Tyro Payments Limited (TYR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Tyro Payments Limited First Half Fiscal Year '24 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Jon Davey, CEO. Pease go ahead.

Good morning to everyone. My name is Jon Davey. I'm the CEO and Managing Director of Tyro, and it's my pleasure to present our first half results for the 2024 financial year. I'd like to acknowledge that I'm hosting this meeting in Sydney on the land of the traditional owners, the Gadigal people. I pay my respect to elders past, present and emerging. On the call, I am joined by our Chief Financial Officer, Prav Pala, and I'm pleased to introduce our new Head of Investor Relations, Martyn Adlam. Martyn joins us from Wise PLC in London, and prior to this, spent much of his career in finance and Investor Relations for banks, including Westpac and Lloyds. Many of you will have already been introduced to Martyn over e-mail and will be meeting with him over the coming weeks. Welcome to Tyro, Martyn. The presentation we're about to share was released this morning and is available on the ASX website and the Tyro Investor Center. It will also be displayed on this morning's webinar. Both Prav and I will refer to the slide number as we speak, making it easier for those calling in to follow. I now ask you to turn to Slide 3. There are 4 items on our agenda. I will start by providing a business update and an overview of our results. Prav will then take us through the financial results before I provide comments on the outlook and an update to guidance. We will then open the meeting to Q&A. Can you now turn to Slide 5? The last time I presented to you was at our Investor Day last October. As I outlined then, our vision is to be the leading payments and cash flow management platform for Australian businesses. We continue to be leaders in payments because we build solutions that businesses want. The hospitality, retail and health verticals are the foundation of our business. As opportunities for new payment experiences emerge, Tyro must continue to be at the forefront. Managing cash flow is key to our vision. A significant business pain point is optimizing the receipt of payments and the payment of suppliers. Tyro's core business is built on a solution that allows businesses to accept card-based payments. Our cash flow management products, our bank account, term deposit and cash advance lending solution allow us to optimize the receipt of payments and the payment of suppliers, thereby solving this pain point. Our bank account provides same-day access to funds. Our term deposit offers an attractive interest rate for excess funds. And our cash advance lending solution offers a simple product to cover short-term payment needs. Our strategy is to integrate our cash flow management products with our core payments acceptance products. We have the building blocks to truly differentiate. However, we must prioritize enhancements to our solution if we have to drive greater merchant adoption. The payments industry continues to change, and Tyro does and must continue to differentiate and diversify. We must deliver sustainable growth through product differentiation in both our current and new industry verticals. We must improve the lifetime value of our merchants by growing average revenue per merchant. And we must continue to drive profitability through pricing optimization and further operating efficiencies. We have made positive strides towards these outcomes, which I'm pleased to share with you today. I'll now ask you to turn to Slide 6 for a summary of our results. We have delivered a strong gross profit -- sorry, we have delivered a strong profit result for the first half. We increased gross profit by 10.5% to $105.2 million, and we've delivered $27.3 million worth of EBITDA, a 41% increase. Our EBITDA margin hit our end of year target of 26%, demonstrating continued focus on operating efficiency. Transaction value growth was lower than forecast at 2.2%, largely the result of a reduction in the transaction value processed by Bendigo Powered-by-Tyro merchants, and a reduction to spend in the discretionary hospitality and retail verticals. The reduction in discretionary spend is consistent with weaker consumer sentiment seen across the economy. We've also seen increased competition, including Lightspeed-related customer churn in our hospitality vertical. Notwithstanding these challenges, these are strong results. They highlight our work on margin management, the growing momentum of our banking products, and our continued investment in operating efficiency and cost management. We are delivering good profits, and importantly, we're starting to generate strong free cash flow results, results that I will discuss shortly. Can you please turn to Page 7? There are 3 key themes from our first half that I would like to highlight: firstly, strong profitability; secondly, excellent growth in our nondiscretionary verticals; and thirdly, we're building the payments products that customers want. Firstly, we've delivered a strong profit result for the half, driven by revenue growth, margin improvements and continued operating efficiency. This has contributed to gross profit growth of 10.5%, an EBITDA margin growth of 5.6 percentage points and a significant increase in free cash flow to $10.4 million, up from $600,000 in the corresponding period. We've also continued to drive operating efficiency. We have simplified our business through the digitization and automation of processes. We have right-sized teams, and we have invested in a smaller number of high-impact projects. This has resulted in an 11% reduction in headcount compared to the first half of FY '23. Secondly, merchants in our nondiscretionary verticals, where we have invested in product innovation, are growing strongly. Our focus on building and, in the case of health, combining internal investment with the Medipass acquisition to develop industry-specific features is driving strong results. In health, we've seen an increase in transaction value of 24%. In our emerging services sector, we saw growth of 7%. Finally, our focus on customers and building the payments products they want is working. We are seeing increasing multi-product take-up, driven by our integrated payments and cash [ flow management ] customer value proposition. We're also developing new products to solve our merchants' pain points, which we plan to release to the market later this half. Following our launch of Tap-to-Pay on iPhone, we have also accelerated development of the next frontier of payments. Tyro's embedded payments SDK will allow Tyro to present a market-leading all-in-one payments and point of sale, or POS, solution, removing the dependency on a Tyro terminal. Turning now to Slide 8, at the first half results presentation last year, I was pleased to announce our first positive free cash flow result of $600,000. That momentum has continued, and these results demonstrate the resilience of our business to a tougher economic environment. While we have seen softening to historical transaction value growth, our strong gross profit, EBITDA and free cash flow performance highlights our ability to drive strong returns. In early FY '23, we prioritized initiatives to scale our business through digitization and automation. This is now delivering benefits through growth without a corresponding increase in our operating expense. Gross profit has increased by 10.5% to $105.2 million, and our EBITDA margin has increased from 20% to 26%. Free cash flow has increased by more than 17x that in the corresponding period. Prav will also take you through the continued improvements that we've seen to efficiency with a 3.5% decrease in underlying operating expenses. Key contributors to these improvements have been our pricing transformation program that has increased revenue and improved margin, and the digitization and automation of processes, for example, sales and onboarding, where we are seeing good results with approximately 26% of all applications fully digital in the half. Not only has this provided cost savings, but importantly, we are delivering a significantly better merchant experience. We are confident that we can continue to increase this percentage in the coming months. This work, coupled with prioritization of a smaller number of high-impact projects and the outsourcing of terminal management logistics to global payments company, Ingenico, has led to further headcount reductions. Our headcount is 22% lower than it was less than 2 years ago under the previous operating model. Can you please turn to Slide 9? Within the installed Tyro merchant base, we have seen strongest growth in verticals where spend is nondiscretionary. Industry-specific features are driving great results. In services, we have seen growth of 7%. And in health, we have seen a 24% increase in transaction value. The health transaction value growth of $600 million was the highest of all our verticals. Through our Tyro Health product offering, integrations to funders that support digital claims for traffic accidents, workers' compensation, private health and Medicare payments have allowed us to grow in a growing part of the nondiscretionary spend category. In the first half, we added to our offering, deploying several features to meet the specific needs of our health provider customers. This included: acceptance of digital private health insurance cards for Apple iOS and Android; the implementation of our [ clips ] integration, which allows health professionals to process online eligibility checks and to submit inpatient medical and overseas visitor claims; and the launch of our integration to ensure a QBE for compulsory third-party claims. Our strategy prioritizes growth through products and product features that allow us to deliver differentiated solutions in our target verticals. This includes building features and solutions to defend and grow share in both hospitality and retail, and as previously committed, to launch a new industry vertical during the 2024 calendar year. We are making good progress on both objectives, and I look forward to providing more detail at our full year results call later in the year. Can you please now turn to Slide 10? Our installed Tyro merchant base has grown by 9.3%. However, we have seen a decrease of 16.5% in Bendigo Powered-by-Tyro merchants. As a result, merchant numbers have grown on a net basis by 2.8%. Growth of 9.3% in the installed Tyro customer base is a good result. Application volumes have been strong. Our direct sales channel is performing best with 50% of all new applications, followed by our partner channels with 32% and our retail channel with 18%. Lead to application conversion rates are different by channel that average approximately 20%. Our strategy work highlighted significant opportunities to drive growth by improving conversion, an initiative that we have prioritized. Transaction value churn has been higher at 13% and growth has been disproportionately driven by a high number of micro and small merchants, driven in part by the launch of both Tyro Go and Tyro BYO. These are highlighted by the lower transaction value growth of 4.1%. We have implemented actions to address this, and we expect our segment mix to return to more normal levels in the coming months. Bendigo Powered-by-Tyro customer growth of negative 16.5% was disappointing. The comparative period is prior to completion of the customer migration and included merchants that did not migrate to Tyro and low transacting merchants. The 10.8% decrease in transaction value is a better reflection of performance. Our analysis has identified 2 reasons for Bendigo performance. Firstly, many of these merchants operate in an industry vertical where spend is more discretionary in nature and in regional areas more heavily impacted by the cost of living crisis. Secondly, we are not seeing the front book growth that we expected. Addressing this is a priority. We are working closely with the Bendigo team. New sales incentives, product offers and marketing campaigns are being implemented. Though these are yet to translate into results, we were pleased with the recent NPS survey result of 46 for our new Bendigo customers. This gives us confidence that we can address the negative growth. Can you please turn to Slide 11? We are pleased with the go-to-market changes we have made by integrating Tyro's payments and bank account are gaining momentum. More than 1 in 5 new leads are requesting a Tyro bank account, and we have seen an 11% increase in the total number of merchants who use a Tyro bank account that is integrated with their payment acceptance product. Importantly, we continue to see better customer profits from customers who use these solutions. Merchants who use payments and Tyro bank account are contributing 1.3x the gross profit value of payments-only customers. And those who use payments, a Tyro bank account and our lending solution deliver almost 3x the gross profit value. This is just a start. While we are seeing improvements, the execution of our banking or cash flow management strategy has historically been poor. However, the value that we're seeing from these customers highlights the opportunities to grow customers and gross profit and to create a more resilient business through revenue diversification. Can you please turn now to Slide 12? We are excited about the growth prospects for Tyro, as well as our accelerated innovation agenda. We've been focused on further enhancing our integrated payments and cash flow offering ahead of key releases in the coming months. Managing cash flow is a key pain point for many businesses, particularly small businesses, for example, for Sarah, who manages a bustling cafe during the day, which transforms to a restaurant at night from the same location and with just one payment terminal. Each day, Sarah is frustrated that she can't access her daily takings and that reconciling payments from her cafe and her restaurant is complicated because they are paid as one settlement to the same bank account. And because she has to wait until the restaurant closes and the terminal settles the whole day's takings, often meaning she has to wait at least one more day to receive takings from the cafe. All acquirers in Australia settle a merchant's takings at a fixed time later in the day, usually around 10:00 p.m. Australian east coast time. For merchants using payment providers such as Square, Stripe, Smartpay and others, their funds will not be available in the merchant's bank account until the following day. They will have longer settlement times on a weekend and even longer settlement times on long weekends. This delay can be a significant pain point. Merchants want access to their takings on the same day that they receive payment. It's their money, and they don't understand why the bank is keeping it. Today, through our bank accounts, Tyro provides merchants with same-day settlement, 7 days a week, 365 days a year. Uniquely, we also allow merchants to choose what time they want to settle. We will shortly provide even more flexibility, meaning Sarah's cafe could settle at 2:30 p.m. into one account when it closes and the restaurant into another account at 1:00 a.m. when it closes. Settlement times will be configurable by the merchant on the Tyro portal or our mobile app. Sarah will get access to all her money on the same day and reconciling will be so much easier. Can you please turn to Slide 13? In addition to offering multiple accounts and flexible settlement times, we know that merchants currently find it hard to use their funds in the Tyro bank account. Business owners need cash flow management solutions that help them be paid and get same-day access to their funds, but they also need cash flow solutions that help them or their staff pay suppliers. In this example, Phil realizes that his restaurant is low on napkins and he needs to make an urgent order. He doesn't have time to do it himself, and his staff don't have a simple way to make purchases on behalf of the business. We are solving this by offering a virtual debit card to merchants who have a Tyro bank account. These cards can be added to an Apple iOS or Android wallet. Instantly via the Tyro web portal or our mobile app, business owners will also be able to issue additional on-demand virtual cards to their staff, complete with configurable credentials that are set to control spend limits, merchant types and dates for card use. In our example, Phil could issue a virtual card linked to his Tyro bank account to one of his staff. This card could be configured so that it's available for use only by that employee at Phil's napkin supplier for spend of no more than $100. The card could also have a 24-hour or less expiry date. The implementation of multiple accounts and flexible settlement times and our virtual debit card gets us closer to Tyro's vision to be the leading payments and cash flow management platform for Australian businesses. These solutions will not only provide merchants with same-day access to the funds, but we will provide them with the tools to better manage how they use their funds. These features will be available to merchants in the middle of the year. If you could turn to Slide 14? For many years, Tyro has led the market through our direct integration to more than 400 POS and PMS partners. These integrations continue to be market leading, and the importance of these partners as a sales channel is still significant. However, the payments landscape is changing, and Tyro must respond to these changes. Competitors are now offering integrated payments and POS solutions, some with new flexible form factors that are replacing a traditional terminal. To ensure that we continue to provide solutions that our customers value, we've accelerated the development of Tyro's unified payment solutions. These consist of a bundled payments and POS commercial offer and technology that embeds our payments solution in our partners' POS equipment. Firstly, our bundled payments and POS solution is available today. In response to customer feedback that some prefer a single unified price for their payments and POS, we're working with our network of partners to offer an integrated solution with one simple price that incorporates both the transaction fee for payments and the cost of the software. Tyro collects this agreed fee as part of our daily settlement to merchants, receiving a wholesale [ raise ], with the rest passed to the provider of the POS. The solution offers merchants an integrated product and a single price, giving them a choice of software that best suits their business needs. In addition, the Tyro SDK can now be embedded into point-of-sale enabled hardware device. Unlike competitors, our solution is both POS and hardware agnostic. It allows us to work with software and hardware providers in new and existing industry verticals, while removing constraints that exist with a traditional terminal. For example, the solution opens up opportunities to integrate payments into unintended payment devices in a new vertical or in an existing vertical such as quick-serve restaurants. We could also work with partners to deliver low-cost hardware solutions [ that fast ] queues of busy bars and restaurants without the need for a traditional payment terminal. Tyro's unified payment solutions are an exciting step forward in the future of payments. They are key to defending our position in existing verticals, and they are an important platform in giving us solutions that will drive growth in new verticals. I will now hand over to Prav to take us through the financial results.

Thank you, Jon, and hello to everyone on the call. My name is Prav Pala, and I'm going to spend some time talking through our financial performance. Please turn to Slide #16. We continue to focus on building a resilient and more profitable business. Our performance during the first half demonstrated good progress against this with all key financial metrics improving over the period. Our financial performance for the period showed 3 things: firstly, increased gross profit; secondly, a disciplined cost management, and as a result, increased profitability and strong free cash flow generation. I will cover each of these in turn. Starting on the left, our top line gross profit grew 10.5% year-on-year. This was driven by a combination of active margin management in the payments business, complemented with an increased contribution from the banking business. Banking is a core part of our strategy, and the growth in this emerging business reinforces this. Our underlying operating expenses reduced by 3.5% to the prior comparative period, as well as improving by $1 million to the previous half. One-off costs of $3.9 million were incurred, which included spend for an independent review of our strategy, termination costs, as well as legal costs against Counter, one of our POS partners. The $75.8 million of expenses reported are not normalized and are shown including these one-off costs. With growth in gross profit and disciplined cost management, our EBITDA margins and free cash flow margins improved progressively. We reported an EBITDA of $27.3 million for the half, which is a margin of 26% and in line with our guidance. We also reported a record free cash flow of $10.4 million for the half, which equates to 9.9% of gross profit. These metrics are discussed in more detail on the next slide. Gross profit, our core measure of top line performance, increased 10.5% in the first half of FY '24 to $105.2 million. Payments made up 88% or $92.7 million of gross profit. This represented a growth of 5% to pcp, outpacing the transaction value growth of 2.2%, and was driven by active margin management. Our gross profit margin for the Tyro core portfolio was 43.1 basis points of total transaction value for the half compared to 41.3 basis points in the comparative half. The banking segment delivered $7.1 million in gross profit for the period, a growth of 56% over the prior comparative. Total contribution by banking increased to almost 6.8% of our gross profit, up from 4.8% last period. Responding to economic conditions in the half, we implemented additional credit measures, which resulted in subdued originations of $68 million compared to $73 million in the pcp. Despite this, our banking gross profit increased strongly as we increased our upfront fee on the merchant cash advance product, in addition to earning a higher spread on excess deposits held. Corporate gross profit was mainly reflective of the higher interest rate environment. The income is earned on working capital required for the payments business. Our total operating expenses of $75.8 million was a result of disciplined cost management and includes one-off costs of $3.9 million. Including these costs, the total cost increase from prior year was 1.7%. Excluding these one-off costs, our underlying operating expenses were better by 3.5% to pcp. Lending losses increased by $0.9 million to the comparative period. The increase in lending gross profit, as I mentioned before, more than absorbed the higher losses. Losses were well within expectations and reflected the broader economy and higher business insolvencies seen during the period. With the growth in gross profit and well-controlled expenses, we achieved EBITDA of $27.3 million for the half year. We also significantly improved our free cash flow result. While we delivered free cash flow of $0.6 million in the prior comparative period, we generated a record $10.4 million in positive free cash flow for the half, adding to our strong capital and liquidity positions. 2 significant call-outs need to be made in regards for this for the second half. Firstly, there will be an outflow for the Bendigo top-up guaranteed commission payment, you should factor into your forecasts. Secondly, we received $10 million in settlement for the litigation against Counter. This will be accounted for in the second half. However, the guidance Jon will provide later in the pack excludes the impact of this cash inflow. I'd like to also highlight the lower share-based payments expense during the half. We achieved this by moving more towards cash compensation for short-term incentives. While the second half should see an increase in share-based payments expenses, the full year expense will be around half of what we reported in FY '23. I will now spend a few minutes breaking down these metrics in the next few slides. On Slide 18, starting with payments gross profit. Payment is at the core of our business, and as I called out, contributed $92.7 million to our overall gross profit. This was driven by $22.2 billion in transaction value processed over the half year. In analyzing this, I will separate the transaction value processed by the Tyro core business and that processed by the Bendigo book. Tyro core transaction value increased by 4.1% to pcp to $19.7 billion. Breaking this down by vertical, the hospitality vertical contributed $9.5 billion in transaction value. Hospitality continued to be our largest vertical and grew 2% to pcp. The moderated growth was both a function of the discretionary nature of the spend in this vertical and the aggressive competitive behavior by Lightspeed, which we litigated. Retail delivered $5.4 billion in transaction value. Year-on-year, retail declined 2%, again reflecting market conditions in the last half, as well as the loss of the Mecca Group, which was a top 10 merchant within this vertical in the prior year. Mecca left due to the need for a global solution, which is not something we offer. While the transaction value from this migration was notable, the gross profit impact was minimal. The health vertical was the strongest performer, growing 24% year-on-year and contributing a record $3.1 billion to total transaction value. Health also returned the highest net margin out of all our core verticals and shows the value of our differentiated offering. And finally, our emerging services vertical also performed strongly, growing 7% year-on-year and now contributing 8% of total transaction value. The health and services verticals have proven largely nondiscretionary, and the investments in both of these verticals have diversified the payments portfolio and delivered better-than-expected results for the half year. As a result, Tyro core book contributed $84.9 million of the total $92.7 million of payments gross profit, which was a growth of $6.9 million or 8.8% to pcp. Of that $6.9 million gross profit growth, $3.3 million was due to the transaction value growth of 4% I just talked through, while $3.6 million was supported by the 1.8 basis points expansion in the Tyro core margin. Our gross profit margin was 43.1 basis points for the core book compared to 41.3 basis points in the pcp. The increased margin was primarily due to the execution against our pricing transformation project that we spoke about at the full year. The margin expansion is despite an increase in international card volume from 2.3% to 3%, which, as you know, have much higher direct costs and lower margin than other debit and credit cards. We believe the international mix is now trending to stabilize as we move into the second half. The remaining $2.5 billion of transaction value was from the Bendigo book, which decreased from $2.8 billion in the prior comparative period. Overall, therefore, our transaction value increased by just over 2%. The Bendigo portfolio performance was disappointing. We reviewed the carrying value of the intangible asset and commission liability related to the Bendigo Alliance. And as a result, we have written the asset down by $18.8 million in the period. The revised forecast also means a lower commission liability to Bendigo, which therefore resulted in a gain of $17.4 million recognized in the period. Both of these are one-off noises that have been normalized out of our results. If you could now turn to Slide 19, where I will discuss our banking and investment income, which contributed smaller but meaningful profits. Our banking proposition comprises a merchant cash advance product, a transaction account and term deposit accounts. The merchant cash advance product is a short-term loan, allowing merchants to conveniently supplement their cash flow requirements at a set upfront fee. The transaction account and term deposit accounts provide us with an efficient and stable source of funding. We originated $67.9 million in loans over the half year, which was a decrease of 6.6% to the prior comparative. The result was deliberate, firstly, by being more selective with credit approvals, as well as risk-adjusting the upfront fee higher to reflect economic conditions. We expected and realized an increase in lending losses for the period. However, this was more than offset by the higher gross profit generated by the lending book. We also diversified and increased our deposit funding. At 31 December, '23, we had total deposits of $111.8 million. The Tyro bank account provides both a stable as well as a low-cost source of funding, allowing us to earn a positive interest rate spread. Wholesale term deposits, on the other hand, are raised mainly for stability. Taking each of these in turn, the annual net return after lending losses on the merchant loans was 20.6% on an average loan balance of $45.2 million over the period. This was up from 15.5% in the pcp. The increased return was driven by a higher upfront fee, as well as a slightly shorter average loan duration. On average, each loan was fully repaid over 6 months compared to 6.2 months in the pcp. In addition to lending, we were able to achieve a positive spread on merchant deposits. Excess deposits were invested at a weighted average rate of 4.3% for the half compared to 2.7% in the pcp. Netting out the average interest expense of 2.1% annualized, the net return on the excess deposits was 2.2%, up from 1.9% in the previous year. As a result, the banking book in total yielded a net return of 10.2% for the half year, up from 8.4% in the pcp. As the book performance is a function of spread over a short duration, the profitability of the business is less susceptible to the external interest rate environment. We will continue to leverage our ADI license as part of our strategy. Finally, the corporate segment did benefit directly from the increased interest rate environment. Our net yield on our working capital increased from 2.7% in the prior comparative period to 4.5% in the current half. Turning to the next slide, Slide 20, I'd like to talk through the expenses for the half year. In reporting our FY '23 results, we spoke about how we've been taking steps to improve our operating efficiency through more disciplined cost management. In the first half of FY '24, we've made further progress with a marked improvement in underlying operating expenses as a percentage of gross profit. This measure has improved sequentially in each of the 2 last halves. At 68%, underlying expenses as a proportion of gross profit was 10 percentage points lower in the half year compared to the first half of FY '23. Underlying operating expenses were $71.9 million, which was 3.5% lower than the prior comparative and reflect a number of items. I will touch on some of these now. Firstly, realizing more of the benefits from the actions we recently took to right-size the organization, we saw a reduction of $4.6 million in staff costs. This was despite a decrease in capitalization of $2.5 million for the half. Our total headcount at 31 December 2023 was 585 compared with 655 at 31 December 2022 and 22% lower than the peak headcount in March 2022 under the previous operating model. The savings were partially offset by 2 [ minor ] items. Firstly, continued growth in marketing, which was $0.6 million higher. We continue to invest more in marketing, particularly as we launch additional products and features for our merchants and co-invest with our retail partners. And secondly, a $1.3 million increase in hosting and licensing costs, reflecting the ongoing work to improve and automate onboarding. Licenses, in particular, were impacted by inflationary pressures during the year. In addition to the underlying costs, we also saw $3.9 million of one-off costs in the period that I have spoken about. The only additional call-out on these one-offs I'd like to make is that we successfully settled our litigation against the POS for $10 million in the second half. Importantly, where we are spending, we are spending in the right areas, as you will see in the chart on the right. More than 60% of all spend is dedicated to product development and sales and marketing, areas that we're investing in to drive sustainable future growth. Turning now to Slide #21, this slide shows the strength of our balance sheet with 3 key metrics. With our banking license and the ability to take deposits, we ended the year with a strong liquidity position. Our total liquidity, which shows the total amount of cash and financial investments, increased to $150 million, up from $128.9 million at 30th June, 2023. The increase was driven by free cash flow of $10.4 million and a net inflow from our banking balances. Our total regulatory capital was $103 million, converting to a total capital ratio of 53% at 31 December, 2023. The strength of our balance sheet allows us the confidence and opportunity to invest for the future, as well as providing us optionality for any acquisition opportunities that may present itself in the market. In October last year, we also stated that we were exploring a share buyback of up to $20 million, implementation of which is subject to regulatory approval. We will inform the market once an outcome is reached. On the next slide, and before I hand back to Jon, I would like to recap on the 3 key things that stand out to me from these results: firstly, increased gross profit, which continues to drive the top line; secondly, our disciplined cost management; and finally, improved profitability and cash generation. We recorded a record positive free cash flow in the period, which I think is a great financial outcome. I will now pass back to Jon, who will talk through the outlook and updated guidance for the business for the remainder of FY '24.

Thanks, Prav. I now ask you to move to Slide 24 for an outlook and guidance update. Performance in the first 7 weeks of the year has been consistent with the last 3 months of the calendar year, moderate growth in hospitality and retail, with health and services growing strongly. The current interest rate environment continues to moderate discretionary spend, which we expect to continue for the remainder of the financial year. Reflecting the positive impacts of the pricing transformation ongoing work to improve our operating efficiency and profitability, I'm pleased to share the following updated guidance. For transaction value, we are guiding to a range of between $43 billion and $44 billion. For gross profit, we are guiding to between $208 million and $215 million, with the bottom of this range up from $206 million. For EBITDA, we have a range of between $54 million and $58 million, again with the bottom of this range up from $52 million, and we are targeting an EBITDA margin of approximately 26%. While we're pleased with our progress this half, we remain alert to the macroeconomic and competitive challenges for the remainder of the financial year. If you could now turn to Slide 25, in a macroeconomic environment that has challenged consumer spending in discretionary categories and an increasingly competitive payments environment, Tyro has not only delivered a strong set of first half results, but we continue to position the business for sustainable growth to increase the lifetime value of customers and to grow our profits. Our profit and free cash flow results are excellent, and we have demonstrated strong growth in our nondiscretionary verticals, particularly in health, where transaction value growth was $600 million. We have maintained our focus on operating efficiency, delivering a further 11% reduction in headcount, while achieving a 10.5% increase in gross profit and a 3.5% reduction in underlying expenses. Finally, our results demonstrate that we're becoming more profitable and a more profitable and resilient business. The opportunities to grow gross profit and our customer base are significant. These excite us, and we look forward towards the rest of the year. I'd like to thank the Tyro team and our partners for their hard work and our shareholders and customers for their support. I will now hand back to the call host and invite any questions.

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

Just a few questions from me. In terms of the TTV guidance, it's down to 6%. Can you talk a little bit about sort of what changed since you provided the AGM update from back in November?

Bob, Jon, here. I'll get Prav to talk to that, and I'll add as appropriate.

Great. Bob, good question. So I'll probably talk through the 2 key metrics, one being the transaction value and the other being the gross profit. So I think as you saw, when we updated the market in October, we continued to maintain our guidance update on our underlying metrics. And we were seeing ourselves leading into the transaction value in the lower range of the previous guidance. What's changed since? So one of the things that Jon spoke about through the year, we have seen -- while we've seen increased application numbers, we did see more of a skew towards the BYO and the Tyro Go products. And the new transaction value contributed by those merchants were probably lower than what we expected but at a better margin. I think the other thing that we saw since was the loss of merchants and transaction value in the Bendigo book, which again was negative to the transaction value but better from a margin perspective. On the other side, we also saw very strong growth in health, which we continue to see since, and health is coming through at a much, much stronger margin than the rest of our portfolio. On the 1st of December as well, we implemented the second phase of our pricing transformation project, which is something I think I called out at the last full year. It's an 18-month project. And the result so far on that has been more positive than we expected. So while our transaction value guidance is lower than our bottom range last time, we continue to maintain our gross profit guidance.

Great. And then, just in terms of thinking about merchant growth across the sort of different verticals, it looks like definitely in hospitality and a little bit in sort of retail, it's been sort of challenged. Do you sort of expect that to continue, especially with your sort of injunction with Lightspeed potentially disappearing at the end of the year?

Bob, I think that there's a couple of things there. I think that there's 2 elements that are impacting growth in -- certainly in the hospitality vertical. I think we are seeing the competitive issues associated with Lightspeed, as an example. And while we've got the settlement and the injunction will continue -- that will continue through until September. We also obviously see lower discretionary spend. I think that importantly, what we've got now is a number of solutions that we believe and we know, through the work that we're doing with various partners, that will help us defend and continue to grow in that particular vertical. But probably, when you look at the sort of the combination of competitive threats and you look at the discretionary spend nature of that category, it's probably going to have more moderate growth in the short term, which we expect to see accelerate probably early in the new financial year.

Sorry, if I just add to that, if you look at vertical by vertical, hospitality grew at about 2% to the last half. In our guidance going forward, we're looking at a low end of flat to 2% growth continuing. Retail was negative, too. So again, you got to remember that Mecca was one of the key drivers of the [ lower, and that ] was expected and we already had forecasted that. And the second half should see a better comparative for that. So we are looking at retail at negative 2% to a flat growth. Health, as I mentioned, was the best margin, and it grew at 24%. So, on the range into the guidance, we're looking at that between a 20% to 25% growth. And services as well was excellent margins, grew at 7%. We're looking at that growing between 5% and 8%.

No, that's really good color. And then, just a final one on the opportunity there with unified payments. Can you talk a little bit about sort of what the economics of that would look like? Like would that be dilutive to your margins or accretive to your margins? And who would you be going up as competitors to ink out these agreements with your POS partners? Are you going up against people like Cuscal, or is it more like Stripe?

Maybe just from a competitive perspective, we think that this offering is fairly unique. Stripe are offering some of these types of services. But in terms of sort of, let's call it, our traditional competitors, there's really not anyone else that's out there sort of providing these services. So, by working very actively with that network of POS providers, we do think that we've got a great opportunity. I'll let Prav talk to the economics.

Thanks, Jon. So the economics are something that we're still working through with the partners at this point. I'm not going to be giving guidance beyond FY '24. I don't think it's going to have a big economic impact on the second half. The only thing I'll call out is the economics -- the dynamics of this feature would be more accessible from a free cash flow perspective. So while the embedded payments, the relevant margin to look at would be the net math as opposed to gross profit because it would not have a hardware implication. It would be -- as I mentioned, no hardware implications, therefore, it would be offset with a lower cash outflow. But it is something we'll probably talk more about at the full year.

The next question is from Tim Piper with UBS.

Just first one on the guidance. Just on the EBITDA in the second half and the margin on gross profit, just looking at the first half, it was at, I think, 26%, but it was sort of weighed down the first few months and there were some one-off costs in there related to legal costs and things like that. If I strip the numbers out correctly, like November, December looked above 30% EBITDA margin. Second half implies that drops back down into sort of the 26%, 27% mark. Any reason why you can't sort of do better in that EBITDA margin in the second half? And I guess the follow-on to that is those sort of one-off costs that you have called out in 1H '24, what's your expectation? Are they effectively 0 in the second half of '24?

Thanks, Tim, and thanks for the question. Look, yes, we can always do better, and we'd always try to do better. But I think the one thing that December and November is generally impacted by seasonality. So one of the things is transaction value for any financial year is the highest at December with the Christmas period, and I expect the same for this year. Like I mentioned, we also implemented card-based pricing from the 1st of December, so that would have improved our gross profit. We also had -- for the first time, we had an office shutdown for 2 weeks, which improved our expenses by getting a positive in our annual leave movement. So I think seasonality would have been a noise. In the second half on the one-offs, I would -- if you're forecasting it, if you look at the range that we provided at 26% EBITDA margin, the range would be implied as a total of $154 million to $158 million. The way I would look at it is if you start with the underlying costs in the first half of $72 million, our salary increases are effective 1 January, and we had on average about a 4% across-the-board increase. So that will be about $3 million into the second half. You'd probably allow for a little bit more, as I mentioned, sales and marketing of about $1 million. Lending losses, we do expect lending losses to increase a little bit as well, which would probably take an additional $2 million on that -- sorry, $1 million on that, which gives us $153 million. You add back the $4 million one-offs that we had in the first half, that takes you to about $157 million. But we also did reduce headcount in October last year. So you would offset that with a savings of about $2 million, which is about between $155 million and $156 million, which is kind of in the middle of the range that we are forecasting.

Okay. That's helpful. Just next one on the $10 million on the Counter outcome on the court case, can you break down how we sort of think about that? There's probably legal costs included in that $10 million. And then, once you strip out the $10 million, was it sort of awarded on a basis of assumed loss of gross profit or business in terms of the merchants that were moved across incorrectly? Or like what does that sort of number represent from that point of view?

Yes. Tim, it's Jon. The $10 million was a settlement payment that covered both our legal expenses and the damages that were incurred as a result of Lightspeed's actions and the customer migration that we had seen up until now. So there's damages associated with that.

Tim, I think we also had a probability assigned of merchants that reasonably could have churned as a result of this. So we believe the $10 million was a good outcome.

Yes, we think it was a good outcome.

Okay. Sure. Just following on from that, the churn, I think the churn you called out on a merchant basis at the AGM was around the 14.7% mark, and you called out some figures attributed to Lightspeed there. Merchant churn came in at -- was at 16% for the half. Can you just give us some commentary around what you saw in November, December and what the sort of the delta is between those 2 merchant churn numbers?

I would probably attribute the delta more to our experience with the BYO product that we've offered. So, effectively, what we have seen, one is it attracts a lot of micro, if not nano-merchants. So they are merchants that typically are taking up the BYO. At the moment, there is no minimal fees associated with that. So merchants that are either using it only for weekends -- some are using it as a backup. Some have experimented with it. So it's come through as a new application, but then decided not to use it going forward. So, not a big deal from a transaction value perspective. But obviously, as every merchant comes in as an application, and if they're inactive, I think that increases the churn rate associated with that. So, as Jon mentioned, this is something that we are aware of, and we saw an increase in that skew in the second half, and we are addressing that as we speak.

So how far has the churn reduced since the outcome of the court case now?

Well, the court case was settled like 2 weeks ago, Tim. So we'd have to go and have a look at those numbers. I would probably say as well that we obviously had an injunction in place for part of the half. The injunction, from memory, was probably about November. But quite frankly, probably a lot of the damage had taken place prior to that.

I might just -- but I might just orient you towards more of the transaction value churns, Tim, just because that's really is what drives our business. So if you look at the 13%, it's -- 1% of that we knew was about Mecca. 1% was Bendigo, and the rest is just general insolvencies and Lightspeed all within that.

That's helpful. I'll just squeeze one more in. Just on the Bendigo side of the business, not surprising to see that business kind of still under a little bit of pressure. What's your thoughts? You called out some initiatives there to try and grow that front book again and improve it. What's your thoughts around the pricing structure on Bendigo? That hasn't been re-priced, obviously, for a long time, a shift across now. Do you think you can re-price and get a better payments gross margin at the same time as actually growing the front book again? Or do you need to sort of keep pricing lower?

No. So Tim, we haven't been able to -- as you know, we haven't been able to and we haven't re-priced that book at all to this point in time. That will happen in this half. Late in the second half, we will re-price that book. And we need to make sure that we earn the right margin on the customers we have from a back book perspective. But we're pretty comfortable that we've got the right actions in place from a front book growth perspective. But we've got the actions in place, but we need to see the results start to come through. So, that re-pricing will happen.

The next question is from John Campbell with Jefferies.

Just in the launch of your bundled payments and POS offering, does that create any issues with any of your channel partners?

No. We're working very, very actively with our channel partners. What I think we're seeing with all channel partners is some opportunities to be able to provide more of an integrated solution. So, no, we see it as a really good thing, and our channel partners are excited about the opportunity.

So across the whole group, then there's generally broad encouragement for it?

Yes. Look, I would say, broadly, the feedback that we're getting is very positive.

Yes. Okay. And just in terms of the 12 basis point increase in the merchant service fee in the last 2 years, some of that's due to positive mix shift, I take it, from, say, towards sectors such as health and some of it is re-pricing. What is the -- how much of it is sort of a positive mix shift? And how much is due to re-pricing?

I'm going to get Prav to take that one.

I'm sorry, John, which page in the presentation are you referring to?

Well, just looking at the Slide 18, in terms of Tyro's core margin, merchant service fees up 12 basis points in the 2-year period. And I just wondered how much of that is basically due to effectively re-pricing and how much is a better mix of underlying sectors?

Understood. I will probably look at the middle graph, so the gross profit margin, which is really the economic driver. The problem with looking at the merchant service fee is that it is also reflective of the changes in card mix. So for example, international cards, they have an MSF of 3% and the costs are also around about 3%, so don't actually contribute to the bottom line. Of the gross profit margin, which went from 41.3 bps to 43.1 basis points, I think, as I mentioned, about $3.3 million of that is to do with the Tyro core growth of 4% and the remainder, about $3.6 million is to do with active margin management.

The next question is from Brendan Carrig with Macquarie.

Just maybe just a follow-up on the expenses. Prav, can you just outline on the $3.9 million of one-off expenses, are any of those expected to sort of reoccur going forward? Or are there similar sort of one-off expenses that you would expect either in the second half or next year? Or are they all going to just drop completely out of the cost base on that $3.9 million of one-off?

As far as we are forecasting at this point, there are no additional one-offs in the second half. So the $3.9 million would be for the full year.

Excellent. And then, just on the pricing that you mentioned from the 1st of December, are you able to sort of talk to a bit more detail on the quantum of the benefits that, that gave? And then, obviously, there will be 5 months of additional benefits that will be flowing through in the second half?

Yes, sure. So if you actually look at our first half by business, I think the main benefits in the second half will be coming from the payments side. If you just look at the midpoint of our transaction value guidance, I would expect our payments gross margin to increase by between 2 basis points and 3 basis points in the second half.

Okay. That's helpful. And then, the last one, just to follow up on the buyback, I guess in terms of timing, you mentioned the $20 million and you've got approvals to go through, sort of how should we be thinking about that process and the timing as to which you need to -- or you should be potentially getting those approvals?

Just to clarify, it's subject to regulatory approval. So we continue to work with the regulator. At this point, we don't have any approval, sorry.

Yes. No, I get that. But if you -- I assume you're asking for approvals or going through the process of getting approval. So I guess, how long does that take? Or at least, what's the time frame as to when you might be able to obtain those regulatory approvals?

It's a very hard question to answer, Brendan. We're actively engaging with the regulator. We're having regular conversations. We've provided all the information that we think is required and we're waiting. So I'd say it's very constructive discussions, but we haven't been given a time frame at this point.

The next question is from Stewart Oldfield with Field Research.

I see Pismo out of Brazil announced a debit card tie-up with you guys last month, and you referred to that Ingenico outsourcing arrangement earlier in the call. So would it be wrong to think that we might be getting some more outsourcing deals in the future?

No. Look, I think that we're partnering with Pismo to be able to provide our virtual debit card, and obviously, Ingenico, from a term logistics perspective. I think that a key part of our strategy and approach is to be able to work with the best partners who can provide us with solutions and capabilities that allow us to be able to provide leading customer value propositions and to run our business as efficiently as possible. So where those opportunities arise, we will continue to look at them. But there's none that I would specifically call out from an outsourcing perspective. There's no sort of further plans specifically at the moment. But as I said, we'll keep those options open.

Got it. And you referred to your positive competitive position, really, the likes of Square, Stripe and Smartpay on the Counter settlement. But I noticed Zelle, the other day, was saying they had now had 50,000 customers after 3 years and that 50% of those customers are coming from what might previously been described as disruptors. I was just interested on the Bendigo side of things. Who are those customers signing up with? I assume it's not the major banks.

Sorry, who are the Bendigo customers signing up with?

Yes, who are they going to? Who are they choosing?

We don't have any visibility about who they're choosing. We know that -- we believe that about 50% of those are businesses that are closing their doors, but we don't get any visibility of if a customer is migrating, who they're migrating to.

Got you. And finally, just my ignorance, when you talk about acquisition opportunities, are there any sort of capabilities that you'd call out that you feel like you're most keen to fill in the short term?

No, there's nothing I'd specifically call out. I think that we certainly are interested in the right M&A opportunities if they arise, but there's nothing that I'd call out.

The next question is from Cameron Halkett with Wilsons Advisory.

One from me. Just wondering if you can talk through the no-cost EFTPOS launch, how that has fared so far? And also, I suppose, how much of a focus is there for Tyro, where appropriate, on moving some of the back book over to no-cost EFTPOS, give the higher embedded margin?

Look, I would say that if you think about sort of the 2 surcharging-related products that we have, one which is no-cost EFTPOS and one which is sort of surcharging that is configurable by merchants, we have, over the half, seen an increase in the adoption of both of those products. We see them as a solution that a merchant can select. And while the margin is generally pretty good for us, our approach is very much to make merchants aware of these solutions to make sure that they have the right information so that they can make their consumers aware. And we don't proactively intend to drive customer swap out or anything like that. We'll just make sure merchants are aware, and we'll provide it as a feature or an option for them.

Yes. So it sounds maybe a little bit more of a front book focus than back book in some way.

I would say that if customers ring us, we certainly make them aware that the product is available. So it's the effectiveness of our direct marketing capabilities to make sure that merchants are aware. They're aware, then I wouldn't say it's necessarily any more front book or back book.

I would also probably just add on to that. It's also a play for us to make sure that if a merchant calls in regarding their pricing, if somebody else can offer a no-cost EFTPOS, so we can also offer that. So our features are no less than what's available in the market.

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

Well, thank you very much. Thanks to everyone for your interest and for joining our call this morning. I know that we're meeting with many of you over the coming couple of weeks. So thanks again, and look forward to hearing or seeing you all soon. Thank you.

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