Paysafe Limited

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.

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.

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.