Q2 2023 Paysafe Limited Earnings Call
Hello, and welcome to the Pea save Q2, 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation. You May press star one at any time she placed into question queue. As a reminder, this conference is being recorded.
Now my pleasure to turn off all over to head of Investor Relations Kirsten Nielsen. Please go ahead Kristen.
Thank you and welcome to pay say earnings conference call for the second quarter in 2020 three joining me today are Bruce <unk>, Chief Executive Officer, and Alex Parrish Chief Financial Officer.
Before we begin a reminder, that this call will contain forward looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent SEC reports.
These statements reflect management's current assumptions and expectations and are subject to factors that could cause actual results to differ materially from those forward looking statements you should not place undue reliance on these statements forward looking statements. During this call speak only as of the date of this call and we undertake no obligation to update that.
Todays presentation also contains non-GAAP financial measures you can find additional information about these measures and reconciliations to the most directly comparable GAAP financial measures in today's press release.
And in the appendix of this presentation, which are available in the Investor Relations section of our website with that I'll turn the call over to Bruce.
Thanks, Chris and good morning, and thank you for joining us today.
So let's begin with slide three were pleased to announce our second quarter results, which marks our fourth consecutive quarter of year over year revenue growth.
Second quarter revenue was $402 million increased 6% year over year.
Or 5% on a constant currency basis with trends broadly consistent with what we had discussed in the first quarter.
We recorded 6% growth in the merchant solutions segment.
Can you bring resiliency in our SMB market and high teens growth from E. Commerce led by I gaming in North America.
And digital wallets revenue increased 5% on a constant currency basis, driven by a classic digital wallets, where we continue to see improved user engagement.
Second quarter, adjusted EBITDA of $113 million increased 10% year over year and 9% on constant currency with a 90 basis point 90 basis points of margin improvement.
We continue to drive our sales transformation to reinvigorate growth in our strategic verticals across gaming digital assets travel and leisure and retail and hospitality.
In the second quarter, we closed 37 enterprise deals, which we define as agreements with more than 100000, each annual contract value.
Additionally, when we look more broadly across deals of all sizes, we booked nearly 150 cross selling wins.
Cross our existing client base.
Paired to very little cross selling a year ago.
Overall, we're pleased with our results through the first half of 'twenty, three including 6% revenue growth as well as margin expansion and a reduction in our net leverage ratio.
Based on growth through the first half, which came in slightly ahead of our original expectations.
We are raising our full year 'twenty three revenue growth outlook to the range of six five to seven 5% and raising the low end of our adjusted EBITDA outlook.
Which continues to reflect more than 100 basis points in margin expansion.
Turning to slide four I'll expand on our progress across our strategic initiatives of sales transformation customer experience and product innovation, which are enabling us to deliver strong growth in 'twenty three and longer term.
In North American gaming, we continue to benefit not only from market expansion, but also through our success in cross selling into existing customer base, which is a key pillar of our sales transformation.
As one example, I'm pleased to share that we have expanded our relationship with Turner interactive a leading operator in North America.
Tenants and existing digital wallet client, we've now expanded our relationship with our E com capability.
We live in 16 states.
As you may have seen they just announced a sports betting agreement with ESPN.
In Canada, we've enabled interact E transfer payment capability with more clients, including batteries in Ontario, as well as three Canadian lotteries.
We've added this popular and widely accepted regional payment method to our product offering when the Ontario market launched last year. It's now live with 11 operators in the region.
Latin America also continues to attract strong interest from our suite of products, including some of the most popular forms of regional payments, which enable our merchants to reach new customers and drive volume growth in the region.
In the second quarter, we expanded our existing product offering with well known brands, including medicine, a longstanding global I gaming client.
As well as epic games, a leading interactive entertainment company.
We're also cross selling our large European client base into Latin America, and signed multiple agreements with financial trading margins during the quarter.
We are providing their customers with new ways to fund their forex trading accounts, including our digital wallets and other regional payment methods, such as real time bank transfers.
We are also cross selling our products with it in Europe .
Such as our recent deal with mill adventure, a licensed I gaming platform in Germany and in existing digital wallet acquired was adding pay saves E cash solution for its customers in Germany.
So we've had a lot of activity with our cross selling strategy, but we're also very focused on winning new clients across our key verticals.
As one example, we're thrilled to have signed an agreement with <unk>, a leading daily fantasy sports operator pay safe is now the payment processor for them in North America, replacing their current provider.
As we've discussed previously these wins with both new and existing clients were supported by our new go to market structure, which has improved our ability to sell P. C. As the strategic payments partner, while also improving deal execution and increasing our average deal size and global pipeline.
We've also seen stronger retention and growth of our existing merchants with net revenue retention of our enterprise clients greater than 100% year to date compared to a negative net retention.
A year ago.
Turning to a few updates on our product innovation.
First we're excited to have launched new features for our eat cash users, including new ways to fund and spend their money, which will support higher engagement and revenue per user.
We have rolled out these features to 18 countries as of today and impressed with the initial outcomes.
We believe this is also support higher retention, particularly with users who typically graduate to other payment methods or have a payment needs beyond digitizing cash.
Next on our APM strategy pay saves priority to bring our assets direct to our global E Commerce merchant base, enabling them to offer a more personalized and localized payment experience to their customers.
We are adding several new regional payment methods in 23, along with enhancements to our existing product set.
We've launched M B way in Portugal in Q2, with a large portion of our local digital wallet consumers already utilizing the payment method and with high approval rates.
Our new regional methods.
Such as M. B way are already being integrated into our existing architecture.
All of them is to offer the payment methods to our own digital wallet consumers and direct to our enterprise merchants through our gateway.
We also enable picks transaction in Brazil, which is another great example of a popular payment method that we offered in the region through a single integration.
Lastly, during the quarter, we introduced network tokens nation, which is an enhanced level of security that helps to increase authorization rates reduce fraud and enable improved customer experiences. So all of these examples provide some color around the initiatives that we shared with you back at our Investor Day in March.
We're making strong progress and we're seeing it in our results with more to come in the second half of the year and beyond in 'twenty three.
Moving to slide five for an update on the classic digital wallets, which is consistent with the update we provided in our most recent earnings calls.
In the second quarter, we saw ongoing stabilization of our underlying active user base was approximately 900003 month actors and we.
Delivered constant currency revenue growth of 12% from the classic wallets.
We continue to make progress with our funnel optimization and prove the gateway experience through our merchant checkout conversion work to retain users and drive more spend per user.
Overall, we continue to see stronger engagement, including double digit growth in both transactions per active user and average revenue per user even when we exclude the benefit of interest revenue.
So the drivers here are consistent with what we've highlighted throughout the year such as improvements to the customer journey and checkout experience. Our goal is to provide customers with a seamless onboarding journey ability to self serve in the app and engaging features that encourage loyalty.
While at the same time broadening the appeal and use cases of our unique wallet platform.
With that I'll ask Alex to review the financial results.
Thank you Bruce and good morning, everybody.
Let's move to slide seven for a summary of our financial results.
Volume was $35 5 billion in the second quarter, an increase of 6% year over year.
And total revenue of $402 3 million also increased 6%.
Or 5% on a constant currency basis.
And our merchant solutions segment, we saw continued resiliency from the U S consumer supporting growth in our SMB space, such as food beverage consumption and transportation.
As well as strong growth from I gaming and the e-commerce side of the business and.
In digital wallet growth in the underlying business was driven by continued improvements to the customer journey and checkout experience.
Adjusted EBITDA for the second quarter was $113 million, an increase of 10% year over year or 9% constant currency.
Adjusted EBITDA margin was 28, 1% an increase of 90 basis points, reflecting higher gross margin in the digital wallet segment and operating leverage.
As a percent of revenue our total SG&A was 33, 2% in Q2 down from 35, 6% in Q2 of last year.
We generated 95 million in free cash flow in Q2, reflecting 84% conversion of adjusted EBITDA.
On the LTM basis free cash flow was $363 million, reflecting conversion of 86%.
Conversion was higher than our expected range of roughly six of roughly 65% for 2023, mainly due to one time items related to taxes in prior periods and safeguarding practices.
Adjusted net income for the second quarter was $34 7 million or <unk> 56 per share compared to $37 5 million or 62 cents per share in the second quarter of last year, reflecting the increase in interest expense of approximately $8 million.
Let's move to slide eight to discuss the segment results starting with merchant solution set.
Second quarter volume and merchant solution was $13 3 billion, an increase of 7% year over year and revenue for the second quarter was $225 7 million an increase of 6%.
Adjusted EBITDA in merchant solutions increased 1% to $55 8 million, reflecting 24, 7% margin.
Down 120 basis points year over year, which reflects the business mix as growth was particularly strong in our third party partner channel.
We continue to focus on driving growth through our direct sales channel in merchant solution as well as our ecommerce pipeline, both which have higher margins relative to our partner channel.
Turning to digital wallet segment on slide nine.
Second quarter volume and digital wallet was $5 4 billion, a 6% increase year over year.
Digital wallet revenue for the second quarter was $179 1 million, an increase of 6% year over year, and 5% increase on a constant currency basis.
Adjusted EBITDA in digital wallet segment was $77 2 million, an increase of 11% year over year, or 8% constant currency and reflecting a 43, 1% margin up 170 basis points.
As Bruce highlighted we're seeing continued progress led by our growth initiatives focused on user experience and product innovation as well as early progress from our sales transformation, which we expect to drive stronger revenue growth in the second half.
Growth was also supported.
By an increase in interest revenue and consumer deposits.
Turning to slide 10 for a summary of debt and leverage.
At the end of second quarter total debt was $2 6 billion, reflecting debt repayments and repurchases of the totaling $42 million during the quarter.
Moving and FX increased our debt balance.
By approximately $8 million year.
Year to date, we have prepaid approximately $91 million of our debt.
Net debt was $2 4 billion and our leverage ratio decreased to five six times at quarter end compared to five eight times at the end of last year.
I'll reiterate that we remain highly focused on reducing leverage to afford the debt repayments and EBITDA growth in 2023.
We continue to believe we will be in a range of $5. One times the five three times by the year end.
Now moving to the full year outlook on slide 11.
Based on our results to date, we are slightly raising our 2023 revenue growth outlook to a range of six five to seven 5%, while maintaining more than a 100%.
Maintaining more than 100 basis points and adjusted EBITDA margin expansion.
We expect reported revenue to range from $1 $5 95 billion to $1 608 billion and we expect adjusted EBITDA to likely come in towards the high end of the range of 454 million to $462 million, reflecting adjusted EBITDA margin in the range of $28 five to 20.
9%.
Now I'll turn the call back to Bruce for closing remarks, before we take questions.
Thank you Alex in closing I want to thank our team for their hard work and relentless focus on winning the customer every day.
After stabilizing the business in 'twenty two.
Well on track to deliver approximately 7% growth in 'twenty three based on the midpoint of our guidance, while increasing margins and reducing our leverage ratio.
Based on what we're seeing today, our end markets remain resilient and highly attractive providing significant runway for growth and exciting opportunities for pace.
Now, let's begin the Q&A session.
Thank you Bruce.
We'll take a couple of questions from the same technology platform, which allows shareholders just the math.
After that we'll turn to questions from our research analyst community.
Our first question is from Leslie who asks what are the headwinds to growth.
Would you like to address this one.
Sure.
Thank you Leslie for the question, let me reiterate that we have seen a return to growth in our Q2 performance marks the fourth consecutive quarter of year over year revenue growth.
And we've done that while absorbing some headwinds, particularly last year related to FX The war in Russia, and some gambling regulations that impacted our clients in Europe .
But we've returned to growth while absorbing these impacts and making a number of changes to stabilize and improve the business.
Going forward, we believe our end markets are quite healthy and we aren't seeing anything today that impacts our confidence in achieving our full year outlook, which reflects 7% revenue growth and 12% EBITDA growth at the midpoint of guidance, which is a strong improvement from effectively flat Rev.
New growth in 'twenty two.
In Q2, we saw growth in all key regions in North America, Latin America, Europe , and we're seeing good stability in the U S. SMB market double digit growth in E Com and continued progress in our digital wallet segment.
Okay. Thanks Brent.
Our next question is from Sachin you asked what our paid plans and projections, Turkey that Alex can you take this question.
Yes. Thank you for the question.
As I said during my remarks on the debt reduction year to date, we have already completed net repayments of approximately $91 million and we reduced our net leverage ratio to five six times from five eight times at the end of 2022 and this continues to be a priority for the company.
And of course, we are driving growth, which will support the improvement in our leverage profile.
The midpoint of our adjusted EBITDA guidance as you saw in our presentation is $458 million, which is an increase of 12% year over year as Bruce mentioned, so we believe that that will put our net leverage ratio in the range of five one times to five three times by the year end longer term.
We're driving towards three five times target.
Thanks, Alex we have diversity of if your question is asking what our shareholders can expect over the next couple of quarters and into next year at Bruce could you take this one.
Yeah happy to look just to add onto our remarks earlier.
When we look at the second half of the year and into 'twenty four and beyond you start to see the proof points in growth related to our strategic initiatives around sales transformation client experience and product innovation.
While it's early days, we have a sales pipeline that's much larger than it was a year ago in.
And the deals we've already won we're seeing multi product wins and cross selling geographically within our existing merchant base compared to very little cross selling a year ago.
And then on the product side, we bid as you know as we've talked about.
Key initiatives around global APM optimization, improving our off rates and leveraging our wallet platforms.
To adjacent markets.
So again, we've delivered our fourth consecutive quarter of reported revenue growth, while driving higher free cash flow higher EBITDA margins and reducing leverage.
Confident that we're in a stronger position today than we were a year ago, we've lapped some of the market headwinds.
That were weighing on our topline and we're driving towards double digit midterm growth profile.
Alright, thanks break.
Let's turn the call back to the operator to open up the lines to take questions from the analysts operator.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
You May press star two if you'd like to move your question from a Q1 moment. Please while we poll for questions.
First question today is coming from Scott We're talk from Wolfe Research. Your line is now live.
Thanks, Good morning, guys and thanks for taking my questions, maybe first to start off on us on the wireless segment I mean, it's great to see the engagement from our transactions per active user perspective, continuing to trend well, but yeah. We're still seeing active user is stabilized but remained flat over the last few quarters. So just wondering.
Kind of when we can expect the active user growth to return to growth and sort of what youre doing around that.
That active user base.
To rise some point in the future.
Yeah, Scott good morning.
Thanks for the question so look.
Look I think as we've looked at.
The wallet business you go back to Q2 2002.
Versus Q2 'twenty one.
Climbing pretty significantly we really wanted to focus on stabilizing the platform. So a couple of things we needed to do we needed to make some <unk>.
<unk> to the to the platform I think our team has done a great job of improving the functionality within the platform now that we've we've done that we've now started moving into.
The focus on expanding the number of users with the platform. We've got a couple of things there that we've talked about as mechanisms to drive users to the platform one.
Obviously, we talked about our merchant platform and Investor day.
That continues to be a focus for us.
I believe that's a mechanism as we come to the end of the year, we'll start driving more users onto the platform.
We also are very excited about.
Yeah.
The platform coming to market in a non branded fashion and so.
We are really out there working.
That platform going out and selling it in a non branded fashion. So we're excited about the opportunity. There. We're really pleased with the product changes that we've made those things needed to happen.
First and then we'll start focusing in on.
Expanding the three months active users.
Got it that's helpful. And then maybe just as a follow up.
When we look at the trends by vertical throughout the quarter I mean, you called out some strength in North America gaming, but wonder wondering if you can kind of parse it out a little bit further and how you saw trends in travel and leisure retail hospitality and digital assets as well.
Yes.
Overall the.
The businesses has improved quite a bit from where it was a year ago. So some.
Some of the businesses, obviously are doing exceptionally well some of the verticals are doing exceptionally well like the gaming vertical others were really coming back from.
Declining verticals and I think we tried to touch on that with the.
The construct of.
Our retention rate being.
At 100% in our prepared comments.
That was down a year ago. So we've really stabilize the business feel very good about it we feel good about the verticals we're in.
When you look at the gaming vertical when you look at the.
Digital assets and travel and leisure all of these verticals are big verticals.
Huge Tam.
Double digit growth for foreseeable future. So we feel like we're in the right place the experiential economy. It seems like a place for us where we can really grow.
For a long time, and we feel we have the products to do that we're now organizing our sales efforts and our client experience. So we feel like we're positioned very well to be.
<unk> been in this market.
Understood. Thanks, guys congrats on the results.
Thank you.
Thank you next question today is coming from a DTA Boulevard.
<unk> of America. Your line is now live.
Yeah.
Hi, Alex Thanks for taking my question.
Good morning Leslie.
Good morning, Justin.
Coming from my time.
If you could talk.
Talk to us about Oh, I should think about some of the moving parts of the second half.
Anything in particular, which are in terms of growth or sort of opex drivers. If I just think of the guidance you are sort of exactly sort of rolled forward I guess, the the you know the better numbers in Q.
And that's impacted about 7% to 9% revenue growth in the second half because it's sort of in line with what you said sorry, any any key moving parts to think about there.
First question second one on the free cash flow Alexey mentioned, there was some one time items for Texas and since they are cutting practices. If you could just expand on that a.
How big was that a one time impact and does that.
How we should think about the drivers for the second half.
Yeah. Thank you. So one week Alex will go backwards, we'll do the tax question first and then I guess the first question is really about guidance and you can probably.
Well I'm not a tax on the tax and the impact on free cash flow. That's why I said in the remarks that we expect a normal free cash flow conversion to be about 65%. So there were some one time payments that we've made taxis in the previous periods that we use that we had some changes in the way I would say everybody was working.
<unk>, which have increased our cash for this quarter, but nothing that we would expect continued that 65% conversion rate. So that's that's how to think about it.
And in terms of guidance boosted Oh go ahead in terms of I think in terms of guidance the way we are.
We said it from the very very beginning that we expect both digital wallet and merchant solution to grow roughly the same we expected a low single digits in the first half higher single digits in the second half we have beaten the guidance we have increased our revenue guidance, we did say.
And I want to be very clear that we did say that from an EBITDA perspective, while we didn't increase the guidance, we expect to be at the higher end of the guidance not necessarily at the midpoint right. So this is but the drivers remain the same.
Yeah.
Alright, that's a that's why I can't if I could just add one more.
So I think you've spoken in the past about getting into that sort of low double digit growth in the in the midterm I mean, given some of the momentum you're seeing on enterprise wins cross selling.
I mean, what do you we sort of say your you know maybe stratify. There had then you would you would expected you know.
Maybe a year ago or even at the time of the seem to go the other scaring and getting there or.
So that's sort of you know apocope expert trajectory, but you might have had a intently.
Yeah.
I'll answer and then I'll, let Alex cleaned it up.
So what I would say is.
Yes.
If we can go back a year or.
I think we're a little ahead of where we thought we would be.
When I came in 15.
<unk> 15, 16 months ago, So feel like we're right on track feel very good about it I think the year is while we as Alex just said, we're a little ahead of where we thought we would be at the six month Mark at 6% growth we feel good about that we think.
I think we're right on track to where we want to be we.
We did talk about.
In Investor day that longer term, we would be a double digit growth company, we still feel very comfortable about that.
And you know as Alex just said.
The model that we're executing on is still the same.
We over performed.
<unk> outperformed a little bit in the first half of the year.
Upper single digits with for the back half of the year parity between the two segments.
Still feel very good about where we are feel very good about.
The way the year is shaping up.
Great. Thanks, Chris.
Thank you. Your next question is coming from Timothy Chiodo from Credit Suisse. Your line is now live.
Okay.
Thanks, a lot I wanted to ask about Hey, Tim pollution.
Hi, I'm here I wanted to ask about merchant solutions gross profit growth and specifically if you could put a little bit more context around Q2, I believe it had to do with the mix in the partner channel et cetera, but also about what's implied for second half gross profit growth for the merchant segment within the full year guide.
Yeah, So again I think.
Carrying forward from Q1 into Q2, and then I'll, let Alex answer, but but still.
Still see a little bit of that product mix and our ISO channel.
Impacting the margin.
But we are seeing really good growth in our E.
E Com business, so over time that will start.
Balancing things back out on a margin basis as we're moving forward, obviously already column margins are much better margin than the rest of the book So.
Yeah.
So youre right.
But yeah.
Yeah.
Yes.
Yeah overall, I think you know yeah.
Yes go ahead.
Sorry about that yeah, I was trying to get to the implied growth rate for gross profit for the second half for the merchant segment.
I don't think I think the gross margin doesn't change because of the changes to direct as well as ecommerce, while we'll certainly see acceleration in second half of the year on the ecommerce side and hopefully in the direct side makes in the mix side I think the in terms of the gross margin itself. It won't change in the second half we will see that.
Acceleration and then hopefully in the next year 2024, you'll see the changes.
Okay excellent. Thank you both if you don't mind a brief follow up.
So you mentioned that the direct channel was more of the focus and that's the higher margin could you just talk a little bit about what the direct channel growth was in the second quarter and also what's implied for the second half of the year.
Yes.
I don't have the the direct channel.
Growth in that.
In front of me, but.
Yes.
Our direct channel.
In aggregate I'm, just trying to do the math here in my head but.
Probably mid single digits in aggregate on all of our direct channels.
So it's.
It's progressing we're moving along the sales transformation has taken place, bringing onboard bringing though.
Changing the marketing strategy around the direct channel. So we've had a lot of moving pieces, there and feel very good about the progress that we're making with.
With the direct channel and really to be honest very bullish about.
The direct channel as we move forward.
Great. Thank you for that Bruce Okay, It's a bad thing.
So it's not it's below but not too far below total segment growth that's really helpful. Thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Jamie Friedman from Susquehanna. Your line is now live.
Hey, Jamie.
Perhaps your phone is on mute please pick up your handset or take your phone off mute.
I'm, sorry, sorry about that.
Hi, Good morning, I was hoping you could help us unpack a little.
The relative size.
The E Commerce business.
I gaming business and the gambling business any dimensions related to those would be helpful.
To unpack the I gaming E com.
And what was the other one Jamie I'm sorry.
Gambling.
So.
In our E comm business.
It is predominantly driven by R. R.
Ambling merchant acquiring business, obviously are gambling.
Business in total is a much bigger piece.
Or.
Right around 30% of our total revenue stream.
Got it.
Merchant acquiring piece.
Of Av.
E Com is a much smaller piece obviously.
As we've talked about extensively in the past so gaming is growing very well feel very good about that vertical obviously.
E Com piece E com component of that.
Our ability and the now cross sell into our existing customer base.
Whether it be Atms or merchant acquiring we're having a lot of success with that into the existing customer base.
And so we're seeing real good good growth out of that segment.
Okay and then.
In terms of the unbranded strategy Bruce.
Yeah.
Yes that sounds interesting and I remember you had alluded to it at the analyst day, but.
Can you help us think through both the use cases, and maybe like the take rate for the unbranded opportunity.
Yeah.
Well look I think it's probably early to talk about the take rate on the branded strategy, but look for us.
We're really trying to do is be excellent in a couple of verticals.
So when we look at our verticals with the gaming vertical.
Travel and leisure.
Hospitality digital assets, we really want to be exceptional providing services in those in those verticals and that's really what we're focused on.
We think there is a tremendous amount of opportunity to leverage our platform in a different way as you know historically, we've only gone to market really is grill and net teller in a branded <unk>.
Fashion week.
Learned over the last year that we have the ability to sell an unbranded fashion within the digital asset space and we think there's other things that we can do.
As we have.
Done with Penn Interactive we've.
We've used.
Our wallet there.
We think theres opportunity to leverage other people's brands.
And do a co branded or.
White labeled version of our wallet and we think that's something that's going to catch on in and grow significantly as we move forward into 'twenty four.
Great. Thank you both.
Yeah.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Bruce for any further or closing comments.
Well. Thank you very much look I appreciate everybody joining us today I just want to thank our team.
For again, a great quarter, great effort and really appreciate.
All of the focus on improving client experience and energy around our sales transformation.
And looking forward to bringing product innovation to our clients to help them be successful as we're moving forward. So thank you very much.
Have a great day.
Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Yeah.