Flywire Corporation (FLYW) Earnings Call Transcript & Summary

I'm Tim Chiodo. I'm the lead payments, processors and fintech analyst here at Credit Suisse. We are very fortunate to have with us today the team from Flywire. We have the CEO, Mike Massaro; and the team, Akil from Investor Relations as well. Thank you. I want to thank you both for making the trip here and being a part of our 26th annual technology conference.

Thanks for having me.

All right. Excellent. We have plenty of more detailed questions, but we're going to start it off with for those of you in the room that are a little bit newer to the story. We are going to hit the basic generic overview, just for the intro to Flywire. And with that, I'm going to turn it over to you, Mike.

Yes. So for those that don't know much about Flywire, we're at the intersection of software and payments. So financial technology company. Our belief software drives value in payments. And so we have 3 core components that we think differentiate Flywire, vertical-specific software, sits between our clients, system of record and their customer, the person trying to pay them. The second part is a payment platform. Think of this as shared infrastructure, could be things like store credit card, do a bank transfer, make a currency conversion, send a notification. Think of those as all shared services that are developed once and then shared by the vertical software application. So we're not replicating functionality in the vertical software. Third part about what differentiates us is our own payment network. Probably one of the most strategic assets we have. We actually own and control our own infrastructure. So think of that as us having the train track as to how the money moves from our clients' payer through Flywire to our clients and doing that across banking infrastructure, card infrastructure, third-party payment method infrastructure. Those 3 components are quite unique and different. We also think go-to-market vertically. So our 4 industries are education, think of it as processing higher ed tuition, health care. We're mostly focused in the United States as the growth of out-of-pocket spend has occurred for patients, less being covered by insurance, more out-of-pocket spend, travel being our third industry, which you're paying for a luxury trip around the world. You're renting a villa, you're going on an African safari, good chance you're running into Flywire technology in those types of transactions, high-value, complex, typically cross-border and then B2B payments. And so within there, a whole set of subsectors like tech companies, manufacturing companies, import-export businesses, all good examples of companies that use Flywire. So we're always helping our clients get paid always on the AR side and really deploying software. Revenue stream is transactional and software, SaaS-based, about 70%, 75% or so transactional on the rest of platform usage.

Excellent, Mike. Okay. One other clarifier that I think is important for folks is around -- it's not just card payments, right, there's lots of non-card payments. And in terms of the network you built out to facilitate those payments across multiple payment methods, can you just talk about the breadth of owned versus partnered versus licensed, meaning sometimes you're going to -- it can be a wholesale or so, sometimes you can work with acquirers? What is the mix of that to put that network together and how complex because it took a long, long term to build and let's just talk about how hard it would be to replicate that?

Yes. No, great question. So first, just with Flywire in general, like we always say -- we often say we have multiple moats, right? Like we have these industry expert teams who understand our industry, spend a ton of time identifying these problems, solving them for customers. In addition to that, we have this deeply embedded software, so it's tied to their system of record in between the system of record and their customer, really hard to get that out. And then third is we actually control how the money moves, right? So if you're going to beat us, you've got to kind of beat our people, you've got to get software removed and then your software deeply embedded, and you actually have to come with an entire payment network that took us over 10 years to build. Frankly, when we started the company, we hoped we borrow someone's network. We assume there B1 to borrow. Fun fact, most of the networks are AP networks, accounts payable networks, not AR networks. So it's easy to send money to many places. It's hard to collect money from many, many places. We were also dealing with high-value, low-risk payments that's actually pretty rare when you're dealing with global payments in general. There's -- the vast majority of money going around is remittances, money transfer businesses. That's not our business, right? The money is stopping at Harvard, it's stopping at Yale, right? It's going to really trusted institutions through invoice process, so it's low risk, high value, typically thousands of dollars. So when we set out to build this network, we quickly realized if we don't own the endpoints of the infrastructure, right? If someone's paying us from Singapore to send their kid to Harvard, if we don't have that account in Singapore, for instance, we don't really provide the benefit to Harvard to say, hey, we've got your money, don't worry about it's paid, right? So if you have both the endpoints, you actually can deliver speed and off almost of -- creating almost like a credit card off status for a bank payment, right, which is kind of this unique concept. And that's really what we're doing with the banking infrastructure. So it's 50-plus currencies around the world. It is truly local accounts. We're not talking about multicurrency accounts sitting in London. We're not asking someone to send Turkish lira to a multicurrency account in London and providing somewhat a multicurrency wallet. This is local infrastructure connected bank infrastructure, Flywire owned and control to some of the top banks in the world. And then we quickly realized bank payments, although the vast majority of the volume because our transaction sizes are so large, people want to see other payment methods, right? You may be making a deposit to hold your kids spot at an educational institution. It may only be a couple of thousand dollars. You may pull out of credit card to do that. And so behind Flywire is 3 of the largest global acquirers. So FIS, Worldpay, First Data, Fiserv and Adient. We control who gets what volume, however, right? So our clients don't sign paper with those acquirers. It's all within the Flywire agreement with the client. And Flywire controls how much bank volume goes to a given bank. We can switch it overnight, right? So we not only control that train track. As I said, we control the switching of the train track. And so acquirers are behind us and then folks like an Alipay or a China UnionPay, American Express, PayPal for PayPal and Venmo acceptance. All those different payment methods people would expect to see are all available within Flywire, doesn't mean people have to sign more paper, don't have to go through a second set of onboarding documents, don't have to make changes to tech. It's all being delivered through the payment experience that Flywire delivers.

All right. Great. Mike, we're going to get into some of the key verticals one by one. So before we do that, though, and maybe we can answer this question on your main vertical in education or maybe you could even speak to it more broadly. But competition, RFPs. So let's say there's a big university who opens up an RFP. You already have most of them, but there are some that you don't. When there's an RFP that comes up, who else shows up with that RFP? And maybe the answer is no, based on everything you just mentioned in terms of others not having the network. You mentioned some of the moats. Do we -- do you ever see the large merchant acquirers that most of the audience is extremely familiar with, the Global Payments, the Fiservs, the Worldpays that also you're partnering with to an extent?

Yes. In general, we don't see a straight acquirer. Global has a bit of a different strategy. They acquired one of the domestic competitors in education called TouchNet, and frankly, the incumbents in domestic U.S.-only education have been what are known as the nets, which used to be TouchNet. They're now rebranded owned by private equity, and it used to be part of higher one. Some may remember long ago as a publicly traded company. That's moved ownership a couple of times. Nelnet, which is part of a loan servicing company in Nebraska, which is also publicly traded. They have a payments division and then TouchNet is a Global Payments company. So that's where the traditional incumbents have come from in education in the United States. Now most of those players haven't really gone global, ironically, with the education vertical. So when it comes to most of their client concentration, it was U.S.-centric. Flywire has clients now in over 30 countries within the education vertical and have expanded quite a bit internationally and proven we can go after and sign up universities all over the world. So for us, that's who we'll traditionally see. We won't really see those players though in our cross-border product. We'll run into them when we're deploying the domestic product, which, think of that as doing all the payments from parents and students within the United States. So our original product was across border products, 7 years of our company. We're only U.S.-focused only cross-border tuition and only higher education focused. And so since that first 7 years, we now have a whole suite of domestic capabilities to compete with those incumbents. We've gone global to have clients in over 30 countries. And in addition to that, within education, we've kind of gone into subsegments. So things like language programs, boarding schools, some of the premier boarding schools in the world use Flywire, vocational schools, like Le Cordon Bleu, it's famous culinary school, $65,000 for culinary arts tuition in 13 campuses around the world, right? Those are all good examples of how we've expanded the total addressable market inside education. But in the U.S. in that RFP scenario, we'll run into one of those 3 incumbents, right? And what they're trying to do is they're trying to prevent their customer from making a switch, right? And so how we typically go into those situations is obviously talk about our cross-border capabilities and domestic having everything under one set of functionality. It's a more modern platform. Most of the incumbents have been around for decades. And so as you'd imagine, they're dealing with typically older technology that they've had to kind of migrate from maybe on-premise software even to a cloud environment. And frankly, just the way in which we go to market with our team, our client services, we've been doing a lot of innovation in this space, right? Remember, the incumbents didn't solve the international tuition problem. They didn't solve the overdue receivable problem, which we built the product for. They didn't solve 529 payment problem that we built a solution for and have deployed. They didn't solve the agent education problem. So we're really kind of painting ourselves inside the education space is the innovator that has delivered that does have the kind of premier logos.

Okay. Excellent. Well, let's hit on the education vertical. We've talked on it a little bit so far, but one -- sorry about that. Let's hit on the education vertical. One of the main aspects for the U.S. clients of yours is how many international students are enrolling in these U.S. universities? So there's been some disruption to that related to COVID. But maybe you could just talk about what those trends look like pre-COVID, during and now the recovery post?

Sure. So first 7 years of the business, cross-border product, so still a cornerstone of obviously, the revenue today. International students, if you look, there's some great public data available, if you haven't seen it, the iie.org publishes what's called Open Doors, pretty much shares what international student enrollments have been in origination countries and destination countries all over the world. If you look at the last 2 decades where this data has been shared, you've seen changes in origination country volume where countries like China weren't even really on the map 20 years ago to shifts in destination countries where Canada, for instance, is gone from the top 7 maybe into the top 3 as destination markets for students. And so you'll see fluctuations over the years of student volumes by origination and by where they're choosing to go to school. What's happening at a macro level, and if you look across the 20 years, pretty much it's a mid-single-digit growth rate on the number of international students. It's about 6 million higher ed international students globally, about 1 million in the U.S., which is the largest market. As you mentioned, some of the COVID recovery, specifically from China has been slower. And so you saw visa rates still lower, visa issuance rates, right? There's macroeconomic, geopolitical, there's COVID-related stuff. There's a lot going on in that kind of corridor right now. We did show, in the last earnings call, great growth at Chinese students going into Asia Pacific as well as into the U.K. So Flywire wins when students travel outside their home country. And over the kind of medium term, we expect that kind of single-digit growth in population to continue. Where it comes from, where it goes to, that's kind of a fluid dynamic that is just kind of natural in the space. So for China, in particular, our expectation is this kind of rolling recovery back to pre-pandemic levels that will occur over '23. And for us, we're not fully penetrated in Chinese students, right? So our ability to grow even if this Chinese student number stays flat or goes down, happens when we add more schools, when we get our payment capabilities launched and get in front of more parents and students. And so as we're adding more schools inherently, we can grow that corridor even if the total student numbers are still flat or down.

All right, Mike. That last -- those last couple of sentences you mentioned there kind of related to this next question, which is -- or topic, which is around your NRR, which in the education vertical, you recently disclosed that it was about 130% or over 130%. What were the drivers of that? And a lot of it is probably related to what you just referenced?

Yes. So Flywire has really awesome growth levers, right? We have -- even if you just look at the fundamentals of our business, unit economics, really strong, oftentimes we'll comment our LTV number is kind of almost hard to define, right, because we barely lose a customer, have been around for 12 years. So you have these really long LTVs, your cost of acquisition is also very low. And so as you kind of look at those dynamics, you've got these kind of financial profiles that are really good. If you look at NRR, which is another metric we talk about a bit and at the point of IPO, we talked about a 3-year average, which included a COVID impacted year. I think it was 123%, if my memory serves. And that included 100%, meaning a flat year on 2021 with the -- sorry, 2020, the height of the pandemic. And so that's our cornerstone growth for our yearly basis. If you think of that 123%, it proves our ability to keep growing at an existing client. And then on top of that, you add full year effect, you add net new client signs and new revenue coming from new clients, and that's really kind of the growth algorithm, right? And that's all organic. You can layer in inorganic. And so that's really how the growth algorithm works. And when you look at NRR, what's driving NRR, which again isn't just one lever, right? You've got functional expansion. So I'll give you an example of functional expansion. A hospital chooses to select Flywire to do their patient receivables starts us in the state of Texas. They also own hospitals in Arizona and New Mexico and wherever else. Year 2 will get maybe New Mexico lit up. Year 3, we may get -- and that's the same product being deployed in different kind of functional areas or could be the oncology group versus the surgical center, right? That's a good example of a functional one as well. You could have a geographic expansion, good example, that's Hilton in our travel business, started off doing their grand vacation business in the U.K., in European Union properties. That project was successful. They said, let's take the same product to different geographies, right? And we drive and grow NRR. And then the third one is new product, right? So you can deploy a new product and obviously drive additional revenue at an existing customer. So the NRR metric is being driven across industries, but it's being driven by those 3 capabilities, right, which is functional expansion, same product in multiple places, product expansion and then geographic expansion, which are all present in the vast majority of our clients.

Perfect. Glad you wrapped that up pretty nicely there on the growth algorithm contributions to NRR. Let's shift to health care, which you also alluded to a little bit there. So first, let's talk about what is the status quo when you enter one of your health care clients? What are they currently doing before you get in there? And then in terms of how you approach them, what is the mix of the channel there? Is it sales more direct? Is it channel partnerships, a little bit of both?

Yes. Vast majority of Flywire's growth has been direct, although we have kind of this emerging channel business, which is a combination of financial partners. Bank of America, we've talked a bit about publicly, which is part of our payment infrastructure, but in addition, provides great kind of lead gen for the business and then integrated partners, Cerner in the health care sector is a good example of that. There's plenty of integrated partners all around the world. It could be a bookings platform in travel, could be system integrator that does B2B payments and accounting system and ERP deployments. All of those are good examples of potential channel avenues for us. But the vast majority of our business comes through our direct teams. And so when you think of it that way, within health care, Cerner being the biggest relationship, but when we get involved, it's either coming through a trusted relationship like a Cerner or you're going in and you're finding legacy players, like you may be finding some people in this room may remember terms like EIPP or EBPP, folks like me have been around 20 years in payments. Remember, the Version 1 of those things, think of them as what looks like a white piece of paper on a screen, and very static interfaces may look like you're making a payment in 2002 or 1998 on the Internet. What you'll see at home is just being inundated with paper, right? And I've got 4 kids like the health care bills that chop at my house, they come 3 or 4 a week, probably. And at the bottom, they have an amount due, but it says this is not a bill, right? So what do you do with that? And the reason this all happened is that hospitals had these systems, but so little of their revenue came from out-of-pocket spend, right? So they almost didn't care if I paid my bill, right? They got the vast majority of their revenue through the insurance provider, the payer, which is what is called in health care, the insurance. But that percentage went from like less than 5% for most hospital systems to nearly 20%. And so they can't just write that money off anymore. And then they realized, well, geez, the only place we can capture payment details from our consumers is when they're checking in or checking out of the hospital, and they weren't doing that very well, right? The minute you left, all they could do is mail you something, right? And so how do you start digitally engaging your patients? How do you capture mobile numbers? How do you capture e-mail? How do you authenticate into an EHR system that has patient records and data in it? So all that digitization has been happening. And obviously, payments and patient experience around payment becomes part of that. So it's usually a hospital system who's going away from one of those legacy environments, maybe they're streamlining their EHR system or consolidating into one system on the back office, and they're saying, geez, how do we get our payer experience, how do we collect more of the money we're owed. The other trend that's happening is people are realizing they have to be flexible in how they get paid. Most people don't prepare for an unexpected medical expense. And so if you're kind of surprised by a $1,000 or $500 or $2,000 medical bill asking someone to just pay it, right, with a credit card or with a bank account, like it may not be the best way to do it. So what we've built is a whole engine that allows the provider to effectively configure the rules for what payment terms are being offered. So if you're getting billed through Flywire with your medical provider, you may see an offer to say, hey, do we think you can pay the bill all upfront? And we may ask you to do that. If you say you can't, maybe you're getting a 3-month option. This isn't a finance. This isn't a buy now, pay later solution that we're offering. It's all our clients just configuring different receivable rules through our software to allow someone to pay over time, right? And what this does is it increases the amount of collections they can get. It helps someone who may be not able to afford a $1,000 bill, but could make payments over a year of $100 a month. And it's smart enough that if there's another procedure that happens at that hospital system that it will prompt the user and say, hey, there's an additional balance, what do you want to do? Do you want to extend your payment plan? Do you want to rebalance it and change the amount from $100 to $130 a month and continue the same amount of months? And really, our software is driving all that interaction with their payer and it allows them to really turn dials to increase the amount of receivables they get through their hospital from patients. And so that's really how we're taking them from kind of the static paper-based experience to something more modern. And I'm sure many of you have seen text-based experiences. You may not even notice it's Flywire, sometimes there's a little logo on the bottom kind of powered by, but it's usually branded as our client, whether it's in education or health care or travel client.

Okay. Excellent. I want to make sure we have a little bit of time at the end for the audience. So let's try -- let's hit travel. So clearly, travel has been rebounding, and that's been a benefit for anyone with exposure to it. But beyond just the market growth, you mentioned that there was a big increase in new deals. In other words, new clients that have been coming in to the Flywire ecosystem. Maybe just talk about those new wins and for the audience a little bit of what types of clients are these? It's not your typical Expedia price line. It's a different type of travel. It's high value. It's something that's less likely to be carded.

Yes. So Flywire is not going to go compete with an acquirer for like easyJet or BA plane tickets, credit card volume, like that's not our business, right? We're not going to go do walking tour -- $10 walking tours of London, e-commerce or things like that. We're going to again be in luxury accommodations, high end, large, typically thousands of dollars, multi-day tours, luxury biking tours, you go in heli-skiing, you ever go heli-skiing, you're probably paying through Flywire, almost have 100% penetration in heli-skiing, it's actually a pretty big sector, great clients, great payback period for us, African safari. So there's so many of these experiences that are happening that are big ticket transaction sizes. And if you think of what these -- most of these, what I'd say, small to medium-sized businesses we're dealing with was trying to find a local acquirer that was going to allow them to collect payments from all over the world. They were getting inundated with card transactions, high cost lots of manual reconciliation someone couldn't make a card payment from overseas, card was rejected, payment limits, whatever. They'd have to send a bank wire, business would have to reconcile the wire, right? All that messiness was happening. So what Flywire does, we come into these systems, right? Think of the Flywire pay button being on the invoice. We can even generate the invoice if they don't have a good way to generate an itinerary or an invoice. And then we're the way to pay. So a client can configure the rules. Is there a deposit due upon booking? Is there another payment due 30 days from the trip, another payment due on the day of the trip. Whatever the rules are, the client configures that inside Flywire, and we're actually processing those payments. And again, bringing our whole banking infrastructure, our third-party payment method and our credit card infrastructure to solve that problem for the customer. And so for us, the travel sector is super exciting. If I've often said publicly that if it was a separate business, even in this environment, it would be raising a sizable growth round, like that's the type of business it is for us right now. So it's super exciting. It's global in nature. And when you dissect the total addressable market, which we've shared to be around $500 billion, $600 billion for us in those 3 subsectors of travel, there's still some sectors to go. Like I just learned the term for tourism related to wine. It's like [indiscernible] tourism or something like that. Like it's like a $40 billion opportunity just in tourism related to like vineyards and wines, right? So like these are huge markets that everybody would really write off is like, oh, that's too small. Like they're massive. And they have a huge payment problem and the straight put a credit card form on the website or on the invoice isn't sufficient to drive value. And so for us, that's the exciting part. We talked a bunch at our Investor Day in May as well about what we're seeing as an emerging trend where these clients don't only have challenges getting paid. There's this whole complex manual system of where supplier payments go, right? Most of these companies don't own the helicopter, right? It's a third-party supplier. And so they're configuring these tours and there's receivable payment challenges and payout challenges that exist, there's commission owed back to maybe a boutique travel agency. Maybe they own 10% or 15% of the transaction back to someone who originated the traveler in New York City or wherever else. All of those are really interesting payment challenges for us in the future. But really, our focus right now is those 3 subsectors, geographic expansion and really trying to run the table on the total addressable market.

Great. Mike, thanks for those examples on the travel side. I think that really brings it to life. We have a few minutes left. I want to make sure the audience has an opportunity to ask a question. If you would like, please just raise your hand and we'll bring you a microphone. If not, we have plenty more. Okay, here we go. Thank you.

Can I just ask like operationally, like how does a student in China pays bill for Harvard or something along those lines. Like what are they doing, like?

Yes. So talk you through the user experience a bit, we'll use China as an example. Think of Flywire is connected into the invoicing process of Harvard, right? Again, we're signing up the biller, multiyear exclusive term typically, and then we're part of that invoice flow. So imagine there being international payers go here, right? And it's a Flywire button. It's all branded Harvard. We'll start with you owe, right, probably going to get this wrong, even with the high school senior, $72,000 maybe to Harvard U.S. dollar equivalent. First question starts with where you're paying from, person selects China. We're going to immediately show renminbi prices across the local payment methods in China. So fully foreign exchange rate quoted, China UnionPay, Alipay, local bank transfer, which is an equivalent to like ACH equivalent here in the United States and really give the choice to the payer to pick which method they want to transact in. Different countries will have different limits, right, of what limits can be done based upon regulatory. What Flywire's payment experience, which is kind of like a checkout process that they go through, things like student ID may have to be entered or validated as part of that payment experience. In China, they actually have to upload their Chinese national ID documentation as part of it securely so that they can actually get the funds out of China as part of the regulatory requirement in China. It's different for India. It's different for Korea. So all our software is driven by what is required within that country to make that transaction in that home country. And we take all that complexity away from the institution, right? What they see on the other end is when that student picks China UnionPay to debit their bank account in China, those funds are going to settle to Flywire's banking partner. They're going to be aggregated together, of course, Flywire is going to receive either CNH, which is a Hong Kong derivative of the renminbi currency or will receive U.S. dollar, British pound, wherever the money is going to. In case of Harvard, it's going dollar. That will all be from not just China, but from Nigeria and Korea and India, right, on a daily basis. Payments are coming in all the time. So what we're doing is on the back end, we're settling to Harvard, meaning we're delivering, say, $20 million to Harvard with a fully reconciled ERP file that post to their student information system. So saying Student A paid from China, they picked China UnionPay, here's the amount fully reconciled $72,040, right? Here's the other one came from the U.K. They paid on their American Express. So they're getting all the payments aggregated into one feed, typically not even a person's looking at it. It's flowing straight through processing into their ERP system and the money is deposited into their bank account.

And that's because you have like a bank in China that UnionPay is paying? Is that like the infrastructure system?

Think of us as having a global network of banking partners, Flywire owned and controlled infrastructure, wherever possible. And then the card acquirers would settle to us just like they would settle to a merchant, if you will, same with PayPal or Alipay or anybody like that. We're almost like -- in some ways, you could see us as a super merchant. Some people would say, oh, it's like a payment facilitator kind of model. That kind of only works in certain geographies. No one is really a global payment facilitator. It's kind of tricky in that dynamic, payment facilitator doesn't work with banking rails, but it's kind of a good theme if you know payments well to think about us as that kind of aggregator across methods across countries and bank accounts.

Well, thank you for the question, and thank you, everyone, for joining us. Again, on behalf of everyone at Credit Suisse, I just want to thank Mike and also Akil for making the trip and joining us here at the conference. It was a pleasure hosting you.

Super fun. Thanks for the outdoor spot. It was awesome, better than a hotel room. If anybody hasn't been outside for a meeting, it's pretty special.

It's not bad out there.

Yes. Awesome. Thanks, everybody.