Q2 2021 Paysafe Ltd Earnings Call
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Greetings and welcome to the pace of <unk> second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Like to ask a question you may do so by pressing star one on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host.
We're sitting Nelson head of Investor Relations. Thank you. Please go ahead.
Thank you and good morning, welcome to pay say second quarter 2021 earnings conference call.
With me today are Philip Mchugh, Chief Executive Officer, and Izzy Dawood Chief Financial Officer.
Before we begin a friendly reminder, that this call will contain forward looking statement and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent periodic SEC report.
These statements reflect management's current beliefs assumptions expectations and are subject to factors that could cause actual results to differ materially from those forward looking statements.
Todays presentation also contains certain information that will constitute non-GAAP financial measures under SEC rules.
Can find additional information about these non-GAAP 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 on the Investor Relations section of our website with that I'll turn the call over to Philip.
Thanks, Kirsten and thanks, everyone for joining us after another successful quarter. We are pleased to announce a strong set of financial results. Several key strategic wins continued progress on our cost transformation two exciting and complementary acquisitions, let me begin with the financial highlights painted.
<unk> grew 41% to 32 billion in the second quarter reported revenues were $384 million, an increase of 16% pro forma when excluding to pay later divestiture on an adjusted basis, excluding the direct marketing business.
It grew an impressive 23% compared to the prior year.
Before we move onto the bits update let me summarize a few highlights upfront.
North America gaming, we recorded strong volume growth of seven 2% year on year.
Several customer wins and began piloting our updated scurlock with AEP merchant.
Outside of our gaming, we won multiple deals and fast growing digital commerce verticals across digital goods Crypto financial services and travel we saw revenue growth of 30% in the second quarter. We continue to see the combination of our E Commerce gateway with digital wallets online banking and eat cash.
<unk> is a true differentiator in the market. It would be do you see a very strong pipeline for growth.
On our transformation program, we delivered 17 million of cost reduction year to date against our full year goal of $30 million with the team continues to identify new opportunities. Additionally, we're really excited about the opportunity of two acquisitions, we recently announced combined Agatha Tivo at safety PE gives us market leadership.
Position and open banking and E cash solutions in the fast growing Latin American market.
These transactions are expected to be accretive to 2022 and further enhance our long term growth as we drive multiple cross selling opportunities across all pace eight business units.
We also announced that she wrote to tell will join pesos next month to lead the digital wallet business. She joins us from Santander group, where he was global head of payments and prior to that had an international payments at Amazon Shiraz brings over 20 years of industry experience and we're really excited to welcome on board next month.
On a final note I mentioned, a 23% adjusted revenue growth.
This growth into context during our first quarter call, we talked about exiting a discrete set of direct marketing clients at the beginning of the year and now we are in a transitional period as the market adjusts to new compliance. While this headwind is immaterial to total volume it impacts revenue and margins given our relatively high take rate of the business.
So we think it has helped to provide this color will cover. This later in the presentation, but we're already seeing signs of a strong recovery and see this as a tailwind in the first quarter of 2022.
With that let's move on to the strategy.
Stay safe is a truly unique payments company and this is a quick snapshot of how we think about the breadth and depth of our solutions. We offer the complete spectrum of payment solutions from card processing digital wallets D cash and now, especially with the acquisition of Pago <unk> safety PE open banking solutions as well.
We combine this Brexit payment solutions with strong risk management, and our focus and deep verticals. It starts with our position as a global leader in high gaming with a focus on winning the fast growing U S and now Canadian market. However, we are seeing the combination of our payment capability driving a growth pipeline and online gaming.
Crypto travel digital goods and financial services. Finally, we continue to execute on scale of platforms and cost takeout, while also beginning to execute on our inorganic growth strategy.
That said, let's turn to the North America gaming.
Starting with the market backdrop. The U S continues to gain traction in mobile sports betting and gaming legislation. While we're also starting to see some strong signs of market openings in Canada and.
The United States 17 states, representing about 27% of the U S population and gone live with some form of I gaming and seven additional states are expected to go live over the next 12 months collectively representing about 45% of the population.
<unk> is live in 15 states today, we expect to be live in Wyoming, Arizona, Louisiana with mobile sports wagering in the coming weeks, we're also eyeing entrants, Connecticut, and Maryland in the fourth quarter collectively this would bring our total coverage to 20 states representing 32 population by year end.
Additionally, we're paying close attention to the timing around Florida, and New York, which are obviously big markets.
Turning to Canada, we were pleased to see that single event sports betting has been legalized paving the way for provinces to license and regulate single event wagering online at the provincial level, Ontario, which has a population of nearly $15 million is advancing its regulatory framework for competitive gaming and more.
Sports wagering market with expected marketing opening sometime in the first half of 2022.
Let's say if there is a long standing history in Canada since 2010, where we have the leading position processing payments for all of Canada regulated online gambling overall, we're seeing positive regulatory momentum and basic is clearly well positioned as the market leader serving more than a thousand operators globally and with connections to more than 70.
5% of the operators in the U S market.
So that's a bit on the market, let me highlight a few proof points on how we are delivering it.
It starts with our growth as stated earlier, we saw North America volumes grew over 70% and revenue grew 48% in the second quarter on the back of continued momentum in new client wins and May pay stake was recognized as the leading payments platform at the E. Gaming Review North America Awards in July we announced partners.
With wind that integrating our payment gateway across four U S States.
We continued to expand our presence in Michigan, where we went live with Golden Nugget in the second quarter and we're looking forward to additional launches later this year.
Also in Michigan, we extended our partnership with Fox that we have been where we have integrated Scripps digital wallet and pay State Park Fox bet is operated by Flutter Entertainment one of the biggest global gambling operators and pay states have been supporting Fox bet flagship sister brands, Pokerstars and Betfair globally for more than a decade.
Turning to Scribd product enhancements, we previewed on our last call the initiative to expand the Scripps digital wallet with a focus on VIP players and instant funding capabilities. We are now piloting with eight brands, including play up at Wildwood Dotcom bed 365, Fox that pokerstars among other major brands.
Our product upgrade will make the depositing in pad experience truly frictionless for players, giving operators a competitive edge when it comes to customer acquisition and retention, while it's still early days and this is just the first of several planned initiatives I am pleased with the progress we've made implementing instant deposits and with the feedback from our clients to rebuild products folks.
On their needs.
Lastly, we continue to strengthen our organizational focus and commitment to North America I gaming will be announcing some exciting talent hires from the industry in the coming weeks.
Outside of our game and we're seeing strong growth in winning new customers and attractive e-commerce verticals, including digital goods Crypto financial services travel and integrated verticals in the second quarter revenue growth from these verticals grew 30%.
We continue to see growth in online gaming and further expanded our E cash partnership with Microsoft integrating pace a card on the Xbox.
In the second quarter Squirrel went live with riot games, which was one of the significant online game publishers.
We continue to also see crypto as a major growth driver across our business since the first quarter digital wallets added 20 to crypto currencies available to trade, bringing the total to 37 crypto currencies and more than 80 markets and we are now live on 30 exchanges.
Equally we continue to extend payment processing capability to crypto and are now supporting eight exchanges with strong growth in our clip their pipeline.
Finally, we're expanding our banking partnerships to further enhance our position as a global specialist acquire the understands these market needs and cash we continue to win new customers in financial services, where pace is becoming a meaningful player, including recent partnerships with extra finance repay and Intel are paid enabling Merck.
Just accept cash payments of over 60000 retail partner locations across the U S.
Lastly, we continue to see good traction in travel.
<unk> is uniquely positioned to meet the specific needs of travel businesses with our safeguarding solution, providing more flexible funding and lower overall payment of rest of the industry. We're seeing a strong response already including our recently announced partnership with arc, a leading provider of settlement services for airline transactions with a network with more than 200 Airlines.
<unk>.
Now turning to transformation.
Playbook, we implemented with Bill Paul It continues to make good progress driving cost savings and accelerating key initiatives such as our tech migration and banking as a service. This year, we're targeting around $30 million of cost savings, which is about $45 million annualized June year to date, we've delivered 17 million. So we're well on track.
At the same time, we continue to make organic investments to accelerate growth in U S I gaming and emerging verticals and further enhance our risk and regulatory platforms.
In banking as a service, we announced our core digital banking platform bankable on which we will further build out banking solutions for our consumers and merchants. We also went live with J P. Morgan and signed two new banks in Europe to facilitate acquiring and wallet payments for crypto exchanges.
Now, let me turn to the fourth pillar of our growth strategy M&A.
You've been very active this quarter and announced two acquisitions toggle effect evil safety peg the leading E cash in open banking solutions in Latin America.
Really three key messages I want to emphasize here one for pay say this establishes a strategic foothold in Latin America. The creates the leading open banking solution for the region.
To both probably to pick teeth with safety pace or verticals that are complementary to pay safe in the areas, where we want to grow including I gaming digital goods financial services travel and E Commerce.
Lastly, while these businesses are growing rapidly in their own right, we see material synergies, where we can expand the reach of our cash business augment our leading PSB and digital wallets with open banking and cross sell across our international merchant base. We also see opportunities to expand upon their open banking rails into other emerging markets.
We look forward to welcome them to these companies the pace they family.
Before I hand, it over to Izzy I'll make a few comments on direct marketing as we noted last quarter, we exited a discrete set of clients and referral channels. As we entered 2021 based on our views of the market and our anticipation of some upcoming compliance changes. So we're in a transition period. This year as the market adjust to these new compliance.
Rules, while we're seeing some improvement in the second half of the year the market pullback a somewhat deeper and wider than we had anticipated as you would take you through the financials, but we're expecting a strong recovery big getting into in 2022 in June net new merchants turned positive. So we are already seeing solid signs of a turnaround.
Overall, we continue to we like this business is specialized it requires strong bank relationships and data monitoring it's not easy to do and we've continued to invest in this business. Despite the market pullback developing the strongest offer to support growth in the space.
<unk>. This is a good tailwind starting early next year.
With that said I'll hand, it over to Izzy.
Thank you Philip.
Let's turn to slide 11 for a quick summary of our Q2 financial performance compared to our guidance.
Revenue was $384 million, which came in at the high end of our guidance driven by a strong U S recovery and continued momentum in E cash.
Adjusted EBITDA of $119 million was also at the high end of our guidance.
Most profit and expenses were right in line.
We're all we are pleased with our performance for the quarter.
Turning to slide 12.
Volumes were $32 billion up 41% compared to last year with growth across all three segments and we saw sequential growth in both integrated processing and digital wallets.
Total revenue for the second quarter was $384.3 million.
13% year over year, driven by growth in all segments.
Pay later, which was divested in October of 2020 revenue growth was 16%.
As Phillippe mentioned.
They divested pay later business and adjusting for the direct marketing vertical revenue growth was 23% compared to the prior year and I will provide further details later in the presentation.
Adjusted EBITDA for the quarter was $118.8 million up 8% versus the prior year, we saw growth and margin expansion in both E cash and digital wallets, resulting in an adjusted EBITDA margin of 31% for the quarter.
While there was noise the year over year margin comparison, including the temporary COVID-19 related cost reductions in 2020.
The decrease in margin compared to prior year, primarily reflects business makes an integrated processing.
Lastly, free cash flow was $54.6 million and 46% conversion on an adjusted EBITDA basis.
Lower conversion ratio this quarter was driven by significant tax payments part of which we expect to be refunded in 2022.
Year to date, our free cash flow conversion is approximately 70% consistent with our expectation of approximately 70% to 80% for the full year.
Turning over to slide 13 for additional details on how we look at the underlying growth for the quarter.
As our direct marketing business goes through a transitional year. We believe it's helpful to look through the results excluding this vertical.
<unk> direct marketing vertical and pay later revenues grew approximately 23% compared to the prior year, while adjusted EBITDA grew 29%, reflecting over 140 basis points of margin expansion. This performance is consistent with our long term growth thesis of the company.
And our strong growth and expanding margins.
On slide 14, I will quickly touch on our GAAP results.
Net income for the second quarter was $6.6 million compared to a net loss of $15.8 million in the prior year.
Net income benefited from a fair value gain of $39 million on the measurement of the warrant liability at period end.
This was offset by an increase in interest expense of $22 million.
Like in the acceleration of capitalized debt fees as well as income tax expense of $16.7 million for the quarter.
Going forward, we expect an effective tax rate of 25% to 28%.
Let's move to slide 15 for a discussion on our segment results starting with the cash.
Volumes increased 35% to $1.4 billion in the second quarter and revenue increased 37% to $103.9 million, reflecting extended lockdowns in Europe and associated consumer behavior.
Adjusted EBITDA was $43 million, an increase of 58%, resulting in adjusted EBITDA margin of 41% an increase of 550 basis points year over year.
Moving to digital wallets in slide 16 volumes were $4.7 billion up 3% year over year.
Revenue in the digital wallet segment for the second quarter was $97.3 million, an increase of 7% driven by higher crypto and trading activity normalized calendar sporting events and favorable exchange rates and partially offset by the impact of market exits.
Adjusted EBITDA was $46.9 million, an increase of 16% compared to the prior year.
Adjusted EBITDA margin of 48% increased 400 basis points year over year.
Turning to slide 17.
Integrated processing volume growth was strong.
54%, reflecting continued continued economic improvement led by the U S market and growth across most of our industry verticals.
<unk> Q2, 2019 volumes are up more than 40% as well.
For the second quarter was $191.2 million, an increase of 7% compared to the prior year on a pro forma basis revenue increased 13% year over year.
Adjusted EBITDA was $45.8 million compared to $53 million in the prior year.
Adjusted EBITDA margin of approximately 24% decrease year over year due to merchant and channel mix, including the decline in our direct marketing channel.
On Slide 18, we can review our strong performance. If you look through the discrete items that impacted growth in the integrated processing segment for the quarter.
On a pro forma basis, and excluding the direct Marty marketing vertical.
Revenue growth was approximately 28% compared to the prior year.
The direct marketing headwind meaningfully impacted margins given their relatively high take rate of the business adjusted EBITDA would have increased more than 30%, reflecting strong operational performance for this segment.
Moving to slide 19, I'd like to take a moment to discuss the take rates across our segments to help address some of the questions. We have received from investors and analysts.
Here you can see how our take rates by segment have trended over the last few years.
Given the consistent pace average of one 4% the recent take rate compression happen entirely driven by business mix.
Starting from top to bottom.
Cash connect continues to generate that take rate slightly higher than our long term expectation of 7%.
Digital Wallets is also steadily increase its take rate as you build out functionality and expansion in new markets, such as FX trading and crypto trading.
We anticipate long term take rates normalize around one 8% with digital wallets.
Finally, the take rate in our integrated processing segment has decreased over the last few quarters from 1% last year to 70 basis points. This quarter, driven primarily by business mix within the segment.
The pie charts at the bottom of the page showed a meaningful shift in volume this quarter to integrated processing, which is driving the overall take rate lower.
Turning to slide 20, we're able to dig deeper into integrated processing.
We're seeing robust volume growth from our U S acquiring business up 68% year over year fueled by the macroeconomic recovery, albeit at a lower take rate compared to the prior year.
Integrated E Commerce has been strong as well growing at 48% year over year with steady take rates around 50 basis points.
While Europe acquiring growth should moderate from these robust levels, we see strong growth continuing in E Commerce, which will further influence take creates an integrated processing.
We're all we're pleased by the momentum across the segment, which is driving absolute growth in revenue and EBITDA for integrated processing and the company.
Now, let's shift our focus to the balance sheet and liquidity on slide 21.
Total debt outstanding was $2.1 billion as of June 30th.
Our net debt to last 12 months adjusted EBITDA ratio was four three times in line with Q1.
In June we successfully refinanced our existing debt by accessing the long term loan market and added the high yield market as a new source of liquidity for future needs. We also increased the size of our revolving credit facility to $305 million.
With our recently announced acquisitions, we expect our pro forma leverage to rise to approximately five three times.
We remain comfortable with this temporary increase as the deal synergies and our growth profile will allow us to delever quickly and meaningfully make progress in 2022 towards our target of three five times adjusted EBITDA.
Now transition to guidance, starting with the full year on slide 22.
We are reaffirming our guidance for the full year, we continue to expect revenue in the range of 153 billion to $155 billion and adjusted EBITDA in the range of 480 million to $495 million, excluding any impact from the two acquisitions.
On slide 23, we have provided a supplemental view on our expected 2021 performance.
Excluding pay later and direct marketing and using the midpoint of our full year guidance.
Revenue growth is expected to be roughly 14% with adjusted EBITDA growth over 20%, reflecting strong margin expansion deep.
These growth metrics and margin expansion are in line with our long term growth thesis.
Now turning to the third quarter outlook on slide 24 for Q3, we expect revenue of 360 million to $375 million on a reported basis.
We expect continued strong growth in our integrated processing segment, and a return to normalized post COVID-19 seasonality, but quieter summer gaming activity in the European markets, we see a moderation of the growth rate in your cash and digital wallets.
Gross profit is expected to be between $210 million to $220 million and adjusted EBITDA between $95 million to $110 million.
We expect to return to double digit growth in the fourth quarter, coupled with strong margin performance as well.
This reflects continued strength in integrated processing, including the Onboarding of several new ecommerce clients in late Q3, and early Q4 stronger growth in digital wallets as well as sequential improvement in direct marketing.
I'll now turn the call back over to Philip for closing remarks.
Thanks Izzy.
Conclusion, we are really pleased with our strong second quarter, we really like the momentum we're seeing in North America I gaming, we're excited about the building pipeline and some of the faster growing emerging verticals and happy with the discipline and execution on our cost program.
We see good signs of recovery and a return to growth in direct marketing.
We're especially excited to welcome safety pay and Tiger team or the pace they family as they add additional opportunities for growth.
But in all of these pieces together, we continue to execute on our strategy in line with our long term growth outlook for Casey. Thank you now, let's open up the call for Q&A.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again that is star one to register questions at this time.
Our first question is coming from Dan Perlin of RBC capital markets. Please go ahead.
Thanks, Good morning, everyone I wanted to I wanted to dive in a little bit more on the acquisitions, if we could I know.
Bill you mentioned.
Strategically, it's giving you a kind of a foothold.
Foothold in Latin America, you had some complimentary verticals and some synergies, but in the context of kind of levering the company up a little bit.
Over five turns I, just want to make sure I understand kind of.
Maybe a little bit more about that strategy and what you see kind of.
Playing out from from those two in particular over the next couple of years.
And then maybe if there's anything else you can provide around expectations around synergies that would be great. Thank you.
Thanks, Dan it's great to hear from you Yeah. Let me give you a couple and then I'll give you a view on leverage.
Talk about the deal basics.
Talk a bit about what we really liked about the deal and give color on this synergy so.
When we when we kicked off.
Hey, safe and we start talking about our strategy, we talked about doing deals that we would see leverage go up but then we say go back down into that kind of mid 33335 range and that's 100% our plan.
Outlook when we see.
The performance of those businesses and the performance of pay say overall, so we feel we feel really comfortable on that front in terms of the deal basis.
Safety pay was 441 million all cash transaction with Pago SEC Tivo, it's about $550 million in total.
We expect about $60 million of revenue and $20 million of EBITDA next year.
From those two pieces historically, the two businesses and had a CAGR in the past two years about 55% topline growth range, So theyre very fast growing businesses.
It gives us presence in 19 markets, including 11, Latin American markets.
Principal markets include Brazil, Mexico, Peru, Columbia, and Chile in terms of the markets of note.
Over 300 merchants and most importantly, 90% bank coverage. So these bids are predominantly open banking with some E cash in them.
And with a single integration you can access 90% of the networks for.
For open banking solution, so that's kind of a.
Kind of a snapshot of the deals.
What do we like about the business stand one on a standalone basis.
These are great businesses are very very high growth businesses there.
They're very successful with a very high demand APM and open banking and.
In Latin America.
And we see these as big trends, we see open banking is a major trend, we see cash as a growing demand in Latin America, and we loved the bank coverage. So you don't have standalone snapshot really like it too.
Aside from an incredibly strong management.
We really like the same sectors.
They're growing in high gaming, they're growing in online and video gaming travel and digital goods and as we talk to our clients in the U S. As an example, and I gaming.
One expand obviously in the U S. They want to expand in Canada.
But I'd say the majority of our clients have plans to expand in Latin America as well. So this is this doesn't connect globally in an important way.
Then on a synergy basis.
Think about it in kind of four or five key synergies one there's clearly an obvious merchant cross sell we have global clients, where we can plug our Latin America into.
Into those relationships and vice versa. They have some strong clients that can plug into North America and Europe.
To augmenting our wallet in our gateway when you plug in open banking.
Create a really really effective way to pay to accept payments and a gateway to funded pay in and pay out in a wallet that's very competitive.
Three we really liked the Pago I think tivo and safety past synergies amongst those two brands as well. So there are two there are two competitors in the market and this gives us a really good scale.
Position there and then just two last points there are some nice treasury synergies.
These companies together and we also like the fact that combined with our cash business.
We have over a million distribution points in 60 countries now so that's.
That hopefully gives you a bit of context and color on the deal.
That's great. Thank you very much.
Thank you. Our next question is coming from George.
Uh-huh of Cowen. Please go ahead.
Hey, guys. Good morning, and thanks for taking my my questions I guess firstly.
I want to make sure I understand sort of the.
The third quarter guide can you maybe help us frame what the expected growth rate would be on a normalized basis to sort of factoring out the direct marketing and obviously some of the other rollovers.
What would that have implied.
If we didn't have those.
Impacts.
Yeah, Hey, Georgia configure from you yeah, let's dig into that so obviously, we're seeing the recovery in direct marketing as both talked about.
Once that God once you've taken to impact direct marketing in Q3, you're roughly about 10% to 12% to 13% year on year growth in revenue.
Again as I've mentioned in prior calls prior conversations at July August is going to be interesting post COVID-19 to see what kind of activity, we see and we are seeing the seasonal quiet activity.
Traditional slate.
Lack of like a sporting events in Europe, we're seeing our focus on vacation. So that's what we saw in that kind of what informs our Q3 guide for the most part does that kind of provide a little additional color there George.
Yeah, that's actually exactly what what I'm, what I was looking for just to kind of get an apple to apples comparison.
And then if I may just just just two more questions I'm curious like what I think the U S volumes being up 68%. So nice to see the strength there I'm I'm I'm curious if you can talk a little bit about what you're seeing in.
In Europe, maybe kind of posed to Q, how some of that reopening maybe sort of a.
Playing in and then last question for E cash.
Should we be assuming that you know growth is maybe somewhat flattish year over year in in in the third quarter I. Appreciate the color guys. Thank you.
So I'll grab a little bit on that and then maybe as you also grab onto it so in Europe, a couple of things going So we did see kind of a post COVID-19 reopening the market has really opened up after a much more stringent lockdown, then certainly kind of a U S comparison.
So that that's.
That's kind of created some softness in the kind of online gambling space in the summer months.
In addition to work until you can consider regular soft seasonality in the summer as well. So we are seeing that.
Two on the cash side, it's been an incredibly strong story, we do see that a tempering down and we've been very consistent about that so we are starting to see signs of that slowing down on the flip side.
Our E Commerce business, our integrated ecommerce business is seeing an extremely strong pipeline of growth as we expand.
And and build up a pipeline of new clients. So that's also creating some some nice outlook for us as well. So you have a couple of things happening across Europe, and kind of international markets.
Yeah, and just to kind of close out out of specific on E. Cash, yes, definitely have seen that tempered down here, we're not going to see 30% growth, but we still see a pretty strong growth year on year in Q3, and the business that the work that <unk> been doing and the team has been doing in terms of greater engagement with Credentialing.
Customers on like is still driving our Europe and Europe growth at least in Q3.
Yeah.
Very helpful. Thank you.
Thank you. Our next question is coming from Jason Kupferberg of Bank of America. Please go ahead.
Thanks, guys. Good morning, maybe just to build on one of George's questions in a little bit more can you maybe call out some specifics around quarter to date.
Underlying acquiring volumes that youre seeing whether its kind of in store versus E. Comm just in light of the Varian I know theres a lot of interest in terms of what's happening in recent weeks.
Yeah. So we don't have the in store versus online handy, but we can say like August volumes were seeing pretty consistent with July.
I mean, it's up slightly up to flat. So we're seeing that momentum continue for.
For the integrated processing business, and we feel pretty good about that overall, yes, we haven't noticed a dip because of the Delta merit coming through we remain pretty positive on how the U S. Acquiring an SMB is performing.
Okay.
That's good to hear so on the EBITDA margins I think for.
For Q3, it looks like at the midpoint you'd be around 28% and as you alluded to Theres, a pretty big ramp implied in Q4 to get to the 32% target for the full year. So I know you rattled off a couple of the dynamics driving that but can you just throw in a little bit regarding your visibility on that acceleration in March.
In the fourth quarter. Thanks, guys.
Yeah, Hey, Jason are two good questions in there. So you are right on a reported basis and margin shrinks, but similar to what we did in Q2, we will provide a look through on direct marketing and you'll see the continued margin expansion I think we've been looking forward to that so again more and more details will come as part of the Q3 call.
Q4, a couple of the three major things that we think about that drive that ramp up and again recognizing that there isn't a probably good comp out there from a seasonality basis.
Four for you guys to work with but there are three major factors one is the.
Traditional active gaming activity in Q4, the holiday so digital wallets growth is pretty solid in Q4.
That's one second.
Direct marketing.
Sequentially the headwinds start to abate you know based on the investments, we're making in the market starting to recover that we see as well.
Third and probably the most meaningful also is the onboarding of a pretty strong pipeline and our integrated our E. Commerce business right now we anticipate that we will continue to drive the growth.
Absolute revenue as well as we've had a farm into Q3 into Q4.
Okay, well, thanks for the color I appreciate it.
Yeah.
Thank you our next question.
<unk> is coming from David <unk> Evercore ISI. Please go ahead.
Thank you good morning could you unpack your take rate expectations for Q3 and Q4. This year that are embedded in your guidance and more specifically could you walk through your expectations for digital wallet E cash and integrated processing and then once we get beyond year end.
When should we start to see a take rate on average begin to expand again if that in fact is part of your outlook for 2022.
Right.
David a couple of questions that I'm sure are thoughtful added towards the end.
We will talk about 2022, when we when we have greater clarity obviously at the time is right, but we're gonna take rate what he called impact. If we continue to see really strong growth in the integrated processing segment and integrate ecommerce naturally we will see the denominator effect.
A lower take rate, but as we showed on the slide to take create by by each of our individual businesses are staying pretty solid right. So it really becomes more of a denominator effect and where the growth is and.
If it's going to drive absolute revenue growth at or higher than our expectations. I think we'll be pretty happy about that it's just a matter, where we see more activity or more.
Basically more stickiness with our customers and growth as well so that's one aspect on take rates.
In terms of the outlook for the rest of the year again digital wallets growth will help take rates.
Marketing recovery will help take rate and then integrated e-commerce and integrate processing growth of heartache rates, just a matter of the dynamics right, but right now the growth towards the focus on absolute revenue growth has been kind of a pretty good for us and that's kind of where we're staying focus.
Yes, I think we gave a lot of detail on the take rates to really unpack that we said, we thought that was important to share and go in.
In the individual business lines, we're seeing consistent take rate. So it is a mixed business and as you said some of that cash slowdown.
E Commerce growth.
Those are big mix issues, but ultimately the direct marketing recovery as we go into early next year there'll be a tailwind on revenue, but also on take rate.
Understood would you expect E cash take rates to sustain at seven 3% level.
No actually we expect it to come down a little bit towards we always plan towards the target of 7%.
Last couple of quarters have been higher.
We've just seen some additional fees come through but David I think 7% is kind of where are we kind of want to.
Plan for on a medium to long term basis.
Understood. Thank you very much.
Thank you. Our next question is coming from Jamie Friedman of Susquehanna. Please go ahead.
Hi.
So good job with these slides and with the discussion I really like slide 20, and slide 23.
I just wanted to ask though generally are you comfortable with the.
March nine.
Analyst day guidance on page 37.
Our three years does that 2023 are you still comfortable directionally with that.
Directionally, absolutely Jamie as we've talked about our long term thesis right and I think it's showing through in our kind of adjusted results as we've taken out direct market pay later that mid mid to low teens revenue growth high teens EBITDA growth, it's definitely coming through.
As we work through this transitional period with direct marketing and Thats, what our long term outlook also showed that range. So yes, so far to date, we're pretty comfortable with the overall outlook.
And then Phil in your prepared remarks, and I don't have it exactly I apologize, but you.
You said something to the effect that direct marketing was correct me, if I'm wrong, a little bit worse than you had thought.
So can you just give us a sense of what you had thought.
And why it's worse and if you can't quantify it just like.
If you can unpack that a little bit relative to what you had thought.
That would be helpful.
Yeah, Hi, this is al I'll take that one Jamie.
Just to just to recap the issue. So in Q1, we did spend.
Some time on the call talking about.
How we exited a discrete client set in the first quarter.
Talked about a 10 million dollar impact in the first quarter and we said that it takes till Q1.2022 to lap the issue. So that should give you a sense of size and scope here.
That that is that is 90% of the same issue. The marginal comment is as we've seen the changes in the market, which we anticipated.
We have seen some market softness in general as other players are also adjusted to this.
Boston market not just for us.
But.
Why are we talking about why we really like this business. We continue to invest in this business we are seeing a recovery.
We've been in lots of conversations with our direct marketing clients and they are focusing on reinvesting.
Reinvesting and go back into the market.
There's talk about programs coming back on at a much higher volume.
And look we have.
We've got the strongest risk management.
Very wide set of bank partners CRM partners very strong relations with visa and Mastercard on this so it puts us in a really strong position.
To be to be that partner win win this business turns around and so that's what we're seeing is that we had that discrete set and that's got to work its way through the numbers markets pull back a little bit because of all the changes.
But we see that coming back as the market stabilizes and people start to reinvest in direct marketing campaigns.
Got it thanks for the color.
Thank you. Our next question is coming from Darrin Peller of Wolfe Research. Please go ahead.
Hey, guys.
You know I want to hone in on the digital wallet growth rate potential terminate when we start off with what we're seeing in the quarter at 7% I know a big part of the thesis on the story is the opportunity.
Digital wallet long term.
And that encompasses both the digital wallet side in the.
Digitization of cash as well, but when we think about first just the 7% in bridging that.
It's anniversarying, new referral partners or other new products in crypto or the U S opportunity.
To something that I think is more well into the double digits you'd expect sustainably can you just walk us through that that those steps to get from 7% to potentially low to mid teens or something along those lines.
Hey, Darren.
Great Great question as always so yes, no. Obviously you know again in the first quarter.
We talked about exiting some of those network accounts in some specific markets.
$20 million headwind in the first quarter is what we kind of talked about we're still seeing we're still seeing some of those impacts in the second and third quarter, albeit at a lower level and that's why it's turned from kind of a negative growth to a positive growth.
But wouldn't it to the long term basis, we really think about three things one is just <unk>.
Core customer growth as we lap some of these legacy issues and you get back to some some good start strong and steady growth.
Two is obviously U S and Canada to markets that are opening up and in fact up though in Latin America is an area where gaming is growing we.
We do have some good positions there are some good some good customer basis. So we see that the geographic pieces, creating some nice lift in the third one is really crypto.
We really do like this.
This business, we see it more and more is becoming a major payment rail over time.
We see it very similar to where I gaming was let's say 10 years ago.
And so we like that positioning the digital wallets is very well positioned there is driving sign up so those are really the three big factors.
When I do the math to get us back to kind of consists of 15 plus percent growth.
Yes, and Darren I think youll see it.
Two other aspects.
Q3, we start seeing that seasonal acquire activity just because there are fewer games, but Q4 is when are we expecting a full kind of a good comparison to start showing up where you start seeing the double digit growth in digital wireless revenue.
Okay.
And just timing on that would be one next year and your views are in 'twenty two.
For the it will start to see a good Q4 with some initial double digit.
And then in 2022, we'll start to see some more consistent growth.
Okay, and then just quickly on the overall guidance just how should we think about volume guidance for the year just given the moving parts in all the different puts and takes I think you had previously said about a $100.210 billion for the full year.
Then just to see if we could just finalize on the guidance for Q3, and we're still getting investor questions on the puts and takes there in terms of just making sure we Havent Street because.
It seems like if you incorporate somewhat around mid teens growth in terms of merchant or even high single digit EMEA wallet side the digital side.
It's hard to get to the numbers, where you're guiding it just seems pretty conservative unless were missing something so just maybe remind us of all the any any element of conservatism in the outlook that you are putting in there are just so if were missing anything. Thanks again guys sure. So a couple of things one is on the volume side for <unk>.
I'll just talk about the full year, our volumes are going to come in.
Meaningfully higher we think youll, probably closer to 130 to 140 billion actually for the full year.
But again.
That is dependent on how quickly or how fast an integrated processing really grows.
But.
Higher than what we thought earlier in the year.
Thats one regarding the puts and takes on Q3, and just sticking to that down a little bit more.
E cash obviously, we expect in the I would say eight.
8% to 10%.
Year on year.
We see integrated processing also this includes everything about.
10% to 15%.
Great processing digital wallets year on year in Q3 will be a little weaker again, it's just a challenging comp because Q3.2020 really had a bunch of sporting events and Lockdowns in Europe and Q3. This year is effectively going to be.
Great client seasonally and as expected. So Q3 year comps basically is a decrease likely in revenue effectively.
The slightly lower than Q2.
Okay that makes sense, okay. Thanks, guys.
Thank you. Our next question is coming from Josh <unk> of Autonomous Research. Please go ahead.
Hi, good morning, I'd like to ask a follow up question on your Latin American expansion, a few months ago I guess back when the deal was announced in December were at your analyst presentation back in March.
I remember the growth story here really being about seasoning in the U S. I gave I gaming opportunity set.
So the Tam expansion strikes me as a bit of a change in strategy is that accurate and if so what has caused your thinking on the Tam to evolve and I guess the follow up would be what how would you describe what would be paces competitive advantage in Latin America. Thank you.
Thanks, Josh.
I wouldn't call it a change in strategy at all we talked very clearly about.
All three buckets right, we've talked about waiting in gaming we talked about.
Expanding in and deep vertical.
Articles either through Atms.
Or through gateway, so that those are the kind of the buckets of investments we talked about very consistently throughout.
We still really like the <unk> gaming, we are investing there.
If it if we see the right deal for USA gaming, we would be.
Nearly interested player there so that doesn't change our strategy at all well, we really liked about safety pay a pago SEC Tivo is kind of what I talked about earlier, one when I look at the Aps, we do credit and debit card processing.
We provide digital wallets have great pay in payout capabilities, we offer E cash.
And more and more we see open banking and crypto is incredibly important payment rails and when you do this you really completing all of the payment options for a merchant to grow we see this in our gaming we see this in a lot of our emerging verticals. So as we start to look at the deals.
We got closer and closer we really we really started to get more excited about it. It started initially you know theres an E cash cross sell that's a nice play.
But more and more data verticals, they're in they're in I gaming <expletive>.
The clients that I have in Europe that we have in the U S. They have Latam strategies, we can provide that now so a single integration.
Can get you a much broader set of payments across more and more markets. So it is driven by our client needs and theres lots of comment overlap there.
Two we think open banking is a pretty major trend, it's a very attractive payment form factor.
And we think expanding that Latin America and into other emerging markets.
Strategically very important it definitely complements our I gaming position it definitely complements are.
Kind of emerging vertical position as well. So so those are the real drivers that we really like from a strategic point of view.
Yeah.
Thank you.
Thank you. Our next question is coming from Timothy Chiodo of Credit Suisse. Please go ahead.
Thanks, a lot and echo Jamie's comments there on the slide Slide 20 is pretty helpful. I appreciate that.
Come back to a follow up on that one but quickly on the guidance and I know, we kind of hit on this earlier I just wanted to drill in a little bit more.
Relative to when you last reiterated the full year guidance at the last earnings call. How is your take on the mix between Q3 and Q4 shifted in other words is this roughly the seasonality that you would've expected or.
Are there some things that are happening under the hood that are positive that are giving you more confidence in what would seem to be a slightly implied higher Q4 exit rate heading into 2022.
Yeah, Hey, Timm, Great question, and you're right. If you recall, we did talk about seeing how July August kind of play out in terms of it that's going to be anywhere close to 2020 or seasonally quieter.
Compared to prior years. So this is always kind of our expectation was this COVID-19 post COVID-19 recovery comes through we will see obviously quieter activity in Europe, what youre seeing.
And then are robust.
Rebound in Q4, so relative to how were planning and thinking about it historically, how we've seen the the gaming activity. This is kind of where we thought it would play out IPO.
Second point in terms of exit rate in Q4, yeah, we feel pretty confident about that.
<unk> I'm going to be some seasonality that drives it but overall given the <unk>.
Covering direct marketing and the real strong pipeline in our integrated ecommerce business gives us.
Pretty good pretty good confidence walking into Q4.
Okay, great. Thank you the follow up is on slide 20 on the integrated ecommerce segment. The take rate there in the 50 to 60 basis points range could you just recap for US again, the reasons why that there's a little bit lower than U S. Acquiring is it things like gateway mix I think is a big part of it but also is there a large merchant mix is or something.
The verticals.
A little more context on why that E. Commerce take rate is a little bit lower than U S. Acquiring.
Yes, I'll take that one I think it's I think it's really important to call out so the U S. As a scaled very scaled U S. SMB player right. So we're dealing with a smaller end of merchants with.
With a mix of card present card not present, so that the take rates you see there are very much in line with where the industry sits in the U S market.
Our E Commerce business it is global.
It is focused on specialized verticals. These are larger international 100% E. Commerce merchant rates are 100% digital there's no card present business here.
So that's that's the profile of clients so.
I gaming client its video gaming it is crypto trading client as travel that's the type of sectors that we're looking at we can process in multiple markets.
Mix of our gateway with single API plugging in E cash and digital wallets and other Atms risks.
Our risk management that Formula is really really working and so what you get is this is larger scale E. Commerce. So the margins are lower right. The take rates are much lower but because they are international and.
And fairly specialized you kind of land more in the 50 to 60 basis points versus let's say the 30 to 40 basis points for E. Retailer. If you will so that's the profile of that business and we do see.
Continued growth very strong growth in that channel, we like what's happening there.
Thank you Philip as a quick follow up though within that though is there.
Could you give me give a rough sense of what portion of that is gateway only versus.
The portion that's taking acquiring risk.
It's a good question I don't have that to hand, we can we can follow up with you on that exact split.
It's going to be a fairly significant portion we will have acquired on it but I don't have the exact split to hand. So we can follow up with you to give you that breakdown.
Okay I appreciate that thanks for taking those questions.
Yes.
Thank you. Unfortunately, we have run out of time for questions today, I would like to turn the floor back over to Mr. Mchugh for closing comments.
Thanks look thanks, everyone for for.
<unk> for the questions. We look forward to plenty of follow up calls.
And conversations I'll wrap it up with the following look we really like what's happened in Q2 and the execution in the numbers.
We're particularly excited about de levering and I gaming and being the de facto winter in the U S market.
Really like the the pipeline and the growth we're seeing in our emerging verticals. When you combine our E. Commerce you combine our digital wallets you combine our E cash and now open banking, we think we have a mix and a formula that is winning in some very very valuable areas.
We don't like the direct marketing noise does to our numbers, but we really like the business and we see that as a tailwind coming in next year.
But overall when we look at the pipeline and the direction, we feel very confident on the direction, we feel very confident on the long term thesis as well and look forward to continue to tell that story. Thanks everybody.
Ladies and gentlemen, thank you for your participation you may disconnect your lines or log off the webcast at this time and have a wonderful day.
Okay.
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