Finseta (LSE:FIN) — Interim Results

0:00 Good morning, ladies and gentlemen, and welcome to the Cornerstone FSPLC Interim Results Investor Presentation. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and public responses where it's appropriate to do so, and these will be available via your Investor Meet company dashboard.

0:33 Before we begin, I would like to submit the following poll, and I would now like to hand you over to CEO, James Hickman. Good morning, sir. Good morning, and thank you, Jake. Good morning, everyone. During this presentation, we're gonna have a look back at h one, see some of the progress we made, sort of a deep dive in into the numbers. Myself and Judy are presenting today. So please, as Jake said, please do feel free to ask any questions at all, and we will certainly answer what we can do. So without further ado, delighted to to be able to announce maiden pretax profit, and this was versus a loss of 3,000,000 last year.

1:19 Revenue increased 90% to 3,600,000. EBITDA positive 2,000,000 200,000. Cash and cash equivalents, very important, $81.06. And that's obviously an increase from December 2022. Interestingly enough, from a nonfinancial perspective, we've increased our capability as part of our strategic plan in the number of currencies that we can pay in and out of now up to a 150 countries in 58 currencies. So this is very much a a strategic direction that we're going on. And as previously mentioned, we're not doing this alone. This is innovations through partnership. So it's increasing our number of counterparties and partners to be able to offer our customers and potential customers even more choice in terms of currencies.

2:21 Another highlight for for h one was consumer duty. We we we were ultimately consumer duty compliant in in the specified time given by the FCA. It was no small feat at all, and the team worked extremely hard to get us there, but a very, very important milestone, not only from a regulatory point of view, but also from a from a customer point of view as well. And and final sort of piece here, we are ahead of market expectations, and Judy will come on to that very shortly when we delve into the detail. So in terms of our stated strategy and sort of spoken on this before, very much investment investing in people.

3:15 We've strengthened our compliance and regulatory side of things.

3:19 We have strengthened our sales side, and we continue to do so. So this is a theme that will continue throughout H2 and also going into 2024 as well. We're actively building our sales capability and continuing to do so. And obviously, you can see through the numbers and revenue growth that is really starting to pay off. We continue to develop and enhance products and services, as I mentioned, our counterparty capability, but also in terms of product set. We look forward in H2 to be able to announce some other exciting developments. We are expanding our customer base in terms of the types of customers that we're onboarding, and this is very much done in a regulatory compliant manner, thus the investment in compliance and in our sales as well.

4:14 One item to note, and, again, within the strategic stated strategic goal is to reduce the number of the traditional white label businesses that the the the Cornerstone has served and increase our direct revenue. And pretty much in that journey, we are nearly done. We have a couple of white a couple of white labels that we service, but, ultimately, the majority of our revenue or the over 90% of our revenue is now direct. And in terms of the the regulatory side of things, as I say, we will continue to invest, continue to grow out our expertise because, ultimately, in a in a particularly in particularly in in a a payment payment services business, as I said before, the compliance and the regulatory aspect are really an incredible value to us.

5:12 In terms of our platform, sort of the journey that we've been on, a lot of the development has gone into or certainly H1 this year has gone into the onboarding process. So in terms of creating

5:30 effectively a straight through process, we we've we've completed that. We've invested heavily in into new systems, ultimately creating a a platform or addition to our our sort of in house platform that enables us to onboard customers seamlessly without any friction at all. So so benefit to us and also a benefit to the customer. Other than that, as I say, we we are actively looking at a card program, and we should be, within the next few weeks, be able to announce the the completion or or certainly the decisioning on that.

6:18 And I'm I'm looking forward to updating the market on that as and when it happens. So without further ado, we'll dive into the numbers now, and I'll hand over to Judy to go through the next part of the presentation. Thanks, James, and welcome, everyone. I really am delighted to walk you through our first half of twenty twenty three. And I hope over the next few slides, get a true sense that this is a a really transitional period and a set of results for us and the culmination of of a lot of hard work from everyone across Cornerstone. So starting with revenue, as you've already heard, revenue for the first half of twenty twenty three, 3,600,000. That's up 23% from the previous half of 2,900,000 and ninety percent up from the from h one of twenty twenty two when we achieved 1,900,000.

7:12 Key drivers of this has been the expansion of the sales team, as James has already mentioned, particularly in the second half of twenty twenty two, and that indeed was supported by the small tuck in acquisition of Pangea FX. We've continued to build out our introducer network, including in our a desk, which has really continued to go from strength to strength. And we've also seen the embryonic revenue development from the expansion of our counterparty base. So increasing our reach into currencies, sectors, and countries that are harder to serve. That stands us in good stead as we look to grow further in future periods. Collectively, those factors have helped us grow our number of customers. So 874 customers traded with us in the twelve months ended 06/30/2023.

8:02 That's up from 697 customers from the previous period. And as you can see on the graph on top right, I really think this demonstrates that we consistently delivered very, very impressive sequential revenue growth over the last five halves. Moving on to gross profit. We achieved gross profit of GBP 2,200,000 in H1. That's up over 88% year over year when we achieved GBP 1,200,000 and up 24% sequentially. The margin is broadly consistent with the two previous halves at 61%. And James already touched on this, but you can see on the graph on the bottom right that the proportion of revenue derived from our direct sources has continued to increase up to 91% in this half and the share of white label business, therefore, percent down from down from 26% in h one twenty two.

8:58 That's a result of really the decision to manage down almost all of the the white label stable, only maintaining a few a handful of of partners that meet certain profitability thresholds. The gross margin benefit of that, you would expect a natural gross margin benefit of that given the payaways to white labels of of typically around 70 to 75%. The gross margin benefit of that has been partially offset by a change in in commission arrangements, particularly with Roberto, the general manager of APAC and Middle East. Previously, it was agreed that that would be set at enhanced levels in 2023 compared to 2022. You may recall that in March, we announced that mister O'Brien had agreed to very certain elements of his commission arrangements, decreasing his share, on certain established revenue lines and increasing his share on the profitability of the Dubai office.

9:57 That was immediately beneficial for us within the half, and we saw a small uptick in the gross margin in the second quarter of twenty twenty three compared to the first quarter. Turning to adjusted costs, which are cost less depreciation, amortization, share based compensation and transaction costs. Adjusted costs for the first half were GBP 2,600,000. That's down from down £81,000 from the previous half. And so delighted to to show that we're we've we've achieved our first half of sequential cost decrease and the first half of adjusted cost being lower than gross So it really, really reflects the strong cost control ethos that you've heard from us over over previous presentations with rationalizations, particularly in the areas of legal professional fees and marketing and PR that we've reinvested into growing the sales team and making the enhancements in our platform, particularly around the onboarding journey, as James already mentioned.

11:02 That in turn led to us delivering our first period of EBITDA profitability, a 190,000 for the first half of twenty twenty three compared to GBP 319,000 EBITDA loss recorded in the previous half.

11:22 Below adjusted EBITDA, we've also achieved further key profitability milestones. We achieved operating profit of 138,000 compared to 2,647,000 loss in the second half of twenty twenty two. There are a number of things to explain in this transition, so please bear with me as as I explained through those. The most significant transition is is in our share based compensation charge, which reduced to 173,000 in h one twenty three compared to 2,000,000 h two twenty twenty two. That variance is is entirely attributable to the share based incentivization agreement that the group had with Robert O'Brien and the Asia team that followed the aqua hire of that team in h two twenty twenty one. As you may recall, that incentivization agreement was settled in h two twenty twenty two, meaning we have no further share based compensation charges related to that agreement.

12:24 Secondly, we generated a profit on disposal of the subsidiary of Avila House in the half. You may recall that the the sale was announced in December, but completed in April, receiving £300,000 in gross proceeds. We held us the small e money balance held by Villa House was on our balance sheet at a value of 93,000, meaning we recognized a profit on disposal of £207,000 in the period. The third notable change is the recognition of interest income related to the group safeguarded balance. You may be aware that under the terms of our EMI license, we're required to protect customer funds in safeguarding accounts with authorized credit institutions.

13:12 And the interest rate environment has meant that interest has become much more material and significant, and we are not under the terms of our license able to pass that interest back to our customers. So the group has recognized in the $0.5184000 of other operating income related to the interest, on those customer balances, that compared to 31,000 in the in the prior half. Below operating profit, finance costs were 115,000 consistent with h 02/2022. That includes 65 k of interest related to the £2,000,000 of loan notes that are on our balance sheet. Sorry. 2,200,000, which I'll get to shortly. They have a fixed coupon rate of 6% per annum.

13:58 The income tax credit of 12 k in the period related to deferred tax asset release. And in the period, we reckon in the prior period, we recognized r and d tax credits, which we typically receive in the second half of the year. The whilst we are now in a profit generating position, the group currently has accumulated tax losses of of around about £505,000,000, and therefore, don't expect to recognize a tax charge in the medium term. And as a result of all of those changes that I've outlined, and there were quite a few, so apologies, we generated our first net profit also in the period of 35 k compared to the 2,600,000 loss in the prior half.

14:47 Turning away from the income statement onto cash flow, we see some other first for the group. So we generated an operating cash inflow of 114,000, and we generated our first overall cash inflow for the period. Importantly, no fundraising flows impacting that, of course, a 134,000 overall cash generation. And you can see from the waterfall graph on the on the right how that breaks out. So the 114,000 cash inflow from operations comprising the 184 interest on client safeguarded, funds as I've already mentioned, a 186 in other cash based operating income, and a 255,000 working cash outflow. The 300,000 sales proceeds from the Avila disposal were largely consumed by the capitalized software, additions as we continue to build out our platform and 66,000 interest charge on the loan notes.

15:46 Therefore, the overall cash outflow, as I mentioned, 100 cash inflow, sorry, 134,000 for the period. That would have been a cash outflow of 166,000, were it not for the sales proceeds from Avila House. And very briefly looking at the balance sheet, cash stood at a $108,116,000 as at 06/30/2023. Total loan notes of 2,173,000 comprising 2,000,000 due to Robert O'Brien under the terms of his settlement agreed in August of last year. That's repayable in July 2026.

16:24 And 173,000 in deferred consideration related to the Pangaea FX acquisition, that's repayable in on the 08/31/2024. Loan notes in the period reduced by 225,000 following the conversion of a loan note held by Mark Horrocks following receipt from the FCA of approval to take his shareholding above 10%. Net debt, therefore, reduced by

16:52 360,000 in the period to 1,356,000. Within equity, the deferred consideration reserves stood at 1,000,000 as at 06/30/2023. And related to deferred consideration on capital current on the capital currencies acquisition. That was originally recognized as a as being equity settled. However, you will recall that in March 2023, we negotiated

17:20 an option for the company to settle that in cash, and that is certainly within the company the management's forecast to utilize that cash settlement method. The final deferred, consideration tranche is is repayable in March 2025.

17:40 Just, in some reading, on the financials, I wanted to ensure you really took away that this was a transitional half year for us. And we really are delighted with our progress. And as you can see from the following metrics, they all turned positive in in this half. So adjusted EBITDA went from a 319 k loss in h two twenty twenty two to a 190 k e EBITDA profit in h one. Operating profit, net profit,

18:11 we generated an overall cash flow. There was a overall cash inflow of 134 k. Though as I as I mentioned, that was supported by the 300,000 gross proceeds from the sale of Avila House. We remain on track to deliver a record cash generation in the second half of twenty twenty three in line with our previous commitments to the market. And all of that means we had an extremely positive impetus going into the second half, which I'm pleased to say has been sustained in the first two months of the half of of h two. And we that we therefore expect full year 2023 results to be significantly ahead of market expectations.

18:56 And further, given the great progress we've made on on our overall strategy, strategy, the current prospects of the group, a clear focus on our strategic growth. The board is confident that the group's funding position is comfortable and sufficient to support our existing growth patterns. I. E, we do not expect to make any further fundraisers or dilutative events. And with that, I'll turn back to James. Thank you, Judy. So just to wrap up in summary before we go questions, and we've got a fair few of them, so we'll try and race through those as quickly as we can. So just in summary, we're a growing business with cash, what we believe is the right strategy and executing that strategy.

19:45 We have definitely the right people. We've got a great team here, very experienced, very ambitious people, and and that definitely cannot be underestimated. And and importantly, we're able to attract from within the industry some some very senior people that just shows how far Cornerstone has come come along and certainly within the industry now very, very well respected. We've got a in house platform that is extremely robust, well built, scalable, app fit for purpose into payments and running an EMI, eMoney license. We have the regulation.

20:32 We have the the team behind the regulation, so compliance. And we are now focused, as I said before, very much on direct revenue. So long are the days giving away most of the revenue in terms of revenue share. Ultimately, for us, we're working hard to acquire the customers, and therefore, we're reaping the rewards of that. So in summary, a a fantastic growing business in a in a great segment in payments. So much is happening in in in the payments world at the moment, and we're ideally positioned to capitalize on that. So without further ado, I think we'll go on to the questions now, which we have quite a few. So I'll I'll I'll read them out and some that I will take and some that that Judy will take.

21:29 So the first one, this year, a dozen of countries' currencies depreciated massively, Zimbabwe, Venezuela. One of Cornerstone's benefits is to manage currency risk for clients. How is currency risk management going at Cornerstone? Any significant gain through spread betting? So I guess two answers to this. The first one, we definitely don't take any risk at all on behalf of customers or, in fact, on our own book as well. So spread betting is completely out. There is none of that. Secondly, this gives us a chance to add value to our customers by guiding them through, you know, a lot of the a lot of the currency pairings and the fluctuations.

22:17 So very much, absolutely, we we add value to our customers. But I will absolutely say that we do not take any principal risk as a business at all. We're only adding value to our customers, and we're certainly not advising them in any way. The next one, can you provide an update on the following taken from the 2022 full year r results RNS? A core element of the group strategy is to establish a global payments network that would enable Cornerstone customers to be able to pay from and pay out to any jurisdiction by any payment method. Whilst it's still relatively early days, important steps have been taken implement what important steps have been implement taken implementing this strategy.

23:08 Well, I'm delighted to say that we've we've increased our number of counterparties, and we continue to do so. In fact, we're onboarding with two more as we speak, very large ones actually. So we'll increase our capability even further. I've touched on the card proposition. So that's another payment rail that we're we will be adding. So in the strategy of adding to our sort of global footprint, if you like, in terms of the payment rails, absolutely, we're making I'm delighted with progress on that. It's not going to stop. It's going to continue. Ultimately, our ambition is to cover as much of the globe as we possibly can do in terms of payment capability. Next question. Please, can you provide an update on the following I'm sorry. I just read that one. An update on the twenty two twenty twenty two year results, RNS, to to be able to support customers with more of their business needs. The group has formed strategic partnership with specialized and alternative lenders to offer a range of funding solutions.

24:22 Yes, absolutely, It's now on our site. It's worth noting, actually, we're updating our site currently, so we will be launching a glossy new site very shortly, which actually is much more aligned to the products and services that we now offer and the type of business we are. But in terms of those partnerships, we are both reciprocally receiving and also sending clients both ways. Now I think I said initially when we launched this, we we don't perceive this as a a silver bullet in revenue terms. This is very much around for for customers to make ultimately sure that they're served well, and we have trusted partners for some of their requirements that perhaps sit outside of what Cornerstone's core capability is.

25:14 So that, I'm very happy with. Again, we'll continue to progress on that and not just around lending, but other bits of other bits of businesses and certainly to expand our proposition. Okay. I'll I'll take the next one. It's a very long question, so I'll try and summarize it. Is the company still expecting to maintain 6,500,000 full year revenues, which looks on the low side? So as I've already mentioned, 6,500,000 is is is the analyst consensus that's out there that was published in April of this year, and we are now expecting our full year revenue to be significantly ahead of that. As you know, Shore Capital, we're we're taking on as a broker earlier in in in this half, and we do expect them to publish an initiation note on us probably in in in the coming month or so.

26:11 The group's performance in h one twenty three and twenty three is exceptional. It underscores the potential for growth under the current corporate strategy, which seeks to optimize the potential of CFFS' technology platform. Blah blah blah blah blah. Sorry. There's a lot here. I think, essentially, it the the the the genesis of of the question is the the current value of the company seems to be disconnected with the first half performance that we've delivered. And we would probably, you know, although we're not allowed to give, our own guidance on valuation, of course, we would certainly agree that when you compare us to some of our peers in the industry, we do look particularly undervalued.

26:58 And as we've said in previous presentations, I think when you look at the sum of the parts, including all of those points really that James has just summarized in his last slide, again, we would probably look undervalued, particularly, as I said, in reference to our peers. Would you like to take that? Sort of the next the next question actually is seems to be a little bit of a follow on. Appointment of Shore Capital as the company's broker. The appointment of such a high profile broker seems a real coup for Cornerstone considering the relatively small market capitalization value of the business. Can you provide some background as to how and why Shore Capital was attracted to Cornerstone at this time? Ultimately, Shore Capital see the the value in the business. They can see what we're trying to do. They can see the direction of travel of the business.

27:52 Very much, you know, we we were selling to them rather than than them selling to us. Absolutely right. Shore Capital is a very, you know, high profile broker. And and to looking looking in, in, you might say we're punching above our weight. And at this time, we probably are, to be honest with you. The reality is this business has big ambitions. And in order to fulfill those ambitions aside from revenue growing the business, we do need the support of a brokerage like Short Capital. So we are very we're absolutely delighted that they're coming on the journey with us and and have made an impact straightaway, actually, must be said. So, yeah, we're we're we're absolutely delighted to have them supporting us.

28:39 Next question. Do you wanna take the next one, Judy? With these type of companies, bonuses are obviously paid to management and staff. Will there be cash bonuses, or will it be paid in shares? If it's cash, can you tell us more about the structure, please? So I I'll actually have to refer you to our ad doc for this this the answer to this question. So the the the structure of our compensation is outlined in that. Both James and I receive a 40% cash bonus of our salary. That's typically paid after the annual results are published. And, really, as you as you would expect, the the the KPIs around bonus payment are set by our remuneration committee.

29:32 Next one. Did you hi, Jane. Did you take up your options at Tenpi? I think they were due to expire a while ago. I certainly hope they weren't due to expire a while ago. They're they're five five years. They're five years. I've been actually with the business a year pretty much to the day. So this is so, yeah, there's some way off, but I certainly you know, in terms of incentivization, my my part part of my incentivization, to be frank, is to to ensure that the share price performs well for for existing shareholders and to create shareholder value. So so I'm very much aligned in terms of shareholder and company goals from that point of view. There may be a a confusion because there was a tranche that vested over the first year, but they expire after five years.

30:26 Can you please give more information on large share based incentive given to Far East in the past and what has changed this year? Yep. So I I will take that. So as I mentioned, we actually it was an acquisition of the team out of one of our white label partners actually in h one sorry, h two twenty twenty one. As a part of that, they were incentivized based on the incremental profitability that they that they would generate being part of the Cornerstone group due to the huge overperformance of that team under the Cornerstone brand. They they hugely outperformed our expectations, and therefore, the the the share based compensation charge related to that incentivize incentivization agreement was fairly substantial, I think, over 4,400,000 over over the year and a half after the acquihire.

31:25 That was settled, as I mentioned, in in h two of last year, in terms of a £2,000,000 loan note to mister O'Brien and the issuer of shares to him and his team, of around about, 18% of of the company. So there is nothing more to do in terms of recognizing any future share based compensation charges related to any acquisitions or acquihire agreements. Do you still expect gross margins to increase further over the coming years up to 66%? What I would say is I would expect margins to be maintained given our value Having said that, given that we are have a very relatively high transaction value, you know, there is a capital margin that we that we can create. Ultimately, if we were doing a lot of very trades, then then, yes, you know, there there is room there. But, ultimately, because we are attracting high net worth individuals, business customers that are that are regular customers and ultimately transferring relatively largest you know, transactional size, larger sums, then really, you know, to increase it much further is gonna be a push. So in the in this mix of business, having

32:55 said that, as a broader mix with other products, then then, yes, quite possibly. I think just to supplement that, what we're saying is there will be not be the shift change that you might have seen over previous periods. We've seen a stabilization now, and there will be probably incremental ones and twos up to a a kind of a natural ceiling of this type of business, I think. Agreed. Absolutely right. What is the what part of the business are you most excited about? What worries you most? And what's what's your biggest worry? So what part of the business excites me most?

33:41 Ultimately, it's the it's the opportunity. It's the people, and we we are doing business in a in a very, very exciting space. Payments is really exciting at the moment. And overall financial services, particularly within the payment sector, as I said before, there's so much change. There's so much opportunity going going on, on, and it it it is genuinely a super exciting time to be involved in it. What worries me most, and I think it's what worries any CEO or anyone involved in in a financial services business, is, you know, there there's fraud risk, obviously, and also compliance and regulatory. I know we spend, you know, an awful lot of time and money and effort, but always, you know, keeping up with regulation is always a challenge. You know? And it's not going away. It's always gonna increase.

34:36 And, you know, making sure that we're always ahead of the the regulatory environment or at least keeping pace with it, as I say, is a challenge. So worry is probably not the right word, but but certainly, you know, it's something I think about a lot. James, Judy, if I may just jump back in there, and thank you very much for your presentation and for addressing all of those questions that came in from investors this morning. And if I may just remind investors on today's call that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. But, James, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great. Yeah. Absolutely.

35:24 Firstly, thank you very much indeed for taking the time to listen to us. It it is very, very important. As a business, you can see we've we've undergone significant change over the past twelve months and continue to do so and will continue to do so. As a business, we are, in my opinion, you know, just at the start of our journey here. We have and and as Shawkap said, we're at the very beginning with huge potential. We're growing fast. We have the cash reserves to do so. We have the right people, most importantly. So very, very exciting times for Cornerstone as a business.

36:13 And I encourage you to continue to follow us, continue to support us, and please do feel free to reach out to either myself or Judy if if anyone has any further questions, and we will certainly try and answer if we can do, under my rules. Thank you. Thank you. James, Judy, that's great. And thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations? It's gonna take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Cornerstone FS PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.