Flywire Corporation (FLYW) Earnings Call Transcript & Summary

All right. We are going to kick off the next session. Up next, we have CFO of Flywire, Cosman. Cosman, you've been here for the last couple of years. We're very happy to have you back.

Awesome. Thanks. Well, glad to be here.

So I thought we would open this up high level kind of the headline from the Q2 call. You laid out the ambition for $1 billion of revenue and 30% adjusted EBITDA margins. over the next few years, starting with the revenue number, when you build up to that number of bottoms up, what are the 2 or 3 largest building blocks? And maybe just talk about the decision to put those targets out at this time, given all the volatility we've seen in some of your largest verticals.

Awesome, 2-part question, my favorite kind. So let me start with the first one. So first, in terms of the building blocks, and how we thought about it. Listen, the $1 billion and 30%, that's an organic target, and it's our usual approach being prudent. And data-dependent overall. So as you think about the building blocks, I would start with the enterprise client and the fact that a large majority of our both education and travel clients are [indiscernible] $100,000 in revenue per year. And those clients stay with us. They see the high ROI of kind of our software and the combination of capabilities that we provide. And as you've heard us they're lower than 1% churn. So very high retention of those clients. So that creates a sustainable base on which to build. And so that's sort of part one. And then you go to our sort of biggest our biggest vertical, education, strong growth there, but increasingly diversified components of that growth and the growth algorithm as we'll talk about it later. So seeing that cross-sell on the domestic side, that's driving a lot of the growth there too. So that's the second piece. Now look, travel is now in its own right, sort of bigger than the U.S., nearing the size of the U.K. kind of education business. And it is a big TAM the clients see the ROI there and we have sort of the breadth of clients now with smaller and larger and also just the depth of product, which we didn't have before the Sertifi acquisition. So that's great. And then lastly, B2B health care, both big sort of growth drivers this year and continuing to deliver. So kind of firing on all engines. So figured that -- so those are the building blocks. And to your second point, why now? Look, it's sort of aligned with my sort of in our guidance principles, which is you start with transparency. And so as we're doing our normal sort of medium-term kind of planning. This is starting -- those numbers are trying to come into focus, and they don't require macro to get better. We actually assumed in that a very prudent kind of macro environment from our perspective. So as we think about that $1 billion and the 30% felt that it's coming into focus. So helping folks kind of plan around that. Second, it's data dependent. We'll see how things play out, and we'll let you all know. But third, I think I noticed the balance between -- we've always talked about revenue. Revenue is still obviously a huge focus for us in growth. But now we have free cash flow, we have margins, and certainly, GAAP profitability as we're pivoting this year. So those are also important balancing aspects. I wanted to bring that in. But listen, I'll just finish with this financial framework was built to within a tough macro, it was not but to assume it gets better. And so we've tried to kind of balance that expectation externally.

Great. And the other half of that equation is the expense base. You said transformation investment will peak in 2027. And beyond that, you expect operating costs to stay relatively flat while still funding a lot of your strategic priorities, how do you get the confidence to manage OpEx for a company that's still growing in that way?

So I would think of it as sort of structural. It's not cost-cutting exercise, and it's already happening. So actually, if you look back -- so if I start -- sort of just go back a few years, as you know, we've grown and scaled. We've invested -- we've kind of gone through a large investment scale kind of cycle. And so since IPO, that's both organically and inorganically. Now if you look at the [indiscernible] the last couple of years, even in 2025 and '26, if you were to obviously Sertifi was a big acquisition last year. But if you adjust for that, to some extent, to organic OpEx is actually not growing that much. It's probably single-digit growth. So we're already even before kind of doing the transformation, we're already growing at scale on a much smaller kind of OpEx level of growth because of that early investment. So now we're sort of today, we're in the middle of the transformation that we announced, which has become kind of a mindset internally at the company. then that allows us to drive growth, so growth at lower cost to some extent. So the way to think about the drivers there are across a few different areas. One, it's the G&A or functions that we talked about is about 1/3 of the costs. Those are opportunities for us to simplify a lot of the systems, and we'll talk about kind of the transformation project itself, so able to simplify that to reduce a lot of those manual costs. Second, you have kind of the R&D and engineering areas, which, again, we can do a lot more in those areas with a lot less. And third, one that we sort of talked about it, but not as much as the enterprise versus nonenterprise client approach. So how you tier support and how you look at kind of enterprise clients given that we're so focused on that, and that's 1 of the big drivers of growth even in the future. you can obviously change your client support models internally. So that makes your sales and marketing is kind of the other component also pretty manageable. So as we look ahead, feel pretty comfortable that OpEx, as I said, will be kind of growing a little bit into next year as you kind of peak through this transformation investment phase, but then managing the growth, again, in line with the organic kind of assumptions on the revenue side, which have been, again, pretty prudent.

So talk a little bit more about the digital transformation initiative, Project Adapt you talked about kind of bottoms-up redesign of processes, systems, data structure. Where are you in that journey today? And what have you found to be some of the biggest unlocks so far?

So I would think of us as being sort of in the -- right in the middle of it. We still have about 18 months ahead of us, so we're not sort of done per se. But we -- if I look back, we sort of started a little bit last year. And I think the important part is to think about when you do 1 of these large transformations, you can say you're replacing systems and things like that, but that's not the hardest part. The hardest part is org and process changes. And that's kind of where we started, brought in the right talent, a lot of folks with a transformational mindset having seen it at scale. Again, 1 of the reasons even I joined is to bring that scale mindset and how do you scale? And so brought in a lot of the talent, and you've seen us do some of the org changes that we've done, but then also just redesigned processes, which is usually the hardest part of any transformation if you talk through. And so that's been kind of the journey so far. Now we've started to -- we're in the middle of sort of the systems consolidations are the same as many of our clients, we're looking at how do you consolidate 20, 30, 40 different systems into a lot fewer, that reduces cost, reduces complexity, reduces kind of handoffs between different departments. And so that is kind of where we are. The data side of it is the other aspect where, again, the opportunity to do so much more with data. We all talk about AI, but at the end of the day, I'm a data person. I'm a machine learning guy as we talk about it. And so for me, it's easy to put a wrapper of AI on top, it's the substance underneath that then gives you more value out of any kind of AI capability. So that's where we're spending a lot of time now. So you'll see us obviously continue to get benefits from this. But I would say over the next 18 months, you'll see more of it. And so it will be kind of showing up in all these different areas. The way to think about productivity from this and just in general isn't sort of 3 tiers. AI is a big component of it. And so if you were to do nothing and you just handed everyone, some of the most recent AI models, the most advanced models, I think I know I'm certainly a lot more productive than I was to, I think, the disappointment of my team who is now realizing that every time they send me something, it comes back in about 5 seconds later with an answer. And so you start to skip levels in terms of how you make decisions and how fast you can move through things that you never thought were possible. So that was just a sort of individual level of productivity, but then you have function level and enterprise level productivity. For those you actually do need to invest in transformation. So if you're going to make the IR function more productive, it does need a bit more work or and so forth. So that's what we're working on. But anyone sort of wondering, can you be more -- should you aim to be 20%, 30% more productive as an organization. I think it is with the tools and capabilities that if you're working on the substance and underneath the foundational area like we are, I think that should be definitely achievable.

Yes. That makes sense. Let's talk about business diversification. You mentioned it in the upfront question. 5 years ago, Flywire was largely a cross-border education story. Today, you've got a large domestic education business, travel, as you mentioned, is now a very large business in its own right and B2B health care, still smaller, but still growing. How would you frame the growth rates across the different verticals? And where do you think that mix settles out as you approach the $1 billion milestone.

Yes. So if you look back at IPO, yes, I think most still out of us is a cross-border probably mostly kind of in the large Big 4 markets. kind of player. And now I think hopefully, everyone is seeing that this is quite a very different business certainly this year and going forward. And a lot of it has just been diversification into the other verticals of travel B2B health care now kind of adding. But even within education, you now have the domestic SFS cross-sell, which is driving growth that is above the company average. So as I think about where we are today and where -- how to think about the $1 billion even in the future, it's growth from these other verticals. So it's growth from travel, it's growth from, again, B2B, but also domestic EDU growing faster. So those will become a larger share of the business and key growth drivers. And so that, to us, is kind of obviously good. Still cross-border will still be an important component. We still see that as a key underlying sort of feature of the platform that enables you to cross-sell into some of these other areas. But -- the others are in their own right, strong contributors. So I would say those would become -- so those assume they grow faster than the company average, which, by definition, if you look at the mix last year, it will shift towards -- if you just look at cross-border, which is mostly basically portion of the U.S. mostly outside the U.S., then that becomes a smaller portion while the rest becomes a much larger portion over time.

Yes. Makes sense. Maybe sticking with the cross-border business. We're sitting here in August, right in the heart of U.S. enrollment peak. What are you seeing in your own data? Maybe help clear out all these headlines on the status of getting visas in any given market, what are you seeing on the ground?

Yes. So we are now pretty much past the US PEAK of getting into September. We've seen most of it. And so far, played out sort of okay for us. I would summarize it, but to give you some components, we look at external and internal data, as you know, externally, the data, we've gotten our data through February and sort of trending more negative, but we've assumed 30% already negative in our numbers. And we're not seeing that level of decline in our own first payer data. And some of that is just -- if you look at a couple of things. One is the selective institutions. So those schools that are sort of higher ranked or able to be more selective or able to do quite well. So the headline usually is student can make it into whatever the school may be. I think if you double-click into that, usually, it's a graduate student. And sometimes it's a less selective institutions. So we've seen that mix of quality for us and more selective institutions along with kind of where tend to lean more undergraduate those are still doing pretty well. So if you look at a 30% decline, we still feel pretty good that we've captured that. Now the channel that remains negative. We talked about it. You see it in the [indiscernible] is coming from India in particular. But even with that, again, we've taken a pretty prudent approach. So if I was to then step back and summarize what we've seen so far for the U.S. As you know, we guided the full year U.S. growing the low single digits with the assumption of sort of a 30% decline -- and in visas. And so far, for the PEAK, at least have done sort of in line or better than that modestly, but that's so we're comfortable as far as kind of the U.S. performance within that. So -- for PEAK, and again, more to go in the year, but feel pretty good so far about the U.S.

Yes, no. Great. Okay. And then the other 1 was the U.K. I think this quarter, you flagged higher rejection rates on visas. And I think you took a more conservative stance on that market. What do you think is causing that? And how do you think about the range of outcomes in the U.K?

Yes. I think there's similarities there, too. So the headlines tend to be a bit more negative than the reality on the ground is certainly for us. And so if I was to separate the headlines versus what we see -- so in the headlines, again, the more -- there's very specific corridors where compliance is foreseeing some higher rejection rates. So we're seeing that. And again, when you look at it, it's mostly kind of the graduate, the 1-year sort of these specific programs, it is not our sort of higher-quality undergraduate kind of programs that we tend to be in the U.K. So again, a little bit different. Then even if you look at the external data, what we're seeing there is very choppy, right? I think it was in the first quarter, it was something like 30% plus down. But then in July, I think it was down maybe 11%. Now we're not going to take -- again, that's my approach is I'm not going to take 1 data point and say, oh, now it's gotten better or something. So we're sort of remaining prudent as you saw and as you pointed out, we've taken a usual prudent approach, assumed second half decelerates, in the U.K. that's baked in. And so we're going to continue watching. We're early in the U.K. cycle. The U.K. kind of goes from through the end of this quarter and into October. It's 1 of the things we talked about on the earnings call just around that timing where you can have just even before a holiday season or a holiday timing and China can sort of move 1 or 2 points around because of that. But that aside, which, again, we've tried to capture quite clearly well. We'll continue watching it. And it's less -- listen, we've been very prudent around this on purpose, and it is for this -- with the view to this year. And these things tend to play out over academic gears. We do -- everyone tends to look at what did this month do with the other months to do, these things tend to play out over academic areas. What we're seeing in the U.K. is political change, but the general kind of focus remains on high-quality students kind of being something that they -- every sort of large market will want to try to remain continued attractive.

Yes. That makes sense. So sticking with the U.K., how do you think about the growth algorithm there? And specifically in SFS, so how much of the U.K. growth outlook is now SFS driven versus being more cross-border?

Yes, I mean, the U.K. has gone itself through an evolution, I would say, as we -- and I think the SFS definition is important because if we define SFS is just the latest integration that we started piloting last year, that's not a huge driver. But what we've seen in the U.K. is transform itself from -- I think if you look several years back, it was again mostly cross-border. It's kind of a transaction. based. And then what has shifted to is a combination of new logos but integration based cross-sell on the domestic side. So whether that was the -- you saw the WPM acquisition enabled Unit4 type integrations. Now we've got -- sorry, tribal and then we got Unit4 Agresso as part of SFS, so as we expand the number of integrations that are available that captures more of the market, we're able to increase utilization. So then the growth algo of the U.K. becomes less of just new logos, which now are quite penetrated, and it's more about utilization. And there we've kind of giving you this metric of our aim is to process at least 90% of student in volumes. And we -- I think we gave a number last year, it was around 12 this year, that we do that for. But there's a number of schools where we can continue to grow that level of penetration and utilization -- and so the way we do that is through those, having more of those integrations, which then embed us deeper into the school's ecosystem. And so and that's where we have that stability of long-term kind of client retention from that. So again, much more diversified in terms of the growth algo for the U.K., it's more growing that utilization. So the cross-sell internally, you still have some new logo growth, but I would say that's a lower component of the growth more of just the utilization that's driving it.