Q2 2023 Nuvei Corporation Earnings Call
[music].
Good morning, ladies and gentlemen.
Thank you for standing by.
Welcome to newly Corporation second quarter 2023 earnings call I said it.
Reminder, this conference call is being at a contract I'll now turn the conference call over to Crystal ammonia head of IR. Please go ahead and some money.
Thank you operator, and thank you everyone for joining us this morning with US today are little bear Cherokee and David Swartz CFO . As a reminder, this conference call is being recorded and webcast and the copyrighted property of new that we brought out this information in whole or in part without written consent of new banking right.
Earlier this morning.
Issued a press release announcing financial results for the period ended June 32023.
Relief as well as an accompanying supplemental slide deck is available on your bench section of our Investor Relations website investors <unk> Dot com.
During this call we may make certain forward looking statements within the meaning of the applicable securities laws such forward looking statements involve risks uncertainties and other factors that may cause the actual results performance or achievements of the business or developments in the way the industry to differ materially from anticipated results performance achievements and developments expressed or implied.
Thank you.
Information about these factors that could cause actual results to differ materially from anticipated results or performance can be found a new base filings with the Canadian Securities regulatory authority and on the company's website.
Our discussion today will include non ifr's measures, including but not limited to adjusted EBITDA adjusted net income and adjusted net income per share management believes non-GAAP results are useful in order to enhance our understanding and our ongoing performance there.
They are not a supplement to and should not be considered in isolation from except that beautiful ifr at financial measures.
Reconciliation of these measures to I R. S measures is available in our earnings release and M. D N a.
Well open up the call to your questions. After our prepared remarks during that portion of the call in order to get to as many people in queue within the allotted time.
Ask that you limit your self to one question and one follow up with that now I'll turn the call over to Phil.
Thank you Chris and thank you all for joining our call. This morning, we have a lot to share with you today as you have seen because they had a solid quarter with total volume up 68% and revenue up 45% organic revenue growth excluding digital athletes in crypto currencies was 20%.
This growth underscores the continued strength and momentum in the business as we advance our strategic initiatives, while reaching a number of significant milestones along the way. Furthermore, we have now both laughed and outgrow the digital assets and crypto currency headwinds in the past 12 months.
With Pi are largely integrated and now in the fold my prepared remarks today, including additional onetime disclosure expand on new age evolution, our channels and related go to market strategies, and current trends, which shape our outlook for the remainder of the year as well as our medium term targets.
And I think you'll appreciate we have fundamentally changed the business and are favorably positioned for future growth.
And given our strong and consistent financial performance cash flow generation and deleveraging, we will discuss some important announcements made today with respect to future capital allocation.
Starting with our market position as a global payments platform with category, leading modular technology growing rapidly with the addition of new end markets and use cases geographies and capabilities. We are one of the few single global platforms. Today. This year alone, we've accelerated our offering in Colombia, and Chile, Peru, Brazil.
Singapore, Hong Kong, Australia, UAE, South Korea, France, and Japan, just to name a few.
We are focused on being the technology partner of choice and are scaling the business with over 16 million daily interactions supported by more than 3000 servers 10 global data centers and innovating with 36 releases year to date driving 2500, new features functionality or enhancements as you can see we're constantly.
Innovating importantly, with every passing day, we are increasing our product and technology gap versus the competition. The reality is that we have only four competitors who are able to serve their customers globally. This is not a segment, where we can easily be disrupted by new entrants nor can someone easily acquire there.
[noise] weighing to the space our right to win in this market is more compelling than ever.
For those that had been tracking our progress you know that we have spent a lot of effort building a world class go to market playbook and have successfully made the newly branded payments for all the right reasons integrity transparency and keep a duty we are considered a prominent voice and payments today with large customers as well as known brands.
Across it makes it a discretionary and non discretionary as well as cyclical and non cyclical end market use cases.
As a brief update on the overall integration and achievement of our estimated 21 billion cost synergy target is on plan and we've begun to execute our strategy to realize up to 100 million of incremental revenue by 2027.
We are at a new and exciting juncture in our company's evolution with Pi and now in the fold and having lapped a full year's impact of digital assets in crypto currencies, we wanted to share some incremental insights into how we organize our commercial organization reframed the market opportunity explain why were winning and help you better understand the gross dry.
Or is the trajectory of the business.
Today, we operate the commercial organization through three defined channels, our core channel, which is global commerce, our emerging channel, which is comprised of BTB government in integrated payments and our legacy channel, which is our SMB portfolio.
Our core and emerging growth channels address a large and underpenetrated global tab, which on a combined basis equates to more than 100 trillion and for which we believe we have a unique modular platform to compete and win.
Ample white space with deep pools of opportunity globally.
As I'll describe the key tenets that have made US a category leader in our core global Commerce channel, Great technology capabilities global reach and investment in our go to market function or 100% applicable to our emerging BTB government and integrated payments channel by applying the same playbook that significantly accelerated our growth following the safe.
Charge acquisition, just a few years ago, we expect to accelerate the growth profile of our emerging channel.
Now double clicking on the results for the quarter by channel starting with our core channel Global Commerce, which is our largest and fastest growing channel.
Revenue grew 16% to $172 million and 35% excluding digital assets in crypto currencies and represented 56% of total revenue in the second quarter. We are very pleased with these results as we continue to take market share and outgrow our peers to reiterate.
We have now both laughed and outgrown the digital assets on crypto currency headwinds in the past 12 months.
With the introduction of our unified Commerce is one of our many product enhancements, which offers card present solutions single token and unified reporting we've expanded the scope of this channel beyond global ecommerce to global Commerce as we believe that our unified offering now opens entirely new cab previously unavailable to your day.
In terms of new client wins as you may have seen in the near to press releases, we had an exceptional number of wins across all regions.
Clooney, the signing of one of the fastest growing global online marketplaces with more than 800 million users.
New enterprise customer partner with new day to expand globally and support its rapid growth in Europe , and the U S and it comes on the heels of our win with global market place. She just a few months ago.
We partner with card dotcom, and incredible opportunity to integrate payments fulfillment shopping cart and marketing capabilities into a single offering they becoming its exclusive payments partner.
And online car rentals, we partnered with rent cars, the largest online car rental platform in the Americas and a global leader in the segment for whom we will be providing our full set of capabilities across Latam.
In mobility, we welcome in drive International ride hailing service with more than 175 million downloads operating in 47 countries, and which partner with new way to improve their checkout experience and loyalty programs Incidentally in drive was the second most downloaded mobility app globally in 2022.
On the travel side, we won several major airlines and now servicing four of the top 20 Global Airlines.
And as part of our efforts to continue innovating and supporting new experiences within the payment ecosystem. We've partnered with a top five car manufacturer to pilot in car payments and APAC with ample opportunity for wallet share expansion.
We also saw significant wallet share expansion opportunities with existing customers our engagement levels with existing customers remained strong across all regions and capabilities. We are now firmly at the table with Fortune 500 Fortune 1000.
And Internet top gold stars globally.
And while it's just a sample of what we have listed a box is not live yet they are in various stages of activation, we feel really good about our growth sectors across the four regions of operations today.
When considering the mix of growth from this channel approximately 80% of our growth comes from existing customers, where we expand wallet share by cross selling new capabilities or geographies, while new customers represents approximately 20%.
One thing we've learned more recently is that implementation timelines are equal across all end markets around the world. This is something that is relatively new for us and something we will strive to communicate better to our shareholders. The fact is that it takes more time to activate large global customers and our prior expectations for the timing of implementation was too aggressive.
The less we have approximately $100 million in annualized revenue in various stages and are highly confident they will activate these customers over the next few quarters.
Turning now to our emerging channel, which includes B to B government any integrated payments. We believe this is the next frontier to monetize new these unique capabilities with our deep ERP integration and proprietary software, which we expect to accelerate by neighboring or commercial playbook.
Emerging channel revenue grew 13% on a pro forma basis to 54 million and represented 18% of total revenue in the second quarter, starting with B to B, there's strong momentum in BTB payments given the enormous white space driven by the ongoing shift away from inefficient check based payments towards the conversion and accelerating adoption of electronic payments, which drive.
Greater automation and efficiencies for businesses for perspective is estimated that BW represents a 25 trillion dollar 10 globally.
Today, our proprietary accounts receivable automation module that sits on top of the ERP and then between our payment engine is designed specifically for the new ones and complex use cases for beta bee transactions and acts as a billing engine, providing our customers enhanced tools to collect receivables more quickly streamline back office processes and reconcile order cashed out with.
Their core ERP accounting platforms with.
With deep integration into our ERP partners, we facilitate the customer experience, while helping our ERP partners create stickier offerings and increase their software win rates in the market.
As you can appreciate leveraging new ways, many existing competencies with our seamless global reach our vast local payment acceptance options, our incident and automated payout capabilities and our embedded finance with specific focus on factory. In addition to our automation drive a comprehensive suite of solutions to enable our b to b customers to grow efficiently.
Historically.
We have focus our commercial efforts primarily within the Sage axiomatic I N E. C O ERP ecosystems. This quarter, we greatly expanded our Tam by adding two other global ERP theaters, Infor and S. A P to our list of partners and we plan on adding Microsoft dynamics, the largest ERP player in the World later this year.
We have now expanded our ERP engagements beyond the U S to all reaches of the globe combined we estimate these expansions will increase our ability to reach more than 3 million ERP customers globally.
With respect to the performance in this year's second quarter, New account onboard we're up 27% versus the previous year same period, which we believe lays the foundation to expand our growth in 2024.
In government, we held 2000 agencies public utilities and municipalities in 30 states create streamlined engagements with their citizens are government offering is powered by our recently enhanced proprietary applications utility connect and citizens portal, which seamlessly bolt on top of it the agencies ERP software and offers an instant digital.
So hence citizens engagements that streamlines and reports applicable usage account invoicing auto pay capabilities and simplified workflow, thus, eliminating the cost and hassle with late and paper based payments here, we go to market both directly to the agencies and more recently yourself or focused partnerships.
Post acquisition, we are enhancing the payments functionality to include open banking payments and payouts wherever applicable along with expanding the footprint of our offering beyond the United States.
In the quarter, New client wins included the U S. Virgin Islands, the cities of St Petersburg, Florida, and Erie, Colorado to support the Maine public water utilities in those municipalities Atlanta County, Texas for processing property taxes amongst many other ones.
In total the earlier results here too are compelling this quarter alone more than 10% in annualized new business growth as we're successfully winning both new partners and municipalities. We believe government growth can also accelerate to over 20% in the medium term.
Moving now to integrated payments, while it's early days the monetization opportunities for new day with software partners based on embedding our unified commerce capabilities into the ecosystems of global software and technology partners are very compelling.
Integrated payments is an enormous global market opportunity with a Tam of approximately 35, Chilean and light global Commerce and B to B. We believe our capabilities are uniquely suited to help our integrated partners thrive globally.
To support the bearing business models, our integrated partners, we launched this quarter, our fully managed pay it back into service offering which includes Onboarding reporting fraud management and Configurable funding options with a comprehensive roadmap of additional functionality under development. This quarter alone. We on boarded two very large Ics both processing over 1 billion in annual volume.
And servicing over 20000 unique locations across North America.
Based on our current capabilities, coupled with our investment roadmap. We believe we have the potential to be the partner of choice for mid market integrated partners globally.
In summary.
We think theres enormous opportunity here for new day to accelerate the growth of our emerging channel to 20% plus over the medium term.
Finally, turning to our legacy channel, which predominantly consists of our non integrated standalone SMB portfolio pro forma revenue declined 5% to 81 million and represented 26% of the revenue in the second quarter, specifically the legacy business is more sensitive to the prevailing macro conditions that can impact same store sale trends.
As such Q2 marked the second straight quarter, where we saw slowdown in same store sales versus the previous year.
Do these legacy channel is a mature business and while we'll continue to provide full support and remain loyal to our customers. It is not expected to be a key focus of our growth.
Bringing it altogether, you don't have better visibility for each of our channels, which should give you more insights into our overall growth to summarize we have fundamentally changed our business significantly increased our cab and expand our technology use cases, we have category leading growth in our core global Commerce channel, 35% growth, excluding digital licensing crypto crime.
Ts and $100 million in pending new business. We also have a defined path to accelerate growth into the 20% range for our emerging channel the bdd government and integrated payments finally.
Overtime as the legacy channel becomes a smaller portion of the overall business the impact to our consolidated growth rate will become less meaningful.
As it relates to the medium term outlook for our consolidated growth, while we execute on our expanded distribution and end markets in pursuit of these growth initiatives, we feel that it's prudent for now to amend our medium term revenue growth target to a range of 15% to 20%. We remain confident that we can grow consistently within this range.
Turning now to an update on technology product innovation, a few key highlights for the quarter include.
We are on track to endorse North American processing with Canada being finalized by year end in the United States by mid 2024. This is an important step as it will allow us to normalize all operational functions globally drive greater efficiencies and standardized processes. In addition to improving our operating margin in the region.
We're continuing to invest in our bass APM offering now supporting 634 alternative payment methods available to our customers globally.
We've also launched south APM enrollment functionality in our merchant dashboard, allowing our customers to select and enable additional payment methods instantly.
We've launched our AI driven data analytics platform, providing insights to help optimize approval rates for customers by as much as 1% to 2%, but here. We are just scratching the surface and continue to identify new opportunities opportunities in traditional AI machine learning and generative AI to improve the outcomes and the overall customer experience for general.
They are in particular, we're starting to use it and customer service queries to support our compliance and legal teams as well as for customer Onboarding to name just a few of the emerging use cases, but unlike others. We don't necessarily believe AI is purely a cost reduction opportunity, but rather it will help us scale, the business faster and provide greater efficiencies, thereby allowing us to expand our operating margins over time.
Additionally, we continue to advance our domestic processing capabilities for global airline customers, providing them with more compelling acceptance offering across every major market in which they operate and finally.
We have released the first phase of our new global Chargeback suite, which we expect to benefit our customers by automating significant portions of the dispute resolution process.
So as you can appreciate we are not standing still every new capability drives greater opportunity to deeply engage with our customers as we focus on helping them grow their businesses.
Turning now to capital allocation strategy, we continue to be highly disciplined in our approach during the second quarter, we focus on deleveraging repaying $55 million of our outstanding debt, bringing our leverage ratio down to 276 times at the end of June .
Puts us in a very comfortable leverage ratio and gives us optionality.
While we expect to continue prioritizing debt repayment, we will also explore opportunities to expand our use cases and markets capabilities and geographic reach via strategic M&A as appropriate.
In terms of our ongoing commitment to returning excess capital to shareholders and giving careful consideration to our limited float we are introducing a quarterly cash dividend, which for this quarter is 10 cents per share.
With the dividend in place and is one of new ways largest shareholders I have elected to forgo any stock based compensation going forward, thereby further aligning my compensation with the interests of all shareholders.
I'll now discuss recent market trends and how that informs our views of the current quarter and the rest of the year Daily average volume through July and early August have remained solid and we're not seeing any signs that the near term macro environment has changed we are however, revising our full year outlook driven by two factors first the delayed timing of the new business unit.
Versus prior expectations and second our recent decision Gulfport a large customer.
Dave will cover the update outlook in more detail.
Despite this near term revision I've never felt better about how new base positioned to accelerate its growth potential over the long term, we have a rapidly growing core global commerce channel and a phenomenal potential.
In our emerging D to be government and integrated payment channel and we're executing very well against a wealth of opportunities across the entire business.
Before turning the call over to Dave I'd like to welcome our New recently appointed Board member, Chris I Rushee Corita joins a new Bay board with over 36 years of human resource experience. She is a former chief human resource officer at Equifax and serves on the boards of both threat up and two you Inc.
She also further strengthened our corporate governance by increasing the number of independent directors and advances our board diversity as chair of New Bay, I look forward to working and learning from her.
And two are new way colleagues I want to thank you for all your hard work and dedication you guys are simply amazing with that I'll now turn over the call to Dave.
Thanks, Bill and good morning, everyone I'll start by reviewing our financial performance for the second quarter. I'll, then discuss our outlook for the third quarter and fiscal year 2023.
Looking at our performance during the quarter, we are pleased with our execution through the first half with either.
For Q2, specifically it is notable that we realize some very significant milestones we achieved in excess of $50 billion in total volume $300 million in revenue and $100 million and adjusted EBITDA for the first time in the company's history.
These quarterly accomplishments speak to our success in scaling our platform.
And yet in terms of our overall runaway for growth we are in the early innings with so much opportunity still ahead of us.
For the second quarter total volume increased by 68% to 51 billion and was within our outlook range.
We're driven by our focused investments and execution within our global Commerce channel and the inclusion of ply after the full quarter.
E Commerce volume represented 88% of total volume in the period.
Revenue for the quarter was $307 million up 45% year over year, and essentially align with the high end of our outlook range.
Oh that contributed 76 million of revenue during Q2.
As a reminder, all revenue figures for Pi or express net of interchange to be consistent with our accounting treatment of revenue.
Excluding <unk> organic revenue growth was 9% in the quarter.
This reflects the impact from the decrease in revenue related to digital assets in crypto currencies.
Adjusting for this factor organic growth at constant currency, and excluding digital assets and crypto currencies it was 20%.
From a regional perspective, we experienced strong growth.
North America revenue grew by 108%.
Latin America grew by 77% and Asia Pacific grew by 67%.
In the Europe Middle East Africa region reported revenue was essentially flat year over year due to the $15 million revenue decrease relating to digital assets in crypto currencies.
Excluding the impact from digital assets in crypto currencies EMEA region growth would've been 17% in the quarter.
Consistent with our focus on driving incremental gross profit dollars to expanding wallet share with our customers gross profit increased by $78 million to 253 million compared to last year's second quarter.
Presenting gross margin in excess of 82%.
Selling general and administrative expenses in the second quarter increased by $75 million or 51% year over year to $222 million.
Of this increase 63 million can be attributable to the contribution of SG&A from Playa.
Ross all expense items, including commissions employee compensation and depreciation and amortization.
Share based payments increased by $3 million versus last year.
The majority of this increase is due to the contribution from share based payments related to the pie of team members, who joined new Guy.
As a percentage of revenue share based expense continue to decrease from 15% in Q2 last year to under 12% from the second quarter of this year.
We expect share based expense to continue declining as a percentage of revenue over time.
Adjusted EBITDA for the quarter was $110 million and was above the top end of our outlook range, representing an adjusted EBITDA margin of 36% in the quarter.
Looking at other line items on the income statement net finance cost was $28 million compared to net finance income of $4 million in last year's second quarter.
The main driver of this Delta was an increase in finance costs to service, our outstanding debt, including the new $800 million credit facility. We entered into in late February in connection with financing the player acquisition.
Going forward as we used excess cash to Delever. We expect this will have a positive impact on finance costs.
Net income for the quarter was $12 million or seven cents per share compared to net income of $35 million or 23 cents per diluted share.
As I just mentioned a $31 million increase in net finance costs was the largest contributor to the reduction in net income.
Adjusted net income was $58 million or 39 cents per diluted share for the quarter.
Turning to the balance sheet.
How is that June 30th 2023 we had cash and cash equivalents of $118 million in term debt of just under $1 3 billion.
Meanwhile, our cash generation remained strong free cash flow increased by 19% to $96 million, representing 87% conversion rate from adjusted EBITDA.
Cash flow from operating activities for the three months period was $60 million versus 91 million for the comparable prior period.
As I mentioned previously this year's figure was impacted by financing costs related to the Pi acquisition.
In Q2 interest paid increased by 29 million.
During the second quarter, it's part of our capital allocation strategy, we deployed $55 million of cash towards reducing our outstanding debt.
Bringing our leverage ratio down to 276 times of.
Of this $55 million 44 million it was voluntary which shows the magnitude of our cash generation and our approach to delevering.
Our financial profile provides us with enhanced opportunities to return excess cash to shareholders in several ways, while still maintaining the flexibility to invest in our business pursuing both organic and inorganic growth.
Through the first half of the year, we chose to use excess cash to further reduce our leverage from current levels and to repurchase almost $1 4 million of our shares under our normal course issuer bid.
Today, we announced a quarterly cash dividend of 10 cents per share.
On September 5th 2023 to shareholders of record as of August 'twenty, one 2023.
The aggregate amount of the dividend is expected to be approximately $15 million.
I will now turn to our outlook and would refer you to our forward looking information disclosure in our press release and N DNA.
We are revising our growth expectations for the back half the year, primarily due to two factors.
First the more significant factor relates to longer lifetimes, and we anticipated between signing and implementing new in your business.
As we've come to appreciate the nature of serving larger enterprise customers is that the timelines to go live and begin generating revenue tends to be longer.
The second factor stems from our recent decision to exit our relationship with a large customer.
For the third quarter, we expect total volume of between 47.5, and $49 5 billion, representing a year over year increase of 16, 9% to 76%.
Revenue of between 300 mm $308 million, representing a year over year increase of 52% to 56%.
Revenue at constant currency of between 294, and $302 million, representing a year over year increase of 49% to 53% and.
And adjusted EBITDA of between 105 hundred $10 million, representing adjusted EBITDA margin of approximately 35% to 36%.
For the full year 2023, we are revising our outlook to reflect the two reasons I. Just mentioned, we now expect total volume of between 193, and 197 billion, representing a year over year increase of 51% to 54%.
Revenue of between 1.17, and $1 $2 billion, representing a year over year increase of 39% to 42%.
Revenue at constant currency of between 1.16 and $1 one 8 billion.
Presenting a year over year increase of 37 to <unk> 40 per cent.
And adjusted EBITDA of between 417, and 432 million, representing an adjusted EBITDA margin of approximately 36%.
In addition, we now expect full year organic revenue growth at constant currency and excluding digital assets in crypto currencies to be between 16% and 20%.
In addition, as Phil mentioned, we are amending our medium term revenue growth target to be between 15% and 20% and are reiterating our long term adjusted EBITDA margin of greater than 50%.
Overall, we are pleased with our results and continue to be excited about our prospects going forward I'll now turn the call back over to Phil for closing remarks.
Thanks, Dave before opening it up to questions I'd like to reiterate the key takeaways from today's call first our category, leading global ecommerce business had 35% organic revenue growth, excluding digitalized as in crypto currencies.
We're well on our way to accelerate the growth profile of our emerging BTB government and integrated payments channel to 20% plus over the medium term.
Third our revised outlook is due to two near term transition reflects with no bearing on our robust pipeline of high profile customer opportunities and fourth our strong cash generation provides us flexibility to delever, our balance sheet quickly and return excess cash to shareholders via dividend.
With that operator, we're ready to take questions.
Thank you.
We will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your questions from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
The first question comes from the line of will Nance with Goldman Sachs. Please go ahead.
Hey, guys good morning.
I wanted to ask on some of the building blocks of the updated target.
The vertical disclosures over the last couple of quarters have been helpful. I, just if we think about S&P. It sounds like that there's going to be relatively flat.
Pioneer business kind of growing in low double digits. It would seem like the updated guidance imply something like high Twenty's gross on.
55 kind of a business that global ecommerce is that the right way to think about growth going forward are there any refinements to that framework you at Max.
Good morning.
So I think you you haven't had you haven't in the right ZIP codes. So for US we tried to do a channel disclosure to highlight the different segments of the business now with powerful in the fold our core channel were expecting between 20 and 30% growth in our emerging channel we are accelerating the growth today.
13%, we believe we can accelerate it and SMB realm.
Relatively flat that is down 5% this quarter predominantly just because the same store sales movement, but we expect it to be relatively flat and one thing as you build your models and understand that you know of course, 56% of our revenue today, but as it continues growing it's going to be a larger and larger part of the revenue so the impact from SMB overtime.
Decrease in certainly as Pi and our emerging channel continued driving momentum.
And bind we believe that hydro channels with both be 20% plus and F. N b will be a lesser part of B.
Be a drag on growth in the outer years.
Got it that's helpful. And then if I could just follow up on the the 100 billion dollar pipeline disclosure you guys gave.
How do I think about that in the context of the updated medium term target if or maybe thinking about some of the out years and our model I know you've mentioned in the script that you know.
New business is is only 20% of the growth. So if you think about that being a contributor to new business.
What can you tell us maybe about wallet share expansion opportunities with the existing customer set that could kind of bridge the rest of that that delta.
Yeah, so rent revenue opportunities for us are always built into existing customers and new customers and I think you've seen just a myriad of press releases that have come up I'm. So proud of this team we are winning ultimately the who's who.
Across all of our regions and it is taking a little bit more time for those clients to activate but the opportunities and our quality of business that we've been onboarding. This year, it's truly exceptional but the onboarding doesn't and right. So it's taking a little bit longer for us to onboard them and that's something that we are reflected in the revised outlook for the remaining of the year, but the interesting thing is client.
<unk> had technicals have continued to grow so it is interesting the onboard for a particular feature functionality and drive forward as they too have experienced with new they enter new countries or consume new a new solution. So the 100 million revenue in the mix of both new in year, New you typically see a smaller percentage of the full potential of the customer.
And it takes two or three years to really drive the full potential of the customer's existing profile and naturally as we add capabilities and geographies wallet share opportunities as that customer continues developing so it's a fascinating business its not a signed and done it's assign engage and grow with which is such a interesting components to the end.
Markets that we're servicing in our core channel.
Got it I appreciate you taking the questions.
Thanks, Paul.
Thank you next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.
Hey, guys.
You know what I think we'd love to just get a little bit more color on what actually drove the cut to the medium term guide in terms of the change from what you had anticipated even at the time of the prior close.
Good now, saying the 15% to 20%.
Versus the 'twenty, you know not too long ago was it is there something competitively changing or was it something about you know just maybe a little more color on what the actual drivers workforce would be helpful.
Hey, good morning, Darren It's David speaking.
So we obviously spent time looking at that the you know what our medium term targets. It's important to make sure that were in line.
We talked about in our prepared remarks kind of the great quarter that we had and I think we should start there just thinking about the growth that we've seen right 45% Rev.
Revenue growth in the quarter on a reported basis organic growth 20%.
And then if you think about that core global Commerce channel on an organic basis, excluding digital assets is 35%.
So those last two data points with 20% organic growth in the 35% organic on global Commerce, excluding digital assets that that's kind of where I'd frame in terms of what our growth profile looks like when.
When you think about that growth profile.
And the scale that we're at from a revenue perspective, we think that that it's it's it's it's class leading and quite impressive and then still talks about I won't I won't belabor it but when you think about the channels I think that's probably the best way to think about the medium term.
You know revenue growth target that we've set.
When you look at all.
I'll quickly say it just to make sure that it's clearly understood that.
Those three channels the core channel at 56% of total revenue now it grew at 35% pro forma was 16.
But you know 35, excluding digital assets and digital assets, we're going to.
We're going to lap that right. This was the last quarter that there was really an impact starting in Q3 that you know that's pretty much muted and then think about the traction that we've just seen in that channel on some of the you know we we had a whole bunch of P. Ours that we mentioned that we had in windows, whether it's Shane cart dotcom and drive those are pretty good names you can see the traction that we're building up in that channel.
No. The downside you know at least for the current year is that we did see how learn a bit more of a timing of some of those larger merchants you know how long it takes to kind of get them up and running now.
We do have line of sight on a $100 million of revenue opportunity. So that's kind of the core channel and emerging again D to B I S and Gov that you know that grew on a pro forma basis at 13%, but we certainly have line of sight to 20% plus growth. We talked about you know the expansion of ERP platforms, we've talked about some of the government wins.
And then as well and I see some of those two those two large billion dollar plus our partners that we sign.
And if I kind of remind you of the $50 million to $100 million of incremental revenue potential to that's also you know from.
The pie aside that that really plays into that emerging channel.
So if you do the math kind of weighted average with those growth rates you get a pretty good sense that you know about 15 to 20 per cent its something that we feel really confident about achieving and we want to be disciplined in our approach and make sure that the expectations are appropriate and so that that's kind of the logic of how we got to about 15, 20% medium term, which is effectively what we're growing out today.
You know and of course, you know for the rest of this year and even when we think about you know medium term, we obviously want to be.
Be cautious of how we kind of set expectations.
Okay, and then guys just a little more color on the decision to exit this large customer what what exactly drove that and is that anything is that really just one off to be clear.
You know, we strive to be Darren, but northstar in all verticals and use cases globally. I mean that is our commitment across all stakeholders around new Bay, we have a team of 200 and compliance risks and underwriting focus on doing the right thing for the company regardless of size, but I think the biggest takeaway is exiting this merchant relationship is just the right.
Could you rank you.
These things happen all the time Darren in terms of Onboarding off boarding this just happens to be a top 10 customer, but I would come back and just say that deep. These things are not scheduled right. This was a new base decision to exit that particular customer and Michelle we feel strongly that it was the right thing twice a day.
Alright, thanks, guys.
Thank you next question comes from the line of Joseph Murphy.
Canaccord Genuity. Please go ahead.
Hey, guys. Thanks for the extra color here this quarter I thought maybe it was just first start an umpire here.
You know the large isps expanding into some other ERP platforms.
Just wood.
I would like to know where were these some of these endeavors underway, our pre acquisition or you know.
How much of that Oh, My Gosh, you know extra roadmap of progress that we're seeing there is kind of post.
Acquisition, and you know, perhaps you know maybe at the beginning of your revenue synergy.
Endeavors here and then I'll have a follow up.
Good morning, Joe I think it's the beginning of our revenue synergy target.
Been adding resources into the emerging channel, we feel that our technology and additional use cases really combined well together and we're very excited about what the overall opportunity is for new veins. So two additional ERP platforms significant ERP platforms C with the introduction of <unk>.
And in for and we think Microsoft dynamics will be material as well, but let's not also forget we've expanded that relationship with sage into new geographies. We have active discussions on a on other ERP for new geographies. So it's part of the marriage between what <unk> brought to the table and what nobody is able to deliver it together and we think.
That is ultimately the foundation for accelerating our footprint in D. B.
Yeah.
Fair enough and then I guess, if we look at you know the business moving for I mean I guess.
I think Dave you said that you frame, maybe a little bit of the of the headwind here to be more on the ramp of new customers.
That customer loss I guess Im just wondering is that because that customer now exited and we we think about lapping that in four quarters or or timing there.
Relative to exiting that customer thanks, a lot.
Hey, Joe I know the customer spin we started the exit process in the second quarter I believe it will be done this quarter. So it's it's a it's a process to exit claims, but the majority the majority of our of the client's volume has been doing anything.
Thanks very much.
Yeah.
Thank you next question comes from the line of Dan Perlin with RBC capital markets. Please go ahead.
Thanks, Good morning, there's a lot to digest here I wanted to jump into the guidance and specifically maybe start with third quarter.
So it looks like pro forma growth at the midpoint is calling for kind of 14% and I think you just did nine.
So I guess, one you know what's driving the kind of 500 basis points sequential acceleration I know FX is about two points of that but it's still like 300 basis points. So I'm just trying to understand why that would accelerate and then the implied fourth quarter.
At the midpoint looks like it gets back to about 8% with a much bigger benefit from FX, so that looks like a bigger deceleration I'm, assuming that the client deconversion, but filling it sounded like most of the volumes are off so maybe you could help understand that help us understand the cadence of that.
Hey, good morning, everyone.
Dan its David.
So you know obviously that for the third quarter, we have pretty good line of sight, where in the quarter now I, we feel really comfortable kind of where the growth rate that we're seeing certainly there's going to be some variability within within the quarters.
You know Q3, like we said, we lapped crypto. So Q2 was impacted by crypto. So there's some variability there and then when you look out into Q4.
From a revenue perspective, that's typically seasonally a strong quarter for us. So there is some uptake there from a seasonality perspective, if you look if youre looking purely at on the revenue side of course, you know we can get into the take rate discussion is all that's that's a little bit different. There's obviously you know seasonal seasonally some lower take rates, we see in Q4.
But generally speaking you know for.
I'm, an organic perspective, the in Q3 and Q4, certainly the loss of the customer impacts.
Of course, the off boarding sorry that the new business kind of timing both of those transitory and so.
Granted over time, we see that you know the revenue starts to come back up to that 16.
15% to 20% level that we have on the midterm target, but if I can leave it there's nothing specific to call out other than you know.
And back in Q2 of course, you mentioned that the FX impact that is more impactful in second half as you can see the first half impact.
Was you know a somewhat of a headwind second half there's somewhat of a tailwind overall when you look at that FX impact on our total revenue from a percentage basis, its not huge but.
You know, but it does it does add up in terms of in terms of dollar. So there was some fluctuation there on the FX side, both in Q3 and anymore.
Slightly more in Q4.
Okay. That's helpful.
Just philosophically I was a little surprised to see you guys starting to pay a dividend kind of this early in your and your growth I guess algorithm.
So so can you just maybe talk about how that discussion even came about obviously you have the free cash flow to handle it but.
You know most companies at this growth stage or.
Dividend payers, yet so any way you can just kind of contextualize how that conversation went to arrive at this point. Thank you.
No. We we strive to set the pace guy, but I think that's the biggest thing, but but in all seriousness people forget that were high growth and were highly profitable and we're generating a tremendous amount of free cash flow that provides us flexibility.
I think as we started exploring returning cash to shareholders via buybacks or dividend the dividend, but what is better for us just because of the limited float.
And we do think it will open up a new line of investors for us and it's just a continuation of our capital allocation strategy of how we intend on returning capital to shareholders via dividends or buybacks.
Got it thank you.
Thanks, Matt.
Thank you next question comes from the line of Todd Copeland.
CIBC. Please go ahead.
Alright, great.
Good morning.
I wanted to circle back to the last customer if you could just maybe I missed it.
Oh Wow index that relationship.
Okay.
Todd just out of respect it's nothing that we would consider doing you know these are all great businesses that have their own success and journey, but it was no longer a fit for new way I'm proud of our team for making the right decisions and we expect this customer to continue driving but from a profile perspective, it's not a client for new Bay and we'll leave it at that.
Okay.
But there should be not any impression left at this as.
Our competitive access this is a new made decision.
That's what we've talked about that correct.
Yeah Okay.
Secondly, I wanted to ask about you know you got the break down on <unk>.
Growth by your new segmentation can you just talk about.
EBITDA margin profile or path in those segments, maybe qualitatively to start to get towards your your longer term target. Thanks a lot.
Hey, good morning, Todd It's David.
So in terms of the the channels I mean, we don't specifically talk to the EBITDA margins of each are we really you know.
There is infrastructure across the company that really supports all of those channels.
Of course, the you know we talked about the growth profile.
In both our core and emerging channels, so that those profiles and that growth rates certainly will contribute more so as we look forward to to our you know both the revenue, but also to adjusted EBITDA margin, especially on the legacy business you know is flat to declining.
In terms of that you know the long term the 50% plus long term EBITDA margin target that's something that we we still feel very strongly and this is a business.
That is you know is at scale and continues to grow.
And nothing has changed fundamentally nothing has changed in the business. So that that target still holds well we talk a bit about the incremental revenue we talked about last quarter, we mentioned that again a bit this quarter, but on the on the pie of revenue synergy opportunities. There's about 150 to 100 million of incremental revenue that's there.
So that will certainly I'm sure. It's not just a growth debt to EBITA margin expansion as we have the platform that can scale and absorb that revenue with a high contribution to EBITDA margin.
So we feel very good about it and very confident about that that long term, 6% EBITDA margin in the.
Correspondingly, our our growth rates that are going to get us back.
Great. Thank you.
Thank you.
Next question comes from the line of Bob Napoli with William Blair. Please go ahead.
Thank you.
That was going to dig into our margins a little bit.
Any commentary kind of on a.
The passage of the.
Now what we should expect on an annual basis do you have a target for four expansion on an annual basis or.
I mean, obviously, there's a lot of operating leverage and you know 15% to 20% growth as it was still very good growth.
Just any commentary on what we should expect on a as we look at 'twenty 'twenty four kind of margin expansion from current levels.
And it may be annually.
Good morning, Bob its David.
Nothing specific that we've targeted externally of course internally, we have our own expectations that ramp to get to 50% of course there'll be there'll be certain things that will resulting maybe step ups. So incrementals as we do certain things for me, let's say from a.
Integration implementation in sourcing perspective anything about costs. So there could be some one you know one step items that happened along the way, but at the same time to also be some gradual increase in margin just as we continue to scale and grow on the on the topline.
So it takes a bit of a function of both.
And certainly that you know about 50% plus target is like we said its over the longer term. So think about that as you know five to seven years.
But nothing specific nothing that's a large one stops Bob it's more kind of incremental steps along the way as we continue to do the things we do from a product technology.
Integration perspective.
Thank you and then I don't think he said what sector the the customer at that E D converted.
As in what vertical are they ran in yesterday's you adjusted your guidance. This year, how much of the changes from the timing I guess of Onboarding versus the deconversion.
Yeah, Bob where we're not going to double click on on the customer specifics and I would tell you just for the second question.
It feels about two thirds, one third one third customer two thirds delay in implementation.
Great. Thank.
Thank you and I guess, if I could sneak one last one in geographically.
Where are you doubling down or and you know given the lower growth rate profile that you're targeting which is still very good are you pulling back on investments in any area.
What's interesting about it is we've made the investments already so we actually have lots of white space in APAC and Latam as we continue growing.
We feel North America has a lot of opportunity for us as well. So we have we have you know pending licenses and other infrastructure, that's actually already been expense. So we're going to execute on those.
Yeah.
Right. Thank you very much I appreciate it.
Thank you.
Thank you next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.
Hi, Good morning, guys films, just curious what your overall assessment of of execution across the organization. It seems like the market opportunity is very real.
But forward looking expectations had been a bit of a moving target.
Yeah. It's a it's a good question I think ultimately as we're moving upmarket and just how fundamentally that business has changed Jason We're learning as we go through it but I think you have to keep in mind right.
Over $1 billion of revenue over 400 plus million of EBITDA, you know significant free cash flow and profitable growth I think we're in a very unique SIFCO, Jason and our disciplined growth in terms of mean not revenue at all costs are disciplined growth as pain, we think as you know.
I'm very compelling path for future growth our objective our objectives are high and we think that there's a lot of scaling and that for US. We do in every one of our regions and our channels. So I think the team is doing a really great job and I'm really proud of every new the employee in terms of execution.
Okay, and then I guess, just coming back to guidance I guess, if we look at the second half in aggregate. The implication is that organic growth ex crypto will be around 13% on average in.
In the second half shows that's below the updated medium term revenue guidance and you know I respect some of the factors impacting you. This year are transitory, but just how would you encourage investors to get comfortable that the growth can really reaccelerate comfortably and sustainably into that 15% to 20% range as we look.
2024 and beyond.
Good morning, it's David the Yeah, I think that observation is correct Jason.
But really when we think about it is like you said when you think about the rest of this year. It's really those two transitory factors the off boarding of the of the large customer than timing of new business. So that's really the impact what we see for the rest of the year.
That will lap as we go for it and I guess the way that I would frame. It is you know coming back what we said at the beginning.
Two things one thinking about the channels and thinking about how those gross growth profiles of each one specifically core and emerging.
And if you drill down just the drill down and kind of strip away. The onion and you can see the growth of those businesses right. So a 35% excluding the digital assets crypto currencies and then.
Just overall, but it is 20% and then the emerging business again at.
The 13%, but with really good upside in line of sight on the 20%. So that's that's what I would I would say in terms of how to think about the go forward in the medium term. We're in we're in that ZIP code down to 15 to 20 per cent.
Or even to some degree above if you look at the core business. So we feel really confident about about that medium term target and we feel that that's going to be very achievable for us and.
As Phil mentioned in the prepared remarks like we'll continue to look at that target, but you know there's a.
Certainly we forget about it and I'd say also this rest of this year, especially as it relates to Q4 I think we have some caution built into our outlook I think that's another important factor to think about when you think about Q4.
Okay I appreciate the color.
Thank you next question comes from the line of Tim children with Credit Suisse. Please go ahead.
Great. Thank you I think we've kind of covered this in terms of what's implied in the medium term, but if we look at those three buckets. So core global commerce ballpark, 55% emerging ballpark 20, and legacy ballpark about a quarter of the revenue just using round numbers, but core global commerce and implied in the guide and I'm, assuming it's in sort of the 20th.
Thirty's emerging as.
Potentially approaching back towards 20, I believe you said and then I guess the main question was for legacy F. N b within the medium term guide are you implying that it'll be figuring it out maybe a slightly negative right over the coming years in the medium term and then the brief follow up is on the legacy F N b.
You mentioned that it is non integrated non integrated into software could you just talk about how that business user was distributed with the direct sales going to smbs with it through third party isos or or just in general what the distribution approach was for that portion of the business.
Yeah.
Good morning tenants David.
On the first part of your question was kind of what we baked into the guide so yeah somebody on the legacy business like we said like Tom mentioned it earlier. It is you know kind of mid single digit decline now is what we're seeing.
A lot of that is driven by same store sales. We suspect that you know from a go forward perspective. Its you know flat to maybe slightly negative it was kind of where we see that that business.
In terms of distribution in the legacy side. It was really all through indirect I mean, these are really S. N DS where our indirect so we're going through through partners the relationships to the feet on the street to win that business and so that's kind of that distribution model, which is slightly different of course than our than our core which is really direct and then.
On the on the emerging side, it's indirect but it's it's through technology providers, what's called a technology partner I, just think about highest season and that sort, whereas on the SMB. It's it's it's more of a you know.
Feet on the street indirect relationships so it's.
You know kind of a one to many through our partners that are on the street.
Perfect Yep, that's exactly the context I was looking for I appreciate that on both thank you.
Thank you. This concludes today's question and answer session I would like to turn the floor back over to Chris <unk> for closing comments.
Thanks, again to everyone for joining the call today on the IR team, both Andy and myself are available for follow up calls and questions and we look forward to speaking and seeing you on the road bye for now.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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