Flywire Corporation (FLYW) Earnings Call Transcript & Summary

Thanks, everybody, for staying with us. This is the Flywire session. For those tuning in, my name is Tien-Tsin Huang. I cover payments, and we've got Mike Massaro, the CEO of Flywire, a fun name to cover. I know a lot of the management teams, also Rob Orgel is here, Cosmin is here. So thank you for being here and investing your time with us.

Thanks for having me.

So just for those less familiar, maybe Mike, just to give a quick commercial on Flywire, you're right to win with the mission of the company is, et cetera.

Yes. So Flywire sits at the intersection of software and payments. We look at industries that have been poorly digitized in the evolution of payments. And so when you look at things like e-commerce and you look at point-of-sale transactions, those are things that have gone through a multi-decade transformation. And when you look at other huge parts of the global economy, payments are still very dated and poorly digitized. And so we solve that with a combination of software and our own payment infrastructure. So for instance, things like global education payments, certain types of health care payments, luxury travel payments, B2B payments, those are all good examples of where you'd see Flywire technology deployed. Our software is always deployed, attached to typically a system of record of our client, the biller, the receiver of money, and we help deliver payment experiences, almost like checkout experiences that are tailored to the industry and tailored to the geography. And then we move the money through our own global infrastructure that took us over 12 years to build. And so that's the business about 1,200 FlyMates employees around the world, clients in over 40 countries. So it's a global diversified business.

No, I think we've talked about this. It's software, it's payments, it's a network. It's a platform. It's all those things that you guys have built, those are the things we're going through today, Mike. So maybe I just want to cut back to it, if that's right, I know the stock has been under some pressure from the quarter, I know you're getting a lot of questions around Canada and everything else. Maybe just upfront, what do you think is misunderstood?

Yes. I think Flywire is coming up on our 3-year anniversary being public, you look at any way you cut that kind of revenue and profitability metrics, and we've overachieved all those metrics. And so I think when we look at our business, some folks have the ability to look at us and say our business has lots of verticals, lots of geographies, has various macro conditions that it's having to navigate. Honesty, we look at that as diversity of revenue stream across industry, across geography, across multiple products. And when you look at Q1, it was no different. Even with 2 multimillion dollar headwinds that were unexpected, we outperformed on the top line and the bottom line. And that's what we've been doing really on an annual basis for the last 3 years. So I think sometimes people can look at our business and say, oh, there's a lot of nuance to it. There's a lot of things I have to follow around it. But it's actually relatively simple when you break it down. It has one of the most simple growth algorithms it could have. We start every year with 85% to 90% visibility in revenue, meaning our clients were attached again to their invoicing process. So you have this kind of great reoccurring nature to the revenue stream. And then you'd layer on top of what is a very strong NRR, net revenue retention, which is in the mid-120s for the last 6 years. You layer on top of that a full year effect of clients, you layer on top of that in-year revenue and net new client adds and the revenue associated to that. And that's really the core growth algorithm and we're doing that across geography, across industry, across subsector. And so I think you can look at the business 2 ways and say, wow, it touches a lot of corridors, it touches a lot of different industries, and it potentially has different things that could impact it from a macro perspective. But time and time again, that diversity has proven as a strength for us. And I think those investors that understand that and understand the simple growth algorithm and the diversification of the business, I think we'll see that over the long term.

Yes. I'd agree. I mean you're a little bit of a victim of your own success. I mean you created a high bar, there's been a lot of good growth.

Yes. I mean if you look at -- I mean, yes, I mean, the numbers we put up for the last couple of years have been quite strong. I mean we finished last year, 43% growth, 540 basis points EBITDA margin expansion. Those are pretty strong exceptional numbers. And I think as people look at the global market, they're going to look for companies that can grow and grow profitably no matter what is thrown at it.

All right. Great. So what might Flywire do differently? I think, given what you've learned from, let's call this an air pocket. I know you brought Cosmin in, which we're excited to work with Cosmin and of course, Bob and team here about consistency there. What might you do differently from this learning?

Yes. I mean I think there's a few things. I think, obviously, having Cosmin here 20-plus years, PayPal and eBay, has great understanding around just scaling businesses and doing so profitably. He's got a deep analytical background as well, right? So when it comes to partnering with the business, identifying areas to grow and also kind of using that data to better optimize the business, I think that's a strength we never had as a company. So I think that's a huge benefit to us to kind of have his next level of scale and growth. I think we'll, of course, always look at disclosures. It's -- sometimes you're at these events and you get half the folks that say, disclose way more, and then half the folks that say don't disclose anymore, please, it's already a business that is a lot to consume. And so I think we're going to be smart, continue to be smart in how we disclose and provide visibility into different parts of our business. And at the same time, we're going to do what we've always done, which is execute and deliver. So that's really our focus.

And I appreciate you being visible and accessible to take the feedback. So just to clarify, in terms of your 2024 outlook, what really changed versus 90 days ago?

Yes, for sure. So really what -- for us in 2024, you had a business that had a macro change in one of our geographic markets. So in Canada, international students who go into Canada to study. It's our largest vertical as education. Canada is one of those geographies. And what you had happen is ultimately the government said, hey, we need to put some restrictions on the number of student visas or permits that get issued in Canada. And the purpose of them doing that is just they had seen a large amount of growth in the number of students going to Canada, which was a net positive. It was the intent of the country to grow that number and bring talented students into the country to work and stay in Canada, but it had an adverse effect on the housing market up in Canada. So places like Vancouver, Toronto, saw a huge growth in both rental cost as well as real estate prices with that growth of students. And so they put some caps in place. Those were announced in mid-January of this year that became almost a freeze moment for a lot of the universities in Canada, where they said, hey, we don't know how many study permits we're going to have. We're not sure how many students we should allow into the university. And so they paused a lot of their admissions processes. And so that was a single-digit millions headwind to us in Q1 and one that we had to adapt to as we went through the quarter. I'd say the other thing that has come up for us is FX and so our business has a little over 50% of the revenue is outside the United States. And so when it comes to financial reporting, you have kind of as the U.S. dollar strengthens, you have kind of a headwind of reporting of that income back on the balance sheet. So that was another $1 million-plus headwind in Q1. So we had to navigate those 2 headwinds in Q1. We still beat the top line, still beat the bottom line, even navigating those 2 headwinds. And as we looked out over the year, we had to provide some visibility as to what we thought would happen in Canada as study permits come back, and as the U.S. dollar continues to be quite strong. And so we took down a full year guide on an FX only basis. So the FX impact for -- that we saw in Q1, we've said, hey, if this FX impact continues for Q2, Q3, Q4, there'll be a full year pullback on revenue due to the FX volatility or the strength of the dollar. And then we also had to talk through the bridging of the Canada tuition payments coming back in Q2, Q3, Q4. So the good news in Canada is the visas are now known. The permit numbers are known on a per university basis. And what we've said is expect kind of this rolling recovery of admissions in Canada for the remainder of the year. And so we've adjusted our Q2 guide for that and the full year, we've kept intact outside of FX.

So help me really quickly, forgive me for asking on Canada one more time. Just on the time line and the visibility, what just forms you on that outlook, including the recapture. What can we look at on the outside to do a better job of tracking that?

Yes. So a couple of things. One, now that there's clarity, we obviously see the payment volume coming back, and we are seeing that rolling recovery, which is what we expected. You can also, I think, look, for us, we look at our clients and what they say on the ground, right? And there's a strong belief both our clients and from the educational agents that help students apply to Canada that both of those audiences believe that those seats will be filled, right? These are too critical of a revenue stream for universities up in Canada and throughout in Q2, Q3 and Q4, you'll see a progressing of that admission process to the point where they expect to use their full allocations this year. And so that's how we expect to track. We'll, of course, continue to be as transparent as we have been as to what we see. We've taken a bit of the Q2 revenue pushed it to full year to prepare for that in the guide. And that's what we think will play out throughout the year.

Okay. So I know this feels like a one-off and you've got your arms around it. Are there any other regions or reg changes that are on the radar for you?

Yes. I mean you're seeing -- you see different headlines in different countries around the world. In the last 12-plus years of building the company, you've seen different immigration and visa policies by different countries. In the U.K., you actually saw some concern over a certain set of visas. Now it looks like there will be no change to those visas. In Australia, they're also addressing what are, I would say, Tier 3 or Tier 4 type universities who are issuing visas to folks for short-term educational stints, and they're addressing that with new regulation, that doesn't really impact Flywire much, not really our target demographic of university or school in that sector in Australia. And so you've got a big election year happening all around the world, and you have obviously immigration and policy being a big headline grabber. I think for us, we've seen that type of trend over the last decade plus. And again, we typically see it as more headlines than it is actual real impact. I guess some people could say foreign governments may like the headlines or hit the headlines during election season, but oftentimes, they don't follow through as aggressively as the headlines sometimes say.

Okay. And it seems like, like I said, you've shown the ability to adapt and recapture as well. Okay, good. Let's move on. On the new deal front, I think 200 clients signed in the first quarter. So obviously, a good number there and relative to history. Can you give us a little more detail on who you're signing, the quality of the signings, I think ARR is always a fair question. And who you're taking share from?

Yes, for sure. So across our industries, we put up 200 net new client signed in the quarter. It was another record quarter for Flywire and client adds. Each quarter, you'll see some variation in which of our industry's leads in Q4 of last year. Education had the largest amount of signs. In Q1, it was the travel industry for us. In general, you see relatively consistent average client size. Sometimes, you'll see it a little higher, a little lower. Q1 was a little bit lower. But again, in general, the client size for Flywire is typically 5-figure, 6-figure and some 7-figure ARRs. And so we have clients in all of those tiers across all our verticals. And so that's continuing to be the kind of client size aspect to it. And what's driving the growth is the multiyear investment we've been making in go-to-market. So since IPO, there's been 2 big investment areas. Flywire is focused on product and tech innovation and go-to-market. And so when you look at our go-to-market function, it's not just additional reps, if you will, by vertical. We also look at new countries and new regions we're taking the product and the offering into. Sometimes that's an area of go-to-market. We invest in also marketing spend. We highlighted in Q1 that $1 million of marketing budget led to $10-plus million of pipeline creation. So again, really efficient cost of acquisition economics when it comes to driving new pipeline. And then with the strength of just our LTV and our LTV to CAC, it just shows we need to continue to invest in go-to-market, and that's what we're doing. So by geography, by industry, by subsector. And then also just a level of improved efficiency. So when it comes to revenue operations, just the way in which we have rigor around pipeline, around funnel, around deal desk, all of that has really evolved really strong over the last 3 years as a public company.

Okay. Good. So let's do each of the segments really quick rapid fire. So in education, I think a common question I get. You've talked about TAM a lot, so I don't want to ask that, but just the opportunity from existing versus new logo, is that composition and quality evolving?

Yes. I mean we look at the global education TAM and think of that as kind of moving all the tuition dollars globally. And with clients over 40 countries, we have the ability, obviously, to sign clients in many major markets around the world for education. The strategy is slightly different. It depends on the country. So in the U.S., we actually started just servicing the cross-border tuition product there for the first 7 years plus of the company. And so when you look at our client base installed in the U.S., it's much more of an upsell model to that client base. There's still room to add new universities in the U.S., but the vast majority of the potential is that upsell, right? Instead of just doing the cross-border tuition payments, how do we move all the money for the universities. And we've highlighted great examples of Texas A&M, Stanford, UVA, many other great universities that are now doing all their tuition processing with Flywire. So that's the kind of strategy in the United States to continue to penetrate that customer base. And even broadly at Flywire, we've thrown out the metric. If we stop signing customers, you'd see we could add 3 to 5x revenue off our existing customer base. And so that tells you a little bit of the opportunity that exists just embedding more products and getting Flywire deployed more in our existing client base. It's part of what drives -- helps drive that strong NRR. So when you go outside of U.S. education, it's really still a land grab around the world in markets like Canada, Australia, Southeast Asia, Europe and the U.K. in particular, where we're going and winning universities and moving all the money, so helping with the cross-border tuition but also the domestic. And so there's a bit of a different technique used in those 2 markets but still early innings, less than -- still high single-digit penetrated in our total addressable market for education. And when we're taking share, we're typically taking share from a straight acquirer, outside the United States, who's just doing credit card processing and usually a homegrown system or some type of IT deployed e-bill system, and then in the United States, we typically take share from 3 incumbents that have existed in the U.S. education market, which is Nelnet, TouchNet and a company called Transact, formerly called CASHNet.

What can bend the growth curve on education? What can you do differently? You mentioned go-to-market. I think there's the partner model. I think at your Investor Day, you talked about a lot of different things. But in your mind, what's the #1 thing that can really step up or catalyze growth above what you've singed in?

Yes. I mean I think part of it is continued deeply embedding partner integrations, right? So if you just look at our playbook, most of our business, we signed up, obviously direct, but the technical integrations and the systems and the interfaces that we have to the system of the record can really help kind of reduce the barrier of a client kind of going all in on Flywire. So recently, we won an award with Ellucian as an example, which is one of the largest student information systems. We have a close partner in the U.K. called Tribal, which is one of the leading student information systems in that market. And so having the ability to have those integrations and keep investing behind those integrations, they help reduce the barrier of IT work needed to deploy a new system and help mitigate kind of that transition fear that a lot of clients have in that space. And so I think the more we do that, the more opportunity we will have to accelerate just our penetration of the education market.

Okay.Let's do health care, it was down 1% last year. I know there's a plan in place to get that back up to corporate averages as a new sales lead there, I believe. And you've talked about the pipeline being big, but what's the timetable for that to improve? Are you happy with the progress?