AfterPay, my notes
I had less than a 1% position at the end of December and it has now about tripled to 2.8% of my portfolio. It’s price has risen during the month of January by 26% in US dollars and by 32% in constant currency (Australian dollars).
Afterpay’s symbols are APT in Australia on the ASX, and AFTPF in the US.
Here are my notes on Ant’s post in December, which got me interested. His post is shortened and paraphrased, and any mistakes would thus be mine.
Afterpay is a buy now, pay later, fintech player that has come to dominate Australia and New Zealand (ANZ) and is now taking US and UK by storm with designs on further global expansion including: Canada, Europe and Asia. It provides customers an installment purchasing offering over 4 equal monthly payments. It actually provides this plan as a service for merchants both online and offline.
Afterpay recently released its Black Friday, Cyber Monday (BFCM) performance update, which included growth in underlying sales of 160% and growth in new customers of 160% as well, yoy and underlying sales for the 4-day BFCM period of $160 million.
Its customer count stands at 6.6 million, with active merchants at 42,500, and has achieved underlying sales of $3.7 billion for the first 5 months of the 2020 fiscal year (to end of Nov 2019) equivalent to $8.5 billion in annualised spend based on October’s performance.
Previously they provided an update for the first 4 months of the fiscal year which included:
Revenues up 110% to $2.7 billion (yoy)
Active customers up 137% to 6.1 million (yoy)
Active Merchants up 96% to 39,450
Whilst also announcing deals with:
eBay in Australia
Visa in the USA
Mastercard in Australia & NZ
In Australia/New Zealand, which is Afterpay’s most mature market, purchasing frequency, loss rates, and spend are all improving in FY 2020
The spend of customer cohorts onboarded in previous years now at:
7x for 2019 FY cohort
14 for 2018 FY cohort
22x for 2015-17 cohort
Additionally - it has repeated its ANZ penetration success in US in less than half the time and is even further ahead of the curve with its UK launch.
Afterpay’s annual results record have delivered consistent meteoric growth:
2016 $ 37 million
2017 $ 561 million (+1405%)
2018 $ 2,200 million (+ 289%)
2019 $ 5,200 million (+ 140%)
Total Income (Revenue):
2016 $ 2 million
2017 $ 29 million (+1535%)
2018 $ 117 million (+ 302%)
2019 $ 252 million (+ 115%)
On a valuation basis, Afterpay’s Market Cap stands at 1.5x ttm underlying sales and 30x ttm total revenue, which for a company growing at over 100% is remarkable whilst enjoying a $6 trillion TAM opportunity in the current ANZ/UK/US geographies alone. If one were to add Canada, Europe, and developed Asia, that would increase further as would the addition of developing Asia where affordability and with it funding is a purchasing barrier to everything. As an example of where this could go - in China where fintech adoption is way ahead of the rest of the world installment purchasing has reached 40-60% of transactions.
I believe Afterpay has the momentum, performance and valuation that will allow it to progress substantially in 2020 with the list of announcements (already released) all to be executed in the near term and more together with geographic roll out as well as a potential US listing.
Saul: So I went back and looked at their last complete earnings report, from August, which gave fiscal 2019 (June) yearly results. All figures are in Australian dollars.
I have interpreted Australian terms into US language. When they refer to statutory figures, I interpret them as Australian GAAP equivalent. When they say Pro Forma, I interpret that as Adjusted. When they say total income it means total revenue, as well as I can figure it out. You will see however that there are some terms I haven’t figured out.
Global underlying sales up 140% to $5.2 billion.
Run-rate is over $7.2 billion.
Active customers up 130% to 4.6 million at end of June, and over 5.2 million currently (end of Aug).
On-boarding over 12,500 new customers per day.
Active merchants up 101%, to 32,300 at end of June, and 35,300 currently (end of Aug).
US and UK growth exceeding expectations - major new merchant brands continue to on-board.
US underlying sales of nearly $1 billion in fiscal year
US Run rate over $1.7 billion.
Over 200,000 UK customers on-boarded in the first 15 weeks, higher than the US at the same time post-launch.
Strategic partnership with VISA to support future expansion and platform innovation in the US.
Australia and New Zealand strong growth continues – instore growing strongly with over $1 billion of underlying sales since inception and represents a significant growth opportunity.
High customer Net Promoter Score (NPS), and purchasing frequency, driving customer lifetime value and stable margin performance.
Gross losses reduced to 1.1% in FY19 from 1.5% in FY18.
Total adj revenue of $252 million, up 115%, and Afterpay Net Transaction Margin (NTM) of $126.1 million, up 126%.
Adj EBITDA stable at $35.5 million, in spite of international start-up investment.
Underlying free cash flow of $33 million, reflecting high return on capital employed (ROCE) business model, and organically adding to balance sheet growth capacity.
Strong balance sheet to scale and compete globally - Cash on hand over $230 million, and fully undrawn receivables finance facilities of $947 million. Capable of scaling underlying sales in excess of $16 billion above current run-rate assuming conservative gearing levels.
Organisational and governance changes being implemented, including transition to a majority independent Board.
Adj total revenue for the Group up 91% to $272.5 million, driven by strong performance in the Afterpay business.
Adj total revenue for the Afterpay business up 115% to $252 million.
Adj Merchant income margins (end of Aug) remained stable at 3.9%, a strong result in light of continued strength in Enterprise merchant underlying sales (means they aren’t having to discount much to enroll larger Enterprise merchants). The high margin SMB channel remains deep and prospective in all markets.
Adj gross losses as a percent of underlying sales improved significantly, down 0.4% to 1.1% (from 1.5%), reflecting the refinement of our customer base due to the increased frequency and lower losses associated with its high proportion of returning customers and the Group’s continued focus on risk management to reduce losses. This was especially pleasing in light of the increased contribution of the US business, which experienced higher losses.
Late fee revenue was 18.7% of total revenue, down materially from 24.4% a year ago. Late fee revenue is now just 0.9% of overall underlying sales, down from 1.3%. This was a another result in the right direction.
Pro forma NTM (Aha! Maybe it means Net Transaction Margin) as a percent of underlying sales was fairly stable at 2.4%, in spite of higher losses in the US and UK given the earlier stage of lifecycle.
Momentum in the US and UK markets exceeds Australian performance at the same point in their respective lifecycles:
? US underlying sales continued beyond expectations, increasing to almost $1 billion in the first full year of operations. Run-rate in excess of $1.7 billion.
? US merchant income margin was broadly in line with Australia and New Zealand and US adjusted NTM was positive and improved over the course of the year.
? Strong launch in the UK, exceeding US growth at same point in the life cycle. Contribution not material in FY19 (7 weeks)
Adj EBITDA of $35.5 million was in line, with strong earnings growth in Australia and New Zealand offsetting the start-up costs in the newer US and UK markets.
Statutory loss before tax (GAAP operating loss) of $44 million was impacted by one-off and non-cash items (including share-based payment expenses and the initial application of new accounting standards). Excluding these items, the adjusted operating loss would be a profit.
Underlying free cash flow, adjusting for receivables funding, remains positive ($33 million), organically adding to balance sheet capacity, and is reflective of the high cash generative nature of our platform.
Our entire receivables book has a weighted average duration of less than 30 days. This allows us to scale with reduced amounts of working capital and generate a high ROCE. Our adjusted NTM implies over 25% ROCE (annualised) in FY19.
Accelerated Mid-Term Growth Strategy
We are executing on our mid-term strategy and capturing the market opportunity in our current markets, as we scale towards our previously stated FY22 target of $20 billion ++ of GMV and NTM of 2%.
Active merchants more than doubled to over 32,300 at the end of June and are approximately 35,300 currently. The increase reflects more partnerships with large Enterprise retailers and the continued onboarding of higher margin SMBs across all regions.
Global merchant acquisition run-rate is currently over 1,900 new merchants per month.
Our customer acquisition run-rate is also accelerating – currently attracting over 12,500 new customers every day.
Length of customer tenure on our platform drives higher frequency of purchases, combined with lower loss rates, thereby improving lifetime value.
In Australia, customers who began with us three or more years ago are now transacting more than 20 times per year and early experience in the US demonstrates a frequency glidepath that is higher than Australia at the equivalent stage of lifecycle.
Even with strong new customer growth, over 95% of monthly underlying sales in Australia and New Zealand is now from returning customers.
(Saul: This is very much like recurring revenue and high net retention rates)
Low Net Transaction Losses and high NTM in Australia and New Zealand provides ‘glidepath’ for new international markets, although a greater proportion of early stage lifecycle losses and lower NTM in US and UK will be prevalent in FY20.
NPS across our Australian, New Zealand and US markets has stayed consistently above a market leading 80 points, demonstrating the appeal of our customer-centric business model and a material point of difference to not only traditional finance and payment methods but also other ‘buy-now, pay-later’ products.
• Our global technology, data and risk management capability delivers unique data insights that drive business performance and ensures that our most innovative ideas are prioritised and scaled.
• We are continuing our focus on, and investing in, innovation in FY20 - particularly in relation to our global platform and data capability to provide further value to the customer and merchant experience. A number of innovations are being piloted and/or in roll-out phase, including Variable Payment Upfront (VPUF) and Merchant Cross-Border Trade (new FX revenue stream potential).
? VPUF - this new feature, having been trialled with a key Enterprise retailer, allows customers to use their own funds to pay a higher deposit upfront - this increases the value of the transaction and conversion rate, supporting retailers without further indebting customers. Feedback to date has been positive and a wider rollout of this feature is underway globally.
Further, Afterpay has entered into agreements with VISA which will form the basis for a strategic partnership to support the development of innovative new solutions and business growth in the
The agreements will facilitate the ability for Afterpay to expand the delivery of its services to merchants and customers in a more flexible and efficient manner.
The payments and instalments markets are very large and diverse and both Afterpay and VISA see significant scope for collaboration for our mutual benefit.
Afterpay looks forward to announcing further developments arising from our arrangement with VISA during implementation stage.
Successful completion in late FY19 of a $317 million equity raising and the establishment of a US $300 million dedicated US receivables warehouse facility has solidified Afterpay’s strong balance sheet to scale and compete globally. Warehouse facilities ($947 million) are currently fully undrawn, providing capacity to significantly scale underlying sales and enhance ROE.
Current liquidity is in excess of $600 million, together with existing facilities, capable of scaling underlying sales in excess of $16 billion above current run-rate assuming conservative gearing levels.
Australia and New Zealand
Australia and New Zealand underlying sales increased 99% to $4.3 billion, almost double FY18.
Continued growth in online and strong instore growth continues with major Australian retailers onboarding.
Instore underlying sales has now exceeded $1 billion since inception and comprised 21% of the Group’s underlying sales in the second half of FY19, up from 16% in the first half of the year. With the size of the addressable instore market in Australia and New Zealand estimated to be at least 5-8x that of online retail sales, instore will continue to be a growth focus for Afterpay in Australia and New Zealand throughout FY20.
Diversification into new verticals, including the health, hair, skincare and travel sectors, continues to progress.
Merchant, customer and underlying sales growth have continued to track above expectations with current run-rate in excess of $1.7 billion.
Over 6,500 merchants are onboarded or currently integrating on the platform who can access over 2.1 million active US customers.
The rate of US customer acquisition is accelerating as the network effect of our platform plays out. The US is currently acquiring 50% more new customers per day than the FY19 daily average.
Over 3.8 million retailer referrals via the Afterpay platform in July 2019, demonstrating the value proposition and increasing market opportunity for our retail partners.
Merchant revenue margin is trending in line with Australia and New Zealand and is supported by strength in the number of higher margin SMB merchants joining the platform.
Pro forma NTM contribution was positive in FY19, driven by strong merchant revenue margin and improving loss experience as our risk systems are optimised and customer base grows. We are targeting future opportunities to reduce processing costs as well as losses.
Successful launch at scale into the UK market, further demonstrating the global appeal of the Afterpay platform (trading as Clearpay in the UK) and management capability to execute on our international expansion plans.
Over 200,000 active customers in the first 15 weeks of trading, higher than the US at the same time post-launch.
Continuing to add to our local presence with a best in market team of 29 professionals.
New retail partnerships, including:
Our business model generates more money when customers pay on time - more than 95% of our transactions incur no late fees - and is built on encouraging responsible spending habits through inbuilt customer protections such as low spending limits and caps on late fees.
Over 32,000 of our merchant partnerships are with SMBs and in recognition of this, we operate a global mentorship program linking some of those SMBs with some of the world’s most successful retailers.
We continue to work with regulators, customers, retailers and industry in a collaborative and transparent manner.
Afterpay welcomed the Government’s introduction of new Product Intervention Powers that sees the industry formally regulated by ASIC.
Continued commitment to ensure our AML/CTF compliance is robust. External auditor appointed by AUSTRAC, Mr Neil Jeans of Initialism, is due to deliver an interim report by 24 September 2019 and a final report by 23 November 2019.
Afterpay Touch Group (ASX: APT) is a global technology-driven payments company with a mission to be ‘the world’s most loved way to pay’. APT comprises the Afterpay and Pay Now (Touch) services and businesses. Afterpay is driving retail innovation by allowing leading retailers to offer a ‘buy now, receive now, pay later’ service that does not require customers to enter into a traditional loan or pay any upfront fees or interest to Afterpay.
Dec 2019 - Record November, and Black Friday / Cyber Monday
Business update for the month of November 2019 as well as the Black Friday and Cyber Monday trading days.
For November we had:
Underlying Sales - $1.0 billion
Net new Customers – 0.5 million
Active Customers – 6.6 million
Active merchants – 42,500
We achieved $1.0 billion of monthly underlying sales in November, representing the highest monthly performance since inception and contributing materially to total underlying sales of $3.7 billion achieved in the first 5 months of FY2020.
• We have more than 6.6 million active customers, up approximately 0.5 million in November.
• On average, over 22,000 new customers per day joined our platform in November:
• The US now has a customer base of equivalent size to Australia and New Zealand combined, after only 19 months since launch, (over 3 million).
• In the UK, more than 500,000 active customers have transacted with us in 7 months since launch.
• Australia and New Zealand continue to grow strongly in terms of both new and repeat customers.
• Our merchant portfolio and pipeline continues to grow with 42,500 active merchants now offering Afterpay to their customers.
Black Friday / Cyber Monday (BFCM) 2019
• Black Friday and Cyber Monday represented record trading days across several key performance indicators:
• Underlying sales of over $160m (2 days), up over 160% from same days in 2018.
• New customer growth of over 140,000 (2 days), up over 160% from same days in 2018.
Jan 2020 - Post by Sean
Afterpay’s value proposition to merchants: Merchants generally have gross margins of around 50%, but have very high fixed costs, such as rent, electricity and labour.
Afterpay effectively works as a referral service. Where merchants accept afterpay, their turnover generally increases 30%, through the introduction of Afterpay users to the business, and bringing forward afterpay users expenditure. So paying a 4% fee to achieve an increase in 30% of revenue is great value, as for every extra dollar a merchant receives in sale, 46% will go to the bottom line (excluding discounts / sales). So it is completely incorrect to say a merchant is giving away 40% of profit. Retail doesn’t work in that way.
Afterpay is not competing directly with Visa, Mastercard, Square, etc. It has a completely different value proposition. (In fact they are partnering with Mastercard and Visa in various countries.)
Competitors are all below Afterpay in terms of merchant numbers and users. There is a significant network effect in play here, as if you have more merchant options, the platform is more attractive to users, who tend to use just one app. If you have more users, it is more attractive to merchants. (In other words, they have a moat). A merchant will not care if the fee is 4% or 5% if it can increase his gross income.
Saul: All in all this seems like a potential powerhouse in the making. Which is why I took a small position in spite of the inconvenience and hassle of buying shares in Australia.
Best to you all.