Novatti eyes the US to expand billing automation business

Peter Cook is the managing director of Novatti. It's a company that does credit card issuing. They work with Visa and MasterCard or I think Visa mainly, to issue credit cards for people, but they also manage payments processing for businesses and they've just launched in the US. They've been around for 18 years. They listed five years ago and they haven't done much, to be honest. It's been a pretty ordinary experience for those who came in on the float. They were 20 cents back then, and now they're 28, so not great. But he reckons they're off and running.

They've just raised $10 million, which they're going to invest in growth, capitalised at $64 million. Look, it's an interesting little company that's moving into the business payments industry in the US, hoping to replace cheques. That's what they're hoping to do.

Here's Peter Cook, the managing director of Novatti.

Table of contents:
Cash situation
Company history
Novatti platform
Four SaaS platforms
Cross border payments competitors
Growth ambitions
US customer focus
Share price performance

G'day Peter, thanks for joining us. Now, can I just start by talking about cash. You've just raised some money. How much have you got in the bank at the moment and how much are you burning per month?

Alan, we raised a bit over $10 million in early July. Essentially, the company is EBITDA breakeven right now, and we have consumed a little bit of that cash, about $1 million over the last three months, in building up in (a), paying off some creditors from the prior financial year and (b), building up some of our pre-funded deposits, so circa where we've got about $9 million left.

But are you saying you're permanently cashflow positive now? Are you going to start adding to that balance?

Let me answer that specifically, we are EBITDA break-even, or slightly positive and could continue that way. What we have said to the market is that raising was about growth. We are pressing the accelerator. I think I've hired 11 people in the last five weeks and in fact, 10 of those are in Victoria, so I think we're single-handedly driving the employment in Victoria, but of that, let's say $10 million, we've mentally allocated $1-2 million for growth. But so we're break-even, slightly positive or thereabouts, and at our election, we are spending some of that money on growth.

Right. Now, by way of explaining what you do and then it'll probably inform some discussion about where you're heading to and what the growth is that you're getting. Can we just talk about the history of the business? The platform that was created, the company was started in 2002 as Ezipin International, changed its name to Total Tel International, and then eventually pivoted from mobile phones to something bigger. Just explain to us what was created, what was the invention back in 2002?

Yes. So essentially the forerunner of Novatti, and as you said, Total Tel and Ezipin by names, were absolute pioneers in prepaid mobile phone telephony. Actually, the first prepaid mobile phone service in Australia was launched by myself with Vodafone and Ezipin International was really all about topping up those mobile phones with what's called recharge vouchers. And so if you imagine, it was essentially a fintech service for telcos and even today, we…

And your customer then was Vodafone, was it?

Our customers for Ezipin at that point became Voda, Optus and Telstra, and we would provide the technology and the service to allow people to go into a retail shop, buy a voucher and top up their pre-paid mobile phones. And even today, we provide related technology to Telstra on long-term support contracts, and inside their mobiles division. But really going to the pivot when we floated about four and a half years ago, the point was to take a lot of our fintech technology, which was primarily focused on telecommunications companies and change from being a software and tech provider to being a financial services network provider. And so today, if you look at our revenues from last financial year, it was $11.9 million. A bit under half was from technology and SaaS type services and professional services and the other half was from financial services, transaction fees.

What you did in 2012, was to restructure using what you were doing for the prepaid phones and created and turned it into what you call the Novatti platform. Is that right?

That's right. And so essentially what we call the Novatti platform today is really four different SaaS platforms and we use those platforms to provide cross border payments or Visa card issuing, or in fact, what's called acquiring services, where we do payments for merchants. And then we do a lot of payments for the Chinese wallets Alipay and WeChat. Essentially yes, platform type businesses providing those sorts of financial services.

Can you describe in layman's terms what the four platforms do?

Yes. Okay. Let's start with card issuing, which is based on us getting a licence from Visa last year to be an issuer. We primarily do programs, for instance, a large sports club, as an example, might come to us and say, "We've got 50,000 members. We want to give them all a membership card, that's also a payment card." And we would work with Visa to do a branded card and then we would run a service for them where their members would get a Visa card and be able to load funds and pay for services, either in store or online, so that's issuing. We are one of the…

And what do you get paid for that?

The revenue streams are that we would get project fees for setting it up. Then we get ongoing monthly fees for running the service, and then we get transaction fees. Traditionally card issuers in Australia have been the banks, you know, National Australia Bank issues its own cards. In this case, Novatti is now a licensed issuer, but we might issue a card to figuratively the Collingwood Football Club, and they could do a program and a member would have a card that is a payment card, as well as a membership card.

How many customers have you got doing that?

At the moment, we've got about eight program customers who between them have many, I'll say a hundred thousand of consumer customers and we are bringing on more programs, so largely, we are selling B2B. We are signing up programs and they bring on their customers. We did announce a large program with a US company called Marqeta. Marqeta are one of the biggest in the world at this, but in Australia, they've accessed our licence with Visa, for them to be able to roll out their programs in Australia. That's a slight variation on the revenue stream. We also have a business called Vasco Pay where small to medium business owners can go online, essentially identify themselves, KYC themselves and order cards. Now that might be for expense management. It might be, for instance, we've got some small taxi fleets where the taxi fleet owner will order some cards, so he can pay his drivers. So those sorts of services.

That's all part of that first use?

Yes.

Okay. Number two?

What we'd call cross border payments. Some people call it remittances. We essentially provide, I'll call it a layer, for technology and compliance in Australia. Imagine a small remittance company, again, figuratively say a Sri Lankan focused business may be run by a Sri Lankan ex-pat, might have a couple of thousand Sri Lankans as customers who regularly send money to Sri Lanka. With all of the changes with AUSTRAC and banking and so forth, they find it difficult to remain compliant and be able to keep up with modern technology and compliance needs, so that Sri Lankan remittance company would come under our compliance system. We would actually run all of their compliance for them and also all of their AUSTRAC reporting.

We've got about 40 customers who operate in that sort of mode, either sending money out of Australia or bringing money into Australia, where we essentially pay out to them. Just on that circumstance, imagine a company from the UK that's say got 20 employees in Australia. Every month, they need to pay 20 people. Instead of doing 20 individual international payments on the Swift network, which is expensive. They would send us a file. We've identified all of the beneficiaries and we pay out from our main bank account to the bank accounts of those 20 employees.

Who are your competitors in that? And do you compete with them on price?

There are a lot of companies that do cross border payments and remittances, and interestingly, just as an aside, it is one of the single largest industries in the world. I think the World Bank quotes remittances a $600 billion industry or something. But within Australia, there are traditional large companies, such as Western Union, there's MoneyGram, a listed company OzForex and a range of other competitors. Our particular expertise is around supporting some of these smaller companies and providing quite specialist compliance solutions, so we're very compliance focused. We've cut our own niche out, providing these services and we're growing the business quite strongly. And sorry, do we compete on price? Look, price is always there, but I'd say in the service offering, we're doing where we're providing compliance and technology, it's a fair price, but it's not a commodity driven price.

Right. Okay. What's the third thing?

The third thing is, we're doing a range of specialist payments for WeChat and Alipay and shortly UnionPay. Members of those Chinese payment schemes and methods, when they pay for goods and services in Australia, we, as an example, have set up a specialist service, chinapayments.com, where they can interface into the bank network, BPAY and pay bills. A use case would be a young Chinese girl who's say, at university in Australia, could pay her university fees, electricity, telephone bills, or whatever, through that service. Now, interestingly, since the pandemic what's happened is coming into Australia, we've had less students and virtually zero Chinese tourists, so the in-store component has dropped, but the online component of this has increased, as people, you can imagine that young Chinese girl we spoke about, she might still be in Australia. She's still got all of her bills to pay, so she wants to pay them electronically. Or if she's gone back to China, then she still may have to pay her rent or electricity or phone bill from China and so we're enabling all of that.

Okay. That's good and number four?

Number four is what we'd call traditional acquiring services and network payment services. And alongside this, we do some subscriber billing and automation services. Essentially for business type customers, we build payment networks for them to be able to create invoices, take payments from their clients and also make payments out to pay for other services. Early this year, we signed an agreement with a small listed company from Perth called rent.com.au and we're building a payments network for them called rentpay.com and then related to that, we're doing a whole lot of embedded payment services for them.

Right. What's your focus in going for growth now? You're talking about, how you're going to get the $10 million that you raised, is all about growth. What sort of people are you hiring and where are you focusing your growth ambitions?

We made an acquisition in early April, called Emersion, and that's our subscriber billing and embedded payments platform. We've hired about, I think, seven people for that business unit since August and we are one, driving the business development side of that. And that's both salespeople and onboarding and customer care and services people and we're getting very strong growth out of that business. But what we've also done is now hired an extra team to uplift their software, to localise it for the US and we've announced to the market that we'll launch that business in the US Q1 next calendar year. And so it's a SaaS platform for, as I said, billing, or subscriber billing automation and embedded payments. Essentially at the moment, we've got the business going very well in Australia and New Zealand, and we're uplifting it in the US for Q1 next calendar year. That will probably consume, say a million, million and a half dollars for the market entry to the US, and of that, just thinking through that, it's about $150,000 for software development between now and Christmas.

And then, we budget the next million dollars for business development and marketing costs in the US next calendar year. But what that really allows us to do is suddenly globalise and increase the value of that business unit. We go from being an Australia, New Zealand, SaaS play to an Australia, New Zealand and US SaaS play and then, without having announced it, one could assume that we'll then further globalise it to Asia and Europe.

What makes you think that the Emersion business model, the end to end billing collection subscription management and embedded payments is going to work in the US? I mean, give us a picture of that US business or that industry in the US that Emersion's going to be able to break into?

Yes, so interestingly, I guess I've done a lot of research on the US around various payment methods and deployed technologies, whilst the US leads in many things, there are some things that it doesn't, and they can take a lesson from us. And the other thing, of course, is it's a market in many ways, that's 12 to 15 times the size of Australia. The very specific things, and a lot of this is coming out of COVID, about the need for businesses to automate their processes, reduce the human input. As an example, in the US there's still a huge amount of business to business payments that are done by cheque. If we can help people essentially create their invoices from complex amounts of data, and then send out an invoice and then get paid for it, we're actually helping US businesses automate and there is just an immense need for that.

Look, to make it up a little bit, even for your business, let's say that you were invoicing me, which you're not, but let's say you're invoicing me per minute of this conversation. A normal accounting system, that's not a simple thing for it to collate. 27 minutes of recording for this and 12 minutes for that and adding in whether it's video, yes or no. We take all of those event records, very quickly collate them, make invoices and automate the business, to be able to get those bills out to their clients. There is just an immense need for that.

And so are you focusing on a particular customer set in the US or just spreading yourself around?

No. Our experience in Australia is what we would call small utilities, which could be small telecommunications, reseller companies, some small electricity and gas and water, small utilities like that. And then we have another very specific vertical in what's called managed service providers, which is companies that do things like provide your internet, your Microsoft licences, your Oracle licences, maybe your desktop computers and support. That particular vertical of which I think in Australia, the 3,000 providers, so you could imagine in the US, there would be 15 or 20 times that number. They have very specific billing needs, which a standard software system doesn't meet, a standard accounting system.

Again, if you think of the managed service provider, they provide you say your Microsoft licences, so that might be $20 a month. You phone them up and you get an hour of work done. That needs to be added to the bill. Maybe they're renting you some leased lines or hardware or whatever. Our software collates all of that and just very cleverly brings it together in automated billing. We'll very much focus on those market segments and in fact, we've commenced our initial business development into those markets already.

Just looking at the...

Sorry. One more thing, Alan. I think the other thing is, with software such as this, you also of course, want to have your strategic partnerships. So, Emersion is on the Oracle marketplace. We're also on the Xero marketplace in Australia and we are working towards similar marketplaces. The largest small business accounting marketplace in the US is QuickBooks Intuit. And so, we'll work to integrate there and then also, we do a lot of work with a company that's very specialist in this managed service provider marketplace called ConnectWise.

I was going to ask you, I thought maybe Xero and QuickBooks do what you do, but obviously they don't.

No, it's I guess, a deeper level of accounting for records and events inside a business.

Right.

You might think about it that in many ways we pre-process for the accounting packages.

Why haven't one of those companies taken you over by now?

Well, I guess we'd like to get a little bit bigger, a lot bigger and make it a compelling proposition that it would turn the dial for them. But yes, whilst I'm not running their strategy, I guess that they're very, very large companies. At the moment, they run very much, very focused on the accounting for small to medium business. And this is a lot more niche and specialist, but I guess if we were big enough to turn the dial on their revenues, they might take it.

Yeah. Right. I mean, for investors in your business since 2015, it hasn't been a shocking, terrible experience, but it hasn't been great. I mean, the stock has basically stayed where it is. It's 28 cents now, and it was 28 cents a few years ago. I mean, I think that you're not alone in that. I mean, looking at other payments companies, even OzForex and so on, they haven't done much either. What's been the problem?

I guess how I would put it is that the market, it prices you according to how it wants. In terms of running the business, we're a lot larger and a lot more sustainable and stable than we were a couple of years ago and our growth prospects are very strong. And I think for the first time now, is that we have a proper balance sheet that really allows us to drive hard for growth. So hopefully the market will just pick up on the fact that we've achieved break-even, which is always a worry. We're not, cum raise, which we had been for a number of years. And then I think the other thing is just on the upside is that we spent a lot of time and money getting ready to get a bank licence over the last two and a half years and at some point, the market will hopefully see very strong value come from the work we've done there.

Like any emerging or developing company, you go from an idea to small revenues to when are you going to be cash break-even when are you going to be in profit? We think we've turned that inflexion point. We're basically cash break-even, and as per the last quarterly, we consumed $16,000 in the quarter. And of course, now with a strong balance sheet, we can really punch hard.

Good to talk to you, Peter. Thanks.

Alan, thank you.

That was Peter Cook, the managing director of Novatti.