Tyro: Not terminal

James Marlay

Livewire Markets

It was meant to be a shocking result for Tyro. The payments company was in the doghouse with investors and customers after an embarrassing outage in mid-January that crippled their merchants, got splashed through the media and resulted in a class-action lawsuit. The technical glitch came on the back of a period where much of their customer base had been doing it tough with lockdowns and trading interruptions. So, you can imagine the surprise many investors would have felt when Tyro shares stormed higher following the release of their half-year results. 

It’s a classic case of shares rallying because investors worst fears simply didn’t materialise. 

The result is a welcome relief for Tyro shareholders and perhaps especially for Ben Clark from TMS Capital, who tipped Tyro as his #1 pick for 2021 just weeks before the outage. Ben was the winner of Livewire’s 2020 Fundies’ Stock Picks and undoubtedly many of our readers will be keen to get his thoughts. I called Ben at the time of the outage, and we agreed to have a chat post results when more information was available.

Key stats from the Tyro result

  • 36,720 merchants, 13.2% higher compared to H1 FY20
  • $12.1 billion in transaction processed by Tyro merchants, 10% higher compared H1 FY20
  • Tyro is Australia’s 5th-largest merchant acquirer by terminal fleet
  • Record EBITDA of $8.5 million (H1 FY20: $1.5 million)
  • EBITDA margin expansion from 3% to 13.8%
  • 11.764% the rally in Tyro shares following the results announcement 

    Click on the image to enlarge

    A bit of background

    Tyro listed late in 2019 providing local investors with a pure play on the massive shift towards a cashless society. For context, it is estimated that the annual transaction value of card payments acquired in Australia was $660 billion as of June 2020. After a steady debut, Tyro got crunched as transaction volumes fell off a cliff amid the pandemic and the share price promptly caved from ~$4.30 to $1.30 in the space of a month.

    Clark says he had listened to its management a few times and was impressed; he added Tyro to his fund in May of 2020 in anticipation of tailwinds from a reopening economy.

    “Back in May, we were coming out of the nationwide lockdown, and we thought that this was a business that was going to benefit from a reopening of the general economy. We were also looking at the fact that most businesses were going cashless as a result of that period. It was going to be a big beneficiary of that as well.”

    Clark says the stock maintained a 3.5% position in his fund prior to the result today.

    A few surprises, mostly good ones!

    There were really two results in one for Tyro, the first being the performance for the first half of the current fiscal year. Tyro’s CEO, Robbie Cooke, described the result as ‘pleasing’ against the challenging backdrop. The firm now has 37,000 merchants using the service and this saw the company book a record $12.1 billion in transactions.

    Clark says the surprising aspect of the financial performance for Tyro was the EBITDA margin expansion which rose to 13.8%, up from 3% in the prior period. This was driven by a change in the mix of international vs domestic card transactions that were processed during the period.

    “International card usage fell off a cliff, and that was replaced with a lot more local debit card usage. That's actually seen them push toward a better profit number than the market anticipated.”

    He adds that cost control for the period was ‘impressive’ and notes that, prior to the outage in January, customer churn rates were falling.

    The second point of interest was clearly going to be on the fallout from the terminal outages in January. Clark says the initial comments coming from Tyro’s management are encouraging, or at least not as bad as feared. He says that the firm is not seeing a material change in their merchant termination and surprisingly new merchant applications have been at ‘surprisingly normal’ levels. Clark says Tyro received 190 new applications last week and 818 new applications since the 1st of January.

    Tyro has also set aside a pool of $15 million to assist with remediation required with merchants and Clark says he is hopeful that the worst of the outage saga has been contained.

    “I think the evidence is there that this isn't hopefully going to be a really nasty event financially for the company. They seem to have kept merchants on board at this point.”

    Turning a negative into a positive

    The firm also told investors of the imminent release of a ‘dongle’ that would serve as a back-up service to all merchants. This backup offering will be an industry first and Clark says it is a sign that management is looking to turn a negative event into a competitive advantage

    From my impression, they haven't handled this perfectly by any means, but I think they've been pretty open and honest and transparent about it. I guess the main thing is that they're not hoping this all just goes away, they're actually trying to be proactive in terms of making sure that it doesn't happen again.

    Staying with the thesis

    There are four pillars to Clark’s thesis on Tyro, which you can read here, and on the back of today’s result Clark says he has increased his position in the stock. Shares in Tyro finished the day 11.76% higher. Clearly, he wasn't alone. 

    Want more earnings season content?

    Click here to find more articles like this one and insights for Livewire contributors on the February 2021 Reporting Season.

    (Disclosure: The author owns Tyro shares in his super fund)

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    James Marlay
    Co Founder
    Livewire Markets

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