Adyen N.V. (ADYEN) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Adyen's H2 2020 and first-ever Earnings Video Call. I'm Ethan, and I'll be your moderator today. As this is a new format, I'd quickly like to run you through how this will look. We'll start with a video from our design team, which will be narrated by our CEO, Pieter van der Does; and our CFO, Ingo Uytdehaage, followed by Q&A with both of them. [Operator Instructions] I'll now pass it off to Pieter and Ingo to explain what happened in the second half of 2020. Enjoy.

Good afternoon, everyone, and thank you for joining. Before we begin, I hope that 2021 has been off to a good start for you and your loved ones. I will now share an overview of how we performed in the second half of 2020 as well as some trends in the payments landscape, which we have visualized for you. Afterwards, Ingo will take over to take a closer look into the numbers and our team. With 2020 in our rearview mirror, we have seen how the COVID pandemic continue to impact the world economy, businesses, people around the world and the team. We remain focused on learning and adapting in this ever-changing environment and helping our merchants to do the same. Around the world, we have seen the acceleration of long-term trends as a result of the pandemic. This includes the shift from cash to cashless economies, the increasing share of omni on volumes in global commerce and the conversions of the online and the offline shopping channels. Despite the COVID-19 pandemic continuing to disrupt the day-to-day of many of our merchants, the business was resilient and we saw profitable growth in the second half of the year. This is mirrored by a process volume for the period, which was EUR 174.5 billion and EUR 303.6 billion for the full year, with net revenue at EUR 379.4 million and EUR 684.2 million for the full year. We supported many merchants in shifting volumes between online and offline channels to keep their businesses going. Some merchants needed to swiftly facilitate new ways of selling, so we helped them to roll out new channels such as curbside pickup. When lockdown restrictions eased in some regions, we enabled our merchants to then safely reopen as all of our terminals offer contactless payments. Due to COVID, shopping holidays shifted this year to become fully online events and more momentous than ever. During the prolonged week-long periods of Black Friday, Cyber Monday and Single's Day, our merchants sold record volumes. We are proud to have helped navigate our merchants through this uncharted territory. Multiple consistent long-term trends on the platform persisted in this period. With increased diversification of our merchant base, the growing number of existing merchants adding a second channel, the volume churn remaining below 1% for the period and existing merchants continuing to contribute to over 80% of our growth. These trends have been consistent since our IPO. For us, it's incredibly important to support our merchants locally. In line with that philosophy, we opened an office in Dubai, and we are looking forward to explore the potential of the region. Additionally, we grew our presence in North America this period. Many of our existing North American merchants who have historically used our platform for their nondomestic volumes chose to also use us for their U.S. volumes. We saw this shift due to the increasing complexity of the U.S. domestic market. In line with previous years, enterprise merchants already on the platform continued to be our largest growth driver. We also continued onboarding new merchants with the pipeline unaffected despite early COVID impact. In unified commerce, we saw the upward trend of merchants adding a second channel persist. We also saw continued success across the broad spectrum of retail from high end to mass market, illustrated by how we added Ralph Lauren for sale and Columbia to the platform this period. In mid-market, we continued to invest in simplifying access to single platforms, and we saw the merchant portfolio rose significantly in this space. We've always built to meet our merchant's needs. This philosophy is reflected in how we build network token optimization feature of our revenue accelerating product in partnership with Microsoft. We also launched identity risk, android-based mobile POS devices, our 3DS2 tool and Adyen Giving, the tool that enables merchants to accept through-push donations to charities at checkout. We also continue to invest in Adyen for the long term and grew the team in the second half of 2020 to a total of 1,747 people. Despite the challenges that came with the pandemic, such as remote onboarding, working from home, our culture remains our top priority as a management team. Throughout the year, we implemented many new initiatives to help our colleagues stay connected, exercise and mental health and find communities of like-minded individuals within Adyen. As a team, we continue to balance realism and optimism as it relates to the pandemic. For more details, you can find our shareholders' letter online. Now Ingo will deep dive into our numbers.

Thank you, Pieter, and thank you, everyone, for joining this call. Diving into processed volumes. We processed EUR 174.5 billion in the second half, growing 29% year-on-year. Full-year process volume was EUR 303.6 billion. Of this EUR 174.5 billion, EUR 21.3 billion came from point-of-sale, accounting for 12% of total volume. Point-of-sale volumes were directly impacted by the pandemic and subsequent increase in e-commerce volumes due to the closure of physical stores. Net revenue went up to EUR 379.4 million for the second half, up 28% year-on-year. Full year net revenue was EUR 684.2 million. The further diversification of net revenue contributions across regions and verticals resulted in business resilience over the period. Take rate was 21.7 basis points in the second half of 2020, down from 22 basis points in the second half of 2019. This is mainly due to enterprise merchants moving into new volume tiers. For the full year, take rate was 22.5 basis points. OpEx were EUR 157.7 million for the second half and up 80% year-on-year. We continue to invest in building Adyen across all regions in the team and in marketing. For the full year, operating expenses were EUR 310.3 million. EBITDA was EUR 236.8 million in the second half of 2020, up 36% year-on-year. For the full year, EBITDA was EUR 402.5 million. EBITDA margin was at 62% for the period and 59% for the full year. Net income for the period was EUR 163.1 million and EUR 261 million for the full year. CapEx were 4% of net revenue in H2 2020, slightly up year-on-year. Full-year CapEx were 3% of net revenue. Reflecting on the previous period, our pipeline and product development were largely unaffected despite the pandemic. Given the substantial growth in operating leverage we have seen since IPO and our continued focus on the scalability of our single platform, we have decided to update guidance on EBITDA margin going forward to increase to levels above 65% in the long term. Our order guidance remains unchanged, with net revenue growing at a compounded growth rate between the mid-20s and low 30s in the medium term and with CapEx sustainably up to 5%. We have posted these results and our accompanying shareholder letter on our website. This can be found at adyen.com/ir. Thanks all for listening. Pieter and I are happy to take questions now.

Great to see the business is resilient in the second half of the year. I'm sure there's lots of questions now to get to, so we'll be happy to take them. [Operator Instructions] The first question we have is from the line of Sandeep Deshpande of JPMorgan. [Operator Instructions]

Can you hear me?

Yes, we can hear you well.

So I have 2 questions. I mean, clearly, you had a very strong second half. U.S. growth was very robust indeed. And my question is, that U.S. growth was helped by the eBay transition, which is occurring to your platform at this point. But if you look at the growth that you're seeing as such, excluding if we can calculate eBay exposure, your growth was still higher in the U.S. than it was in Europe. So is this an issue with the base effect in Europe that your base is already very high and so that's why the growth is lower? Or there is something else happening, U.S. versus Europe? And my second question is, is Adyen targeting any new sectors from here? You've targeted mid-market in the past, but the data shows that almost all your growth is still enterprise. So is mid-market still very much an emerging or hobby sector? Or is this going to be a key focus? And at some point, you expect this to be a big driver of your revenues?

Ingo, maybe you want to start with the question about U.S. growth. And Pieter, you can follow up on the mid-market question?

Sure. Thanks, Sandeep, for the question. So if you look at the U.S., I think the U.S. is clearly the result of our investments over the recent years to be a relevant player in that market. And the reason why we're relevant there in that market is because we're getting more and more domestic volume sent to us because we're solving for complexity. There are a lot of retailers in -- that want to solve unified commerce problem and that's why they like to work with us. A good example, for instance, is Dick's Sporting Goods, but also H&M recently announced to start working with us in U.S. And this is the opportunity that we have in this market. So I agree, of course, Europe is growing from a larger base, but there's also something very important happening in the U.S. that they see us as a relevant player in that market. Pieter, to you?

Right. Something about the question about mid-market and if we are focusing on new segments. Let me first say the segments that we're focusing on. That is, next to mid-market, we're also focused what is new in hospitality and we see some good early traction there. And mid-market, if you look at the size below the highest segment, platforms also play a large role, and we also have platforms and marketplaces and we also play a role there. So it's not just mid-market. On the mid-market initiative, yes, that is something which we are rolling out and which will take some time. So we are investing in that. And it's important the lessons that we learned there because they're also relevant for platforms and marketplaces, and we'll see that further developing over the next years.

Thanks. Next up is Adam Wood from Morgan Stanley.

I've got 2, please. Just first of all, it's kind of a follow-on. It's very interesting to hear you describe how the payments market is changing and in the U.S., in particular, business that maybe wouldn't have come to Adyen a couple of years ago is now coming to you. Could you talk a little bit in general about how the payments market has become more complex? What changes have happened? Do you think that increases or decreases as we come out of the COVID pandemic? And is there any way you can quantify how much more of the market you think is open to you because of these changes than would have been the case a couple of years ago? And whether you want to do that with percentages or maybe verticals, however, would be very helpful and useful. And then secondly, maybe just on the EBITDA margin change. Is that basically forced on you because of the economics of the platform, you just can't invest enough to offset the leverage of the platform? Or did you make a conscious decision to take the profitability of the company up and invest a little bit less?

Thanks for your questions, Adam. I think, Pieter, it would be best if you start it on the complexity of payments and how that's changing with the COVID-19 pandemic?

Yes. So what I've seen is that our efforts, and we were very early with combining online with point-of-sale and we call unified commerce, and there's a need for that globally. And there's a second element in the U.S. We were later with being able to offer full stack, so was acquiring processing all in one platform. So what you now see coming up is that in the U.S., we are a logical player to choose. And we've seen that in recent announcement with Dick's Sporting Goods, but before also in the quick-service restaurants. And then COVID, of course, creates tailwinds with the move from cash to cash flows. And what we've seen in retail is that if stores are closed, then online takes over and the companies, the retailers who have a unified commerce strategy, they really benefited from that. So that explains why the U.S. is coming up. It's not temporarily, but that I think that, that's a trend which was anticipated and also in earlier calls, we spoke about it. The U.S. is just lagging blend the developments what we have seen in Europe.

Let me say a few words on the EBITDA guidance. So when we IPO-ed the business, we set a target which we set like we go -- only going to change it if something fundamentally to the business has changed. And if you look at the current discussions that we recently had also with investors around our profitability levels, we already passed the year 55 marker quite often, and we firmly believe that there is additional operational leverage into our platform. We have a single platform. We really benefit from having a single platform, and that's why we believe that we can further increase our margins. That doesn't come at the cost of lower investments because we still find top line growth more important. That's also why we have guided these margins towards the long run, and that's also how we see it. So if we see a good investment, we will for sure make it. But with the single platform, eventually, we will get to this very high efficiency and leverage of the platform.

Next up, we have Hannes Leitner from UBS. [Operator Instructions]

I have also a couple of questions. Could you talk a little bit more about the unified commerce merchant wins? Help us a little bit better to understand, of those specific group, what is their current split between in-store and e-commerce? And on that note, clearly status up to the quick service restaurants, merchant wins ramp up. That's the first question. Then the second is, maybe you can give us a little bit more KPIs around the Issuing business. You stated further 30,000 cards issued. And then the last question is coming back on that long-term EBITDA margin guidance. Should we think now about kind of a linear progression over that? And -- or is this something rather more that the margin should stay, at the moment, fairly stable at the print what you have done this year?

Maybe Ingo, you want to start with the split between how unified commerce looks given point-of-sale or online?

Yes, sure. So I think the good thing from unified commerce is that we always started in a single channel. I think with most of the implementations, that's the case, and it's either retailer starts in-store and then later adds online or the other way around. I think what is very key to us is that payments is strategic. And the fact that it's strategic, that helps us to have this type of conversations. We see volumes in both channels increasing. And if you just think about the fact that also in the second half, quite a bit of stores were closed and you see the strong performance of retail in general on our platform, we feel that we're very well positioned. And also when stores will reopen, that we continue to see this growth. And yes, if you think about other verticals that we're addressing here, so we're always solving for complexity. There also in QSRs, that's the reason why they like to work with us. So whether it's multiple geographies or multiple channels, like the combination of in-store terminals with apps, that's the type of problems that we solve and rollout with our partners goes well. So we're very happy with the progress that we have made in QSRs.

Pieter, you could pick up how we look at Issuing?

Yes. So Issuing is a relatively new product that we launched. It is -- what is -- we just announced that we're going to roll out in partnership with Glovo 30,000 cards, so that's a more significant best case than we ran so far. Also what we have done this for Christmas, we gave all Adyen employees cards so that everybody could test. And that means that it's a product which we have -- which we're confident how we're rolling it out. But on the other hand, in contribution, that will take longer before you see that back in the total results.

Yes. And Hannes, on your question on EBITDA, we really see this as a long-term guidance, and we continue to invest in the business. So if we see a good opportunity, we will invest. Revenues and costs are basically unrelated on the short term. So it is hard to say, like, it will be a gradual change over next years towards 65%? It is more intended to say like we're -- we strongly believe in operating leverage of our platform, and let's make sure that we cater on the long term. We will -- I think like you've seen in the second half of 2020, the operating margins are already quite high. But if we see a good opportunity to invest, we will certainly do so. But that couldn't mean that on the short term, EBITDA margins could be slightly lower. So it's not a guarantee that we will -- that's basically what I want to say, it's not a guarantee that we will maintain the H2 EBITDA and margins going forward.

And just maybe a quick follow-up on the unified commerce. Just to be specific, those -- for example, in the quick-service restaurants, they also sell quite a lot of their products via platforms, thinking about Deliveroo or Uber Eats, would it still go over the Adyen platform? So are you the connecting central connector of the streams?

It depends a bit on the type of implementations, the way we work with different food delivery services. So it depends, I would say.

Thanks, Hannes. Next up is James Goodman from Barclays. [Operator Instructions]

A couple from me as well, please. Firstly, on the Affirm partnership that you announced, I think, the back end of last year, pretty interesting what's happening in Buy Now, Pay Later. As I understand it, you're integrating it as an additional payment option. You've talked a lot in the past about just continually expanding all of the alternative payment types that you accept. But I just wondered if you could share some thoughts around, I guess, this explosion we're seeing in Buy Now, Pay Later. What your own expectations are around that? Given that some of these vendors, of course, are also pushing their own sort of checkout experience, just wondered if you see that to what extent there's an opportunity or a threat? And then secondly, a bit more specifically, just on the FX impact that we saw in the second half of the year, particularly on the net revenue which was more impacted, I think, 9% versus the gross revenue, could you just explain that? Is that a mix thing that some of the regions more impacted were higher take rate? Or is it more that there's some scheme fees there in a specific currency? And do you expect to see that exaggeration of the FX impact as well we kind of come into the first half of this year?

Thanks, James. I think, Pieter, if you could start with our view on Buy Now, Pay Later? And then Ingo can take a look at constant currency and the impact that we're seeing.

Yes. So in general, you see new payment methods coming up. You constantly see that. And the way how we look at that is we have merchants, which have -- if we see a clear merchant demand and if we have merchants, that if we take the -- if we build a product, we'll immediately take it live, then we integrate it into our platform. So that's what we do with Buy Now, Pay Later. If we look at those companies, sometimes they indeed have their own checkout experience, but what you in practice see is that it's much more attractive for merchants to work with us and have a part of their payment suite. And also, typically, what you see is that many of those companies, we are the largest provider of volume to them. So for us, it's more opportunity because complexity in the market is what we sold from merchants. So more payment methods, more complexity. What I'd like to add is that we are agnostic towards payment methods. So it is merchant demand, and we provide the payment methods which are used by consumers, and we're not steering in that. Ingo, if you want to maybe do the second half of the question?

Yes, sure. So if you look at the revenues on a constant currency base, we were about 9% higher, which is, I think, a great outcome because that means that the underlying growth in currencies is even better. So we suffered a bit from devaluation of some currencies, like the dollar and the Bulgarian reals. We -- it's the difference between gross and net is mostly a mix effect, so there's no specific trend there.

Next up, we have Gautam Pillai from Goldman Sachs. [Operator Instructions] Gautam, are you there?

Can you hear me?

Yes, we can hear you.

All right. Great. So 2 questions from my end. Firstly, on large customer ramp-up and can you comment on how the ramp-up is progressing in customer like eBay and Alibaba? And should we assume that this could be a kind of a growth tailwind in 2021? Also, can you comment on the partnership expansion with Microsoft and how important is Microsoft becoming as a large customer for you? And on the topic of large customers, there was an announcement from Shopify yesterday that they will roll out Shopify Pay for Facebook and Instagram merchants. How does it affect your relationship with Facebook, if you can throw some light on that? And secondly, a follow-up on the FX question. Ingo, can you give us a rough sense of your currency mix? You highlighted U.S. dollar and Brazilian real as having the biggest impact, but if you can just give us a mix of that in the revenues, it would be great.

Pieter, maybe you can take a start with our large customers. I think these are our favorite type questions talking about single customers, but if you could expand on how we view that, that would be great.

Yes, if you look at how we roll out with companies like eBay, I mean we're really proud to have them, and it's -- and they have communicated to the market what their plans are to shift volume over to Adyen. On the other hand, we should realize that, that doesn't change the underlying trends. So to call the major tailwind, no, it's a good contribution, but the underlying trends are also the same without single merchants. What I really like about relationship with Microsoft is that is what you often see in our relationships. And that said, we start with a market or with the products and that over time, you build them out to multiple products in multiple markets, and that's also what you see with Microsoft. I think the question behind the question is, does that mean that you -- that it becomes a huge merchant in your portfolio? I think the trend in our portfolio is the other way around. We have more merchants, more diversification rather than the opposite trend where single merchants make out a large part of our portfolio. Then I think it's good, yes, on single merchants, you sometimes see that merchants announce that they do a project or multiple projects with other companies, and I've no comment other than that we see no volume churn or no -- less than 1% volume churn. So over time, the volumes that we have, we are capable of keeping them or expanding them. So churn is at the current company, not a big theme for us. And maybe, Ingo, you want to do the second half of the question?

Yes, sure. Thanks for that, Pieter. So if you look at in the FX constant currency mix effect, it's largely related to reals and dollars. It's hard to give you -- or we don't disclose the precise mix of this. I think the best proxy is to look at net revenue distribution if you want to have a proxy because we kept the net revenue per region.

Thanks, Gautam. Next up, we have Charlie Brennan from Crédit Suisse. [Operator Instructions]

Well done on the results. Can I just touch on the acquiring market? You mentioned it in the context of the U.S. market, but if we look at the airline sector, we've seen some of the incumbents leaving the market. I was just wondering what's the opportunity there for you to accelerate acquiring an airlines?

Pieter, would you like to take that one?

Yes. If you look at acquiring in airlines, we always took the view that airline risk is -- can be significant, so we always chose to do a processing service only with a few exceptions. And if you look at in the future, if we would change that view, I think during COVID, it turned out that we are happy with our stance on the topic of airline acquiring. Did that answer your question?

Yes, it did. It doesn't sound like you're leaping to fill the void that's left by Wirecard exiting the market.

Well, for airlines, we have always been careful because airlines is the typical case where as an acquirer, you could end up with huge losses. So it's a business model where time of buying and time of taking the surface flying is quite far apart. So it doesn't really fit our risk appetite, but we will always look at the market. And if there are good opportunities there, we would. But I think Wirecard has a larger airline portfolio that fits our risk appetite, and that's for acquiring. For processing, we are fine for the technical service, but acquiring or being liable if the company goes bankrupt, that's a different story. There, we have a low-risk appetite in airline.

Next up, we have Sanjay Sakhrani from KBW. [Operator Instructions]

Ingo, you talked about the impressiveness of growth while stores have remained closed. And obviously, we're hoping for some sort of normality as we move into the second half. Can you just talk about what the volume growth might have looked like if we had seen a more normal environment? Have you guys tried to estimate that? I'm just trying to think about how the volumes come back on the other side in terms of what's gone negative. And then second question is on Lat Am growth. That was a little bit soft. Maybe you could just speak to how much of that was FX related versus COVID related, maybe something like that? And then final question on the U.S. bank charter, just wanted to get an update on timing and sort of how you see that impacting the company.

Ingo, would you like to start with volumes and how we expect those to bounce back as the pandemic hopefully improves?

Yes, it is a difficult called set of question to answer. I think we're seeing an acceleration of a couple of trends that we have seen already for a long time. The trends that also Pieter was referring to in the video, the trends that people pay more cash flows, the digitization of commerce and that where it is hard to give a precise number or even a rough estimate. I think that if we would reopen again and the pandemic is over or slowed down, then we also have a lot of reopening scenarios where we will benefit from the rollout of contactless where our merchants is very important. If you look at the number of terminals that we have added over the recent months, that has developed really according to plan. So we feel that we're in a very good position. Also, if you think about the nonretail flows or volumes like in travel if we would reopen again, that, of course, also will really help us to get to additional growth. But to give precise numbers is -- even rough estimates is quite difficult, I must say.

Did you want to give a comment on Lat Am as well, Ingo?