Paysauce (NZX: PYS): Payroll made easy … CEO interview

 

Paysauce (NZX: PYS)

We spoke to Asantha Wijeyeratne, CEO of the innovative Kiwi tech company PaySauce (NZX: PYS), about his company’s unique product offering in the payroll space, the way in which PaySauce has grown in New Zealand by targeting the dairy sector, the company’s upcoming launch in Australia and its global potential.

We also talked about the excellent numbers for the year to March 2023, when recurring revenue grew 68% to NZ$5.7m, allowing PaySauce to be virtually break-even at the EBITDA line.

Full transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts, and I’m one of the co-founders of our service. And joining me from Wellington in New Zealand on the morning of Tuesday, the 6th of June, 2023, is Mr. Asantha Wijeyeratne, who’s the CEO of PaySauce, NZX:PYS. Asantha, good morning.

Asantha: Good morning, Stuart.

Stuart: You gotta get up early to beat your Kiwis to work. It’s 9:00 AM in New Zealand, it’s only 7:00 here. But I figured I didn’t wanna take up too much of your day, yeah, talking about what a great company PaySauce is.

Asantha: We’ll take any handicap you can give us.

Stuart: Right. So, Asantha, you are a bit of a legend in KiwiTech circles. Back in 2013, you sold… You were within a company which was called SmartPayroll. You sold it to Datacom. I can’t remember the price, but I suspect it was a reasonably good one because you had 10,000 small-to-medium-sized enterprises, mostly in New Zealand, who relied on you to do their payroll every week, fortnight, or whatever it is. So, you were a vital part of the small and medium-sized enterprise ecosystem in New Zealand. But you haven’t rested on your laurels, right?

Asantha: Yeah, absolutely. Look, we sold that in 2013, and Datacom disclosed the final price, which was 55 million. Not bad for a business that they sort of… It was their own software that we built around. And I was retired for a year. Didn’t enjoy that. And the whole thing that brought me back is the amount of blue sky around payroll for the small and micro end of the market, both New Zealand, Australia, and beyond. It’s a massive opportunity. It’s an underserved market. It’s a poorly served market. For those who are starting up, who might have two or three employees or five employees, they’re very poorly served, and there’s a significant opportunity ahead of us. That’s what’s brought me back.

Stuart: Right. So, talk to a newcomer to the story. They’re thinking, how can you build a huge business out of something as prosaic as payroll? But to your point, payroll is everywhere. Like we’ve got a significant slab of the adult population goes to work every day, and most of them are on a payroll somewhere. And it turns out, and I mean, you think about payroll while you’re shaving in the morning, that’s how passionate you are about this particular part of the economy. It turns out that most of the existing platforms don’t make it as easy as PaySauce has proved to be.

Asantha: Correct. So, the battle is in usability. So, coming back to the first point, you need payroll, and payroll is one of the… It’ll be the last thing a business gives up in terms of software subscription. So, it’s incredibly sticky. It is vital for the running of the organization to pay their people correctly and on time. And what’s happened is as technology has evolved, the solutions available to business owners around payroll haven’t evolved. We’ve just digitized the same time cards and clocking systems that we used when we worked in mines and factories.

That same thinking around batch processing, why the heck do we have a payroll period on a fortnightly or monthly cycle? It was to make it easy for the pay clerk to go down the mine, pick up the pay cards, come up and do the calculation. But we are not living in that world. So, the payroll technology has not kept up with it. There’s not a single solution, other than ours that allows you to calculate, pay and file your total PAYE obligations on a smartphone.

Stuart: Right. So, the example used to me, and I think it’s an app one. Imagine the owner of a hairdressing salon. With your tool, she can be cutting a lady’s hair with one hand, and fixing a payroll on the smartphone on the other. It’s that easy.

Asantha: Absolutely. And that’s the key. So, it’s not just purely about calculating pays, or checking time sheets, or approving leave, but it’s actually enabling the business owner to pay the pay to their employees, to pay the tax department what’s owed, and file the return to the tax department all in the single solution. And that’s what’s missing, and that’s what we offer.

Stuart: Right. And it was very elegant the way you described it. You’re now a very widely-used product in New Zealand. But you held your powder dry by choosing the most important market. It turns out that dairy farmers in New Zealand had a problem with payroll from [inaudible 00:04:37] and [inaudible 00:04:38], just about every dairy farm uses your product because you solved an important problem for them. Talk to us about that.

Asantha: Yeah, I’ve always been a great believer in finding a market and dominating it, and to find… In a recessionary time, we still eat and drink, and milk is a key thing. It’s one of the largest industries in New Zealand. So, it was a safe sector to go after. And it’s also a sector where word of mouth is really strong. So, what we do is we solve a problem for a group of people that are closely connected. They talk amongst themselves. And so, we are acquiring a customer for somewhere between four and six months revenue, which is incredibly good for a SaaS business like ours.

So, that’s enabled us to be the dominant player in the New Zealand dairy… The dairy environment here. More than 50% of dairy farms that employ are using us, and that’s only continuing to grow. So, that’s given us a really strong platform to launch from. We were never just a dairy or farm-specific payroll, but we found problems that we solved in that sector, and we think we can do pretty much the same playbook back in Australia where we know that dairy farmers, and farming in particular, are having problems around maintaining records around the fair work agreements. Those are the triggers that cause people to go and change payroll systems.

Stuart: Yeah. So, it’s interesting to me, as you described it, basically, if you’re a dairy farmer in New Zealand, you work on a dairy farm, for part of the year, you’re working like a galley slave, up at 3:00 AM and going to bed at midnight. Other half of the year, it’s a little quieter, and you do your maintenance and other stuff. That looks really bad in terms of filing hours worked with the tax authorities, right?

Asantha: Yeah. That’s where the opportunity came… Yeah, that’s where the opportunity came because, in New Zealand, the regulation is that the hours worked in each pay period is the determinant factor of working out whether you breach minimum wage. So, if someone works 100 hours and they’re paid $1,000 in that pay period through something like learning or carving where people are working all hours, then you are essentially paying the employee $10 an hour, which is below the minimum wage.

Stuart: Right. That looks like wage theft, but it’s not. Right?

Asantha: It’s not. So, the attitude of the farmers was that it swings and roundabouts, but the Department of Labor have no swings and roundabouts in their universe. They say, “Look, in this pay period, you paid someone $10 an hour, you breach the minimum wage, we’ll fine you.” So, what we did was we built an algorithm that recognized when that condition arose, [inaudible 00:07:18] the employee in that pay period to at least minimum wage. So, that enabled the farmer to always be compliant. And that’s the key. It’s really hard to sell payroll if you are not solving a business or compliance problem that your client is having.

And that’s what we’ve been really good at, is to identify specific business problems. We are not just selling a payroll solution, we are selling a compliance solution, and we are selling a business ease solution. And that has a lot of attraction to a small business owner.

Stuart: Now, you’ve conquered the New Zealand market, but the next market to conquer is the one over here. So, you’re spending a lot of time in Australia. What’s your strategy for this market?

Asantha: Look, as I said at the start, the issue around the micro and small end of the market not being satisfied is a global one. And we’ve recognized that from day one. So, we said, if you can create a solution that looked after the filing, the calculation, and the payments in one solution that worked on a mobile phone, that has massive appeal throughout the world. Whether you look at Latin America, whether you look at Asia or Europe, all of those markets where micro-businesses are the fastest growing segment, and they’re the most poorly supported and serviced, which is hard to get to them. You need scale to get to them.

So, we looked at it and said, “Look, so with our learnings now, what can we do?” And we’ve picked Australia to go to because Australian employers have a challenge around the awards. The traditional attitude of a payroll provider is to say, “The interpretation of the awards is the business owner’s problem.” We think differently. We think if you can solve the awards or embed the awards along with payments in a solution for the business owner, you’re making a huge step change in terms of making sure that the business owner is compliant. Because you don’t go into business to become an expert in payroll law or in the fair work agreement.

You’re good at selling flowers, or you’re good at making coffee, right? So, but these are the burdens that are placed on a small business owner when they start up. They’re expected to know that 138 different awards that cover the different categories in Australia.

Stuart: Yeah. Because we’ve all seen the stories over here, this business person, or that business person has been underpaying their workers. Well, no surprises there. If it’s that complicated, you’re gonna make mistakes.

Asantha: Absolutely. Now, if you just take the 152 hours or a fortnight period work, so overtime in the dairy, under the Pastoral Award, and I think there are a number of other awards, it’s the same, you start paying overtime when the employee crosses on the 151st hour to the 152nd hour. So, you gotta keep track of a 4-week period, even though you might be paying every two weeks, you’re keeping track of how much they’ve worked every four weeks. That’s a hell of a burden to place on a business owner amongst everything else they’re doing. And so, they’re keeping spreadsheets, they’re keeping books, they’re writing notes, and you just can’t be compliant.

So, our promise is we can take that pain away, we can track that for you, and we can show you when you’re going to exceed or start paying overtime. So, you can either roster that person on or off, it’s a decision you make, and it also makes sure that you’re compliant, and you’re paying the person the correct overtime payment once they cross the 152nd hour.

Stuart: I’m sure, I’m glad you know about all this stuff because [crosstalk 00:10:50] already. But it’s clearly resonating with the customers. You’ve just had your full-year numbers for 2022 in, and they’re pretty good. 6.7 million annualized recurring revenue. And you’ve calculated the lifetime value of those customers is now up to about $54 million. These are very [corsstalk 00:11:08] cash-based customers that keep coming back every year.

Asantha: Absolutely. We’ve got incredibly low churn. And that’s the beauty of a solution like payroll, people don’t leave you. If you’re giving them what they want, and you are adding value to their business, they will stay with you, and they will tell their friends and neighbors about you. And so, we’ve been able to acquire customers effectively, and the other biggest thing for us is that we’ve essentially got to breakeven. So, we are not coming back to the market and asking for more money to keep the lights on. And that was a really important goal for us.

We foresaw that there will be a time when easy money ends, and like it has now. And so, we’ve essentially plowed back every dollar that they’re gaining back into the business, and will skirt along the breakeven line for the foreseeable future. And so, we’re essentially self-funded. That’s not to say that if an opportunity comes up to make an acquisition, or an expansion requirement comes up, that we won’t come back to the market, but we won’t come back to the market to keep the lights on. That’s a very important distinction.

Stuart: Right. Now, it’s interesting, I brought my magnifying glass here because you need that to see your market cap at the moment. Let’s face it, 2022 was a bad year for tech. So, it’s fair to say your stock took a bit of a battering through that time. People should sit up and take notice now that you are cash-positive.

Asantha: Like every other stock out there, meaning it’s… I tend not to look at it, it depresses the hell out of me. We’re probably one of the best-kept secrets on the NZX. We’ve got no major institutional investors on our…

Stuart: Right. And we should clarify to the readers, you can only trade this stock on NZX, you haven’t made it over to ASX as yet?

Asantha: Yeah, no. That’s one of the decisions ahead of us as we embark on our Australian journey. And that’s always on the cards, whether that’s… Whether we do that or not. But currently, we are purely listed on the NZX.

Stuart: Asantha, many of the viewers won’t know much about you. Now, clearly, that accent says you’re not from around here. You immigrated to New Zealand from Sri Lanka back in the ’80s. Tell us about your journey.

Asantha: I qualified as an accountant in Sri Lanka in 1987. My destiny was to join my father in an audit firm. I had better ideas…

Stuart: You’ve got too much personality for audit, Asantha.

Asantha: So, I essentially ran away from home looking for a country that has got a decent cricket team. That’s a bad [crosstalk 00:13:34].

Stuart: Don’t come here. Don’t come here, Asantha.

Asantha: And yeah. So, I came here, and I’ve worked in manufacturing for six years. And thereafter, I’ve been working around small business and payroll. So, I’m now one of the old men of payroll in this country. And it’s been a hell of a ride for me, this is my second time around the payroll journey, so.

Stuart: Right. And with this journey, you’ve gathered some interesting people around you. Tell us about some of your board members. In particular, a name that many in Australia will know, Mark [inaudible 00:14:07].

Asantha: Yeah, look, Mark and I have known each other just by corresponding because we were on similar sort of journeys. Him with PayGroup listed on the ASX. And then with their acquisition, they’ve been acquired by Deel. And I approached Mark and said, “Look, come join our board.” Mark’s got extensive connections and knowledge around payroll, not only in Australia, but throughout the Asian region, and has an incredible wealth of knowledge around things, payroll. And like me, he’s been doing this for some time. His first foray into payroll was YADP.

So, it’s been an incredibly strong person to add on to our board. He believes and shares in the vision that we’ve got of being the micro payroll business globally. And that’s what we’re going for. And in order to do that, we need the people like Mark on our board. Some of the others on our board are Mod [SP]. Mod’s come from Trade Me. He was one of the early members of Trade Me, then with…

Stuart: Trade Me, for those not familiar with it, that’s like a platform for people to sell stuff in a garage-style top environment, right?

Asantha: Yep. And then his…

Stuart: In fact, New Zealand’s tech scene is largely the creation of the Trade Me mafia, I think, it’s fair to say.

Asantha: Absolutely. So, they got bought out for 780 million, which seemed like a big deal at that time. And if you plot the amount of money that’s gone back into tech, including Xero, a lot of those companies are funded out of money that was generated out of the Trade Me sale. The founder of Trade Me was one of the first investors and directors on Xero. So, it’s a very small community like that.

We’ve got Shelly Roha, who is XB and Z on a number of other boards, fantastic chair for us. Jackie Chen, who’s ex Deloitte’s looking after our compliance side of things. So, we’ve got… And Gavin Thompson, who’s one of the founders of New Zealand’s largest open-source provider, Catalyst Cloud, and Catalyst Solutions on our board. So, we’ve got a really well-balanced and experienced board.

Stuart: Right. You mentioned Xero a second ago, let’s stick with that theme. They’ve got a new CEO in terms of Sukhinder Singh Cassidy. She likes to talk about the rule of 40, and we were talking before we press the button about the rule of 40. That’s a combination of top-line growth with margin. So, you’re not sacrificing margin to growth, etc. She wants to get her number above 40. You’re doing much better than Sukhinder.

Asantha: Yeah, absolutely. So, the rule of 40 is a number that we’ve followed. This is what happens when you come from the subcontinent. Margin is important. We never say profit doesn’t matter. Profit always matters. And so, based on the rule of 40, at the end of this financial year just gone, we are at 67%, which puts us in a significantly strong position. So, which means that we are growing and our margins growing at the same time, and margins positive. And compared to last year, so, we jumped from 37% the year before to 67%. So, we made a 20% leap, which we’re really, really proud of. And…

Stuart: When was that?

Asantha: Yeah, it was addition that as a board that we took that, we will take the safe path of being able to fund ourselves.

Stuart: Right. And we’ll conclude with this. One of the characteristics of your company is it’s a company with heart. You’ve got interest in social justice-type issues, and that reflects on the way you run this company. Talk to us about some of that.

Asantha: Yeah. Look, one of the things that we’ve seen… Look, we cannot ignore the world we live in. And one of the real social evils that have come about as a result of the pay cycle and, essentially, the working poor, is the arrival and dominance of payday lending. Payday lending is a curse on humanity. They prey on the most vulnerable people. So, what they’re doing is that it’s the gap between me having a cash emergency that I can’t fund, and me getting paid on Friday. So, the average loan is $200 to $300, and it’s for a very short period of time. But what happens is when people borrow money, that becomes the entry point, and you end up paying 300%, 400% interest on that debt with charges added on.

And so, we said, “Look, what can we do about this problem? And we introduced a solution called PayNow, which we convinced BNZ to fund. So, we offer a zero interest, zero cost earned wage access solution through our PaySauce platform. So, an employee who’s paid through PaySauce can request and receive within the hour, up to 80% of the wages that they’ve earned up to that point. So, it’s not an advance, it is essentially you are getting the money that you already earned earlier than payday. And then on payday, we collect the money back from the employer before they spend it on anything else.

So, in terms of that, we’ve done around five, $6 million of PayNow, and we’ve had literally zero failure rate on that. We’ve collected every dollar that people have taken as an earned wage access has been returned, and we’ve done that with a small capital pool. But it’s made a difference to hundreds of families out there who, on a Wednesday, might not have enough money to get their car fixed, to get to work, to work for the rest of the week. This is 10% of the working population are resorting to a payday loan somewhere during the year. It is a curse on us. And as a business, we felt we had a responsibility to do something. We make no money on it, but we make a huge social impact by doing that. And it’s great to use technology. We’re using the same payment rails and the same technology that payday lenders are using to essentially exploit the working poor in our countries.

Stuart: Right. Well, Asantha, doing well by doing good. Hold on to that [inaudible 00:20:35] stock because I predict it’s headed up. And you’ve only conquered New Zealand so far, Australia is next, and then the world. So, maybe not quite the next Xero, but you’ve got a slightly stronger runway than that company has at the moment. Well done. Keep up the good work.

Asantha: Thank you, Stuart. Really, thank you.