional $0.5 million of nonrecurring product development expenses, and we'll talk more about that later. EBITDA after interest expense or $0.9 million improvement up 25% to negative $2.7 million. And we expect H2 FY '24 to deliver stronger revenue and EBITDA than H1 as we get closer to delivering profitable EBITDA. On the next slide, our flagship finance product continues to show increasing adoption in both the U.S. and Australia. With TTV growth really starting to accelerate in the U.S. as a result of Jennifer's strategic changes she's made over the last 6 to 12 months. In particular, October, and then December both posted all-time record lending volumes for any month in the U.S. We've achieved almost USD 25 million on a rolling 12-month basis in the U.S. and over $50 million in Australia for the first time ever, and finance revenue is down 59% of total group revenue. We're now growing without increasing our product loss ratio. We've continued to incur minimal bad debts with our low credit loss business model where firms guarantee the payment plan taken out by their clients. On the next slide, this was in the Q2 webinar we held last month, but it's important to understand as finance revenue becomes a larger contributor of our revenue. As we have seen finance revenue growth this year was 58% in the U.S. and up 57% in Australia. This breakdown shows a split between price and volume growth. The chart on the top right of this slide shows Australia lending volume for H1 FY '23 and then H1 '24. Then the revenue yield percent we make from that volume, which is just revenue devoted by volume. And on the far right, where the current half revenue growth over TTV has come from. In that last column, you can see $0.5 million of revenue growth is from the higher volume of lending and another $0.8 million is from the increase in the rates we charged over and above the TTV revenue of $2.3 million. Similarly, in the U.S. chart, bottom right, USD 0.25 million has come from volume growth in H1 FY '25 -- FY '24, sorry. And USD 0.2 million come from yield growth over the prior year revenue. That bottom chart is in U.S. dollars. Interest revenue from lending naturally increases as we write more loans just based on the higher volume of those loans. And because interest is recognized over the life of these loans typically with an average loan life of between 9 and 12 months. There's a long tail of revenue to be recognized about higher yield in FY '24 from those loans already made. So there are two levers of growth, both price and volume in our core finance product. Over on the next slide, again, we presented this data last month. But for those of you who missed the Q2 update, I'm keen to outline the seasonality in our business and how our fiscal year performance is split into two halves. The chart on the left shows quarterly revenue with Q4 traditionally the strongest quarter in any year. You can see in FY '22 revenue grew from Q2 to Q4 from $2.5 million to $3.5 million. And the next year in FY '23, Q2 revenue grew from $3.7 million to $4.3 million in Q4. On the right-hand you can see our track record of revenue growth by half years. So we expect similar trends to continue in the second half of FY '24. Volume growth doesn't always increase across consecutive quarters, which is the main reason we look at growth over the same quarter and the same half versus the prior year instead of the immediately prior quarter. Q2 and Q4 traditionally the stronger quarters in both markets, but for different reasons. And what drives that seasonality? We've put a few comments down the bottom half of the screen, just to explain that. Q1, which is July to September, is the Northern Hemisphere summer in the U.S. and the vacations that have taken impact activity there. In Australia, it's the start of the financial year, and that's usually less busy. The Q2 December quarter is the lead up to the 1 January tax season start in the U.S. and firmly keen to invoice as much as they can before they get busy with tax season work from 1 January. And in Australia, similarly it's the lead up to the long summer break firms rush to complete work before the long summer holidays. Q3 is tax season in the U.S., which runs from 1 January to 15 April and firms are busy with tax return work with seasonally less invoicing happening. In Australia, January is particularly quiet for the long school holidays. And in the Q4 June quarter, U.S. tax season is finished and the backlog of billing is done and in Australia, it's the lead after the end of financial year and firms want to collect as much cash as possible before 30 June. So Q2 and Q4 are the stronger in any fiscal year and Q1 and Q3 tend to be softer. In total of that revenue there's a slide here that breaks down our EBITDA and operating expenses, and we've seen steady improvement in EBITDA in recent consecutive half years. We show EBITDA after interest expense, which reflects the cost of our funding, we're funding our loan books and is really a direct cost of doing business. The chart top left here shows EBITDA by half and top right, operating expenses in total, again, by consecutive half year. EBITDA was flat for the last two halves however this most recent half is the weaker of the two [ traditionally in a ] fiscal year as I've explained. In addition, we incurred $0.5 million of one-off product development expenses relating to consulting work and some work transitioning to a lower cross product development structure going forward in H2. Total operating expenses increased from $7.7 million H2 FY '23 so immediately consecutive half year to $8.4 million H1 FY '24. About $0.7 million increase is due to that $0.5 million product development cost and also there's $0.2 million of share-based payment expenses this half, which was nil last half. So the $0.2 million and $0.5 million is really the reasonably increased of the $0.7. And the four charts of the bottom show our four OpEx categories across the last three consecutive half years, so, H1 FY '23, H2 FY '23 and H1 FY '24. All these categories show underlying reductions remain approximately flat and we expect our cost based to remain broadly stable for the remainder of this fiscal year H2 FY '24. So in summary, we expect revenue to continue to trend upwards and costs to stay relatively flat, which gives us confidence H2 FY '24 will deliver improved EBITDA over H1 this year. I'll now pass over to Jennifer to talk a little bit more about our platform and what we do.

Great. Thank you, Simon. So I wanted to take just a few moments to recap what the QuickFee platform includes and what our primary product offerings are. Founded in Australia, QuickFee has been in business since 2009, entering the U.S. market in 2016. Since our inception, we've really had one mission to help professional service firms get paid faster. QuickFee's payment platform allows the firm's clients to Pay Now through ACH, EFT or credit or debit card, which we refer to as Pay Now. Think of this as traditional digital payments. Then we also offer a lending option that's proprietary to QuickFee called QuickFee Finance. This pay overtime option allows clients to pay their invoice over 3, 6, 9 or 12 months, while the firm gets paid in full upfront at no cost to the firm. Finally, our Connect product is a significant growth enabler in the U.S. market. Our existing customers have a combined annual revenue of around $10 billion. Right now, only $1.2 billion of that annual revenue is processed through QuickFee. The remaining $8.8 billion is primarily being received by the firm in the form of checks. As digital payment adoption in the U.S. accelerates, our total transaction volume organically increases. In other words, as the U.S. market continues to mature in its digital transformation journey there's over $8 billion in annual transaction volume we could capture from our existing customers alone. This is where Connect comes in. Connect provides integration into leading practice management solutions, helping turn a manual, often paper-based invoicing process into an automated digital process by sending out the invoices generated within the practice management solution by e-mail. These invoices have a payment link on them, which sends the customers directly to the QuickFee payment page. We currently have three integrations, CCH ProSystem fx, CCH Axcess and IRIS Practice Engine, and we have a number of others in the queue, including Thomson Reuters Practice CS, which our product and development teams are hard at work on as I speak. While the majority of our customers in the U.S. are accounting on legal firms, we also recognize the importance of having a strong secondary vertical. Well, tax season is upon us in the U.S., it's the perfect time to pursue those secondary verticals in a more strategic, targeted way. Secondary verticals that we're pursuing include recruiting firms, management consulting firms, marketing agencies, training and development firms as well as architectural and engineering firms. We've already seen some early success in the pursuit of some of these verticals and are putting a number of irons in the fire and then doubling down where we get traction. Now I'm going to walk you through why we're well positioned for growth in the U.S. market. We've made a number of advancements in the U.S. business that are starting to deliver results, particularly in the commercial function. We've launched new commission plans that incentivize finance volume. We've automated our sales and onboarding processes as much as possible to expand reach and scale in the most efficient and effective way and have added partnerships that help us reach firms on a one-to-many basis. I'll be speaking to these efforts in a bit more detail in just a few minutes. What I want to call out on this slide are the results that these activities have yielded. Our new firm sign-ups are up 12% over H1 of last year. Our average annual revenue of our new firms in H1 is up 67% over H1 of last year, which speaks to the quality of the firms that we're attracting and signing. The number of new firms that signed up for QuickFee Finance is up 71%. But the statistic that I'm probably the most proud of is the finance transaction volume driven by new firm sign-ups, which is 17x what it was last year in the same period. So this is the finance transaction volume driven by new firms that signed up in H1 of FY '24. Our sales team has done a better job of selling the value upfront and our relationship managers have done an exceptional job of onboarding and activating our new customers. On the next slide, you'll see that we've seen strong revenue growth in the U.S. with revenue up 24%, driven by 58% growth in U.S. Finance or Pay Over Time revenue to AUD 1.9 million, an 18% growth in Pay Now revenue to AUD 3.3 million. We've also delivered improved profitability with an improvement in adjusted EBITDA to negative $0.3 million and tracking towards operating profitability. From a gross margin perspective, we've been impacted by higher interest rate expense due to rate rises and higher borrowings to fund loan book growth. Finally, our new customer acquisition has seen strong growth in firm numbers, up 9% to $757,000 as well as customer numbers up 10% to $148,000. Now let's dive into our strategic priorities in the U.S. Our new sales strategy and operating rhythm, led by Chris Smith, has been a significant driver of our revenue growth in the U.S. market. Chris has led the transformation of the sales and customer success functions and there are a few highlights that have been instrumental in delivering our first half results. A new and unified consultative sales and on boarding process has been implemented for the sales and relationship management teams. This enhanced sales process exposes billing challenges the firm has experienced prior to adopting QuickFee, and then the on boarding experience is tailored around solving those challenges collaboratively with the firm. The sales and relationship management teams work hand-in-hand with one another, ensuring that the customer accelerates their time to value received from QuickFee. And as mentioned in an earlier slide, the emphasis on QuickFee Finance on boarding has led to a 17x pcp improvement of finance volume generated by new firms. Furthermore, significant updates were made to the sales technology stack that strengthened the entire sales process from prospect to close. LinkedIn Sales Navigator and LeadIQ were implemented for enhanced prospecting, while Gong was implemented for improved coaching, deal management, automated and personalized e-mail marketing and AI-assisted note-taking and call summaries. In addition to the transformation driven in the sales and customer success functions, we continue to aggressively pursue once many partnership opportunities. Our go-to-market support continues to progress with our recently formed partnerships with Allinial Global and IRIS Software and at the same time, we strengthened our partnership with the BDO Alliance. You can expect to see some new partnerships announced in the near future as we finalize conversation with a number of key players in the market. Finally, we continue to accelerate the development of our technology under the leadership of our CTO, Dave Moore, who was appointed in H1. A key focus area and development effort is around Connect, which enables increased transaction volume as shared before. Our goal is to ensure we continue to be cost effective in our development spend while still delivering a world-class product to the market. So now let's move over and take a look at the Australian business. As many of you know, in Australia, we're well established as the market leader, and Bruce Coombes, our founder, continues to lead the team to sign up new firms and drive organic lending growth. Both TTV and revenue have seen consistent growth over recent years, and we expect to continue to post growth as economic conditions work in our favor and as we track towards record lending for the full FY '24 year. In Australia, we delivered strong revenue growth in the first half with revenue up 52% to $4.1 million, driven by a 57% increase in finance revenue to $3.6 million. Additionally, the Australian business was EBITDA positive and transitioned to profitable operations in H1 FY '24 driven by strong growth in the higher-margin finance product. I'm now going to hand it over to Simon to walk through the detailed financials before I wrap up. Simon?

Thank you, Jennifer, and a little bit -- I'll look at the detailed P&L here, and this is H1 FY '24 versus H1 FY '23, so the July to December period for this year and again, 12 months ago. That's -- we've talked a little bit before about some of the immediately consecutive halves. This is against the period 12 months ago, which more accurately reflects the revenue seasonality. So we've seen revenue up 35%. As Jennifer mentioned, interest expense has increased to $2.1 million. Two factors for that, higher interest rates on our borrowings, which are linked to the U.S. and Australian cash rates. Obviously, they've increased over the period, that's driven some interest expense. And then secondly, our level of borrowings has increased as our loan book grows and interest expense will tend to track with the increase of the loan book as well. So we'll continue to fund that loan book growth through borrowings. A small increase in cost of sales, cost of sales is primarily payment processing and credit underwriting costs and with that, gross profit was up $1.2 million or 27% to $5.7 million. An overall increase in OpEx of $0.3 million from H1 FY '23, including $0.5 million of nonrecurring product development expenses, I already mentioned. EBITDA was up by $0.9 million and NPAT up by $1 million to negative $3.4 million. Headcount saw 1 additional FTE to 48, and our bad debt write-offs were $66,000, which is 0.1% of total lending. This demonstrates the low credit risk nature of all QuickFee's lending products on the firms we underwrite. Our finance product provides low credit risk payment plans. As I've already mentioned, are reinforced by our professional firms guarantee of their clients' payment plans. Over on the balance sheet shows loan book growth of $4.6 million and borrowings up by $9.9 million. The borrowings fund loan growth that I mentioned and also operating cash burn, and we expect this to decrease in H2 in operating cash burn. We saw good growth in both loan books, in particular, the U.S. book, which was up USD 2.1 million or 26% to USD 10.1 million. Total cash was up $0.5 million from $3.4 million to $3.9 million. And there was also a $1.9 million decrease in current liabilities that were paid down from 30 June during the current period. On the cash flow slide, on the left-hand side is a summary cash flow statement in the usual statutory format. On the right is the reconciliation from loss for the period to operating cash flow. Our operating cash flow is comprised of 2 main elements. The first line net cash outflow from operating activities of negative $2.9 million really represents the operating cash burn from running the business, and that will become positive once we're profitable. The second line, net cash outflow from loan book firm funding of $6.3 million represents cash outflow from funding our loan book growth. And that loan book growth is funded from a mixture of debt facilities at 85% to 90% advance rate and our own first loss funds at 10% to 15%. So as our loan book continues to grow, then the second line will continue to be negative. A quick summary of our facilities here and facility growth capacity. In December 2023, we finalized a AUD 10 million facility with Australian lender Wingate to support growth in the Australian legal disbursement funding product, and this provided about $4 million of additional liquidity on close in late December. We don't draw any more cash from the facilities that we need to just to minimize interest expense, but we do to operate a float that enables us to settle loans as soon as we can. We're comfortable we have sufficient cash reserves to fund the 10% to 15% equity contribution required for loans written as the loan book grows, while we reach profitability. There are no planned equity raises, and I said cash reserves are expected to be sufficient to fund that growth while we reach profitability. And with that, I'll hand back to Jennifer to wrap up.

Great. Thank you, Simon. So in summary, we expect growth in both the U.S. and Australia to continue, supported by economic tailwinds and the continued modernization of the U.S. payments landscape. The strong first half of FY '24, along with our strengthened management team gives us confidence that we will continue to build on our existing momentum as we execute on our growth strategy. We'll continue to focus on progressively reducing cash burn in H2 FY '24 with a narrower focus on cost-effective product development. We have not provided revenue or earnings guidance for FY '24. However, as we track towards profitable EBITDA these recent results give us confidence that we can expect to deliver improved revenue and EBITDA over H1 FY '24. I'd like to invite all of you to join us for our Investor Day at 9:00 a.m. Australian Time on Thursday, March 21, 2024. In that presentation, you'll get the opportunity to hear updates from key members of the U.S. management team, learn about strategic growth priorities and hear our growth ambition over the next 3 years. I'll now hand it back over to Katie to facilitate the Q&A with any questions that came in during the presentation.

Thanks so much, Simon and Jennifer for that really comprehensive presentation. So we do have a few questions that have come in. So the first one, I think, for you, Jennifer through. You talked in the presentation about the refined growth strategy, delivering early results, and you had some impressive stats there across the full metrics. How should investors think about the trajectory of those metrics moving forward and how you sort of think about those metrics internally?

Yes. I think we're tracking a number of metrics across the business on a weekly basis. You're seeing some of them in that slide, but that's probably 10% to 15% of what we're tracking overall. We have our eyes very closely watching all of the numbers. I think one of the things that I'd call out is that we're -- that we have a number of different irons in the fire, and we're trying a number of different strategies. And every time we click on something that works and delivers results, we're doubling down on it. And so, we have a number of ingredients in our recipe book, if you will, that have worked and continue to deliver, but we continue to lock in to new and improved ways to do things, and our onboarding -- our new onboarding approach shows exactly that in that 17x transaction volume for QuickFee Finance from new customers. So I think we just continue to dial into the recipe that delivers that growth, and we doubled down on it and then click into the next winning part of the formula.