12 months on from a restructure of their business and leadership overhaul, digital payments company Novatti Group (ASX: NOV) is exceeding expectations by slashing expenses while growing revenue through new commercial wins from businesses seeking to be paid quickly through digital channels.
Novatti offers the common merchant services that allow businesses to accept digital payments from customers with their bigger wins coming from channel partners that can bring hundreds of business customers at once. These channel partners being targeted include online platforms, chain operations and distribution businesses that have contributed to Novatti reporting $12.5 million revenue for the quarter ended 30 June 2024.
While that figure is a quarterly revenue record itself, it took Novatti’s FY24 revenue to $46.5 million, a 19% increase on the previous year.
Making the revenue jump more remarkable is that it has come in the backdrop of Novatti decreasing its operating expenses for the year by 21%, spearheaded by CEO Mark Healy who is now 12 months into a turnaround strategy.
“Since the start of FY24, we have pursued multiple initiatives to execute the new strategy and simplify the business, introduce a market led, customer focus, and ultimately lift financial performance,” said Healy.
“Across the past four quarters, this included many individual initiatives, introducing a new leadership team, streamlining Novatti’s business portfolio, undertaking a strategic review of all business areas for optimisation and divestment, implementing a $4m+ annualised cost reduction program, streamlining access to multiple products, and repositioning Novatti to leverage its strengths for high-margin revenue opportunities.”
The drop in expenses has Novatti positioned to achieve positive operating cashflow by the end of the year, an ambitious target for the Company that was logging around $4 million in cash outflow per quarter, prior to Healy’s arrival.
“Quarterly operating expenses are down 29% YoY and have been reduced every quarter throughout the year. This had a substantial, positive impact on Q4 cash consumption, with a $1.8m net operating cash reduction in just one quarter,” added Healy.
Novatti still has some way to go over the next 6 months to achieve Healy’s goal but with net cash outflows of $2.5 million for the June quarter in the backdrop of $12.5 million revenue, there is now a clear line of sight to positive cash flow.
That $2.5 million included $0.78 million that was consumed by the International Bank of Australia of which Novatti was the major shareholder before divesting its entire stake last week for $2.87 million cash. Essentially, it means Novatti’s adjusted cash outflow was just $1.7 million and does not include the recently announced $3 million cost reduction program that was implemented.
Additional revenue, without additional resources, has played a key role in Novatti’s turnaround where the Melbourne-based fintech has transitioned from an innovation-led strategy to a customer-led one with progressive results firmly heading in the right direction.
Part of Healy’s strategic review of the entire Novatti business has been assessing all sources of revenue to identify opportunities to cross-sell additional digital payment services, as well as the internal resources utilised. This has been part of Novatti’s stated target to achieve 70% margins from its Payments AU/NZ division which is the biggest growth opportunity for Novatti where 83% of SMEs that invest in their digital payments offering reported stronger revenue and customer relationships.
As of the end of FY24, gross margins from Payments AU/NZ were 45% which was an increase on the 37% reported in FY23 with Healy anticipating this number to now start rising faster with Novatti’s cost controls finally in order. Having pulled levers to increase revenue while cutting costs, Novatti will turn attention to its cross-border payment services in the coming months, flagging plans to exit its wholesale service offering. The move, which will reduce compliance costs and lower Novatti’s risk exposure, is forecast to see a decline in revenue by approximately $1.5 million in FY25, but this revenue has been classified as low-margin, thus ceasing the service will increase the broader profitability of Novatti.
“While important progress has been made, much more is coming. We will continue our focus on portfolio optimisation, margin growth, improving efficiencies and reducing expenses with a further $3m in annualised costs to be removed in Q1 FY25 as we remain committed to achieving positive operating cashflow by the end of H1 FY25,” said Healy.
Mitch Korver is a Business Writer focused on high-growth companies listed on the ASX in the small and medium cap space.
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1 Comment
Shraddha13
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