Smartpay Holdings Limited (SPY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Smartpay Holdings Limited Release of FY '25 Full Year Results. I would now like to hand the conference over to Martyn Pomeroy, Chief Executive Officer and Managing Director. Please go ahead.

Thank you. Good morning, everybody, and thank you for attending, and welcome to our financial year 2025 results presentation. I'm Marty Pomeroy, Managing Director and CEO of Smartpay. And joining me for today's call is Cherise Barrie, our Chief Financial Officer; and Aidan Murphy, our Chief Business Officer. Before we begin, as you may be aware, Smartpay has entered into an exclusivity period with an international strategic in relation to a non-binding indicative proposal valued at NZD 1.20 per share. There is no certainty that any transaction will arise. And at this stage, I'm unable to provide any further comments. Please refer to the announcement made on the 2nd of May for further details. Smartpay shareholders do not need to take any action at this stage. Smartpay will continue to keep shareholders informed by market announcement in accordance with our continuous disclosure obligations. We will not have Q&A as part of today's call, but we look forward to meeting many of you over the coming days and of course, welcome the opportunity to meet with any shareholder that would like to have a direct engagement to discuss our financial year '25 results. Please just reach out to myself, or Cherise Barrie, if you'd like to arrange a meeting. We continue to execute through our 3-stage strategic plan with good progress made against all stages throughout the financial year 2025. Our ultimate ambition is to embed our solutions and brand within our customers' business and become true partners, realizing value accretion for ourselves, our customers and of course, our shareholders. In Australia, we continue to grow our market share in an increasingly competitive environment. Our focus has continued into the market verticals, where we see strong unit economics, and this has resulted in further penetration to these verticals and growth in our Australian revenues. Whilst the ongoing macroeconomic conditions have continued to pressure overall TTVs when compared to prior years. Our growing outbound sales capability is driving towards higher-value merchants, maintaining strong average revenue and margin per merchant. As a result of this activity, we're also seeing increased customer acquisition on our fixed price payments offering, simple flat rate and can see the broader opportunity we will execute into with our LCR product and POS and payments products when launched later in the year. During the first half of the financial year, we invested in our brand with a major campaign launched into Australia, coinciding with the launch of our next-generation Android payment terminal. Both have been extremely well received by our customers. The investment in the solution not only provides our business with a leading edge technology foundation for our merchant solutions into the future, it also provides the basis of our Trans-Tasman payments offerings and our launch into acquiring in the New Zealand market. Late in the second half of financial year 2025, leveraging this technology and investment, we entered into the pilot stage of the testing program of our New Zealand terminal acquiring solution. Entering into the pilot stage is a significant milestone for our business and the result of over 5 years concerted effort breaking into a market that has seen very little competition. And similar to our launch into the Australian acquired market is dominated by the major banks. Throughout financial year '25, we have also been actively engaged in developing our solutions for Stage 3 of our strategic plan, where we expect to deliver additional solutions and value to our Trans-Tasman customers. Our business unit economics continue to show resilience through the ongoing challenging economic conditions many of our customers are experiencing. As mentioned, whilst TTVs have remained soft through the 2025 financial year, a continuation of what we saw through financial year '24. Our focus on customer verticals with strong payment economics has delivered growth in our top line revenue. [ It means ] transacting terminal margin across our fleet with better revenue profile from newly onboarded Australian customers throughout the period being a theme. We maintain our focus of measured investment into our opportunities with investments in brands and incremental spend in our Australian marketing activities throughout the year compared to the prior period. And early investments into our New Zealand opportunity, largely focused on sales, onboarding, support functions and technical resource brought on over the period. As New Zealand acquiring revenues come online throughout financial year 2026, we would expect our operating leverage ratio, a key performance indicator for our business to return to pre-New Zealand investment levels and improve further over time. I will now hand over to our Chief Financial Officer, Cherise Barrie, who will take you through further analysis of our '25 financial results.

Lovely. Thank you, Marty. As Smartpay grows and the numbers increase in size, there becomes more pieces to the puzzle that make up the financial results as presented. Firstly, growth in revenue of $8.2 million or 8.5% on PCP in the current economic climate and with the challenges our merchants faced is a pleasing result. However, this only presents part of the picture. As highlighted in our FY '24 results, we were subject to specific competitor activity and the loss of a large white label customer in Q3 of FY '24. Whilst not material, this lost revenue needed to be replaced during FY '24 given the annuity nature -- sorry, FY '25, given the annuity nature of our revenues when looking at comparison to PCP. This growth continued to be delivered in Australia. Consolidated gross margins have been maintained at 58% for the year-on-year, which again is a pleasing result, as it reflects the maintenance of the underlying Australian gross margin and is reflective of the ongoing penetration into the higher-value merchants in Australia, together with the ongoing focus on our COGS cost inputs. At the commencement of FY '24 -- sorry, FY '25, we positioned our intention that FY '25 would be a year of investment in OpEx being both the investment in headcount and marketing to prepare for the New Zealand acquiring opportunity that we were unlocking and the launch of the new brand in Australia supporting the launch of the new Android terminal market. Further through the year, we have continued the investment and strengthening of our technology platforms, as we have transitioned from our on-prem to Infrastructure as a Service and Software as a Service. Marty has previously talked about the investment in Stage 3 of our strategic plan commencing this year. This has also resulted in additional costs being incurred during the year. These are expensed as they are software as a service. Depreciation and amortization has increased by $3.9 million, reflecting the capitalization of the new Android terminal management system and [indiscernible] together with the Android terminals now being deployed to the market from May 2024. And in the prior year, we had the benefit of depreciation holiday as the PCI 3 terminal fleet in New Zealand was fully depreciated in April 2024, but we were able to remain in market past that date, thereby giving a depreciation benefit. This has now come to an end. Additionally with the purchase of the THL customer contracts during the year, contract amortization has increased. Taking all of this into account, [indiscernible] were small loss before tax of $100,000 for the year compared to the prior year profit of $8.8 million. When we set out this FY '25 year, we commenced -- we have commenced the investment in the New Zealand acquiring opportunity, investing in Stage 3 strategic plan and launching new brands and terminal into the Australian market. On top of that, we did the THL acquisition. So there is a lot to these results that are reflective of our execution of our 3 stage strategic plan and overall, they are very pleasing.

Thank you, Cherise. We have continued to deliver against our clearly defined strategic objectives throughout the FY '25 year. Our business is structured to maximize the efficiency of our human resources, leverage our talent, where it resides and grow our business, whilst delivering exceptional operating leverage. As such, we work on the principle of one team, one organization, even though we operate in 2 distinct locations. Our corporate structure reflects this efficiency with many centralized functions largely resourced in New Zealand, serving our entire business needs. Given the differences in market structures in Australia and New Zealand and therefore, the unique sales process, onboarding process and settlement process required, we have built out localized capability in each country for these functions. During FY '25, we have recruited approximately 25 people into the New Zealand business in these roles to prepare for the launch of our acquiring solution. We have previously informed the market that the roles associated to the New Zealand opportunity are not expected to scale as we engage in the launch and execution of our opportunity. Therefore, as mentioned previously, we would expect as the revenue continues to build in Australia, and we generate new revenue in our New Zealand business that our operating leverage returns to pre-New Zealand investment levels and rapidly grows thereafter. We realized core revenue in both Australia and New Zealand through the development and deployment of our in-store hardware platform. In May 2024, we launched our next-generation PAX A920 Pro PCI 6 Android terminal. This terminal is both WiFi and GPRS capable, operating on the 4G GPRS network in both countries. All terminals deployed in Australia are certified to connect to the Cuscal network for processing and all operating payment applications and call modules have been developed in-house by our engineering teams. This same A920 Pro terminal utilizing the same payment application is the basis for our deployment of acquiring solutions into the New Zealand market, simply requiring configuration changes from our Australian version and with both countries being supported by a Smartpay developed and owned Android terminal management system. This approach provides a range of benefits. Firstly, a common terminal and Android operating system for both markets with common payment application has rationalized our R&D expense moving forward with only a single payment application to develop and maintain to serve both countries. This allows for more efficient use of our R&D investment moving forward to be deployed on new products and enhancements instead of operating 2 distinct compliance regimes across the markets we are growing into. Secondly, further customer solutions based on our technology platform can be remotely distributed to our entire Trans-Tasman fleet of devices through the use of our in-house developed terminal management system. QR payment solutions are an example of this. This allows for our business to consider business cases on the basis of rapid deployment and a greater network of opportunities. As we further develop our POS and in-store customer tool set, we expect to deliver the PAX Android Elys solution, a dual-sided tablet solution to a growing number of customers. Our current Trans-Tasman payment application can run on the Elys solution. Focusing on Stage 1 of our strategic plan highlights our organization's strong execution capability and embedded go-to-market prowess. Australian transactional revenue for the full year was up 8.4% PCP, reflecting ongoing growth into the Australian payments market, as I mentioned, in a challenging economic environment. With business closures in the SME space at record levels during 2024 across both countries we operate in and TTV still subdued due to the macro environment, this is a pleasing result for our team. Our Australian transacting terminal fleet grew to over 20,500 terminals, reflecting ongoing customer acquisition. The transacting terminal result also reflects the ongoing reality of targeting verticals with a reduced average number of terminals required per merchant than our existing base and the average number of terminals associated to customers closing being higher than those we are putting on, an ongoing trend from financial year '24. Especially impacting our transacting terminal results largely in the second half of the financial year, we have seen a number of customers upgrading from our legacy terminals in Australia to new Android terminals with a lower overall terminal requirement. This accounted for over 550 terminals used by existing merchants not being required by those same merchants post upgrading to the Android solution. With our continued focus on merchant categories with strong unit economics, we have maintained both our average revenue per terminal and gross margins, a very positive result given the macroeconomic environment. An indicator of our efforts focusing on different customer verticals is a close to 16% increase in our average ticket size from the end of March '24 to the end of March '25. This leads to processing efficiency, as we deliver similar revenues with lower processing costs on a per merchant basis. With a little over 8% share of our total addressable market in Australia now being served by Smartpay, the roadway ahead for continued growth is both clear and significant. Our story over financial year 2025 has been the refinement of our go-to-market efforts. Slide 13 illustrates the maturity and ongoing development of our go-to-market execution in Australia, as we continue our focus on verticals that offer strong payment unit economics. Our approach to growth in the Australian market is refined over the last 5 years. In the early periods, we were engaging with our total addressable market with fairly broad marketing messages through tried and tested channels such as Facebook, Google AdWords, SEO, et cetera. As our fleet of customers has grown, we have regularly reviewed, where the sweet spot in our TAM exists through the lens of some key payments unit economics. Our existing fleet has highlighted where within our TAM, there are merchant verticals with strong TTV, minimal prepayment exposure, lower-than-average international card usage and less discretionary spend. Having identified these opportunities, we have evolved our marketing capability and channels to include more direct engagement with opportunities and refine print and digital messaging into publications and online environments serving the verticals we want to engage with. We have coupled this with the recruitment of business development sales capability and the transitioning of our inbound sales capability to outbound sales capability to help directly engage with these verticals and execute on our marketing investment. This evolution also allows us to target opportunities, where we see value in our POS and payment solution and provides for a more engaged product conversation with potential customers. We expect to further develop our marketing and sales capability in these areas, as we transition from our historical lead spend model to a more direct-to-market model. This has resulted in ongoing customer acquisition, coupled with improvement in our customer unit economics when compared to our existing fleet profile. We have identified and qualified the TAM for each of these verticals, and the result is we have significant roadway ahead into these opportunities and have an increasingly decentralized risk to any particular industry vertical or customer demographic. Whilst we focus our outbound effort into these verticals, we obviously still engage through our wider marketing investment with broader SME customers. This presents as a highly sustainable go-to-market business model, and we have leveraged these insights to best prepare our business for growth and targeting into our New Zealand opportunity also. Our Trans-Tasman product coverage has unlocked access to a range of customers seeking to have a consolidated payments partner for their Trans-Tasman business, and we are already actively engaged with a number of these merchants. As part of our initial pilot program launched in February this year, we have installed our terminal acquiring solution into a range of customers across a range of industries with some of these being our pre-sign customers. Our pilot to date has been very successful and has reinforced some simple value outcomes for the merchant that highlight our point of difference in the New Zealand market. With simple pricing models tested, validation of our daily settlement procedures and monthly statements confirmed, we are pleased with the pilot to date as we progress towards launch. Pilot customers have been impressed with the ease of transition from their current acquirer to Smartpay, impressed with the quality of our hardware and software solution, a byproduct of our new acquiring merchants upgrading to our Android terminal and the difference in engagement and customer experience compared to their incumbent bank provider. Throughout April and into May, we've expanded our pilot to include more of the pre-sign customers from our calendar year 2024 sales activity and identified others in our fleet of New Zealand customers represent strong unit economics for conversion. The average revenue we expect from our pilot customers to date is around $400 per month. In context, this is the equivalent to around 10x the revenue we would receive from an average terminal-only customer in New Zealand. Or put another way, every acquiring customer in New Zealand is worth 10x 10 terminal-only customers. Expected average gross margin from the pilot customers is coming in between 30% to 40%. We expect the average revenue per terminal from New Zealand acquiring fleet to exceed $400 per month throughout FY '26. As we have previously stated, we would focus our attention on the higher value opportunities in our fleet earlier, where we could identify. In late December 2024, the New Zealand Commerce Commission released their initial decision paper post the review into the retail payments market. The commission's initial decision has the potential to dramatically change the payments environment in New Zealand with significant reductions in interchange costs proposed. This outcome would obviously positively benefit Smartpay, as it becomes a new acquirer in New Zealand with the changes allowing for a range of pricing models, and we see significant customer acquisition opportunity, as a potential result of this decision. As such, we are awaiting the final decision from the New Zealand regulator communicated by the commission to be the end of July this year prior to undertaking our full sales and marketing launch into the New Zealand acquiring opportunity. Our focus on Phase 3 of our strategic plan has progressed very well through financial year 2025. Our intent to deliver additional value to our Trans-Tasman small and medium enterprise customers resulted in the execution of 2 key agreements during the period. Our product road map will deliver a comprehensive in-store and payment solution to our customers, including point of sale, transaction and business performance reporting, cash flow management, analysis and forecasting, integration to accounting platforms and bank accounts and marketing tools. We have executed a white label arrangement with a POS provider, which will allow Smartpay to provide a complete POS and payment solution to the hospitality, retail and services vertical under our own brand and are on track to launch this solution during calendar year 2026. We have also executed a partnership with an exclusive period to deliver a next-generation merchant ecosystem, a comprehensive small business tool set to our Tans-Tasman customer base, also under the Smartpay brand. Phase 1 of this solution will be delivered towards the end of Q1 this financial year. With Stage 1 of our strategic plan well underway, Stage 2 now crystallized in market and pending launch and execution, the material potential and prospects for our organization are a reality. Our organization is well prepared, efficiently structured, aligned and highly determined to deliver on our Trans-Tasman opportunity. The significant growth in consolidated revenue realized since launching our Australian acquiring solution from nothing will now be accelerated with significant growth in New Zealand revenue from our captured base of over 24,000 merchants. Our execution effectiveness is undeniable and evidence in our performance to date. Maintaining our cost base to the necessary capacity to deliver this revenue accretion will deliver significant operating leverage over the coming years. The future for our business is bright. That brings to a close today's results presentation. Thank you, again, for attending. We look forward to meeting with many of you over the coming days. And again, if you would like to arrange a meeting with myself and the team to discuss our financial year 2025 results, please feel free to reach out directly to myself or Cherise. Thank you.