It's difficult to say anything bad about the results. Smartpay is on a big purple patch at the moment.

Free cashflow lags some of the other numbers, because the growth requires upfront capex in payment terminals. The company increased the Australian fleet terminal by +62% this financial year. Australia is now 81% of the group's revenue having been 40% only 3 years ago.

Coming out of March 2023, the revenue run rate is already +17% on that of FY23, due to the extra terminals deployed during the year.

There is also a potential kicker on whether SMP can transition its New Zealand business (19% of group revenues, but 2x the number of terminals vs Australia) from a terminal rental to payments acquiring business and become vastly more profitable. Something to watch out for.

Roughly 4.5x revenue, 50% gross margin, 33.6x EBIT and FCF positive despite the capex required to fund the company's impressive growth rate.

Surprised that there’s not a lot of chatter on this name, given the share price is hitting into all time high territory.

1H FY23 results (30 Aug half end) was out on Monday and the company has continued its path of revenue growth, profitability and positive free cashflow.

Group revenue grew half-on-half by 23% (68% vs pcp), with EBIT and FCF still both positive at $3.8m and $3.0m respectively (not too dissimilar to the last half).

While increased advertising spend was largely foreshadowed, it was a significant jump in salaries that muted profit margins in the half. The CEO clarified this during this morning’s Coffee Microcaps interview - it was due to the hiring of a Business Development manager and Outbound Sales manager in late Q4 and the building out of the teams underneath which spiked the costs. Salary expenses will return to the previous run rate in 2H FY23.

In my previous post, I wrote about Smartpay’s “marketing innovation”, and still think this is an area that is being dismissed by some. There’s a value proposition difference between a “completely free payment terminal” and “here’s a bunch of fees to use our terminal, but you can recoup it by configuring a surcharge”. The end result might be the same, but the cognitive and initial financial load on a small business owner is tangibly lower.

The big 4 banks (76% share of the merchant terminal market, excluding Square - according to Tyro) will have difficulties responding.

1. The merchant terminal business is trivial compared to everything else a bank does. It’s really just an add-on to help support the business banking proposition.
2. Banks have much bigger and much more profitable credit card divisions. The employees working in credit cards have had many years of education from their scheme partners (Visa, Mastercard, Amex) that credit card surcharges are bad because they suppress spending. Suppressing spending is bad, because the bank makes money from transactions (interchange) and larger outstanding balances. Who’s going to be ballsy enough to introduce a SmartCharge feature at a bank to make next to no money at any risk (perceived or otherwise) of endangering the top-line of a much larger and more profitable line of business?

SMP reported FY22 (31 Mar year end) results yesterday, and it has inflected into profitability with positive free cashflow. $3.1m EBIT and $3.3m free cash flow, and most/all of it coming in the 2H for a business without much cyclicality.

It's already running at a $61m revenue run-rate which is 27% above the FY22 revenue of $48m. So there's a lot to like about the underlying traction and its ability to generate positive cashflow.

This is not my favourite company. I see a lot of ways for competitors, especially big tech, to muscle in on the current incumbent payment rails and the infrastructure around that, which Smartpay is one.

The innovation with SMP is primarily a marketing one. To me it feels like the Afterpay of the payment terminal world. Instead of charging the merchant a rental fee and a transaction fee for the terminals, it's a completely free terminal (SMP calls this SmartCharge). Smartpay just adds a surcharge to each transaction so the end consumer pays.

I've seen may other terminals/POS combos automatically add a card processing surcharge so it's nothing new. The "innovation" is being able to proposition the payment terminal as completely free for the merchant. No "you can recoup the rental and transaction costs by configuring the terminal to add a surcharge, etc".

It's free, here's a terminal, go for it. It feels Afterpay-ey (4 payments, no interest) because the proposition is so simple and cuts through.

And it's cutting through in terms of traction. The Australian business has grown 40%pa over the past 3 years for an in-person payment terminal business. And now it has hit into profitability.

Worth watching.

Disclosure: Hold in real life portfolio.