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Operator
Greetings and welcome to the Paysafe second quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kirsten Nielsen. Head of Investor Relations. Thank you. Please go ahead.
Kirsten Nielsen
Thank you, and good morning. Welcome to Paysafe's 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 statements 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. Today's presentation also contains certain information that will constitute non-GAAP financial measures under SEC rules. You 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 in the investor relations section of our website. With that, I'll turn the call over to Philip.
Philip McHugh
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, and two exciting and complementary acquisitions. Let me begin with the financial highlights. Payment volumes grew 41% to $32 billion in the second quarter. Reported revenues were $384 million, an increase of 16% for FORMA when excluding the pay later divestiture. On an adjusted basis, excluding the direct marketing business, PayState grew an impressive 23% compared to the prior year. Before we move on to the business update, let me summarize a few highlights up front. In North America iGaming, we recorded strong volume growth of 72% year-on-year, announced several customer wins, and began piloting our updated Skrill app with eight key merchants. Outside of iGaming, we won multiple deals in 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 and with digital wallets, online banking, and e-cash solutions as a true differentiator in the market, and we continue to see a very strong pipeline for growth. On our transformation program, we delivered $17 million of cost reduction year-to-date against a full-year goal of $30 million, with the team continuing to identify new opportunities. Additionally, we're really excited about the opportunity of two acquisitions we recently announced. Combined, Agafectivo and SafetyPay gives a market leadership position in 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 PaySafe business units. We also announced that Chirag Patel will join PaySafe next month to lead the digital wallet business. Chirag joins us from Santander Group, where he was Global Head of Payments, And prior to that, head of international payments at Amazon. Chirog brings over 20 years of industry experience, and we're really excited to welcome him aboard next month. On a final note, I mentioned a 23% adjusted revenue growth. To put 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 the relatively high take rate of the business, so we think it's helpful to provide this color. We'll cover this later in the presentation, but we're already seeing signs of a strong recovery and see this business as a tailwind in the first quarter of 2022. With that, let's move on to the strategy. PaySafe 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 to digital wallets, e-cash, and now especially with the acquisition of Toggle Effect Team and SafetyPay, open banking solutions as well. We combine this breadth of payment solutions with strong risk management and a focus in 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 markets. However, we are seeing the combination of our payment capability driving a growth pipeline in online gaming, crypto, travel, digital goods, and financial services. Finally, we continue to execute on scalable platforms and cost takeout while also beginning to execute on our inorganic growth strategy. With that said, let's turn to the North America iGaming. Starting with the market backdrop, the U.S. continues to gain traction in mobile sports betting and iGaming legislation and while we're also starting to see some strong signs of market opening in Canada. In the United States, 17 states representing about 27% of the U.S. population have gone live with some form of iGaming, and seven additional states are expected to go live over the next 12 months, collectively representing about 45% of the population. K-State is live in 15 states today. We expect to be live in Wyoming, Arizona, and Louisiana with mobile sports wagering in the coming weeks. We're also eyeing entry into Connecticut and Maryland in the fourth quarter. Collectively, this would bring our total coverage to 20 states, representing 32 of the 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 is a population of nearly 15 million, is advancing its regulatory framework for competitive iGaming and mobile sports wagering markets with expected marketing opening sometime in the first half of 2022. PaySafe has a long-standing history in Canada since 2010, where we have the leading position processing payments for all of Canada's regulated online gambling. Overall, we're seeing positive regulatory momentum and and PaySafe is clearly well-positioned as the market leader, serving more than 1,000 operators globally, and would connect just to more than 75% 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 starts with our growth. As stated earlier, we saw North America volumes grow over 70%, and revenues grew 48% in the second quarter on the back of continued momentum and new client wins. In May, PaySafe was recognized as the leading payments platform at the eGaming Review's North America Awards. In July, we announced a partnership with WinBet, 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 expanded our partnership with FoxBet, where we have integrated Skrill Digital Wallet and PaySafe cards. FoxBet is operated by Flutter Entertainment, one of the biggest global gambling operators, and PaySafe has been supporting FoxBet's flagship sister brands, PokerStars, and Betfair globally for more than a decade. Turning to Skrill product enhancements, we previewed on our last call the initiative to expand the Skrill digital wallet with a focus on VIP players and instant funding capabilities. We are now piloting with eight brands, including PlayUp, BetWildwood.com, Bet365, FoxBet, and PokerStars, among other major brands. Our product upgrade will make the depositing and payout 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'm pleased with the progress we've made implementing instant deposits and with the feedback from our clients as we build products focused on their needs. Lastly, we continue to strengthen our organizational focus and commitment to North America iGaming, and we'll be announcing some exciting talent hires from the industry in the coming weeks. Outside of iGaming, we're seeing strong growth and winning new customers in 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 PaySafe Card onto 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 22 cryptocurrencies available to trade, bringing the total to 37 cryptocurrencies in more than 80 markets and we are now live on 30 exchanges. Equally, we continue to expand payment processing capabilities in crypto and are now supporting eight exchanges with strong growth in our crypto pipeline. Finally, we're expanding our banking partnerships to further enhance our position as a global specialist acquirer that understands these market needs. In eCash, we continue to win new customers in financial services where PaySafe is becoming a meaningful player, including recent partnerships with Exeter Finance, Repay, and Intellipay, enabling merchants to accept cash payments at over 60,000 retail partner locations across the U.S. Lastly, we continue to see good traction in travel. Paysafe is uniquely positioned to meet the specific needs of travel businesses with our safeguarding solution, providing more flexible funding and lower overall payment risk to 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 of more than 200 airlines. Now turning to transformation. The playbook we implemented with Bill Foley 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 are 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 USI 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. We've been very active this quarter and announced two acquisitions, Pago Efectivo and SafetyPay, the leading e-cash and open banking solutions in Latin America. There are really three key messages I want to emphasize here. One, for Paysafe, this establishes a strategic foothold in Latin America and creates the leading open banking solution for the region. Two, both Pago Efectivo and SafetyPay serve verticals that are complementary to PaySafe in the areas where we want to grow, including iGaming, 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 e-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 welcoming these companies to the Paysafe 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 adjusts to these new compliance rules. While we're seeing some improvement in the second half of the year, The market pullback is somewhat deeper and wider than we anticipated. AZ will take you through the financials, but we are expecting a strong recovery beginning in 2022. In June, net new merchants turned positive, so we are already seeing solid signs of a turnaround. Overall, we continue to really like this business. It's specialized. It requires strong bank relationships and data monitoring. It's not easy to do, and we continue to invest in this business despite the market pullback. developing the strongest offer to support growth in the space, we see this business as a good tailwind starting early next year. With that said, I'll hand it over to Izzy.
Kirsten
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. Gross profit and expenses were right in line. Overall, 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, up 13% year-over-year, driven by growth in all segments. Excluding pay later, which was divested in October of 2020, revenue growth was 16%. As Philip mentioned, excluding the 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 presentations. Adjusted EBITDA for the quarter was $118.8 million, up 8% versus the prior year. We saw growth and margin expansion in both eCash and digital wallets, resulting in an adjusted EBITDA margin of 31% for the quarter. While there is noise in the year-over-year margin comparison, including the temporary COVID-related cost reductions in 2020, the decrease in margin compared to prior year primarily reflects business mix and integrated processing. Lastly, free cash flow was $54.6 million and 46% conversion on an adjusted EBITDA basis. The 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. Excluding 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 a long-term growth thesis of the company and of strong growth and expanding margins. On slide 14, I will quickly touch on our gap 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 $20.2 million reflecting 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 eCash. 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 of 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. Turn to slide 17. Integrated processing volume growth was strong. up 54%, reflecting continued economic improvement led by the U.S. market and growth across most of our industry verticals. Compared to Q2 2019, volumes are up more than 40% as well. Revenue 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 $50.3 million in the prior year. Adjusted EBITDA margin of approximately 24% decreased 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 as you look through the discrete items that impacted growth in the integrated processing segment for the quarter. On a performer basis and excluding the direct marketing vertical, Revenue growth is approximately 28% compared to the prior year. The direct marketing headwind meaningfully impacted margins given the relatively high take rate of the business. Adjusted EBITDA would have increased more than 30%, reflecting strong operational performance for the 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 pay safe average of 1.4%, the recent take rate compression has been entirely driven by business mix. Starting from top to bottom, eCash continues to generate a take rate slightly higher than a long-term expectation of 7%. Digital Wallets has also steadily increased its take rate as you build out functionality and expand to new markets such as FX trading and crypto trading. We anticipate long-term take rates to normalize around 1.8% for 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 show the 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 U.S. acquiring growth should moderate from these robust levels, we see strong growth continuing in e-commerce, which will further influence TakeCrate's integrated processing. Overall, 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, and our net debt to last 12 months adjusted EBITDA ratio was 4.3 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 5.3 times. We remain comfortable with this temporary increase as the deal synergies in our growth profile will allow us to de-lever quickly and meaningfully make progress in 2022 towards our target of 3.5 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 $1.53 billion to $1.55 billion and adjusted EBITDA in the range of $480 million to $495 million excluding any impact on the two acquisitions. On slide 23, we're 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. These growth metrics and margin expansion are in line with the 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 seasonality with quieter summer gaming activity in the European markets. We see a moderation of the growth rate in e-cash and digital wallets. Gross profit is expected to be between $210 to $220 million, and adjusted EBITDA between $95 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 e-commerce clients in late Q3 and early Q4, stronger growth in digital wallets, as well as sequential improvement in direct marketing. I will now turn the call back over to Philip for closing remarks.
Philip McHugh
Thanks, Izzy. In conclusion, we are really pleased with a strong second quarter. We really like the momentum we are seeing in North America iGaming. 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. And we're especially excited to welcome SafetyPay and PagaPayKey to the PaySafe family as they add additional opportunities for growth. Putting all of these pieces together, We continue to execute on our strategy in line with a long-term growth outlook for Paysafe. Thank you. Now let's open up the call for Q&A.
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you 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.
Dan Perlin
Thanks. Good morning, everyone. You know, I wanted to dive in a little bit more on the acquisitions if we could. I know, Phil, you mentioned acquisitions. strategically it's given you kind of a foothold in Latin America. You had some complementary verticals and some synergies. But, you know, 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, you know, maybe a little bit more about that strategy and what you see kind of playing out from those two in particular over the next, you know, couple of years. And then maybe if there's anything else you can provide around expectations around synergies, that would be great. Thank you.
Phil
Thanks, Dan. It's great to hear from you. Let me give you a couple on the – I'll give you a review on leverage. I'll talk about the deal basics, and then I can talk a bit about what we really like about the deal and give color on those synergies. So when we kicked off PaySafe and we started talking about our strategy, we talked about doing deals. that we would see leverage go up, and then we'd see it go back down into that kind of mid-three, kind of 3.3, 3.5 range. And that's 100% our plan. That's our outlook when we see the performance of those businesses and the performance of PaySafe overall. So we feel really comfortable on that front. In terms of the deal basics, safety pay was $441 million all-cash transaction. With Pago Efectivo, 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 have had a CAGR the past two years of about a 55% top-line growth rate. So they're very fast-growing businesses. It gives us presence in 19 markets, including 11 Latin America markets. Principal markets include Brazil, Mexico, Peru, Colombia, and Chile in terms of markets of note. Over 300 merchants. And most importantly, 90% bank coverage. So these businesses are predominantly open banking with some e-cash in them. And with a single integration, you can access 90% of the networks for open banking solutions. So that's kind of a snapshot of the deals. What do we like about the business, Dan? One, on a standalone basis, these are great businesses. They're very, very high-growth businesses. They're very successful with a very high-demand APM and open banking in Latin America. And we see these as big trends. We see open banking as a major trend. We see e-cash as a growing demand in Latin America, and we love the bank coverage. So, you know, on a standalone snapshot, we really like it. Two, you know, aside from the incredibly strong management, we really like that they're in the same sectors. They're growing in iGaming. 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 in iGaming, they want to 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 does connect globally in an important way. And then on a synergy basis, I really think about it in kind of four or five key synergies. One, there's clearly an obvious merchant cross. We have global clients where we can plug Latin America into those relationships and vice versa. They have some strong clients that can plug into North America and Europe. Two, augmenting our wallet and our gateway. When you plug in open banking, You create a really, really effective way to pay, to accept payments in a gateway, to fund and pay in and pay out on a wallet that's very competitive. Three, we really like the Pago Efectivo and SafetyPay have synergies amongst those two brands as well. So they're two competitors in the market, and this gives a really good scaled position there. And then just two last points. There's some nice treasury synergies. We put these companies together, and we also like the fact that combined with our e-cash business, we have over a million distribution points in 60 countries now. So that hopefully gives you a bit of context and color on the deal.
Dan Perlin
That's great. Thank you very much.
Operator
Thank you. Our next question is coming from George Mahola of Cowan. Please go ahead.
George Mahola
Hey, guys. Good morning, and thanks for taking my questions. I guess, firstly, Izzy, I want to make sure I understand sort of the third quarter guide. Can you maybe help us frame what the expected growth rate would be on a normalized basis, just sort of factoring out the direct marketing and obviously some of the other grow-overs? What would that have implied if we didn't have those impacts?
Kirsten
Yeah, hey, George, good to hear from you. Yeah, let's dig into that. So, obviously, you know, we're seeing the recovery in direct marketing, as both talked about. Once you take into impact of direct marketing in Q3, you're roughly about, you know, 10% to 12%, 10% to 13% in your growth and revenue. Again, you know, as I've mentioned in prior calls, prior conversations, July, August is going to be interesting. post-COVID to see what kind of activity we see. And we are seeing the seasonal quiet activity. You know, there's a traditional slate of a lack of, like, sporting events in Europe. We're seeing a lot of folks on vacation. So that's what we saw, and that's kind of what informs our Q3 guide for the most part. Does that kind of provide a little additional color there, George?
George Mahola
Yeah, that's actually exactly what – what I was looking for is just to kind of get an apple to apples, uh, uh, comparison. Um, and then if I may just, just, just two more questions, I'm curious, I quote, I think the U S volume is 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, uh, in Europe, maybe kind of post to cue how some of that reopening may be sort of, uh, um, playing in. And then last question for, for e-cash, um, Should we be assuming that, you know, growth is maybe somewhat flattish year over year in the third quarter? Appreciate the color, guys. Thank you.
Phil
So I'll grab a little bit of that, and then maybe, Izzy, you also grab onto it. So in Europe, a couple things going. So, you know, we did see kind of a post-COVID reopening. The markets really opened up after a much more stringent lockdown than certainly kind of a U.S. comparison. So that's kind of created some softness in the kind of online gambling space in the summer months, in addition to what we consider regular soft seasonality in the summer as well. So we are seeing that, one. Two, on the eCash side, it's been an incredibly strong story. We do see that 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 e-commerce business, is seeing an extremely strong pipeline of growth as we expand and build up a pipeline of new clients. So that's also creating some nice outlook for us as well. So you have a couple of things happening across Europe and kind of international markets.
Kirsten
Yeah, and just to kind of close that out as specific on e-cash, Yeah, definitely seeing that temper down. You know, we're not going to see 30-plus percent growth, but we still see a pretty strong growth year-on-year in Q3 in the business. The work that Udo's been doing and the team's been doing in terms of greater engagement with credentialized customers and the like is still driving year-on-year growth, at least in Q3. Very helpful. Thank you.
Operator
Thank you. Our next question is coming from Jason Smith. Kupferberg of Bank of America. Please go ahead.
Jason Smith
Thanks, guys. Good morning. Maybe just to build on one of George's questions a little bit more, can you maybe call out some specifics around quarter-to-date underlying acquiring volumes that you're seeing, whether it's kind of in-store versus e-coms, just in light of the variant? I know there's a lot of interest in terms of what's happening in recent weeks.
Kirsten
Yeah, so we don't have the in-store versus online handy, but we can say, like, you know, August volumes were seeing pretty consistent with July. I mean, it's slightly up to flat, so we're seeing the momentum continue for the integrated processing business, and we feel pretty good about that overall.
Phil
Yeah, we haven't noticed a dip because of the Delta variant coming through. We remain pretty positive on how the U.S. acquiring and SMB is performing.
Jason Smith
Okay, that's good to hear. So on the EBITDA margins, I think for Q3, it looks like at the midpoint, you'd be around 28%. And as you alluded to, there's 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 margin in the fourth quarter? Thanks, guys.
Kirsten
Yeah, hey, Jason, two good questions in there. So you're right, on a reported basis, the margin shrinks, but similar to what we did in Q2, we'll provide a look through on direct marketing, and you'll see the continued margin expansion. I think we can look forward to that. So, again, more details will come as part of the Q3 call. On Q4, there are three major things that we think about, right, that drive that ramp up. And, again, recognizing that there isn't a probably good comp out there from a seasonality basis. for you guys to work with. But there are three major factors. One is the traditional active gaming activity in Q4, the holidays. So digital wallets growth is pretty solid in Q4. That's one. Second, direct marketing. Sequentially, the headwinds start to abate based on the investments we're making and the market starting to recover that we see as well. The third and probably the most meaningful also is the onboarding of a pretty strong pipeline in our integrated e-commerce business. We anticipate that will continue to drive the growth and absolute revenue as well as we head into Q3 and Q4. Okay.
Jason Smith
Well, thanks for the call. I appreciate it.
Operator
Thank you. Our next question is coming from David Sagat of Evercore ISI. Please go ahead.
David Sagat
Thank you. Good morning. Could you unpack your take rate expectations for Q3 and Q4 of 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 take rate on average begin to expand again, if that in fact is part of your outlook for 2022?
Kirsten
Right. So, David, a couple of questions that I'm sure Philip will add in towards the end. So, we'll talk about 2022 when we, you know, when we have greater clarity, obviously, and the time is right. But regarding take rate, what do you call impact, if we continue to see really strong growth in the integrated processing segment and integrate e-commerce, naturally, we'll see the denominator effect, you know, lower the take rate. But as we showed in the slides, the take rate by but each of our individual businesses are staying pretty solid, right? So it really becomes more of a denominator effect on what 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, right? It's just a matter of where we see more activity or 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. Direct marketing recovery will help take rates. And then integrated e-commerce and integrated processing growth will hurt take rates. It's just a matter of the dynamics. But right now, the growth towards or the focus on absolute revenue growth has been kind of pretty good for us, and that's kind of where we're staying focused.
Phil
Yeah, I think we gave a lot of detail on the take rates. To really unpack that, we thought that was important to share and go in. In the individual business lines, we're seeing consistent take rates. So it is a mixed business. And as Izzy said, some of that e-cash slowdown, e-commerce growth, those are big mixed issues. But ultimately, the direct marketing recovery as we go into early next year, that will be a tailwind on revenue but also on take rates.
David Sagat
Understood. Would you expect e-cash take rates to sustain at the 7.3% level?
Kirsten
No, actually we expect it to come down a little bit, you know, towards, we always plan towards the target of 7%. The last couple of quarters have been higher as there's just seen some additional fees come through. But David, I think 7% is kind of where we kind of want to plan for on a medium to long-term basis.
David Sagat
Understood. Thank you very much.
Operator
Thank you. Our next question is coming from Jamie Friedman of Susquehanna. Please go ahead.
Jamie Friedman
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 9th Analyst Day guidance on page 37, out three years. Does that, you know, 2023, are you still comfortable directionally with that?
Kirsten
Directionally, absolutely. Jamie, as we talked about a long-term thesis, right, and I think it's showing through in our kind of adjusted results as we've taken out direct market and pay later results. that mid- to low-teens revenue growth, high-teens EBITDA growth. It's definitely coming through as you work through this transitional period with direct marketing. So, yeah, and that's what our long-term outlook also showed, that range. So, yeah, so far today, we're pretty comfortable with the overall outlook.
Jamie Friedman
And then, Philip, in your prepared remarks, and I don't have it exactly, I apologize, but 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 what, if you can unpack that a little bit relative to what you thought, that would be helpful.
Phil
Yeah, hi, this is, I'll take that one, Jamie. Yeah, 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. We talked about a $10 million impact in the first quarter, and we said that it would take until Q1 2022 to lap the issue. So that should give you a sense of size and scope here. 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 have also adjusted. So there's been some slight pullback in direct marketing investments as the market kind of adjusts back. So that's what we're seeing. So we're seeing just slightly, some slight pulldown across the market, not just for us. But, you know, we talked 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 and go back into the market. There's talk about programs coming back on it at a much higher volume. And, look, we've got the strongest risk management, a 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 that partner when this business turns around. 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.
Jamie Friedman
Got it. Thanks for the call.
Operator
Thank you. Our next question is coming from Dallin Tellar of Wolf Research. Please go ahead.
Darren
Hey, guys. You know, I want to hone in on the digital wallet growth rate potential for a minute. 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 on digital wallet long term. And that encompasses both the digital wallet side and the digitization of e-cash as well. But when we think about first just the 7% and bridging that, whether it's anniversary and the referral partners or all the 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 those steps to get from 7% to potentially low to mid teens or something along those lines?
Phil
Hey, Darren. Great question as always. So, yeah, no, obviously, you know, again, in the first quarter, we talked about exiting some of those network accounts and some specific markets About a $20 million headwind in the first quarter is what we kind of talked about. We're still seeing some of those impacts in the second, 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 the long-term thesis, we really think about three things. One is just that core customer growth as we lap some of these legacy issues and you get back to some good, strong, and steady growth. Two is obviously U.S. and Canada are two markets that are opening up. And in fact, I'd throw in Latin America as an area where iGaming is growing. We do have some good positions there, some good customer bases. So we see the geographic pieces creating some nice lift. And the third one is really crypto. We really do like this business. We see it more and more as becoming a major payment rail over time. We see it very similar to where iGaming was, let's say, 10 years ago. And so we like that positioning. The digital wallets is very well positioned there as driving signups. So those are really the three big factors. When I do the math, it goes back to kind of consistent 15-plus percent growth.
Kirsten
Yeah, and Darren, I think you'll see it on two other aspects. In Q3, we start seeing that seasonal growth. quieter activity just because there are fewer games. But Q4 is when we expect, you know, the full kind of good comparison to start showing up where you start seeing the double-digit growth in digital wallets revenue.
Darren
And just timing on that would be what, next year in your views or in 22?
Phil
We'll start to see a good Q4 with some initial double-digit. And then in 2022, we'll start to see some more consistent growth.
Darren
Okay. And then, thanks, Phillip. Just quickly on the overall guidance, just how should we think about volume guidance for the year, just given the moving parts and all the different, you know, puts and takes? I think you had previously said about $100 to $110 billion for the full year. And then just to, Izzy, if we could just finalize on the guidance for Q3, we're still getting investor questions on the puts and takes there in terms of just making sure we have it straight, because it seems like if you incorporate somewhat around mid-teens growth in terms of merchant or even high single digit in the wallet side, the digital side, you know, it's hard to get to numbers where you're guiding. It just seems pretty conservative unless we're missing something. So just maybe remind us of all the, any element of conservatism in the outlook that you're putting in there, just how, if we're missing anything. Thanks again, guys.
Kirsten
Sure. So a couple of things. One is on the volume side for, I'll just talk about the full year, Yeah, our volumes are going to come in meaningfully higher. We think probably closer to $130 to $140 billion, actually, for the full year. But again, that's just depending on how quickly or how fast the integrated processing really grows. But it's definitely higher than what we thought earlier in the year. That's one. Regardless of puts and takes on Q3, and just digging into that, Darren, a little bit more, E-cash, obviously, we expect in the, I would say, up 8% to 10% year-on-year. We see integrated processing also, and this includes everything about 10% to 15% on integrated processing. Digital wallets year-on-year in Q3 will be a little weaker. Again, it's just a challenging comp because Q3 2020 is really had a bunch of sporting events and lockdowns in Europe, and Q3 this year is effectively, you know, going to be very quiet seasonally and as expected. So Q3 year-over-year comms basically is a decrease likely in revenue, you know, effectively just slightly lower than Q2. Okay. Thanks, guys.
Operator
Thank you. Our next question is coming from Josh Levin of Autonomous Research. Please go ahead.
Josh Levin
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 or at your analyst presentation back in March, I remember the growth story here really being about seizing the U.S. iGaming opportunity. So the LATAM expansion strikes me as a bit of a change in strategy Is that accurate? And if so, what has caused your thinking on LACAM to evolve? And I guess the follow-up would be, how would you describe or what would be PACE's competitive advantage in Latin America? Thank you.
Phil
Thanks, Josh. I wouldn't call it a change of strategy at all. We talked very clearly about three buckets, right? We talked about winning in iGaming. We talked about... expanding in deep verticals either through APMs or through gateways. Those were kind of the buckets of investments we talked about very consistently throughout. We still really like the USI Gaming. We are investing there. If we see the right deal for USI Gaming, we would be clearly an interested player there. So that doesn't change our strategy at all. What we really liked about SafetyPay and PagoFactivo is kind of what I talked about earlier. One, when I look at the APNs, we do credit and debit card processing. We provide digital wallets to have great pay-in, pay-out capabilities. We offer e-cash. And more and more we see open banking and crypto as incredibly important payment rails. And when you do this, you're really completing all of the payment options for a merchant to grow. We see this in iGaming. We see this in a lot of our emerging verticals. So as we started to look at the deals, we got closer and closer. We really started to get more excited about it. It started initially, you know, there's an e-cash cross-sell. That's a nice play. But more and more, the verticals they're in, they're in iGaming. The clients that I have in Europe, that we have in the U.S., they have LATAM strategies. We can provide that now. So it's 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 there's lots of common 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 into other emerging markets is strategically very important. It definitely complements our iGaming position. it definitely complements our kind of emerging vertical position as well. So those are the real drivers that we really like from a strategic point of view.
Josh Levin
Thank you.
Operator
Thank you. Our next question is coming from Timothy Chiodo of Credit Suisse. Please go ahead.
Timothy Chiodo
Thanks a lot, and echo Jamie's comments there on the slide. Slide 20 is pretty helpful. I appreciate that. I'll 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 want to drill in a little bit more. Relative to when you last reiterated the full-year guidance at the last earnings call, how has your take on the mix between Q3 and Q4 shifted? In other words, is this roughly the seasonality that you would have expected, or is 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?
Kirsten
Yeah. Hey, Tim, great question. And you're right, if you recall, you know, we did talk about seeing how July, August kind of play out, right, in terms of if it's going to be anywhere close to 2020 or seasonally quieter compared to prior years. So this is always kind of where our expectation was. If post-COVID recovery comes through, we'll see obviously quieter activity in Europe, which we're seeing, and then a robust rebound in Q4. So relative to how we're planning and thinking about it, historically how we've seen the gaming activity, this is kind of where we thought it would play out. And to your second point in terms of a exit rate in Q4, yeah, we feel pretty confident about that. Granted, there is going to be some seasonality that drives it, but overall, given the recovery in direct marketing and the real strong pipeline in our integrated e-commerce business gives us a pretty good confidence walking into Q4.
Timothy Chiodo
Okay, great. Thank you, Izzy. The follow-up is on slide 20 on the integrated e-commerce segment, the take right there, and the 50 to 60 basis points range. Could you just recap for us again the reasons why that it'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 large merchant mix? Is there something with the verticals? Just a little more context on why that e-commerce take rate is a little bit lower than U.S. acquiring.
Phil
Yeah, I'll take that one. I think it's really important to call out. So the U.S. is a scaled, very scaled U.S. S&B player, right? So we're dealing with a smaller end of merchants and with a mix of card present, card not present. So 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, right? It's 100% digital. There is no card present business here. So that's the profile of clients. So You know, it's iGaming clients, it's video gaming, it is crypto trading clients, it's travel. That's the type of sectors that we're looking at. We can process in multiple markets. The mix of our gateway with single API, plugging in e-cash and digital wallets and other APMs, 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're international 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 an 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.
Timothy Chiodo
Thank you, Phillip. As a quick follow-up, though, within that, though, is there – could you – Can you give a rough sense of what portion of that is gateway only versus the portion that's taking acquiring risk?
Phil
It's a good question. I don't have that to hand. We can follow up with you on that exact split. It's going to be a fairly significant portion we'll have acquiring on it, but I don't have the exact split to hand. So we can follow up with you to give you that breakdown.
Timothy Chiodo
Okay. Appreciate that. Thanks for taking those questions.
Operator
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.
Phil
Thanks. Thanks, everyone, for the questions. We look forward to plenty of follow-up calls and conversations. I'll wrap it up with the following. We really like what's happening in Q2 and the execution and the numbers. We're particularly excited about delivering in iGaming and being the de facto winner in the U.S. market We really like 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 it 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 I look forward to continue to tell that story. Thanks, everybody.
Operator
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.
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