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Edited Transcript of OFX.AX earnings conference call or presentation 21-May-19 10:59am GMT

Full Year 2019 OFX Group Ltd Earnings Call

SYDNEY Jan 9, 2020 (Thomson StreetEvents) -- Edited Transcript of OFX Group Ltd earnings conference call or presentation Tuesday, May 21, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Alexander Malcolm

OFX Group Limited - CEO, MD & Director

* Selena Verth

OFX Group Limited - CFO

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Conference Call Participants

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* Bob Chen

Deutsche Bank AG, Research Division - Former Research Associate

* Tim Lawson

Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the OFX FY '19 Financial Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, the 21st of May, 2019.

I would now like to hand the conference over to our first speaker today, Mr. Skander Malcolm, Chief Executive Officer of OFX Group. Thank you, sir. Please go ahead.

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [2]

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Well, thank you, Christian. And thank you, everyone, for joining the call. As Christian mentioned, I'm joined by Selena Verth, our CFO; and Matt Gregorowski, who leads our Investor Relation Program with Citadel-MAGNUS. Selena and I will take you through the pages and then there'll be some time for Q&A. We'll cover the full year result and what drove it as well as our outlook for FY '20. And for those of you who aren't aware, the pack is on the ASX website.

Let's move straight to Slide 4. FY '19 was a strong operating result with net operating income up 8%, underlying EBITDA up 8.1% and a final fully franked dividend of $0.0328 per share being paid, up 9.3% on second half '18. To put it into perspective, this is OFX' best full year growth in underlying EBITDA since 2015 and the strongest growth in net operating income over the last 3 years. It was a better result than we estimated in March, driven by a strong finish to the month in terms of revenue, margins and expense control. Selena will elaborate further on that later in the discussion.

More importantly, the financial fundamentals of the business are in great shape. Transactions growing well at 8.8%. We're delivering an annual positive operating leverage on an EBITDA basis and generating cash for own use of $19 million. Our balance sheet is strong with no debt, and we remain a capital-light business, a strong, sustainable growth company. Our underlying return on invested capital is very healthy at 36.3%. Further, the revenue growth in our targeted geographies, North America and Asia, continue to be strong at 19.8% and 19.3%. And our NOI margins remained stable, ex-IPS, at 55 basis points.

What creates confidence for us is that our client metrics, NPS, transactions per active client and recurring revenue, are all strong and improving. Our Global Currency Account is a huge hit and growing faster than we'd anticipated. Ultimately, it's our clients that drive our revenue. So winning and retaining their support is vital, and these metrics reflect a healthy client program.

Finally, execution is good. We're delivering on our technology and operational agenda on time and on budget to our clients' standards. Our client experience is better than ever with a new mobile app, improved personalized website, increased Global Currency Account functionality and investment in our API offering. We're investing in reliable, scalable systems with new treasury, transaction monitoring and pricing systems. We have a very clear line of sight to what matters most to our target clients and prospects and clear ways of prioritizing and executing to that.

Moving to Slide 5. The market, defined as global spot volumes, contracted over the year. However, we grew our net operating income each quarter and annually. The chart on the left shows global spot volumes and indexes it to March 2018 in order to show the movements quarter-on-quarter and cumulatively. It shows that each quarter the market shrank, except for a very small increase in fourth quarter versus third quarter. In that quarter, it shows that the market was down around 14% versus the start of the year. Over the same period each quarter, we continued to grow our net operating income. This reflects the high levels of client engagement, the regional diversity of our net operating income and the strong recurring revenue we attract in our portfolio.

The chart on the right shows the market on an annualized basis and compares our net operating income each quarter annualized versus the global spot market growth annualized. It shows that the market is down around 8% in the second half and 14% in the final quarter year-on-year. This is also reflected on Slide 22 in the appendices, which shows overall volatility down, particularly in the second half. The good news is that similar to our quarter-on-quarter view, OFX consistently outperformed the market on an annualized basis. There are a range of external reasons why the market had softened, but what's important that is that we've outperformed and our business model remains resilient in those circumstances.

Further, as we'll discuss in our FY '20 outlook, we will continue to invest to outperform by continuing to diversify the business, more global, more corporate and more enterprise. Whilst ensuring that our foundations, excellent service, competitive pricing and building our brand, are strong. The board and management team believe we can and will grow the business regardless of the economic backdrop and build a strong and sustainable company over time.

Moving to Slide 6. We continue to grow engagement in our active client base. Transactions per active client are up 12.6%. Transactions are up 8.8%, and turnover is up 11.9% in a softer market. We're disappointed not to have grown active clients on an absolute level. Our consumer-direct marketing measured by the cost to acquire a new dealing client was substantially improved in the second half, particularly in the fourth quarter, but the overall market was soft and therefore too expensive in some regions to acquire new dealing clients at acceptable returns. So we chose not to spend on marketing in those parts, and as a result, we did not add consumer active clients at the rate we expected to. Nevertheless, we grew active corporate clients everywhere and we grew consumer active clients in North America.

Moving to Slide 7. Our marketing, commercial and service efforts are creating a more valuable portfolio. The chart on the left shows the calculated lifetime revenue of our total client base at the end of each financial year. We take historical data to build a forecast on expected revenue across our different business lines over the expected lifetime of those clients and discount that to create a calculated lifetime revenue. What we see is that, in line with growing our transactions per active client, growing consumer margins and growing our overall corporate business, we are building more lifetime revenue across the portfolio.

Indeed, whilst we would like more active clients, we have grown lifetime revenue even whilst not growing active clients. And further, recurring revenue continues to be very strong, demonstrating how much clients value our service. Now that does not mean we won't be targeting growth in active clients as well, and the chart on the right shows how we're doing that.

In consumer, it starts with being clear about what consumer clients we want to target and then being exceptionally good at the execution against that. Our marketing program is based on rigorous research about who we want and why and our client experience, both digitally through things like our app or our website and our onboarding procedures, and they've all been enhanced substantially. The real magic though is the human touch, 24/7 access to our people, and it's getting even better. And that's where our target consumer client continues to value OFX.

In corporate, our marketing and commercial teams have identified several clear use cases that SMEs who value what we bring typically use us for. This is being improved going forward, but by adding salespeople and delivering a strong digital and human service, we're pleased to be growing this very important segment by more than 10% across all our regions. I'll outline further investments here later.

Finally, we support a selection of enterprise clients for whom we provide either white label or direct on behalf of services. In the last few years, we've increased our attention on this segment to better serve existing clients and find new ones. As we touched on during our Investor Day on March 20, this is a very valuable business and it provides a highly efficient channel for acquiring consumer clients, and we've invested in FY '19 to improve it.

Moving to Slide 8. We've talked previously of the value of OFX as a global platform with revenue streams being diverse, not just by business line, consumer, corporate and enterprise, but also by geography. We have 3 regions: Asia Pacific, North America and Europe. And then we further divide these into countries such as the U.S. or Australia. This chart shows that every region grew turnover and transactions whilst the 2 we targeted for extra investment and focus in FY '19, being North America and Asia, grew especially well.

At our Investor Day on March 20, you heard from our President of North America, Mike Kennedy, on what we're doing there. But to recap and summarize, we have redefined the client experience to ensure it's locally relevant. We've increased our investment in marketing and sales. And we've built on our service delivery. This is working well. And whilst we would always like more, we're pleased with the momentum.

In Asia, our focus has been on corporate and Global Currency Account. In both cases, we're seeing good growth. To complement that, we opened a new office in Singapore and we're seeing good early traction in both consumer and corporate there.

In the U.K. and Europe, as you heard from our President of U.K. and Europe, Sarah Webb, markets have been affected by 2 things: some very active fintech competition in consumer and Brexit in corporate. We are preserving our promotional expense on consumer for more lucrative opportunities there, but our corporate business has performed well, growing 14% in FY '19.

Finally, our home markets, Australia and New Zealand, have improved on the fundamentals: transactions per active client, NPS and the cost to acquire across consumer and corporate, but more to do. Australia grew by more than 5% in FY '19 and we plan to improve on that in the year ahead.

Now let me hand to Selena to walk you through our results in more detail.

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Selena Verth, OFX Group Limited - CFO [3]

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Thanks, Skander. Let's start with the financial results on Slide 10. Fee and trading income at $128.7 million was up 8.2% on the prior year. We are really happy with this growth and it is evident in all regions and both the consumer and corporate portfolio. ANZ was up 5.1%; U.K. Europe, up 11.9%; North America, up 19.8%; and Asia, up 19.2%.

Net operating income of $118.7 million was up 8% on the prior year. On a constant currency basis, this is up 6.1%. This is our strongest NOI growth since 2016. The drivers of this growth are growth in turnover, up 11.9%; growth in transactions, up 8.8%; and increasing transactions per client. Average transaction value is stable at $22,600. And NOI margin is stable, ex-IPS, at 55 basis points. This is solid growth despite active clients being down 3.3% and registrations down 4%. Note, it is pleasing to see that corporate registrations are up 12.2%. As we've already discussed, we are growing our lifetime revenue, which is driving a positive NOI growth rate despite these metrics being down year-over-year.

Underlying operating expenses of $86.5 million were up 8% on the prior year. As you may remember, this does not include our corporate action cost of $4.3 million, which included in our statutory results but excluded from our underlying reporting.

We've invested for growth with revenue generating expenses, being investment in salespeople and promotional spend, growing 3x faster than revenue-enabling expenses.

We have delivered a positive annual operating leverage on an EBITDA basis in underlying EBITDA increasing 8.1% to $32.2 million. This is ahead of the range provided at Investor Day due to a stronger-than-anticipated revenue performance in the second half of March, stronger margins and expense benefits that flow through.

Our daily revenue can vary and we've seen differences of up to $200,000 per day depending on what is going on in markets. September is a great example of a month where we had a solid first 2 weeks and then the markets turned and the second 2 weeks were 15% lower. It was great to see good March volume continue through the whole month.

As you may recall, we've been looking at our pricing and testing the price elasticity to ensure we are extracting the right value for the service we offer. In the beginning of the fourth quarter, we completed a back-book review of a large portion of our clients and showed that they were at the correct price points given their current volume. This resulted in a number of customers being retransferred upwards and downwards and drove stronger-than-expected margins for March, up 3 basis points on the prior year.

We managed our expenses and we looked at all of our costs closely. With great execution, these came in lower than expected. In March, we saw no bad debt and a very efficient cost to acquire from our promotional spend.

Statutory profit is $17.6 million, down 5.8% on the prior year. And we had a statutory tax rate of 20%. This is lower than the normal tax rate of 25% due to the impacts of the R&D benefits which we saw in the first half and offshore tax rates. The ongoing tax rate is expected to be 25%.

We had strong cash generation with $58.6 million held for own use. Note that $26.1 million is held in cash and $32.5 million is held on term deposits. Our full year dividend is $0.0328 per share. As you may remember, when we released the impact of our corporate action costs in December, we committed to paying a dividend on an underlying basis. $0.0328 is 70% of our underlying net profit after tax.

Now we move to Slide 11. Our underlying operating expenses are $86.5 million. With net operating income up 8% and underlying operating expenses growing less than net operating income, we have delivered an annual positive operating leverage on an EBITDA basis.

You will see the majority of the $5.4 million increase in underlying operating expenses we invested in employees and promotional expense. We grew our employee base with a high investment in revenue-generating staff that drive our sales activities. You may recall that promotional expenses were $9.5 million at the first half of '19. The spend in the second half of '19 was lower at $8 million. We will only acquire new clients at acceptable returns. And as the market volumes dropped, the promotional spend reduced.

We work our technology infrastructure costs hard and have made great progress keeping these flat while transaction volumes are up 8.8% on the prior year. For occupancy, we are investing for growth. Those that visited our offices after the Investor Day presentation would have seen we've taken up the rest of the floor in Sydney, providing capacity for the future. We also invested in increased capacity in London and at Singapore office.

When we turn to the coming year in expenses, we're expecting the following. We are constantly reviewing our spend and returns. We like all parts of our portfolio, being consumer, corporate and enterprise. In fiscal year '20, we are planning on pivoting spend to corporate as we love the revenue stream and return these clients bring. As a result, employment expenses will increase and there will be a shift in mix in promotional expenses.

For technology infrastructure, you'll see this number increase in future periods as we pivot from in-house development to Software as a Service for parts of our technology. Examples of this are the treasury management and transaction monitoring systems which are purchased off the shelf, replacing a bespoke system.

Occupancy expenses for the coming year will include a full year of increased occupancy expenses and we have one office move coming up in Hong Kong, a new facility with increased capacity to support our growing Asia business at similar rates.

Moving to Slide 12. We have invested $7.7 million in our infrastructure and are really happy with the delivery and results. Our client experience is excellent, and an updated -- with an updated website globally, new mobile app, a better process for North American clients, improved functionality for our Global Currency Account clients and continued development of our API.

The impacts have been felt throughout the business. Registration completion rates from the app are up 2x, NPS is at a high of 67 and every region is up 10%-plus. Our API rate fee is more accurate and a better experience for our valuable partners. We have also invested in our reliable, scalable systems, in particular investing in improved capability and treasury management, transaction monitoring and pricing. We've already seen increases in pricing improve customer margins by 3 basis points. We have had the best-ever regulatory and bank review outcomes and we have reduced our banking costs by 1.6% per transaction.

We move to the next slide. As you can see on Slide 13, we have a very strong balance sheet. There is no debt and cash held for own use is up at $58.6 million. This is a combination of both cash held for own use of $26.1 million and term deposits with financial institutions of $32.5 million. Note, we do have collateral requirements for our regulatory and FX banking lines of $30.8 million, which is included in this amount.

We generated $19 million in cash during the year, which is after our investment in the business through capital expenditure of $8.9 million. We have then paid out $13.6 million of this via dividend and $4.3 million in corporate action costs. As already highlighted, our final dividend of $0.0328 per share is on an underlying net profit after-tax basis as committed to in December. The dividend is 100% franked and future dividends will be 70% franked as we have limited franking credits available for subsequent financial years, and a 70% franking is more in line with our effective tax rate of 25%.

I will now hand back to Skander to go through our fiscal year '20 focus areas.

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [4]

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Thanks, Selena, for that excellent detail. Now if you turn to FY '20 and where we're focused to deliver. And that's on Slide 15. Our strategy remains consistent, as we shared on Investor Day. Let's step through the 2 main areas.

Firstly, in terms of growth. In client experience, we've set aside CapEx and teams to focus on substantially improving our corporate onboarding experience as well as engagement generally through customer-relationship marketing. The team will operate cross-functionally across products, technology, risk, marketing and sales as well as regionally to take unnecessary steps out of that process and to make our value propositions clearer and easy to buy and to emulate what we've done in consumer to simplify and make our communications more engaging. It will underpin our efforts to grow corporate faster in FY '20.

In addition to this, we will scale and automate our pricing programs to deliver better and more consistent pricing programs everywhere. Geographically, we will invest disproportionately in North America and Asia again while setting aside CapEx for growth in corporate in the U.K. With the new leader in Asia Pacific, Yung Ngo, we are taking a fresh look at each market and each business and expect to see improvements, particularly in corporate and enterprise here.

Our strongly held belief is that OFX is a natural partner for many organizations in the payments and commercial ecosystems. Our Global Currency Account is an easy to understand example of that, where we partner with marketplaces like Amazon, eBay, Rakuten and others. But it goes further. We've invested in and will invest further in the tools to make those partnerships work: APIs, salespeople, risk management programs and marketing support in order to win new enterprise partners.

Underpinning our growth are our foundational enablers, and we continue to invest and improve them. As Selena touched on, FY '19 and earlier investments in treasury, pricing, transaction monitoring and other systems allow us to be more reliable and to take down our unit cost. That will continue in FY '20, and our ambition here is to deliver unit cost decreases every year that will support the delivery of an annual positive operating leverage on an EBITDA basis along with revenue growth.

Probably the greatest potential for disruption to us is our risk management. We either do it well or we face business model challenge. External scrutiny and standards for this grow every year. So continuing to improve it in FY '20 is not an option, it's essential. We will do that by further extending and incorporating our operational risk activities into our operational delivery. The reorganization of risk as part of our operational teams will allow this. And we've identified opportunities to improve cyber risk management as well as better case management.

Finally, our people are the heartbeat of this company, and without them, we're just software to our clients. And without investment in their skills, we can't meet the ever-changing market needs as a global company. We have built a very talented leadership team over FY '18 and '19. And in FY '20, it'll be about investing more in leadership development for the middle of the company.

Moving to Slide 16. I touched earlier on why growing our corporate business is so valuable and this slide describes in a little more detail how we're going to accelerate that. In FY '19, we completed some quant and qual research that gave us more clarity on who we want to target and how they want to engage. We touched on that a little during Investor Day.

Now that, that is clearer, to execute it, we have to create value propositions, which are products, services and messaging bundled up that meet those needs. We add momentum to those by investing further in marketing and salespeople whose focus is to win new clients and account management whose focus is to grow existing relationships. We have invested in FY '19, but we'll accelerate that in optimizing our marketing and commercial sales processes: consistent definitions, the use of data, leads and lead generation, salesperson performance and so on. And all the while, what will be different is that those efforts will be cross-functional, teams with a clear understanding of what everyone else is doing in service of a few clear goals.

Moving to Slide 17. I wanted to share a little more about an example of what we've been delivering over the last 3 to 4 years at Global Currency Account. It started with a few commercial people who were close to their clients seeing a gap in the market for a product and service that supported a huge and growing opportunity: online marketplace selling. In FY '19, our investments would both improve the scalability of our platform, things like automated payouts, better banking support, better service delivery, but also in the client experience, better reporting and more currencies.

FY '19 was a record year for revenue with over $1 billion transferred in FY '19 alone. In FY '20, we will build on this with third-party integration, more payment capabilities, more currencies and we're exploring further use cases our platform could extend to. It's a very exciting example of a great growth program inside OFX.

So in closing on Slide 18, our strategic choices remain consistent and our growth commitments involve growing our corporate business faster, continuing to improve our client experience everywhere and continuing to invest regionally.

As a result, we will retain the core financial commitments of delivering an annual positive operating leverage on an underlying EBITDA basis; maintaining stable net operating income margins, ex-IPS; and keep CapEx investment within our cash generation and stable, excluding any one-off items we may need in the event we win a new enterprise client that requires CapEx in FY '20.

Thank you for listening. And now let me hand back to Christian to handle questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Tim Lawson from Macquarie.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [2]

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Actually a number of questions. Just in terms of the enterprise investment you talked about in the outlook statement, can you talk about the sort of dollars you think might occur there, the timing and what it would bring to the group?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [3]

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Yes, we aren't actually elaborating on that, Tim, at this point because that would depend on the opportunity that we are looking to support. So an enterprise client may require a set of capabilities that we don't have. And if that's the case, then we have to invest to do that. But we'll certainly guide if and when we're going to add that to our CapEx in FY '20.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [4]

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Okay, just in terms of yields, you talked about yields being up 3 basis points in March or it was a good period for you. But that is somewhat driven by activity, and I guess somewhat driven by repricing. I mean, how much should we be thinking about that flowing through into FY '20 impact?

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Selena Verth, OFX Group Limited - CFO [5]

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Yes. So when we look at -- Tim, it's Selena. When we look at FY '20, we continuing -- as you know, we continue to look at pricing and we're always looking at how do we look at the price elasticity and making sure we're getting the right value for the book that we have. Into FY '20, the corporate -- and you'll know that the corporate piece of the portfolio is growing. So to keep the margins, what -- at the moment, our guidance is keeping margins stable. But that means even with the shifting mix in our portfolio, which takes work within itself. So I'd say we're going to keep the margins flat -- stable and flat during the year. But we'll make sure that we continue to look at it and continue to do testing and pricing to making sure that we're getting the right output for what we're putting in.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [6]

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And then just in terms of you talk about sort of cost in revenue-generating areas increasing, I think it's 3x more than other. Can you just talk about what you're measuring there? Where the spend is in particular? I mean staff is the biggest spend and I can't quite reconcile that comment.

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Selena Verth, OFX Group Limited - CFO [7]

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Yes. So what we look at is basically those revenue-generating areas, predominantly sales and also promotional expenses. We make sure -- and marketing. We make sure that they get the investment first. We also do invest in our enabling, so things like the finance function, our people and culture and technology. We also invest in those at well -- as well, but we're making sure that the amount that goes to those revenue-generating really is foremost and also drives the output for the business.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [8]

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Just in terms of the expenses in terms of the sort of move towards sort of SaaS model, what does that do to your operating leverage in the business?

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Selena Verth, OFX Group Limited - CFO [9]

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From -- so if you move to software as a service, what you're going to find is it should be the same, right, but you should obviously get a better outcome for what you're investing in and -- because someone else has an expertise and skill set that you're relying on. So for example, if you got software as a service, yes, there will be licensing costs. So yes, the technology infrastructure costs will go up. But over time, there should be less tech cost required from a people perspective to maintain bespoke technology which we have today. So that will flow through over time. But really, how we value these things is absolutely the productivity that we get from the benefits that those technology providers give us and how can we drive both revenue up but also maintain expenses or create efficiency in the expense line as we go forward.

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [10]

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So probably the best example of that, Tim, would be we've talked in past about server hosting expense. And that's actually come down on an absolute level in the last 12 months whilst we've grown transactions double-digit. So our ability to kind of keep that type of software expense through SaaS under control and scale is exactly what Selena's talking about. We can keep that under control while growing revenue.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [11]

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And you talked about registration completion improving from the app. Can you just talk about how important that is a source of customer acquisition? And when that measure -- when you are measuring that from?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [12]

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Yes. So over the course of the year, we set ourselves a goal of improving conversion rates. And traditionally, what we did is we looked at all those prospects who had got through to registration but had not necessarily completed the next step, which is to become a new dealing client. So we always started with that. But over the course of this year what we did is we went further up the funnel and we looked at all the people who started the registration journey, whether it be web, mobile or app, and we measured that funnel all the way through. And we naturally looked at that within each region as well and there was CapEx allocated to improving that. Indeed, 4 of the 8 executives shared a KPI on improving that substantially. The really good news is that because of the improvements that we've put through there, we saw a really material improvement in those pull-through rates. And to your question, if you look at mobile -- or sorry, app, North America is very much an app-based geography. We saw the improvements in every region very substantially. But if you look at North America, we're now pulling through our app at equal or better rates than every other platform. And that's where -- not just consumer, but even corporate are starting to say, that's where I want to get my service from. So if you look at registrations, it's really very much a consumer story and NDCs. But in terms of service, it's both consumer and corporate. So it's had a material effect on our ability to convert in North America particularly, and that has been a contributor to the North American growth.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [13]

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Okay. And last question for me. Just -- you obviously talked about a good March. Just conditions since the end of the year, what you're doing on promotion, sort of client wins and level of activity?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [14]

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Yes. Look, as Selena touched on, when we went to Investor Day on March 20, we had had a pretty good first half. You build an estimate. But as she also touched on, if we compare that to say September, we had a similar experience in the first half of September, but then that literally kind of inverted in the second. So we put out an estimate that we thought was a reasonable midpoint of that, but it actually continued in the second half in terms of the revenue that we got, the margin that was delivered and the expense control was excellent. So that's kind of what happened in the last part of March. The market data was that it actually was a pretty tough month. As we pointed out, fourth quarter was 14% down. We really had to deal with that, and we did. So promotional expenses were very, very carefully handed out. We actually improved our efficiency of acquisition in the fourth quarter extremely well. And as we sort of head into the year, that's obviously something that we watch every single day, and that's a really big area of focus for us every single day.

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Tim Lawson, Macquarie Research - Division Director of Australian Insurance and Diversified Financial Market Research [15]

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And April and May, what you -- sort of things you've seen?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [16]

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Yes. So April was another very, very tough market. We saw, in terms of global spot volumes, probably the toughest April in 4, maybe even 5 years. And we took necessary actions. We outperformed. We've done a really nice job. But it's extremely tough in April. In May, it's picked up a bit. And we're executing well. And obviously, you've seen a little bit of volatility return in some of those key currency corridors. But we've done -- we've been doing a bunch of work on what could be driving that. And clearly we don't have all the answers, but the data seems pretty consistent. We see a lot of global banks talking about trade flows being down, volatility has been down in multiple corridors, as I touched on. If you look at our U.K., Europe business in corporate, the growth rate slowed particularly as we sort of headed towards the Brexit vote. And there was so much uncertainty that small- and mid-sized businesses are really struggling to invest and that's definitely affected flows. But look, that's our job to outperform that and we like what we're doing. We're continuing to outperform that and we just have to be really, really tight with our customers and continue to innovate the client experience. And we will outperform.

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Operator [17]

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Your next question comes from the line of Bob Chen from Deutsche Bank.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [18]

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A few questions from me. Maybe just firstly on those EBITDA margins for the full year. I mean it looks like that second half cost control really helped to drive that operating leverage. I mean what can we sort of expect sort of for FY '20? I mean do you expect that promotional expenses to tick back up as well as those employee expenses as well?

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Selena Verth, OFX Group Limited - CFO [19]

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Yes. So we've given you some fiscal year '20 expectations. Obviously we have a profile that we're running towards in fiscal year '20. But the guidance that we're giving you is the same one that we had this year that what we're targeting is an annual positive operating leverage on an EBITDA basis. So we have a particular profile that we're working towards. But as we always do, as we make investments, we look at them, we understand if they're working or not working. If we don't see the returns that we were wanting to get, we will pivot and tilt. So it could change throughout the year. But overall, we will commit to delivering a positive operating leverage on an EBITDA basis.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [20]

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Okay. Great. And then just in terms of that sort of CapEx on that outlook for next year. I mean you've guided to sort of flattish CapEx plus some incremental for enterprise investment. That's $7 million to $8 million flattish CapEx component. I mean can we view that as sort of ongoing maintenance CapEx? Or what component of that is sort of growth versus maintenance?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [21]

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Yes, no. We wouldn't call that maintenance CapEx. We're actually investing in growth opportunities within that envelope. There's definitely a degree of CapEx that we set aside for kind of core systems and to make sure we are continuing to improve those. But per the earlier conversations, we also definitely like software as a service on infrastructure. So if that's a better cost profile for us and allows us to scale, that's what we'll actually do. But certainly, that CapEx envelope assumes growth investments. And we can certainly share some of the things that we've got earmarked in that. So it's -- but it is kind of -- we like that kind of figure because it's within our cash generation range. It allows us to continue to kind of grow. But it's also sensible and it sort of also allows us to execute well. I mean as we've talked about in the past, if you -- we could afford to spend more CapEx, but it's a question of what we can properly execute.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [22]

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Yes. Sure. And then in terms of just that active client numbers. I mean obviously that's continued to come off. What sort of initiatives have you sort of put in place to try and turn that around? Or will you just focus more on, I guess, the corporate side of the business?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [23]

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Yes. Look, I mean active client numbers at a total level, remember, are a function of -- it's a blended number so it includes consumer and corporate. As we've guided in the past, the larger proportion or 80%-plus, are consumer. And so as we are much more disciplined now around the ROIs of acquiring consumers, then if we don't like the ROI, we won't acquire the consumer client, which means that if a consumer client goes inactive in the period, you're kind of net negative 1. And on the flip side, we invest in acquiring corporate clients, but it's a longer lead time. They are a lot more active. And so what we'd say to you is, look, where we like the ROI on consumer, we'll continue to add. If we don't like it, we won't add. But we're always focused on building much stronger lifetime revenue. And that's really what we're trying to show on that chart for all these. Even when we take active clients down, and in some cases, it's deliberate. If the market doesn't support it, we won't do it. We will always be focused, to your point, around what are the initiatives, more and better products, better pricing for them. Things like Global Currency Account is a perfect example of it. It only might add one active client, but it adds very substantially more transactions, more revenue at a very acceptable cost. So we're really very, very focused on that lifetime revenue. We absolutely look at active clients. But if it's the right trade, then we'll make it. And the other thing that clearly could drive active clients is if we win a new enterprise partnership, and they clearly bring large numbers of active clients to the portfolio as well. And that's one of the reasons why we're working hard on securing more of those.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [24]

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Okay. So just in terms of that Global Currency Account, I mean you're still tracking some decent progress there. In terms of the margin profile with sort of customers using that product, how does that sort of compare with sort of the existing customer base, I guess?

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Selena Verth, OFX Group Limited - CFO [25]

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Yes. So the Global Currency Account, the profiles are slightly different. So what you'll see, and we've taken lots of people through this is basically you'll see more transactions at smaller values. Okay? So the ATV is lower, but the number of transactions is higher. And also the other thing to note is the margins are typically higher than a corporate customer. Okay? They're not as good as a consumer customer, but they are higher than the typical corporate customer.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [26]

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Okay. Great. And then just finally from me, just around North America, I mean that you sort of maintained almost a 20% sort of run rate growth for the year. Is that sort of peak run rate for the team that you've deployed there? Or do you feel like there's some more efficiencies you can gain there and some improvement there?

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [27]

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Well, no. We're certainly of the view that we should be continuing to grow North American growth rates. We love what we're doing. And again, North America, as I touched on it, is a region but it's made up of U.S. and Canada. So it's sort of -- there are multiple stories in there, but if you look at the U.S., for example, actually revenue grew more like 27%. And of that, corporate was 38%. So there's tremendous growth coming out of the U.S. There were some issues in Canada that we've now got fixed. So that should give us a much more stable Canadian growth profile and the team are doing a nice job this year. But certainly, what Mike and the North American team are doing is continuing to look for much more substantial opportunities in the enterprise space. They're doing a great job on corporate, as I just touched on, and we're continuing to invest in consumer. So consumer grew nearly 20% in the U.S. And in fact even in the second half, if you look at corporate growth rates in the U.S., it was pretty stable to the first half, which was a really nice outcome from Mike and the team. So we're far from kind of resting on our laurels for growing North America.

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Bob Chen, Deutsche Bank AG, Research Division - Former Research Associate [28]

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Okay. I mean just interpreting that, I mean, it sounds like if you blend that profile through then, yes, you can almost do mid-20% to 30% growth in that North American business the next year.

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [29]

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We don't guide, Bob. But we're certainly driving it hard.

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Operator [30]

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(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

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John Alexander Malcolm, OFX Group Limited - CEO, MD & Director [31]

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Okay. Thanks very much for dialing in. Look forward to sharing more detail in the various sessions that we have lined up over this week. And thanks, again, for your time.

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Operator [32]

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Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may all disconnect.