Paysafe Limited

Hello, and welcome to the Paysafe third quarter 2021 teleconference and webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kirsten Nielsen, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to PaySafe's third 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 reports. 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. 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 them. Today's presentation also contains 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. On today's call, I'll provide an update on the business and then turn the call over to Izzy to review the financial results and guidance in more detail. Starting with a few key messages, our third quarter adjusted EBITDA of $106 million was in line with our expectations despite revenues of $354 million coming in below our expectations for the quarter, primarily reflecting softer than expected results from digital wallets. We continue to see strong momentum across our strategic priorities that we set out at a time of going public as we grow with some of the true leading edge companies in faster growing segments of the market. In North America iGaming, we announced several customer wins in the third quarter across multiple states, and really like our position as new states and online players come online. Additionally, the Skrill wallet, while still small in the U.S., continues to show good progress. Outside of iGaming, we continue to position ourselves as a disruptive, specialized payments platform with our combination of cards processing, e-cash, wallet pay-in and pay-out, and real-time banking solutions. In particular, our pipeline across crypto, digital wallets and financial services continues to build. The U.S. acquiring business continues to perform well with solid growth, and our direct marketing vertical now shows strong signs of recovery. Lastly, we are on track to meet or beat all of our cost takeout and tech platform milestones. At the same time, we are facing challenges within the digital wallet business, which has performed below our expectations. We've identified the cause of the headwinds, both internal and external, and we're taking action to improve the core wallet and to pursue the real growth opportunities in front of us. However, with the headwinds we're seeing in our markets, coupled with a low exit rate in 2021, we believe it's going to take another year to reset the digital wallet business and get us back on a path to growth. As a result, we are lowering full-year guidance for 2021. In that context, we're also providing a preliminary update on 2022. While this is disappointing, We have a strong growth plan, exceptional talent under new divisional leaders in wallets, and the right core assets in place to reposition digital wallets for success. And when we combine wallet capabilities with our e-commerce and e-cash solutions, we are winning the deals with the leading players in fast-growing markets. Turning to slide four of the presentation. While Izzy will provide more detail on financial results and guidance, I want to share some context on what we're seeing today compared to what we discussed on our last earnings call. When we reaffirmed the outlook back in August, we'd expected a return to double-digit growth and strong margin performance in the fourth quarter. At that time, our confidence was supported by four main drivers. First was our expectation that the direct marketing headwind would start to improve in the second half. This is recovering as expected with revenue up sequentially, and continued strong growth of new merchants in the third quarter and early fourth quarter. Next, we expect a continued execution on cost savings. We've delivered $26 million year-to-date and expect to deliver $35 million in 2021, 17% higher than our original target. Third, we had signed agreements in place on large deals in our e-commerce pipeline. These are still in progress. However, the scope and timing will differ from our initial agreements. meaning volumes will be more spread out versus the ramp we initially expected in the fourth quarter. Finally, we had an expectation that digital wallets would see a soft third quarter, followed by improvements in Q4. So I mentioned the performance of digital wallets has been lower than expected in the second half of the third quarter, and we see this continuing into the fourth quarter, driven by market softness and performance challenges that are being addressed. Turning to digital wallets on slide five. I'll start by unpacking the headwinds here and specifically our current expectations relative to what we last discussed. Earlier in the year, we saw the fundamentals improving with a stronger, firm baseline following our exit of network referral accounts and solid indications that we were lapping these headwinds as we approached the second half of the year. Turning to the summer, we are seeing quiet European activity coinciding with the removal of most lockdown restrictions. This softness coupled with our expectations for a return to normal seasonality, informed our outlook for Q3 as communicated on previous calls. At that time, we expected improvement in Q4 driven by seasonal growth as well as uplift from prior marketing incentive programs. However, what we are seeing is continued market softness, particularly due to the regulatory environment in Europe. Overall, the third quarter came in below our expectations for wallets, and we see this extending into the fourth quarter. As an example, in Germany, adoption of new regulations had a more meaningful impact than we anticipated, with several operators reducing activity or leaving the market. Additionally, in the Netherlands, we're seeing a medium-term impact related to local licensing requirements. To put some numbers around this, we characterized the impact of our headwinds in 2021 as the following. First is the network impact, which is north of 20 million. We are lapping this at the end of the year. we expect this to be partially offset by growth in the core business as discussed on prior calls. However, since then, our expectations have changed. First, the softness in the European market, including the regulatory impacts, which has dampened the uplift we'd anticipated in the back half of Q3 and in Q4. These factors, combined with the impact of some counterproductive customer pricing and tiering, have brought us to a lower base of the business as we sit here today. We are actively driving changes to strengthen our core proposition, particularly in more mature markets. As you recall, we transitioned to new leadership within our digital wallets business in Q3, bringing on Chirag Patel, who brings extensive global payments experience to Paysafe. Together, we are moving quickly to reset the business and respond to the real growth opportunities and funds. Let's now go to the next level of detail on the slide six. First, what are the challenges One, we have the legacy issue of network accounts, and we are lapping those items. Two, the core wallet has to be more competitive in terms of customer user experience and in terms of pricing in more mature markets. Third, the digital wallets become too complex over time. We have to simplify the product offering, right-size the organization, and clean up the balance sheet. Lastly, we have to deliver on the bigger initiatives in front of us. Moving to the right-hand side of the page, you'll see we're taking immediate short-term and mid-term steps to address these challenges. First, we're taking actions to address customer experience and pricing to be more in line with the market. As an example, we are overpriced in certain deposit forms, which has had some counterproductive outcomes. Equally, we are underpriced in other parts of the world where we see opportunity. We have tangible actions underway and are already seeing some positive results. Additionally, We will be streamlining the organization, including rationalizing subscale product features. And finally, we are taking on actions to right-size the division as we focus on the core wallet. Turn to the midterm, we have several programs underway, and these absolutely underscore why I continue to see digital wallets as a true differentiator with the opportunity to partner with some of the most disruptive players in the market. We have an active program underway to strengthen our relationships with our top merchants, We've reset and increased our engagement with all our top clients. They're having very constructive discussions around their pain points, ways to collaborate, and ways to drive better conversion and growth. We're already seeing positive developments here, recently opening several new markets with one of our largest and oldest clients. In North America iGaming, we will continue to grow and deliver on our enhancements to the Skrill digital wallet, where the numbers are small today, but we're really pleased with the early progress, including our expansion to 11 brands, strong conversion rates, higher than market average deposit size, and great proof points with some up and coming operators. We are now capturing double digit share of their cashier. Lastly, we will continue to invest in expanding our crypto presence, where we are not only expanding in terms of our ability to trade more cryptocurrencies within the wallet, but are also seeing very tangible interest from some of the top crypto platforms due to our unique combination of card processing, real-time banking capabilities, and wallet pay-in and pay-out capabilities. Although these initiatives all drive real value next year, we expect 2022 to be a transitional year for digital wallet, followed by strong growth as we reset the division and deliver on initiatives. To summarize, while we have challenges to address, we have a strong plan, exceptional talent, and the right core assets in place to reset the business and unlock value that exists within our digital wallets. We're a leading provider of a highly functional digital wallet to a large active customer base of gamers and traders. Additionally, our pay-in and pay-out functionality across the globe continues to create excitement with some large disruptive players. That combination of capabilities continues to drive my personal excitement for our digital wallets as the most unique and highest value asset within PaySafe. Turning to slide seven, I'll now quickly touch on direct marketing. As we discussed in our last two earning calls, 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 compliance changes. So we've been in a transition period this year as the market adjusted to these new rules. The recovery is well underway and in line with our expectations. In June, net new merchants turned positive and we saw this progress continuing into the third quarter. Additionally, We expect a strong fourth quarter with net new merchants for the month of October already exceeding the levels from the entire third quarter. Overall, we're on track for direct marketing vertical to return to growth. I'll now move on to slide eight. When we look at the rest of our business across eCash and integrated processing, representing 70% of our revenues, we see continued strong momentum with high teens growth this year, as well as strong trends relative to pre-pandemic levels. Looking ahead, We expect continued normalization of the growth rates in e-cash, as well as continued double-digit growth in integrated processing. Now let me dive deeper into some of our strategic pillars. Turn to slide nine, starting with North America iGaming. We've grown revenues 50% year-to-date in North America, reflecting strong momentum as the market continues to open up. Within this growth, we're expanding relations with new and existing operators who trust, pay safe, to provide customers with all the ways they want to pay. We are now live in 19 of the 21 legal jurisdictions across the U.S., having recently launched in Arizona, Wyoming, Connecticut, as well as Louisiana, which is live for deposits ahead of a full launch expected in early 2022. We're also looking forward to upcoming launches in Maryland, Florida, and New York. We're seeing multiple operators sign up for the full suite of our payment options with several more Tier 1 operators on the way. Turning to Canada, we're building on 10 years of market leadership as the exclusive payments provider for regulated online gaming traffic. We are well positioned to be the dominant player as the Canadian market opens up to private operators, specifically in Ontario, where we have signed multiple deals with tier one operators that we expect will be the leaders in that market. It's a real testament to our deep industry relationships, our superior offering, including an acceptance rate of more than 90% and multiple acquiring options. Lastly, as mentioned earlier, we continue to advance our Skrill wallet revamp and add new brands to our pilot in the U.S. As I mentioned earlier, the volumes are small today, but we're pleased with the early results with 11 brands, strong conversion rates, higher average deposits, and achieving double-digit share with some of our earlier operators. Overall, I'm really pleased with our progress. We have a number of key announcements on the horizon, and we're really happy to have Zach Cutler on board leading this highly focused team dedicated to winning in North America at gaming. Turn to our other key digital commerce verticals. In eCash, we continue to see a lot of traction and exciting use cases across financial services. We are further expanding our network, supporting financial inclusion, enabling cash consumers to pay bills at more than 4,600 Walmart stores across the U.S. in partnership with Income. Building on some of our prior announcements, our e-cash business now partners with the largest neobanks in Europe, including Moniz, Bunk, and N26. In crypto, we continue to add cryptocurrencies available to trade in digital wallets, and we're seeing very compelling pipeline opportunities with crypto operators interested in our global risk management and pay-in and pay-out capabilities. Lastly, with our partnership with Visa, we've launched Visa Direct, further enhancing more payment options. Now, turning to slide 10, We are on track to meet or beat all of our cost takeout and tech platform milestones, which will set us up to go to 2022 with a more efficient cost position. We've been focused on migrating the business to cloud, and we've already achieved our target for 21, with 70% of our business across Paysafe now on our new tech stack from effectively 0% two years ago. We've also made strong progress in our cost savings program, taking out $26 million year-to-date, We expect to deliver $35 million for the full year ahead of our initial target. On our recent acquisitions, we're well on track with integrations, and we're enthusiastic about the interest we're seeing from both existing and prospective new clients, particularly across iGaming and crypto. While it's early days, we already have several cross-sell initiatives underway. Before I hand the call over to Izzy, I'll reiterate a few points. Our strategy remains intact. we continue to see the unique combination of payment solutions as a real differentiator, particularly in more demanding markets and with more disruptive clients, where alternate payment methods and risk management have a true premium. We're winning deals in North America. We really like our pipeline and growth opportunities in emerging verticals like crypto. We're delivering against our cost and tech milestones, and we're very happy with initial progress on our recent deals. However, there is work to do with digital wallets. but the combination of our capabilities position us well to win in the right markets with the right players. With that, I'll turn the call over to Izzy.