Earnings Transcript for SPT.AX - Q4 Fiscal Year 2022

Catherine Strong: Hello, everyone, and welcome to Splitit's Q4 Financial Year 2022 Investor Webinar. [Operator Instructions] For your information, the call is being recorded. And I would like to now turn the conference call over to Nandan Sheth, your CEO of Splitit. Nandan.

Nandan Sheth: Thank you. Good morning from beautiful Melbourne. It is my pleasure and honor to be in Australia to give you the readout of our Q4 2022 results. This meeting will be co-chaired by myself and our Chief Financial Officer, Ben Malone. The market reaction to our embedded white label installment solution has been very positive. On the back of this change or pivot, we have recorded our strongest MSV quarter in history. The future is bright for Splitit. Our focus and our energies are targeting the execution of the strategy that was then unfolded in 2022. Some key financial highlights. Our Q4 MSV was $141 million with a revenue, registered revenue of $3.1 million. Our net transaction margin was 1.3%, an increase over last year. Our operating expense was $4.7 million, a $2.7 million reduction year-over-year. And cash on hand is just a tad under $30 million, with $19.2 million available for operating activities. A quick business update. We've had a very strong quarter in terms of delivering on our mission to attract large partners and large merchants or enterprise merchants to our platform. Number one, we executed on a global partnership, a distribution partnership with Checkout.com, one of the fastest-growing payments platforms in the world. This is a global deal that will allow us to be embedded within the Checkout sales organization as a value-added service. But more interestingly, on the back of this deal and within 60 days, we closed AliExpress, one of the largest e-commerce marketplaces in the world. This is a testament to our ability to convert partnership relationships into actual merchant traction and MSV traction to follow. Number three, we signed a North America partnership with Worldline. Worldline is one of the largest payment processors in the world, doing about $460 million in -- $460 billion in sales volume across their different regions. This will be an embedded solution where we will technically integrate to the Worldline platforms starting off with North America. On the back of the success that we've had in Japan, we expanded our Google relationship to include 3 further markets. We believe that this will give us exponential growth compared to the MSV that Google is driving with us today. Tabby, one of the largest buy now, pay later payment platforms or payment wallets in the Middle East, has implemented our white label solution as a means to service some of the largest brands in the world that operate in the Middle East. That relationship alone accrued $12 million in MSV in December, the largest month that they've had since they became a client. We continue to add to our management team and our leadership. We just added Colin Mellon as our Chief Commercial Officer. Colin comes where the over 20 years of experience in fintech and payments, having worked at First Data, Fiserv and Payspan. In a transition year where we self-churned merchants that were unprofitable and high-risk merchants to the tune of about $50 million to $60 million in annualized MSV, we came in and closed the year at $231 million in MSV, which is 9% growth year-over-year. From a product standpoint and an innovation standpoint, we launched a very creative pay after delivery service in partnership with Checkout, which will be implemented at AliExpress. We believe that this is a highly accretive product, a very unique installment solution that has been productized and will be sold to other relevant merchants. Number two, we launched an embedded third-party experience for Shopify, allowing Shopify merchants to experience our white label solution. And with the anticipation of the growth, especially with some of the larger merchants and larger partners that we've closed in quarter, we continue to scale our back office and our compliance framework. With that said, I'm going to hand it off to Ben Malone to provide additional detail on our financials. Ben, over to you.

Ben Malone: Thanks, Nandan. Okay. So overall, when looking at Q4's top line metrics on screen right now, be in MSV and revenue, we've delivered solid year-on-year growth in what has been a transition year, as Nandan stated. As we mentioned previously, Q4 delivered our highest quarterly MSV and revenue, with 9% MSV and 6% revenue year-on-year growth. And more importantly, as we look to the top -- to the right-hand side of the screen, we see a very significant incremental MSV opportunity over the next 3 years with $2 billion to $4 billion through a combination of merchant expansion, new merchant growth and partner growth. And some recent examples of that Nandan is going to talk about shortly. At 1.4% net transaction margin, which is our full year 2022 number, this would translate to $28 million to $56 million of incremental transaction margin for the business. So if we just move to the -- thank you. So as we move past the top line, we focus on unit economics on this slide. The key theme here is a year of significant improvement and paving a pathway to profitability. So our Q4 net transaction margins came in at 1.3%, and this was 50% -- over 50% year-on-year growth. And this was delivered through a reduction in year-over-year funding costs as well as an enhanced focus on profitable merchants, as Nandan mentioned earlier. Now being shielded from the defaults that are impacting the rest of the industry and having over 30% of our portfolio on a nonfunded product, it provides us with a structural advantage to maintain these numbers. You will have a note that the Q4 margins had softened slightly compared to previous quarters, as the effect of some recent interest rates came through. But in the longer term, we remain very confident that as the portfolio expands and diversifies with new merchants on both funded and nonfunded products that our transaction margins will longer term remain in line with what we've delivered throughout this year. And finally, from an OpEx perspective, you'll note the continuation of the rebased cost base that we executed on throughout the first half of the year and we've continued in Q4, in line with prior quarter, which we expect going forward as well. So that's enough for me on the financials, and I'm going to hand back to Nandan now to talk a little bit more about some partnerships.

Nandan Sheth: Thank you very much, Ben. The reason why I'm really excited about a partnership like Checkout.com is the fact that very soon after executing our contract with Checkout, we were able to score one of the largest marketplaces in the world, in AliExpress and Alipay company. Now we believe that just in a couple of years, this particular relationship could be over $600 million in MSV. As we go through the year and as we generate more activity from Checkout, we will be able to further refine the expected value from this relationship, but I do believe that this relationship will accrue yield over many years to come. The flexibility of our technology and our ability to be plugged in to a payment platform's API infrastructure gives us a huge advantage because we have the ability to be turned on and turned off by existing merchants that are using Checkout.com today. Finally, we've shown that we can co-collaborate and innovate with one of the fastest-growing and largest unicorns in the world in delivering a pay after delivery service. We believe that this pay after delivery service, which is really a 1 to 2 installment service, gives us a very interesting opportunity [pay markets], which are dominated by cash on delivery or merchants such as the furniture segment that are dependent on delayed shipment. Next slide, please. Just like Checkout.com, Worldline provides an incredible opportunity not just for e-commerce, but also for point of sale. If you're not familiar with Worldline, 19,000 employees serving over 1 million merchants in 100 countries, and they are the largest merchant acquirer in Europe. And if you look into the details, they do over $460 billion in MSV across the company. Worldline will be embedding our service into their North America API stack, allowing us to be toggled on and toggled off not with -- not just with direct merchants, but also with ISOs and ISVs, giving us the opportunity to play beyond just the direct merchant category. We believe that this opportunity in the next 2 to 3 years could be worth up to $1 billion in MSV for us. As the year goes on, I'll give you much better clarity in how we're doing against those numbers. Next slide, please. So I wanted to make sure that I gave you my scorecard. If you remember back in November, we committed to delivering on some very specific goals. Goal number one was to secure 3 large enterprise merchants in 2023. We delivered Google as the first merchant, and we will continue to strive for adding more merchants to this list. Number two was to secure 2 large distribution partners. Checkout is one of the largest that was on our list, very fortunate to have secured them. We've got 2 additional distribution partnerships that we're working on, and we hope to announce 1 or 2 of those in the coming quarters. The next was to secure 2 merchant acquirers, one large, one small. I believe that in addition to Worldline, which is a large acquirer, we will probably be announcing in the next couple of quarters, another acquirer of the same size, if not larger. And last but not least, we are still working on our network partnerships to enable our solution not only to merchants, but also to issuers. So as we think about this, and we try to offer a little bit of an outlook and what this means, we believe that the deals that we closed so far, the backlog that we have within implementations will project out to an MSV run rate on target to be $700 million to $800 million by the end of 2023. And as I stated earlier, we'll have greater certainty on the year as we progress through the quarters, and I'll give you a more precise number to focus on as we go through the year. Next slide, please. So in summary, I think a very good end to the year. I'm very confident about the future prospects of Splitit. And in a year where I've been on the clock for 11 months, I think we've achieved a lot as a team. However, we have a lot more work to do. And we continue to focus, we continue to execute. We've delivered on some of the aspirations that we have in terms of large partnerships with the likes of a Checkout and Worldline. We have extended our relationship with Google, showcasing the successes that we've had in Japan. We have a strong base of merchants and partners in our pipeline, and you will see more announcements during 2023, as we close more direct merchants and more partners. We continue to innovate where such things as pay on delivery. Again, you'll see some sizable innovations coming out of us in the coming quarters. We have an excellent product innovation and technology team that has the ability to be agile and has the ability to focus on quality. Our Q1 focus on implementing existing partners and merchants while securing new clients to drive 2023 growth is really what we're going to hold in on within the first half of the year. With improved unit economics, we see a clear pathway to profitability. And for the first time in a few quarters, we're giving you a little bit more of an outlook in terms of our annualized run rate, which we're targeting to be $700 million to $800 million by 2023 -- by the end of 2023. Now please remember that the deals that we closed need to be implemented, need to mature. So much of the MSV, the growth of MSV will come in second half of the year, but we'll work tirelessly to ensure that the implementations and the onboarding gets done to drive these numbers in the first 2 quarters of 2023. I want to thank you for your confidence in us. I want to thank you for your support, and I want to say it again, the future is bright for Splitit. Back to you, Catherine.

A - Catherine Strong: [Operator Instructions] Our first question relates to a financial question for Nandan and Ben. Could you give us any indication on your time frame or your pathway to profitability?

Nandan Sheth: Ben, I'll hand that to you.

Ben Malone: Sure. Thanks, Nandan. So look, I think what we've always said, we've never given a prescribed sort of time frame. But what I will point to is that our unit economics have clearly turned this year, and we expect them to continue to do so. And then we expect, basically, the time line really is going to be dictated by the implementation and the pace of onboarding, as Nandan sort of outlined, and we'll know a lot more about that over the coming quarters. Once we hit that maturity level of around sort of $1.5 billion to $2 billion of MSV, then we see that, that is a real achievement that we can be achieving profitability by that point.

Catherine Strong: Thanks, Ben. And there is one more question at this stage. How is the business performing into the new quarter so far? Any color on how that's progressing?

Nandan Sheth: So on the back of a very strong quarter, the first quarter tends to be a little softer. We're seeing a similar trend for the first quarter of 2023. However, with that said, we've got a few fairly sizable implementations around the corner. So we're very hopeful that we start the first quarter in a very positive manner. As you look beyond the first quarter and you look at Q2, we're very hopeful that we'll start to see top line growth at scale in Q2, going into Q3, and Q4, where I think we'll see the crescendo for the year in terms of top line growth.

Catherine Strong: Thanks, Nandan. The next question is from [Thomas]. He asks Amazon's deal with a firm is ending. Do you have any plans to go after that opening?

Nandan Sheth: Look, we're always in discussions with the largest brands in the world. Amazon's deal with a firm actually charge the consumer and the dynamics in the ROI of that deal, I'm fairly familiar with. And our goal would not be to replicate that deal. Our goal would be to enable an infrastructure play for Amazon where they can enable installments on a white label basis across some of their largest markets in the -- at some of their largest markets in the world. As you know, it takes a lot of time and energy to secure a merchant of that size. But rest assured, we are working on securing the largest merchants and the largest brands such as AliExpress, and we're very hopeful that you'll see some results from that work that we're engaged on in the coming quarters.

Catherine Strong: Next question is, does Splitit have plans to develop a mobile app in the future to manage the cash flows and help users navigate Splitit easily?

Nandan Sheth: Look, we have a portal today where consumers can go to, to manage the card that's being used, to manage the installments and to gain communication. At this stage, we have no plans to have an app for consumers to manage their particular plans through us. However, we do have plans of white labeling a portal that merchants can use for their consumers. So for example, a merchant X, Y, Z, if they have their consumers, they want those consumers to have an end-to-end experience that is with their particular brand. So we're actually in the throes of white labeling our consumer portal, and we hope to deliver on that in the coming quarters.

Catherine Strong: Our next question is from James Lennon from Petra Capital. Can you please provide a bit more detail regarding Splitit's installment as a service conversion rate, share of MSV relative to other payment options like buy now, pay later?

Nandan Sheth: Sure. Our typical conversion rates are anywhere between 80% to 95%. They're in line with credit card approval rates. And in terms of share of Checkout, meaning what volume of a merchant's online sales can we touch, we've gone as high as 35%. So if you look at the ROI for the merchant and compare some of the publicly available information, therefore legacy buy now, pay laters where at 3% to 4% share of checkout is deemed to be success and conversion rates of 25% to 30%, and those conversion rates suffer an average ticket of, say, $250, and those conversion rates actually go down as the average ticket goes up. I think you can read between the lines and ascertain that the ROI that we bring to the merchant in terms of being a white label embedded solution, providing the highest conversion rates in the industry and eclipsing the share of Checkout that's available through the legacy buy now, pay later lenders is allowing us to break away from the pack.

Catherine Strong: Thank you very much. The next question is from [Thomas Cummins . Are there any plans to be present and grow through bricks-and-mortar stores?

Nandan Sheth: A fantastic question. I think there is a tremendous opportunity for face-to-face commerce and to split it to participate within face-to-face commerce, because if you look at the numbers in most countries or most markets, point-of-sale commerce is still 75% to 80% of all commerce within that market. I'm very interested in developing into this segment. I think we get a brand-new TAM by moving into this segment. And I firmly believe that no other provider can offer the frictionless solution that we can in terms of a one-click installment plan. So all I'm going to say is hold that thought and we will provide additional information on how we plan to deliver against that opportunity in the coming quarters.

Operator: Thank you very much, Nandan and Ben. That was our last question. As there are no further questions, I'll just hand back to you, Nandan, for some closing remarks before we complete the webinar.

Nandan Sheth: Look, I really appreciate you joining, if you have joined live. We very much are in a privileged position to be in a place to serve our shareholders. I want you to know that we're working tirelessly as a team to ensure that we register growth. No longer is this a strategy question, it's an execution question, and we're going to focus on executing on our strategy. Thank you very much for joining, and have a good rest of the day.