Hi mate. I did, I bought a small parcel at current levels (after the market had steadied a little). For those that didn’t see, Tyro shares were hammered (down 20% at one point) during and following the AGM.

There was initially a lot of confusion about the drop in share price, but I subsequently suspected (as with many others, analysts included) that the share price took a hit due to a combination of:

• Management failing to give guidance
• Gross profits up until Oct 2021 was 14% in comparison to profits in the prior period. This was despite transaction value growth rate being 25%. There were some real question marks, and rightly so, about declining margins here. Why was there such a difference between the two figures? Is top line growth potentially not translating to profitability?

Tyro provided further clarification after close of market. This stated gross profits had been reduced based on the Bendigo Bank Alliance revenue share, resulting in variance between transaction value (25%) and gross profits (14%).

This was satisfactory in my opinion. What puzzled me is the fact that, on a statutory basis, they also indicated that alliance revenue share would not be deducted from gross profit, and instead amortised into depreciation and amortization expense. This will therefore make the gross profit up 22%, not 14%. I am not sure how they can do this, perhaps someone else can clarify? Seems a little fishy to me but I don’t have the greatest understanding of the ins and outs of this sort of thing – so any additional insights are welcome.

As for what I think, I think the market has overreacted slightly. Just like the recent-ish short seller report, in which Tyro shares fell to mid-2s, I bought more shares. I have done the same here, but unlike back then when I backed up the truck, I haven’t done so here due to some of the question marks that still linger (instead adding a small parcel to cover my backside due to a few lingering unknowns).

As for management not giving guidance, I have zero concerns with this – in fact I would prefer that they don’t. I don’t care how competent a management team might be, no one can forecast the next 6-month period, particularly a business which relies on transactions. Even if the market chucks a tantrum short term, this looks better than a management team setting guidance, and potentially overpromising and under-delivering – because restrictions tightened up for whatever reason.     

Re: gross profits, this was a little more concerning. While a fair chunk of revenue is being shared under the alliance, more than I initially calculated, the partnership still appears a bloody good one (and management’s decision to embark on it was absolutely the right one in my view). If there are additional signs that margins are declining, this however would concern me and I would consider taking some profits off the table. What I think is most important here is, Tyro won’t be a world beater, but should they continue to grow at 20-25%, I believe there will continue to be favourable upside. Another thing to remember is the company still managed to increase revenue in a period where Australia’s largest states were locked down. I think the business fared very well during this period considering. Based on my valuation of the business, which I intentionally made conservative to help me account for risk, Tyro is trading around fair value at 3.30. I anticipate transaction volumes will continue to increase in the next 6 to 12 months. I also anticipate that management, armed with a warchest of cash and a savvy leader in Robbie Cooke, will make additional strategic partnerships similar to the Bendigo Bank one which will see result in further increases to Tyro's transaction volumes. That said, I am keeping a close eye on transaction volume to profit translation to ensure Tyro’s margins aren’t declining (noting the competition that exists in this industry).

Hi @jwrostagno27,

Thanks for your thoughts. My responses are below:

“If Bendigo bank decide not to renew the partnership at anytime in the near future (lets say the next 3-5 years) then this will have a big impact on Tyro's transaction volumes, as well as the brand engagement and number of businesses using Tyro. We may find that if Tyro is a valuable product to Bendigo Bank, that they could look at acquiring it. I think this is relatively likely.”

The Bendigo/Tyro alliance has an initial 10-year term with provision for extension by agreement for additional five-year terms. It has resulted in 26,000 Bendigo terminals being shifted across to Tyro; considerable time and resource is involved here in enabling this to occur (it simply wouldn’t be a short term arrangement as a result – but we know this isn’t).

“We may find that if Tyro is a valuable product to Bendigo Bank, that they could look at acquiring it. I think this is relatively likely.”

With respect to a possible takeover, there are no bear cases here in my opinion. Shareholders would almost certainly be rewarded in this instance. I would probably give the neighbour a high five to be completely honest with you!

“I still remain confident that Tyro has a good sized portion of the health care, health fund card rebate market. This is something that I believe is very important for them right now, but I also see the space changing rapidly in a way that could be detrimental to Tyro's business and could make it obsolete in the health care market.”

I try not to categorise Tyro into industries. Out of all the companies I own, this one is arguably the most basic (with respect to the thesis): I want to see steady growth in transaction volumes and merchants acquired. It won’t be a world beater and deliver outrageous growth, but that’s not why I am here. I try not to over complicate this one.

The financials are sound in my opinion – since 2015 they have delivered YoY growth to gross profit, while operating expenses have steadily decreased since FY17. Conversely, transaction volume and merchants acquired have increased gradually in volume YoY. Merchant churn is at its lowest level in five years. Structurally, I like what I see under the car bonnet. I am a big fan of Robbie Cooke and am therefore confident that he will make the right decisions, while at the helm, to create and maintain shareholder value. Yes, there will be slow periods to growth – but when/if this plateaus my thesis is busted and I will sell and move onto other opportunities in the market.

“What things could give Tyro the longevity it needs in its marketplace?”

With respect to Tyro, quality management is the first big one – and Tyro have that in droves. Secondly, continuing to see ongoing growth and gradual increases to market share – both organically and through sensible partnerships and acquisitions. The latter benefits enormously from having Cooke at the helm; he is a great operator and he has demonstrated that over many years.

But to answer your question at a high level: bloody unpopular banks and growing distaste for the way they operate. It reminds me of Taxi vs Uber. This industry was ripe for disruption and this has occurred – and continues to occur. Banks aren’t getting more populated; quite the opposite. The TAM is big enough for the likes of Square, Tyro and a few other smaller players. While I continue to see growth to all major metrics and low churn rates – with Cooke in charge – I will (touch wood) remain a happy shareholder.