OFX Group (ASX:OFX) Q2 2027 Earnings Call

0:00 I would now like to hand the conference over to Sander Malcolm, CEO and Managing Director. Please go ahead.

0:08 Thank you, Ash. Thank you, everyone, for joining us all. As Ash mentioned, I'm joined by James Georgeson, our CFO, and Matt Gregorowski, our stallion coach, who leads our investor relations program. James and I will take you through the pages and then there'll be some time for Q&A. The presentation will cover four sections, an overview... the performance update, first half financials, and the fiscal year 27 priorities and outlook, and then we'll go to Q&A. So let's move to slide four, PAC. The main focus of our update is on the pivot to profitability that's underway after several years of strong investment in our transformation. That investment, along with softer top-line growth, has significantly impacted our recent earnings. but before getting into that, I want to make a brief comment on the strategic review.

1:04 Discussions with equals continue on a non-exclusive basis. The board is very engaged, the opportunity is still being assessed, and both parties continue to apply resources to reach a conclusion. Understandably, I cannot comment in any detail on the substance of the discussions given their confidential nature. At the outset of the strategic review, We stated that we would consider our organic and inorganic options, we would consult with our stakeholders to get their views, and we would ultimately recommend what we believe to be the best path forward. Since the review started, we've been doing that work, building proof points on the transformation and its effect on our outlook. We've engaged in lengthy and comprehensive discussions with equals and others, and we've sought and received feedback from our investors.

1:56 So when we reached the point of making a recommendation, I am confident we will have completed a very thorough process with a broad range of inputs and views. Pleasingly, the proof points on the transformation are starting to become more evident, and we're starting to see a more scaled-up. I'll go into that in more detail later, but the single most important reason we undertook this, which was to grow with our clients and access a larger total addressable market, becoming increasingly evident. As you'll see later, those clients who have FX and at least one other product, whether existing clients who we have migrated or new clients at the platform, are showing that they are twice as valuable in terms of the average revenue per client that they deliver and three times stickier versus clients who only transact FX with us.

2:51 It is very encouraging to see quarter-on-quarter revenue growth and to see that both first quarter versus the fourth quarter and second quarter versus first quarter and October has been a good start for the third quarter. This growth in revenue coupled with the cost actions we've taken signal the end of the investment phase and point to a return to stronger profitability in the second half and beyond. The cost actions were highly targeted and largely in areas where the cost is not directly supporting revenue generation. Let's turn to slide six and review performance in the first half. Our clients tell us that business conditions are very tough in most of the markets we operate in, and we saw that reflected in the soft top line over the half, with NOI of 89.2 million down 15% versus prior corresponding period, although this was down 2.7% versus second half 2016.

3:51 NOI margin was down four basis points versus prior corresponding period but steady versus second half 26 and improving through second quarter. Underlying EBITDA for the first half was $4 million and net available cash was $36.6 million. These are both down significantly versus prior corresponding period. James will walk through the drivers of this in detail. As you will see in our outlook, we expect a material improvement in both in the second half. Average revenue per client, or ARPC, as an annual measure, slightly down versus prior corresponding periods, and broadly flat versus the second half. Amazingly, the non-FX revenue from products such as cards, subscriptions, and payment methods continues to grow up to $1.8 million in the first half, or 290% growth, and the wallet balances from clients are also up to just under $295 million.

4:50 or around 390% versus prior corresponding period. Turning to slide seven, the macro environment continues to be tough in all markets, with business confidence remaining low, consumer confidence declining, interest rates increasing, and inflation persistent. Somewhat surprisingly, volatility in currency movement is also low compared to the long-term trend. The weak confidence and the low volatility meant ATVs remained subdued by historical standards as our corporate clients remained prudent in buying inventory and employing staff, preferring to do regular, somewhat smaller transactions. Pleasingly, we started to see the shift in the second quarter with more larger value payments. The penetration of all was growing slightly and our new corporate revenue growing around 15% in the second quarter versus the first quarter.

5:47 The low volatility also somewhat dampened the larger value of consumer transactions, contributing to a decline in our consumer revenue of just under 7% versus the second half of 2026. Reasonably, our enterprise segment again performed well in this environment, up 32% versus the second half of 2026. Moving to slide A, we delighted with the the progress we're making in providing more products to our clients. I'll share the key data points here that give us confidence going forward that the transformation efforts are already going through. On the left-hand side, you can see that the multi-product adoption continues to grow in the client base, with 11.7% of all our corporate active clients now holding more than one non-FX product, up from 10.1% in the second half of 2016.

6:39 That is very encouraging. Breaking down further, new clients continue to adopt more than one non-FX product at a rate of over 25%, and now around 6.5% of our migrated clients also have more than one non-FX product. I'll get into the effect that has on revenue in a moment, but for now, the first effect of this multi-product adoption is on active clients. You can see in the middle chart that the client base, excluding OLS and Burma clients, is steady. We're looking at this on an annualized active client basis, which is our traditional definition. When we look at active clients on a quarterly basis, in other words, those who transact in quarter, we can see that the total quarterly active client number is lower at approximately 15,600 clients versus the 27,900 active clients on an annual basis.

7:37 However, we can see that they've grown slightly since the fourth quarter and that is largely due to the proportion of these that used us for FX and at least one other product. In fact, we would have seen a small decline in this number if it weren't for the growth in multi-product clients. It's a small increase, but it's encouraging. And as we mature, this will be a key factor in our ability to grow our active clients and activity. Moving to slide nine. what is more encouraging is the activity of these multi-product clients and the revenue and retention they show. When we look at ARPC on a quarterly basis, we see a very healthy trend in multi-product clients versus FX-only clients.

8:22 Going back a year, the first half of 26, we saw the quarterly ARPC is roughly similar between FX-only clients and multi-product clients. But by the second quarter of this year, we have seen a significant divergence with the ARPCs of multi-product clients now almost double the FX only ARPC. And what's especially interesting is that around half of that incremental ARPC is actually coming from more FX, meaning the other half is the non-FX. Further, we don't include the interest income from client wallet balances in this measure, but if we did, there'd be an even bigger effect. On the right-hand side, also incredibly encouraging, although not surprising, is that the lapse rate of multi-product clients is around three times lower than the FX-only clients, and it has been that way for some time.

9:16 In other words, multi-product clients give us almost double the ARPC in the quarter and lapse at around a third of the FX-only clients. And as the new clients continue to be on board, with 25% plus of them taking multi-products, And as we continue to provide more product to existing clients, this will have a very positive effect on both our total active clients and our ARDC. Moving to slide 10, as I mentioned before, what the increase in multi-product clients is doing, as well as the shift to providing wallets for clients to manage their SXs done, is to create new revenue sources. This is now scaling at a very reasonable rate.

10:02 over $10 million in annualized revenue when adding the non-FX revenue and the interest from client wallet balances. This is already just under 10% of our total corporate revenue and around 5% of our group revenue and it's growing at a very healthy rate with non-FX revenue growing at around 275% versus prior corresponding periods and over 30% quarter-on-quarter. What is especially encouraging is that we really only finished migrating corporate clients in the fourth quarter of 26. So the marketing and commercial efforts of the client base are still very much in their infancy. To summarize, whilst our performance at an absolute level looks soft, the signs are there for a strong return to profitability in the second half of 27 and beyond. Now let me hand over to James to give us more detail on the financial performance.

11:00 Thank you, Skander. Good morning, everyone. It's great to be here presenting the results for ROFX for the first half of 2027. Moving to slide 12, as you just heard, our financial results reflect a period of softer trading against a backdrop of challenging business conditions in most of the markets we operate in. Whilst our results are lower than the prior half year, we have seen modest improvement across the half year with quarter-on-quarter revenue growth across each of the last two quarters. The fee in trading income was $92.2 million for the half year, down 15.5% versus the corresponding period, but less than 3% lower than the second half of 26. The reduction versus the prior period reflects the ongoing macroeconomic uncertainty that continues to dampen business confidence.

11:46 This softness versus the same time last year was seen across all regions, with reductions in APAC in North America of 9% and 15%, respectively. EMEA was down 22% reflecting the prior period benefiting from some larger transactions that have not completed this period. The reduction in revenue half on half came from lower cross-currency volumes and lower margins. We have seen lower cross-currency volumes and lower average transaction values over the last 12 to 18 months, which we believe is cyclical and reflects the macroeconomic environment and the pressure on small to medium-sized businesses. Our net operating income, or NOE, was $89.2 million, which is down 15% versus the prior period. The NOE margin was down 9 basis points, or only down 4 basis points when excluding higher-same currency flows.

12:36 That decline was largely a result of lower corporate margins, which include lower forward volumes, partly offset by the growth in non-FX revenue. Whilst our forwards book is well down compared to $12 to $18 supported corporate margins versus the second half of last year. Seasonally, we've also started to see a more meaningful contribution from non-FX revenue, $1.8 million for the half year, which is three times higher than the first half of 26. We also hit an important milestone in the half, with the quarterly non-FX revenue exceeding $1 million for the first time in Q2. In addition, interest revenue continues to grow as client wallet balances grow. first half 27 contribution from interest revenues $5.6 million, up almost 50% from the first half last year.

13:28 Underlying operating expenses reduced 5.9% to $85.2 million following decisive cost action and lower performance incentives. I will talk through the movements and operating expense outlook in more detail in slide 14. Despite the cost reduction, the impact of the softer trading environment on revenues resulted in an underlying EBITDA of $4 million for half down $14.5 million from the first half of last year and down $10.7 million versus the second half of last year. Once depreciation, amortization, interest and taxes were taken into account, we reported an underlying loss after tax of $3.3 million for the half and a statutory loss of $6.7 million, including the impact of one-off items. Our balance sheet remains solid with net cash held at $63.3 million at the end of the half. while it is a bit lower than the prior corresponding period.

14:19 As I'll talk to you a bit later, we expect that to pick up in the second half. As you can see on slide 13, we've shown the main drivers of reduction in underlying EBITDA versus the prior corresponding period. This has reduced to $4.5 million compared to $14.5 million in the first half of 26, with NOE down $15.8 million, partially offset by a $5.3 million improvement from lower operating expenses. As I've just outlined, the reduction in revenue half-on-half came from lower cross-currency volume and lower margins. The lower volumes contributed just over half of the reduction, about $8.6 million, with margins of $6.8 million. Non-FX revenue and interest revenue were up a combined $2.9 million, showing the value of the transformation that the gander has just outlined.

15:08 This was partly offset by the lower treasury revenue, which mainly reflects the slow impact of the lower trading volume. Whilst NOIA was down $15.8 million, operating expenses reduced by $5.3 million following the decisive cost action and lower performance incentives. Those cost actions were to deliver approximately $10 million in savings in the second half. Moving to slide 14, you can see the composition of our operating expenses. Operating expenses are down 5.9% as I just touched on, mainly from the lower employment expenses. down 7.9% following the completion of the corporate client migration to the new client platform and reshaping our product and technology team. This resulted in 65 fewer FTEs when compared to 12 months ago.

15:54 As you would expect, given the softer revenue outcomes, performance-related costs and commission expenses were lower in the half. Promotion expenses were also slightly lower than the first half last year as well as the second half of last year. Our continued refinement of our go-to-market activities resulted in a small consecutive improvement in revenue despite the reduction in promotion expenses. Corporate NTCs excluding OLS were up 4.8% on the prior corresponding period and up 13.5% in the second half of 2016. The reductions in employment and promotion expenses reflected the expected return to the pre-2.0 investment level. However, disappointingly, bad debts were $3.8 million for the half of the year, $0.6 million higher than the first half of last year.

16:43 The main driver of these continued to be direct debit fraud in North America. The bad debt expense for the half includes approximately $1.6 million of adjustments to existing items that are not expected to recur and $1.1 million of consumer losses. Residual bad debt expense is in line with typical levels and we have implemented additional controls in our consumer business through the half. Accordingly, we would expect the second half bad debts to reduce relative to the first half as we continue to pursue recoveries and benefit from the strengthening of our risk settings and controls. We typically think bad and doubtful debts should level out at circa 2% of revenue going forward. There have been no losses relating to the cyber event. As Scanner covered earlier, we took decisive cost actions in half, largely in areas where the costs were not directly supporting revenue generation.

17:36 These actions amounting to $15 million of annualised cost reductions were largely taken at the end of the half. They predominantly rate to OpEx-related roles and costs. We expect $10 million of these savings in the second half of 2027 and the residual $5 million in 2028. Of the $15 million in annualised cost reductions, approximately two-thirds relate to employment cost savings, with the residual amount comprising targeted promotion expense reductions and other non-FTE savings. restructuring costs incurred in the half of $1.9 million and are reported outside funding of operating expenses. We expect to report the second half, 27 operating expenses of between $74 and $27 million, which implies a full year operating expense base of between $159 to $162 million.

18:25 These actions will support a stronger uplift EBITDA in the second half of this year and into full year 28. Turning to slide 15, the Group's balance sheet remains healthy, although cash generation was lower versus the prior corresponding period, given the lower revenue and continued capex investment in NCP. Despite the lower operating cash flow generation, cash conversion remained above 100% in the period, reflecting the efficiency of the business model and also favourable timing differences. Net cash held was $63.3 million, down 5.8% since the year end. after Deluxe deducting collateral and bank guarantees, net available cash totaled $36.6 million, down $13 million since the year end.

19:12 All this $13 million and a half, $4.6 million related to movements in collateral and bank guarantees, which are principally timing related and we would expect to reverse in the second half of the year. There was $3.4 million related to one-off cost items associated with strategic review, restructuring costs and the residual and firmer and paper integration costs. and the residual net reduction of $5 million comprise the operating cash flows offset by the continued investment in our technology platforms. As discussed previously, we've been investing to create a path to growth and better long-term performance, but that investment is now peaked and is expected to slow in the second half and into the year 28. Accordingly, we expect four-year capex investments, approximately $17 to $19 million, slightly lower than our prior guidance.

20:02 As I discussed earlier, $10 million of this $15 million of annualized cost savings will flow through to net available cash in the second half of 27, which will support an improved cash balance by year-end. The unwind of the timing difference on collateral and bank guarantee is also expected to further improve net available cash. Our remaining debt balance now stands at $18 million. Given the backdrop of the strategic review, we will be expecting to either refinance or extend the facility ahead of its due date in early fall. I'll now hand back to Deanna to take you through the outlook for the remainder of the year and fiscal year 28.

20:37 Thank you, James, for that excellent summary of the financials. Turning to slide 17, let me close by providing some detail on what we expect the second half of fiscal year 2017 to look like, along with our initial data on where that takes us in fiscal year 28. But first, just to recap, The accelerated and incremental investment in our transformation is now largely complete. Over the last three years, we have invested over $57 million in CapEx and lifted our OpEx from just over $160 million in fiscal year 24 to over $170 million in fiscal year 26 to build our new client platform, to migrate our corporate clients, to create a world-class client experience.

21:25 We've also invested to migrate firmer clients off the firmer platform and ultimately onto PPP and integrated the Patreon platform into OFX, as well as enhanced it radically to make it more secure and more global. We have completely changed our go-to-market model, impacting our commercial product and marketing teams. We have reorganized our global operating model to focus on the B2B and B2C sectors. and asked our functional teams to realign accordingly. That is a lot of hard work and a lot of investment, which continued through the first half of 27, but that is now in the rear view mirror. I am incredibly grateful to the OSX team for their extraordinary commitment and to the board for their belief and support, and of course, to our investors for your support.

22:17 Over fiscal year 27, thanks to the cost actions James mentioned earlier, We expect our underlying objects to be down to between $159 million and $162 million, or a decline of around $10 million. We're targeting NOI to grow modestly in the second half, building on the momentum in the first half. We are always mindful that the operating environment remains challenging, although this does not depend on any significant improvement in business concepts. Combined, we believe that we will generate positive operating leverage on an underlying basis and clearly a much stronger underlying second half. Fiscal year 28, assuming we can again generate modest and wide growth, we expect again to generate operating leverage with our cost base slightly down fiscal year 27, including the impact of assuming STI funding, short-term incentive funding to 100%.

23:18 And again, we are not expecting any material uplift in trading conditions. We will achieve that OPEX profile by realising the additional $5 million in cost savings from the actions we've already taken and see a return to more normal and modest bad debts. With that, now let me hand back to Ash for questions. Thank you. Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Start To. If you're on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Michael James Trott with MST Financial. Please go ahead.

24:05 Hi, Skoda and James. Can you hear me? Yeah, hi, Michael.

24:11 Thanks for, I guess, some more positive light into how the business is transforming, and it's good to see, I guess, Some of the initial steps coming through from Q1 and Q2 as well. I just wanted to touch upon, I guess, the FY27 NOI growth of 2-3% or the second half 27 NOI growth of 2-3%. And the tagline you've got there assumes current macro conditions. So I just wanted to understand what the trading volumes are kind of looking like. at the moment, especially since the midterms and the massive volatility that's come through there. And is that kind of the macro conditions you're referring to? And if so, is it quite a conservative 2% to 3% suggesting that perhaps if it was more consistent macro conditions, it could actually be stated to the upside of that if it was normalized over the next few periods? Thank you.

25:07 Thanks for the question, Michael. Let me have a first go and you can maybe add some colour as well. So the guidance we've said for the second half of the year is 2% to 3% NOI growth, which is obviously growth on the first half. We grew it circa 2% and 3% quarter on quarter across the first half. So we've sort of put it in a similar sort of banding across the second half. Look, the conditions, we probably think of them as I guess in the broader backdrop of, you know, the economic conditions, you look at the interest rate environment, you know, obviously in Australia we've seen interest rate rises recently. Canada is obviously facing a tough economic, which is one of our other large markets, although despite the US being reasonably strong economically.

25:55 So we would sort of say we're sort of assuming that this current backdrop of interest rates, business confidence and those types of things are sort of fairly steady. there are clearly pockets of opportunity slash volatility that arise such as the midterms. We have seen some good trading around that through the last week to 10 days. It's not smashing the lights out, but we've definitely seen better, stronger volumes in the last week or so. So our assumption is more that the broader backdrop is staying broadly unchanged. you may get pockets of opportunity that happen normally. In terms of one, there may be obviously other moves around other central bank rates, but I think that's the way we sort of thought about it.

26:45 Great. Just then turning to, I guess, the operating expense guidance from, it's beyond more FY28. So previously it's spoken to just targeting inflation previously. um it's clear that the expense base has been completely reset uh I guess this half or this year um and so then with broadly flat next year will it be that same inflation growth line for beyond FY28 or are you expecting it to again be flat um over the medium to longer term uh look we obviously might haven't said anything but beyond

27:25 28 at this stage. We're doing our planning through the second half of the year, which would then allow us to sort of, you know, have a form view for the 29. I think you take sort of Sagan's comments might as well. You know, we think we've peaked through this transformation expenditure period where we had the, you know, migrate business, migrate clients, you know, get the platform, you know, really ready and set. But that now passed, the peak of that passed. We were that would create some tailwind on expenses. We've always said CapEx was one area where we had to build up our investment and to get into the platform. We'd always indicated, you know, approximately $5 million of further savings to CapEx would be available once we get to the right, you know, through the investment cycle, which we're sort of thinking is into 28 and 29.

28:17 So, look, I think we would definitely be looking to try to keep within those bowels, but it will also be subject to what kind of revenue growth that we can deliver. So if we could deliver a return to the stronger revenue growth that we were seeing a few years ago, which might mean that you might want to spend a bit more on promotion or frontline teams, we think that that might be a good investment. But again, if we don't deliver the revenue growth that are more in the subdued level, we would manage costs more tightly. So I think it would take a little bit to sort of see how conditions play out as we to our plans for the next six months and when we come to the full year, we can give a better view of what 29 would be.

28:57 Okay, thank you. And just one last one. Just with the exclusivity now lapsed with equals, you've previously spoken to the many interested parties that you were having discussions with prior to entering into the exclusivity. Just wanting to understand, has there been, I guess, any recouping of those discussions or circling back on it at all? Like no specifics or anything, just, I guess, a vague interest of what's going on with external parties, if you can provide that.

29:30 Yeah, maybe I'll take that one. I mean, obviously it's, It's very sensitive, so there's only so much I can say, but I guess the short answer is yes. Okay, great. Thank you, guys. Once again, if you wish to ask a question, please press star 1 on your telephone. We'll pause a short moment for any final questions to register.

30:01 There are no further questions at this time. I'll now hand back to Skander Malcolm for closing remarks.

30:08 Thank you, Ash, and thank you, everyone, for joining and look forward to the conversations we'll have with individual investors over the next week. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.