Further info from Wilson.. The FY15 forecast only includes current contracts.. They have Telstra contract signed in December and could be a good catalyst for the revenue increase. Looks pretty good I must say..
Touch is an integration software specialist operating in the retail space with a relatively fixed cost base
Touch provides inventory mgmt., accounting, transaction integrity/authentication, invoicing/payments, reporting/audit, communications and rewards programs. Payments account for about 10% of the company’s transactions.
Touch’s revenue per transaction ranges from $0.10 to $1.00, with the more services provided leading to higher revenue per transaction.
Revenue growth into FY15
Prospectus forecasts for revenue to increase by $16.2m (+65%) to $41.0m in FY15. Importantly, FY15 forecasts only include current contracts.
Growth is expected to come from:
New retail customers such as United Petroleum and Puma Energy
New telco customers such as Virgin
Organic growth in retail services as penetration of Valora’s stores increases (As at Dec-13 Valora had 2,609 stores in the network)
Organic growth in the Mobility division due to new service modules such as fraud management
Addition of the Reitan Group stores across 7 countries
Integration revenue – a leading indicator:
Integration revenue is forecast to be $5.5m (13.5% of total revenue) in FY15e and is expected to revert back to more normal levels of ~$1.0m in future years. However, integration revenue is a leading indicator for transaction revenue i.e. as more customers are connected into the platform, transaction revenue will follow.
Growth options
The Touch story to date has been about developing the platform with most customers referred to them rather than an aggressive sales effort. The next stage of the story for Touch is building the sales team and directly marketing the platform.
The addition of 1 medium size telco will have a material impact on profitability given the fixed cost nature of the Touch business.
Other significant growth opportunities outside of Telstra include Optus Postpaid (revenue 5-6x bigger than prepaid). They are also talking with 7-Eleven (USA and Scandinavia).
Optus Master Services Agreement (MSA) up for renewal in 2015:
The company believes it is highly unlikely that Optus would not renew the contract.
The existing MSA expires on 30 September 2015 with a process currently underway to renew the MSA. If the contract is not renewed the contract will roll from month to month. There are also 18 additional contracts beneath the MSA that expire at different dates.
We believe there is high level of integration between Optus and Touch making disintegration unlikely. Touch processes about 1/3 of Optus’s prepaid transactions. Optus have invested $3m-4m in the Touch system. We believe disintegration would be very difficult for Optus.
The company has indicated that Optus has spent an additional $2m this year and requested extra services from Touch from 2015 and beyond. Importantly, Touch have renewed on each major contract renewal.
Customer concentration decreasing:
Optus is Touch’s largest customer and is forecast to account for about 40% of Touch’s revenue in FY15e and about 8% of revenue will come from 7-Eleven and Valora Group.
As Touch win more contracts and the spread of clients increases, the reliance on Optus is expected to be reduced.
Telstra contract:
No Telstra transaction revenue (as opposed to integration revenue) is included in FY15 forecasts. Touch signed a Master of services agreement with Telstra in December 2014. The next step is to potentially sign a Statement of work. If successful they will “switch on” the platform and revenue maybe generated in FY16. The company expects news flow on this contract by end of CY15.
According to Touch management, Telstra are in need of a solution because their current system incurs: 1) high levels of fraud 2) customer dissatisfaction
Competition
Epay (Euronet) are their main competitor in retail services. The Epay system does not provide real-time communication. Touch has won 3 contracts from Epay – Valora, United Petroleum and Puma Energy.
R&D accounting:
In the past Touch has expensed R&D, as revenue streams related the products developed was uncertain. In FY14, part of R&D was capitalised and going forward, where appropriate, expenditure will likely be capitalised and expensed over the life a customer contract.
In FY13 all R&D was expensed and in FY14 Touch capitalised $4.8m of R&D. Touch expects R&D of $8.0m in FY15 of which they expect to capitalise $5.5m and expense the balance.
Touch have invested $50m in the platform which is expected to generate $12.0m of EBITDA in FY15e. There is clearly value in their platform, however, the balance sheet does not reflect this. There is only $5.0m of intangible assets and $27.4m of accumulated losses as a result of expensing R&D in the past. Their balance sheet understates the value of the platform, however, this will change going forward with the change in accounting policy.
