Flywire Corporation (FLYW) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone, to the UBS Global Technology and AI Conference. This morning, we are very pleased to have with us the CFO of Flywire, Cosmin Pitigoi. So to Cosmin and to Masha, we want to thank you both for making the trip here to be with us in Arizona.

Thank you. It's been a great conference, and love the weather here just coming from East Coast right now. It's a nice break.

Excellent. We're glad to have you. All right. The way we'll go through this today, we have a great set of questions. We're going to start around some of the key verticals, really focusing on education and travel. We'll then touch on maybe some of the more recent trends that the business is seeing. We'll talk a little bit about the payments network, both from a strategy perspective and from a monetization or net take rate perspective. We'll touch on a little bit the SFS offering. We'll touch on NRR. And then a few additional more kind of financial and acquisition capital allocation type questions, and that will probably take us through the 30 minutes.

So with that, in the spirit of making the most important thing, the most important thing, education, big part of the business. You've seen strong revenue growth, and maybe absent some of the Canadian related government changes and whatnot, so may be with that context you could talk a little bit about what is happening with the overall education business. And then more specifically, digging into your initial thoughts you have given on Canada in 2025.

Yes. So education is sort of our largest vertical right now. It's kind of our origin story started with an international student paying their bill at a U.S. university cross-border. So that's kind of our original start and education remains sort of our largest vertical. What we've seen in the last year plus and what we're still seeing now this year and a little bit into next year is, this focus on immigration, obviously, from a lot of the governments that have been having a lot of sort of -- it seems like the whole world is having elections this year. So a lot of immigration talk and Canada, in particular, I think, has taken a very aggressive stance in terms of pushing back on immigration. So -- and that's where we've seen this pattern, which is extreme versus almost every other country we're seeing any kind of movement in that area. So in Canada, just to sort of break that down a little bit because that was about a $30 million headwind for us this year from Canada alone. So even growing at sort of in the mid-20s plus like we have in our guidance, that is despite this $30 million headwind in the year. And what we've guided for next year for Canada, given some of these dynamics is basically roughly flat revenue. And so let me walk through the dynamics there. So on the one hand, we continue to add clients. We continue to ramp up new clients, cross-sell in Canada. So that is good solid growth that the team is continuing to build despite some of the challenges that the educational institutions are having there. Now offsetting that is this sort of immigration focus where there's 2 dynamics. There's the supply and there's the demand side dynamic that you've heard. So the supply side is the caps that they've put on international students. That was clarified earlier and actually as a positive. At least I think everyone now knows what the caps are, so that we're not guessing at what that is. That was part of the challenge coming into the year is what is Canada going to put as caps. From the supply side, that's known, and that's put some level of pressure. The problem is now there's a demand side kind of challenge. So some of the -- whether it's the policies around students being able to work, so the postgraduate work visa program or some on India -- those of you who follow politics, India-Canada diplomatic relations are kind of in tensions right now. That's putting pressure on the demand side of sort of students wanting to go to Canada, especially from India, which is an important corridor. So if you balance those 2 out, we felt prudent as far as looking at revenue for next year to say, look, you're going to have these pressures, both on the supply and demand side in terms of students going to Canada right now. But offsetting that, we have, again, the team is doing a great job adding new clients, ramping new products and capabilities in the market. So those 2 things sort of offset at the moment.

Excellent. Thank you, Cosmin. And then if there's a minor comment that you might want to make just around any potential implications in the U.S. given the recent election outcome?

Yes. So that also was sort of an overhang and sort of what's going to happen in the U.S. Now we have clarity at least. So we've actually heard the incoming administration talk positively, especially about students being able to study after which is actually an important decision for students is can I work in the country where I'm studying. So we've heard the incoming administration make positive comments about allowing students to stay. So that's one. Two, obviously, the focus has been on illegal immigration. So this is obviously not the case for students for the most part. And then third, we know as a country, we need tech talent and incoming administration. obviously had a lot of support from the Silicon Valley and the tech kind of industry. So I think that will also be another positive as we look at U.S. So as you look at Canada being under pressure, I think there's an opportunity for us. As you know, we have our agent network that helps place a lot of these students to some of the students who maybe didn't go to Canada could go to the U.K., could go to other countries and start to diversify further away from those areas where they may not be welcome.

Okay. Thank you so much, Cosmin. Let's move on a little bit to the travel vertical. So recently, you've highlighted a little bit of upmarket momentum, some larger ARR clients. Maybe you could talk a little bit about what you're doing in that specific vertical that's helping you win against more of the sort of vertical agnostic or horizontal type competitors?

Yes. So Travel is now our second largest vertical. We've mentioned earlier this year that it was growing over 50%. So very strong growth, significant capabilities and very low percent TAM. So the TAM for luxury travel is what is our focus is about $500 billion, and we're approaching it in a very sort of disciplined subvertical view. So we have the sort of think of destination management companies or travel operators that kind of help manage luxury travel. We have capabilities that if you think of a cross-border payment, large payment and usually sort of operationally complex or vertical specific, those are kind of the 3 kind of areas where we differentiate. So the example I give because luxury travel may not be something, again, I have maybe 4 kids, I don't necessarily afford a lot of luxury travel, but it's an opportunity for us because if you think of the folks who travel, usually, it's a group of people and they need to sort of split up the payment, and we're able to allow them to do that in the local currency. If you want to, for example, pay 20% when you actually book the trip, 60% when you actually just before you go on the trip and the rest later, we're able to split all those payments and something that the incumbents -- so from a competitive standpoint, usually competing with somebody in the back office doing all this work manually. So there's a natural fit for what the value that we're providing versus kind of the existing incumbents. And so we've seen good progress there, and we've now added the ocean experience as yet another subvertical, and that's also another $16 billion market. And so for us, again, Travel has been growing well. We continue seeing a lot of opportunity there in the future.

Okay. Thank you. All right. So we hit on education, we hit on travel. Why don't we just give an opportunity here if there are any trends you've seen now that we're a little bit deeper into the quarter, maybe across some of the other verticals and just the business overall?

Yes. I mean, look, maybe I'll mention a little bit on the health care side and then FX in general for us, which is a big topic. So on health care, you've heard us talk about health care is, it has been through a sort of turnaround and improvement in the business. We've now seen the first quarter of growth this last quarter and we're starting to see some of that pay off as we look ahead, health care, we feel should start to kind of come back to growth. And then more of a broader comment, we're obviously -- we have almost 65%, 70% of our business is outside the U.S. in terms of revenue. So that is basically an impact from an FX perspective. You've heard us talk about FX in the past. So if you look at this quarter with the dollar being down or being up basically versus every other currency, our main -- 4 main currencies are basically the main markets, right? It's Canada, it's Europe, the pound and the Aussie dollar. We guide with the last day of the quarter for prior quarter, so September 30. So we have about $3 million or $4 million of headwinds now from FX, as probably any other global companies feeling right now coming off the election with the dollar strengthening. So that's probably one of the dynamics that we've seen kind of intra-quarter, which is mostly well understood, but I think in the past, it was perhaps a surprise so I want to make sure that people keep it -- keep that in mind that we are a very global company. We benefit from that, too.

Excellent. Thank you for clarifying that. We appreciate it. Let's move on to the next topic, which is the Global Payments network that you've built out. So many, many years of building out this network with relationships with banks and acquirers and local payment methods. Maybe just talk about from a strategy perspective, why is that so difficult and how differentiated it is, those types of topics.

Yes. So if you hear Mike, our CEO, talk about the origin story, we actually did try to initially partner with many folks. As we went through new countries, partner with payment partners then locally. And what we found is that most can actually pay out but not receive payments locally. And so we started building out this network, as you said, sort of over -- well over a decade. And we've been building out 200-plus countries, 2,000 corridors and the capabilities to receive payments in the local -- in the local currencies. And in any kind of way you want to pay. I think the benefit that we have as a software provider is that we're agnostic to how people want to pay. So we wanted to build this payment network that allows you to get paid in -- with any way in any currency locally. So it's one of the things that it actually resonates really well, not just with the education providers, but with whether it's travel vertical or many of some of the B2B smaller verticals that we're building now, it resonates with those companies the ability to actually receive payments locally. And so right now, obviously, we take any kind of cards, and we take sort of ACH payments, obviously, and any other payments, local payments providers. The way to think about that from a -- as we get the question on spreads all the time and margins, we are basically agnostic to how you pay. We make money on all those payments. Obviously, on a credit card payment going to have a smaller spread, a smaller margin, if you will, versus an ACH payment. But overall, we make money on all those. And that's -- when we talk about any kind of pressure or trends in margins and spreads is because of usually a mix dynamic where sort of, for example, the B2B or a travel vertical where people tend to pay with a credit card tend to have lower gross margins versus an education cross-border kind of growth. And that's where you see that mix that we talk about in terms of gross margin pressure.

Yes, I think the topic of the gross margin aspect -- I'm glad you brought it up. I also think it's one that's becoming more well understood, but the credit card aspect -- but I think, one, from the spread perspective that is maybe less understood or a question we get often is around for domestic payments. So if we think about the spread earned on cross-border kind of regardless of the payment method, just that net spread. In other words, gross profit dollars divided by volume. How can we think about the delta directionally for the domestic payments volumes that you're doing for U.S. educational institutions?

Yes. I think it's probably best to look at it on a gross margin basis because if you think of some of our new products, so we continue innovating based on what clients are telling us. And we heard things like, hey, first student who is not paying the bill themselves, maybe the employer is paying or somebody else is paying on their behalf, we did a third-party product or the 529 product. 529 product is actually a good order, even the payment plan. But the 529 is the most extreme example where we -- you will pay $5 for a $10,000, $20,000 tuition payment to go through. Now that sounds like a very low monetization rate, but that $5 cost us -- it's de minimis for us to actually process. So from a gross margin perspective, that $5 is actually very high gross margin, even though the spread is obviously lower. So that's why, for me, I think the gross margin and gross profit dollar growth is as important of a metric that I look at as sort of the top line in that monetization rate. And the other thing is to keep in mind is the split of transaction versus platform revenue. So our transaction revenue is mostly kind of driven is tied into that TPV even though it has that dynamic of kind of mix. The platform revenue is mostly softer revenues. That's where you have the payment plans and other kind of those types of dynamics that have -- they're probably not as helpful to look at a monetization spread rate, but it's really helpful to look kind of gross margin percent.

Yes. Perfect. All right. Thank you, Cosmin. We appreciate that. Let's move on to the next topic, which is SFS. So Student Financial Software. You talked about this business as a revenue multiplier for Flywire, so multiple revenue streams. There is some license or SaaS revenue, the payment plan revenue, volume-based revenue. Maybe just talk a little bit about this business and -- or offering and the momentum that you're seeing?

Yes. So SFS or think of it as our domestic offering is one that we've built, again, just based on feedback from our clients, when we used to process their cross-border and they said, "Well, why don't you help me with the rest of the payments and the rest of my capabilities, especially in education clients." So it's a little bit different in U.S. versus international. So if I split that out in the U.S. actually in our last earnings supplement. If you look at it, we talked about the fact that we've got about 1,000 clients that have this kind of cross-border in the U.S. capability that we've built. And of those, there's almost maybe almost 10% and have this full stack kind of offering with SFS. And we've been able to obviously show that we can continue winning in that domestic business. And that's a huge change for us because, obviously, if you only have 10% of the business there, we can 3 to 5x the business just based on not adding a single new client to just doing that cross-sell motion in the U.S. And internationally, it's a little bit different because there, we did not start with just cross-border. There, we kind of go in with what we call our one door kind of approach, which is sort of you go in with the full domestic and cross-border offering, you start with one campus, and then you expand to other campuses or other parts of the educational institution, which then creates that NRR dynamic that we talk about. And so again, we continue innovating around all of these and it is helping us to kind of continue expanding. But that's one of our, probably again, our most exciting and the reason why education is still, Even though it's been around for a long time, it's still growing quite well. You can see especially internationally, really strong growth there.

All right. Well, that's a perfect segue into the NRR discussion. So ex some of the Canadian headwinds that you mentioned earlier, remains really strong at that kind of $120, $120-plus kind of range for education. Maybe just talk about the various factors that you have that are driving that, whether it being the student population growing or just pricing of the tuition and the room and board and some of the expanded relationships and so on and so forth.

Yes. So the way I normally broke down NRR, as I've started -- I started here of just earlier this year, and I come from a sort of a background of looking at same-store sales. So NRR is basically that for us. But if you start with kind of what is outside of our control to some extent and sort of organic secular growth, there's a couple of things. One is, as you mentioned, is that student international growth, which if you look at the external data that's kind of available out there, it's around -- it's open doors data or, I think, is the organization that provides that data over 70-plus years. And it's been in that sort of low to mid-single-digit growth for the longest time. Now there are certain countries like Canada that have been a bit above that. Others are a little bit below like the U.S. But generally, we've seen pretty stable growth in students. Now the last couple of years, again, some have been higher like Canada. So that's, call it, roughly mid-single digit or just below. Then you have again tuition. Tuition tends to continue going up as much as some of us with kids would prefer not to. Tuition continues growing roughly similar to inflation. So you end up with the sort of mid-single-digit plus growth that is just secular growth in that business, very long term. There's dislocations here and there, but overall, that's one component of the $120 million. And the rest of it is two things. One is we continued that land and expand motion that I talked about, where you start with one campus or you start with one product, you expand to others or you integrate with the client initially and then they expand beyond that. So that's the majority of it. The third part, which is probably a little less known is the fact that you have these very long-standing relationships, very low churn in this because we're integrated in terms -- as a software provider, which makes it harder to replace than if you are just a button or something, some of a simple kind of payment because we're a software, our churn is sort of in the low single digits. So very high retention, which then makes a very small negative against that sort of overall bigger positive. And that's why the $120 million and this year, excluding Canada, $120 million has been pretty consistent over time is this you have this kind of dynamic that plays out quite well over many years.

All right. Let's move on to operating leverage. So maybe you could just call out some of the areas where you think there might be some outsized area for leverage and then also giving you room to make some investments that will support your future growth.

Yes. Thank you. I think the way to think about our -- obviously, our OpEx, you have G&A product and sales and marketing right now as we break it out. Within G&A, right now, you do have some components like client services and other costs that are more volume driven. But I would say the biggest area of opportunity for us as far as getting margin leverage is in that G&A area. Product would be the second. And then even in sales and marketing, I think there's opportunities to continue. Again, we don't need to add a salesperson every time. We now have some critical mass in some of these markets, so we're able to continue growing. And some of the drivers, look, I mean, in G&A, as you can imagine, a lot of our costs are people costs. So we've -- we're improving our data on automation. And so we're able to reduce the cost there. which is why we feel comfortable saying that we're going to be a Rule of 40 company going forward as that margin that this year, EBITDA margin is around 16%. We've basically said, look, we're going to keep adding around 300 bps. We said 300 to 600 bps. But even at the low end of that 16% becomes 19% and so forth into the future. So that's one of the reasons is because we see that opportunity to continue getting leverage, not just G&A but also on products and other areas.

Okay. Great. Let's move on to another lever for growth, which is acquisitions. So you've done many over the time as a public company since 2021. So just to name a few, WPM, Cohort Go, StudyLink and then also there was invoiced within B2B. So maybe just talk a little bit about the criteria and strategy that you use as a company for evaluating M&A and where you should do it.

Yes, we've -- the team has been incredibly disciplined around adding capabilities. And the way we've looked at it is sort of 2 or 3 areas. So first off is existing verticals where we can build on the existing vertical capability, our existing geographies, so continuing to build that. So you've seen us do things like WPM in the U.K., in education or Cohort Go in Australia around insurance, StudyLink, again, in terms of helping that agent network again, the agent network, which we talked a little bit about it, but it's a very powerful sort of partnership of ours that allows us to place students. So as you think about an agent network using the StudyLink software that we bought, is able to much more quickly -- if the student is not able to go to Canada, can go to any other country and be able to process that. And so it's been the software acquisitions that build capabilities to tie into the payments software. So that's -- so those are sort of the areas, I guess. And then in terms of the criteria that we look at, again, quite disciplined. We look at, hopefully, businesses that don't -- we obviously don't dilute our growth too much. We have very high growth, high margin. So we look at growth rate, we look at margins, we look at the culture fit and then certainly the technology and making sure that it's a good technology fit and then valuation obviously is key. And so that's where we've looked at deals of all sizes, and we're open to kind of any opportunities, but that's one area where we're spending a lot of time right now. There's continuing to focus on finding good deals there and adding that, again, that software that connects into the payment side.

Okay. I think we should wrap with a little bit here on capital allocation strategy. I want to make sure we leave some time at the end for some closing comments. But in terms of capital allocation, so at the recent quarter, we started to see some of the execution towards the $150 million of share repurchase, that program that you put in place. Maybe just update us on your thoughts on capital allocation?

Yes. So our priorities as far as capital allocation are sort of threefold. One is organic investments. So we continue investing organically as you've seen us. So to your question earlier, we'll look for any opportunities to continue to gain share. We are actually tying into the invoice point, the invoiced business that we purchased this year, actually a pretty solid gross margins and good margins in particular. But we've told the team, invest what we need to make sure that it's integrated and then we can start to cross-sell that to B2B clients. And so we'll continue investing organically wherever we see an opportunity to continue growing the business. Second is M&A. So we'll continue to do the strategic M&A acquisitions. And so we'll look at opportunities across the board. Like I said, we'll be thoughtful in our approach, but we'll continue to look at those. And then third is the buyback, which we've put in place. Clearly, we saw the market sort of dislocation of our value sort of middle of the year and felt that, that's -- we didn't feel that, that was the right valuation for us. So we've stepped in and we'll continue to step in. Again, it's opportunistically so. But as I look ahead, I think it's an opportunity for us, it's $150 million, but it's an opportunity to look at dilution and other factors. So as we become profitable next year, we have an opportunity to also look at sort of on a per share basis, ensuring that we manage dilution going forward. So that's another angle as we think about using the buyback and our capital is to make sure that we provide that stability in terms of -- and predictability of our earnings over time for people, too. Again, as you look at revenue and it may be harder to predict exactly what countries are going to do with immigration, we feel quite good about the kind of the margin profile going forward.

All right. Excellent. With just a little bit of time here left, maybe we should just want to hand it over to you if there are any other general or closing comments that you'd like to make to the audience or the investment community.

Yes. Look, I think we get a lot of questions about Canada as much as I love talking about, but that I think I see it as an opportunity. As an immigrant myself, I was born in Romania, grew up in South Africa, most for the U.S., I think this is a temporary dislocation. I think there will always be demand for international students. And it will be demand from the international students to go study somewhere and there'll be most of developed markets don't have the level of talent that those kind of other markets can provide. So I feel, again, quite fortunate, and I think we have a huge opportunity in front of us to lean into this and take share even despite some of the challenges. I'm excited about what we can do in terms of building these capabilities and exit out of this kind of temporary kind of pressure whether it's Canada or others. Again, even this quarter, we've said we're growing at 26%, if you actually take out the kind of the inorganic and FX neutral, which will start to actually guide FX neutral next year, you'll -- we're sort of in the low 20s growth rate exiting the year, but we feel that's with, again, this $30 million pressure from Canada. So still very, very strong growth despite all this, and I feel really good again about the capabilities that we've built. And look, the margin profile, we don't talk enough about it. And the fact that we'll be profitable, I think, is a huge opportunity, and we'll continue investing where we see -- especially where we see dislocation. So even in the countries where people look it as a challenge, we look at it as a definite opportunity for us to step in. So whether it's Canada itself to help Canadian educational institutions, which are going to be under a lot of pressure, we can step in with the products and capabilities that we've built. But look, I mean we're agnostic where students end up going. So actually, we can help place students wherever they're going to go. So if they decide to go in other markets, we're happy to help them. And so I see it as an opportunity for us to grow and to gain share. especially when things are under pressure. So I'm quite excited about that. So -- but I appreciate the opportunity to come here today and speak to all of you.

Cosmin, thank you. On behalf of everyone at UBS, I want to thank you again for making the trip and also Masha, new Head of Investor Relations, for joining us well here in Arizona. So thank you for being here.

Thank you.