Flywire Corporation (FLYW) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for being a part of Citi's 11th Annual Fintech Conference. I'm Ashwin Shirvaikar, CIti's Global Head of FinTech Research. And the company I'm hosting next, is from Flywire, we're delighted to have Michael Massaro, who's the CEO. Mike, welcome. Thank you for being part of our event, and good to see you again.

Ashwin, great to see you. Thanks for having me.

Absolutely. Absolutely. I know this is, sort of, the late part of the day since you're in Europe. So hopefully, we keep this simple and straightforward.

Lots of caffeine. Lots of caffeine.

Yes. Caffeine and growing fast, that goes together. But look, a new public company, many investors may not yet be familiar with Flywire. I'm thinking, maybe we should start with you describing who you are, what you do at a high level. We'll get into the segment and vertical level details in just a moment, but let's start there.

Sure. Happy to. So for those, who don't know Flywire, our belief is that if you look at sectors of the global economy, things like retail and e-commerce, they've gone through a massive digital transformation, but huge sectors, the global economy have not. So in sectors that we focus on, things like education payments, health care payments, travel, business payments, these are high-value, high stakes payments that have, traditionally, been really poorly served. And ultimately, Flywire has a combination of software, payment technology and our own payment network that helps our clients get paid, and helps them get paid from their customers, pretty much anywhere in the world. And one thing you'll often hear about Flywire, is you say that software drives value in payments. And what we really mean by that is that we have this industry-specific software that's really helping facilitate the financial transactions. And so it's much more than simply adding a credit card button. It really provides engagement software for our clients, payers, and we're the system that's typically interfacing to the system of record in the back end. We are the one communicating to the actual payer. And our belief is that over the next decade, you're going to see a similar digital transformation around payments in these other parts of the economy, similar to what you saw over the last 2 decades, at retail and e-commerce. And we think, we're really positioned to lead that innovation.

Got it. Yes. Yes. I mean, when I think of Flywire, and most of the descriptions, they do start with the verticalized offerings that you mentioned. But I feel like it's also important to spend some time on the plumbing that you have spent so much time building, which is, kind of, differentiated. So payments platform, payments network. Maybe can you start by telling us about the size and scope of the platform, what's platform used for? Talk about that first?

Sure. Yes, happy to. So we often talk about the Flywire Advantage. It's 3 parts. As Ashwin said, it's the vertical software, which we'll talk about, later. But there's 2 horizontal components that oftentimes, get overlooked. First is the payment platform. Think of this as a shared set of services, things like payment notification, store a credit card, do a bank transfer, convert a currency, all of those are good examples of shared services. So even though we're going to market vertically, we're building those in a core platform that is really able to leverage that capability. So whether we're doing a payment plan, for instance, for a major hospital system or an Ivy League university, it's leveraging the core platform, and we're not replicating that capability in different sets of software. And the beauty of that is that as we add new industries, as we enhance capabilities to that platform layer, they're immediately accessible to all the industries, all the clients that we serve. So first part of that horizontal capability is the platform. And then, the next part is our payment network. And that's really a global network. It's Flywire owned and controlled. So it is acquiring card processing relationships with folks like AGAN, FIS Worldpay, Fiserv's First Data, but it's also direct relationships with folks like American Express, Discover, Paypal for Paypal and Venmo acceptance, Alipay for Alipay Wallet acceptance out of China, China Union Pay. It has a whole series of payment options, including 50-plus bank accounts around the world. And these are owned and controlled accounts, connected to local clearing networks that are Flywire-owned accounts. And the amazing part of that network is that we actually own and control it. So think of us as owning the train tracks for how the money moves from our customers' payers, and we actually control the switching of that train track. So when it comes to unit economics, when it comes to faster settlement, it's really all configured through that software and that platform. But we're the ones, actually collecting and delivering the money to our clients, fully reconcile in today. And again, that platform and that network work across the industries, in which we serve.

Got it. Yes. Yes. So what responsibility do you, at Flywire, have versus what, say, a bank does, in that scenario? Only -- I'm just, kind of, trying to figure out...

Yes, sure. Yes. The combination of those three things together, right? The industry-specific software, the payment platform and the payment network, lets us go into a client within one of these industries, and really take away all the challenges that they have in getting paid. And so historically, remember, people used to have to pick software. They used to have to then, maybe run an RFP for a credit card processing. They may have to have gone out to RFP for banking services as well, figure out who's going to route the ACH payments, who's their primary acquirer, the backup acquirer, how are they going to have third-party wallets, what are they going to do with bank wires that come in from overseas. And when you deploy Flywire software, all of those other challenges go away, right? It comes with the network. We often say that our clients aren't experts in payments, they shouldn't have to be. They should really be running the university, running the medical hospital, running their travel business and really, leaving that complexity up for us. And we're constantly enhancing these products, enhancing the network, improving the economics that exist there and delivering great experiences for our customers.

Okay. Okay. No, that's -- so that, sort of, sets the baseline of a lot of how stuff gets done. But let's now talk about the part that your consumers see, that investors see, on the vertical pieces, right? And obvious place to start here, biggest one, education. The question to ask is, what problem do you solve here, and before Flywire, how was this done? What's your competitive moat?

For sure. So we started out -- and we had about a 10-year private company history before went public in May. We've identified one use case in education, and it was a cross-border tuition use case. And so this was a foreign parent or students, paying at the time and predominantly, a U.S. university. And that was our first product. For the first 6 years of the company, that's, actually, our only product. We focused on education only, in the United States, for U.S. universities, and it was that cross-border tuition product. What really happened, since that product was a big success within that industry, is our clients kept coming to us and saying, "why are you just doing like cross-border payments, why don't you help me with all my payments?" And so we started to realize that there was a series of domestic solutions that weren't meeting the expectations of the customers. In addition, we also learned, there was this huge massive set of countries out there that have international students, and we didn't have a presence in those areas. And so we set off a mission to expand geographically. Today, we have clients in over 30 countries using Flywire products. And then, we also added a whole set of capabilities to enhance our cross-border offering. So now, at a major university in education, major boarding schools, vocational programs, language programs, we're actually processing the majority of the payments, right? So, kind of, we can do domestic tuition, we can do their payment plans, we can do their deposits. We even have capabilities that help with overdue receivables. And so when you think of all the money being collected on these campuses, Oftentimes, it was happening for all different types of payment relationships. And tuition was one that was full of lots of manual processes that were really impacting the back office of the finance department. So we brought a whole series of software capabilities, help streamline that back office, create more flexible ways in which people can pay through payment plans and other capabilities. And then, we brought with us that amazing international payment product. And so we could really digitize the entire set of receivables. So when you think of what's behind the universities making this shift in this digitization, really remember that there's people in those finance departments, right? They're consumers. They've seen the amazing products that are out there for consumers, and they would go into work every day and realize they were delivering relatively poor payment experiences, maybe not mobile first, maybe not even cloud-based technology, technology that often looked like it was 1 or 2 decades old. If you've ever paid a tuition bill, you've probably seen some of those products. And what Flywire does, it really brings modern technology that we're all used to seeing in our consumer lives, but bringing it to these sectors like health care, like education, that have been relatively poorly digitized over the last decade.

Understood. So that actually is one of the questions that comes to me from investors. And it comes in the form of a concern, is you're already so deep in education, where is the growth going to come from? Could you maybe address that?

Yes. So nearly $100 billion opportunity, just within the cross-border product, and we're still single-digit penetrated, right? So huge opportunity, not to mention that anyone has seen our net revenue retention number. That's part of the strategy of major growth. And it's a blended 118% that includes a COVID-impacted year as was noted in the S-1, we filed. So again, you're seeing an amazing position to start, every year, with this net revenue retention number, and then, layer in new client acquisitions, new geography expansions, new industry expansions, product additions. And so for us, starting with that huge base of clients that only knew us for that one cross-border product, gives us an amazing opportunity to keep upselling those clients more and more capabilities. And we've shared numerous examples on our first two earnings calls of Texas A&M, which went in on all Flywire's capabilities. So we're helping them digitize, really all their payments on campus. As well as MMU, which is a university here, in the U.K., that had a similar challenge, where they wanted to bring everything under one umbrella, one system that could really handle all financial transactions, domestically and cross-border. And so we have numerous examples of those in the more deployments we get of all our capabilities, created an area of opportunity for us to keep driving that net revenue retention number. So still, super early innings for us, within education, both from capabilities deployed across our customer base, as well as more clients to bring in, as well as more geographies to expand to.

Right. And just to be clear, the -- when you say single-digit penetration, right? And that's just on the cross-border?

Yes.

You are counting tuition only, you're not necessarily counting such things as where is the kid going to stay, textbooks -- there aren't things such as textbooks anymore.

They get e-books, but yes. Yes.

Yes, they're e-books. But you're not counting those sorts of things. Are those also a real opportunity?

Yes. I mean, if you look at -- I mean, just the cross-border is $100 billion, and education TAM, for us, is closer to $500 billion, $600 billion. So a huge, huge opportunity, when you think of digitizing, really all of that work on Campus. Now, Flywire is not going to go compete in the near term, go compete in things like point-of-sale units at a university, right? Those are not things that really haven't been improved, right? There's relatively, modern tech there. But when you think of 80-plus percent of the dollars collected by a university, that really comes down to tuition and fees, like you mentioned, things like room and board, things like books and materials. That's really where that massive opportunity is for digitization of the education space.

Okay. Okay. And you've seen, as you've expanded past the -- past universities, boarding schools and things like that, you've seen, kind of, a similar thing and the domestic payments push, can you talk a little bit about that?

Yes. I mean, coming out of the -- as universities got hit with the pandemic, remember what happened. If anybody has children in school or especially in higher education, you saw last year, full of uncertainty, right? You saw bill due dates move. You saw different parts of the United States have students going back to campus, others fully remote. You saw some countries opening up their borders, some not. And so you saw all those different changes. And what that led to, is it led to a lot of universities realizing how rigid their billing and payment processes were, right? If you had, for instance, a 3-payment semester payment plan, semesters weren't semesters last year. Due dates shifted, right? And what happened is, many universities had to manually manage those things in their back office because the products they had selected, may be deployed 10 or 20 years ago, even, were inflexible, right? They couldn't adjust to the changing demands in the world. And so it became a catalyst for many of these universities to look at their infrastructure, to realize why are we dealing with technology that is too rigid. And what we've seen in the last year of interest and growth in our pipeline as well as universities looking to deliver great experiences, providing different terms for payment plans, providing even multiyear payment plan for certain students, providing students who are behind because they have an overdue invoice, keeping them enrolled by giving them ways in which they can pay over a series of months, an overdue balance, right? Those are things that our product and our software actually handles for our client, without adding to the manual steps in the back office.

Right. Can you talk, maybe -- and I do want to spend some time on the other verticals, but there's so much talk about, even on the education side. How does that integration look like? Do you directly get integrated with the university?

Yes. So across all our industries, our software actually, sits in the same location. It's just different integration points, as you mentioned. So we sit between our client system of record and their customer, right? Our software is actually delivering the screens, mobile or web-based, where someone sets up a payment plan or makes a bank transfer, makes a payment from a different country. We're delivering that entire experience. We're communicating in e-mail and text to the payer. We're updating the back-end system of record. So where our software sits, is consistent across all the industries that we serve. In education, it's going to be more of a student information system, so something like an [indiscernible] or a Banner or a People Software Workday type system. In health care, it's going to be more of an EHR like an Epic, [ Cerner ] or MEDITECH, those types of platforms that store patient data and billing information. In travel, it's going to be a system of record with the traveler data stored, typically a bookings platform or a CRM system, of sorts. And in business, in business payments, it's going to be like a PeopleSoft or NetSuite, probably a better example, Xora, Xero, those accounting platforms that, traditionally, are maybe delivering paper or PDF e-mail bills, that's where our interface point is going to be to delivering these great experiences. So we're experts in integrating into those systems of records for the industries that we serve, and we try and take that burden off our customer because we know they're always strapped of IT resources.

Got it. Okay. And how do you get paid for all this stuff you do?

Yes. So our software is a combination of transactional and platform usage SaaS-based revenue. So it's about 70-30, 75-25 kind of split. And again, both those revenue streams, as people have seen in Q2 and Q3, have grown quite nicely. There's, oftentimes, more of an opportunity to outperform, if you will, on the transactional side, as you would imagine, as the software-based revenue is a little more predictable, based on billing practices. But as more transaction volume comes in, we get that opportunity to overachieve and have additional revenue growth on the transaction side.

Right. And just to put a finer point on that, is it in number of transactions? Or do you benefit from such things as the cost of education going up?

Yes. So yes, on the transactional side, it can be based on transactional fee revenue, but also on the average transaction size increasing. And so things like currency conversion, for instance, is going to be based on an average transaction size, you'll have different currency payers, majors, minors, exotics and such. But all of that has an impact of the cost of tuition going up, or of medical care going up, travel expense spend going up. So there is an aspect that grows, as the costs or as the industry grows.

Okay. Got it. And switching gears to the health care vertical. This is -- this started with domestic as opposed to education. It started the other way. I guess, the question is the -- it seems, first of all, like the crowded vertical, unlike education, like there are a lot of different providers, doing different things, health care by nature, seems to be just more messy in the U.S. So what problem are you solving for? And where in the ecosystem do you sit?

Yes. So it is definitely, a complicated space. I mean, historically, patient out-of-pocket expenses is where we focus. But historically, that has been a relatively small part of a hospital system's revenue, right? The vast majority had come through insurance and claims processing. But as the cost of health care has gone up, specifically in the United States, you've seen more and more have to come out of the pocket of the consumer. And so insurance covers, kind of, less and less. And so as that's happened, obviously, it's been critical that hospital systems figure out how to engage patients and whether to do so the pre-service, before you even go in for an appointment or post service. And as a consumer, you may have seen this poor experience, historically, been receiving many medical bills like 4 children. So imagine the reams of paper that show up at the Massaro household. And all those pieces of paper, oftentimes, are disconnected, right? You may have seen a specialist for one procedure and your primary care for another, you're likely to get 2 bills. It's, oftentimes, hard to figure out, if your insurance was already applied or was it not applied yet, and you don't owe this bill. So it looks like a bill, and it may not be an actual bill. And how you actually pay that, oftentimes, historically, had been unchecked. And so again, oftentimes, these large balances were built up. Patients would either show up at a doctor's office and be told they had a balance. It wasn't really great, clear transparent billing process. And so what Flywire software does, is we connect in to the systems of record, again, typically, it's an EHR. And every time, whether it's pre-service before a doctor's appointment, we're, oftentimes, preparing an outstanding balance, giving you ways to pay that balance upfront. If you can't afford that in 1 payment, you can actually pick a payment plan. That's a non-Flywire finance plan. It's just truly, off the balance sheet of our customer. They choose the payment plan terms that they provide to the payer. And also, post service, right? As you get -- whether it's a bill that you'll still get in the mail, there'll now be a way that you can enroll easily in a payment plan or make that payment electronically. But we'll also be the system e-mailing, texting you, letting you know that you have an outstanding balance on behalf of that hospital, all through our software. And again, where we sit is in that post-planes, post-insurance. So that whole claims process is happening outside of Flywire. We're focused on just that out-of-pocket expense aspect, which is quite a significant, another $500 billion market opportunity in the U.S. alone.

Right. And you actually helped improve collections in here, which -- just the very nature of -- just simplifying, providing more clarity and also making them smaller multiple payments that people can, kind of, plan for?

Yes, That's exactly right. It's making sure that there's ways in which to pay, that aren't just which credit card brand or which bank account you want to use, but really making sure people that can't afford a bill, don't see a bill that is so large that the [indiscernible], right? And by hospitals offering 3-months, 6-months, 9-months, 12-month payment plans, what you see is, consumers want to make those payments. They just want more flexible terms, especially if it's an unexpected medical expense that they weren't budgeting for, weren't planning for. And that's really the affordability problem that we're helping solve with the software.

Yes. Okay. Do you have any metrics? I don't know, if you've shared any metrics publicly, about the benefits of...

Yes. I mean, yes, double-digit improvement in collections for large medical systems. So again, for us, 4 of the top 10 hospital systems in the U.S. use Flywire technology. Again, once we get deployed, there's been so little done, really, around the space, but you can see huge jumps in returns. We also just issued a report with Forrester, where 318% ROI return on deploying Flywire technology in major health systems. So again, really huge payback periods, huge ROI returns, very short payback periods as short as even 6 months.

Right. And here, is there like performance-based payments to you? Or I mean, do you -- does it stay as SaaS monthly fee? How do you get paid?

Yes, it can vary slightly by client. I mean, some hospitals look for structures that have those types of things built into them. So the more we help the hospital collect, the more usage-based part of that revenue that we can get as Flywire. We have such confidence in the technology and the data that we have, from so many hospitals and clients getting benefit from our solution that we're happy to have those arrangements with our clients, where if they're collecting more Flywire benefits, they benefit, obviously.

Okay. Got it. Let's talk about the other 2 verticals. I guess the first question there is, why those 2 verticals -- and B2B is, sort of, this big, larger, more of a space. Me doing something for you, could be considered B2B, I don't know. So what part of B2B are you working in?

Yes. So we start off in education. We expanded into health care next. We started talking about all different types of businesses. And what really emerges for us, is we first found the travel sector, and we had a whole bunch of travel companies that were starting to struggle with large cross-border and domestic payments. Again, when that transaction size goes up, oftentimes, credit cards aren't just the only payment method you need, right? A lot of bank wires often exist, when that transaction size goes up. And so we found the travel sector first, as we expanded. We found subsectors like accommodations, luxury trips, even destination management companies. So if you ever take a family vacation to a place like Iceland or Spain, sometimes you use a company that actually configure an entire, kind of, group travel experience. Those are good examples of Flywire clients, in travel. And then as you look -- as we, kind of, kept diving into business payments, we found all types of subsectors that really needed help in the B2B sector. And there were so many companies focusing on the AP side of B2B payments and trying to digitize the accounts-payable process. We felt, there was a huge opportunity to really focus on the accounts-receivable side. And so again, the power of our network, our existing platform capabilities, for us to connect into a system of record, deliver great branded payment experiences, for businesses to pay each other, no matter where they're paying from, around the world, that's something, we felt, we could deliver value in. And so today, you're seeing manufacturing companies, professional services firms, tech companies, really select Flywire solution because of the combination of the software and that global payment network, that it took us over 10 years to build.

Okay. And when you look at these 4, how do you expect the vertical contributions to evolve, over time? Is there a, sort of, a target mix that you want to get to? Or is it opportunistic? How do you think about it, strategically?

Yes. I mean, across these 4 sectors, I mean, it's nearly $12 trillion of total addressable market. It's a massive opportunity. Obviously, we started education at a 6-year head start or so. And so it's hard to catch up, too, especially with how fast -- how early stages we are, even in that industry, and how fast that industry keeps growing for us. But over time, I've said, over the long term, 5 to 10 years, people can expect education to be less than half of our business.

Okay. But you haven't really defined, what over time, necessarily, means.

No, long term, 5- to 7- to 10-year type time thing.

Right. And considering what you just said about, sort of, the size of the opportunity in each of these, would -- I would assume, you're not necessarily looking to add a fifth vertical.

No, we're not -- I mean, we'll be opportunistic. We think, there's so much going on in the geographies and the subsectors, within our industry. So we're quite comfortable there. But I do remind people, all the time, there are other highly-complex, poorly-served industries, right? Anybody that has ever paid a tax bill, has probably seen some pretty poor experiences. Anybody, who's closed on a housing transaction, has seen a pretty painful housing process for funds changing hands. So there are other huge sectors of the economy that have large, complex and poorly-digitized payments. But again, we're really focused on the 4 sectors that we serve today.

Okay. Got it. In terms of just your overall revenues -- and you commented on monetization for a couple of the sectors, but overall, when you think of it, what's the -- are there overall metrics, with regards to how you get paid, on what basis? What are the drivers for transaction revenues, where there is some variability, as opposed to the back [indiscernible] piece, which is stable?

Yes. When people look at our business, a couple of things that they'll hear us talk about, oftentimes, in the earnings calls, our first -- just seasonality, in general. Our business started off in education, heavily in the U.S., as I mentioned. And so there's still a seasonality to when education payments are due around the world. It varies by different location, Q3 being a big quarter for the U.S. education system over the summer and into the fall. So it's important that people always look at us, year-on-year, from a quarter-by-quarter perspective, as opposed to sequential quarters. In addition to that, to your question, oftentimes, people will often jump very quickly to a monetization rate question. And for Flywire, it's a bit different because really, to us, modernization, it's not as simple as like almost like a take rate, people will want us to say, it's really an output for us, right? It's not the only factor, right? So because we really don't care how someone selects to pay. It's not really, our customer pay, right? It's our customers' customer. And so our job is to deliver all the payment choices, whether domestic or internationally, and leave it up to our customers' client to figure out how they want to pay. And so there can be some variation, based on that seasonality, by quarter, right? Which payments are coming in, from where in the world, could be different types of economics, by different regions. Also, transaction size matters, right? So if someone makes a deposit, it's very common for that deposit to be, maybe made the credit card but that larger tuition payments that may be set up a payment plan, could be being drawn from a bank account. So the important thing for people to realize with us, is modernization rate is really an output of that combination of the software that we're deploying and the fact that the ultimate choice of how to pay that bill, is made by the consumer, who is a customer of our client. And so that's an important thing for people to understand. And again, in each of those instances, no matter how someone's choosing to pay, Flywire has great unit economics across those payment types.

Yes. Can I ask you to talk a little bit about talent? I mean, it's, obviously, a tough talent market. You're on LinkedIn, all the time, go FlyMates and all that stuff. So -- but -- yes, talk about talent. How are you doing?

Yes. I mean, it's -- I appreciate you asking it. It's something super near and dear to my heart. I've always had the people organization at Flywire, reporting directly into me. At points in our journey, I've been the interim Chief People Officer as well as the CEO. I really think as you go through high growth, high-scale businesses, really connecting with your people and your talent, and focusing on culture is really important. For us, navigating the pandemic, of course, like so many others, was challenging, personally, professionally. But we're a globally-distributed team, prior to the pandemic. There's more FlyMates outside the United States than inside the United States. And so we're 40 nationalities, 30 languages spoken inside the business. So it has a very unique global culture that has really helped us navigate being first remote and then a more of a hybrid world. And I think, as we've transitioned into this hybrid environment and are competing for talent. I think, that's a big differentiator for us, right? Where we can bring people in, and we're looking for industry experts, right? People, who have spent 5, 10, 20 years within an industry that we're serving, and appreciate those industries, understand them, want to better serve them. And so our ability to pull talent with the combination of modern tech, hard-running team, fast-growing business, but also this global presence, where people can get back to traveling the world. I'm in London, right now, and seeing FlyMates, right now, and later tonight, I mean, it's a very vibrant culture. And also, our customers really do love our team and the technology that we're delivering. So I think, it puts us in a really unique spot. We've hired over 200 people, this year alone. So, kind of, in the pandemic, we were 400, 450-ish. And so now the company is over 600, 650 and has 100-plus more positions to hire. So definitely, always looking for great talent, and I think the combination of great tech we have, plus the culture we work so hard together to build, helps differentiate us in what is a very hot, competitive talent market.

Okay. Got it. We're almost running out of time. If I can ask you to maybe, sort of, pull everything together or summarize it, some takeaway comments for our investors?

Yes. So one of the other things I always get, if you think of Flywire, think of high-value, high-stakes payments, think of digitizing parts of the global economy that have been poorly served for decades. And that digital transformation that you all have seen in retail and e-commerce, we're under the belief it's going to come to other major sectors in the economy, and then that combination of software and payment capability will really help differentiate Flywire to own that space.

Awesome. On that note, Mike, thank you very much for your insights. And enjoy London.

Thanks. Great to see you again. Thanks for having me.

Thank you. Bye.