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#Business Model/Strategy
Added 3 months ago

There has been quite a bit of upheaval in Novatti recently which has now culminated in a capital raise announcement this morning at a solid discount to the last traded price. This has resulted in a 25% share price drop.

A dreaded strategic review of business operations was announced in the Q1 activities report as part of the simplification strategy.

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First has been the sale of the 19.9% holding in Reckon at a large discount to the market price. ($0.40 vs the trading price of ~$0.60 at the time) Granted there have been an accumulation of dividend payments during the holding, which has meant that they have been able to come out fairly even, but this move felt rushed. The funds from the sale have been used to close out the Bond facility, with the idea of reducing future interest commitments.


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Then in December it was announced that there was a sale of 9% of the AUDD holding company valuing it at $2.7m. There has been a recent surge in the amount of AUDD minted on the stellar network with the supply jumping from $44k to $2.5m since mid November.

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In the same announcement it was announced that a Series A raise is in the works for IBoA. Currently Novatti holds 91%. Further divestment will be required as part of the regulatory approval and banking requirements.

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Which then brings us to the capital raise, which was announced today. Novatti is looking to raise $5.5m through a series of convertible notes and a SPP with an options attachment.

The convertible notes attract 10% per annum which is slightly cheaper than the rate they had on the Bonds which was 90 Day BBSW + 6.5% (currently around 10.85%) but probably also allows the interest payments to be issued through equity rather than cash, optimising future cash flow given the recent push of cash flow positive (Operational) by end of FY24.

Sentiment for the company is now in at all time lows given the ongoing under performance and cash burn. The only positives I can take out of the announcement is that additional funds are required for security collateral on payments which means that this division is continuing to grow and management are participating in the convertible notes to the tune of $750k (Pending Shareholder approval, which may not go through given the current sentiment)

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The SPP offer opens on 5th of February, so there will be time for existing shareholders to review the Q2 performance before committing to allocating funds. 

Very precarious times for Novatti.

#Quarterly Review
Added 5 months ago

Announcement

The Good:

  • QoQ improvement in revenue up 6% to $10.8m. Second consecutive improvement since the recent declines which is a positive signal. This was mostly driven by growth in the international payments sector, however the commentary from management was largely silent on this and point to the AU/NZ payments division as the “growth engine”

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  • Operating costs remain largely flat, only with product costs rising from previous quarters.

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The Not So Good:

  • Strategic Review. Never a positive position for a company to be in. As of FY23 only the technology and alternative payments divisions were EBITDA positive. My guess at the prime candidate for divestment would be Emersion. It was bought for $2.6m in Apr 2020 with $1.7m rev in FY19 and looks to have failed in the U.S expansion. Revenue for FY23 was $2.15m & ($2.8m) EBITDA 
  • All timeframes and targets of cash flow positive operations are now removed from reporting. Even with the improvements this quarter the previous targets of H1FY24 are very unlikely.


Watch Status:  

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What To Watch:

  • Coming up on 1 year since the RADI was issued. At that time Novatti was indicating they had a 12 month target to reach full ADI status. Under the conditions of their licence, they have 24 months to establish the required banking infrastructure. 

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  • Outcomes / divestments from the strategic review. 
  • Ongoing international payments growth.
  • Previous quarterly mentioned Gross Transaction Values and company wide margins. Only AU/NZ was mentioned in this report. Watch for the return on these metrics.


#Quarterly Review
stale
Added 8 months ago

Announcement

The Good:

  • Improvement in GTV to $1.19b, up 15% QoQ. As @NewbieHK has stated previously, transaction volumes are key to this type of business. 

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  • Change in reporting metrics and format with Mark’s first quarterly report. The previous reporting of sales, issuing and acquiring has now been refined into a single breakdown of quarterly revenues by business. This makes it clearer to see which business units have been performing, however there isn’t a clear breakdown of which Novatti subsidiaries sit within each area.

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  • Improving gross margins. One thing to note on this is that it is hard to match the reported improvements against the previously reported metrics. For example when compared to the cash flow numbers, there doesn't appear to be a correlation, however cashflows do operate on a different timeline.

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  • In the update presentation Mark in his first update as CEO delivered a short and sharp update. Although some of his Q&A responses were vague and could be improved, there was no sales talk or fluff. Along with Mark as new CEO and Dharsh as new CFO, Mark stated that there has also been a reorganisation of management below the C-Suite level.


The Not So Good:

  • In the previous strawman meeting, Peter noted that Novatti was differentiated by the services they offer, not the rates they charge, however it looks like they are now making a push as a low cost option. This is a dangerous battleground against the bigger players.

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  • Operating cash flow continues to not show any improvements with $4.15m of outflows this quarter, which is the second worst burn since the start of FY21. This still includes the IBOA operations, which I feel has been misrepresented on how this would be reported in the past. Outside of the product costs which will grow with the business, the other operating expenses look to be fairly level, so ongoing growth in transactions should start to improve the overall operating cash position.

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  • Operating cash flow positive has now been moved to the end of FY24, previously this was a H1FY24 target.
  • Cash position of $18.2m means that the FY24 timeline will be tight based on the current cash burn rate of ~$4m per quarter. Novatti will receive a dividend from Reckon in September which will assist slightly with cash flows.


What Status:  Cautious

What To Watch:

  • No mention of the previous potential contract pipeline and the value of conversions to date. AU/NZ Payments is the clear focus for near term growth.
  • Previous target of IBoA unrestricted licence approval was for Q2FY23 (Restricted licence issued in Nov 22). Currently minimal updates provided by Mark during the update presentation.
  • Progress of payXcrypto joint venture which was announced in January and backed by the CRC-P grant. Novatti received $639k out of the $830k government rebate which indicates they are the lead partner in this project.

https://payxcrypto.novatti.com/

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Example from PayXCrypto website

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  • AUDD supply continues to grow, however this is still at a small overall value.  

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SourceL Stellar Expert

  • Review FY Report for business unit level reporting
  • Reporting of gross margins. Mark noted that these are expected to continue rising, however at a steady and incremental rate from here on out.
  • EMoney Issuing licence application (No update - carried over from last quarter) & Singapore major payment institution licence application (No update - carried over from last quarter). Both of these items have been left unreported for some time.
#Quarterly Review
stale
Added 11 months ago

The Good:

  • Issuing rev up 67% to ~ $1m & acquiring rev up 70% to ~$680k. This is also likely to get a further boost by the continued migration of customers to Novatti’s own solution from the third party previously provided. 
  • Issuing and acquiring businesses continue to form a larger portion of revenue. Close to 20% for Q3 by my estimates. The growth in these areas has masked the hit taken to the payments revenues which are down close to 30% from highs. As these areas of the business are still maintaining strong growth rates, they should now start making noticeable contributions going forward.

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.

The Not So Good:

  • Overall revenue stalled around $9.2m 

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  • Operating cash flow of - $3.97m which is the highest over the year. Even if this is “normalised” to $2m this is still not an improvement over previous quarters. In the investor presentation, Peter Cook was hesitant to provide a target for cash flow positive, whereas in the past this was a H1FY24 target which is fast approaching.

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What To Watch:

  • Management has provided indications on the size of potential contract additions going forward, which is the first time they have done this. Based on the 70% of 15m by Q1, this should result in approximately $2-3m per quarter by the end of H1FY24
  • Impact of Hnry and Wirex partnerships on issuing growth over the next quarter.
  • AUDD is still in its infancy, but continues to grow slowly

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  • Development of IBoA and product launches
  • EMoney Issuing licence application (No update - carried over from last quarter)
  • Singapore major payment institution licence application (No update - carried over from last quarter)
#Quarterly Review
stale
Added one year ago

The Good:

  • The acquiring business is maintaining decent growth with a 19% increase in transactions over the previous quarter. Licences for New Zealand have also been granted with that region to become live in H2FY23. This is still only a small portion of the business generating an estimated $900k / quarter.

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  • Issuing card transaction value continues to grow, up ~40% QoQ.

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  • Cash balance remains strong at around $17.5m after taking into account cash balances for IBoA.


The Not So Good:

  • Second consecutive decrease in quarterly revenue. $9.3m revenue for the quarter vs $11m all time highs.

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Management attributed the decrease to a margin shift with a large scale international client and it will be 6-9 months before growth offsets the cuts.  This is an indication that NOV is susceptible to a race to the bottom in cutting margins. In the strawman interview Peter indicated that this typically wouldn’t be a major issue with the business, so this is one to watch. The other risk highlighted are some major client /small number of customers making up a large proportion of the revenue.

  • Adjusting for the dividend received, operating cash burn has remained level for the last 3 quarters. This will improve when the bank expenses are removed from the reporting, however it needs to start improving beyond that change. Cash receipts were up on the prior quarter.

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What To Watch:

  • Expansion of IBoA activities and initiatives in preparation for full licence. Target remains around Q2FY24.
  • AUDD user growth 

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Source:

https://stellar.expert/explorer/public/asset/AUDD-GDC7X2MXTYSAKUUGAIQ7J7RPEIM7GXSAIWFYWWH4GLNFECQVJJLB2EEU-1

  • EMoney Issuing licence application (Carried over from last quarter)
  • Singapore major payment institution licence application (Carried over from last quarter)
#ASX Announcements
stale
Added one year ago

Novatti has been awarded a Government grant to the value of $2.3m for the development of an anti money laundering fintech project. Announcement here.

The grant looks to be split amongst the project partners to cover a portion of the approximate $6.1m costs of the 2 year project duration. So this won’t directly result in additional cash flows for the company.

The project is a collaboration between a mix of businesses:


Ultimately not much may come from the project / grant, however it may lead to further improvements in Novatti’s crypto payments ecosystem and some more exposure with other fintechs in the crypto space.

It hasn’t been indicated how the IP ownership will be handled at the end of the project.

#Media Release
stale
Added one year ago

Novatti issued a media release today announcing a partnership with Datamesh Group to integrate their POS terminal solutions with Novatti’s acquiring payment system.

https://novatti.com/wp-content/uploads/2022/12/20221214-Novatti-partners-with-DataMesh-to-provide-cutting-edge-card-present-payment-solutions.pdf

A bit more on Datamesh group here:

https://www.datameshgroup.com/ 

https://www.afr.com/street-talk/datamesh-raising-at-115m-valuation-nab-tipped-to-corner-round-20220912-p5bhap

This will allow Novatti to offer physical payment receipt terminals as part of their acquiring offering. There should be some minor commercial benefits to this over time as the existing customer base take on the terminals as it should increase the overall transaction value that Novatti is handling.

The bigger upside is this partnership builds off previous one’s such as the partnership with Riskified to continue to improve their product differentiation in a very competitive market.

#ASX Announcements
stale
Added one year ago

RADI Licence

After many years Novatti’s application for the restricted authorised deposit-taking institute licence has been approved. The announcement was also followed by an investor presentation that can be seen here:

https://youtu.be/HzrTwcfEoPs

The licence means that Novatti can start operating its new banking business International Bank of Australia.

https://iboa.com.au/

The banking business will focus on two key areas of the market where they believe there is an unmet need in the sector. The first is b2b offering payment services to fintech companies similar to Novatti. Novatti will also become a customer of the bank, using them to provide banking infrastructure(i.e settlement services at a cheaper rate than their current providers. This gives Novatti benefits two fold, increasing margins for Novatti and providing revenue for IBoA.

Guy stated the time waiting for approval was used to grow their tech stack and develop the go to market strategy, having Novatti systems to use as a test case. This will allow them to scale in the b2b sector much more rapidly.

The second is for b2c services for international based customers looking to come to Australia and easily move money between countries prior to entry to Australia. Examples of the target customers are international students and migrants. As part of the restricted licence IBoA are currently unable to provide services to the general public, with the current target timeline for first accounts going “live” in around 6 months and receiving full ADI status within 12 months. 

IBoA will start increasing its marketing over the next several months in preparation for this timeline and leveraging off Novatti’s existing business network.

Novatti have also increased their ownership in the business to 91% through a further $5m investment and while this will impact Novatti’s cash balance, IBoA will start funding their own expenses which are currently ~$750k a quarter.

All in all this is a significant step forward in Novatti’s long term strategy and it will be interesting to see what the next big goals are now that IBoA and the AUDD stable coin have now been launched.

#Quarterly Review
stale
Added one year ago

The Good:

  • Expanding range of services and offering with the addition of services such as MYPINPAD tap and pay services, Riskified fraud protection.
  • Operational cash burn decreased to -$2.04m for the quarter. Still a way to go for cash flow break even but heading in the right direction.

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The Not So Good:

  • First quarter of decreased revenue from $11m to $10.5m. Not a bad sign as this is the first instance but a warning sign going forward.
  • No changes to restricted banking licence status. (Note: This was announced after the quarterly)


What To Watch:

  • Further improvements in cash flow heading toward operational cash flow break even within 12 months.
  • AUDD launch in November and how this is integrated across the rest of the Novatti ecosystem
  • EMoney Issuing licence application
  • Singapore major payment institution licence application


#CEO Meeting
stale
Added 2 years ago

Thanks @Strawman for lining up the interview with Peter Cook. Andrew tried to dig down into what makes Novatti different and this is what I was hoping to get from Peter. He did keep his responses fairly high level but did provide a few insights for me to look further into.

Some takeaways from the interview:

  • After restricted licence approval, NOV is obligated to deploy first services within 6 months of approval, then targeting the full bank licence within 12 months. Peter noted that any revenues during the restricted phase are unlikely to be significant.
  • The launch of AUDD stable coin across the stellar, ripple then ethereum networks is a key focus for the company short term, with the focus then shifting to integration into their existing platforms and payments ecosystems.
  • Future acquisitions would be targeted at expanding operational and licencing footprints in the B2B space. Not interested in acquiring technology specifically. Businesses would need to be cash flow positive or close to it.
#Quarterly Review
stale
Added 2 years ago

@NewbieHK has already summarised the key points in the announcement. Not too much new in there to dig into.

The Good:

  • FY22 Revenue of $32.5 inline with my forecast of $33m & $11m sales revenue for Q4. Slightly lower growth rate than expected, however still a record quarter.
  • Reduction in cash burn down to -$2.3m for the quarter, with $6.06m in cash and a further ~$8m expected from the Reckon dividend. If NOV can continue to reduce cash outflows, there should be plenty of cash left to reach positive cash flow within FY23.

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  • Integration with Reckon has started to generate revenue. This has only been live for just over a quarter. No figures were given, however early traction is a positive indicator.


The Not So Good:

  • No changes to restricted banking licence status. Still an ongoing drag on cash flow.


What To Watch:

  • Increase / maintain organic growth rate next quarter ~ $50m rev for FY23 an achievable target.
  • Ongoing cost control / reductions.
  • How sector revenue is split in the annual report.
  • Launch of AUDD on stellar network
  • Progress of EMoney Issuing licence in Europe (Ongoing)
#Reckon Sale of APMG Business
stale
Added 2 years ago

Reckon has announced the sale of its accounting practice management group for $100m. As 19.9% owner, Novatti will end up with ~$7m to $8m in cash post sale. 

Going forward, Reckon will focus on the cloud business where Novatti has integrated its payments platform. 

With the transaction expected to take around 3 months, the special dividend is well timed and will give Novatti a further 6 months of cash runway limiting how much debt they may need to take on to cover operation costs. (Based on Q3 cash flow). At this point in time based on previous updates the company should be getting close to cash flow break even.

#Finnies 2022
stale
Added 2 years ago

Novatti is nominated as a finalist for two categories in the 2022 FinTech Australia  Finnies. 

Link

The ceremony is on 23-06-22, so we will find out how they go then. Not sure how much stock I really place in industry awards but any recognition is good for the brand.

In 2021 they took out best Fintech Payments Provider so maybe they can go back to back in the payments field.

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#Quarterly Review
stale
Added 2 years ago

Report

The Good:

  • Significant revenue growth for the quarter - 79% QoQ including the ATX revenue. Well ahead of my previous estimates, but inline with the assumed organic growth rate over the quarter. Main driver was the addition of ATX.
  • $3.6m of revenue for ATX vs $3m FY21 according to the acquisition presentation. (LINK) Need to explore this further on if its how it has been reported or if there has just been massive growth in FY22.


The Not So Good:

  • Corporate cost control is mentioned, and staff costs have remained at close to the last 18 months average of ~40% of cash receipts, but product manufacturing and operating costs have jumped to around 78% of cash receipts compared to the 18 month average of ~68%. Which carrying forward does not have NOV entering positive cash flow territory in the foreseeable future. 

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  • In my previous post I was expecting cash outflows to taper off slightly, but instead they have increased to $4.4m. With only $8.36m in cash that is barely getting NOV through into FY23.


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  • Looking to leverage assets for future collateral needs, which is good in the fact that it is not further diluting shareholders, but in an environment of rising interest rates, management will need to watch how heavily they rely on this.
  • No changes to Banking License status. Ongoing drag on cash flow, and reforecast date for investment funds expires in June.


What To Watch:

  • Maintaining 8-10% organic growth each quarter, particularly now initial boost from ATX integration has passed.
  • My revised target ~$33m in total Rev for FY22
  • Compare RKN & NOV FY22 results to try to determine if there has been any contribution of Reckon income to overall revenue.
  • Keep corporate and admin costs level / dropping for consecutive quarters.
  • Switching over to full acquiring licence solution to be live by June
  • Customer acquisitions for Verv & Emersion
  • Progress of EMoney Issuing licence in Europe
#Presentation
stale
Added 2 years ago

Peter Cook has been pounding the pavement carrying out an investor relations interview with ACB News which is a Chinese language business news site in Australia.

The slides from the presentation are here. These are pretty much the standard slides that have been attached to most market announcements / updates. What does provide a bit more information is the transcript from the interview on the ACB website here. (English version is at the bottom of the page)

Peter provides some updates around ChinaPay and other segments but also states that the business is aiming to be cash flow positive in 12 to 18 months. 

Having a bit of a look at this, and assuming they reach this point at the end of FY23. At Dec 21 the company had $13m in cash available or 4.6 Qtrs at the current operating cash outflow of $2.8m (including $676k of Reckon dividends).

If they can get this down closer to the $2m mark for the upcoming Q3 update it will indicate that they should be able to nurse cash balances along until the cash flow positive target date.

But. This does not account for any investing spend and I doubt that ATX will be the last bolt on acquisition, it also does not allow for any further growth in business. What we will likely see then is a capital raise once the banking licence is finalised or the company holding off hoping for some share price appreciation before another raise. (Last raise was carried out at $0.55)

The company has had a fair amount of justified negative sentiment recently given the delays to the banking licence and ongoing cash burn, so there needs to be some decent news over the next few months to swing momentum. Peter states at the end of the interview that in 5 years he'd like to see Novatti as a multi billion dollar company. I will let that one slide for now, however if big pumpy statements like that keep popping up in the future it will be a bit of a warning sign for me.

#Reckon Integration Live
stale
Added 2 years ago

Yesterday Novatti announced that the Novatti payments platform has been integrated into the Reckon One accounting software platform with a new invoicing app that is ready for launch.

Announcement (Side note - Reckon always seem to provide much clearer, more detailed announcements. Here)

As the platform is ready for launch, there should be a contribution to Q4 revenue from this agreement. The transaction fees are currently at a reduced rate to try to encourage uptake and the revenue will be split 50/50 with Reckon.

To get an indication of what this could look like, I have used the following scenario:

Total Customers - 114,000

Customer Online Payment Revenue - $35,000 (Based on median small business revenue in 2018 - $118,000 & 30% Online payments)

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Uptake - 5%

Fee - 1% Split 50/50 (Standard acquiring fee 1.75% From Novatti website)

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This results in $997,500.00 for Novatti, which is not a massive increase (~4%) to overall revenue which I was forecasting for the full year at around the $25 million mark prior to this announcement. This will be a key area to keep an eye on at the release of the Q4/H2 results to get an early indication of uptake.

What is encouraging is that there is indication of the two companies looking at further integrations across their offerings. Potential for similar revenue splits would be an attractive alternative to Reckon to replace their current providers and Novatti would also benefit from this with their 20% ownership.

#Movement at the station?
stale
Added 2 years ago

Novatti have been pretty light on details with their ambitions with Reckon with vague general statements like 'continuing discussions on servicing the needs of Reckon customers'. Reckon have done more than Novatti to provide a level of comfort that there is something of substance in the works in their Investor Roadshow Presentation. It may not be something that provides any significant contributions to revenue in the near term, however it does timestamp a target window for the launch of Novatti payments within the Reckon platform.

LINK

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#Quarterly Review
stale
Added 2 years ago

Announcement

The Good

  • Quarterly revenue of $5.8m in line with my previous estimates and demonstrating continued revenue growth.
  • The ATX acquisition was completed in mid January. This will add around $750k to the Q3 revenue. So I would expect ~$7m to be reported in Q3 if the current growth rate is maintained.


The Bad

  • Including the $676k of Reckon dividends in operating income. I think it’s a little bit of creative reporting to list the dividends from investment in an outside business in operational cash flow. By doing this it looks as though cash burn has improved for the quarter whereas there have been minimal changes to outgoing operating cash.


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  • Continued increase in staff costs in line with revenue growth. Novatti have been scaling for growth, however there will come a point where these two items need to decouple. If it doesn't it means that there just isn’t the operating leverage in the business and it will need to be looked at through the lens of a consultancy service.


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  • No new update on banking licence. The end of February deadline for the investment capital is fast approaching. 2 weeks to go.


What To Watch

  • Impact of recently announced acquiring licences to bottom line due to margin increases.
  • Any updates on integrations / partnerships with Reckon.
  • In the update it was noted the company is assessing further acquisitions. With only $12.9m in cash, this provides around 1 year of runway without any further investments, which is comfortable, unless they look to do this via a capital raise which may not be looked at favourably by the market given how the Reckon investment has played out.


Impacts on Price Forecast

  • Revenue currently in line with forecast. - No Changes.


#Research Summary
stale
Added 2 years ago

I have held Novatti for a while in both Strawman and IRL but was not able to fully articulate what they do and the core elements of their business, so decided it was time for another dive to rectify that.

What Does Novatti Do?

Novatti is an Australian based fintech company that focuses on billing and digital payments which listed on the ASX in January 2016. Originally starting with a focus on payments and billing, Novatti has continued to grow its business to provide a wider range of digital payment technologies and describes its business activities across five verticals: Issuing, Acquiring, Processing, Billing and Banking. There is overlap between these across some of the business divisions as each of the elements are linked in the payment processing chain.

Issuing is where a customer is provided branded physical and digital prepaid Visa cards through Novatti and Vasco Pay. Novatti is working to expand its offering in this area through partnerships with other fintech platforms. Examples of these are implementing Marqeta’s prepaid card launch in Australia, providing payment cards for Afterpay in New Zealand and Visa payment cards for Cryptopay.As Novatti continues to expand licensing and approvals across more regions, it is expected this segment of the business will continue to grow through further partnerships. In FY21 the issuing business had a revenue of $935k up from $100k in FY20.

Acquiring allows businesses to accept payments online and through point-of-sale. Previously Novatti provided this service through a third party, however in early November, Novatti announced that they had been awarded principle acquiring licences from both Visa and Mastercard. The image below from the Mastercard website shows where the acquirer sits in the payment processing chain.

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 In FY21 the Novatti did not generate any revenue from providing acquiring services, however in the Q1FY22 update it was stated that this business is now live and generating revenue.


Where Novatti currently generates most of its revenue is from Payments and Billing services. This amounted to $15.5million in FY21, up from $10.8million in FY20.

Billing services are provided under the Basis2 and Emersion platforms which focus on utilities (Simply Energy) telcos (Telstra, FibreMax) and other service providers. Emersion launched in the US in March 2021 to expand into a larger global market.

Some of the services that are under the payments banner are the Flexewallet business, recent acquisition Malaysian based ATX,  cross border payments with Ripple partnership in Philippines and Thailand and the recently launched Verv in Europe. Novatti also provides the technology and at times taking ownership positions for other payment platforms such as LITT, Lifepay (25%) and RentPay (2.5%) developed for Rent.com.au. 

Novatti holds a 70% interest in Novatti B Holding Company (NBHC) which will form Novatti’s banking division. Currently NBHC is awaiting approval of its restricted banking licence from APRA, which was previously targeted for November 2021. Series A Investor funding is pending the licence approval by the end of February 2022.

In September 2020, Novatti launched Digital Payments accelerator program to foster and grow new payment technologies, e.g. working with University of Victoria on multi-crypto payment gateway patents. 

Outside of its core business, in June 2021, Novatti raised funds to acquire 19.9% of ASX listed accounting software provider Reckon, to open up access for synergies between platforms and access to Reckons customer base. Beyond that , the ownership stake provides Novatti with a position in a profitable growing business that has been paying a regular dividend.

Management

The board of directors has a range of experience across the payments industry, in particular CEO Peter Cook and Paul Burton. The recent addition of Abigail Cheadle onto board of directors and chair of Audit and Risk committee brings strong experience working with companies in Asia and along with increasing diversity of the board.

Directors hold around 11% interest in the company which provides alignment with shareholders, however several of the directors along with the COO & CFO have significant options at lower than the current share price.

Opportunities / Catalysts

Outside of general tailwinds from ongoing growth in the digital payments market, there are several catalysts over the short term which have potential to add value to the Novatti business.

First is the launch of the banking business which will add to Novatti’s payments ecosystem. Novatti have been preparing for this for the last several years and should be able to hit the ground running once licences have been granted which is expected to be announced this quarter.

Second is the ongoing expansion into new regions and markets through acquisitions and partnerships. The recent ATX acquisition allows Novatti to expand their presence in South East Asia, building on their partnerships with Ripple in Thailand and the Philippines. Novatti also has a pending application for an E-Money licence in Europe, which will allow them to provide digital payment services.

The third area where there could be a boost to short term revenue is if the investment in Reckon has some outcomes that allow Novatti to incorporate into the Reckon platform. In the September quarterly update it was announced that discussion had begun, however all updates around this to date have been fairly light on specifics.

Valuation

Refer to Valuation Straw.

Risks

The digital payments market is a highly contested segment with competitors typically competing on fractions of fees of transactions. There are some barriers to entry in terms of the range of licences required to provide a full range of services, however even with this there are alot of players in the space. This includes large international competition that provide a full suite of integrated acquiring and payment technologies i.e Stripe, Paypal and have bigger budgets to compete on the technology front.

Novatti also historically has high levels of cash burn and that has continued into FY22 with a negative cash flow of $3.8 million in Q1. Novatti has been direct with their growth strategy of investing in a payments ecosystem, however unless those elements start to generate capital they drag down the profitable sections of the business. With a current cash reserve of approx $13.5m, this will be a key area to watch as another capital raise could be on the cards in CY22 if cash flows are not improved.

#Quarterly Review
stale
Added 3 years ago

I started re-reviewing Novatti’s latest quarterly with the eye of a potential top up opportunity as the share price has been on a slide for the last several months, however, there has been a bit of an upward bounce (17%) in share price in the last week.

The market cap at the time of writing is sitting at $163 million and with reported annual sales of $16.4 million for FY21, NOV is currently sitting on a Price/Sales of ~10. This ratio is at a bit of a premium to the average of professional & commercial services sector which sits around 7 (source: nabtrade) but still is likely to reasonable given the continued growth reported for Q4FY21. Quarterly sales revenue of $4.9 million is the highest ever and up 63% on Q4FY20. The payment processing portion reportedly growing 87% year on year.

The partnerships Novatti have been developing are now providing a range of revenue, example is using Visa licencing to facilitate digital AfterPay payment cards in New Zealand. NOV are actively seeking to expand across other international markets in a similar manner.

Novatti has also been open about further acquisitions and the upcoming second tranche of the recent capital raise will provide further $11.9 million which will help facilitate this.

Another catalyst for short term growth is the company has now put forecast on the approval of the restricted banking licence, which was delayed due to Covid. The banking arm of business has been a drain on cash recently, but the partnership is in place with BC Investment group ready for the licence approval, so should be able to hit the ground running and start offsetting cash burn fairly quickly.

One thing to watch and which the market has been uncertain on is the recent capital raise for the 19.9% ($22.5 million) equity stake in Reckon (RKN).

A few reasons I think contributed to this is it was carried out at 0.55 cents which was 14% discount to market price and the current share price is still sitting below this point.

The shares in Reckon were purchased at $1 which was at a significant premium to the market at the time, and there was not a lot of clear reasoning behind move provided to shareholders other than potential ‘synergy opportunities’ between two companies.

Shareholders responded by only taking up $249,000 of the $5 million allocation in the share purchase plan.

So far, the move has worked out ok with Reckon releasing a solid report and having the share price climb 10% on original purchase but time will tell what NOV can make of deal.

TLDR: I think there is still room for decent continue growth for NOV with a solid quarterly announcement, but the opportunity to pick up some extra shares at a decent price may have passed for now.

Disclosure: Held