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spk00: Ladies and gentlemen, greetings and welcome to the PaySafe 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on a telephone keypad. As a reminder, this conference is being recorded. I would now like to hand the call over to Kirsten Nielsen, Head of Investor Relations, please go ahead.
spk02: Thank you, and welcome to PaySafe's earnings conference call for the third quarter of 2024. Joining me today are Bruce Others, Chief Executive Officer, John Crawford, Chief Financial Officer, and Alex Gersh. Before we begin, a reminder that this call will contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent SEC reports. These statements reflect management's current assumptions and expectations and are subject to factors that could cause actual results to differ materially from those forward-looking statements. You should not place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. Today's presentation also contains non-GAAP financial measures. You can find additional information about these non-GAAP measures and reconciliations to the most directly comparable gap financial measures in today's press release and in the appendix of this presentation, which are available in the investor relations section of our website. With that, I'll turn the call over to Bruce.
spk08: Thanks, Kirsten, and thank you all for joining us today. Before I discuss our fantastic quarter, I want to start by saying that our hearts and thoughts are with our colleagues, customers, and partners in Florida and the southeastern U.S. who are impacted by the recent hurricane. And I want to especially thank our business continuity team for their efforts to quickly support our employees who live in the affected regions. Next, I'm excited to welcome John Crawford, our new CFO. As you read in our press release, John brings with him more than 25 years of financial leadership experience with a strong background in the payments industry. I am confident that John's partnership will be extremely valuable as we move into the Paysafe's next phase of growth. I'll ask John to say hello and share his initial thoughts towards the end of today's call. We sincerely thank Alex for the work he's done over the past two years as CFO. I've really enjoyed working with him, and he's been an instrumental partner in stabilizing the business and improving our financial performance. Alex will stay with us through the end of the year, working closely with John to ensure a smooth transition. Now, let's review our Q3 results. We have continued our momentum, accelerating our higher-quality revenue growth from the prior year, with revenue increasing 8% year-over-year, or 7% on a constant currency basis, to $427 million, with merchant solutions growing 11% and digital wallets growing 4%, slightly offset by lower interest revenues. Adjusted EBITDA of $117.8 million was up 1% year over year, and our adjusted EBITDA margin expanded 70 basis points in the third quarter compared to the first half of 2024, while making planned incremental investments as well as actions to reduce risk in the business. Additionally, we continue to focus on net leverage. reducing 8% from Q3 2023 to 4.7 times at the end of Q3 2024. Overall, our third quarter and year-to-date results highlight a strong year with our continued execution on our strategic priorities and our focus on delivering higher quality revenue growth, strengthening the business, and progressively reducing net leverage. With that said, we're pleased to reaffirm our full-year financial outlook for 2024 with revenue growth in the expected range of 7% to 8% and adjusted EBITDA margin in the range of 27.5% to 28%. Let's turn to slide four for an update on our four strategic priorities for 2024. I remain pleased with the progress that we've made this year as all of our initiatives remain on track or ahead of expectations. Let's start with the expansion of our sales capabilities. During the quarter, we booked 83 enterprise wins, which was up meaningfully from last year, demonstrating our continued momentum in cross-selling and winning new clients. On our hiring initiative year to date, we've welcomed 170 new sales reps, reaching our target ahead of schedule. As a reminder, this is a critical initiative to expand our reach and sales capabilities across both enterprise merchants and S&B merchants. Second, on our portfolio optimization, we continue to perform better than we expected, supported by our actions to grow the direct sales team and enhance our products with value-added solutions and partnerships. Year-to-date, we've generated over 40 million revenue related to these initiatives, ahead of schedule to reach our target of 50 million for the year. Our investments in these initiatives are tracking to our expectations with some remaining spend expected in Q4. Our third priority for the year was to revamp our consumer acquisition efforts. Our marketing team continues to utilize new market testing strategies with the goal of building a scalable blueprint to drive user growth. Beyond our traditional acquisition efforts, we've also expanding our reach to new users through B2B to C partnerships. Last quarter, we announced a collaboration with Revolut to bring our eCash service to Revolut's 10 million UK customers. Through this relationship, we're enabling their customers to deposit and withdraw cash seamlessly to and from their bank accounts at any of our 12,000 point-of-sale partner locations in the UK. Within the first three months, we've transacted with 28,000 unique Revolut consumers, and we expect this to increase over time through further adoption in the UK, along with expansion to other markets. We look forward to launching a similar collaboration with a marquee client in the coming months. Finally, while still relatively small numbers, our revenue generated from new product introductions continues to be up significantly compared to last year, reflecting our sharpened focus on innovation and consumer experience. Turning to our merchant business on slide five, we saw solid performance led by double-digit growth in e-commerce, which represents about 15% of our merchant portfolio by revenue. North American iGaming revenue grew over 50%, reflecting merchant wins in the prior year and industry growth. we also continue to see strength in our cross-selling efforts. Out of the 83 enterprise deals booked in Q3, 28% of those were with existing clients, and our net revenue retention with enterprise merchants remains above 100%. Fillable mids were down slightly in Q3, mainly reflecting our focus on the ideal customer profiles and de-risking the portfolio. Revenue per new merchant was up double digits, and the SMB direct book grew 5%, reflecting the benefit of our investments to optimize the portfolio and our focus on driving stickier merchant relationships with greater lifetime value. Turning to digital wallets on slide six. In Q3, we saw transactions per active user grow 16% year over year, with positive trends across all products and average revenue per user grew 5%, supported by product initiatives and the ramp-up of merchants onboarded in 2023. This marks the seventh consecutive quarter of year-over-year growth for both metrics. We acquired 1.3 million users in the quarter, slightly up from the 1.2 and Q2, and stable year-over-year. Our active user base was 7 million and consumer acquisition costs also stable at approximately $17 in Q3. Again, we're seeing stability here with active users along with improvement in the user engagement and experience. As I touched on earlier, we continue to improve our consumer acquisition strategies while targeting a broader consumer base and enhancing our wallet platform to offer a scalable model that supports sustainable growth. With that, I'll ask Alex to review the Q3 results in more detail.
spk05: Thank you, Bruce. Let's move to slide eight for a summary of our third quarter results. Total volume increased 7% year-over-year to $37.5 billion. Total revenue grew 8% to $427.1 million, or 7% on a constant currency basis. Revenue growth reflects strong performance from our 2023 sales cohort portfolio optimization, and product initiatives. This was partly upset by a $3 million headwind from interest revenue. Adjusted EBITDA was $117.8 million for the quarter, an increase of 1% year-over-year, while adjusted EBITDA margin was 27.6%, a decline of 170 basis point, primarily reflecting the incremental investment as well as certain client exits related to de-risking the portfolio. As Bruce mentioned, our initiatives remain on track, and we expect to have a continued investment activity into Q4. On an LPM basis, unlevered free cash flow declined 3% to $318.7 million, mainly due to timing and tax-related items and reflecting a 68% conversion rate, which is in line with our expected conversion range. Adjusted net income was $31.4 million, and adjusted EPS was $0.51 per share, down from $0.57 in the third quarter of last year. This mainly reflects an increase in our adjusted effective tax rate, which was 35% in 2003, primarily due to the recognition of BEAT tax expense in the U.S., totaling $3.5 million, related to growth in the U.S. and disbursements to non-U.S. entities. This includes roughly $2 million of catch-up attributable to prior periods. Excluding this catch-up, the rate would have been approximately 30%. Going forward, we expect an adjusted ETR in the range of 26% to 30%. These increases were partly offset by lower interest expense, reflecting lower debt and interest rates. Let's move to slide nine to discuss the segment results. Starting with merchant solutions, volume increased 8% year-over-year to $32 billion, and revenue increased 11% to $241.1 million. Growth was driven by strong double-digit growth within our e-commerce business led by iGaming. The remainder of the merchant segment grew 8% year-over-year, reflecting our strategic initiatives to expand our sales capabilities and optimize the portfolio. Adjusted EBITDA was $52.6 billion, a decline of 8%, reflecting continued investment in our 2024 initiatives and our actions to de-risk the portfolio, as we have discussed. Turning to the digital wallets in slide 10, Volume increased 5% to $5.9 billion, and revenue increased 4% to $190.9 million, primarily driven by products and sales initiatives, along with the solid growth from merchant onboarded last year, partially offset by lower interest revenue. Foreign exchange impact were immaterial to the segment growth related in Q3. Adjusted EBITDA was $84.1 million, an increase of 5%, while adjusted EBITDA margin expanded 40 basis points. Turning to slide 11, we continue to strengthen our balance sheet and focus on disciplined capital allocation. At the end of the quarter, total debt was $2.4 billion, and net debt decreased by $39 million from the second quarter. Our net leverage ratio further improved to 4.7 times compared to 5.1 times in Q3 of 2023. As a reminder, we have approximately $25 million remaining in our share repurchase program. We remain confident that our solid cash flow generation will enable us to continue investing in the business while also deleveraging and returning capital to the shareholders. Moving to full year outlook on slide 12, based on our strategic progress and results to date, we are maintaining our revenue and adjusted EBITDA guidance for 2024, which we have updated on our last earnings call. Just to reiterate, our guidance reflects full year reported revenue to be in a range of 1.713 billion to 1.729 billion, which is higher than our initial 2024 guidance provided at the beginning of the year. We continue to expect adjusted EBITDA to come in between 471 million to 484 million, reflecting adjusted EBITDA margin between 27.5 to 28%. I'll note that the Euro to USD exchange rate averaged 1.1 for Q3 and approximately 1.09 quarter-to-date in Q4 and has recently trended lower. As a reminder, given our geographical mix, every 1% weakening of the euro versus the U.S. dollar has an unfavorable impact of approximately 6 to 7 million on revenue annualized. Lastly, I want to reiterate that we continue to expect our net leverage to be between 4.6 times and 4.7 times at the end of the year. So we've achieved that a quarter ahead of schedule. And finally, I want to welcome John and also express my gratitude to my colleagues at Paysafe. Through a collective effort, we were able to improve our financial performance while reducing debt and leverage. I am grateful for the opportunity I've had to contribute to these stronger results and the company's broader transformation. Now I'll turn the call over to John to say a few words.
spk06: Thank you, Alex, and I'll be brief. Since coming on board, I've had the opportunity to meet our teams across multiple locations, and I'm impressed with their dedication and drive to succeed. I've been following this business from the outside for many years and knew it had very interesting assets combined with attractive end markets. Now I can add in the quality of the people, and that's a great formula for success. A few areas of opportunity stand out to me, and these early observations will help shape my priorities as we close out this year and prepare for next year and beyond. First, we've got too many systems, and we have the ability to achieve meaningful efficiencies there. Second, I believe we can improve internal capital allocation to generate more value for our customers and better returns for Paysafe. Finally, I will focus on cost discipline as we continue to scale and drive margin. To wrap up, I am thrilled to partner with Bruce and the team to build upon the progress to date and to unlock new opportunities to drive growth and operating leverage. And with that, I will turn the call back over to Bruce.
spk08: Thank you, John and Alex. Our performance throughout 2024, including 8% revenue growth year to date, showcases continued execution on our priorities and our focus on delivering higher quality, sustainable revenue growth. At the same time, we're investing in our future and progressively reducing net leverage. I remain highly confident that we are taking the right actions to drive continued momentum in 2025 and beyond. I want to thank everyone on the PaySafe team for their persistent dedication and hard work throughout this turnaround. While we have more work to do, our progress has been remarkable over the last couple of years. And now, as we continue to focus on getting better each quarter, we have a clear and exciting path to the next chapter of our journey. We are making our own weather. With that, we will open the line for your questions.
spk00: Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. The first question comes from Andrew Hart with BTIG. Please go ahead.
spk04: Hey, thanks. Good morning, and welcome, John. Excited to work with you going forward, and good luck, Alex. Thanks for all the... Help and support. Bruce, you talked about the portfolio optimization efforts being ahead of schedule, including the $50 million of revenue benefit this year. I know in the past we talked about kind of those same efforts should yield about $100 million benefit in 2025. So is that still the case? How should we be thinking about some of those portfolio optimization efforts, you know, and the revenue contribution next year? And kind of what has been the key to be ahead of schedule to date?
spk08: Yeah, Andrew, look, thanks for dialing in and joining us this morning. Look, we feel like we're making great progress against the four initiatives. I think, as we said in the prepared remarks, we're on track or ahead with each of them. Each of those have kind of a little bit different spin on it, but to your question specifically on the $50 million, we're trending a little bit positive there against that number as we outlined. When we calendarize that for next year, we see really solid growth with that. So we have really excellent, as we sit here today, we have excellent visibility into revenue growth and accelerating a bit of margins and reducing our net leverage as we kind of move into 25. I don't want to get ahead of ourselves. Q4 is usually our tool next year discussion of kind of where we're going but now today we have really good visibility unlike years past as to kind of what the outcomes will be so we feel very good about that I think the other thing that we talked a little bit about is the hiring so we're ahead on hiring 170 people so we're probably maybe a little more than a quarter in front of that from what we originally planned. That probably spins out another couple million dollars of investment this year as we look at it, but it's worth it because the team is performing at a high level. We see really good growth within our sales organization year over year, and we think that that's going to pay off as we move into 25 and 26. So these, as we talked about a quarter ago, These are decisions that are driving a longer-term outlook and output, and so we feel very confident about these are on track and the right thing for the company to be doing.
spk04: That's helpful. Thanks. And then on the Revolut partnership, you called out the 28,000 transacting users with the eCash partnership into a base of about 10 million in the U.K., and I think there's about 4%. X that globally Revolut users. So I guess what's your expectation for the ramp with those UK customers and kind of what could a timeline be to expanding into other regions with Revolut as well?
spk08: Yeah, I think you'll see that continue to expand through 25. It's going to be a nice growth item for us. I think you saw it probably as well. We announced the Deutsche Bank partnership as well prior to the call last week. So we have another similar one with a much larger client base. So this is a kind of new initiative, really leveraging the assets that we have in Europe. Keep in mind that over 600,000 merchants across the European landscape. So this is really a great opportunity for us to do something unique and different than what we've done historically. In essence, allowing for cash deposit and withdrawal at any one of our retailers across Europe. So, yeah, we're very optimistic about how this kind of continues to go, and we think there's a lot more room here. I think we'll look to continue to add and find other institutions to this type of model.
spk04: Thanks. And then just last one for me, Alex, with the higher risk merchants rolling off, did we kind of see that impact in the merchant gross margin this quarter with those higher risk customers rolling off? And then, you know, I guess kind of thinking forward when we're thinking about the merchant gross margin mix, can you just remind us or help us kind of frame it up how we should be thinking about it longer term, especially as it pertains to the direct versus ISO versus e-com channel mix? Thanks.
spk05: Well, Yes, on the first question, yes, definitely. We said they were high margin, but they're not sustainable. And so you'll see it on the EBITDA margin, you see it on gross margin, and you, of course, see it on revenue. In terms of overall, in terms of how you should think about gross margin. To be honest with you, the way we think about it, at least the way I think about it, we focus on our revenue and we focus on our EBITDA. And as John said, he's going to continue to focus on efficiency to try to drive that EBITDA margin higher. What's going to happen to the gross margin? It's really hard to predict at this point.
spk08: I would just add, you know, as we said coming into the year that we would see margin acceleration from the front half to the back half of the year, we We talked about that in our prepared remarks as well, with 70 basis points expansion from the margin at the front half of the year to the back half. So we're executing exceptionally well, navigating the optimization of some of our portfolios and margin expansion, as we said. And we feel like we're in a great position, as we said earlier in the year, to see margin expansion as we move into 25. So none of that has changed from our view as we sit here today. Thanks, Tim. Nice quarter.
spk00: Thank you. The next question is from the line of Trevor Williams with Jefferies. Please go ahead.
spk03: Hi, this is Spencer James on for Trevor Williams. Thank you for taking the question. I wanted to ask a bit of a preview of the playbook for FY26. Just given a lot of the initiatives in FY25 so far have appeared to really pay off. So curious if next year will look like more of the same or if we should expect a bit of a shift in investment priorities.
spk08: Yeah, great question. I think, you know, when we do our next earnings call and, you know, March, we probably will have a cool slide on what we're going to do for 25. But I don't think we'll be sharing necessarily what we'll be doing with 26. But I think what you'll see in 25 is we have a clear path. We'll have a similar construct to what we have this year, where we have four or five initiatives that, candidly, the team's already working on. Four 25 that we'll set up 26. So I think the playbook is very much established at this point. We're taking on just a few projects, executing well against those projects that will drive particular outcomes. And so we're very focused on getting off to a good start here in 25. And as I said, the projects that are identified, we're already working them, and I feel pretty good about that. So we'll – 26 is just a little too far out there for us to start sharing just yet, but we definitely have a view and a path on where we're going.
spk03: Yeah, thank you for that. Apologies. I did mean to say FY25. Getting ahead of myself as well. And then maybe just as a follow-up, I was wondering if you could provide an update on the health of the pipeline, just in the context of achieving growth targets for next year. And any thoughts on makeshift of opportunities within the pipeline, maybe?
spk08: Yeah, look, our pipeline is really strong, you know, on the enterprise side. Really solid growth, 83 enterprise deals per year. It's basically double what we had a year before. We're seeing really solid growth within those numbers. And so feel very good about what Rob and the sales team are doing. I think the product organization is starting to come together. We're seeing good initiatives starting to emerge there. So we feel very confident as we sit looking at our pipeline, looking at the things that are coming for 25, like I said before, we have pretty good visibility into how 25 is shaping up already, so feel confident about that. Thank you for taking the questions.
spk00: No, thank you. Appreciate it. Thank you. The next question is from the line of Paul Obrecht with Wolf Research. Please go ahead.
spk07: Hi, thanks. This is Paul Obrecht on for Barron. It's great to see that you've reached the goal of 170 ads to the sales organization. Can you touch on the progress in ramping these new hires and when you expect them to be fully ramped at kind of a normal run rate of productivity?
spk08: Sure, happy to do that. So as some of you may recall, what we talked about is our enterprise sales team generally takes about six months to get fully ramped. So accelerating the hiring really is about driving more opportunity into 25, getting them on board quicker so that we can really maximize the impact in 25. When you look at our SMB sales organization, they get online a little faster. So they're getting online typically within three, four months. And so a little quicker ramp there. What we can share so far as we look at both the enterprise and the SMB channel, I would say the enterprise team is probably outperforming our expectations slightly, and the SMB is probably right on expectation. But there's a lot of people for us adding, just to put it in context a little bit, we basically have doubled the size of the sales team in the last few months. So there's a lot that we're absorbing, a lot of processes that had to be worked through on onboarding training and all those things. But overall, I think the team is doing a very good job with that, and we feel like it's progressing on track.
spk07: Great, thank you. And then as a follow-up, it looks like S&B Direct decelerated to around 5% from 10% last quarter. Is that mainly reflective of the decisions to exit risky merchants? And can you just provide some color on what you're seeing in this part of the portfolio and kind of what your expectations are going forward?
spk08: Yeah, look, as we talked about previously, We looked at kind of where the market was going, what we saw kind of emerging from a regulatory standpoint, and we decided to start being proactive instead of being reactive as we had been historically as a company. So we decided there were certain merchants that were the highest of risk customers. that we no longer wanted to be associated with, so we started taking advantage of the fact that our growth was significantly ahead of where we thought it would be at this point, and we started laying off some of those merchants from our portfolio, and that's what is driving the SMB decline. When you look at, internally as we look at our revenue walk, The same-store sales, the new sales, those things are progressing very, very nicely, and it gave us the latitude to prune some of the portfolio and still, and to keep in mind, we're still driving to a number that is above what the midpoint was at the start of the year. So when we look at the original midpoint of expectation of revenue is around $6 and change just over 6% growth, we're going to be obviously above that as we've given the guidance for the year. So, you know, it's a great year. We're making a lot of progress in the transformation and setting ourselves up for a good solid 25. Got it.
spk07: Appreciate the color. Thank you.
spk00: Thank you. A reminder to all participants, you may press star and 1 to ask a question. The next question is from the line of Timothy Chiodo with UBS. Please go ahead.
spk01: Hi, this is Jing. I'm for Tim. Thank you for taking the question. I wanted to touch on your value added services opportunities. It's encouraging to see you're ahead of the 15 million 2024 revenue. And last quarter you highlighted a integrated loan program for short-term working capital support for your partners. And we saw Paysafe being highlighted by JARIS as a commercial lending customer. So could you expand on this partnership and any unit economics that you can share, impact on take rate, or any other value-added services you could highlight? Thank you.
spk08: Yeah, thank you for the question. Yes, we are a partner of theirs. The loan program is a great program As you look at our client base, we've got an aggregate around the world. We've got close to 900,000 merchants. So for us to have a program that offers working capital loans makes a lot of sense. I think you'll see that from our standpoint, This is not something that we underwrite or take any risk on. This is something that we have just a referral arrangement with or origination type of deal with them. I think we will add others to that mix as we go forward, respective of the different geographic markets that we're operating in. I think this is just the beginning. I think you'll see us offer a large number of other solutions You know, much like, you know, as probably everyone knows, we sell a lot of Clover, one of the largest resellers of Clover. You'll see our programs start to really take on more of that, where we're adding more and more ancillary services to our merchants. At the end of the day, what we're trying to do is provide the merchants the opportunity to run their business the best that they can, and that's really what we're trying to do on the merchant acquiring side.
spk05: And just to add, just to confirm, yes, our take rate, if you look at Q3 of last year in the merchant solution business versus Q3 of this year, is up a bit. Thank you.
spk01: Awesome. Really appreciate the color. I also wanted to follow up on Clover, so really glad you mentioned it. So related to your distribution of Clover, how should we think about the potential overlap of value-added services offered by Paysafe and by Clover on the merchant side? Thank you.
spk08: Yeah, that's a great question. Look, I would say that Fiserv is a great partner of ours. We work with them quite a bit on product innovation and ideas on how to expand distribution of our products and their products. to the compliant entities, customer base. So, you know, we feel very good about the opportunity to continue to expand, you know, expanding the product that we sell from Fiserv into the market. And, you know, we feel very good about the opportunity in front of us, so. I think something we'll continue to be pushing on here as we move into 25.
spk01: Really appreciate the call. I'll pass it on. Thank you.
spk00: Thank you. As there are no further questions, I would now like to hand the conference over to Bruce Lother, CEO, for closing comments.
spk08: Well, thank you. Thank you, everyone, for joining us. I want to thank, obviously, everyone here at Paysafe for a great quarter. Again, just a reminder, 8% growth. We saw margin expansion from the front half of the year to Q3, so excited about that. It really needs to be reiterated again. The net leverage ratio coming down to 4.7, as Alex touched on, meeting kind of our full year obligation already, a full quarter in advance. We're excited about that. So really a strong quarter for us with a solid top and bottom line and net leverage reduction. So thank you very much. Appreciate everyone dialing in today.
spk00: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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