Paysafe Limited (PSFE) Earnings Call Transcript & Summary

Thanks for joining us at the DB Tech Conference. We got a virtual fireside chat now with Paysafe, Philip McHugh, the CEO; and Izzy Dawood, the CFO. I'm Bryan Keane. I cover the payments processors and IT services here at Deutsche Bank. And so format, we'll go through some questions with the Paysafe management and then feel free also to enter in any questions in the portal, and we can get to those. So Philip, it's good to see you. And Izzy, thanks for joining us.

Good to see you, too.

I guess let's start high level here. How would you frame up the investment thesis for Paysafe?

Yes. The way I describe that is it's really some of the logic of when I was brought in to manage Paysafe, one of the things that attracted me and the biggest thing we talked about is being a leading specialized payment platform. We're a scale player. We've got global presence in multiple markets, very strong in Europe and North America, but also a good global presence. But really, there are 2, 3 things that really I thought created uniqueness and capability and the right to win in some exciting markets. One, we're much more than just a credit card processing company. We have an incredibly strong gateway PSP and acquiring capability across multiple markets. Our digital wallet brings sophisticated digital-savvy customers into a merchant's ecosystem. They also create really powerful pay-in and pay-out capabilities. That's interesting for a merchant. Our eCash business, it's the same thing. It really brings in very hard-to-get consumers, the underbanked Gen Z consumers. It makes cash a viable option for a merchant. We'll also be able to plug into 100-plus other ATMs. So that breadth of payment capability allows a merchant to just sell more to do more and you really differentiate yourself against others. At the same time, we really like to focus in deep verticals. So iGaming, so sports betting, online casino, poker, that's an area that we have very deep global history, knowledge, risk management. But we're seeing that expand now to crypto and trading to online and video gaming and other digital goods as well. So we like to go deep into verticals. We like to have deep expertise in some very powerful ultra payment methods beyond card processing. So that's at our core of how we think about everything and where we think that Paysafe positions itself to win. In terms of our growth algorithm, I kind of put it together, I think about 3 basic numbers. We have -- we do have a scaled U.S. SMB business. It's 200,000 merchants, single boarding. We're in some nice verticals there. It's done incredibly well post-COVID recovery. Over time, we see that grow more in the kind of 9% to 10% growth range, some good cost takeouts there and efficiencies, but that's kind of the profile of that business over time. Then, two, is really that combination of our PSP and Gateway, our wallet, our eCash, our deep risk management, these exciting verticals. We see that as more of a natural growth rate of 15% to 20% over time. We're in very fast growth markets. We're winning some nice clients there, and that represents probably about 55%, 56% of our total business. And then finally, within there, there's a small piece, 2%, which is really our North America iGaming. As the U.S. market opens up state by state, we're also seeing the same thing happen in Canada now, too. So we're treating it almost as a single event in terms of how to win the market. We see those growth rates as very high, right, 40%, 50%, 60% as states opened up, and we're positioned to plug in our single API and give that broad set of solutions. So when you do the math on that, we end up getting to consistent organic double-digit growth around 11% to 13%. We're really happy with the program and taking out repeatable costs. So we see OpEx growing at a much lower rate than revenue. So we see EBITDA growth in that kind of plus 15% to 17% range over time. So that's the overall framework of strategically why we think we win and then kind of how I do the top-level growth algorithm for Paysafe.

Great. That was really helpful. I wanted to start with the iGaming business. I know in the Analyst Day back in March, it was highlighted as a big growth story, and volumes have been up, I think in North America, 72% or so. And so the Wynn, Golden Nugget, FOX Bet. So I guess how do you see yourself in terms of longer-term plans in iGaming?

Yes. We've been certainly very pleased with the progress so far. Again, the overall framework is to be able to sit down with an operator, and our job is to make their life simpler, make sure they can sell more, they could attract more customers and they can play as easy as much as they want, as fast as they want on their platforms. That's what we have to solve. And we do that in [ 2 ] ways: one, ease of integration, so good technology; two, deep industry understanding in terms of regulators, in terms of risk management that support them; three, giving them more payment options. So we solve the card processing, we can bring the digital wallets, we can bring them eCash. We can bring them some real-time banking solutions as well. So the more we do that, the less they have to do, the more they can focus on their actual core business. And the third one is really focused on their customer types, too, not just your you're kind of BAU customer that plays every now and then, but also their high-volume VIP customers. And that's what we've been doing. We've been attacking the market first with our gateway. About 75% of the operators have some sort of Paysafe integration, where we're the exclusive or partner processor. Many of those integrations also have a Skrill or a Paysafecash integration as well. So that's how we're winning. We're getting on the ground first. As each state opens up, you'll see us there live on day 1. You'll see us active with operators. So we know how to operate that side and we're winning the processing. We've been investing in Skrill to really up our game there in terms of real-time funding, larger ticket funding and VIP support because the big ticket players can represent anywhere from 10% to 40% of the cash share volume for an online sports betting company. And we certainly feel that, that market is underserved in the U.S. That's an area we've done very well in other markets, and that's how we're building the digital wallet as a follow-on strategy. So we win the processing and then start to build up the wallet volume the way we have in other markets over the next kind of 2 to 3 years.

So what does the competitive environment look like in the U.S. iGaming as the country moves to legalize online gambling?

Yes. So there are a couple of things happening. One is, certainly, it's getting normalized. There's lots of demand. There's lots of interest here. There's clearly big consumer demand. And there's clearly a big industry demand, too. I just had dinner the other night with the president operator of a major California professional sports team, and they were -- there's -- we need this to happen in California. It can't happen fast enough. They're watching other states grow, launch sports betting. And what that drives, that drives greater engagement in sports and entertainment across the board. So even traditional channels thrive with this. So there's a lot of pull and push, which is good. We're seeing banks starting to accept online sports betting. And so you can see credit card and debit card approval rates grow, and we think that's a good thing. We're the lead processor for card payments in online sports betting, so we think that's a good trend. But we also see consumers who want to use multiple ways to pay. There isn't going to be just one de facto way. You see open banking or real-time bank payments is certainly quite popular. So you're seeing Trustly or PayWithMyBank. That seems to be doing quite well in the market. Clearly, PayPal, for its sheer size and volume, it has the digital wallet, it has Braintree as the gateway. They're clearly a very strong player in the market. And obviously, U.S. is their home market. We compete against them in sports betting and kind of iGaming globally. We actually have very strong positions with them or against them in many markets. But the U.S. is their home turf, and there's a huge population there. So our focus to be a PayPal is by focusing on the VIPs. We're really focusing on the true gamers, where they won't have as much focus in terms of real-time funding, larger ticket funding, other multiple options to fund into the wallet. These are things that we can do to create a real benefit and create traction, and that's what we've done in other markets. Other than that, you see a few other players. PXP has quite a few large clients. They've been in the market for a while, and then other people but with much smaller presence or much smaller wins so far.

eCash has been a really strong part of the story. I think volumes were up something like 60% in the first quarter and then up 40% in the second. I know you guys guided to a further -- a little bit further of a deceleration there. But how should we be thinking about that segment on a normalized basis going forward?

Yes. We did do incredibly well. We will see a little bit of a partial slowdown as year-on-year comps kind of normalize. There are a few tax laws in Germany that are creating a bit of pullback in online sports betting in Germany, we think, for the next kind of 5, 6 months. So we just got to work through those pieces. But at its core, we really like this business, and we like this business for a couple of reasons. Part one, it's a business that can really benefit from scale. You consolidate businesses. You put on to a single platform can drive out some really nice cost synergies and just spread out the distribution onto a single payment form factor. Two, the TAM for digital cash is actually massive. When I first came in, I heard cash, I heard prepaid and my kind of radar went up. Where does this thing go? And I think I'm really impressed. It's not at all like a prepaid business that U.S. would know. I was at NetSpend and Green Dot. It's not that formula at all. We don't do any hook and loop. It's proprietary end-to-end. We really target Gen Z and underbanked consumers. And what we are able to do is get consumers into digital environments, that haven't been able to access. So we bring new customers absolutely to digital commerce players. And we see this all time with Spotify and Google, Amazon, Xbox, Fortnite. So we've been able to do that, and so we get excited about that. We think the demand to transact digitally is growing much faster than the need to take out cash, which actually is really not leaving the system nearly as fast as people would expect. So we like it from that reason. And then the last one is we do see geographic expansion. We launched recently in Michigan with PokerStars. We're seeing debt collection and health payments grow. And in Europe, we're seeing the neo banks absolutely needing an eCash solution for both pay-ins and payouts, and we're becoming really the de facto rails for them. So there's lots of interesting use cases, leveraging the exact same technology and the exact same platform over and over again. So when I do the math on that, we definitely do see kind of sustained double-digit top line growth for that business.

Great. And when I look at the digital wallet business, I think it grew 7%, our digital wallet growth. Following your exit of certain network accounts that began back in the spring of '22, if I take a longer look at the offering, how do you see the dynamics playing out between focusing on core customer growth, geographic expansion and new product offerings such as crypto?

Yes. That's the spot-on question. So we've clearly had a bit of noise in our digital wallets as we've exited markets. We've exited some legacy channels that were high risk, and we've had to burn those clients off in Q2 and in Q3. So we have to lap those issues. And in Q4, we'll get a cleaner look at digital wallets. So that's created noise and, certainly, a lot of attention. Two, we want to see more out of the growth even after we lap. We want to see the growth pick up there. And we are, as you laid out, we're really focused in the 3 areas. One, really invest in core customer user experience and approval rates with our merchants. We brought in a new leader, Chirag Patel. He ran Payments globally at Santander. Before that, he ran all the payment expansion internationally for Amazon. So he really understands APMs. He really understands from the merchant point of view. And he's very, very customer- and U.S.-centric, and then we really wanted to ramp that up to drive up new account sign up. So that's kind of a core pillar of the growth. But the engine for growth gets boosted by 2 things. One is geography and two is crypto. So on the geography side, clearly, the U.S. is our focus. We launched an upgraded program in the U.S. with instant funding and large ticket instant funding over the summer. We're integrated to 8 operators right now, and we'll continue to expand that program, spend some marketing dollars on in the NFL season and get some traction to start building growth into 2022 and beyond. We are seeing pickup in other markets as well. There's a lot of demand from our global clients in Latin America. So we'll see some pick up there as well. So geography plays a part. And then the third one is the roots of the Skrill wallet is clearly in iGaming. The very kind of instant pay-in and payouts and the functionality of the wallet, it's very powerful. But we're seeing this in trading. So FX and crypto trading is clearer than air that's driving up sign-ups. We're adding -- we're making the wallet more available on more exchanges. We're expanding the crypto trading capability. So we see that as a growth engine. And over time, we certainly believe that the crypto off-ramps, the crypto back to currency is a major demand. And we think the wallet is very well placed to be a player there. You have the AML, KYC. You could unpick blockchain. So that's going to be on our radar, but that's going to be more of a later item for next year. But geography plus crypto on top of that core UX is the formula to get us back to kind of 15-plus percent growth.

You mentioned the direct marketing business, it's obviously a very high-margin business. So what about the broader market or complexities of that business caused you to ultimately pull back there with some clients?

Yes. So the first thing I'll say is we really like the market. It's -- and we like the market for 2 reasons. One, at its core, we certainly think the demand for nutritional supplements, health supplements, diet supplements, those types of things in the U.S. isn't going to wane anytime soon. We think that's a kind of a core demand. Two, it's a pretty specialized vertical. It's not easy. You have to have very good monitoring. You have to really monitor sales practice and make sure that people are complying with scheme rules. You have to manage chargebacks, and you have to have a good mix of low-risk and high-risk chargebacks to have a successful operation. These are things that your average player just doesn't walk in and do, and we're good at that. So we like the business, and we see this as a nice tailwind in 2022. What happened in -- at the very end of 2020 is we saw changes in scheme rules and enforcement around clarity of selling guidelines, clarity of what's being sold, what's being guaranteed and promised, and we sort of tracked that. And we had a slug of customers that were not compliant, and we wanted to get out ahead of that. And so we made the decision to exit customers that were selling, in our view, certainly not the right way. And that was a cost to us, and we have to kind of work through that through this year. And we obviously lapped that issue in Q1 of 2022. We did see in the industry other players take on fines and fees for the reasons we outlined. So there's a little bit of a pullback in the industry as well as things normalize. From where we sit today, what we see is the following. The direct marketing companies that create and launch these campaigns and companies, they're still in business, they're still thriving, they still want to grow. They all pulled back a little bit, but they're building plans to get back in and sell. Two, we built up our capacity with bank partners, with CRM partners. These are the partners that help us track and monitor the practices of these companies. And then our ability to manage at scale kind of higher and lower chargeback volumes and blend them together. We have these capabilities at very high scale in the market. So we're positioned, very well positioned to capture that growth. And we'll start to see signs of that in Q3, more in Q4. And then Q1, typically, you see a bigger spike in seasonal campaigns for those types of products. So that's a little bit of a background on that one.

Great. I want to move on to take rate. It's been pretty resilient in digital wallet and eCash integrated processing and is obviously impacted by the direct marketing. So can you talk about take rate? And I think you guys are factoring in some pullback on the long-term take rate. So can you just give us the pieces there?

Izzy, do you want to pick that one up a little bit on the mix, some of the mix changes?

Yes. Sure. Thanks, Bryan. Yes, you're right. We've given you a lot of detail about take rate, which just kind of help conversations, how people model it out a little better. Long term, here's the following aspect. What we're seeing in eCash right now, it's just higher maintenance fees coming through, which our takes rate over 7%. But when you look at our customer contracts, merchant contracts, over time, that should stabilize at 7%, so we're running a little ahead. On digital wallets, currently, it's a mix that's really driving take rates. Our crypto merchants, our FX merchants tend to have higher take rates, which is pushing that above the 1.8%. When we look at our core merchants and betting merchants, online gaming, casino, we see that whole transactional nature come out about 1.8%. That's not going to come down in the short term. But long term, as things stabilize out, we should see that come down as well. And then finally, on integrated processing, it's really, as you mentioned, it's really 3 different segments, right? I'd say our card present effectively, our acquiring business is relatively stable take rates, 0.7%, 0.8%, and they've been pretty steady. It's the growth that we've seen in our integrated e-commerce offering, combined with the decline in direct marketing, that has led to low take rate compression with the integrated processing segment. But long term, we see that trending in that by 0.8%, 0.9% as the growth rates kind of stabilize and kind of what we see through over time. Is that helpful on giving some context, Bryan?

Yes, yes. And how do you think about pricing power that you guys have in the product set?

Yes, it's surprisingly, like, I think we've always talked about let's go business by business, right? eCash, very resilient. We are a payment option for merchants who can't access this customer base. And the -- and half our take rate goes to the distribution points are happy because we're providing walk-in traffic. So that's been a very resilient take rate in that business and continues to stay there when we look at markets. Digital once again, it's around convenience. We are -- have been and are a very good option for the merchants, especially look at our global gaming presence at a very attractive take rate actually. So that's been -- it's pretty sustained. That's going to move around based on our merchant mix, but that's been pretty good. Where we probably see more pressure is probably on our -- in our integrated e-commerce offering with the Gateway business, where you have huge volume, so absolutely revenue growth is really, really strong. But with higher volumes, we have different tiers that will lead to lower take rates. Net-net, it's net-net positive for us given the higher volume we see. But that's kind of how we see some of the pricing or competitive dynamics around the take rates.

What about real-time payments, RTP, and the importance it has for you guys? How do you see Paysafe position the benefit from the rollout of RTP globally?

Yes. So we -- so when I take a step back, Bryan, I definitely look at the world as evolving. People try to pick winners and lose all time in payments, this payment type of win, this payment type of win. My very strong view is when you're forecasting the future, the following is going to happen, consumers are going to have even more choice to pay online. Credit cards and debit cards have been the de facto only way to do it. We've seen, obviously, digital wallets come into play. But as the adoption, obviously, the mass adoption of mobile phones around the world grows and the ability to plug into bank APIs also grows either because the market drives it, technology drives it or regulation drives it, you're going to really create some really powerful real-time banking capabilities. We're seeing this happen very rapidly in Europe. And you also see, I think, crypto as a payment rail as well. So when I take a step back, I think about being able to offer all the different kind of core payment rails to a merchant, so they can sell more. We're uniquely positioned. So that's a big part of certainly how I think about the Paysafe strategy. Within real-time banking, it's a nice matter of, hey, I've got my online bank account, I can pay with it. The winners are creating deeper integrations. They're able to capture data at a transaction -- per transaction and per customer level. So you can do refunds, you can do chargebacks, you can do discounts, things that you can do on credit card rails. This is happening. You're seeing some players, and I admire Trustly in Europe. They've done a very nice job of creating a really nice user experience that's integrated into the merchant experience that created that. So we absolutely see that happening. We see that starting to happen in the U.S., and we're seeing demand for that internationally as well. And the SafetyPay M&A deal with PagoEfectivo, whilst eCash is a part of that business that we like a lot, and it creates some nice synergies, having a real-time payments platform in 19 markets, including 12 in Latin America, we certainly see plans to expand that. We have rapid transfer capabilities in Europe as well, and we'll do some combination there to start really linking these services. We see it as a really fast emerging payment rail. And if you can plug that into your PSP gateway, plug that into your digital wallet or plug it direct into a merchant, depends on how they want to access it, you create a lot more payment optionality for the merchant to accept. And it's clearly a -- it's a strong feature for consumers. They like paying it. They don't want their credit card numbers exposed online as much. In certain markets, credit cards are already penetrating 30%, 40% of the population. So we think it's a payment rail with real legs.

Yes. I was going to ask on the M&A front with PagoEfectivo and Safety Pay. Can you talk about the creation of an open banking solution in the regions and how that ties in with your existing verticals?

Yes. So our -- when we started to look at M&A, we -- since the pipe, we talked about 3 flavors of M&A that we would pursue. One is anything that really augments our iGaming position, especially in the U.S., but anywhere globally. Two is really focusing on APM consolidation, from digital wallets to other kind of core APMs. And three, tactically, we look at some eCash roll-ups where you get some really nice synergies. Those are kind of the 3 clear flavors. And we looked at many, many options. Some were great, but not actionable. Some were great, but way too expensive for us at the moment in terms of where the market pricing is. As we look at Pago and SafetyPay, they're great clients. They have great growth rates on their own. But we really like, one, the fact of creating a scaled real-time banking network for international markets. We think that's a powerful position. Two, the synergies of expanding eCash clients and having a million now distribution points in 60, 70 countries, we thought it was clearly an easy attractive space for us. But three, as we got to know them, we had very similar clients. They are in iGaming, so sports betting, online and video gaming, travel. These are very, very similar client bases. And so we saw a lot of synergy from that side. We've talked to some of our leading online gaming clients, they're very excited about this in terms of us being able to augment their services in, clearly, a key market of growth for them. So that's how we see the logic behind those 2 deals.

So obviously, you've gotten this question a lot about potential stock buybacks, with the stock being a little bit weaker as of late. So can you talk a little bit about your thoughts on capital allocation?

Yes. Right now, when we think about capital allocation, there's really 2 things. The CapEx that we spend on; and then two, how do we leverage our free cash flow. So on the CapEx side, we're really focused on a few things. One, we're going to continue to invest to win in iGaming, particularly U.S. iGaming will actually be announced. And we said we'd announced a few weeks, which means basically next week now, some new additions to our team as we bolster our presence and our strength to win clients. So we'll continue to invest to win in iGaming. We're making -- continue to invest in digital wallets and really scaling our PSP offer, our e-commerce. We've got a nice pipeline there. We're really scaling up our ability to take on more volume as well. So those are the 2, 3 big areas of investment where we're driving our CapEx. And then on the free cash flow side, the absolute priority will be paying down our debt and lowering our debt -- our leverage ratio back down to the mid- to low 3s and putting us in a position to go on the attack again as well. So that's kind of a very clear positioning.

A question from the portal asking about what percentage of the underlying customers you process come from Asia and, in particular, China and what type of growth are you seeing in that area.

Zero from China. We don't do any integrated processing in Asia. We have positions in Asia with digital wallet clients and some eCash clients, but our payment processing doesn't have a presence in Asia. And many years ago, we had a Chinese gateway that was exited several years ago as part of the [indiscernible], so there's no presence there.

Got it. If you look at the pipeline and your business and given the visibility you guys have, I just want to ask a bigger question on outperformance versus your guidance. There was obviously a lot of talk last quarter about your numbers versus guidance. How do you -- what needs to happen to drive additional revenue and growth above some of what your targets that you're looking for?

Yes. It's an interesting market. We certainly hit consensus in Q1. We are slightly ahead of consensus in Q2, and we reaffirmed full year guidance for the full year. And clearly, there's some expectation in the market to do more. And clearly, we're clear that we need to get kind of a cleaner performance with less adjustments in the numbers as well. So we're very kind of lucid about those challenges. But for us to continue to get growth and start to outgrow or, let's say, just get back to that long-term growth algorithm, what do we need to see? It's really 2 things. We want to see that turnaround in digital wallet get back to growth, but then really start to see that accelerate closer to consistent double-digit growth. And that's -- we're going to start lapping. We're not going to be at double-digit growth in the next 2, 3 quarters, but we're going to keep working to get that growth up and up, get the legacy further and further behind us. The second piece is really our client pipeline, particularly on the e-commerce side, where when we do introduce digital wallets, we do introduce eCash, plus our kind of global processing, our risk management. These are hooks that really work and are attracting some really nice clients. So we have to see that pipeline, that top of funnel continue to grow and see some of the big names really drop to the bottom line, and we're starting to see some nice proof point. That will definitely drive a different trajectory and grow.

Okay. With that, we're going to keep it there. Philip, good to see you. Thanks for taking the time out. And Izzy, thanks so much for being here with us.

Thanks, Bryan.

Thanks, Bryan.

All right. Have a good weekend.

You, too.