Ann: Quarterly Investor Briefing - Q1 2019, page-16

• ISX reported a promising start to CY19 with its March qtrly cash flow release, now that the European operation is operational, and Australian merchants are beginning to sign up in significant numbers.
• While OCF was -$1.6m, this was an improvement from the -$2.5m in the Dec. qtr.
• Cash receipts were up c.55% to $1.4m from c.$0.9m in the Dec. qtr. Revenue was up c.56% at $1.85m, from c.$1.04m in the Dec. qtr.
• Costs in the period were c.$3m, but some of this was non-recurring related to Card Scheme and APRA related infrastructure, audits and setup costs.
• ISX has guided the market to an increased cost base from previous disclosures of c.$1m pa to a total cost base of c.$8.75m, but this is offset by expected revenue streams from Probanx and BBS core banking and network operations that leave the EBIT guidance the same at c.$10.7m for CY19.
• Annualised GPTV (settlement book) is now at c.$380m (c.$300m on 4/4/19) based on actual weekly run rate.
• The MSF (Merchant Services Fee) being generated is at 125bp as compared with the 100bp built into our forecasts.
• Customer approvals (sign ups) increased significantly in the March qtr. and include about c.75 custodial deposit accounts (EMA business) and c.48 Card Acquiring customers. There is some overlap between Card Acquiring customers and EMA customers of c.30%, as merchants may operate more than one deposit account. As these customers are on-boarded, we would expect both the GPTV and EMA balances to scale up over the course of CY19.

Impact

• Pleasingly, the ISXPay Card Processing operation (GPTV) generated a Gross Profit contribution of c.$0.62m due to a major reduction in COGS, as merchant customers have been transitioned form costly 3rd party networks on ISX’s own tier 1 network. COGS in CY18 was c.$5.7m and in the March qtr it was only c.$0.35m or nearly 20% of CY18’s total on an annualised basis.
• ISX’s Technology Group, which incorporates the two acquired businesses of Probanx and BBS, generated an EBIT contribution of c.$0.29m. At the AGM in November, the guidance for Probanx excl. BBS was for >$0.3m, so the qtrly result is pleasing.
• ISX provided some informative charts in its ASX presentation, which highlight the scale up of turnover being processed, particularly after the end of the March qtr. Another chart noted that the Card Acquiring (GPTV) business is close to breakeven at the gross profit level and should hit break even in May. This does not include the Technology operations, Paydentity or ancillary fees.
• ISX also provided some useful charts relating to the card acquiring operation, that showed it is operating on a 24 / 7 basis and even in the off-peak periods of the day, it is still managing to generate c.2% of its overall traffic. As ISX scales up its operations and expands geographically, we would expect the continuous nature of the operation to become more prominent.
• ISX also highlighted that in the transition from the tier 2&3 networks to its own tier 1 network, the migration occurred smoothly and new merchants have been activated successfully.
• These two data points are important to demonstrate that ISX is a reliable service provider for critical time sensitive merchant operations.
• Pleasingly, ISX has again reiterated its CY19 EBIT guidance of c.$10.7m. We still currently sit at c.$6.8m, with strong growth from that baseline. We will look to upgrade our forecast earnings subject to the June qtrly outcomes. If we do upgrade our EBIT to match ISX’s guidance and rebase our forecasts from a higher starting point, we would arrive at a valuation of $0.58 / share or c.35% above our current valuation.