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spk06: Hello, and welcome to the Paysafe fourth quarter and full year 2021 earnings call 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.
spk00: Thank you, and good morning. Welcome to Paysafe's fourth 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, 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 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.
spk11: Thanks, Kirsten, and thanks, everyone, for joining. I'll begin with an update on the business and then turn the call over to Izzy to review the financial results and guidance. Starting with a few key messages, our fourth quarter revenue of $372 million and adjusted EBITDA of $105.5 million both exceeded the high end of our revised guidance range for the quarter. The turnaround of our digital wallet business is well underway, with the team taking decisive action to improve the core wallet, reduce costs, and deliver on our growth opportunities. I'll share more on this in a moment, but we're seeing good signs of early progress. Across our broader digital commerce strategy, we're winning exciting deals with our new partnership with Binance, initially launching a newly developed white label wallet solution. In iGaming, we launched in new states, including New York, and announced new partnerships, including Hard Rock and Bollies. Overall, our digital commerce pipeline continues to grow and reflect merchants plugging into Paysafe to access full end-to-end solutions across card processing, digital wallets, e-cash, and real-time banking. So more and more, we are selling our solutions as a single competitive offering. In our U.S. acquiring business, we continue to see solid growth in the U.S. S&B market, and our direct marketing vertical is recovering in line with our expectations. On our cost savings program, we delivered $40 million in savings in 2021, ahead of our initial target of $30 million, and have plans for incremental savings in 2022. Lastly, on our third quarter earnings call, we provided a preliminary outlook for 2022 based on the headwinds we were seeing in Europe, coupled with our expectations for a reset of our digital wallet business. Based on our progress to date and current expectations, we are confident in maintaining that outlook. Turning to digital wallets on slide four. On our last earnings call, we unpacked the market headwinds and challenges in digital wallets and the actions we were taking to reposition the business for long-term success. First, we said the core wallet needs to be more competitive in terms of customer user experience, in terms of pricing of mature markets. Second, the digital wallet business had become too complex over time, and we needed to refocus on our core product features and right size of division. Finally, we talked about midterm initiatives to strengthen our relationships with our top merchants and to deliver on the bigger growth opportunities in front of us. Our team acted quickly, making tough decisions, and the results are starting to show. Starting with the short-term initiatives, our actions to optimize pricing and improve user experience are delivering some positive early data points. particularly in regions where we have implemented changes. Across 19 targeted countries in Europe, we saw monthly bank deposits increase more than 50%, and total deposits increased more than 10% by implementing the changes from October to February. Additionally, we completed a right-sizing of the organization in Q4, improving our cost position and focusing the organization on our core products. Turning to the midterm priorities, two main things to highlight here. First, in North America, our Skrill digital wallet continues to progress with strong proof points, including volumes tripling from Q3 to Q4. And now we're ready to drive increased awareness for the launch of a marketing campaign with Barstool Sports, one of the biggest U.S. sports betting focused and social content producers in the world. Second, we continue to expand our crypto presence, where in addition to our new partnership with Binance, we have a strong pipeline of other crypto platforms as our unique combination of card processing, open banking, wallet pay-in, pay-out capabilities continue to generate excitement with new and existing clients. To summarize, we're making strong progress in the turnaround of digital wallets. We're winning very competitive deals and remain very excited about the business. Our expectations for 2022 as a transitional year remain largely the same, with the actions we are taking now enabling us to absorb market risks in Europe. We'll continue to keep you posted and updated on our progress. Now turning to slide five, I'll now take a moment to highlight our differentiated offering and why we win in digital commerce. First is ease of connectivity through a single API. Basically, we're easy to plug into. Second is more ways to pay in addition to traditional card processing. We have a scaled global gateway. We provide powerful pay-in and pay-out capabilities through our digital wallets. We digitize cash, and we offer real-time bank payment rails, along with 100-plus APMs. Third, we have very deep risk and regulatory management capabilities, along with deep bank relationships, which help us to service, specialize, and demanding verticals. Lastly, we are focused on specific industries, including iGaming, crypto, digital goods, financial services, and travel. This combination of our single API and multiple payment types, risk management and industry focus is a combination we're really focused on in terms of driving growth going forward. So let's bring this to life on the next slide. We've been very active in crypto, and now we're starting to work with crypto exchanges in a more holistic way. More importantly, we see the combination of crypto, NFTs, and the fast-emerging Web 3.0 as a major trend, unleashing a new generation of digital entrepreneurs as well as creating new ways for people to buy and sell in a virtual environment. PaySafe is uniquely positioned to support the full end-to-end product needs, demanding growth requirements, and complex risk and regulatory challenges in the space. We're excited to partner with Binance, the largest crypto exchange in the world, to help their business grow in the right way, leveraging the depth and breadth of our payment offering. We're starting off with an embedded finance solution in Europe and the U.K., where Binance is leveraging our wallet platform effectively as a white-label wallet, allowing pay-in and pay-out capabilities with their own app, real-time banking, and the ability to plug into other payment types. This will be phased rollout on a country-by-country basis. We're taking a steady approach, but we're excited about the long-term potential and expansion of services, which should develop into a large relationship over time. Additionally, we're seeing strong interest from other cryptocurrency exchanges, as well as large e-commerce organizations. So we really like the emerging pipeline. Again, it's a great example of what our teams can do when we bring our products together as a single solution. Turn to another key vertical for Paysafe North America iGaming. In 2021, we saw strong growth in North America, including 58% volume growth year-on-year, driven by expansion in new states and continued growth in existing states. We are now live in 21 out of 22 legal jurisdictions across the U.S. that allow some form of iGaming, including all seven states that enacted legislations during 2021. In 2022, we're off to a strong start, having launched in New York with four operators, Caesars, DraftKings, PointsBet, and WinBet. We also went live in Oregon with DraftKings and in Louisiana with multiple operators. In addition to expanding our relationship with existing clients, we announced new customer wins strengthening our position as a leader in North America iGaming payments. Last week, we announced a multi-state partnership with Bollies, starting off in Arizona and New Jersey, with plans to expand into more states over time. We also announced a new partnership with Hard Rock Digital to support its iGaming and sports betting brands with payment solutions in New Jersey, which is a really nice competitive takeaway. We're excited about the breadth of PaySafe solutions, that we can offer HardRock both in existing and future markets. Turning to Canada, Ontario will launch its long-awaited iGaming market for private operators on April 4th. With a population of 15 million, Ontario will be the fifth largest North American jurisdiction. We look forward to launching in Ontario where we've signed multiple deals with Tier 1 operators, building on 10 years of market leadership with the provincial lotteries, delivering the full stack of processing, and local APMs with market-leading acceptance rates. Lastly, as I mentioned earlier, we continue to advance our Skrill wallet revamp in the U.S. and are very happy with early results. Although the initial baseline remains small, volumes are growing very fast. We are seeing repeat VIP users. We now represent a material share of the cashier with some of our pilot customers. As a next step in our expansion, we have signed an exciting deal with Barstool Sports to promote the Skrill brand in the U.S., utilizing a variety of Barstool's most popular media assets. We're excited to be a unique payments partner with Barstool and see great synergies between their incredible customer base and the Skrill value proposition to make sports betting fun and engaging. Now turning to U.S. acquiring on slide eight, we continue to see solid growth in the U.S. S&B market, including 20% year-on-year revenue growth in the fourth quarter and 15% growth compared to 2019. PaySafe is a scaled US small and medium business player, serving approximately 200,000 merchants with a strong mix of card-present and card-not-present solutions. We focus on a single platform for onboarding with multiple processing options, enabled by multiple sales channels, including direct internal sales, ISO partnerships, and ISV integrations. The team has done a great job executing against their plan, focused on automation and self-service capabilities, cost management, and very strong customer service. Lastly, our direct marketing vertical is recovering in line with our expectations, and we continue to be uniquely positioned to service the market with a strong capability set. Now turning to slide nine, we've delivered very well against our cost program, taking out more than $40 million of repeatable costs in 2021, and we're targeting an additional $20 million in 2022. We made a lot of progress last year consolidating our tech platforms, migrating to cloud, upgrading our bank relationships, and further improving our risk management capabilities. We will continue to benefit from these upgrades in 2022 while also delivering our new cost opportunities. On our recent acquisitions, we are well on track with integrations. As an example, in the fourth quarter, we completed our product integration with Pago Efectivo and are currently live in Latin America with about 20 of Paysafe's global clients So the team is executing at a fast pace there. Safety Pay closed at the end of January, which is about a month later than we planned for, but our product integration plans are well underway, including our global real-time banking initiative. Overall, we remain enthusiastic about the interest we're seeing from both existing and prospective clients, particularly across iGaming and crypto. With that, I'll turn the call over to Izzy.
spk10: Thank you, Philip. Before we dive into our financial performance, let's briefly review our segment realignment on slide 10. As Philip mentioned, our dialogue with impactful clients in iGaming and emerging verticals such as crypto require us to provide a full set of payment options to support the global growth ambitions. The conversations have transitioned from specific product solutions to end-to-end payment solutions, from local solutions to capabilities that are available in multiple markets in multiple countries. Additionally, with increased regulations, having a single and at times global partner has become more critical to allow our customers to grow efficiently and react to market changes. Thus, it makes sense to realign our segments to better reflect the evolving landscape. The digital commerce segment, which combines our digital wallet, e-cash, and integrated e-commerce businesses, is 100% online, global, and focused on the core verticals that we serve. Additionally, in this segment, we are presenting holistic pricing solutions and becoming more agnostic with respect to which product generates the revenue, as long as we enable our customers to grow, and thus we grow with them. The U.S. acquiring segment is predominantly focused on our U.S.-based card present customers in the SMB space. Approximately 35% of the transactions are e-commerce. In terms of performance, in 2021, Digital commerce had volumes of $44 billion, revenues of $837 million, or 56% of our total revenue, and adjusted EBITDA margins of 42%. Growth in e-cash and integrated e-commerce solutions offset the decline in our digital wallets business. In 2021, U.S. acquiring had volumes of $78 billion, revenues of $650 million, or 44% of our total revenue, and adjusted EBITDA margins of 26%. As we go through the business results in the next slide, I will focus on our prior segment structure for consistency with the prior quarters of 2021. You can also find historical quarterly results for the new structure in the appendix as well. Moving to slide 11 for a summary of our performance versus our guidance. Revenue came in higher than our guidance range primarily due to stronger digital wallet and e-cash performance, which benefited gross profit relative to our expectations. Adjusted EBITDA was also higher than our guidance range because of gross profit outperformance, as well as reduction in our credit reserve in Q4. Turning to page 12 for a summary of the Q4 results. Volume was $31.5 billion, an increase of 20% year-over-year, as strong growth in integrated processing more than offset the decline in digital wallet. Total revenue for the fourth quarter was $372 million, flat compared to Q4 2020, as growth from U.S. acquiring integrated e-commerce and the acquisitions was offset by declines from e-cash, digital wallet, and the direct marketing vertical. Adjusted EBITDA for the quarter was 105.5 million, up 11% versus the prior year, resulting in adjusted EBITDA margin of 28.4% and 260 basis points higher than last year. This was primarily driven by lower credit and SG&A expenses. Lastly, free cash flow was $53 million of 50% conversion on an adjusted EBITDA basis. In Q4, the free cash flow conversion was lowered due to payment of cash taxes and increase in accounts receivable. Quarterly free cash flow conversion can fluctuate meaningfully. For example, our Q1 free cash flow conversion was over 95%, and it is best evaluated on a trailing 12-month basis. Now, turning to page 13 for a summary of the full year 2021 results. Volumes were $122.4 billion, up 22% with growth in integrated processing and e-cash, more than offsetting a decline in digital wallets. Total revenue for the year was $1.49 billion, up 4% versus 2020, and up 6% if you exclude the pay later divestiture. Adjusted EBITDA for the year was $444 million, up 4% versus prior year, and up 5% excluding pay later. Adjusted EBITDA margin was approximately 30% and flat compared to last year. Growth in adjusted EBITDA was primarily driven by strong e-cash performance and integrated processing performance and strong cost discipline. Lastly, free cash flow was $286 million or 65% conversion on an adjusted EBITDA basis. Free cash flow conversion was slightly below our expected range of 70% to 80%. For 2022, we expect our free cash flow conversion to be between 50% to 70% on a trailing 12-month basis, primarily driven by the expectation of higher cash tax payments and higher working capital needs as our acquiring business continues to exhibit strong growth. On slide 14, I'll quickly touch on a few additional line items, including our GAAP results. Interest expense was $21.5 million and 48% lower driven by lower overall debt levels and lower spreads from our refinancing earlier in the year. For Q4, our net income was $90.3 million, including a gain on the remeasurement of warrant liability, compared to a net loss of $3.4 million last year. Our tax rate for the quarter was 24.8% and 43.6% for the full year, which is higher than our effective tax rate of 31.8% last year, primarily as a result of non-taxable gains on the warrants. Ignoring discrete items and gains and losses in the warrants, we estimate our effective tax rate will range between 23% to 26%. Also, our interest expense will increase to roughly $25 million per quarter this year as a result of the December closing of our debt raise to fund the acquisition of safety pay. Moving to slide 15 now for a discussion of the business results. Starting with eCash, volumes are $1.6 billion. up 9% in Q4 compared to last year, and $5.8 billion for the full year, up 26%. eCash revenue for the fourth quarter was $99.2 million, a decrease of 6% compared to prior year, which is a particularly tough comparable. Q4 results also reflect regulatory impacts in Germany and the Netherlands, which is partly offset by the inorganic contribution from the acquisitions. For the full year, revenue was $406 million, up 22%, or approximately 18% excluding the two acquisitions that closed in 2021. Adjusted EBITDA for the fourth quarter was $37.6 million, an increase in 8%, resulting in adjusted EBITDA margin of approximately 38%. For the full year, adjusted EBITDA was $165 million, an increase of 42%, with an adjusted EBITDA margin of 40.6%. Overall, a strong year for e-cash business that benefited from strong adoption of the product, partly supported by extended COVID-19 lockdowns in Europe, and we're seeing a moderation of that as expected. Moving to digital wallets in slide 16, falling to $3.9 billion and down 19% year-over-year, and $70.2 billion for the full year, down 16%. Revenue in the digital wallet segment for the fourth quarter was $87.9 million, a decrease of 9% compared to the prior year. The revenue decline, which was expected, was driven primarily by regulatory changes in Europe. Revenue for the full year was $363.8 million and down 8%. Take rates remained above 2%, reflecting the mix of activity within the Wallet's customer base. Adjusted EBITDA was $42.4 million in the fourth quarter and up 16%, which benefited from lower credit losses relative to the prior year. For the full year, adjusted EBITDA was $167 million and down 7% for the year. As Philip discussed earlier, the turnaround of our digital wallets business is underway, and over the last few months, we're seeing progress and net deposits into customer accounts remain positive. In Q4, we also saw softer volume in financial markets trading. Moving to slide 17, integrated processing volume increased 30% year-on-year to $26.1 billion, led by the U.S. market, and up 37% compared to Q4 2019. For the full year, volumes are $100 billion, up 32% year-on-year, reflecting increased volume across most of our industry verticals, and up 36% versus 2019. Revenue for the fourth quarter was $190.3 million, an increase of 9% compared to the prior year. For the full year, revenue was $745 million, up 4%. Excluding the pay later business, revenue increased 7% as growth from our U.S. acquiring and e-commerce merchants was offset by lower revenue from our direct marketing channel. Take rate was 70 basis points in Q4 as expected, lower than Q4 2020, primarily due to mix within our integrated processing business. Adjusted EBITDA increased 8% to 51.8 million, and adjusted EBITDA margin was 27.2% comparable to the prior year. For the full year, adjusted EBITDA was $187 million and down 8%, primarily due to the decline in our direct marketing business. Moving to slide 18, I will review the components of our consolidated take rate, which continue to be driven by business mix and have been consistent over time within our business segments. eCash continues to generate a take rate over 7%, excluding the impact of the acquisitions, which have a lower take rate than the organic eCash business. Digital Wallets has steadily increased its take rate as we expand into new verticals and expect it to hold steady in the near term. As our embedded finance relationships expand, we expect our take rate to decline towards more historical levels as the year progresses. Finally, the take rate in our integrated processing segment has decreased over the last few quarters from 1% to 70 basis points turned primarily by business mix. In 2022, we expect the take rate to increase back to 80 basis points as the direct marketing channel recovers. And as you can see from the pie charts at the bottom of the page, the meaningful growth or share of integrated processing volume is driving the overall take rate for the company lower. Now let's turn to slide 19 to look at our balance sheet and liquidity. Cash and cash equivalents were $702 million at year end, which is higher than normal as we had not closed under the safety pay transaction by year end. but we had received the cash. Total debt outstanding was 2.7 billion as of December 31st. Net debt was 2 billion, and our net debt to last 12 months adjusted EBITDA ratio was 4.6 times at the end of 2021. Adjusting for the safety pay acquisition, which closed on January 31st, our pro forma net leverage would have been 5.5 times if we had closed the transaction on December 31st. Our primary use of excess cash Looking forward is to pay down our debt and start moving towards our target of 3.5 times adjusted EBITDA. Now let's move to slide 20 to discuss our guidance. Since our last call in November, we have had a delay in the closing of safety pay, unfavorable movement in the Euro-USD exchange rate, and the economic uncertainty driven by the war in Ukraine. However, we remain confident in our maintaining our full-year outlook. For the full year, on a reported basis, We expect revenues between $1.53 and $1.58 billion. U.S. acquiring revenues expected to grow high single digits to low double digits with 300 basis points EBITDA margin improvement. Digital commerce revenues expect to be flat to up low single digits, and EBITDA margins are expected to decline approximately 400 basis points. For the total company, adjusted EBITDA is expected to be between $440 million and $460 million. For Q1, we expect revenue in the range of $355 million to $365 million, and adjusted EBITDA in the range of $95 to $100 million, in line with the preliminary view we provided on the third quarter earnings call, despite the delay in closing safety pay and the adverse movement in exchange rates. We expect mid-single-digit growth in use acquiring, offset by high single-digit decline in digital commerce, by year-over-year adverse FX movements and the impact of gambling regulations in Europe as expected. We also expect growth and margin to improve in the second half of the year as we start to lap the impact of some of the regular changes in Europe and see the turnaround in digital wallets. With that, I'll turn the call back to Philip for closing remarks.
spk11: Thanks, Izzy. Before we wrap up and take your questions, I'll take a moment to address this morning's board announcements. As you saw in our press release, Bill Foley has decided to step down from the board to focus on other commitments. I'd like to thank Bill for the leadership and vision he has brought to Paysafe throughout his time as our chairman, as well as his belief in Paysafe, including the recent reinvestments from Kenai. It's been a privilege working with Bill. I look forward to staying in touch with him as one of Paysafe's major shareholders. As part of this announcement, we welcome Dan Henson as Paysafe's new chairman. Dan currently serves on the board of Alight alongside Bill, and he brings decades of relevant expertise across capital markets, financial services, and technology. I've had the opportunity to spend a lot of time with Dan over the last few weeks, and I'm really excited about what he can bring to PaySafe. To quickly summarize, we're really pleased with our Q4 results and our progress on the turnaround in digital wallet. The actions we've taken are driving positive early results. We position the business for success and are allowing us to absorb market risks in Europe. As we continue to improve those fundamentals and return to growth, We also continue to win and pursue exciting deals in high growth verticals with some of the most disruptive and emerging companies in the world. We remain extremely focused on executing on both fronts, positioning Paysafe for strong growth in the future. And just to end, I'd like to personally say that the last several months have been challenging for Paysafe. I'd like to truly thank the team for their energy, their hard work, their customer focus, and really their will to win. We see what we're capable of. We're excited about the direction we're going, and that's the energy we have at the company. With that said, I'll turn it over for the Q&A session. Thanks a lot.
spk06: Thank you. And I'll be conducting your question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Dan Perlin from RBC Capital Markets. Your line is now live.
spk02: Thanks. Good morning, and good to see things starting to turn back around here. I wanted to revisit, Izzy, if you could just talk about the cash flow conversion dynamics. Again, I know you mentioned it on the fourth quarter numbers. I'm just trying to make sure I understand the specific drivers as to why you'll be able to drive that improvement in FY22 in as much detail as you're willing to share. Thanks.
spk10: Yeah, sure. Thanks for the question. For full year 22, let me rephrase by saying, reframe, for 2021 as a whole, our free cash flow conversion is roughly 65%. And in 2022, we expect about the same. Fluctuations you see more is around the quarterly, be it in a month and in terms of our receivables or in terms of when cash taxes do get paid. But overall, year on year, we expect that cash flow conversion to stay flat. I think the other nuance that I raised is that it's lower than what we set between 7% to 80%, so around 65%. Again, it's driven by the growth in our U.S. acquiring business, which we're pretty happy about. And just in terms of generating more income in jurisdictions, that we don't have offsets again, so our cash taxes are going up. But overall, it's still a pretty strong cash flow conversion rate for the company. Got it. Okay.
spk02: And then, Phil, can you talk a little bit about maybe some of the competitive dynamics that you've seen? I mean, you did a lot of changes during the quarter. I'm specifically thinking here maybe some of the success that you've had in iGaming. I know a lot of other companies that we cover are trying to push into that environment as well. So I'm just wondering maybe what you're seeing – specifically in that area. And then if you could maybe also speak to some of the specific things around the Skrill revamp. I mean, it sounds like volumes, albeit smaller, are really accelerating here. So I just want to make sure I understand directionally how that's being positioned in the States. Thank you.
spk11: Sure. Sure, Dan. It's good to hear from you. So yeah, look, the questions surround mainly kind of our actions in North America iGaming. So It's definitely a very competitive space. But as we said, look, we're live in 21 states. All seven states that went live in 2021, we were there on day one, right? So the first thing is being fast, being ready, being ahead of the curve. The second piece is we are offering one of the most holistic capabilities. Again, it's a single plug-in. You get a full set of APIs. It's not only card processing with good acceptance rates. You can get kind of instant bank payments. You can get multiple APMs, and we'll be expanding that as well so that really all the major form types and wallets that a consumer wants to use can be used with our gateway. And you can't underestimate also the market expansion of You know, Canada's growing very rapidly. We have the highest acceptance rates there. We're a full end-to-end gateway and processor. And it's the same integration. So, you know, what we're seeing is that the product is the broadest set. That's good. Our relationships are incredibly deep. You know, as we said last year, we brought on Zach Cutler. He's an incredibly well-known person in the industry. He was a former operator, so he knows what's needed. And that does change our relationship. It changes what we're solving for. But we're even seeing some players, some operators that had direct acquiring integrations actually coming back to us because with our gateway, we can give them Canada and the United States. We're live in markets on day one. We can plug in multiple APMs from interacting Canada to merging wallets in the United States. So all of this comes together, Dan, and makes us very competitive. The second piece, obviously, is we can bring things like eCash and like our Skrill wallet that can create different, you know, differentiated opportunities. We talked about, you know, that was an important factor in our win with Hard Rock. It's an important factor with our win with Bollies. And with the Skrill product in particular, you know, we've been talking about it for a while that we revamped the product. We said we were very, very focused on the VIP customer, which we felt was a serious gap in the market. And personally, Dan, I've gone with Zach on several calls to clients, and we've talked about the offer, about the digital wallet being focused on VIPs, large ticket, instant funding capability, and also we indemnify a lot of risk and loss for them. So we're not only solving a customer issue, Frankly, we're solving a huge headache that a lot of these operators have. So it's really resonated well with them. So that's one. Two, we're coming now with proof points, right? We've been piloting the product. We can show to some smaller operators that we're at 15% to 20% of the cashier. As VIPs or repeat users, they're betting more. They're betting in large amounts more and more on that platform. So we actually have data and proof. that we can show to the more of the tier one operators. And of course, now we're going to start marketing the product. You know, we'll be an exclusive partner, a payment partner with Barstool. And that's an incredibly engaging, active, fast-growing consumer base, incredibly relevant to the industry. And so we're excited to take the product to the next level, get some advertising. And then, of course, our focus is to... to get more Tier 1 operators signed up, and that's a goal of the team for 2022. That's great. Thank you so much.
spk06: Thank you. Next question is from George Mahalos from Cowan. Your line is now live.
spk12: Hey, guys. Let me add my congrats on the fourth quarter results. Nice to see that momentum. I guess to kick things off first, if we can just look at the 22 guide that you reiterated earlier, Phil and Izzy, you talked about several additional headwinds, FX obviously being one, some geopolitical uncertainty, acquisition closing a little bit later than what you expected, yet you kept the guide there. So I'm curious, what in the business feels better to you? What do you think will outperform relative to those initial expectations? And maybe you could also size for us again what you expect inorganic contribution to be for 22 now.
spk10: Hey, George, great to hear from you. Let me hit the second one first, kind of knock it out of the way. We're still, as you mentioned last year, about $60 million in revenue and $20 million EBITDA, probably performing a little better, but that's kind of where we think the inorganic contribution is. To your point, let's just walk through the steps from last November's call, right? We laid out the outlook back in November of the revenue growth and the $444 and $60 million EBITDA. This is what we're seeing. We're seeing the momentum in U.S. acquiring retail, e-cash, North America iGaming, and integrating e-commerce solutions. Strong, continued momentum as expected. We're executing. The recovery in direct marketing, that's coming through. And we're starting to see the green shoots of stabilization and the transition in digital wallets. We're not, you know, running victory laps yet, but we're seeing the positive proof points around deposits coming into the consumer wallets. The headwinds, partly because of the geopolitical crisis that we're seeing, the dollar strengthened meaningfully since last November, right? And then the other thing that has come up is that if there's further impacts on Russia and Ukraine, we have an exposure on an annualized basis, about 20 million revenue. But even with that being said, we feel there's enough amendment items I mentioned and our execution for us to stay within and confident with our guidance that we laid out in November.
spk12: Okay, that's great, and I appreciate that color on Russia and Ukraine because that was going to be the next question. Maybe just a quick follow-up on the regulatory side in Europe. You cited Germany, Netherlands. Are there any other countries, any other regions that might move in that direction as well where there could be some regulatory risk relative to where we are now? I'll hop off, and again, congrats on the quarter, guys.
spk11: George, I'll take that one on the regulatory piece. It's great to hear from you. Look, in the third quarter, we talked about the impacts of European iGaming regulation, which was sizable. And the two big features were, one, obviously Germany. They put limits on sports betting, on gambling limits, as well as taxes on games. And that had some pretty big impacts and some bigger impacts than expected with the operators. And then, two, Holland had a – a surprise decree that really impacted the ability for e-money institutions to operate in the space. And that was really, we continue to feel that was a misplaced, basically a mistake that we hope can be reversed. To give you a sense of the combined impact of those two in the fourth quarter earnings, that was a $15 million year-on-year impact in the quarter alone. So it is sizable in the fourth quarter. Now, we have all these impacts baked into our guidance. What we see first is we expect to start to lap the German impacts in the third quarter, right? They'll start to baseline. That's when we started to feel the impacts. And in Holland, we expect some sort of partial or full reversal of this regulation in the second half. We're working with regulators, with the industry on that piece. More broadly speaking, we don't see any imminent pieces. There's some small ones. A country like Finland will probably have a 23 impact that will hurt us, but that's not a major market. Other markets like the U.K. have a really good track record of being very proactive and self-regulating. So, you know, overall, we see Europe as, you know, kind of a tougher comp. But we're working through that, working with our clients. We see lots of nice growth, obviously, United States, Latin America. We're seeing some nice pickup and growth there as well. But the two big ones, Germany and Holland, we have baked into our numbers. One will baseline. One will reverse. And the rest of Europe, we're not seeing any major impacts in the short to medium term. Great. Appreciate the color, Philip. Thanks, George. Thanks, George.
spk06: Thank you. Our next question today is coming from Darren Peller from Wolf Research. Your line is now live.
spk07: Hey, guys. Thanks. It's good to see the momentum with a lot of the operators and some of the brands across the system. Philip, can you just touch on the consumer side for a minute? You know, we obviously have been seeing the various headwinds to the growth numbers in terms of the user base, the consumer user base of Skrill and digital wallets, but I'm curious what can, you know, where, where would you expect an inflection in that on a sequential basis perhaps? And what will be the driving force in terms of marketing to those consumers? Uh, if you could also expand on the finance relationship, I know it sounded like something, um, you brought up a couple of times on the call, uh, in your prepared remarks. So just a little bit more detail on how, how that could play out and what that can really mean for you.
spk11: Yeah, no, thanks Darren. Uh, and great question. So, you know, we obviously, um, You saw in our Q3 update, we had, you know, decreases in volumes and active customers. And we talked about some of the challenges, especially where we had to really right-size our pricing, our user experience to be much more competitive. And what I've been really happy with is the team in Digital Wallets, you know, with Chirog, they've really done a great job of reorganizing, refocusing, and frankly, right-sizing the business And we've got really two specific groups. One is focused on that core wallet, the customer user experience, the pricing, the flows of really working through that and improving it. And then a second group is really working on the bigger growth deals like Skrill US, like the Binance deal. So that's how we're operating. On the first piece, look, we took a lot of steps. We simplified lots of steps for sign-ons and approvals. We did make our pricing much more competitive, especially in mature markets like Europe. And in the presentation, I talked a little bit about that. So we saw bank deposits, Darren, grow 50% on the changes between September, October period to February. And that drove a net growth in deposits of plus 10%. These are consumer deposits in, right? So all foreign factors grew 10%. driven by being much more competitive on bank deposits. And that's a net positive revenue impact because what we're seeing is consumers being more active in the wallet. We've also seen active customers baseline now, right? So it's not dropped, it's flattened. And we expect that to stay flat and then start to veer towards growth towards the second part of the year. So this is not a silver bullet. You don't just do one action and it changes everything. This is a focus and discipline piece. There's still a lot more to do. We're still working on pricing in other markets. We're working on simplifying the checkout with merchants. We're having great engaged conversations with merchants on the changes we've made with the team, with the pricing, with the user experience. So you're engaging the large merchants who start to promote Skrill more than they have in the past kind of year, year and a half. So those are the factors, Darren. So we should see that baseline flatten and start to get to some more growth in the second part of the year. So that's kind of my view on the inflection point. We're staying prudent. You know, we've got some nice positive proof points. We like it, but we're not willing to say it's solved and kind of shout from the rooftops yet. We're going to be very disciplined on this and work those KPIs. The second way to drive customers is linked to Binance, right? So the Binance deal... is a big deal for us for the following. One, more broadly, we see the kind of the convergence of crypto, NFTs, and kind of Web 3.0. I know those are some buzzy words, but we absolutely do see this as a mega trend. I think the use of virtual currencies, virtual commerce, unleashing millions of digital entrepreneurs, creating digital products, will be a huge market, will change the way e-commerce works. And we think PaySafe's ideally suited for this. You've got to be global. You have to have multiple ways to pay. You have to have great risk and regulatory management to do this. So that's how we see this. And we see the same kind of positive pieces we see in gaming apply to this kind of fast emerging market. So that's our overall mindset. And with Binance, look, they... We've got a single API, so we plug in. They can access all of our products. Initially, we've white-labeled our wallet. That's a big change, right? So we can go to market with a scroll of the NetTeller brand, but we can also unleash the power of our wallet and white-label it for specific clients. So we've white-labeled our wallet, and what that allows Binance to do is consumers, when they're using the Binance wallet, which is our platform... They can buy, they can store, and they can use crypto in the wallet to buy on the Binance platform and to also take the proceeds from sale of crypto as well. Initially, we're using bank payments to fund the wallet, but we will be expanding both markets and we will be expanding payment types, including card processing and other APMs over time. So we see this relationship as building up to something – into an important large relationship for PaySafe. We've been really impressed with the team. And we also, this is opening up a pipeline, not only in the broader crypto space, but also the white label wallet. We're seeing interest in other industries beyond crypto as well. It's got a couple of cool angles. And that will drive accounts in, right? That will drive lots of consumer signups. And so we're excited to see that start to happen in the next couple of quarters.
spk07: Okay. That's really awful. One quick one is on the merchant acquiring side. I mean, I'd just love to hear where you think you are in terms of differentiation and ability to maintain growth in that business. Obviously, there's been a big reopening out, you know, benefiting. But your volume does seem to be trending well versus the networks, for example, and when you look for S19. And so if you could just touch on the assets you have versus the assets you need to stay competitive in what's becoming, you know, just ever-changing and competitive environments. Thanks, guys.
spk11: Yeah, and you've seen how we're looking at the digital commerce, large enterprise clients, global, bringing all of our global APMs and risk management. And then you have the US S&B business, right? And that's all about scale, ease of use, speed, and convenience, and frankly, data and services to the merchant. So quite separate platforms, and that's how we see it. That's why we're presenting it that way. So look, we are a very scaled U.S. SMB player. We have over 200,000 merchants. You know, we're one of the top, top players, the kind of top five or six in terms of size in the U.S. So we have a lot of breadth and scale. The biggest thing that we've done, we've spent a lot of last year working on the basics to be very, very effective. So automation of underwriting and and of servicing has skyrocketed for us. So we've gone from being fairly manual to really an automated business. Two, we have a single application form that can get you back in processing across multiple processors in the U.S. And that is an advantage for ISOs and ISVs and agents. They see the benefit of that. And it also allows us to offer an extremely wide menu of smart POS devices across multiple processors specific gateways that work for SNBs or ISV integrations. So we're able to deploy a really large menu. We're able to do it with a single application. We're able to do it with really, really strong automation and strong customer service. So that's our play right now, and that's what's driven NICE growth. That will continue to drive the NICE growth through this year. In terms of next kind of iterations of capital investments, It's really about capturing more and more data so we can do kind of instant payments, same-day clearing. We can go into some wider services beyond just the payment processing. So that's how we see it. But for the next 12 months, it's really focusing on the first part that I was talking about in terms of speed, automation, and service.
spk06: Thank you. Are you there, Darren? Our next question is coming from Jamie Friedman from Susquehanna. Your line is now live.
spk08: Hi. Let me echo the congratulations. Excited for you guys. So I want to ask about slide eight and your disclosure on the direct marketing recovery. I got my ruler out to look at these, the bar chart. But I'm just trying to understand, is this, does this demonstrate sequential growth? Because it does look positive in direct marketing, but I think you still said it was down. and wondering also about what you're contemplating for 22 as a whole for direct marketing.
spk10: Hey, Jamie, it's Izzy. I'll take that question, and thanks for your kind words. Yeah, your ruler probably won't help, so I'll give you some perspective on it. 2021 was a challenging year for direct marketing. To put some numbers in context, we lost roughly $45 million in revenue and $35 million in EBITDA year on year. We expect in 2022, based on the momentum we've seen, to recover about a third of it. And then from there, grow responsibly, working with our issuing banks, working with our merchants as well. So hopefully that puts things in context for that business.
spk08: Yeah, that's a great answer. That's what I was looking for. And then, Izzy, since I have you, in terms of your assumptions about the EBITDA, You're at $98 million, I think, for the 1Q22. It looks like, though, you'd need to do a high teen's run rate ramp for the guidance for the year. So maybe if you could just – I know you mentioned some of this already, but if you could just revisit your assumptions about the EBITDA sequencing for the year. Thank you.
spk10: Yeah, Jamie, actually, that's a great question. So we think about it this way. Clearly, first half of the year, you know, we expect year-on-year comps to be lower as we work primarily through digital wallets, the challenges. And the second half of the year, we see a couple of things. I'll begin with three items. Binance is a part of it. You know, we're slowly wrapping up with them. We're being careful as we roll out new markets, new capabilities with our single API. And that really starts picking up steam starting in, like, late Q2 into Q3 and Q4. Now, that's one aspect. The second aspect that we see is we have a very strong pipeline across iGaming, travel, and crypto outside of Binance. And that sort of pickups the team as well that adds to the double-digit run rate. And the third one is the M&A deals, effectively. These are relatively high-growth platforms that we purchased. So the run rate you see now, even in Q4, those start to become additive and start growing as well as the year goes on. Those are probably three of the larger components that help drive to our second half improvement. And as I think you probably noticed, as we start seeing this momentum, if you look at Q1, you have slow movement progressing towards kind of the second half run rate for 2022. Got it.
spk08: Thanks for the call in.
spk06: Your next question is coming from Josh Levin from Autonomous Research. Your line is now live.
spk03: Hi. Hello. In one of your previous responses, Phil, you talked about an inflection point, positive proof points, but you said you were staying measured and you're not yet ready to shout it from the rooftops. So I guess what are you concerned about or what's stopping you from shouting it from the rooftops? And then on the progress in digital wallet and the balances growing, how much of that is price-driven versus non-price-driven? Thank you.
spk11: Yeah, I think, Josh, you know, we went through a lot of this in the third quarter that we were very open about some of the fundamentals we had to fix. And what we're simply saying is, you know, it's been a good quarter. We like the proof points. We've seen the changes in making it to signups and funding easier and more price competitive on bank deposits. And those have had very, very positive impacts so far. So we like that, but there's still more to do. We still have impacts to fix on the merchant checkout. We want to continue to test some of the pricing in other markets. And we're working with our clients on a one-to-one basis to really get them to promote Skrill more as we've made these changes. So it's a positive reception. We have ICE coming up in April, which is a really, really big conference of all of our clients. And we're coming to them... not only with the fixes that we've made in digital wallets, but also approaching the market as a single face with processing, with e-cash, and with digital wallets together. And that combination drives flow. So it takes time. It's not just a single thing you turn on or off. That's what we're saying. It's a positive proof point. We're very positive, but we're also remaining prudent. We're aware of the miss last year in Q3. and we're going to be very steady in improving our return there. So that's how we think about it. And in terms of pricing, we're basically – we're not underpricing. We're at market competition with bank deposits, and we saw the demand and flow in. Net-net, it's been a revenue-positive piece. We see more funds come in. Consumers are active within our wallet that drives revenue. So we like the direction here. We don't see this as a – a price giveaway at all. It's really about fixing and being more competitive, more aligned with our clients.
spk10: And Josh, let me dig in a little deeper. I'll give you some puts and takes as well. Like, for example, KPIs, metrics to keep an eye on. Net deposits into the wallet. Those are trending in the right direction. Checkout at conversion. Conversion at checkout. Those are looking positive and improving. Gambling revenues growing up. Our active customers are stabilizing. But at the same time, Crypto and FX trading have been soft so far this year. And the Russia-Ukraine crisis is putting potential revenue at risk as well. So even though we feel really good about some of the core metrics and KPIs, we need to kind of see this come through in the revenue on a sustained basis before we start, to your point, shouting from the rooftops.
spk06: Very helpful. Thank you. Thank you. Next question today is coming from Jason Kupferberg from Bank of America. Your line is now live.
spk09: Thanks, guys. Good morning. Just wanted to start with a question on the balance sheet. You talked about the three-and-a-half times leverage target. What would be your base case in terms of when you think you can get there and where do you think you'll be by the end of this year? And as part of that, can you just remind us of the mix here of fixed first variable rate debt? Thank you.
spk10: Yeah. Hey, David, thanks for the question. First, let me knock the second one out. Fixed variable is basically 50-50 is where we have basically what's public debt versus bank debt. So that's the second part of the question. First one, by the end of 2022, we expect our leverage ratio to be in the low fives. Again, it depends on performance, but we'll be in the low fives by the end of 2022. And potentially, you know, it goes down to 3.5, barring any, I'd say, accelerated debt repayment or anything out of the ordinary. We'd probably get there by, you know, knock on wood, by 2024. Okay.
spk09: Okay, understood. And can you just tell us what is built into this year's guidance for North America iGaming?
spk10: Yeah, I'll take that. I'm sure Philip will add it as well. Right now, North America iGaming is roughly 1.5% of our revenue. And our expectations for growth for that business in the near term and midterm is about 40% plus revenue CAGR and higher volume CAGR as well. Okay, excellent. And let me kind of build on that as well, kind of what drives it, right? Obviously, there is growth in existing markets that we're in. So we saw the takeaways that we just talked about. There's growth in new markets. And then probably the third piece is just the addition of Skrill becoming a bigger factor as part of the overall North America iGaming revenue and volume. So those three factors give us the background and confidence in the 40% plus CAGR in that business.
spk09: Okay. I appreciate it. Thank you, guys.
spk06: Thank you. Next question today is coming from David Toget from Evercore ISI. Your line is now live.
spk01: Hey, guys. Thanks for taking my question. This is Spencer Kennedy on for David Toget. So your logos include DraftKings, who's investing pretty heavily in customer acquisition this year. I think they're guiding to an EBITDA loss of $825 million to $925 million. So... Some investors are actually interpreting this as a modest slowdown in iGaming activity moving past the pandemic and stimulus requiring higher promotional activity. How are you guys interpreting this?
spk11: Yeah, we obviously track all those pieces, and DraftKings is a very old, great, and deep partner. We've got great relationships there. Look, obviously we do see the cost per consumer acquisition, the kind of CAC in that industry is very high, and different players are changing their strategies. But overall, the growth fundamentals are incredibly strong. When we talk about plus 40% CAGR over the next three years for that business, it's We just have all the fundamentals. A, we're seeing the volume growth now. We're not seeing a change in that. The existing states we're in continue to show strong growth. Obviously, as you said, new markets opening up. New York has just opened up, and we've seen some nice pickup there. Ontario opens up in April. We'll assign quite a few Tier 1 operators in that market. And that represents the fourth largest market in North America. Arkansas, Maryland, most likely potentially Ohio at the end of this year might go to early 23. And even California has a ballot. We'll most likely have something, a referendum sometime towards the end of the year related to sports betting. So we continue to see positive signs in the markets. Obviously, Florida was a huge one for us, for everybody. That's been delayed due to COVID. legal issues and challenges there. So that's going to get pushed out probably to just beyond 23, we think. And then finally, like I said, we're adding a new revenue stream here as well. So we're capturing the integration, Spencer, with all of these clients, and we're ready to enter new markets. At the same time, we're also adding new products. We had our digital wallet, and we had our e-cash products. You're adding higher margin vehicles on top of that. So that's what informs our outlook.
spk01: Okay, that's super helpful. And then if I could just quickly follow up. So just thinking through crypto and your revenue exposure there, and then I think we've kind of seen Bitcoin volumes start to trail off a little bit year to date. So any sort of impact you're seeing right now? And then also, I don't know if we might have missed it, but just the inorganic contribution to revenue in the fourth quarter. I think you gave for the full year, but might have missed the fourth quarter there. Thanks a lot.
spk11: Yeah, I can take the first part. I'll hand over to Izzy on the second part. So across within PaySafe, well, it's about kind of our crypto activity. So there's really, I'll break it out to three pieces, right? One, what we currently do. Two, what we're starting to do. three, what we're going to be doing, okay? What we currently do today is two things. We are a card processor for several crypto exchanges. We like that pipeline that's growing. And then two, we allow consumers to buy and sell crypto within our Skrill and NetTeller wallets, right? So we're there about, I think about just under 40 currencies available in 90 markets. So those two are existing revenue streams. They represent 1.5% of our total revenue, and they grew over 100% last year. So that's part one. We have seen the crypto trading in the wallet be subdued. Bitcoin pricing is down. The market's a little subdued. It's a spiky market. So I think Izzy mentioned that as one of the reasons why we're a bit more cautious on the digital wallet Q1 outlook. Just market performance right now. That doesn't change our view at all on the broader outlook of where this is going. Two, with the deal, the Binance deal, this is the largest crypto exchange in the world. They have 30 million consumers. Consumers love the product. They're a huge share of the global market. We are their white label wallet across most of Europe. We're slowly opening up markets. We'll be adding more products and services soon. allowing our wallets and other APMs as well. So this is a relationship that will grow, and we're repeating similar relationships with other exchanges. So that's going to create a second wave of revenue growth for us. And then third, more futuristically, we're looking at opportunities in decentralized finance. We're looking at NFT marketplaces. We're looking at how do we become more competitive in fiat on and off ramps. in this world, which is really, you know, deeper risk and regulatory capabilities. So that's more future pieces, but that's where we're focused at investing. So we see this business growing at extremely high rates, potentially doubling again this year and beyond. So that's our view on crypto.
spk10: Yeah. I'll just add to that as well, Spencer. The thing that Philip may not have mentioned is about the size of our North America iGaming business, right? So about 1.5% revenue. and effectively doubling so far year on year. In terms of the M&A, the two deals that we did close in Q4, you can probably assume it contributes about somewhere between 2.5% to 3% of revenue in EBITDA. It's probably a good modeling assumption.
spk01: Okay, great. Very helpful, guys. Thanks a lot. Good job.
spk02: All right, thanks.
spk06: Thank you. Next question is coming from Timothy Chiodo from Credit Suisse, your line is now live.
spk05: Great. Thanks a lot. Good morning, and thank you for taking the question. I think you guys did a really good job of covering this in a few of the prepared remarks and also during the Q&A on the new U.S. acquiring specific segment. It does sound like that's a very SMB-focused business. I know Clover sits there. You talked about the direct marketing piece, but it also has e-com. It has integrated payments through Clover. There's a card-present mix. There's a card-not-present mix. If you could just maybe give us the pie charts, if you will, just to bring to life what the mix of that business is, how much is direct, indirect, et cetera.
spk10: Yeah, hey, Tim and Susie, let me take that. I think I'll answer it this way. In the U.S. acquiring segments, about a third of our volume is card not present, meaning e-commerce. So two-thirds is card present is how you should think about that. And that includes all the elements you mentioned, like Clover and the indirect, direct marketing, and the likes. It's 100% North America or U.S., effectively.
spk05: Great. Thank you, Izzy. Sorry about that. On that card present piece, which you mentioned is about two-thirds or so, should we think about that as also integrated into software platforms such as Clover, et cetera, or is that a non-integrated payment scheme? Just bring that to life a little bit.
spk11: Yeah, I'll pick that one up, Tim. So the breakout, we go to market with a direct sales channel, ISO partners, and ISV integration. So that's part one. So we have gateways, which can integrate. We have direct sales that can support the ISV growth there. So that's an area that we like, and we'll continue to see IT grow more. With the ISOs and the direct channels, we do sell a series of smart POS devices. Clover's a big Part of that sales, we really like the product. We work with one or two other ones as well. So we do integrate into their point-of-sale device. The merchant gets all of the kind of Clover benefits, and then we're also the back-end processor and service agent for that POS. So we can offer the omni-channel online and in-store, in-store only or online only. We have the full suite of products.
spk05: Excellent. Thank you for all that context. Appreciate it, both of you.
spk06: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
spk11: I'll pick up. Look, first of all, I'll reiterate something I said on my presentation. Just a huge thanks to my team, personally. I know Q3 was tough. We didn't like where we landed there. But the team never lost its focus on what we're able to do with our clients, where we can win. And we're really excited about that. We love what's happening. We love what's happening in the iGaming space. We love what's happening in our ability to go to market as a single proposition. It's a big change for Paysafe, right? Single team, single API, single underwriting. It's just changing our culture and approach. And obviously, we're really excited about some of the big wins like Hard Rock Ballets and like Binance. which we think do start to embed future growth. We're absolutely aware there's still a lot of hard work to do in the details, and that's going to take time and transparency to prove that we're turning it around. But we feel good about it. I look forward to continuing the conversation and questions with all of you. Thanks a lot. Bye.
spk06: 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.
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