Flywire Corporation (FLYW) Earnings Call Transcript & Summary

Good morning. Thanks, everyone, for joining. This is the Flywire session as part of the J.P. Morgan Ultimate Services Investor Conference. My name is Tien-Tsin Huang. I cover the payment sector and very grateful to have Mike Massaro, the CEO of Flywire, join us for the first time as a public company. We've had Mike before at some of our other events on the private side, including in Boston, right, Mike, with the tech conference. So -- and I'm really, really grateful again to see you here in the public side. So like the other sessions, we'll do a fireside chat. We'll take questions from the Ask a Question button. So feel free to hit that, and I'll be tuning into that as best I can throughout the session, but I've gathered a lot of questions from the investor community and hopefully get through all of that. So, Mike, great to see you. Thanks for doing this.

Yes. Thanks for having me. Good to see you, Tien-Tsin.

Yes. For sure.

So let's get right into it. I think -- like the last session, I think it's important for those who are newer to the story, and maybe they'd go back to basics, as I call it. And tell us a little bit about the founding of the company. What problem was the company trying to solve? And how has it evolved to this point?

Yes. So back then, 10-plus years as a private company, really centered around one of our industries. So today, we get multiple industries. So back then, we just really focused on education payments. And there's a big pain point that was seen by a lot of universities where international students started traveling the world, they had difficulty paying for many countries. And so a bunch of payments and enterprise software folks and our founder as well, who was an international student going to MIT, having trouble payiing MIT really identified this problem, and we started working with major universities solving this first cross-border problem. And then as we grew the business over time, geographically expanded, industries got expanded, and then our clients pretty much looked at us and said, "Hey, why don't you just do all my payments?" And so what it really led to is just this belief that there are huge parts of the global economy that are poorly digitized for payments. We've all seen what's happened in e-commerce and retail, and those have been kind of amazing transformations over the last 2 decades. But if you look at things like education payments, health care payments, certain types of business and travel payments, it's almost like you're going back on the Internet a decade when you're trying to transact.

So what is Flywire replacing then? You mentioned the whole digitization theme that's very apparent throughout all of tech. So are you replacing manual processes, just legacy systems? And what's the pitch just from an ROI perspective?

Yes. So for sure. So I mean, the old way of buying software: You buy the software. You'd have to integrate in payments. You'd have to run an RFP for an acquirer, maybe pick a backup acquirer as well. You'd have to figure out which bank was going to route domestic payments. You'd have to handle wire payments directly with a lot of manual office work on the backside. You'd have to identify third-party wallets you wanted to accept and have to sign direct relationships with those. And so what Flywire really does is we take the software aspect and the payment capabilities that we have that are unique, put them together and really take away all that pain from a customer's perspective. So you're often either replacing legacy software that is either oftentimes pre-cloud e-bill-based software. Sometimes it's bespoke EBPP, if anybody is as old as I am around the table and remembers those terms. Those first- or second-generation platforms could have even been on-premise software. And then there's also a whole series of back-office manual steps that we're also eliminating. And so when you look at the ROI, it's really a clear indicator, short payback periods. And these sectors, again, are not experts in payments, and we always say that they -- our clients shouldn't have to be, right? They should focus on running the university, running the medical hospital, running their business and leave the payments and the complexity around the payments up to someone like us.

Well, investors, Mike, ask me this all the time, given what you just said there, what's the moat for the company? Is it more of the software? Is it more of the payments? How do you see the moat?

Yes, for sure. So we often talk about the Flywire Advantage. It's 3 parts. It's verticalized software. That software is industry specific, handles specific use cases, nuances within the industry. Anybody that has sent a kid to university, maybe it's a payment plan that you configure to make multiple installments through a semester a year. In hospitals, it's all the connectivity around out-of-pocket expense for patients interfacing with all those systems. So that's all in the vertical software component. That software is always deployed no matter what sector that Flywire is serving. It's always deployed between our customer's back-end system of record and their end customer, right? And so it's an extremely sticky location to have your software deployed, right? We're handling all direct bidirectional communication with the payer on behalf of our client through the software, and then we're also keeping those legacy systems up to date with balance information or payment statuses. And so that's where our software is deployed. So that's kind of the first moat someone has to jump over, right? They got to get someone to be willing to replace that software. And then if you go down the Flywire Advantage, there's 2 other components. These are horizontal components, so they work across industry for us. First is a tech platform. Tech platform has all shared services, so things like store a credit card, do a bank transfer, convert a currency, send a payment status. We're not replicating that functionality inside the vertical, right? So you have a whole series of scale you're getting there. Because when you enhance the platform, all the industry software benefits from it. As you modernize and find new innovations maybe in one industry, it's often that another one can benefit from that same tech investment. And the third part is really unique to Flywire. It's our own global proprietary payment network, so it supports all local and global payments. It's 3 direct card processing relationships: FIS-Worldpay, Fiserv, First Data and Adyen. It's direct relationships with Amex and Discover, PayPal for PayPal and Venmo acceptance, Alipay for Alipay Wallet acceptance out in China and then 50-plus bank accounts around the world that are connected to local clearing that are Flywire-owned and controlled. So that's almost like the second moat, that network, right? If you're going to compete with Flywire, you've got to first get our software removed. Second, you got to have a way to merge the software that you have, plus the end-to-end payment network that we have, which is quite unique. Clients aren't having to sign paper with all types of different payment processors. It's one relationship with Flywire they get all those capabilities. So you're jumping over 2 different moats, and then we often say the third moat is our team. So the way we go to market is heavily verticalized, right, so with this vertical software. But our sales, our client services, our implementation teams, they're 10- to 15-year experts in these industries. So the relationships they have, selling into the CFOs of these hospitals and businesses or educational institutions, they're very deep relationships. They're often some of the most respected professionals in those industries. And that's almost the third moat, right? You've got to go and pull our customers away technically. You've got to solve the complexities around the payment network, and then you have to compete with our people who are best in class.

It's good stuff. And obviously, you have to orchestrate all of this, which is not easy, so we don't take that for granted. And it's resulted in really great revenue growth for you, clearly, pre and post pandemic and in the most recent quarter that you just reported. So maybe, Mike, talk -- build us up to the revenue growth. And for those that are less familiar, right, I look at your net revenue retention rate, it's very high, 118% zone. So I get a lot of questions around same store, churn, pricing, all this good stuff. So how do you build up to your revenue growth?

Yes. So the cornerstone, the starting point for it is that NRR, but the reality is we have these multiple levers of growth in our business, and that's part of what gives us so much confidence in the future and also partially leads to such great results this year in our first 2 quarters. So first, it's that NRR. If you look at the 118%, that's even a blended 3-year average, so if you look at -- including a COVID-impacted year. So as noted in the S-1, you got a 126%, a 128% and 100%, making that 118% average. And so that's really, for us, quite an impressive number. And if you look prior to the pandemic, we expect the business to kind of return to those levels or better as this rolling recovery continues around the world through the COVID pandemic. The next part is our net new client acquisition. And if -- another great thing about Flywire is that the clients actually have very little impact on a given year's revenue, right? So you have this kind of multiyear client acquisition. And in years 2 and years 3 and years 4, those clients ramp as we get more and more of their volume, as we expand our footprint, get them to use different products and offerings with us. And so that net new client acquisition is a key aspect of growth, both 2019 and 2020 were record years of client acquisition for the business. 2021, we've shared some numbers on our quarterly calls, quite -- going quite well as well. So again, feel really good about that new client acquisition accelerating, especially with the additional investments we're making in go to market. And then on top of that, you have new industries and new geographies, right? So our core business, our 2 largest industries, education and health care, but we have 2 amazing emerging businesses, both in travel and B2B payments. And so you get the benefit of having these multiple industries, all that can grow all on the same core of amazing unit economics. And then geographies is another thing we layer in, and these are all different organic levers. We haven't even talked about inorganic yet. But as you add new geographies, it's the same core platform. So Flywire's ability and now we have clients in over 30 countries, our ability to open up a new industry -- a new geography and bring in multiple industries into that investment has been proven time and time again. So you have geographies that are driving millions and tens of millions of dollars of revenue that have been started with relatively little investment, right, a handful of FlyMates or employees that we've made those investments. So it's about doubling, tripling down those geographic investments to keep the growth going as well. And then I've mentioned inorganic throughout the IPO process. We love the organic levers we have, but we also have a proven track record of finding tuck-in acquisitions that can further accelerate our business. So again, it's part of the long-term view. We hope we'll be able to identify some of these and even accelerate growth even further but quite happy with our organic levers that we've proven to pull.

Yes, yes. And I guess, as a result of that, you've talked about a strong backlog and a strong pipeline in general. So I don't know if there's a way to maybe go a little bit deeper into that in terms of talking about active opportunities and where it stands now. And relative to pre-pandemic, have you been surprised by the number of pursuits that you're chasing?

Yes. When you think about our business, I mean, if you look at the client acquisition numbers, we never slowed down on the organic stuff, right? We just continue to focus even some of these sectors. Like travel, for us, we knew it was obviously going to be heavily impacted. Never really slowed down client acquisition. And I think if you look at kind of getting the company public, for us, inorganic opportunities, we expect them to come over time, dedicating more time on it. But again, don't need them to grow, right? We want to make sure we really find the right thing that fits, right? We've had a great track record of inorganic moves, high 90 percentile client retention, high 90 percentile employee retention. And so again, great track record, proven ability to do it, just going to find the right deals.

Okay. Good. So let's dig into the verticals a little bit, if you don't mind, Mike. Just with education, how I got to know the company, historically thought about as cross-border, as you said, but now you're doing a lot of domestic payment plans. So how does that change the go-to-market and the TAM for you, in general? And probably one of the biggest questions or most common question I get, Mike, is sort of what percent of your education clients use Flywire for both cross-border as well as domestic and where can that go. So a lot of ways to answer that, I know, but just want to throw it all out at once.

Yes. No, no worries. So people need to remember, in our first 6, 7 years of the business, we had 1 product, 1 industry and 1 geography, frankly. Most of our university clients were U.S.-based back then, right? So the company really has proven the ability to go global, to add additional products within industries and then to add industries. And what happened in education is we pioneered this international tuition payment capability. And our clients kept telling us, "Why don't you just do all my payments," right? "Why are you just doing the cross-border?" The experience is more modern. Oftentimes, it streamlined a lot of the back office. It's flexible software. It was all cloud-based, mobile, web-friendly. And oftentimes, the experience they were giving their domestic students and parents was even below what we were delivering for the cross-border side. And so that's what really got us there was to realize -- we almost thought it had been solved, right, or should have been solved by then, but our clients weren't getting the client service or the technology innovation that was really needed. And that's really where we stepped in with, again, enhancements, new product capabilities to not only do the onetime payments, the deposits and the payment plans, which are a huge part of the tuition dollars captured by universities. About 80% of the volume captured on campus is tuition and fees, but it's only about 20%, 25% of the total transactions, right? So huge amount of the payment volume that you can get just by going after all of the tuition and fee dollars. And we built a whole series of capabilities. And customers, when they kind of move all the money with Flywire, it's a multiplier for us, right? So when it comes to having the cross-border product deployed and then going in domestic, truly a multiplier. It also brings in a software and transactional revenue stream for us when someone does -- moves all the money. And that's really been a cornerstone of our expansion. We mentioned the Texas A&M story. On the Q2 earnings call, we mentioned MMU, which is a U.K. university who did a similar type of deployment across domestic and cross-border. And there's really lots of these great stories coming. It is still really early days, right? It's single-digit penetration of our customer base that is moving all the money, and that's what gives us such additional confidence about our ability to do more and more. We got this amazing 6-plus years of client acquisition on the cross-border side, and you'd imagine our teams are going in and talking to these clients about how do they do more with Flywire, how do we help move all the money. The other thing to note is that's not how we've gone to market with this kind of land-and-expand strategy in education. But in all our other industries, health care, travel, business payments, we're going in with a full offering that moves domestic and cross-border volume. And so that's kind of how we're going to market in the other industries.

So if you could spend a minute, Mike, just -- if I'm a domestic student, how do I interface with Flywire? What's that experience? Because you're dealing with the university, obviously, but the end user is so critical in this case. So just spend a minute and maybe talk about what that experience. And how do they get comfortable with the workflow?

Yes, for sure. So typically, you're going to see us more as like an Intel Inside-type branded capability, so it's going to be underneath the branding of the university. Oftentimes, you'll be invited as a parent or a student to make your initial deposit. That communication is likely coming or originating from a Flywire system. Again, it's going to be heavily branded as the university. You're going to be going through some authentication process with the university with your university-based account, again, interface point for Flywire into the single sign-on system. And then we're really going to be delivering to you pretty much everything you see in a payment experience, could be your balance information, could be an option to make that deposit. If it's a tuition payment, you're going to get the option to pay it in full. You're going to get the option likely to set up a payment plan which could have multiple installments. Ours is -- our software is completely configurable by the biller, our client. So if they want to offer 3 installments versus 4 versus 6, if someone in education or in health care has a problem making a payment, they can augment that payment plan and give them more flexibility through their own interface in the finance department. So that's really the experience. And then when you make a payment or set up that payment plan, we're the one going to be communicating to you again, so either the text notification, the e-mail notification. If you have multiple installments, we're going to -- our software is going to trigger and execute those multiple credit card or bank debits that are occurring to satisfy the payment plan that you signed up for. If you're a foreign student, we're going to be handling that with a whole different set of workflow, all from that same system. The rules in which cause a student to pay from India versus China versus Korea are all different, and our software handles all that complexity. If there's a document required or an upload of a document,or a certain type of field that's required in one of those countries, it's built into our software, right? Prior to us, it was a manual process. The school was trying to match wire details with their student account information. You imagine all the complexities that existed there. So we've streamlined that with a whole set of screens, country-specific, and the payment methods are also specific by those countries so that foreign students and parents know the ways in which they're paying. They can pay in their local currency. They can pay with the local methods they're familiar with. And then ultimately, we have a whole set of software that the back office sees, the finance department folks will see payments coming in from Flywire through a whole another set of interfaces. So we've really controlled that entire payment experience, as we call it, which could be seen as similar to an e-commerce checkout experience but really for those invoices being paid.

Yes. Got it. And of course, all the complexity you are doing that behind the scenes, but making it as easy as possible for the end user, customized by geography and by the university as well. Okay. No, good. Thanks for going through that. So kind of domestic is different than cross-border, but the pandemic did have a big impact on your business. Where are you now from a recovery standpoint? And I would imagine that demand probably changed as well, given that folks want more complexity, more comfortable with e-com. They want more digital experiences, et cetera. So talk to us about what -- how it's changed here. Where are we in the recovery?

Sure. 2020, like so many companies, it was a challenging time, right? There was so much uncertainty. Having a business that does health care, education, travel-based payments, we knew we'd see some level of impacts, of course, but we're quite impressed. I mean, the business grew across all sectors, even in 2020. And so again, felt really good about the geographic distribution of our business, about the industry diversification of our business. And that's really what led us to kind of take the company into the public markets in '21. And what we assumed going into 2021 was that the world would see a rolling recovery in our sectors, right? And there are times in which we've thought the pandemic is behind us 2 or 3x, I think, as a collective globe. And so I think that's proven true, right, that there's this kind of rolling recovery. You'll see spikes. You'll see variations. They may -- in different countries, even different parts of the United States have behaved differently in this pandemic. And so again, for us, we believe that rolling recovery will continue through 2022 even. If you look right now, to give you some tangible examples, Australia and New Zealand just recently opened up. It's a major market for international students. If you look at Southeast Asia and Japan, not only have a series of travel but education clients in those markets as well. And so again, lots of restrictions have still existed in those places, not back to '19 levels even yet. If you look at subsectors, you have things like summer programs, language programs which Flywire also services. Those programs are subsectors within education for us, in addition to the boarding schools and the higher educational institutions we work with. And those subsectors haven't recovered because the travel restrictions don't make a lot of sense for someone to go for a 4-week language program in London over the summer, right? That wasn't something that was easy to do with the travel restrictions. So there are some subsectors that haven't come back yet that I think will come back throughout 2022, and then there's also some geographies that are going to positively impact numerous industries, right? We have not slowed down client acquisition and having had record client acquisition numbers. If you look at like our travel sector, 2 years plus of client acquisition that hasn't fully materialized yet, we haven't seen perform full yet. We think that's a really positive trend for us that this kind of recovery, over time, will really continue, and we're global and geographically diverse to be able to benefit from it.

Yes. No. It's important to underline, right? Like you said, the client acquisition has been there, just kind of waiting for some of the demand to come back. So I know I asked this on the main call on the travel side, I mean, the quality of the ARR there, Mike, and the quality of the pipeline. I mean, is there a greater interest as companies or travel companies look to get ready for this to come back? Has that been helpful to you and from a client acquisition standpoint?

It has. I mean, you mentioned it in the last question as well. I mean, the folks during the pandemic, whether you're a university, a hospital, a business, travel company, you have this unique opportunity to look at what you were doing and almost figure out is that how you really want to deliver experiences to your customer. And we saw a ton of interest in our solutions and continue to see this today, where people are using the opportunity to digitize things that were very manual before. Some of it could be manual processes that existed. Sometimes, it was a proof point that the old software they were using was very inflexible, right? If you think of having payment plans, those payment plan dates move around. And if you don't have software that adapts to that easily, becomes a manual process in the back end. With travel companies, oftentimes, the travel companies we work with are large and global, and we're just inundated with bank wires or very high credit card fees, right? Imagine if you're on a luxury trip to, say, Spain or you're taking a group of friends, heli-skiing up in British Columbia, that transaction size is likely pretty large. And if you're running that on a credit card, right, and you're receiving those credit card charges, Flywire comes in and says, "Hey, you can have people pay via bank and via card," right? And so you can look at ways in which they can lower their cost basis, get rid of a bunch of manual work on the back office and just deliver great payer experiences that they weren't doing before. And that's really what we saw clients choose to do in the pandemic, and we think that's going to be a continuing trend, right? If you think of all our clients, our consumers in the finance departments, right, like they use the amazing services we all use in our day-to-day lives. And when they see the systems that they have in place,to deliver relatively poor experiences historically, they're looking for ways to modernize that technology, which is a great trend for us.

Good. No, thanks for going through that. It'd be fun to see, as we get into this new normal and hopefully go back to the old normal, how it all comes through, but it sounds like you're squarely focused on the client acquisition and the experience regardless. Time is flying. We've got a little over 5 minutes left, Mike. So I want to make sure we hit some of the stuff that people are hitting me up to ask you. So let's do the R&D and the investing in sales question. You are stepping that up post IP. I think you mentioned on the call, you hired 200 people, which is great, and it was a tough hiring environment right now. So tell us about where you're looking to lean in on from an investing standpoint across go-to-market as well as R&D.

Sure. The 2 largest areas, obviously, go-to-market. When we say go-to-market, it isn't just sales for us. It's sales, client services, implementation, marketing. And again, remember, it's industry specific and in different geographies, and so that's a huge area of investment throughout '21 and obviously going to likely continue quite significantly into 2022. If you look at product and engineering, that's the second part, right? There's more we can do for our clients, making sure that we're investing at the platform level, the network level and at each of the vertical software levels, keeping, driving innovation, adding new capabilities, streamlining how the products work for customers. So that's really the 2 biggest areas, but there's investments happening all across the business. Pretty much every department is scaling, and we think we have the unit economics, as folks saw in Q2 and Q3, to really justify that continued investment and obviously the public market war chest that we got through the IPO, so really excited about the investments. In the talent war, it is definitely competitive. But if you think about what we're bringing to the table, we have industries that we want, experts who have spent 5, 10, 15 years in those industries. There are some great places to pull those folks from. And we have an amazing global culture, 40 nationalities a year, 30 languages spoken and a real focus on clients and execution. And so people, I think, have really seen that. We also have what we call the Flybrid future of work, which is a blend of in-person activities which are quite special but also more flexibility for individuals to kind of figure out where they want to be to do certain parts of their work. So we think that's another positive trend for us where you can pull people from corporations potentially that are either requiring people into the office and are being less flexible or maybe were a little more geographically limited where they could work. Here at Flywire, we can go after great amazing people to become FLyMates and just help us grow this business to the next level. So I couldn't be more excited with the hiring. And again, go-to-market, product engineering, 2 biggest areas we're focused on.

Good. Product engineering. Yes. Look, I mean, like I said, definitely have been watching some of the talent flow. I remember when Rob joined you guys over from Apple, I thought that was a very positive indicator, for sure. So the beauty of the business, you have very high incremental margins, Mike, as revenue comes through, and we saw that last quarter and actually both quarters, right? EBITDA has been much stronger than what we thought because of the flow-through that you've seen. So can you spend a minute and talk about the EBITDA trajectory here as you balance the growth and the investing equation?

Sure. Yes. I mean, obviously, hopefully, people -- look, industry-leading unit economics and you can see the flow-through in Q2 and Q3 when we outperform. And I think that's obviously a great thing for a business. It shows the healthy business we have, both in software and transactional revenue streams. At the same time, people should remember the 200-plus hiring. You'll see full year effect of that in quarter-on-quarter effect of that next year. And we just see the opportunity to keep investing, right? So I'd say, in the near term, expect us to invest in growth. We see growth across all sectors and pretty much across all geographies. And so for us, that's what people should think about. They should also think that we're one of these companies that we see as a compounding grower over the next decade. You're going to see these industries transform, not over 2 or 3 years, but it's really going to be over this next decade. And so those unit economics are pretty great. You'll see flow-through and great EBITDA performance in those out-years. But right now, we're focused on growth and investing that money to continue that great growth.

Okay. I have a couple of questions on the lock-up expiration. I know that's hitting a lot of the recent IPOs. Any visibility on what supply might come out? And can you clarify for us the dates and the times on some of the expiration?

Yes. So we released after our second earnings call -- so 11/11 was the release. I think you've seen -- if you look prior trailing average volume in kind of the last week or so, you'll definitely see an uptick, but it's a modest uptick. We obviously have great pre-IPO investors, many of which were crossover types. And so the focus is on building this business over the long term. But hopefully, more opportunities for people to invest are getting out there through that lock-up release, and people should start seeing that volume out there that wasn't out there prior to the lock-up being released on 11/11.

Okay. Great. I think we have 1 minute left or less than a minute. So we're going to go to '22 pretty soon, and we're thinking about our outlook. I'm sure you guys are thinking about it as well. I know you're not going to tell us anything until the next earnings report. But what are you most excited about as we turn the page into next year in terms of your priorities?

Yes. Probably one of the things I'm most excited about, I mean, we focus so much on our team and building a great culture, but it's a team that's executed quite well for the last decade. And the talent we're adding to that team and the opportunity, hopefully, that I've shared here today across industries around the world, it's a pretty awesome spot to be in. So the talent I'm seeing come into the business at senior levels as well so that we can do more. We're really, I think, making the right decisions around scale and how to accelerate the business, and I think that's broadly what I'm most excited about.

Good. Well, congrats on all the success so far, Mike, and we look forward to working with you going into next year. And if we don't speak, have a great Thanksgiving as well next week, okay? Thank you for spending the time with us this morning.

Thanks. You, too, and I appreciate you having me.

All right, Mike. Be well. Thank you.