Flywire Corporation (FLYW) Earnings Call Transcript & Summary

And we're excited to have Flywire, and Cosmin is the CFO at Flywire, and we'll go through a list of questions here. And if you have a question, you can raise your hand, and we can bring a mic up. But Cosmin, thanks for coming.

Of course. Thanks, Bryan. Thanks for having me here.

I wanted to start just overall and talk about the pipeline. I think you guys signed over 200 clients in the quarter. How is that pipeline for new client signings? And how is that versus historicals? And what do you think about it going forward?

Yes. Obviously, our go-to-market engine has been a strong contributor and will continue to be. I think the way to think about the 200 clients a quarter because that's been pretty consistent is we look at it from multiple more dimensions. Obviously, the number of clients is important. But equally, the way to think about it is we're seeing that is diversified across all of our four verticals. So it's not coming just from one vertical. Generally, the travel and the education business are the biggest contributors. But overall, we've seen a good diversification across the verticals of those 200 clients in terms of sources and also across geographies. So that's point one. Two, I would say we look at ARR or the size of those deals. And so we've seen this year is not just continued seeing the size of the deal going up, but also more strategic. So we'll talk about SFS and domestic. But increasingly, those are more strategic relationships that we're building with those larger clients. So again, that's another dimension of those 200 clients that we look at, that's important. And of course, then third is the pipeline, and we look ahead, and we feel pretty good again that the pipeline is pretty healthy and quite diversified across the four different verticals with not just number of clients, but also continued improvement in the size of those clients from an ARR perspective. So again, feel really good from that perspective in terms of the driver of growth and us continuing to gain share through that lever.

In business, how much of the revenue comes from existing clients versus these new clients that you're signing on in any given year?

Yes. I mean we haven't split it, and it's a bit different by vertical. So in travel, you would see more of the new kind of clients driving more of the growth. We've given some disclosures in the past of that split. In education, it's a bit more equal because in those verticals like education, you have a long -- you start with one part of the university and then you expand. So you do have this, we would call the land and expand kind of motion that expands existing client once you actually go live with it. But generally, I'd say, it's still pretty healthy. And now with obviously the macro factors impacting our kind of our longer-term cohorts, then you would have more of the growth coming from these new sales motions, which we feel, again, quite good about, and the team is executing quite well on that part, which is, again, focusing on we can control in this environment is really important.

Got it, got it. Can you talk maybe first about the education, your biggest vertical, maybe updated thoughts on demand momentum you're seeing in some of the four countries or the biggest four countries?

Yes. So look, in terms of just sizing the business a little bit, education still remains our largest kind of vertical, but we are seeing obviously good growth in travel now becoming bigger in B2B and health care also. Within education, the top four markets make -- still make up a good sort of large share of the overall education market. However, the non-Big 4 are becoming bigger, too. So -- and we'll talk about that later. But within the Big 4, obviously, outside of the macro headwinds, we're seeing good momentum with the SFS or the domestic kind of products. So think of it this way, obviously, as we think back the origin story of the company is starting with cross-border for education. We've now shifted that perception to really -- for most of our clients to start thinking of us as moving all the money, if you will, for us to summarize, just moving all the money, being able to move the sort of both the domestic and the cross-border in one place. And so we started with the U.S. So in the U.S., we've got about 100 or so, just over 100 clients on the domestic out of the 1,000-or-so cross-border clients. So -- and we're gaining momentum. So this year, we've announced 11 wins in the U.S., which is the largest actually in several years. And all those are large universities like Penn State and others, who are significant sized accounts, very strategic. So we're seeing demand for a few reasons. So one, I think the perception shift, which as our clients have asked us to come help them innovate and grow in terms of the universities that need our software. But I would also say is that being under pressure, so from a budget perspective, a lot of schools, I think everyone knows, obviously, educational institutions are under a lot of budgetary pressure right now. And so our software helps simplify that and also helps with saving -- obviously, saving cost, automation, reducing the need for people in the back room to do a lot of efforts. The second thing is modernization. So a lot of our schools are looking to modernize, automate their systems. And so that's the other driver of this. And then third, I would say, it's also just the overall effort of vendor consolidation. So if you're a university and you have us doing your cross-border, someone else, other parts doing the domestic, obviously, bringing all those vendors together saves a lot of cost. And so those are some of the drivers we're seeing. And it's obviously a big driver for the U.S. business. As you know, the international side of our U.S. business is under pressure because of the visa numbers. And at the same time, we're able to say the U.S. education overall is actually still growing a little bit this year, and that's because of the strength of the domestic business offsetting that, which is a smaller part of the business. Domestic is around -- it was around $30 million last year. So even with that, it's growing so much faster than it's offsetting some of those headwinds from international, along with gaining share in international. And then on the U.K. side, we're starting with SFS. U.K., we disclosed that now is about 1/4 of the business is the U.K. EDU business, which is significant growing, faster than the company average. And we started out with four SFS clients, and we're building the capabilities there, but feel good that as you look at the U.K. business, we have the ability to now consolidate bills and present and reconcile bills, which in the U.K. kind of market, there's not a lot -- the competition is not as established as in the U.S. So we -- our product there is even more kind of stands out overall. So I feel good about kind of the long-term domestic there, both U.S. and U.K. Australia and Canada, again, sort of separate kind of discussions. Canada is coming off the Q2. Q2 was obviously kind of the lowest number in terms of visas, and we're coming off of that and improving as we exit the year. Still expect to see some pressure there, but we're still growing better than the market and Australia is -- while it's been under pressure, we're seeing obviously very strong growth there, too, from gaining clients and less-than-expected macro impact than we thought.

Yes. In that investor presentation, I think it said something like 2 to 3x the uplift in GP from the U.S. and U.K. education relationships that migrate from cross-border only to the full SFS suite. Can you just talk through the profitability bridge?

Yes, for sure. And look, we wanted to provide a little bit -- so actually, if you haven't looked at the latest supplement, there's a lot of disclosures there around the SFS product, especially in the U.K., but also in the U.S. But specifically to the modernization. Look, as you go from a cross-border-only client into processing all of the tuition kind of money, obviously, there's three components to that gross profit dollar pool going up 2 to 3x. First, obviously, the biggest component of it, and you'll see it in the slide we provided is still the processing of the tuition payment. And so that could be an ACH, that could be a credit card in domestic markets. So that will be at a lower gross margin percent, but still gross profit positive. Then the second component of that is the software itself or payment plans. So that -- those 2 have generally higher gross margin, as you can imagine, software where if you're paying $35 or $40 to basically break up your tuition payment into 3 or 4 payments, or we're very flexible around that. That is also high margin. And then that's the second component of that gross profit. And then the third one that's interesting that maybe people haven't realized is the cross-border component itself, once you go from cross-border only to managing all the money or sort of domestic, you actually get more of the cross-border volume. So it is actually helping capture more of those students that are sort of first year, second and third year and fourth and so on. It helps us capture those because, again, we can optimize our checkout, we can optimize the kind of experience and gain more share even within the cross-border. So when you look at all those combined, obviously, it's very different by each school. And so the gross profit profile may differ depending on those combinations, including things like collections management and 529 plans and other capabilities that we build on to, the basics of kind of billing payments and a sort of end-to-end view, so then -- and cross-border. So that all kind of works out to be roughly 2 to 3x, but again, illustrative as we're starting.

No, that's helpful. The visa immigration policy headwinds are expected to result in, I think, mid-single-digit headwind to revenue growth in fiscal year '25. Can you talk a little bit about the headwinds you've seen this year? How do you think about it for next year and maybe what a normalized kind of growth rate of the business is in education?

Yes. Look, obviously, we've navigated some pretty choppy waters in the last 2 years, and that's been something that obviously we've shown our resilience as a team overall through that time. So let me start with 2025 and then maybe talk a bit about '26 within that mid-single-digit kind of framework. So for 2025, look, we're still growing. If you look at full year guidance, excluding Sertifi, FX neutral, we guided to about a 15% growth rate with a mid-single-digit headwind. And so obviously, underlying that, you have to assume that the rest of the business is growing that much faster to be able to offset a mid-single-digit headwind. And obviously, we're continuing to win clients. We're continuing to drive stronger product capabilities and innovation. And to some extent, we're able to offset some of that negative impact. Now that -- this year in 2025, that mid-single digit is, I would say, more of it is coming from Canada. We've talked about that. So that remains a component with, to some extent, less U.S. and Australia. And the U.K. has actually generally been relatively flat, maybe a little bit positive in terms of visas. And U.K. is just itself growing quite fast for us outside of that. As you look into 2026, and again, we haven't given guidance, but just to help folks kind of think about next year, we've said, look, we're going to assume the same kind of mid-single-digit pressure. And if you think about it, obviously, that's a relatively large kind of macro headwind to assume. But if I go back to the principles that I've tried to approach guidance this year, which is: One, prudent; two, data dependent; and three, transparent, we're trying to provide some at least starting point around next year. And we've said, look, the exit for Q4 is a good way to think about it, and that's -- we guided to 14% FX neutral, ex-Sertifi as you think about next year. As you unpack all of that, obviously, the rest of the business has to be growing quite fast for us to be able to offset some of the assumed headwinds. But what I would say is that we feel pretty good that we've accounted for most scenarios out there. We've tried to take a very prudent approach to the U.S., for example, for next year. So I would say, as you think about the mid-single digits, this year was mostly sort of Canada. As we think about next year, it would be, again, some assumption around the U.S. being almost worse than it is today. But that's us, again, trying to take a prudent approach around the U.S. and being cautious as we look into next year. So we feel that we've trying to change the narrative out there, too, as people look at headlines and macro has always been kind of a negative, trying to shift away from that mindset and say, look, we've tried to -- we've captured most of those headlines. We continue seeing those headlines, kind of playing out. But the hope is that, obviously, as F1 visas maybe start to improve to some of these policies and headline -- policies start to kind of lock down and some of the headlines hopefully reduce, then that should help. But for now, we feel we've well captured kind of the scenarios certainly in the U.S., but also in the other three big markets with this mid-single-digit assumption into next year.

Is the best metric to watch just F1 visas and...

F1 visas is one. I think second, I would say, again, it's just fewer sort of headlines in general around the uncertainty, I think, is when you have either H-1B visa headlines or OPT or other things that are just headlines without necessarily policies. And then the third would be actual policies in place because I think we have to separate what is actual noise and sort of things that are being said in the news versus actual policies being implemented. And then third would be once the policy is implemented, it doesn't always have the impact you think. So we have to watch all those things play out. Sometimes there's a headline, not -- is there a policy that follows the headline once you implement the policy, does that actually play out the way you think it is? And we've seen, for example, Canada versus Australia, completely different kind of ways the market actually played out. In Canada, the headline was followed by policy and the impact was quite negative. In Australia, there was a headline, some policies, but we just haven't seen the same negative kind of impact even though we've assumed that in our guide, again, very prudently. Australia, and that's, again, another way to think about the kind of mid-single-digit assumption and our macro assumption in the guide is looking at Australia, where the policy and the headlines have actually turned out to be a little bit better in terms of how they play out in the market. And Australia may be learning from Canada and others, they've actually adjusted and some of the caps -- they've increased the caps assumptions for next year, which, again, good to see the policy. We'll -- in the kind of data-dependent category, I'll wait to see the trends continue over several quarters to improve before we kind of change our view on the outlook. But so far, Australia has played out better than we had assumed in our guidance.

No, it has. It has. So is there anything in the policy in the U.S. that we should be watching in particular?

So far, obviously, the more pressure, one of the reasons students come to the U.S. is to work here. And so anything around the H-1B visas or OPT or other kind of policies around that are important to understand demand. Ultimately, U.S. is still the kind of the destination of choice as far as work opportunities. So that's going to -- the number of universities and obviously, the educational opportunities here are very unique. But for us, we're going to be somewhat agnostic as to where students end up going. But in the U.S., I would say, yes, some of those policies. But again, I would say that we've captured most of those kind of negative assumptions into our mid-single-digit assumptions. So from that perspective, at least there should be comfort that we've captured some of the negative. And hopefully, as it turns out better than we thought, then...

There could be some upside there...

Yes, potentially, yes.

Well, the good news is you're seeing besides those four markets, people -- students seem to go somewhere. So you're seeing growth beyond the Big 4. Can you talk a little bit about what you're seeing in other regions?

Yes. And that's been, to some extent, obviously, an exciting development for us because as we talk to our agents, so we have this unique relationship with agents who help kind of -- guide students along this complicated international student journey, they're telling us that students are starting to apply to more destinations. That's a trend that's happening outside maybe U.S. or just U.K. or even the Big 4. And so outside the Big 4, just to size that market in terms of revenue for us, we've said that the non-Big 4 EDU in terms of revenue is about low to mid-teens share of our 2024 revenue, growing above the company average. And that was sort of -- think of it last year. This year, we're seeing that part of the business growing quite well. And the way to frame that is kind of back to your first question. Out of all the EDU clients that we signed this year, over half or about half are from outside the Big 4. So it tells you that, obviously, there's demand growing, as you can imagine, as some of these other educational institutions outside the Big 4 are starting to get more applications, they're going to look for cross-border or U.S. education -- sorry, education software partner, and we obviously play well in that role for them. So I'll say that is a benefit for us. And again, we're excited about those. Now there's a tuition difference there. As you can imagine, there's lower tuition in some of those countries. So just to name a few in Europe, you have Spain, France, Germany destinations. And then in APAC, sort of Singapore, Japan, Southeast Asia. So some of those countries will have lower tuition than a U.S. tuition or U.K. tuition, but still very healthy margins in those businesses, strong unit economics because it will be mostly a cross-border client for us, given that that's the product that we will be selling to them. So I feel really good about those and the opportunity to grow with the non-Big 4 is certainly a big one for us.

Got it. I want to move to the travel vertical. Can you talk about the growth you're seeing there, and what Sertifi adds to the business portfolio?

Yes. And so if you think of our travel business, which next year will be almost 1/4 of the business, so let's start with Sertifi. So Sertifi right now is sort of our, call it, our hospitality side of the business, and luxury is kind of our legacy. So within Sertifi, the 3 synergies that we talked about, which will play out mostly in 2026. But the three synergies we talked about first was the payment modernization, which is our usual M&A sort of playbook, where we acquire the software, monetize the payments. So that was about a $3 billion volume, that we are looking to monetize the international kind of cross-sell, and that was about $100 million of revenue. And then third, it was just cross-sell between our legacy luxury business and the Sertifi hospitality. There's three kind of, I would say, things that we're looking at this and showing that we're seeing progress here and these synergies are playing out. So first, we're hearing from our clients that, that combination of the agreements from Sertifi, the agreement, the contracting and the payments, that flow resonates very well, and that's an important capability, especially on the payment side, as you think about having payment capabilities in each country, that's something that obviously Sertifi didn't have. We bring that to the table. And so that's one aspect that we're seeing where it's giving us comfort that we've -- those synergies are playing out. Then second is this idea of just being able to drive continued integration with the system of record. So if you think of some of the players out there, this is one of our unique capabilities. We are integrated into a system of record. So things like PEAK 15, which is one of the integrations for one of our clients, we are integrated into that system of record. So it's not just the agreement and the contract and the payment, but the fact that you can reconcile into your system of record and drive significant operational savings and visibility for them into the end-to-end kind of process. And then third, we are seeing -- as we talk to our enterprise clients now like Hilton and Marriott, we're getting validation that this product resonates with these larger clients. Again, our sort of legacy luxury business played mostly with smaller travel clients, but now the validation with enterprise is certainly good to hear. So again, good overall kind of early visibility into the fact that the synergies are going to start playing out. But I would think of this year, Sertifi growth is mostly driven by them stand-alone, and they're growing over 30% year-over-year. Into next year, some of these synergies start to play out, but it's, again, more of a next year kind of dynamic.

No, it looks like a good complement to your business.

It's a great one, yes.

What about health care? Can you just talk about that business? Obviously, Cleveland Clinic and Cook County Health, how does that flow, the timing of that? And how big of an impact will that have on the vertical's TPV and run rate?

Yes. We're quite excited about the health care vertical this year after sort of several years of transformation. So we've improved the sales team and brought in folks who can work with the enterprise side. We've improved the product. The Cleveland Clinic, obviously, it's a marquee large client. We've talked about it as an 8-figure client. Now if you think of the health care vertical being around a $30 million vertical, if you add an 8-figure client, that's a significant growth driver. So what we've said for this year is health care is growing in the kind of low teens. And so with an 8-figure client like Cleveland Clinic, we expect next year to accelerate well beyond that. And then you've got the Endeavor -- so that's already gone live, and it will ramp kind of into next year, if you will. Then you have Endeavor, which we also announced, that's going to go live probably next year and ramp beyond that. And then Cook County is the third line. So we've got a sort of a layered kind of new client-driven kind of growth rate. And so we feel good about that. Again, this is now a combination of capabilities. So historically, health care was mostly software. Now we've got the payment processing also in there. So that has a lower gross margin, but still gross profit dollar positive. And that would show up in the transaction revenue part of our business. But I feel good that as you look long term at health care, it is no longer going to be a drag on growth. And certainly, next year will obviously be a huge lift from this Cleveland Clinic ramp. And then I would say, normalized for that, I would still expect it to be less of a drag and now be an actual growth part of the business.

Yes, I was going to ask, besides those three big wins, what does the pipeline look at for the hospitals?

Yes. Pipeline is great. And I think the fact that you have this marquee client and have them talk to other large clients out there. And we have a very unique product, very few other players out there combine the kind of the payment, the billing, the kind of the affordability suite with the other components of our health care software. So that altogether enables us to have a differentiated product and having someone like Cleveland Clinic and others out there being reference clients is great for the team and certainly helps the pipeline long term.

I have to ask about AI, and what you guys are doing with the Gen AI capabilities. Is it more to streamline processes and costs, or can you generate some revenue as well?

I think it's all of the above. I think of AI -- by background, I'm sort of a machine learning, data science, data guy. So I've been doing this for almost 20 years now, and I think there's exciting opportunities. If you look at it the right way, I think of it as -- it's a different mindset within the company. So I'll give you an example. We had an AI hackathon inside the company where every single group, every employee was able to participate and give ideas. So that's -- so to me, AI is -- it enables us to -- first, there's three buckets kind of like to the point you're making. One is how do we improve capabilities for our clients. And so whether we have very unique data, which is one of the things that I think building AI capabilities on top of what you can imagine, whether it's the education side with very unique kind of flows across education and integrations in terms of data or luxury travel and hospitality or health care and others, again, you have unique kind of capabilities that you can build and examples that you can build client capabilities on top. So invoice already has the ability to provide machine learning type matching for invoices for clients, or we have machine learning or matching around payments. So all those are -- we have client-focused kind of AI innovation. Then we have, what I would say, function-focused AI. So think of customer service as the obvious area where our customer service kind of support is getting a lot of our efficiencies driven by this. And then we have in the functional or support areas like finance and analytics, we have chatbots and others that we've built on top of our data architecture, and that's an investment area for us. So again, to me, it's more of a mindset, and that's -- we're driving that across the company and certainly can drive both kind of revenue and business in the future, but also more efficiency inside the company overall.

With the push in real-time payments and stablecoins maybe in the future, what does that do for your business?

I mean, in general, we believe it's incremental. So if you think of -- and we've announced a partnership with BVNK, and we'll talk more about that as we go live. But I would think of it as incremental for us because especially in the markets where there's volatile currencies, we have an opportunity maybe using the stablecoin, and we have that in real-time payments. But using the stablecoin to enter those markets where you may not have normally entered because of the currency volatility. From an economic standpoint, the cost of the stablecoin is very similar to one of our lower-cost instruments. So it doesn't necessarily change the economics for us. But ultimately, we'll provide choice. So if our clients want to pay by stablecoin, we'll have the ability -- we'll provide that option. So -- and we build -- we're building the capabilities to enable that overall, and we'll announce more as our partnership with BVNK kind of launches in soon here.

How do you think about the margin structure? It sounds like you're expecting a little bit of gross margin pressure, but overall adjusted EBITDA margins expansion and then GAAP margins. How do you think about -- how that all comes together?

Yes. Look, so historically, our gross margin was sort of declining slightly year-over-year, mostly because travel and B2B were growing faster. Now with the macro pressures, that's adding a bit of pressure on that side. And also, as I just described, the domestic business or the -- some of the new capabilities in health care and others come at a lower gross profit. But having said that, so you end up sort of closer to the 200 bps decline versus the 100 to 200 that we talked about. Having said that, we've beat margin expectations every year. And so we feel pretty good that we can continue to drive margin expansion. So growing OpEx below gross profit dollars, and that's driven by kind of every single line item, so sales and marketing and maybe even R&D, but certainly in G&A, you've seen us see opportunity there to continue to lower that, and I expect us to continue to increase margins. And at the same time, reduce the stock-based comp impact so that on a GAAP basis, too, we should be able to continue seeing profitability from a net income perspective growing along with GAAP EPS over time. So looking not just at EBITDA, but increasingly all the way down through GAAP EPS and including free cash flow actually.

Any change in your prioritization of capital allocation, especially with the stock price obviously being down more buybacks? And then how do you think about M&A build versus buy?

Yes. I mean, for now, I would say our focus is on organic investments. So continuing to invest behind travel, Sertifi integration or the domestic EDU capability or some of the data architecture and AI investments that we talked about. So kind of continuing to drive investments organically. From a share buyback this year, we've pretty much reinvested most of the free cash flow into buyback, if you look at it that way. So we remain pretty aggressive. And as long as the stock remains pretty dislocated, we're going to continue to look at that and be opportunistic in terms of the share buyback. And from an M&A perspective, well, of course, we have a pipeline, and we always look at opportunities. For now, we're busy, obviously, with the integration of Sertifi and invoice. So the focus is on execution there in the short term.

You gave a preliminary outlook for 2026, and we talked a little bit about that through the education side. But how do we think about the overall outlook that you kind of outlined for '26 in terms of growth versus '25 and maybe a normalized kind of overall business for Flywire?

Yes. Look, I mean, what we've tried to do is try to take some of this macro noise by being, again, transparent and data-driven and also very prudent in our outlook. So if you look at the last few quarters, we've done better than that macro assumption that we've had. So the intent is that we take some of that -- a little bit of that uncertainty around the macro impact. But obviously, for this year, to think about the normalized growth rate would be looking at taking out the mid-single-digit impact against the fact that we're still growing in the mid-teens, and that's FX neutral, excluding Sertifi. So as we get into next year, again, similar profile, as we said, related to our Q4 exit. But we feel quite good that we've -- the way we've sort of framed this mid-single-digit headwind, it allows us to be more predictable and feel quite comfortable that we've captured some of those risks that are out there, and that the rest of the business, like we said, it's very disciplined growth, very durable growth. And again, it's highly sort of margin profitable.

Okay. With that, Cosmin, we'll keep it there. Thanks so much.

Thank you.