1.5 years ago, I detailed some of my main gripes with Credit Clear in the following forum post: https://strawman.com/forums/topic/6847

The TL;DR: Credit Clear tends to oversell the idea that they’re an AI and machine learning software company when, in reality, they’re more of a collections services company that uses software. While my opinion on that hasn’t changed much, I now find the business more interesting and have added it to both my personal and Strawman portfolios.

As a bit of background, Credit Clear is a collections services company. They help organizations recover overdue bills and loans, from the time a bill is issued up to around 180 days past due.

Many organisations require these types of services, as managing overdue payments internally can be a real headache. That’s why Credit Clear, along with many competitors, exists. Collection services companies collect overdue debts on the behalf of banks, credit unions, lenders, utilities, local, various levels of government, B2B companies, and essentially any business facing late payments.

Debts more 180 days overdue are generally considered highly impaired, and organisations may consider selling these to debt purchasing companies at cents on the dollar. The two largest debt purchasing companies in Australia - both listed on the ASX - are Credit Corp (CCP.AX) and Pioneer Credit (PNC.AX).

In the collections services space, Credit Clear is likely the second-largest player in Australia and New Zealand, after Credit Corp, with FY24 revenues of $42.2m compared to Credit Corp’s $75.5m.

EBIT Normalised is EBIT excluding amortisation of customer contracts from prior acquisitions

There are several things I like about the company:

1. In FY24, Credit Clear inflected into free cashflow positive, and is close to profitability. EBIT, excluding the amortisation of customer contracts from previous acquisitions, was just -$900k.
2. The revenue growth of +17.5% was largely organic growth. A small acquisition of an insurance collections company in Nov 2023 contributed, but even adjusting for this, revenue growth was still a healthy +14.5%. The company is guiding for revenue to grow +16% in FY25 mostly through the expansion of work with existing wins.
3. Over the past 1.5 years, the company has become less promotional and more conservative. For example, FY24 guidance started on 30-Aug-2023 at $39-41m revenue and $1-2m underlying EBITDA (uEBITDA), and ended up at $42m revenue and $4.2m uEBITDA after multiple upgrades during the year.
4. Gaining traction. In Q4 FY24, the company went live with collections for ANZ Bank. Following consistent performance, Credit Clear has been allocated increased share of ANZ’s debt portfolios. There will be more upside should they continue to outperform the other panelists. This case study will no doubt help strengthen its position in winning with other potential customers.
5. There’s still considerable runway in Australia/NZ, in particular in segments where CCR has limited presence like federal government departments. International expansion, particularly in markets like the UK, is another possibility. Since Credit Clear collects debts on behalf of clients without taking on balance sheet risk (unlike debt purchasers), the risks of expanding abroad should be relatively low.
6. The most exciting development for me is the area I was previously critical of - Credit Clear’s “AI company” narrative. While I believe they over-egged the AI sales pitch in the past, since the advent of ChatGPT, the sales pitch of having an AI assisted collections workflow no doubt has become a much more powerful one. In fact, its key subsidiary ARMA has increased its customer win rate increase from 30% to 70% in the space of a few years.
7. There are signs of operating leverage. Gross margins are improving, with 40% of incremental revenue converting to Normalised EBIT in FY23, and 55% in FY24. The FY25 guidance projects a 37% conversion rate this year.

On the downside, Credit Clear isn’t an obvious bargain at current prices. An EV/S of around 2.5x isn’t cheap for a business services company with 53% gross margins, especially one that still requires collections staff to scale and is only just reaching profitability. However, if they can continue growing organically at a healthy pace and drive operating leverage, earnings could improve rapidly.

I believe that large language models (LLMs) and machine learning technologies are advancing rapidly and will significantly transform the operations of contact center businesses like Credit Clear over the next decade. These advancements will lead to increased efficiency, greater automation, and the displacement of tasks traditionally performed by humans. Credit Clear appears well-positioned to capitalise on these trends. As one of the larger collections services company in Australia and New Zealand, they have the scale to invest in in-house technology platforms and leverage technological advancements. Furthermore, having been initially established as a software-only company, improving efficiency through technology is a core part of the group’s DNA.

I’m interested to track the continued progress with ANZ. Credit Clear has been collecting debt for ANZ for the past 3-6 months and increased work from a small position on one portfolio to a bigger piece in 3 portfolio. Management claims they have a leading recovery rate compared to competitors on the same panel, exceeding them by over 50%, and they also lead in most other metrics. Increased work-share with ANZ will showcase how their technology focus and scale provide a quantitative advantage over competitors. This will serve as valuable collateral for the sales team, potentially leading to more wins and further market share gains.

Shares are consolidating just beneath the 52w high. If it breaks out decisively, that will be very bullish.

A similar business, Indebted, is valued at 3x.

https://www.afr.com/technology/digital-debt-collector-worth-350m-after-big-money-raise-20240919-p5kbya

This was an impressive quarter from Credit Clear.

Highlights:

• Record revenue: $11.5m1 up 28% on prior corresponding period (pcp) with growth driven

by winning more share of wallet from existing clients and growing revenue from new

clients

• Cash from operations: $1.8m1 for the quarter, an improvement of $1.6m on pcp, and the

fifth consecutive quarter of positive cash from operations taking YTD net cash from

operations to $3.6m

• Guidance achieved: FY24 Underlying EBITDA3 of approximately $4m1 and revenue of

approximately $42.0m1. The Company will provide FY25 guidance with the upcoming FY24

results on 28 August 2024

• Strong balance sheet: $13.1m cash at bank, an improvement of $0.7m QoQ and $1.1m on

pcp, leaving the Company well positioned to fund growth opportunities

• Clients signed: 85 new clients signed, including five expected tier-2 clients2,4 and 20

expected tier-3 clients2,4.

• Digital collections: Up 65% on pcp to $33.2m for the quarter, surpassing $10.0m for each

month in the quarter and achieving a record month of $11.8m for the quarter, with digital

technology boosting performance and profitability

• Strong trading conditions: Increasing demand for Credit Clear's services highlighted by

the Company’s Consumer division receiving 56% more files in H2FY24 2024 on pcp.

Takeaway

All key metrics are heading in the right direction on the revenue, cost, earnings and cash flow lines. The company seems to have inflected into profitability, stringing a few OCF positive quarters together.

Combined with an asset light business model and the obvious tailwinds from AI, and it is setting up well to continue to outperform over the coming quarters.

should be interesting

Summary from announcement below. The foot in the door with IAG is good to see, growth in sales flagged is also welcome, but as CCR scale, the numbers quoted will need be much larger for a share price bump. This level of growth is base line at best in my view and has spurred me to updating my valuation for the H1 results which I will publish later.

Announcement highlights:

• In March, Credit Clear has signed a two-year agreement with IAG

• Credit Clear will deploy its purpose-built digital workflow for IAG, enabling third-party payments to be made online

• In January and February, 52 new clients were signed for a total of $2.4m in Potential Reveune1

• The appointment of PSC Insurance founder Paul Dwyer as Credit Clear’s Chairman has enhanced the Company’s reach into Australian and international insurance markets

• The Company expects revenue from insurance clients to grow 141% this year, from a total of $2.2m achieved in FY22 to approximately $5.3m in FY23

Disc: I own in RL & SM

Wasn't impressed with the top line shrinking here, maybe its q4 and a bit of down time on collection for Xmas, but they must either be having trouble on boarding these new clients (and they've said they need to speed this up) or something else is eroding in the background. As was pointed out here on the strawman meeting (I think) they didn't pick up any organic growth in q1 either. These last couple of reasons are less tangible and may be unfair, but I was concerned that it took to the 31st for the quarterly (they did last Jan so maybe no big deal, and everyone needs a bit of allowance in Jan!), and was concerned that they haven't advertised an investor briefing, seems out of character. I said I'd give them 2 quarters and am normally slow to sell, but have broken my own rule and sold out after only 1! I'm happy to watch it upto the next quarterly.

Credit Clear - second consecutive cash flow positive quarter - signing 83 clients

By signing four contracts with new and existing insurance clients in Sep22, CCR has further widened its insurance sector offering. A new contract with Zurich Australian Insurance Limited (Zurich) and two contracts with new motor insurance specialists including Aioi Nissay Dowa Insurance Company Australia (ADICA) further expanded its relationship with one of Australia's largest insurance groups. Revenue from insurance clients is expected to grow 150% this year, from a total of $2.2m achieved in FY22 to $5.5m in FY23.

On 15 Sep 22, CCR provided a business update for the month of Aug22. With new clients onboarded in the past few months, growing debt referrals from the existing clients contributed significant growth in the month of August, with revenue reaching a new record of $3.28m.

The group's legal recovery businesses also produced strong growth in revenue for the month. The revenue run rate is now $39.4m2, and the company has achieved four consecutive months of operational profitability.

Awarded “Best use of AI” at the 7th Annual Australian Fintech Awards. The company was also been named an “Insurtech Start-up of the Year” finalist at 2022 Australian and New Zealand Institute of Insurance and Finance (ANZIIF) industry awards for its automation of third-party motor claims with potential Insurance clients building strongly in the pipeline.

Late last year Credit Clear acquired ARMA for $46M, funded by a $25.5M insto placement and $4M share plan at 40c.

ARMA offers a debt recovery solution, outsourced accounts receivables and litigation services. Last year ARMA reported $6.4M in EBITDA from $15.5M revenue.

It’s all about the synergies, isn’t it always, with Credit Clear intending to pursue its billing platform in ARMA’s approximately 400 customers.

ARMA co-founder Andrew Smith will take the role of CEO of the joint organisation with former CEO, who has only been in the seat around 6 months, is moving to a new role to focus on international markets. 

Shares are down around 20% in the last 6 months. Not held, but will be watching to see if the synergies eventuate. 

Credit Clear has taken out the award for “Best use of AI” at the sixth annual 2021 Australian FinTECH Awards over contenders Moula and MyMoney.

In winning the Best use of AI award, Credit Clear demonstrated integrating AI into its accounts receivable technology had resulted in a 150% plus increase in collections. 

The company uses AI to "select the optimal content and channel of engagement which can lead to significantly better outcomes, while a wrong decision can result in increased costs or worse, permanently lost opportunities".

Using its next best action (NBA) model, the Credit Clear developed its AI technology to optimise recoveries while minimising collection costs.

Credit Clear says its NBA model treats every account in a “distinctly unique way” and has a recurrent neural network to assist with building and identifying patterns in a customer’s engagement history.

In other words, they have optimised when to hound people over outstanding debts.

Credit Clear has delivered solid results with a 70% revenue increase to $11 million. The increase has come organically from digital revenues, new client wins and high retention rates across their customer accounts across various industries including transport, financial services, insurance, government, and utilities.

This puts them on their way to meeting the aspiration of being leading technology company in receivable management, delivered using proprietary digital billing and communications platform. Both artificial intelligence (AI) and machine learning (ML) are used to increase engagement and improve debt management.

The process uses email and SMS to target customers. While this sounds like standard debt recovery tools, the use of technology has been proven to increase recovery. In the 4 years since launch the company has increased recovery rates by over 300% for customers including Bendigo Bank, Suncorp, ME Bank.

This is a highly competitive (and regulated) market that can be a tough way to make money, especially against large, established competitors - did someone say Collection House?

Incoming CEO David Hentschke has a growth hat, seeking to expand the use of technology as well as investigating opportunities outside Australia. This is a watch to see if he can execute as he does not come from this industry.

The company has also recently added Hugh Robertson, director of equity capital markets at Bell Potter to the board. Robertson currently sits on the board of Envirosuite and Maggie Beer, and brings decades of experience in financial services.