COVID-19 TRADING UPDATE #76 - WEEK ENDED 27 AUGUST 2021

Still tracking at the same 20-25% with lockdowns still prevalent. Things are not looking too positive in terms of things being open for the Christmas trading season, especially for NSW. If there are still serious lockdowns up until Christmas this will have a major effect on Tyro's transaction numbers. As retail can be cyclical, with large volumes transacted around the holiday season, the removal of this period would seriously alter Tyro's full year results for FY22. It is fortnight by fortnight at this stage.

Full update.

DISC: I hold.

Tyro has released results today and as expected there has been some good growth. With lockdowns across the country multiple times over FY21, this put a strain on in-store retail shopping and this definitely had an effect on Tyro's transaction volume. Despite this, they did post a record number of transactions. These transaction volumes have jumped in FY22 already by around 20-25%. As @Rocket6 and I have discussed these elevated transaction volumes in FY22 are in part due to Tyro's partnership with Bendigo Bank, which was completed in June 2021 and expanded their merchants by upwards of 18,000. 

Another big success story from this business in FY21 was their aquisition of Medipass, which is a significant part of their health solutions platform. On top of this, Tyro has continued to inovate by looking into new software, improving their existing products, and finding new solutions for merchants. In FY21 this included an emphasis on their Tyro Connect and Tyro Go products.

I still remain bullish on Tyro, especially with the tailwinds that will be present as lockdowns are lifted and people return to somewhat normal shopping lives. Add to this the massive amount of new merchants that Tyro has with this Bendigo Bank deal and it creates a pretty positive environment for them to thrive.

I am looking to do a full report in the coming week on Tyro's business and history and post it for all to see (inspired in part by @Noicewon11).

Highlights for FY21

• Record $25.5 billion in transactions processed by Tyro merchants – up 26% (FY20: $20.1 billion).
• Record 58,186 merchants choosing Tyro as their payments solution – up 81% (FY20: 32,176).
• Transaction growth driving record gross profit of $119.4 million – up 28% (FY20: $93.5 million).
• EBITDA1 of $14.2 million - up 424% (FY20: $4.4 million loss).
• Record loan originations in May 2021 of $8.1 million – FY21 originations $25.8 million (FY20: $60.1 million)
• Transformational Tyro | Bendigo Bank Alliance completed 1 June 2021 – 18,490 new merchants + ~$5 billion annualised transaction value.
• Acquisition of health fintech Medipass – significant step in building out Tyro’s health solution.
• Launch of Tyro Go pilot – new mobile payments dongle.
• Tyro Connect generating traction – 695,000 transactions processed.
• Australia’s 5 th largest merchant acquiring bank by terminal count – 104,827 terminals up 67% (FY20: 62,722).
• Strong Balance Sheet - $172.8 million in cash and financial investments - future growth supported.
• Impressive brand awareness increase – prompted brand awareness lifted to 20% (FY20: 14%) + unprompted spiked to 19% (FY20: 9%).

The full annual report can be found here.

The media release can be found here.

The FY21 investor presentation can be found here.

DISC: I hold TYR.

UPDATE #74 - WEEK ENDING 20 AUGUST 2021

Still seeing great signs for Tyro. Volumes still hanging around a 20-25% increase YoY.

As I said in last week's update, if they can continue to increase their transaction volumes YoY they are setting themselves up for a great FY22. This is while they are clearly at a disadvantage with the continued lockdowns around the country. Once vaccination numbers are hit and things start to open up they should experience some serious tailwinds. I expect this to be some time in the last half of FY22.

Full report.

DISC: currently hold.

Health Funds look to increase ease of use for customers by eliminating the need for physical cards.

In a previous straw I discussed Tyro's position in the health care market with it's ability to run through health fun claims using a physical card. One major risk to this advantage of Tyro over someone like Square would be the elimination of physical health fund cards and eventually the move to have claims run through the computer itself or the patient's phone and therefore not need a dedicated terminal. This would mean Tyro would no longer have a clear advantage over someone like Square because the health care provider would have a choice as to what terminal they wanted to use in their business based purely on the need to run through Eftpos cards. 

To eventually get to a point where a terminal is not needed to run through on-the-spot health fund claims, the first step that would be needed is companies moving from a physical card to a digital card (still with the need for a terminal for the instant claim). This step would allow for the next part of the process, from my view, which is the removal of the terminal and a move to on-the-spot claims through an online system that the provider has or through the patient's mobile device, without the need for either a physical or digital card.

Today we received a letter from the terminal provider we use at one of our stores and Tyro's biggest competitor in the health care industry, HICAPS. It outlined the move to digital cards, which were previously able to be used only on some android devices and with only two or three health funds. With the number of people that have an Apple device, what needed to happen was the ability to add a digital health fund card to your Apple Wallet meaning that this method could be more widely used. This is now a reality for a number of large health funds and I assume the rest of the companies will follow. The current providers that allow for digital NFC card claiming on HICAPS machines are:

• AHM
• BUPA
• Medibank
• NIB
• GU Health
• HBF (coming soon)

While this news is in relation to the HICAPS terminals, it means that this will soon be adopted into Tyro's terminals/machines to match. I have included a picture of the marketing we received too from HICAPS.

A small piece of speculation: there are several possible outcomes that exist in terms of how exactly the cardless and terminal-less process would work however what I would love to see is the business doing up an invoice with all of the item codes and amounts, then a claim button is clicked, a QR code is generated and the patient scans this with their health fund app and the claim is sent through instantly, with a response from the health fund within seconds.

UPDATE #74 - WEEK ENDED 13 AUGUST 2021

Positive signs still for Tyro. It seems that even with the current lockdowns across the country we are still seeing increases in transaction volumes through Tyro's terminals. Volumes still hanging around a 20-25% increase YoY.

If the company can continue to see these positive signs until the end of the calendar year, the (hopeful) end of lockdowns should see a big uptick in transacting volumes as shopping centres reopen, so the second half of FY22 could be a big one for them.

Full report.

DISC: currently hold.

@Rocket6 and @Chagsy a very interesting discussion and one I have been pondering myself, ever since the Afterpay acquisition. 

As someone who has used Tyro machines in several businesses, as well as Square and a couple of other types of terminals over the years, I have a few takes on this: 

Square/Afterpay terminals could become the leading type of payment terminal in Australia.? 

I think it's entirely possible that Square could become the leader in this space. Their terminals are already really easy to set up and their business and brand feels very modern and their machines attractive and portable. They have a range of different solutions that can expand across hospitality and retail, and their online integration with Linktree, Wix and many other online platforms is market leading. Even before the acquisition of Afterpay I believed that Square had quite a significant opportunity in Australia, but now that they have Afterpay, it gives them more power and makes them more attractive to businesses.? 

Let me explain why. The first thing to note is the statistics that Afterpay touts in terms of helping a businesses grow. A few of these are:* 

• 3.5M customers shop with Afterpay in Australia and New Zealand. 

• The top 10% of Australian and New Zealand customers use Afterpay more than 60 times per year. 

• Partners of Afterpay see a 20% increase in cart conversion on average. 

• Afterpay increases the average order value by up to 40%. 

• Merchants find that 30% or more of Afterpay customers are new to their brand. 

So for any business this is already a really compelling proposition. Currently, a business will apply to Afterpay to get integration with their business. Once accepted the shop is charged a flat fee of 30 cents and a commission that varies with the value and volume of transactions processed using Afterpay. The more you sell, at a higher value, the lower the percentage fee will be. The fee ranges from just over 6 percent per transaction down to 4 percent per transaction. 

This gives Square power in the sense that they could do two things to make businesses more inclined to swap over to using their terminals: 

1. They could require a business, if they want to have Afterpay integration, to need some type of Square infrastructure, whether that be an online shop directly or indirectly through Square, or a terminal in-store that is owned by Square. While this is probably the least likely option, it is a possibility. 

2. The second and more likely option would be that Square reduces their Afterpay merchant fees significantly when an Afterpay transaction is put through one of their integrated online systems or one of their in-store terminals. This would be an excellent option and would really entice businesses to think about switching to a Square based system if they have a lot of Afterpay transactions going through their stores. This also gives Square an enormous amount of pricing power with the Afterpay customer base being so strong already. 

*Statistics according to Afterpay's website.

Tyro exists in an extra market to what Square/Afterpay does. 

Obviously when we all think about POS systems and payment terminals, the main two sectors that come to mind are hospitality and retail. What a lot of people probably don't consider is the healthcare industry and the terminals they use. According to one survey, the Australian health care industry has around 156,406 businesses, each of these having potentially multiple stores or shopfronts. At these health care services, customers and patients want to be able to use their private health insurance to claim back money. Square terminals do not have the ability for someone to run through an insurance card and therefore these health care businesses would not even be considering using them. As someone who works in the health care service and retail sector, when we set up a business, we always look for a simple, all in one system where we can swipe or tap a private health card as well as run through a range of payment types from the single terminal. To be able to make these claims easily and on the spot for patients, we must be able to swipe the physical card or tap the digital card. Square simply doesn't have this ability and it's exactly the reason why we would never even consider them for one of our stores.  

Of course this could change in the future, with health funds looking to make things easier and more available to their customers, we may see a way where physical cards or running it through the store system is no longer necessary and everything can be done on the spot using the patient's phone. Things are getting easier in this sense slowly but it will definitely be a long time before businesses no longer need a terminal that can accept health fund cards. This gives Tyro a definite advantage over Square with the integration of Healthpoint into their system for on the spot health fund claims. 

Tyro competes with HICAPs in the health care sector. 

Tyro's main competitor in the health care sector is HICAPs. HICAPs has been the go to for the majority of health businesses for a very long time now. They are a well-known brand, owned by NAB Health Group and their machines are reliable. We hardly ever have a problem with their terminals. So what does Tyro have that may entice people to either switch from their current provider, or choose them when setting up a new business/practice? They have a modern day feel. They look a lot nicer (which I know is subjective), and are more portable and easy to use (from my experience).  

The main advantages that would have me select Tyro over HICAPs are: 

• The machines are more portable and less bulky. 

• Tyro can process a claim in as little as 3 seconds (important when running a busy practice). 

The main disadvantages to using Tyro over HICAPs are: 

• Tyro can require you to use specific practice management software so some businesses may not have the ecosystem set up to use them. (However there are a range of different ecosystems that do work and Tyro is expanding this slowly.) 

• They cannot process private health claims for HCF members for Remedial Massage. (Something I think will be fixed pretty soon because it is an unusual little quirk.) 

Where do I think the payment sector will head? 

I believe Tyro has a strong market position and I can only see them expanding over time. They have loyal merchants and their ability to integrate health fund payments opens them up to the added sector of health care. This is a big sector that continues to grow year on year. I honestly think there is room for Square, Tyro and HICAPs as the major players in the field in the coming 10 years. I know for our businesses, the acquisition of Afterpay won't change any propositions for us. If Square somehow comes up with a way to integrate private health fund claiming into their ecosystem then that could very well change things, but in my opinion that would be at least 5 years off if at all. Tyro has a strong leadership team and their machines are great. I think they will only grow over the coming years to be one of the preferred terminal providers in Retail, Hospitality and Health Care in Australia. 

DISC: Currently own TYR 

Latest weekly update is still showing positive incline in transactions for Tyro.

I am bullish on this company but also wonder how the new aquisition of Afterpay by Square could open up the posibility of Eftpos machines in Australian retailers specifically owned by Square and offering cheaper merchant fees on Afterpay transactions. This could save retailers a lot of money and entice them to look away from Tyro. Time will tell and obviously a little while off with the Afterpay aquisition looking to be completed at the end of CY22.

Weekly Update 02/08/21