Thoughts on the QFE Investor Presentation

QFE released a massive investor presentation on Friday with a lot to take in.

•QFE has a new CEO in Eric Lookhoff to focus on the American market with Founder and previous CEO Bruce Coombes focusing on the Australian market; a market that has historically been profitable for them.

•QFE has partnered with Northleaf for a new $70M asset-backed receivables financing facility to fund growth across the US and Australia. This increases the company’s funding by >250%.

•QuickFee’s APR is ~17 – 19% with future interest cost (via Northleaf) on borrowings of 6.50% p.a. These loans are high quality with the loans guaranteed by the professional firm.

•Credit risk over past 5 years is miniscule at 0.31%

•US only – QFE earns 0.18% of 3% surcharge to customers paying by credit card via a third party processor. QFE earns, on average, an average revenue yield of 0.37% of ACH volume (American version of EFT). Strong growth in this segment as seen below:

Australian Overview

•Despite a decrease in lending demand, customer base has expanded with the signing of several major law and professional service associations

•QFE has ~40% of the AU fee funding market & note main competitors include FeeSynergy and SmartAR

•Growth in the AU market is lacking at 3-4%; however, without growth expenditure AU is expected to be profitable

•Average APR on new AU loans 18.8% with average transaction size of $13,695 and an average loan term of 10.4 months as seen below

•Lending in AU was down 37% to $31M due to government stimulus measures

US Overview

•Compete with AffiniPay, who offer no lending product, at the lower end of the US market and have no competitor at the enterprise level (Top 400 firms)

•Tailwinds in digital invoicing and practice management integrations provide growth opportunity in the US

•Average APR on new loans 16.6% with average transaction size of $9,538 and an average loan term of 8.9 months as seen below

•Strong growth across the US segment as seen below

•A large growth opportunity for QFE may lie in the ACH/CC payments with the company currently capturing 13% of the US$6.1B serviceable obtainable market according to Vertical IQ and managements’ estimates.

•Practice management integrations are expected to strengthen their advantage and provide cross selling opportunities

BNPL

Merchant (law/accounting firm) pay 4.99% - 6.99% flat and receive 100% upfront. Consumer pays this off in 4 instalments. QFE has minimal credit risk leveraging consumers credit card limit. This results in capital being recycled faster (net income realised sooner) but lower loan book growth.

•QFE’s APR = 40.2% - 56.4% with cost of processing = ~2.48% of transaction

•US average order value: $2,800

Examples of the serviceable addressable market for this product include automotive dealerships or the recent signing of Jim’s Group.

Outlook & Priorities

•Steady reduction in cash burn moving forward

•Projected to have sufficient cash and funding moving forward

•FY22 OPEX increase of up to 40% possible with full 12 months of FY21 staff hires

Thoughts

If JobKeeper and government stimulus has been the sole detractor from lending than the growth in customer base could provide a strong leading indicator to future growth. The shift in the US from cheque (paper) to digital continues to provide strong tailwinds.

QFE have expanded their management team and subjectively these moves appear positive. It’s nice to see the previous CEO no longer having to split his time between the Australian and American geographies. The new CEO brings a different vibe; less promotional and better articulates company culture and values. This is something the previous CEO was not known for. The market opportunity has also been broken down into serviceable obtainable (SOM), serviceable addressable (SAM) and total addressable (TAM) markets which is nice to see. It’s encouraging to see a strong marketing strategy articulated well; again something we haven’t seen in previous presentations. The company’s strategy is very clear.

I still have high conviction in this company and can see more positives than negatives. However, the market continues to disagree suggesting I’m missing something. If anyone has a well thought out Bear case they’d be willing to share, it would be greatly appreciated.

To Do

Look into Australian competitors FeeSynergy and SmartAR. Are they gaining market share?

Quickfee – Broken Thesis or has the Market got it Wrong?

Quickfee was a winner during the Covid crash rising from $0.18 to as high as $0.84 but has since steadily declined reaching lows of $0.22. Has the thesis broken or has the market got it wrong?

For those unfamiliar, QFE operates in Australia and the US. The Australian segment has been around for many years and is profitable while the US segment represents the true growth opportunity.

Pros

•Only 32% of invoices are sent electronically in the US meaning paper cheques are still the norm. Covid  and a lack of sophisticated online payment processing provide tailwinds for adoption of online payments in US, creating cross selling & additional revenue opportunities for QFE.

•Growth is coming not just from new firms but cross selling of new services to current firms. This suggests new firm sign ups could be a leading indicator with revenue lagging behind. Management has highlighted as much: "Growing number of new firm signups a leading growth indicator"

•Australian business remains profitable despite lower lending, highlighting the resilience of the QFE business model

•Each of the 3 months in Q4 FY21 were individually the 3 highest months with respect to lending volume

•Have expanded beyond accounting & law verticals to commercial services driving 60% of US QFI volume growth in Q4 FY21

•Expanding to other segments - commercial & personal services - opening new markets & higher yielding products

•Ongoing tech developments such as e-invoicing provide cross selling opportunity (e.g. increased interest in payment plans)

•Management has stated when they get American loan book up to $15M “pretty confident” they should be able to reduce cost of loan book by 1/3

•Default risk continues to be minimal <1%

•QFE is pivoting from pure loans to an all in one payment solution

•Developing their own ACH (American version of EFTPOS) card solution which will double their margin on this offering

Cons

•Short term headwinds - traditional lending impacted by gov Covid-19 stimulus in both Au and US meaning FY21 gross interest income to fall to $4 - $5M vs $5.7M FY20 with FY21 gross profit expected to be $6M - $7M vs $5.7M pcp

•Due to pursuit of growth (increase in sales & marketing cost, payments expertise, tech & product development) FY 21 loss expected to be $8M - $9M vs $3.8M pcp

•The shorter 3 month duration of QFI payment plans vs traditional lending product (3-12 months) results in lower loan book growth but better WC as it recycles capital quicker

•Loan book balance expected to remain flat (FY20 $26.5M). Taking the previous point into consideration, relying on loan book growth alone to assess growth will be misleading.

•Positive growth in active merchant signups may be misleading as they include QFEs new instalments product (in partnership with splitit) servicing smaller, sub $1M revenue firms. If my understanding is correct, the only revenue they generate from this is off a revenue share of credit card surcharges. However, this does provide cross selling opportunities.

•Management claim to be moving towards 100% proprietary [software] technology with regards to electronic payment systems and reminders to “strengthen their moat”. Currently lease a portion of this out. This proprietary tech does not appear to be developed in house but rather contracted out. I’d argue this does not significantly improve their moat but instead improves their first mover advantage and may improve customer “stickiness”.

Digging deeper into QFEs results it appears the market may be under appreciating the company’s prospects. The problems facing the company, Covid and government stimulus, appear to be short-term headwinds. The AU segment remaining profitable during this time highlights the business models resilience.

Looking beyond lagging indicators including revenue & loan book growth, the leading indicators such as US active merchant and customer growth paint a more promising picture than the market is giving QFE credit for. This is further supported by breaking lending growth out into US and AU segments. While AU lending is down, US lending, a larger contributor to QFEs future growth, grew 20% during difficult times.

The market may also not be appreciating the cross selling opportunities and higher margin of new tech offerings, the expansion into new market segments or the company’s pivot from merely loans and transaction revenue to a payments company. With a profitable Australian segment the biggest risk to QFE appears to be a failure to execute it’s growth strategy in the American market.

I believe QFEs current struggles are temporary and the market under appreciates the opportunity. Any opposing viewpoints are appreciated.

QuickFee release the following announcement

•April lending hit a new high of A$3.5M up 30% on the previous highest month

•QFE processed $76.4M in US PayNow volume in April, another record month equating to a run rate of >$900M

•US investment bank D.A. Davidson has been appointed to secure additional funding lines to support growth in QFE’s loan book

•QFE installments are growing in the US with April volumes at US$180k, up 600% on the previous month

•445 US & 191 Au merchants now signed up

The growth in Australian lending is particularly promising for a recovery in local business following the cessation of JobKeeper.

In the past 7 days, CEO Bruce Coombes and Chairman Barry Lewin have made on market purchases of $102,000 and $37,694 respectively.

Mr Coombes holds his shares indirectly through Jamada Holdings Pty Ltd and Bonec Pty Ltd.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02353634-6A1024641?access_token=83ff96335c2d45a094df02a206a39ff4

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02353153-6A1024373?access_token=83ff96335c2d45a094df02a206a39ff4

Quickfee released their yearly & half-yearly reports today. The market doesn’t seem impressed with a 10% drop in SP.

Some highlights and thoughts:

Lending in Australia was impacted in a similar way to the US by government stimulus measures, down 45% to A$13.3 million & a further reduction in the AU loan book is likely in the short term

Despite this Aus business reported NPAT of $526,000

The Australian operating segment reported a net profit after tax of A$526k, with the US segment reporting a A$857k loss after A$1.1 million of customer acquisition expenses

This highlights a realistic path to profitability for the company as they’ve demonstrated this in Aus market. This minimises the downside risk as QFE aggressively pursues growth; unlike many growth companies a clear path to profitability has been proven.

Successful launch of ‘Quickfee Instalments’ in December. This product provides further diversification of revenue streams & substantially increases QFE’s total addressable market.

US pay in full transaction volumes increased 182% with an annualised run rate of US$0.7B

Income Statement

Interest income down 4% but interest expense improved by 29% leaving net interest income relatively flat from pcp

Interest income may be limited by QFE’s lending by facilities (?) but would love someone’s opinion on this. Decrease in interest expense is a positive.

Revenues from contracts with customers nearly double from pcp with only a modest increase in cost of sales.

This is largely driven by the US market.

G&A expenses increased by $1M reflecting the “investment in expertise & headcount for the Australian head office & US business unit”

Along with customer acquisition expenses increasing, these are a cost of aggressive growth.

Comprehensive loss is $4M

If we knock back aggressive growth costs associated with G&A, CAC, product development expenses (R&D) to pcp values loss drops down to ~$1M

Exchange differences on translation of foreign operations shows a loss of $1.1M

I couldn’t find an explanation on this but if it’s a 1-off this further improves the bottom line.

Balance Sheet

Overall a strong balance sheet

Reasonable D/E of 0.67, down significantly from 1.56 pcp

Healthy current ratio of 2.0, up from 1.4 pcp

Net assets have improved to $29,930,764, almost double pcp

Cash Flow Statement

Cash from operating activities $4.57M compared to -$3.1M pcp

Positive FCF of $4.50M

Cash at end of period $30.5M

These results appear fairly positive to me but the market clearly disagrees. I’d love someone else’s view in case I’m missing something.

QFE announced a $17.5M capital raise to support the launch of an interest free product to accelerate their growth strategy. Please see Noicewon11’s straw for how the $17.5M is to be allocated.

What this means?

Increases QFE’s addressable market by 650,000 accounting and law firms or 2,500%, with “advice now pay later”. While significant, keep in mind revenue generated from these new sub $1M firms will be less than loans to current clients QFE is servicing. This is because there is no interest generated from these new clients. There is minimal default risk as they are using the customers existing credit limit on their credit card.

What problem does this solve?

Current smaller firms (sub $1M revenue) were too concerned with customers defaulting on any loan and hence were not interested in taking up the QFE BNPL offering. As the firm wasn’t willing to pay any customer defaults to QFE it made no sense for either party to pursue this.

QFE’s new solution (through their partnership with Splitit) allows clients of these smaller firms not to take out an interest bearing loan but to pre-authorise the full amount owed to the firm (ie legal/accounting firm) and pay in 4 instalments – essentially an interest free loan. The firm pays QFE charges to access this service allowing the firm to access customers who may not have previously been able to pay the bill upfront as well as receive their money faster (improve AR/working capital).

The most important takeaway in all this:

“important to seize first mover advantage with increased addressable market”

QFE is essentially strengthening its moat/first mover advantage by making it harder for competitors to enter the market. This should further be strengthened with the tech and software solutions they’re working on = stickier customers.

This is great news. However, I’m disappointed retail shareholders are only eligible to participate in $2.5M of the raise.
 

Mr Bruce Coombes CEO of QFE presented at the ASX Small and Mid Cap conference today. Below are notes from the Q&A session following his presentation.

Moving towards 100% proprietary [software] technology. Currently lease a portion of this out.

If they get American loan book up to $15M “pretty confident” they should be able to reduce cost of loan book by 1/3.

Q: Any increase in bad debts or missed payments during Covid-19?

A: Aus defaults are lowest in 4 years. US arrears have “4 lines on it” – absolutely minimal arrears right now.

TAM in US - >$400B including fortune 500 companies – who aren’t going to take a QFE loan to pay their bill. Also, QFE traditionally don’t want to deal with firms below $1M to maintain credit quality of their book. Working on a new product to expand into smaller law firms using a different approach. Will involve law firms paying the interest instead of their clients to ensure they comply with all consumer credit laws. Currently only do B2B.

They can only do loans over $5,000 due to laws; however, this does not apply to payments.

They monitor that firms they deal with aren’t specialising in high risk areas like hospitality or tourism.

With regards to transaction fee revenue in US. - Bigger firms pay slightly less than smaller but averages out at 35 basis points (0.35%) and this portion of business continues to grow.

No other ERP that does what they are planning on doing.

Mentioned checking out lawfunder.com to see what they’re doing in the U.S. This is the first I’ve heard of this and Mr Coombes did not expand.

New tech will grow revenue as well as build a moat.

Highlighted the extraordinarily experienced team.

Q: Any partnerships?

A: All direct salesforce but do have some independent reps referring leads but are referring as opposed to being the direct sales lead.

Thoughts:

I found it interesting/nauseating the number of questions around default risk. I’m curious if this is a misunderstanding of QFEs model and might keep the company flying under the radar somewhat.

Key FY20 Highlights

Aus lending up 17.3%
US lending up 63%

Revenue growth up 47%

412 firms at year end - up 63%

US transaction volumes up 137% to US$305M - accelerated by Covid-19 shift to online payments

Well capitalised for growth and lending facilities extended

Investments in technology to drive further growth

QFE will be presenting at the ASX small and mid cap conference in Sept.

Disc: I hold QFE

Highlights

Now have more employees in America than Australia

Cost of funding borne by client (accountant, lawyer) - less risk to QFE compared to other BNPL such as APT. What this means is if accountant's customer has $4,000 remaining on their principle payable to QFE and they go bankrupt, accountant than pays $4,000 principle to QFE.

Default happens <1%

Aus business was running at approx $1M profits before expanding to US roughly 1 year ago

Lending $1.5M/month; annualised $18M

Over 25% of top 400 accounting firms

Signed first top 10 US CPA firm

American division provides a full payment gateway:
-interest and fee income from lending
-platform fees
-credit card processing income
-SaaS e-invoicing tool revenue (Q3 release)

When paying a bill (US) client has 3 options:
-Monthly payment plan (QFE earns interest)
-ACH - paid in full (QFE earns 0.35%)
-Credit card - takes revenue share out of surchage on credit card

Aus revenue grew 17% yoy

US revenue grew 63% yoy

Transaction value US gew 154%

Transaction #'s grew 134%

Growth is coming not just from new firms but increased adoption of services from current firms

Covid-19 has accelerated shift to online payments
-business doubled during initial 6 weeks of US lockdown

Less than 25% of American firms bills are submitted electronically (still paid by cheque), adoption of electronic payments = more revenue for QFE

QFE is developing software for electronic payment systems and payment reminders

No competitor in US who provides what QFE does - payment plans, ACH & credit cards all in one spot for professional service firms at virtually no cost to them

https://www.youtube.com/watch?v=qTKsDgxqFW8&feature=youtu.be

Extension of Lending Facilities in US and Australia

US facility

QuickFee US’s current lender, Global Credit Investments, has executed agreements to double the existing US$5 million debt facility, and increase the borrowing base ratio from 80% to 85%. This increase in the facility was necessary given the narrowing of existing headroom on the back of strong US loan growth in recent months.

The increase in the debt facility to US$10 million, coupled with the recent placement capital raising, allows QuickFee significant additional headroom to capitalise on the increasing demand for its payment plans in the US market.

Aus facility

QuickFee is also pleased to announce that its current debt provider for the Australian market, Lease Collateral Pty Ltd (“LC”), has increased the facility limit of debt funding of Australian receivables by A$5 million, on substantially the same terms as the existing facility (full details which were set out in the Prospectus dated 14 June 2019).

This represents the continuation of a long-standing relationship with LC and enables QuickFee to fund anticipated further growth in its loan book in the Australian market. The total facility limit is now A$25 million. QuickFee expects to provide its next quarterly update on its trading performance in early July.

https://research.nabtrade.com.au/uploadhandler/z1e88e00azdf2259e633b243dca970a176ef10ee88.pdf

Disclaimer: I hold QFE

Thesis:

•Experienced, talented management team with CEO having run this business successfully in Aus for past 9 years

•Passionate founder with a 12.3% stake in the company

•The business has multiple revenue streams – interest on loans to businesses (9.9%), application fee revenue charged to customer, merchant fee revenue (this EFTPOS terminal), merchant fee revenue (charged to merchant as recurring revenue), + other revenue

•Operates in Australia and recently expanded to America, servicing accounting and legal firms with possibility to expand to other business sectors (e.g. architecture firms)

•Possess economies of scale

•Operate in a more stable market than traditional B2C companies such as APT as they sell B2B. As an example, businesses still require advice from accounts during the Coronavirus shutdowns and in some cases more financial advice.

•Currently unprofitable as they’re pursuing high growth in the underserved American market

•Strong tailwinds – 18 billion cheques are written in the U.S. every year, with this number decreasing by 1.8B/year as the American market moves towards paperless invoices and payment systems such as those offered by QFE. QFE report transactions have doubled in the past 6 weeks due to lockdowns.

•Strong balance sheet with $5.8M in cash and excess funds from IPO used to lower borrowings

•Quickfee claims to be a first mover in the US with little to no competition for its services

•If we compare to APT, credit risk is borne by firm not QFE; however, it is more capital heavy than APT requiring a larger loan book

•Have recently increased spending on a sales team suggesting rapid growth. In addition, with transactions doubling (as mentioned above) QFE could be hitting an inflection point.

Risks 

•affected by interest rate on their debt facility

•highly leveraged; however, this is to be expected

Disclaimer: I hold a position in QFE.

About QuickFee Limited

QFE is a provider of payment, lending, and e-invoicing solutions.

QFE is effectively Afterpay serving small to medium sized businesses. Instead of you or I purchasing clothing from a retailer and paying via Afterpay, a small business (you or I in the APT analogy) needing accounting or legal advice can purchase services from an accounting or law firm (the retailer in the APT analogy) and pay later – BNPL. The main difference is while APT is business to customer (B2C), QFE is business to business (B2B).

Similar to APT solving a problem for the retailer, QFE solves a problem for the firm – they’re accounts receivable are effectively eliminated as they’re paid in 3 days* and they don’t have to chase up clients regarding payment which is not only time consuming but can damage client relationships. Accounts receivable take 88 and 60 days to collect for law firms and accounting firms, respectively. Clients have the option of taking out a 3-12 month loan at 9.9% with the loan being backed by the firm. QFE’s loan default rates are 0.02% and are guaranteed by the firm, considerably de-risking the business.

For the professional services firms, having their clients access Quickfee provides a convenient funding solution that alleviates working capital cash pressure, reducing the average accounts receivable for a firm from 66 days outstanding by 29 days. For the clients, it helps with cashflow, and allows them to access professional services that they may not have otherwise been able to afford, (all loans are guaranteed by the professional firm). Therefore, there are incentives for firms to adopt the platform, and once adopted, incentives for their clients to utilize it. In the event that clients do not take out a loan, they can still pay their invoice through the QFE payment platform, avoiding a credit card fee. In the US this has significant benefits.

QFE was founded in March 2009, originally servicing the accounting sector. It has proven profitable in Australia and has expanded out to serve both accounting and legal firms. In July 2019 Quickfee Australia and Quickfee US merged to become Quickfee Ltd and completed an (oversubscribed) IPO on the ASX.

QFE is lead by CEO and founder Bruce Coombes who has a 12.31% stake in the company. 30 years’ experience to span areas as diverse as Asian and Australian tax, outsourcing to Malaysia, CA program exam writing, public practice, board appointments and for the last nine years leading the team at QuickFee.

Online payments and even electronic invoicing by accounting firms in the US is years behind Australia – big untapped market $450B US vs $25B Aus

Quickfee achieves exposure through integrating with solutions used by professional firms to run their businesses – this is a key part of QuickFee’s strategy.

As at Dec. 19 352 firms have signed up with 50% of clients having taken at least 1 loan and 40% 2 or more.

US business – revenue is split 50/50 between loans and transaction processing.

Au business – established, profitable business, operating since 2009.

Forecast profitable FY 21/22 while under-promising and over-delivering on every other milestone to date.

Looking to have their US debt facility reduced from current 10% to a rate more in line with Aus rate of 6%.

You may wonder why, if QFE Aus has operated since 2009 they are still experiencing significant growth in the Aus market? This is likely due to the company branching out from only accounting firms to accounting and legal firms.