Paysafe Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 15, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to the PaySafe Q2 2023 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over Head of Investor Relations, Kirsten Nielsen. Please go ahead, Kirsten.

Speaker 1

Thank you, and welcome to PaySafe's earnings conference call for the Q2 of 2023. Joining me today are Bruce Lothars, Chief Executive Officer and Alex Gersh, Chief Financial Officer. Before we begin, a reminder that this call will contain forward looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent SEC reports. These statements reflect management's current assumptions and expectations and are subject to factors that could cause actual results You should not place undue reliance on these statements. Forward looking statements during this call speak only as of the date of this call Today's presentation also contains non GAAP financial measures.

Speaker 1

You can find additional information about these measures and Reconciliations to the most directly comparable GAAP financial measures in today's press release and in the appendix of this presentation, which are available in the Investor Relations With that, I'll turn the call over to Bruce.

Speaker 2

Thanks, Kirsten. Good morning and thank you for joining us today. Let's begin with Slide 3. We're pleased to announce our 2nd quarter results, which marks our 4th consecutive quarter of year over year revenue growth. 2nd quarter revenue of $402,000,000 increased 6% year over year or 5% on a constant currency basis, With trends broadly consistent with what we had discussed in the Q1.

Speaker 2

We recorded 6% growth in the Merchant Solutions segment In digital wallets, revenue increased 5% on a constant currency basis, driven by our classic digital wallets, Where we continue to see improved user engagement. 2nd quarter adjusted EBITDA of $113,000,000 increased 10% Year over year at 9% on constant currency with a 90 basis points of margin improvement. We continue to drive our sales transformation to reinvigorate growth in our strategic verticals across gaming, digital assets, In the Q2, we closed 37 enterprise deals, which we define as agreements with more than 100,000 each annual contract value. Additionally, when we look more broadly across deals of all sizes, We booked nearly 150 cross selling wins across our existing client base compared to very little cross selling a year ago. Overall, we're pleased with our results through the first half of twenty twenty three, including 6% revenue growth as well as margin We are raising our full year 'twenty three revenue growth outlook to the range of 6.5% to 7.5% And raising the low end of our adjusted EBITDA outlook, which continues to reflect more than 100 basis points and margin expansion.

Speaker 2

Turning to Slide 4, I'll expand on our progress across our strategic initiatives of sales transformation, customer experience and product innovation, which are enabling us to deliver strong growth in 2023 and longer term. In North American iGaming, we continue to benefit not only from market expansion, but also Through our success in cross selling into existing customer base, which is a key pillar of our sales transformation. As one example, I'm pleased to share that we have expanded our relationship with Penn Interactive, a leading operator in North America. Penn is an existing digital wallet client and we've now expanded our relationship with our e com capability, currently live in 16 states. As you may have seen, they just announced a sports betting agreement with ESPN.

Speaker 2

In Canada, we've enabled Interact E transfer payment capability with more clients, including Bally's in Ontario, as well as 3 Canadian Lotteries. We've added this popular and widely accepted regional payment method to our product offering when the Ontario market launched last year. It's now live with 11 operators in the region. Latin America also continues to attract Strong interest from our suite of products, including some of the most popular forms of regional payments, which enable our merchants to reach new customers In the Q2, we expanded our existing product offering With well known brands, including Bettsen, a longstanding global iGaming client, as well as Epic Games, a leading interactive We're also cross selling our large European client base into Latin America and signed multiple agreements with Financial Trading Merchants during the quarter. We are providing their customers with new ways to our ForEx trading accounts, including our digital wallets and other regional payment methods, such as real time bank transfers.

Speaker 2

We are also cross selling our products within Europe, such as our recent deal with Mill Adventure, a licensed iGaming platform in Germany and an existing digital wallet client who is adding PaySafe's e cash solution for its customers in Germany. So we've had a lot of activity with our cross selling strategy, but we're also very focused on winning new clients across our key verticals. As one example, we're thrilled to have signed an agreement with Prize Picks, a leading daily fantasy sports operator. Paysafe is now the payment processor for them in North America, replacing their current provider. As we've discussed previously, these wins with both new and existing clients were supported by our new go to market structure, Which has improved our ability to sell Paysafe as a strategic payments partner, while also improving deal execution And increasing our average deal size and global pipeline.

Speaker 2

We've also seen stronger retention and growth of our existing merchants With net revenue retention of our enterprise clients greater than 100% year to date compared to a negative net retention a year ago. Turning to a few updates on our product innovation. First, we're excited to have launched new features for our e cash users, Including new ways to fund and spend their money, which will support higher engagement and revenue per user. We have rolled out these our features to 18 countries as of today and impressed with the initial outcomes. We believe this is also to support higher retention, Particularly with users who typically graduate to other payment methods or have payment needs beyond digitizing cash.

Speaker 2

Next on our APM strategy, PaySafe's priority to bring our assets direct to our global e commerce merchant base, enabling them to offering more personalized and localized payment experience to their customers. We are adding several new regional payment methods in 'twenty three along with enhancements to our existing product set. We launched MB Way in Portugal in Q2 With a large portion of our local digital wallet consumers already utilizing the payment method and with high approval rates, Our new regional methods such as MB Way are already being integrated into our existing architecture, Allowing us to offer the payment methods to our own digital wallet consumers and direct to our enterprise merchants through our gateway. We also enabled PIX transaction in Brazil, which is another great example of a popular payment method that we offered in the region Lastly, during the quarter, we introduced network tokenization, which is an enhanced level of security that helps So all of these examples provide some color around the initiatives that we shared with you back at our Investor Day in March. We're making strong progress and we're seeing it in our results With more to come in the second half of the year and beyond in 'twenty three.

Speaker 2

Moving to Slide 5 for an update on our classic digital wallets, Which is consistent with the update we provided in our most recent earnings calls. In the Q2, we saw ongoing stabilization of our underlying active user base our with approximately 900,000 3 month actives and we've delivered constant currency revenue growth of 12% from the Classic wallets. We continue to make progress with our funnel optimization and improve the gateway experience through our merchant checkout conversion work Stronger engagement, including double digit growth in both transactions per active user and average revenue per user, even when we exclude the benefit of interest So the drivers here are consistent with what we've highlighted throughout the year, Such as improvements to the customer journey and checkout experience. Our goal is to provide customers with a seamless onboarding journey, our ability to self serve in the app and engaging features that encourage loyalty, while at the same time Broadening the appeal and use cases of our unique wallet platform. And with that, I'll ask Alex to review the financial results.

Speaker 3

Thank you, Bruce, and good morning, everybody. Let's move to Slide 7 for the summary of our financial results. Volume was $35,500,000,000 in the 2nd quarter, an increase of 6% year over year and total revenue of $402,300,000 also increased 6% or 5% on a constant currency basis. In our Merchant Solutions segment, we saw continued resiliency from the U. S.

Speaker 3

Consumer, supporting growth in our SMB space, such as food, beverage consumption and transportation, As well as strong growth from iGaming and the e commerce side of the business. In Digital Wallet, growth in the underlying business was driven by continued Adjusted EBITDA for the Q2 was $113,000,000 an increase of 10% year over year or 9% constant currency. Adjusted EBITDA margin was 28 an increase of 90 basis points, reflecting higher gross margin in the Digital Wallet segment and operating leverage. As a percent of revenue, our total SG and A was 33.2% in Q2, down from 35 point an 84% conversion of adjusted EBITDA. On the LTM basis, free cash flow was $363,000,000 reflecting conversion of 86 Conversion was higher than our expected range of roughly 65% for 2023, Mainly due to one time items related to taxes in prior periods and safeguarding practices.

Speaker 3

Adjusted net income for the Q2 was $34,700,000 or $0.56 per share compared to $37,500,000 operating income or $0.62 per share in the Q2 of last year, reflecting the increase in interest expense of approximately $8,000,000 Let's move to Slide 8 to discuss the segment results, starting with Merchant Solutions. 2nd quarter volume in Merchant Solutions was $30,300,000,000 an increase of 7% year over year and revenue for the Q2 was $225,700,000 an increase of 6%. Adjusted EBITDA in Merchant Solutions increased 1% to $55,800,000 reflecting 24.7 percent margin, We continue to focus on driving growth through our direct sales channel our in merchant solution as well as our e commerce pipeline, both which have higher margins relative to our partner channel. Turning to Digital Wallet segment on Slide 9. 2nd quarter volume in Digital Wallet was $5,400,000,000 a 6% increase year over year.

Speaker 3

Digital Wallet revenue for the Q2 was $179,100,000 an increase of 6% year over year a 5% increase on a constant currency basis. Adjusted EBITDA in Digital Wallet segment was 77,200,000 an increase of 11% year over year or 8% constant currency and reflecting a 43.1% margin, up 170 basis As Bruce highlighted, we're seeing continued progress led by our growth initiatives focused on user experience and product innovation, As well as early progress from our sales transformation, which we expect to drive stronger revenue growth in the second half. Growth was also supported an increase in interest revenue on consumer deposits. Turning to Slide 10 for summary of debt and leverage. At the end of Q2, total debt was $2,600,000,000 reflecting debt repayments and repurchases totaling $42,000,000 during the quarter.

Speaker 3

Movement in FX increased our debt balance by approximately $8,000,000 Year to date, we have prepaid approximately 91,000,000 of our debt. Net debt was $2,400,000,000 and our leverage ratio decreased to 5.6 times us to review our financial results at the quarter end compared to 5.8 times at the end of last year. I'll reiterate that we remain highly focused on reducing leverage to further debt repayments and EBITDA growth in 2023. We continue to believe we will be in a range of 5.1 times up to 5.3x by the year end. Now moving to the full year outlook on Slide 11.

Speaker 3

Based on our results to date, operating expenses while maintaining more than 100 basis points in adjusted EBITDA margin expansion. We expect reported revenue to range from 1,595,000,000 option to $1,608,000,000 and we expect adjusted EBITDA to likely come in towards the high end of the range of $454,000,000 up to $462,000,000 reflecting adjusted EBITDA margin in the range of 28.5% to 29%. Now I'll turn the call back to Bruce for closing remarks before we take questions.

Speaker 2

Thank you, Alex. In closing, I want to thank our team for their hard work and relentless focus on winning the customer every day. After stabilizing the business in 2022, we are well on track us to deliver approximately 7% growth in 'twenty three based on the midpoint of our guidance, while increasing margins and reducing our leverage ratio. Based on what we're seeing today, our end markets remain resilient and highly attractive, providing significant runway for growth Now let's begin the Q and A session.

Speaker 1

Thank you, Bruce. We'll take a couple of questions from the SAI Technologies platform, which allows shareholders to submit and upvote questions. After that, we'll turn to questions from our research analyst community. Our first question is from Leslie who asked, what are the headwinds to growth? Bruce, would you like to address this one?

Speaker 2

Sure. Thank you, Leslie, for the question. Let me reiterate that we have seen return to growth and our Q2 performance marks the 4th consecutive quarter of year over year revenue growth. And we've done that while absorbing some headwinds, particularly last year related to FX, the war in Russia and some gambling regulations that impacted our clients in Europe. We've returned to growth while absorbing these impacts and making a number of changes to stabilize and improve the business.

Speaker 2

Going forward, we believe our end markets are quite healthy and we aren't seeing anything today that impacts our confidence in achieving our full year outlook, In Q2, we saw growth in all key regions in North America, Latin America, Europe, And we're seeing good stability in the U. S. SMB market, double digit growth in ecom and continued progress in our digital wallet segment.

Speaker 1

Okay. Thanks, Bruce. Our next question is from Sanchin who asked what are Paysafe plans and projections to reduce debt? Alex, can you take this

Speaker 3

Yes. Thank you for the question. As I said during my remarks, on the debt reduction year to date, we have already completed net repayments our operating cash flow of approximately $91,000,000 and we reduced our net leverage ratio to 5.6 times from 5.8 times at the end of 2022, and this continues to be a priority for the company. And of course, we are driving growth, which will support the improvement in our leverage profile. The midpoint of our adjusted EBITDA guidance as you saw in our presentation is $458,000,000 which is an increase of 12 our Q1 results, we believe that that will put our net leverage ratio in the range of 5.1 times

Speaker 1

Thanks, Alex. We also received a few questions asking what our shareholders can expect over the next couple of quarters and into next Bruce, could you take this

Speaker 2

one? Yes, happy to. Look, just to add on to our remarks earlier, When we look at the second half of the year and into 'twenty four and beyond, you start to see the proof points in growth related to our strategic initiatives around sales transformation, client experience and product innovation. While it's early days, we have a sales pipeline that's much larger than it was a year ago. In the deals we've already won, we're seeing multi product wins and cross selling geographically within our existing market base compared to very little cross selling a year ago.

Speaker 2

And then on the product side, we've been as we've talked about, we have key initiatives around global APM optimization, improving our auth rates and leveraging our wallet platform to adjacent markets. So again, we've delivered our 4th consecutive quarter of reported revenue growth, while driving higher free cash flow, higher EBITDA margins and reducing leverage. I'm confident that we're in a stronger position today than we were a year ago. We've lapped some of the market headwinds that we're weighing on our top line And we're driving towards double digit mid term growth profile.

Speaker 1

All right. Thanks, Bruce. With that, let's turn the call back to the operator to open up the lines to take questions from the analysts. Operator?

Operator

Thank you. We will now be conducting a question and answer session. Our first question today is coming from Scott Wertzuk from Wolfe Research. Your line is now live.

Speaker 4

Thanks. Good morning, guys, and thanks for taking my Maybe first to start off on the wallet segment. I mean, it's great to see the engagement from actions per active user perspective continuing to trend well, but still seeing active users stabilized but remained flat over the last a few quarters. So just wondering kind of when we can expect the active user growth to return to growth and sort of what you're doing around that to see that active reserve base start to rise some point in the future?

Speaker 2

Yes, Scott. Good morning and thanks for the question. So Look, I think as we look at the wallet business, you go back to Q222 Versus Q2 2021, it was declining pretty significantly. We really wanted to focus on stabilizing the platform. So a couple of things we needed to do.

Speaker 2

We needed to make some changes to the platform. I think our team has done a great job of improving the functionality within the platform. Now that we've done that, We've now started moving into the focus on expanding the number of users with the platform. We've got a couple of things obviously, we talked about our merchant platform in Investor Day. That continues to be a focus for us.

Speaker 2

We believe that's a mechanism as we come to the end of the year, we'll start driving more users onto the platform. We also are very excited about the platform coming to market in a non branded fashion. And so we are really out there working that platform, going out and selling it in an unbranded fashion. So we're excited about the opportunity there. We're really pleased with the product changes that we've made, those things needed to happen first and then we'll start focusing in on Expanding the 3 month active users.

Speaker 4

Got it. That's helpful. And then maybe just as a follow-up. Just when we look at the trends by vertical throughout the quarter, I mean, you called out some strength in North America iGaming, but wondering if you can kind of parse that a little bit further and how you auto trends in travel and leisure, retail hospitality and digital assets as well?

Speaker 2

Yes. Look, I think Overall, the business has improved quite a bit from where it was a year ago. So some of the businesses obviously are doing exceptionally well. Some of the verticals are doing exceptionally well like the gaming vertical. Others were really coming back from our declining verticals and I think we tried to touch on that with the construct of our retention rate being at 100% in our prepared comments, that was down a year ago.

Speaker 2

So We've really stabilized the business, feel very good about it. We feel good about the verticals we're in. When you look at the gaming vertical, you look at the digital assets, travel and leisure, all these verticals are big verticals, huge TAMs and double digit growth for our future. So we feel like we're in the right place. The experiential economy seems like a place for us where we can really grow us for a long time and we feel we have the products to do that.

Speaker 2

We're now organizing our sales efforts and our client experience. Us, we feel like we're positioned very well to be competitive in this market.

Speaker 4

Understood. Thanks guys and congrats on the results.

Speaker 2

Thank you.

Operator

Thank you. Next question today is coming from Aditya Boudhavarapu from Bank of America. Your line is now live.

Speaker 5

Hey, Bruce, Alex. Thanks for taking my question. Just a few Good morning. Firstly, good morning. Just a couple from my side.

Speaker 5

Just if you could talk to us about how should some of the moving parts of the second half, anything in particular, Rich, in terms of growth or sort of OpEx drivers? If I just look at the guidance, you've sort of effectively sort of rolled forward, I guess, the better numbers in ARPU, and that still implies about 7% to 9% revenue growth in the second half, which is sort of in line with what you said. So any key moving parts to think about there? That's the first question. 2nd one on the free cash flow.

Speaker 5

Alex, you mentioned there are some one time items for taxes If you could just expand on that, how big was that one time impact and does that and how we should think about the drivers for

Speaker 2

Yes. Thank you. So why don't we Alex, we'll go backwards. We'll do the tax question And then I guess the first question is really about guidance and you could probably

Speaker 5

Yes. Well,

Speaker 3

us On the tax and the impact on free cash flow. That's why I said in the remarks that we expect the normal free cash flow conversion to be about 65%. So there were some one time payments that we've made, the taxes in the previous periods that reduced that. We had some changes in the way our safeguarding is working, which have increased our cash for this quarter, but net net we would expect continue that 65% conversion rate. So That's how to think about it.

Speaker 3

And in terms of guidance, I think The guidance the way we I think we've said this from the very, very beginning that we expect both Digital Wallet and Merchant Solution to grow roughly the same. We expected low single digits in the first half, higher single digits in the second half. We have our guidance, we have increased our revenue guidance. We did say, and I want to be very clear that we did say that from the EBITDA perspective, Well, we didn't increase the guidance, we expect to be at the higher end of the guidance, not necessarily at the midpoint, right. So this is but the drivers remain the same.

Speaker 5

All right. That's fair. If I could just add one more I think you've spoken in the past about getting into that sort of low double digit growth in the midterm. I mean, given some of the momentum you're seeing on price wins, cross selling, I mean, would you we sort of say you're maybe stretching for their head than you would expected maybe a year ago or even at the time of the CMD earlier this year in getting there? Or is it still sort of the expected trajectory which you might have had internally?

Speaker 2

Yes. I'll answer and then I'll let Alex clean it up. So what I would say is, if we go back a year, I think we're a little ahead of where we thought we would be When I came in 15, 16 months ago. So feel like we're right on track. Feel our outlook for the Q1 of 2019, we are very good about it.

Speaker 2

I think that the year, while we as Alex just said, we are a little ahead of where we thought we would be at the 6 month mark at 6% growth, we feel good about that. We think we're right on track to where we want to be. We did talk about an Investor Day that longer term, we would be a double digit growth company. We still feel very comfortable about that. And as Alex just said, the model that we're executing on is still the same.

Speaker 2

We over performed outperformed a little bit in the first half of the year, upper single digits for the back half of the year, parity between the two segments, still feel very good about where we are, feel very good about the way the year is shaping up.

Speaker 5

Great. Thanks, Rob, Bruce.

Operator

Thank you. Next question is coming from Timothy Chiodo from Credit Suisse. Your line is now live.

Speaker 6

Thanks a lot. I want to ask about Merchant Solutions. Hi, I wanted to ask about merchant solutions gross profit growth, specifically to put a little bit more context around Q2. I believe it had to do with the mix and the partner channel, etcetera, but also about what's implied for second half gross profit growth for the Merchant segment within the full year guide?

Speaker 2

Yes. So again, I think carrying forward from Q1 into Q2 and I'll Let Alex answer, but still see a little bit of that product mix in our ISO channel impacting the margin. But we are seeing really good growth in our ecom business. So over time, that will start balancing things back out on a margin basis as we're moving forward. Obviously, our e comm margin is a much better margin than our end

Speaker 5

of the book. So

Speaker 6

Sorry about that. Yes, I was trying to get to the implied growth rate for gross profit for the second half for the merchant segment?

Speaker 3

I don't think I think the gross margin doesn't change because the changes to direct as well as e commerce, while that will certainly see acceleration In second half of the year on the e commerce side and hopefully in the direct side mix in the mix side, I think it may in terms of the gross margin itself, it won't change in the second half. We will see that acceleration and then hopefully in the next year 2024, you'll see the changes.

Speaker 6

Okay, excellent. Thank you both. If you don't mind a brief follow-up. So you mentioned that the direct channel was more of the focus And that's the higher margin. Could you just talk a little bit about what the direct channel growth was in the second quarter and also what's implied for the second half of the year?

Speaker 2

Yes. I don't have the direct channel growth in front of me, but Our direct channel on the in aggregate, I'm just trying to do the math here in my head, but We're probably mid single digits in aggregate on all of our direct channels.

Speaker 5

So

Speaker 2

It's progressing. We're moving along. The sales transformation is taking place, bringing on board, Changing the marketing strategy around the direct channel. So we've had a lot of moving pieces there. Feel very good about the progress that we're making with the direct channel and really to be honest very bullish about The direct channel as we move forward.

Speaker 6

Great. Thank you for that, Bruce. Okay. So mid single, so it's not it's below, but not too far below total That's really helpful. Thank you.

Operator

Thank you. Our next question is coming from Jamie Friedman from Susquehanna. Your line is now live.

Speaker 2

Hey, Jamie.

Speaker 3

I'm sorry, sorry about that.

Operator

I was on mute. Good morning.

Speaker 7

I was hoping you could help us unpack a little

Speaker 2

The unpack the iGaming, ecom And what was the other one, Jamie? I'm sorry.

Speaker 6

Gamblee.

Speaker 2

In our ecom business, it is predominantly driven by Obviously, our gambling business in total is a much bigger piece, right around 30% of our total revenue stream, the merchant acquiring piece opportunities of ecom is a much smaller piece, obviously, as we've talked about extensively in the past. So Gaming is going very well. I feel very good about that vertical. Obviously, the ecom piece, the ecom component of that our ability to now cross sell into our existing customer base, whether it be APMs or merchant acquiring, We're having a lot of success with that into the existing customer base. And so we're seeing real good growth out of that segment.

Speaker 7

Okay. And then in terms of the unbranded Yes. Yes, that sounds interesting. I remember you had alluded to it at the Analyst Day. But Can you help us think through both the use cases and maybe like the take rate for the unbranded opportunity?

Speaker 2

Look, I think it's probably early to talk about the take rate on the branded strategy. But AGLES. So when we look at our verticals, whether it's gaming vertical, travel and leisure, hospitality, digital assets, We really want to be exceptional providing services in those verticals and that's really what we're focused on. We think there is a tremendous amount of opportunity to leverage our platform in a optically, we've only gone to market really as Grille and Neteller in a branded our U. S.

Speaker 2

Fashion, we've learned over the last year that we have the ability to sell in unbranded fashion opportunities within the digital asset space and we think there's other things that we can do as we have Done with Penn Interactive. We've used our wallet there. We think there's opportunity to leverage other people's brands and do a co branded or white labeled version of our wallet. And we think that's something that's going to catch on and

Speaker 6

Thank you. We've reached the

Operator

end of our question and answer session. I'd like to turn the floor back over to Bruce for any further or closing comments.

Speaker 2

Well, thank you very much. Look, I appreciate everybody joining us today. I just want to thank our team for, again, a great quarter, great effort, And really appreciate all of the focus on improving client experience and energy around our sales transformation And looking forward to bringing product innovation to our clients to help them be successful as we're moving forward. So Thank you very much. Have a great day.

Speaker 3

Thank you.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time And have a wonderful day. We thank you for your participation today.

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Key Takeaways

  • PaySafe delivered Q2 revenue of $402.3 M, up 6% YoY (5% cc), and adjusted EBITDA of $113 M, up 10% YoY (9% cc), marking its fourth consecutive quarter of growth.
  • The company raised its 2023 guidance to 6.5%–7.5% revenue growth and projects $454 M–$462 M in adjusted EBITDA with over 100 bps of margin expansion.
  • Through its sales transformation, PaySafe closed 37 enterprise deals (> $100 K ACV) and achieved nearly 150 cross-sell wins, driving net revenue retention above 100% for enterprise clients.
  • PaySafe expanded its product innovation with new eCash funding/spending features in 18 countries, integrated regional APMs (MB Way in Portugal, PIX in Brazil), and launched network tokenization for enhanced security.
  • The Digital Wallet segment saw actives stabilize at ~900 K (3-month actives) and delivered 12% constant-currency revenue growth with double-digit gains in transactions per user and ARPU (ex-interest).
AI Generated. May Contain Errors.
Earnings Conference Call
Paysafe Q2 2023
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