Tyro Payments Limited (TYR) Earnings Call Transcript & Summary

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

Thanks. Good morning, and welcome to Tyro's full year results call. I'm joined by Prav Pala, our CFO, who will be presenting with me this morning, along with Giovanni Rizzo, our Head of Investor Relations. Our plan today is to focus on our published full year results for FY '22 and our key accomplishments in the year. We'll also talk about some areas of ongoing focus, provide an update on our trading for July and August, and for the first time, provide full year guidance for the current financial year. Prav and I will spend about 30 minutes running through our results, and we'll then take the questions. We'll talk through the slide pack circulated earlier today, which is also available on our website. And just noting, a recording of this morning's call will be posted on the Investors section of our site shortly after this session to ensure those who are not able to dial in live to listen at their convenience. So 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. I've always been inspired by the tenacity and courage of the founding Tyro team. But back in 2003, challenged the status quo by building a truly unique Australian payments business. The emphasis then was to build a payment solution that's better served Australia's SMEs, and that ambition remains a core part of Tyro's DNA today. Today, we work with more than 63,000 amazing businesses. We are generally inspired by the success and gain immense satisfaction in assisting them to grow and thrive. This is the essence of Tyro and what drives us as a team. We're creating an integrated commerce ecosystem with payments at its core, enhanced by value-added 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. Our proprietary purpose-built solutions have been designed with those merchants' needs and preferences in mind. Turning to Slide 3 [indiscernible] and despite FY '22 being a tougher year for our business, we nonetheless delivered a 10% lift in merchant numbers to now exceed 63,000 merchants trusting us to their payments needs. Of note, Tyro's core business, excluding Bendigo, gross merchant base by 17% in the year. We increased the value of transactions we processed by 34% reaching a record $34.2 billion. Of this, our Bendigo Alliance contributed $5.2 billion, outperforming our original estimate on first announcing the deal in October 2020. We lifted our revenue by 37% to $326 million. We increased our normalized gross profit by 24% to $148.5 million. We booked an EBITDA result of $10.7 million, noting that our first half EBITDA was $2.8 million and our second half results was $7.9 million. Reflecting on the year, our performance was dampened by continuing COVID lockdowns in New South Wales, Victoria and the ACT. This cost the group an estimated $5 million in foregone EBITDA in the first half of the year. Our results also reflects the absence of the $4.5 million JobKeeper benefit we received in FY '21. The first-time costs of the not-as-yet earnings accretive Medipass acquisition, and additional headcount is originally flagged to conduct the Bendigo Alliance. Our second half provides a better line of sight to Tyro's performance potential without the impact of COVID and with the benefit of actions taken in the second half, including reducing headcount, control and operating costs and lifting our merchant service fee. These actions started to positively contribute in the last quarter of the year and delivered improved operating leverage, as can be seen on Slide 6 of the pack. These actions will remain a key focus in FY '23 and are expected to yield further operating leverage improvements in the year. This will appear in parallel with a continuing focus on driving strong top line growth, new-to-book merchant acquisition and product innovation. Prav will spend a bit more time talking through these matters and our financial results in a short moment. Turning now to Slide [ 9 ] and providing some additional color around our payments operation. I think it's well understood that we operate in one of the most competitive industries globally. The payments landscape today is as competitive as it was 5 years ago, demonstrated by the entry of new international and domestic merchant acquirers, the establishment of new players, new investment in payments tech by the big 4 banks and new payment types emerging such as Buy Now, Pay Later, QR code payments and the NPP. Despite this environment, Tyro has, over the last 5 years, continued to capture segment share, growing 7x the card-present system growth rate. This has seen our segment share of card-present payments reaching about 5% as of 30 June 2020, and our segment share for SMEs and health hospitality and retail, reaching about 19%. As I mentioned, the value of transactions processed in the year lifted 34% to $34.2 billion, notwithstanding the lockdowns in the first half. The addition of the Bendigo Alliance for the full year contributed about $5.2 billion to this amount. Our growth was assisted by a 17% increase in merchant selecting Tyro as their payments provider, if you exclude our 17,000 Bendigo merchants. With our Bendigo merchants included, we ended the year with 63,770 active merchants on the books to be precise. Our new health business, which incorporates Medipass, which was acquired in May 2021, added 2,263 new merchants through the year, seeing us end the year with 12,463 health merchants generating transaction value of $3.3 billion. Merchants in our 3 core verticals, health, hospitality and retail, represented 85% of our merchant count and made up 91% of our transaction value for the year. Our strongest transaction value growth for core Tyro was delivered in our hospitality vertical, up 18%, with health also delivering an uplift of 18%, whilst our retail vertical grew 12%. Even more impressive was our hospitality vertical, which grew 31% half 1 to half 2 in FY '22. Our e-commerce transaction value continues to grow, generating $520 million in transaction value, a lift of 640%. Our largest base by transaction value contribution with New South Wales is 34%, followed by Queensland and Victoria, both at 23%. All states, other than New South Wales and Tasmania, experienced double-digit transaction value growth. Victoria and the Northern Territory were the strongest at 23% and 29%, respectively. . New merchant sign-ups attracted approximately 1,200 new applications per month, with 55% of lease coming to us directly and 45% through partners and referrals. We now have 348 direct point-of-sale system integration, up from 322 in FY '21. We entered into an exclusive partnership to provide merchant acquiring services to Telstra’s business customers through over 350 Telstra retail stores in Telstra Business Technology Centers as well as online. This new acquisition pipeline for Tyro has performed above our expectations and will, we believe, continue to be a strong application channel going forward. Tyro Connect continues to grow with about 2.2 million transactions processed by the platform compared with about 700,000 in FY '21. With [ 109,000 ] terminals now in the field, we remain the largest -- the fifth largest merchant acquiring bank by terminal count. Brand and retention continued to be a focus for our payments operation in the year. Our prompted brand awareness is now sitting at 19%, and our customer retention rates remain very strong with churn measured by transaction value slightly up at 9.2% compared to 8.7% for FY '21. And our churn rate metric by merchant number is 10.5% down from 11.3% in FY '21. And finally, in the payment space, we launched our Tyro Go Mobile card reader in May this year. This new terminal type aims to open up the trade vertical provides a potential cue-busting solution for larger format retail and provides a fit-for-purpose solution for those micro merchants. Turning now to Slide 24 and our banking products. Although our banking operations still only represents a small part of our overall business, it presents an alternative to the major banks and has strong prospects to continued growth. Our products are focused on providing our customers with innovative ways to meet their transactional banking and unsecured lending needs. Our Tyro Bank Account is a fee-free interest-earning transaction account. Just over 5,000 Tyro merchants were actively using the Tyro Bank Account, up from about 4,600 a year ago, with close to $80 million on deposit at 30 June 2022, up from $72 million a year ago. Our term deposit offering, which is available through the Tyro app, of $4 million in term deposits as at 30 June 2022. Our cash flow-based unsecured loan product is designed to assist SMEs in growing their businesses. Our business loan is repaid from a merchant selected predetermined percentage of card transaction volumes as 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 merchants daily card transaction volumes. Our merchant cash advance loans returned to strong growth as we switch back to an automated loan approval process. This followed a period of manual approvals to mitigate the risks inherent due to COVID volatility. We also increased the maximum loan size from $120,000 to $350,000. With fees benefits, we wrote close to $100 million in loan originations in the year compared with $26 million in FY '21. Our average loan size in the year was around $47,000 compared to approximately $35,000 a year ago with an average length of 6 months in line with last year's average. The team managed the risks within our portfolio closely over the period with lending losses at $600,000 in the year. I'll now hand over to Prav, who's going to step us through our financial position in more detail, and then I will return to discuss our outlook.

Thank you, Robbie, and a very good morning to everyone on the line. If you could all please turn to Page 11. The financial results was a tale of 2 halves, with all key metrics pleasingly improving progressively into the second half and beyond. Our strong balance sheet continues to allow us to weather the disruptions in the first half and sustained acceleration in top line growth in the second. In summary, our transaction value growth was 34%, delivering a total of $34.2 billion for the year. Our group gross profit was up 24% to a record $148.5 million. We had normalized EBITDA of $10.7 million, up $7.9 million from an EBITDA of $2.8 million in the first half. I will be talking normalized numbers generally, but I will take you through all the adjustments to the statutory accounts as well. I'd like to focus on 3 key takeaways as you look through our results. Firstly, a rebound in growth in the second half of the year; increased focus on cost management, especially discretionary spend; and finally, the strength of our balance sheet, especially capital and funding as we highlight our pathway to free cash flow. Firstly, a rebound in our growth. Both our transaction values and loan originations achieved strong growth in the year. Our full year transaction growth rate of 34% follows a very strong second half, where our growth rate increased to 38%, accelerating from 31% for the first half, which we attribute to COVID-related disruptions. We processed a total of $34.2 billion for FY '22 with $18.4 billion of this coming through in the second half. Payments gross profit normalizing for the Bendigo profit share and switching costs was $141.5 million, up 28% from the previous financial year. The last of the transaction value growth rate reflects the 30% commission to Bendigo as well as a deliberate deferral in repricing from the first half to the second. The uplift from pricing came from in the last quarter for FY '22, and we are now back to our normal rhythm of pricing reviews. Loan originations grew to $99 million for FY '22. While still a relatively modest business when compared to our payments business, this was a new record for Tyro, representing a 283% increase from $25.8 million in FY '21. In the first half of FY '22, we originated $36 million, which we've almost doubled in the second half, exiting the year at a rate of $12 million per month. We recorded lending income of $5.5 million in FY '22 compared to $3.2 million in FY '21. The quality of the launch remained high with a weighted average duration of just over 6 months, consistent with the prior year. We recognized $0.6 million in loan losses for the year. As a result, our normalized gross profit grew by 24% compared to FY '21. Discounting to JobKeeper income of $4.5 million included in the previous year, the year-on-year growth rate was 29%. The second item I'd like to draw your attention to is cost management and our approach to improving operating leverage without impacting delivery. I will go through our expenses in the next few slides. But as you can see, our operating expenses grew by 31% to $137.8 million, an increase of $32 million. It is important to note that FY '22 was the first full year that included the operating costs for the Bendigo Alliance and the Medipass acquisition. These totaled $13.5 million. And excluding these costs, the underlying expense growth was 18%, the majority of which was an employee and contractor costs. I will provide more details on this shortly. Our market opportunity remains significant. And while we would like to keep investing in revenue-generating and technology-related roles, we acknowledge the need to demonstrate sustained improvement in operating leverage in the face of an uncertain external environment. As Robbie highlighted before, the best way to demonstrate our increased focus on cost management is by looking at our fully operating leverage metrics in FY '22. Our fourth quarter operating leverage was 88.6%, which was significantly lower than the other 3 quarters of FY '22 and will continue to be managed down as per our guidance. As we look into FY '23, we plan to hire only roles that are critical to our strategic priorities of growing our customer base and revenue, delivery of key projects or generating efficiencies in the business. We will continue to take advantage of our access to contractors in the short term to expedite key deliverables as we have done in the last quarter. Our EBITDA was $10.7 million, of which almost $8 million were generated in the second half. The full year EBITDA was down from the $14.2 million in FY '21. However, discounting from JobKeeper income of $4.5 million last year, our EBITDA was up by $1 million, excluding the $5 million, we did not generate as a result of lockdowns in the first half. For the first time, we are providing an EBITDA guidance for FY '23, which is expected to be between $23 million and $29 million as well as targeting positive free cash flow as we exit FY '23. Noncash items for the year included $5.2 million in share-based payment expenses and $20.5 million in depreciation and amortization. Share-based payment expenses were lower due to some releases from previous years, including the unvested equity following the CEO resignation, in line with accounting standards. Depreciation and amortization expenses increased to $20.5 million, up from $14.7 million in FY '21. This increase is a result of previously capitalized development costs, which are now being used and therefore being amortized and increasing the right of use asset for our new offices as well as other capital additions. Our statutory loss for the year was $29.6 million compared to $29.8 million in FY '21, which includes $11 million from the amortization of the Bendigo intangible. Moving to the next slide, Slide 12. Our margins improved in the second half compared to the first. The unit margin decrease over recent years has been due to a combination of larger merchants coming on board as well as the usual dynamic of underlying cost changes. Unlike last year, a change in card mix did not play a significant role for FY '22. As noted in our first half year results, we deferred passing an increase in direct costs through our entire merchant base, including those in cost plus pricing to allow them to recover from the impacts of COVID-19. The price increase was completed at the beginning of the fourth quarter with an overall increase of 2 basis points in margin to the entire portfolio, excluding the Bendigo merchants. You can see this benefit come through in our net MAF margin, which was up to 33.3 basis points in the second half compared to 32.2 basis points in the first, reflecting one quarter's worth of increases. The page shows the Tyro core book, excluding Bendigo, to provide a like-for-like comparison. The Bendigo Alliance continues to perform in line with our estimates provided to the market. Transaction values for Bendigo were greater than our initial estimates, while gross profit margin of 37.8 basis points was just under 1 basis point lower as these merchants are not projected pricing review at this point. With conditions post-COVID now fairly back to normal, our repricing payments have been reinstated, and our next review is currently underway. Moving on to our operating cost base on Slide 13. The 3 main areas of increases were employee and contractor costs, communications, hosting and license costs and other administrative expenses. Excluding share-based payment expenses, permanent employee costs grew by $17 million or 23% year-on-year to $92.6 million. As I mentioned earlier, this is the first full year of the Bendigo and Medipass costs, $9 million out of the $17 million can be attributed to these acquisitions, which added a net 73 new team members. The remaining $8 million are explained by salary increases and the annualization of a net increase of 57 new hires in FY '22 in the Tyro core business, mainly in the technology and customer functions. These were all exclusively in the first half of the year. Our number of permanent employees peaked at 628 March 2022, reducing to 612 as of today. Tyro's salary review cycle is on a calendar year basis and the second half saw the impact of an average annualized salary increase of 4.3% across all teams. Our guidance includes the annualization of the pay increases that were effective 1 January 2022. As Robbie mentioned, we are very much focused on delivering certain strategic initiatives in FY '23, in particular, the Tyro Go card reader, the Android-based Tyro Pro and automated customer onboarding. To balance the quality and time lines of delivery and with us committing to costs into the long term, we have tapped into our various partners to source project-based contractors. As you saw earlier, the number of contractors peaked at 140 in May, and as phases of the various projects get completed, these are being rolled off, getting close to 100 as of today. Our focus on operating leverage allows us to assess and pivot our spend quickly relative to top line income. Overall, our contractor and consulting expenses were $13.8 million, up from $7.2 million in FY '21. In addition, $7 million were capitalized in the financial year, given your view of our total cash spend. Communications, hosting and licensing costs increased by $4.4 million year-on-year. These were largely growth related as we continue to roll our terminals for the Bendigo customer base and progressively increase their transactions process on Tyro's switch. Licensing costs increased as we invested in our CRM system as well as general headcount growth related license costs compared to the prior year. Additionally, we invested in cybersecurity, open banking and tools to make our project delivery more efficient. We will continue to assess build by all license decisions based on what will deliver the greatest return on investment for our shareholders over the long term. Finally, administrative costs increased by $4.2 million, including approximately $2 million in recruiting key roles, including relocation costs. Terminal management and logistics costs increased in line with greater merchant base. Training, travel and entertainment activity, which were paused for much of the prior year, resumed during FY '22. I would consider a significant portion of these costs to be discretionary and expect to reduce as per our guidance provided. On the right, you can see the buildup of our costs with the quarter 4 operating expense run rate expected to be maintained for FY '23. Turning briefly over to Slide 14. We have clearly laid out the normalization adjustments that allow you to see the true operating position of the group. I do think this is a really important reference slide given the statutory accounting treatment of our Bendigo Alliance. The accounting treatment puts significant costs below the line as well as substantial intangible assets and liabilities upfront in our balance sheet. On a statutory basis, the accounts do not recognize the gross profit share, but instead an amortization of intangible. We therefore normalize for this by deducting the commission from the statutory gross profit to provide the commercial reality of the transaction. This will be one adjustment that you will always need to make to the statutory accounts. The remaining adjustments are temporary costs we incur in the period, while the Bendigo merchants have been onboarded to Tyro. Once the rollout is complete, which we expect to be in the coming financial years, these costs will [indiscernible]. I'll leave you with this page, and I'll be happy to take any questions on these adjustments later. The final takeaway is the strength of our balance sheet. In particular, our liquidity and capital positions. At 30th June 2022, we had total cash and investments of $122.8 million on the balance sheet, down from $172.8 million in FY '21. As an unrestricted ADI, Tyro is able to raise deposits as a stable and competitive source of funding. Our liquidity ratios remain well ahead of internal requirements with adequate liquidity to fund our strategy and allow us to exit FY '23, generating positive free cash flow. The reduction of $49.5 million in liquidity is explained largely by the growth in our loan book as well as capital expenditure within the year. In particular, our CapEx was $33.5 million, which included $14 million of terminals, circa $10 million on the fit-out of our new offices and around $7 million in internally generated intangibles. Our banking outflows were a net $16 million as the loan book grew by around $24 million offset by inflows from deposits of circa $8 million. We paid around $5 million in remediation payments and $4.7 million in Bendigo transition fees. These outflows were offset by $10.7 million generated in positive EBITDA and minor movements in working capital. Our capital position remains strong with a capital ratio of 39%, which is multiples above our prudential capital requirements. This strength has allowed us to pursue both organic growth as well as inorganic growth with the Bendigo Alliance and the Medipass acquisition last year. The capital ratio movement from 73% last year to 39% this year is due to a combination of $70 million increase in risk-weighted assets and a decline of $12 million in regulatory capital. To provide more details, the $70 million increase in risk-weighted assets is primarily made up of an upfront recognized right-of-use assets as well as fit-outs relating to our offices at 55 Market Street, totaling $41 million; an increase in our loan balance, which grew to $39.5 million, up from $15.4 million in FY '21, a growth of $24 million; and an increase in fixed assets, including terminals as well as other working capital movements. The decline in total capital is our net statutory loss of $29.6 million, less share-based payment expenses, losses from associates and the unwind of the Bendigo and other intangibles, giving us a regulatory net loss of $12 million. The intangibles and investments in associates are already deducted from capital upfront, and therefore, will be neutral or positive to capital going forward. Other than the growth in our loans book, which we will continue to utilize our capital for, majority of the capital reductions have come from significant acquisitions and one-offs in the last 2 years. We incurred $33.5 million in capital expenditures, which is slightly below the forecast we provided of $34 million. We are expecting to incur another $35 million in FY '23. As we finalize the Bendigo rollout, fund our organic growth with our configuration and purchase of Tyro Pro terminal and Tyro Go readers as well as deliver automated onboarding. We look forward to delivering these in FY '23. That is a summary of the financials for FY '22. Recapping the key messages. We saw a rebounded growth in the second half of the year in both our payments and banking businesses and continue to expect solid performance in FY '23. We continue to focus on cost management and demonstrating meaningful improvements in operating leverage, and we have strong capital and funding to deliver our strategy and target to exit FY '23, generating free positive cash flow. We have, for the first time, provided our guidance on key metrics for FY '23. And I will pass back to Robbie to provide both the trading update and earnings guidance.

Thanks, Prav. So we've had a very strong start to FY '23. Our transaction values for the year to the 26th of August are up 57% sitting at $6.3 billion, with the strongest growth coming through New South Wales, up 118% and Victoria up 70%. Bendigo transaction values were up 8% for July. That's all translates through to normalized gross profit from our payments business for July half of Bendigo commissions, up 46% to $14.1 million. Loan originations for the 28th of August were sitting at $20 million. That's up 91% in the same period last year. . As Prav mentioned, for the first time, we're providing earnings guidance for FY '23, and the following guidance bands are provided. First up, transaction value being between $40 billion and $42 billion for FY '23. Gross profit after Bendigo commissioned between $175 million and $181 million. We're targeting an operating leverage position of circa 85% and an EBITDA result between $23 million and $29 million. And as Prav mentioned, the business is targeting being free cash flow positive on exiting FY '23. As we've stated, actions taken in the second half of FY '22, including reducing headcount, controlling operating costs and margin management will remain a key focus for the business for the balance of FY '23 to drive our operating leverage position. This will, however, occur in parallel with a continuing focus on driving strong top line growth, new-to-book merchant acquisition and product innovation. And to that end, some of the key priorities for us in the year are a continued focus on the needs of Australian SME with our differentiated offering or leveraging our proprietary tech and increasing our focus on the health vertical, combining Medipass in our existing health business to create a class-leading health payments and claiming business in Australia, refining our approach to servicing micro merchants, as Prav mentioned, automated merchant onboarding and servicing, launching new payments devices, including the Tyro Go reader and our new Android-based Tyro Pro terminal; targeting the trade services and accommodation verticals with industry relevant features and products; expanding our merchant acquisition footprint for new partnerships and alliances; providing a unified commerce offering to merchants, including card present and eCommerce payments, banking and data insights; and expanding our portfolio of banking products and leveraging our valuable banking license. So that ends the formal presentation, and we'll move on to Q&A.

[Operator Instructions] Your first question comes from Bob Chen from JPMorgan.

Just a few questions for me. Just looking at the trading update for July, it looks like you've delivered $2.2 million of EBITDA for that month. And then looking at your guidance for the full year, it seems to assume that that's sort of the run rate for the next 12 months. How should I think about that given there's a bit more of a focus on the OpEx line in your business as well?

Yes. Thanks, Bob. It's Prav here. So look, broadly speaking, yes, that can be assumed at the run rate. So incoming up with our guidance, there's a couple of things we've assumed. We've assumed that we'll continue working on our cost base, especially the discretionary spend. Now a lot of that we have already started in the fourth quarter. So as we exited into July, you can already see the results of that coming through. From a margin perspective, we have assumed a static margin effectively, which gives us allowance to onboard larger merchants as well, allowances in case of significant increases in international transaction value. And we've held a steady state from the second half on our loan originations. Obviously, the one expense item that you factor in again is our salary review cycle, which was effective 1st of January 2023.

Okay. Great. And then just in terms of that cost base, I mean, there's obviously quite a lot being invested. Like are you able to break out what's being invested for true growth in the business versus what's -- sort of the ongoing just maintenance OpEx? And then how much of that OpEx is also allocated to the banking part of the business as well?

Yes. So we haven't broken it based on banking and payments. I think the best way to look at what project related would be our contracted base. So we actually accelerated investment into that, especially for 3 key deliverables that are expected to come out in FY '23. And as we complete each phase of those, those are being rolled up, so you can actually see that coming down. Like I mentioned, we'd be very, very keen to be investing in our revenue generating in our technology function. But at this point in time, we're keeping a steady state.

Okay. Sure. All right. And then just finally, just on competition, I think you've got a slide in there on Page 28, that just looks at the different growth between the other 4 major banks, yourself and some of the other nonbank members as well. Can you talk a little bit about how come NAV sort of starting to grow a little bit quicker and you guys seem to be slowing down a little? And then and there's also that other category out there that's growing pretty quickly. Like what's happening across just the whole competitive environment?

Yes. Bob, Robbie here. On that one, look, the terminal growth numbers, a little bit of caution on our 109,000 increase. What we've found as we're rolling the Bendigo fleet out and replacing it with ours, because a lot of those Bendigo merchants had multiple terminals and actually now requiring 3, they might require 1 instead of the 3 they had. So there's a bit of an efficiency gain there, I suppose, in terms of that terminal spread required for the Bendigo merchants. I can't tell you what's going on in our book. But in terms of the other [indiscernible], I mean, that's got a multitude of different players in there. It's got Fiserv, it's got Bank of Queensland. So again, it's a combination of various players and its terminal numbers, not necessarily transaction value. So I think I'd just exercise a little bit of caution around some of those numbers. It's the transaction value for us is the most relevant stat. But we've always got that terminal count just to give an idea of what our actual land -- our land-based terminals look like versus the pack.

Okay. Great. And then just in terms of that competition then. Are you seeing more pricing competition or maybe capability or tax-based competition that's happening in the market?

Look, the dynamic in the market really hasn't changed. I mean, we've always had from time to time, some players do some price competition, which is fine [indiscernible] market. We have a very good view of what the pricing portfolio looks like across the SME landscape by vertical and by size. And we price where we can see a profitable outcome. We don't chase -- we won't chase volume and do it on a loss basis. So we've got some very strict discipline in the way we price. But look, there's competition oftentimes on pricing. There's competition on feature set. We're very comfortable that we've got in the bag a very strong offer. We've got features out there, for example, our surcharging feature is something a lot of our merchants use, and it's very attractive and easy to implement. We've obviously now got our new -- our reader, the Tyro Go device, which gives us an opportunity in that micro space we've never played in before. And we're very excited about having a Tyro Pro device out in market. And our focus with Tyro Pro, which is different to how others have introduced Android terminals, similarly to how we've rolled out the [indiscernible] terminals, where we control the features because we own the tech sitting on the terminal. We're taking the exact same approach with the Ingenico DX8000 device building the actual payments app that sits on that terminal rather than taking an off-the-shelf solution, which minimizes your opportunity to actually do specifical customized features for verticals, which is where we compete very strongly. So we're maintaining that approach, which gives us more competitive leverage in the market by having the ability to build specific solutions for particular verticals.

Your next question comes from Tim Piper from UBS.

Just quickly, just on the follow-up on the 1Q '23 update and also what you're seeing on the acquiring fee margin side, if I sort of break it down, obviously, one situation is a bit of a step up there. It's been offset by your pricing that's come through. Is it right to back out for the first quarter, taking trade, you did sort of $3.4 billion almost for the month of July at $14.1 million. That's sort of 41.5% of the GP margin line for payment, kind of set back a little bit from the second half. Is that just the increase in acquiring fees sort of flowing through into the 1H '23 period so far?

Yes. Sorry, Tim, I didn't quite clearly get the back -- if you don't mind just repeating that, please?

Yes. Sorry, July GP was $14.1 million. And then your payments as per the trading updates is $3.387 billion, that's sort of 41.5 basis points?

Right.

So just thinking -- like looking at the chart that you always provide around that it was sort of 42.4 in the payments GP in the second half. Is that -- am I interpreting it correctly, just kind of step back down a bit in July?

No. So the 42.4 is the core Tyro payments margin. The group margin, if you actually look at from our statutory accounts, that will be about 41. And the reason for that is a significant portion -- Bendigo becomes a significant portion of our total transaction value, and that has a 30% commission payment out to it. So when we say our total payments margins for July that would include the Bendigo book as well.

Okay. So it's basically in line with the second H '22 run rate than July so far?

It's slightly better. It's in line with the last quarter of FY '22.

Yes. Okay. No problem. Sorry. Got it. Can we just step through your CapEx for '23 in a little bit more detail, if possible. Obviously, guiding to $35 million, there was sort of $10 million office fit-out in '22, which I assume is not there. The software and capitalization development where costs were $7 million. Do we sort of assume that, that $7 million grows roughly in line with the OpEx? Or are we sort of expecting a more significant step up in that $7 million in CapEx in '23?

We're probably expecting a slight pickup for FY '22. So that $35 million CapEx is made up of roughly about $21 million in terminals, which will also conclude our Bendigo rollout. It would also include development work that we're completing our Tyro Go terminals and our Tyro Pro terminals as well as the purchase of the Tyro Go and Tyro Pro. In terms of the actual intangibles that we capitalize in the -- like I said, in the last quarter, especially, which will flow into the next year. We will be delivering those 3 key projects. So we are looking to step that up slightly, not huge. I mean, overall, our $7 million capitalization is fairly low. We're probably looking at between 10 and 12 next year.

Okay. So terminals is going from 14 to 21 in FY '23. Did I hear that correctly?

That is correct. And that is the cash flow. Some of that is the payments that will -- that timing difference that comes from between June and July as well.

Yes. Got it. Just -- sorry, 2 more quick ones. Can you give us a sense on the contribution of Medipass now sort of at the EBITDA line at all?

Not Medipass itself. We look at it as more a Tyro Health business unit. But from just Medipass at this point, not a material contribution to the accounts.

Okay. Got it. And then just a final one, just pulling out or stripping out the Bendigo numbers and just looking at core Tyro. Just in the second half, just interested in your take on what sort of you're seeing out there in the merchant base, if we kind of look at transaction value per merchant, so this has stepped up strongly in the second half as we sort of come out of lockdowns and the rest of it. It doesn't look to be quite back at sort of the peak. In terms of that, do you think there's still constrained out there? Or is this more of a business mix? I mean, I know you guys sort of targeting to move up into larger merchants as well. Is there any sort of context you can give in terms of the spend per merchant you're seeing going through the terminal, the Tyro terminal base at the moment?

Nothing definitive. I mean, you're definitely right in the conclusion that it increased in the second half because of the disruption compared to the first half. I mean there are 2 things which we're following closely. I don't have an answer for that yet. It's just a change in the inflation rate. So obviously, as the prices go up, we feel that more transaction value goes through the terminals. At the same time, as inflationary interest rates also go up, the discretionary spend has assumed that consumers will be spending a bit less. But it is something we're following quite closely. It is one that we don't have an answer to at this point. Obviously, international is beginning to come back. It's kind of plateaued at about 1.7% as you see on the chart in the investor presentation. So that obviously increases the average transaction value should go up theoretically. But look, nothing definitively.

Tim, the only thing I'd add to that probably is in relation to Victoria, whilst that grew well for the first part of FY '23 period, it's still -- it's only growing 70%. I think Victoria is still has some challenges, and I think we haven't set a full bounce back in our Victoria merchant base generally speaking.

Your next question comes from Brendan Carrig from Macquarie.

So just a couple of questions from me. Can we just maybe start on the merchant applications. So I think if I'm calculating correctly, it was roughly a 50-50 split of about 7,400 new merchant applications in each half. Can you just talk to the mix of those merchant applications in the second half as I think there was Lightspeed, who were a key referrer of yours, I think, started to go direct and do their own products. So I'm just wondering to get a bit of a sense of if that mix has shifted and if you become more reliant on your external sales partners or referring organizations or if there's been any shifts there?

Brendan, I mean, as I called out, our run rate [indiscernible] applications and still running 55 direct and 45 through partner channels. We're still working with Lightspeed. So Lightspeed, we've still got a strong relationship there. They are using some other referral partners as well, but they're still working very closely with us. So that hasn't resulted in a material change in mix. I suppose the direct referral network that we have in place now, we're seeing, as I mentioned, Telstra is coming through strongly, and that continues to build month to month. Telstra does tend to play. I mean, the -- it's more on a small side. So that's the nature of the merchants coming through there. And we've still got a healthy pipeline of large merchants that our key account team is working on. So no dramatic shifts in the mix, nothing that I'd be calling out is fundamentally changed half 1 to half 2...

Okay. Good. And then, Prav, I think you just mentioned actually on the margin assumption in the guidance. Can you just maybe elaborate on the international transaction mix that assumes as, I mean, it's a 1.7% now, but if that was to trend back towards, obviously towards the 4-or-so percent that you're seeing pre-COVID, that would have a negative impact on the margin. So just interested in the assumption for the recovery of international?

Yes, sure. No problems. So we are seeing the international obviously increase from last year. So it went from about 0.7% last year to about 1.7% this year. If you actually look at the chart on Page 21, it seems to have plateaued around that level. We are definitely now forecast assuming that it does go up, but probably more so in the second half of the year. It shouldn't really impact our guidance in terms of the top line because if it does come through your transaction value should go up, your unit margin would be dilutive, but it would still be the same dollar level gross profit. But it is a key one. So one that you'd probably need to take a view on. The other thing I would say is with the Bendigo book coming in and contributing about $5 billion to $5.5 billion. From what we see with the transition merchant so far, there isn't a significant international transaction mix. So if that assumption holds all for us, I would not see us going back to the 5% that we were pre-COVID. So probably more at peak, probably more closer to 3.5% or so.

Okay. That's clear. And then, sorry, last question. Is there any update to provide just on the CEO transition, Robbie, or the progress on sort of funding your replacement?

Look, I might jump in on that one. Look, it's -- that's something I'm not pretty sure to understand. But as the Board has communicated, there's an external and internal search process going on. That's -- when there's news to announce, I mean, the Board will come out with something on that front. So I looked -- I'm probably not the right person to be making a statement on that one, but that's the stated plan at the moment.

Your next question comes from John Campbell from Jefferies.