Tyro Payments Limited (TYR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Tyro Payments Limited FY '22 First Half Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Robbie Cooke, Managing Director, and CEO. Please go ahead.

Thanks, Emily, and good morning, and welcome, everybody, to Tyro's Half Year Results Call. I'm joined by Prav Pala, our CFO, who will be presenting with me this morning; and Giovanni Rizzo, our head of Investor Relations. Our plan today is to focus on our published half year results for FY '22 and our key accomplishments in the half. We'll also provide an update on our trading for January and February, and we'll talk about some of our key areas of focus for the balance of FY '22 and beyond. Prav and I will spend about 40 minutes running through our results, and then we'll take questions. And we'll talk to the slide pack circulated earlier today, which is also available on our website. Just for noting, a recording of this morning's call will be posted on the Investors section of our site shortly after the session to ensure those who are not able to dial in live can listen at their convenience. So with the formalities out of the way, we'll get started. And before I talk about our results, I just wanted to reinforce what Tyro stands for and our position in the market. We are a technology-focused and values-driven company. We provide more than 61,000 Australian merchants with payment solutions and complementary banking products, largely developed on our core proprietary technology platform. We're creating an integrated ecosystem with payments at its core, enhanced by value-adding features and products designed to attract new merchants and retain existing ones. The majority of our customers are small and medium-sized enterprises operating in the core verticals of health, hospitality, and retail, and our purpose-built solution been designed with those merchants' needs and preferences in mind. So turning to Slide 2 and highlighting some of our key accomplishments in the half as we continue to execute against our growth plans. Most significantly, we achieved a record half year with a 31% lift in transaction value to $15.8 billion for more than 61,000 merchants partnering with us, clearly demonstrating our ability to continue to capture segment share. This was no small feat in a period punctuated by lockdown that impacted many of our merchants, particularly those in the hospitality and retail sectors in New South Wales, Victoria, and the ACT. Adding to this is the fact that we did not get the tailwinds that others get from the COVID-induced spike in e-commerce transactions, given the card-present skill of our book. To put our performance in perspective, our growth is 6x that of the overall card payments market, such that we now hold a 4.4% market share. The importance of our alliance with Bendigo Bank came to the fore in the half, delivering its first full 6 months contribution. The alliance added $2.5 billion in transaction value to Tyro. This run rate being spot on with the estimate we provided back in October 2020 on first announcing the alliance. We also called out that our payments business performed strongly, whilst carrying the cost of actions designed to assist our merchants as COVID lockdown continued. This included the provision of terminal rental relief to COVID-impacted merchants and the deferral of pricing adjustments that we typically make, [ Android ], to offset scheme and interchange fee increases. Given these actions, the 25% lift in statutory gross profit to $68.1 million for the group's payments business was a strong result. After allowing for the gross profit share of payable on the Bendigo Bank alliance, our normalized gross profit left for the payments business was up 20% to $65 million. Also of note, we had the first full 6 months contribution of our core fintech business, Medipass. This acquisition being a key plank in our strategy to continue to build out our health vertical. It provides Tyro's health merchants greater planning and payments capabilities, which I'll talk a bit about later on. We also continued to invest in our Tyro Connect integration hub, which amongst other key features is providing unique data insights to some of our merchants on the Connect platform. We delivered a positive EBITDA result of $2.8 million and whilst lower than the $8.5 million generated in the first half of FY '21, it reflects our continuing investment in growth initiatives, including the recently announced exclusive partnership with Telstra, also reflects the absence of any JobKeeper benefits in the period, some wage inflation impacts and first-time costs associated with our newly acquired Medipass operation. Turning now to Slide 6 and 7 in the pack. We have a high conviction in our ability to accelerate our growth over the medium term. There are 7 core areas of focus in that regard. Firstly, our focus on our core verticals and providing built-for-purpose payments tech tailored Australian merchants in those core verticals. We have demonstrated the traction here consistently over the years. Just looking at our performance since our IPO in December 2019, our transaction value CAGR is 29%, and our merchant count CAGR was 46%. We have every expectation this time it continues. Secondly, we are seeking to drive economies of scale, and we are demonstrating operating leverage in our business, which is important to us as we continue to pursue the considerable growth opportunities available. Delivering strategic partnerships only possible where the proprietary platform can scale is another core area for growth. We have developed unique IP in our Bendigo alliance and our Telstra-exclusive partnership, and have a keenness to explore further opportunities to partner with others where we can access the changes in segment share. Investing on our health business is an important growth initiative for us. With Medipass now integrated into our existing health vertical, we have the ability to offer a unified health payments and claiming solution that extends beyond private health insurance and [ claim ] to include a range of state and federal-based compensatory funders. The approach taken with Medipass is consistent with our overall strategy to build out through acquisition where there is distinct opportunity to gain scale and enhance our segment position. The fifth pillar is our demonstrated capability to make strategic investments to enhance solutions to our merchants. And this also remains an area of focus. Examples here are our tactical investments in me&u and Paypa Plane, which are both progressing strongly. On Slide 7, we've highlighted our still-nascent e-commerce offering, and the opportunities to expand particularly working with ISVs or independent software vendors, such as me&u, which are seen as opportunities to gain scale more quickly. The seventh pillar of the growth is cross-selling our ancillary products to our merchant base, such as our merchant cash advance loans, which are a perfect product for many SMEs. And finally, adding new core verticals. This is where the Tyro Go reader has a key role to play. It opens up the trade vertical, provides the potential queue-busting solution for larger format retailers and provide a fit-for-purpose solution to micro merchants. I'm looking at our financial results at a high level. Prav will spend a bit more time on this in a moment. Clearly, it continued to be a challenged period with COVID lockdowns, particularly in New South Wales and Victoria, and the ACT disrupting our merchants. Given this environment, and as has indicated throughout the pandemic, we maintained our focus in actions designed to assist our merchants navigating COVID impacts. As I mentioned, this included delaying price increases that we ordinarily would undertaken -- we would ordinarily have undertaken to offset increases in scheme and interchange fees. We also included providing terminal rental relief and also providing loan repayment relief. Despite these actions, our business performed strongly in the half. In summary and as I mentioned, our transaction values were up 1%. Group revenue was up close to 30% of $149.2 million. Our payments business generated a statutory gross profit result it was up 25% at $68.1 million. And after allowing for the Bendigo alliance gross profit share, the normalized gross profit result was $65 million. Our banking business generated a 35% lift in gross profit of $2.4 million and we produced a positive EBITDA of $2.8 million, whilst lower than was $8.5 million generated in the first half, it does reflect the absence of $4.5 million in JobKeeper benefits received last year, and the first time cost associated with our newly acquired Medipass operation and some wage cost increases. Turning now to Slide 6, and providing some additional color around our payments operation. As mentioned, the value transactions processed in the year lifted 31% to $15.8 billion, notwithstanding the challenges in the year. The addition of the Bendigo alliance for the full 6-month period contributed $2.5 billion. This amount is closely assisted by a 15% increase in merchants selecting Tyro as their payments provider, excluding the close to 18,000 or more than 18,000 Bendigo merchants. With the Bendigo merchants included, we ended the year with 61,554 active merchants on the books to be precise. Merchants in our 3 core verticals, health, hospitality, and retail represented 85% of our merchant count and made up 92% of our transaction value for the year. Our strongest transaction value growth is the level of our health vertical which is up 17%, with hospitality growing 12% whilst the retail vertical grew 5%. Our largest state by transaction value contribution with New South Wales is 32%, followed by Queensland at 25%, and Victoria at 22%. All states, other than New South Wales and the ACT, experienced double-digit transaction value growth. Victoria was the strongest at 31%. Very pleasingly, new merchant sign-ups touched approximately 1,200 new applications per month. And now with 104,000 terminals in the field, we remain the fifth largest merchant acquiring bank in the market sitting ever closer to the 4 major banks. We continue to sign [ through the year ]. Our prompted brand awareness has lifted to 23%, up from 17% a year ago. I'm very pleased given the experience a year ago, our partner retention rates remain very strong with our churn measured by transaction value relatively steady at 9% compared to 8.7% for FY '21. And our churn rate by [ medtech ] number at 10.1%, which is down from 11.3% in FY '21. So now turning to our banking operations. And just if you can turn to Slide 21, please. Although our banking operations still only represents a small part of our overall business, it does present an alternative to the major banks and has strong prospects for continued growth. Our products are focused on providing our customers with innovative ways to meet their transaction banking and unsecured lending needs. Our Tyro bank account is a fee-free interest and transaction account. And now we have just under 5,000 Tyro merchants actively using that account, which is up from about 4,000 a year ago with $96.4 million on deposit as at 31 December 2021. Our term deposit offering, which is available through the Tyro app of $4.4 million in term deposits as at 31 December 2021. Our cash flow, unsecured loan product is designed to assist SMEs in growing their businesses. This business loan is repaid from a merchant selected predetermined percentage of card transaction volumes that's generated by the individual business and is offered on the basis of an upfront fee. The innovative feature of this product is that repayment cycle up or down in accordance with the merchant's Tyro card transaction volumes. Our merchant cash advance loans returned to strong growth as we expect to an automotive payment approval process enhanced. This followed a period of manual process to mitigate the risks inherent due to COVID volatility. We also expanded this product to make it available to a wider cohort of Tyro merchants with larger advances available. We wrote $36.2 million in loan originations in the half compared to $2.6 million in the same half last year. The average loan growth in the half is around about $41,000 compared to $220,000 a year ago. And the average length of the loans was 6 months, which was pretty much in line with the prior periods. The team managed the risk in this portfolio posted operating losses at a very low $0.1 million. I'll now hand over to Prav, who's going to take us through our financial position in more detail, and I'll return after that to discuss our outlook.

Thank you, Robbie. If you could all please turn to Page 9 for an analysis of the financial performance. The half year continue to be disrupted by COVID with New South Wales and Victoria in lockdown for a significant portion of the 6 months. Under normal conditions, these states would represent a combined 60% of Tyro's transaction value. With this backdrop in mind, financials were strong with 3 key takeaways. Firstly, the results reflect sustained growth. In addition to organic growth, the Bendigo alliance and Medipass acquisition in FY '21 contributed to recording total transaction value growth of 31%. This was achieved in a period when total card payments acquired in Australia stayed flat. Secondly, financial resilience. Our strong capital position allowed us to execute on our strategy while continuing to do the right thing by our 61,000-plus merchant base with repricing deferrals and rental waivers. And thirdly, a renewed focus on our banking offerings. Compared to pcp, we cautiously but steadily increased our lending book reflected in originations of $36.2 million over the half year versus only $2.6 million for the first half of FY '21. In November 2021, we originated a record of $8.2 million in monthly originations. The half year was, of course, not without challenges, as I will go through in more detail. Margin compression in the payments business was greater than expected, partially due to our decision to defer a fee increase coming out of our annual pricing review. On the expenses side with 46% of our permanent headcount in the technology space, we experienced greater than the average wage growth, and turnover. While our full year results for FY '21 followed the acquisition of Medipass and the announcement of our alliance with Bendigo Bank, this is the first time we're presenting results as a group for a full reporting period. The nuances of the Bendigo alliance are significant, and it is important to review the Tyro core business and the Bendigo book in addition to the performance of the combined business. To that effect, certain items have been normalized and detailed on Page 31 of the pack for your reference. However, in summary, $3.1 million has been deducted from the statutory gross profit, which is made up of $4.4 million commission payable to Bendigo. From a technical accounting view, this commission is treated below the line as amortization when it really should be deducted from EBITDA. The opposite adjustment is made to the amortization expense, although the amounts won't exactly aligned as a Bendigo intangible is amortized on a straight-line basis over 10 years. $1.35 million is added back for processing and other fees currently incurred by Bendigo on merchants being migrated to Tyro. This is a temporary expense, which will reduce as the rollout progresses. $1.3 million is deducted from operating expenses, the majority of which, again, is to do with transitioning the remaining Bendigo merchants who have been [indiscernible] to Tyro, but yet to be migrated. Normalizing these and jumping straight into the results. We reported gross profit of $68.1 million versus $61.2 million in the pcp, an increase of 11.3%. A key callout here is $4.5 million of JobKeeper income, which was included in the pcp and not normalized. Additionally, there was margin compression in the core Tyro business, in part due to a decision to defer price increase scheduled in the first half. Gross profit of the underlying business is better understood by looking at the payment segment, which contributed 95% of total gross profit and which grew 25% on a statutory basis or 20% on a normalized basis. Operating expenses of $65.3 million was up from $52.7 million in the pcp, an increase of 24%. I should highlight that this half presents Tyro as a group and therefore includes the cost of Medipass as well as the cost of the Bendigo alliance for the full 6 months, whereas the comparative half was Tyro stand-alone only. As a result, we reported EBITDA of positive $2.8 million compared to $8.5 million in the pcp, noting that the comparative period included JobKeeper income of $4.5 million while the current period includes $1.8 million of EBITDA losses from the nascent Medipass business. With these high-level results in mind, I will go to the gross profit of each segment in detail, shown on the right-hand side of Page 9. Of the group gross profit of $68.1 million, payments contributed $65 million versus $54 million in the pcp, growing 20% as this segment contributed 95% of gross profit, I will spend most of my [ answers ] on payments. However, details of the other segments are provided in the pack. Banking contributed $2.4 million, which although small is growing and represents an increase of 35% with the pcp gross profit of $1.8 million. You will recall that we consciously limited lending during the first wave of COVID. Since then, we have renewed our focus on lending and we originated $36 million in the half year compared to just under $3 million in the first half of FY '21. The credit quality of the book was strong, and we reported fair value gains in gross profit for both halves. Finally, other income of $0.7 million compared to $5.1 million in the comparative half, a decline of 87%. This is simply JobKeeper income of $4.5 million reported in the prior period. For your analysis, you would discount the JobKeeper income in assessing the underlying business performance. Taking the focus back to the payments business. If you could please turn to Slide 10, which provides a transaction value analysis. We started the financial year with New South Wales already in lockdown and a significant number of merchants not transacting were over 68% of the reporting period. In a normal period, New South Wales constitutes around 37% of Tyro's transaction value. Furthermore, Victoria was in lockdown for 73 days in the period, Victoria normally accounts for over 23% of Tyro's transaction value. Despite the challenges faced by our approximately 61,000 merchants, total transaction value grew by 31% to $15.8 billion. Breaking the $15.8 billion down, the Tyro core book grew 10% to $13.3 billion compared to $12.1 billion in the comparative period, while the Bendigo alliance contributed $2.5 billion, which was in line with our announcement in 2020. Taking a segue into the gross profit analysis, which is on Page 11 and 12. The gross profit metric is the main indicator of our business growth as revenue shifts with underlying card mix and its associated direct costs. Recapping, the payments gross profit was up 25% to $68 million on a statutory basis, and 20% on a normalized basis to $65 million. We focus on normalized gross profit as this provides a more accurate reflection of the underlying business performance. Given approximately 16% of the transaction value process was for the Bendigo portfolio, it will provide greater clarity to separately analyze both books. The Tyro core book is analyzed against the merchant acquiring fees or MAF margin graph on the right. This metric directly correlates with the transaction value and excludes nontransactional-related income like terminal rental. As you can see, the MAF margin declined from 36 basis points in the first half of FY '21 to 33 basis points in the second half, and then to 32 basis points in the first half of FY '22. In comparing both the first half of [indiscernible], card mix remains fairly stable. Debit cards in aggregate, including EFTPOS decreased by 24% with a total of 61.4% of transaction value in the pcp to 61% in the current half. Increases in direct costs across the board in both scheme and interchange fees drove up dilution of just over 2 basis points. Such cost increases when they occur trigger a portfolio margin review generally on an annual basis. Through this review process, we decide on any pricing changes, giving consideration to the impact on our customers. With the impact of COVID on a significant portion of our core merchant base, we decided to defer a few increases to the second half of the financial year. The MAF margin is the main driver of the payments gross profit. However, given the significant contribution from terminal rental income, it is worth calling out that as a proportion of transaction value rental income remained steady at 8.3 basis points for both the halves. We supported merchants by providing terminal rental waivers of $1 million, respectively, in each half. These waivers have not been normalized. With that, therefore, the Tyro core business contributed $13.3 billion of transaction value at a gross margin of 41 basis points, contributing $54.5 million in payments gross profit. The remaining $2.5 billion was contributed by the Bendigo book, which is separately analyzed on Page 12. The gross margin on the Bendigo book after the gross profit share was 39.4 basis points, contributing $10 million in gross profit to the group. The transaction value contributed by the Bendigo book was in line with our annualized expectation. With that, if you turn to Page 13, and I'll walk through the expense analysis for the half year. We reported total operating expenses of $65.3 million, up from $52.7 million in the pcp, an increase of EUR 12.6 million. The drivers for the half year compared to the first half of FY '21 -- the current half year reports as a group, while the comparative was Tyro core only. I will go through the Medipass and the Bendigo cost shortly. But firstly, the Tyro core. Given the impact of the first wave of COVID in calendar year 2020, Tyro employees were not provided with salary increases. Salary reviews only became effective again on the 1st of January, 2021. Competition for talent across multiple disciplines, but particularly in the technology space has been widely acknowledged. We also experienced the same wage pressure and have been prudent, but realistic. Given 46% of our permanent headcount are in technology, our salary increase has been skewed higher than average. The annual salary review cycle has been moved to January going forward, and therefore, the next round of reviews will be effective 1 January 2022, which you should factor into your forecasts. Given the competitiveness in the tech market, we continue to supplement capacity with technology partners where needed, so as to maintain our velocity of delivery. This method also provides us greater options to deal with local competition and wage inflation. Finally, although not a significant jump, marketing costs increased by $0.5 million. Breaking down the expenses in [ churn ], and taking last year's $52.7 million as the starting point, costs to support the Bendigo alliance were an additional $4.7 million for the half year. When we announced the alliance to the market, we indicated annual personnel costs of approximately $6.7 million. In addition, other costs under our business model are approximately 30%. So we expected to incur $9 million in total to support this portfolio per annum. We're therefore tracking 4% higher than expected. Given this is the first year of transition, there is some overlap in the operating costs, including contractors for initial transitioning. I would expect the operating costs to come in line with expectations once the transition is complete. Nevertheless, the higher costs are offset by the better-than-expected margin on the book for the half year. Next, Medipass was acquired on 31 May 2021 as part of our strategic investment in the health segment. A total of $2.3 million in operating cost was incurred for this business. The majority of these costs were personnel-related. Medipass had 26 permanent employees at balance date, of which half were in technology-related roles. The Tyro core business added 56 net new permanent headcount over the year, adding $2.4 million to the cost base. Salary increases and annualization contributed around $1.5 million to the cost base. General growth-related costs such as software licensing, communication costs for the increased fleet, training as well as travel costs, grew around $1.5 million, while we incurred consulting and other costs of around another $0.5 million. And finally, our lending and nonlending losses decreased by $0.5 million from $1 million in the pcp. This was a pleasing result again, considering the challenges our customers face and the unsecured nature of our lending product. The business is at a stage where we are able to demonstrate operating leverage, expressed as a proportion of transaction value. Group normalized gross profit was 43 basis points compared to group operating expenses of 41 basis points. This was notwithstanding, firstly, that Medipass costs of $2.3 million are included within the expense base without a material gross profit contribution in the current period. Medipass is an early-stage business and part of our strategic investment in health, and is expected to provide significant contribution to EBITDA in the future years. And secondly, that our transaction values were compressed during the period, with New South Wales and Victoria locked down for a significant portion of the half year. Minimal additional operating expenses would have been reported if the half year was not disrupted and transaction value process was higher than the reported $15.8 billion. Going to Page 14. JobKeeper income of $4.5 million is included in our EBITDA in the pcp and was not normalized previously. For the current reporting period, however, the underlying performance is best seen by adjusting JobKeeper out from the first half of FY '21. Therefore, to compare performance on a like-for-like basis, the combined Tyro and Bendigo book being a material contributor to gross profit for the current period, grew 15% to $4 million in the pcp to $4.6 million in the current half. As mentioned, Medipass is an early-stage business and therefore its income only partially offset its operating expenses of $2.3 million, resulting in an EBITDA of negative $1.8 million. EBITDA for the group, therefore, was positive $2.8 million for the current half. So in summarizing the performance and recapping my initial takeaways, sustained strong growth was demonstrated, notwithstanding lockdowns in New South West and Victoria for a significant portion of the year. Our strong capital position allowed us to carry on investing in our business and supporting our merchants over what was a challenging external environment. And finally, our renewed focus on the banking products. Those are the review of the financial performance. If you now turn to Page 24, I will provide a quick update on the balance sheet and liquidity analysis. Our continued growth was underwritten by a strong balance sheet. We had $157 million in total cash and investments compared to close to $173 million at June. Part of the decrease is a timing difference of $6 million in additional scheme receivables compared to June, given a seasonally high transaction value process on New Year's eve. This was fully settled in the first banking day in January. Other than this, cash outflows were offset by an increase in customer deposits of $25 million. I will go through the cash flow in a bit more detail on Page 25. In notable callouts, property, plant and equipment carrying value increased by $8.7 million, net of depreciation of $5.8 million. Significant capital expenditures included additions of $6.7 million for terminals and $7.3 million of fit-outs and construction for our new office premises at 55 Market Street. The other significant impact of the new premises is the recognition of a right of use asset of $33.6 million with a corresponding lease liability commitment. In terms of our banking balances, loans to merchants grew to $21.1 million after originating $36.2 million over the half year, while customer deposits increased from $75.5 billion at June to $100.8 million by December. And finally, intangibles in the corresponding commissions payable to Bendigo, in relation to the Tyro-Bendigo alliance, both reduced as a result of amortization and the payment of $4.4 million in commissions, respectively, over the period. Moving on to the cash flow on Page 25, and quarantining the banking flows. Operating cash flows were negative $26.4 million compared to negative $4.8 million in the comparative half. The cash flow for the period can be summarized as follows: EBITDA of positive $2.8 million as discussed; terminal purchases of $8.8 million, of which $2 million were payments from the previous period; remediation-related payments of $4 million; and Bendigo transitional costs of $2.5 million. Those give a net cash outflow of $13 million. There is an additional $13 million, which is a timing difference in your scheme receivables where we have prefunded the merchants and the funds were received from the schemes on the first banking day in January. Merchants on our Tyro smart account are part of this where they receive same-day settlements over a longer trading day, which is an appreciated value proposition for our deposit account. The only notable callout on the cash flow is the capital expenditure on our new premises where we have spent $7.8 million in the half. Total capital expenditure remains within the guidance of $34 million we gave at our FY '21 results call. And finally, turning to Page 26 for an analysis of our liquidity and capital positions. As an unrestricted ADI, Tyro is able to raise deposits with a stable and competitive source of funding. Our liquidity ratios are well ahead of those required by APRA, with adequate liquidity to fund our growth. At balance date, we held cash, including term deposits, of $86.7 million as well as financial investments of $70.7 million, giving total cash and financial investments of $157 million. Our capital position remained strong at 45%. Our capital position has allowed us to pursue both organic growth as well as inorganic growth with the Bendigo alliance and a strategic investment to help with the purchase of Medipass. Interest fees were already restricted in our capital ratio of 73% at 30th June 2021. Since June, a total of $40 million has been recognized with the respect of our new offices at 55 Market Street. $33 million of this is a noncash recognition of the right of use assets, capitalized based on a lease term going out to January 2031. Our lending book increased from $15 million at 30th June 2021 to $21 million at 31 December 2021. Lending originations are beginning to meet targets as we exit out of COVID, and our capital position will allow us to continue pursuing growth of our lending portfolio. Finally, regulatory losses for the period, which excludes share-based payments, the amortization of Bendigo and other intangibles, was $6.7 million, which was a reduction to our total capital. The regulatory loss can be reconciled to a statutory loss of $18.1 million reported in the income statement. While our prudential capital ratio is not something I can disclose, the 45% at 31 December 2021 was multiples above our APRA requirement. Robbie, with that, I will pass it back to you for a trading update.

Thanks, Prav. And we now turn to Slide 28. In terms of outlook, while we're not providing specific profit guidance for the second half, we do take the opportunity to highlight a few of our key trading stats and have to note that these data points are not audited. Overall, though, our stat for the second half has seen our strong momentum continues. With lockdowns abating, along with government and businesses encouraging the return of workers to the nation CBD, we consider the outlook to be positive for our predominantly card-present payments operation. The particular highlight steps are in the second half are that we've maintained our transaction value momentum with $4.5 billion in transactions processed from the 1st of January to the 18th of February, representing a 40% uplift. For January, our transaction value growth was up 35% to $2.7 billion. And also for January, our payments business gross profit allowing for the gross profit share payable under the Bendigo Bank alliance was up 24% to $11.1 million. Loan originations for February are also performing very strongly with $5.8 million in loans written to date. In terms of outlook, it is an exciting time to be at Tyro. We've achieved a lot over the last few years, but it's the opportunity in front of us that remains exciting. We have a mix of features and products in [ frame ] that will continue to build out our payment-centric ecosystem. Products such as the Tyro Go card reader will be in the field shortly and will open up new verticals, trades and micro merchants, for example, and will eventually provide a queue-busting solution to large retailers. We're looking to roll out our Tyro Go card reader in the half initially to our Bendigo alliance merchants. We are currently building out our next-generation terminal, which is an Android-based device, which will supplement our fleet and presents exciting opportunities for the future, including an mPOS capability. We continue to look at ways to extend our merchant cash advance product to make it available to a wider cohort of Tyro merchants and also looking at the quantum of the loans that were [ purchased ]. In health, with the Medipass digital planning capabilities, including state and federal compensatory funders, we have an opportunity in combination with our existing health solutions to create the leading unified payments platform for the Australian health care practitioners. We've created the IP both technical and commercial in creating our payments alliance model for both Bendigo Bank and Telstra which has potential application to other market opportunities, and this is an area we remain keenly interested in exploring. And finally, we continue to have an appetite for bolt-on acquisitions whether large or small, which present an avenue to gain scale, leverage our platform capabilities, enhance our market position or supplement our ecosystem. So with that, that ends the formal presentation, and we'll move on to Q&A.

[Operator Instructions] Your first question comes from Brendan Carrig from Macquarie.

Just a couple of questions from me. Prav, maybe just starting on the deferred merchant pricing review. Can you just clarify, when does that usually take place? Or what's the, I guess, the catalyst to invoke those reviews? And generally speaking, would that result in improved margin performance?

Brendan, yes, good question. So it purely depends on our portfolio review. So our portfolio is broken down into 2 types of price merchants, cost plus and normalized or in other. So for cost plus effectively, any transaction-related pricing change to the schemes to buying exchange fees, et cetera, get passed right through. So it impacts our MAF -- sorry, impacts our MSF but does not impact our MAF because the costs go up and down in line with the MSF. We do have a portfolio review quite regularly and every 6 months in detail. And if there's a significant change in the underlying cost that has not been passed through up or down, we make a decision whether pricing change is needed. We do that at least -- the pricing changes happen at least once per annum. The last couple of years has been a little bit of an abnormality with COVID impacts on our merchant base. So we would have normally done this in October last year. We've deferred it to March in the coming year.

And so was that off the back of the scheme fees being lower? But in that instance, would that not potentially results in your review, meaning that your merchants that aren't on cost plus getting -- paying a lower fee?

We would make a decision internally. So if there are other costs that we expect are coming through, which will offset those decreased costs, we would potentially not make any change at that point. Typically, it's when costs go up that we actually price the cost increases.

Okay. That's clear. The second one is just on the payments margin for January, if I'm using the numbers that you provided, it looks like a 40.7 basis point margin which compares to 41 basis points in the half based on the slide. Can you just explain the differences between those 2 margins as I would have thought that with the Bendigo mix playing a bigger part in the first half '22 margin that actually the January margin might be a little higher than the average for the half.

I wouldn't have expected the January margin to be high. So there's a number of variables that play into this. So firstly, December and January are very, very different months together with card mix and transaction value. So in December, we generally see our largest transaction value for the year. We generally see higher average ticket prices, and we generally see the margin to be slightly lower because of flat fees, for example, terminal rental being diluted over a larger transaction base. January, on the other hand, has a lot of merchants which do not transact and actually go on -- shut down for the month, but average ticket size is normally lower. So a margin of 41% in the first half versus 40.7% in January, I think, is very comparable.

But on the same logic, the December margin would be lower because there's more volumes on some fixed income would not the fact that January has less volumes on the same amount of fixed income results in more elevated margin?

Sure. But you're comparing the first half margins to January margins. And given New South Wales was in lockdown for 115 days and Victoria for over 2 months in the half, the overall 6-month transaction value would have been more compressed than what we would normally see.

Okay. And then my third question, and then I'll jump back in the queue. Just on the Android terminal replacement comments, Robbie. Can you maybe give a sense as to whether you'll be replacing the entire terminal fleet and how long you would expect that to be? And if there's any price or cost per terminal that you can provide us?

Yes. So Brendan, look, no intention to replace the whole fleet in a big bang approach. So the new Android terminal will be a terminal available in a portfolio. It will provide some other functionality, as I mentioned, once it's fully developed out it'll have mPOS capability. So the intention is not to cycle out the [indiscernible] in any short order. They will continue in accordance with their normal life span. The model for the new Android terminal will be very much the same as [indiscernible] they'll be on a rental basis. The only pricing difference with our terminal fleet will be when we have the Tyro Go reader in the field, which will be a unit that people purchase rather ahead.

And the mPOS solution that's coming with these Android terminals, is that the one that you've been talking about for some time now, and so this is how that's going to be put to market?

Yes. Originally, Brendan, I think you know we're looking at a tax terminal, which we decided not to pursue. So this is a different unit, different manufacturer. And the beauty of the Android solution is it enables POS partners to build out their POS solution onto their terminal itself. So that's the working partnership with our POS partners.

Your next question comes from Michael Aspinall from Jefferies.

I wanted to just start on the interchange and scheme fees that you mentioned you delayed passing through in the first half features. Can you characterize kind of what those increases look like and how much you might not have passed through to your customers?

Yes. So if you actually just look at our -- there's 3 reasons where margins would change. One would be effectively changing card mix. So that remains fairly stable. The other impact would be if -- based on the customers that we onboard. So generally, larger customers would come onboard at slightly dilutive margins, but they will contribute with a higher transaction value. So we had a few of those come in. So that diluted margin by about 1 basis point in the half year. The increase in costs was about 2 basis points. I would expect that the offset of that would roughly equate to that. Obviously, the actuals will move in line with the card mix going forward.

Okay. So that interchange and schemes fees are up kind of 5% from, say, 40% to 42% and you didn't pass that through. Is that the right way to think about it?

2 basis points, yes.

Yes. 2 basis points at the MAF level?

Correct, yes.

Okay. Cool. And in terms of recovering, you made another comment that you were looking to recover scheme and interchange fee increases in the second half. Do you expect further scheme and interchange -- scheme fee increases? Or are you just talking about the ones that you saw in the last 6 months?

Yes. So these are the ones we saw in the last 6 months. Yes. Look, scheme and interchange fees, they change all the time as frequently as once every 3 months. So we -- which is why we review our margins and portfolios every quarterly. We do have pricing consideration every 6 months. And generally, we do a pricing change once a year. And that would include any true-ups that we need to do for the last 6 months.

Okay. So if interchange and scheme fee impacted margins by 2 bps in the half just gone, are you saying that to you might true-up -- find a way to true-up and get that margin back in the second half of this year or first half next year?

For the ones in the last half year? Yes.

Okay. Okay. And then on the annual -- just on the annual merchant pricing review, I think you mentioned that, that will take effect in March. Is that right?

Yes.

Yes. And I mean is there any kind of thought around potential quantum you can give us? Or just kind of comment or just -- or the discussion we've just had?

Probably would stay away from giving forward-looking guidance other than it will be around 2 basis points of the overall portfolio. And the reason for that, again, as I mentioned, there's other variables that come into play as well. So effectively, what happens to the card mix. The international borders are opening up. So transaction values, depending on when you make a call on that, will increase. Unit margin would be dilutive on that, but at an incremental profitable basis. So if you only are looking at the pricing change, I would probably be comfortable to say it will be around the 2 basis point mark, other than quantifying anything else here.

Yes, that's really helpful. And then kind of a broader picture one, how do you see inflation impacting the business, maybe looking at kind of the revenue side and the cost side separately?

So I think the main impact that it's having to us is on our cost base. Well, it has, and it has -- the technology inflation has been a key item that's been acknowledged in the whole tech sector. So we -- on average, our salary increases last year were about 4% across the board. However, in the technology space that would easily be higher than 5%, even closer to 8% to 10%. And given that about 46% of our team is in that space, I would probably say our average cost would skew on the higher end. Robbie, anything else in your mind?

No, look, Mike -- yes, look, fair to say that technology space and as you sort of pointed out, we're not done rubbing some trees here. I think most -- I think the [ tech ] companies are seeing that wage inflation. I'd be sort of suggesting you're probably looking somewhere in that sort of 5% mark in the technology space on average across the spectrum in the period. And as Prav called out, we do our reviews from the 1st of January. So that's something we're in the midst at the moment.

Okay. And I mean, in terms of, say, customer behaviors, hospitality is a large component of your transaction. If they're seeing kind of -- they're able to put through price increases for their products and you're seeing that impact TTV. Would you expect if restaurants are getting good pricing increases and they're doing really well that to have any impact on whether your customers may shift churn away? Or do you think they'd be more sticky in that kind of environment? Have you put much thought around what the customer will look like in a high inflation environment?

Yes. Look, I suppose we're not anticipating that sort of super high inflation environment in the hospital space, particularly. I mean as we see price increases, obviously, we benefit from that so long as consumers keep spending. But it's not our expectation that we're going to see such increases in pricing that's going to be a deterrent to people spending. I think our operators are very attuned to balancing price increases, and keeping their restaurants and hospitality businesses full, particularly given what they've been through in the last 12 months -- 24 months.

Okay. Last one for me, and I'll let someone else have a turn. You added 56 net new employees in Tyro, the core business in the first half. Can you give us a sense of how many you'd expect to add in the second half of this year?

Yes. So this is the increase over the -- since the same half last year, right? So if you look at the breakdown, I'm giving rough figures here, about 15 of that headcount was in the technology space. And I'd like to actually see that same sort of uplift in the second half in the technical team. I mean, the challenge we've got is just actually the scarcity of talent at the moment, just with the demand. There was an uplift of about 20 headcount in our customer service area. And that is partly a fact that some of our processes still requiring a bit more automation. So I'd like to see that, that stays fairly subdued, but we don't actually increase headcount and customer service, and we actually implement some automation processes, which will reduce the headcount requirements. And the other area we have flagged it consistently over the last few years as we bring on more merchants, our sales and marketing area will grow and you'd expect that. So that's key account managers and sales team members. So they are about 15-odd on personnel in that space. So the 2 areas, the engineering space and our sales marketing. I expect to see some growth in the second half, but customer service we'd like to see that sort of suppressed now.

Next question comes from Bob Chen from JPMorgan.

Just a follow-up to that reinvestment question earlier. I mean how are you guys thinking about that balance of profitability as well as just reinvestment for growth? What triggers you to push that cost lever a little bit more?

Yes. Good question, Bob. Look, from our point of view, and this is for a business like ours, there's a lot of growth to be had, and we want to keep pursuing that growth as aggressively as we can, but looking for efficiency, and that's the balance we've always been striving to achieve. But if you look at the business, that sort of gross profit growth is really what we're very fixed on and just driving that as well as we can, and revenue growth. For us, EBITDA, we want to be EBITDA positive. But it's growth, #1. It's demonstrating operating leverage #, 2. And that will -- should drive an EBITDA positive outcome. But that's how we're looking at the opportunity in front of us. We don't want to not go aggressively after the growth as we can in the environment we're in.

Okay. Great. And then just across different networks. And obviously, there's been a lot of changes in interchange and scheme fees as well. I mean in terms of how you sort of see that develop longer term with the new payments platform being a little bit more active in that area, and I think you guys have that sort of integration with Payto as well. What do you think will happen to your longer-term margins as this takes shape over the next few years?

Maybe just on the [indiscernible] with Prav. The longer-term environment that will definitely be using the FPP for realtime account-to-account payments is going to be a feature. There will be costs associated with those transactions. We haven't got to a point where we sort of thought through what that looks like in terms of the cost profile. Probably, as a general statement in relation to our book and card-present transactions, as we continue to tap into larger merchants, we're going to see total margins on those larger merchants. But the corollary of that, I suppose, is as we now have got a product set for the micro segment that we should be able to more effectively serve the micro market, which comes with a better margin environment. So while it is hard to answer that on a sort of 5-year what does it look like perspective, there will be more ways to pay. They will have different cost models associated with them, and as we evolve our offer and we start tapping more [ large ], that will have an impact on margin. And if we get better in the micro space that will also bring some higher-margin business as well. So I don't know, Prav, if you got anything to add on that one.

No, it's exactly what you said, Robbie. And just trading, the main drivers of margin are threefold. So it is the size of the customers and the unit margins that come onboard. I think traditionally, we've had smaller merchants, which come in -- they contribute lower transaction value when they come in at a higher unit margin. Over the last years or so, we are actually onboarding much larger merchants who are coming at sharper margins, but incrementally profitable. And I would expect to keep seeing that as bigger merchants come onto our books, which is great because we've got a balance the profitability and the growth. Card mix is the other one, and it's an obvious one. So the cards mix in the last 2 years has been fairly abnormal compared to the previous years. Our international transactions have been about less than 1%. The borders are opening now. When exactly that kicks in, would be an open question. But as that happens, our MSF will go up, our unit margins will dilute. Our transaction value will go up incrementally, but our unit margins will dilute. It doesn't incur any additional operating costs so they will all set up and the MSF actually comes through with the interchange fees and the scheme fees. And then the third one is just the interchange and scheme fee that underlies these cards, which, as I mentioned, they're fairly complex. They come through every quarter. Some are transactional, some are flat base. So it's -- our business model is to review our portfolio on a regular basis and reprice as needed.

Okay. Great. And just last one for me. Just on the competitive side. Have you guys seen much movement from competition from the big banks? I mean Citi has been talking about a reinvestment for a little while now. Are you guys seeing any evidence of that in the market yet? .

Look, I think, Bob, as we always say, if you don't like competition, you shouldn't be in payments. So the market is -- the competition -- competitive landscape is as competitive as it has ever been. We continue to perform well. We continue to see really good merchant sign-ups as I sort of called out, we're averaging that 1,200 new merchants per month, which is where we want to be. So we're still capturing share, we're still growing strongly, notwithstanding all the competition that's coming our way. It's the nature of the market, and we've got no expectation if that abates.

Your next question comes from Cameron Halkett from Wilsons.

Just one quick one for me. Just noticed in the pack this time, there wasn't a kind of a monthly breakdown of the debt percentage of [ TPV ]. I think it was mentioned for the half overall, it was around 61%, kind of broadly in line with the prior 6 months. So just kind of wondering your guys thinking around this allocation going forward, particularly given we're likely going to come into in a rising interest rate environment, which might be detrimental to credit card uptake or a resurgence.

It's Giovanni here. So just to be clear, you're referring to the month breakdown in terms of -- between the data card, credit card?

Yes, that's right.

Look, I mean, as Prav stated previously, with the international borders will be opening up. Now there hasn't been a significant change in any of that. So look, from our point of view, there is no reason to put that into the pack. I could say that was in the pipe. I think in terms of the basis point margin that we indicated with Tyro core as well as with Bendigo, that's probably the best guidance that you can...

[Operator Instructions]

I've got a question. Just firstly, can you guys I guess, quantify the extent that you're offering terminal relief in terms of, I guess, what was there in the first half and whether that's sort of continuing at the moment?

It was a [indiscernible] relief in that half and still in the quantum of prior half.

And that's still ongoing at the moment?

It's pretty much phased out now. So we're back to normal operations.

Yes. Then I guess if we're just looking again at just OpEx as a whole, obviously, the wage increases sort of come through the year and the expectation that they're coming through again in January. How should we think about that second half, I guess, OpEx level? I mean are there's an expectation that you'd increase sales and marketing a little bit more as we open up. Can you sort of maybe give a little bit more color on the expectations there?

Yes. So second half, we'll have the salary reviews that we put through now on a calendar year basis. So as we sort of flagged you were thinking around about 5% mark increases that would probably -- on average, it's probably 4.5% to 5% is where you tip in that vicinity. In terms of the headcount, we haven't got a number out there at the moment. As I said, look, I'd like to be putting on more engineers. They couldn't [indiscernible]. And we'll just see how it go and [indiscernible], but we haven't put a forecast on behalf of headcount for this for the second ones. Pretty...

Okay. That's helpful. And then just with merchant applications going out sort of 7,500 or 7,400 new applications and 1,200 per month. Can you breakdown, I guess, how many are coming via Bendigo and how many are coming via Tyro?

Yes. Yes. Look, we -- again, we haven't given those. I would not be able to give you the precision there. But I can say that the lion's share is coming through core Tyro channels, Bendigo Bank is contributing, but it's single-digit amount of that growth probably the best way of putting out at the moment we expect that will continue.

I just -- I guess if you're referring to or referencing maybe FY '21, I think you're averaging around 1,000 merchants per month. Is it safe to say Tyro still above that or is that broad...

Yes, our core Tyro is above the 1,000 mark for sure.

Okay. Excellent. And then maybe just one final one, I guess, in a general, market sense. Can you give us an indication, I guess, from what you're seeing from your perspective in terms of what contribution, I guess, cash payments are making versus card payments, specifically the hospitality and retail, obviously, significant step-up since COVID. I just want to see, I guess, how close that is to fall.

Yes. Look, we don't have -- so that's -- because we're operating in the card space, we don't get the sort of full perspective of what the cash components might be going through a particular merchant. There is some data that the RBA puts out, which is a little bit dated now that sort of show the cash component. That hasn't been updated since we last said it, we can probably check to see that it haven't got up to date. Look, in terms of giving a better visibility in the last couple of months, just what the cash card is. It's not really something we've got visibility over.

There are no further questions at this time. I'll now hand back to Mr. Cooke for closing remarks.

Thanks, Emily. Look, I'd just like to thank everybody for their time this morning, and we'll close the call.

That does conclude our conference for today. Thank you for participating. You may now disconnect.