Paysafe Limited (PSFE) Earnings Call Transcript & Summary

Hello, and welcome back. My name is James Fotheringham. I cover U.S. financials for BMO Capital Markets out of New York, and it's my genuine pleasure to have back with us, Philip McHugh, who is the CEO of Paysafe, Ticker PSFE; and Izzy Dawood, Izzy is the CFO of Paysafe. Guys, thanks so much for joining our Digital Banking Summit. It's a pleasure. Just to put some context in this relative to our previous conversations we've had, this is more of a Canadian audience, very interested in the evolution of digital banking, not just within Canada, but globally as it will relate to Canadian consumers and Canadian institutions. And the reason why we're so delighted to have you here is because digital wallets and digitization of cash is such a key and integral part of your success as a business. So if you don't mind starting as -- sort of giving some introductory comments to our mainly Canadian audience here about exactly what it is that your business model entails but focusing more importantly on the competitive advantage that you have with respect to strong digital wallet offerings and the capability to reach a sector of the market that very often is missed by merchants through digitization of cash.

Yes. I appreciate that, James. And it's always great to speak to you. So I mean, I think with -- what I can just give kind of a top of the house piece, I joined Paysafe in July of 2019, so just over 2 years ago. And when I was doing my due diligence on the company, what were the things that really attracted me to the business. It's a business that was -- is founded in Montreal, also has very deep Canadian roots and founded by some great entrepreneurs out of Montreal and really built up a business. And when I looked at it, it was a set that was global in nature, very, very good international footprint. It was a business that had great roots in digital commerce and e-commerce from its very start. So really understood that in terms of providing card processing solutions in hard to get to markets. But as a business that really started to solve the needs of the kind of international iGaming sort of sports betting, lottery, online casino and poker, these were clients of theirs that were very demanding e-commerce merchants. They needed card processing, they needed risk management in multiple markets, but they also needed multiple other ways to pay. And from that, Paysafe really started to build out its Digital Wallet capabilities with the Skrill and the NETELLER brands and with a product where you could pay into the wallet from hundreds of countries, using hundreds of alternate payment methods, you could pay in and pay out to the merchants very effectively and move money from side to side from wallet to wallet. So it created a lot of functionality that was really demanding. But also, we developed the eCash business as well, where you could use cash to make digital payments. And that's evolved. What was really attractive to me is when I look at the macro trends in payments. there are really 2 or 3 things happening. One, everything is becoming more and more integrated and online. So you have to be able to plug in. And for a merchant, the less work they have to do on that one integration, they want to get more and more from that integration as they have to do it multiple times. And then two is consumer choice. People are going to pay and use more and more alternate products than just your traditional credit card. It's still a core part of commerce, but a digital wallet creates lots of optionality of how to pay for multiple markets. It's a great way to plug in multiple APMs and create lots of flexibility of money movement. And then cash, we see a massive target addressable market, a huge TAM out there. But people that prefer to use cash have to be digital today. They have to pay for things online, and it's definitely a choice. And we're able to bring a very, very wide variety of choice to a merchant. So when I take a step back, I look at a business that can come with a single API. It can bring card processing. It can bring very powerful digital wallet capabilities. It can bring eCash, more and more real-time banking solutions as well through a single relationship. And we think that, that is absolutely the direction that the global market is going. And for me, that was the attraction of a business that had a real understanding of where new payment methods are going, had a real understanding of how to orchestrate that towards a merchant. And then, finally, I really like to focus on industries. We don't compete in the generic retail sector as much. We're very strong in iGaming. We like to go deep with those relationships and go global with them, but more and more after seeing crypto and ForEx trading, we're seeing digital goods like video gaming, certainly is a big growth area and some other specialized areas. And so that combination of focused industries, broad APMs, ease of integration and strong risk management, that was the mix of variables that I found very attractive and 100%. When we talk about being the leading specialized payment platform, those are the elements that underline that statement.

As we've talked about before, we at BMO are struck by the incredibly reliable relationship that exists between organic revenue growth expectations and valuation of stocks related to your industry, payment technology stocks. In fact, I think the last time we checked the R square is 96% or something ridiculous like that. So the organic revenue growth potential of your business model should be of key focus to investors. So could you take us through, I think, what you call your revenue growth algorithm, but what I'm looking for is what are the elements that add up to what we should be expecting from Paysafe as an ongoing reliable organic revenue growth rate?

Yes, 100%. So that -- the best way to answer that is the kind of growth algorithm you've not spoken about before. So within Paysafe, we have quite a few elements. So the way I describe it is we have one part of the business in our Integrated Processing division. A large part of that is U.S. SMB acquiring, right? That is both card present and card not present at very, very large scale, single boarding with lots of back-end capabilities, that's about 45% of our total business. And it's a good business. We get growth in some specialized kind of industries where risk management really works. We do it at scale, and we see quite a lot of kind of cost takeout as well. It's done incredibly well with post-COVID recovery. We see some nice tailwinds going into next year. But over time, when I think about projecting kind of a 3-plus year period, that's going to be about an 8% to 10% top line, which is broadly kind of on the higher end of the SMB growth in the U.S. That's how we think about that. The second part is where I think the real value of Paysafe really lies. When you take our e-commerce, our international e-commerce gateway, which is a lot of capability, you can plug in, you can get access to multiple markets, great risk management tools. You take that with our digital wallets, which really attracts a very nice sector of customers that we can bring to a merchant. We can provide pay in, pay outs. We can provide a very wide menu of how to fund and make payments. And you add the eCash element to it and now more and more the real-time banking element to it. You combine that piece with real knowledge in iGaming, real knowledge in crypto and ForEx, real knowledge in digital markets, digital goods, we see that combination of being able to grow organically 15% to 20% for a fairly sustained period of time. These are high-growth markets. And frankly -- so we're in the faster swim lanes of digital commerce. And our products are in some of the faster emerging ultra-paying methods as well. So that combination gives us confidence of that type of growth rate. And then if you drill down -- and that's about 55% of our business. And then within that piece, about 2% of our total business is U.S. and more and more, we say, North America iGaming. This is actually a market that's being created as we speak. There's federal changes in regulation that allows states to open up sports betting, state lotteries and online casino and poker state-by-state. Probably about 1/3 of the states are open today. We believe about half the states will be open in kind of Q1 next year. We have Florida, we have New York, we have Louisiana and Maryland, all in play. And as each state opens up, you're seeing us open up on day 1, we are ready with the regulators. That's no easy task. We are ready with our partners with a single API that brings you all of those products. And we've got a great pipeline, which includes new entrants coming in and some competitive takeaways. And as exciting for us is Canada. Canada has also recently passed some regulation as well where Canada has a very robust lottery system. All the provinces have provincial lotteries. We are integrated into 100% of Canadian provincial lotteries. We have a 10-year, very deep relationship. There's a lot of trust there in how we've worked with them. And now you're starting to see sports betting will start to open up province by province with Ontario really starting to see some action in the fourth quarter of this year, and we expect other provinces to open up into 2022. So when you take that combination, we see that 2% of our revenue growing at 40% to 50% over time, simply just by following the market and being really the integrated -- the incumbent integrated partner is the way I describe it.

And so what does that all add up to? What should we be assuming as an underlying organic revenue growth rate?

So when we do the math on that, we see kind of a consistent 11% to 13% top line when you put it all together. You match that with some -- we've got some good programs of creating global platforms, repeatable cost takeout. So we see the bottom line organic 15% to 16% before M&A.

Sorry, the 15% to 16% EBITDA?

EBITDA, yes.

Yes. There you go, and 11% to 13% revenue?

Correct.

Now the reason why we love your stock so much, Philip, is because if you look at payment technology stock that can reliably grow 11% to 13%, and you map it on to this relationship, it's so unbelievably reliable against the industry. It implies, if you don't mind me speaking PE instead of EBITDA, but it would imply a mid-20s, mid- to high 20s rolling 2-year forward PE multiple? And you're in the teens, you're in the mid- to high teens instead...

Correct, correct.

So this is why we loved your stock, just to be absolutely clear.

Yes. We like that we're giving people a good deal.

That's right. I mean, relative to your revenue -- organic revenue growth potential, the shares are trading at an incredible discount to where they are relative to peers. So why do you think that is? What's driving that discount? And what are you going to do to narrow that gap?

Yes, no, that is obviously the kind of the core question and the core thing that we focus on. So we went public, we de-SPACed, we went public at the very end of March. And so we've been in the market for kind of 6 months -- 6, 7 months. And I think there are 3 things that have really colored our performance. The first is the most important one and the one that we focus on, that I focus on every single day, which has been our performance. And I'll kind of double-click on that. For Paysafe, there have been 2 other elements. There is an element of de-SPACing. There's just been a SPAC down draft where there's lots of -- there are some great companies in the SPAC form that have real revenues, real profit, real history like Paysafe. But there've also been lots of SPACs that have not had that. They're more virtual in nature than real. So you've seen a downdraft there in the types of investors that we've had in our portfolio. And there's a little bit of private equity overhang as well, which is natural when a private equity company goes public. So yes, the 3 combined, I think, has created some downward pressure. The latter 2, we're convinced it's a matter of time, just cycling out kind of shorter-term investors, longer-term quality investors come in and that will kind of change the dynamics for growth and take some of the weight off our share price. But the most important one is performance. It's performance 100%. So we delivered consensus in Q1, we beat in Q2, we've reaffirmed the full year, but we did lower Q3 and raised Q4 doing that. And the fact is, and we're very eyes wide open about this, James. The performance has been good, but not as good as it needs to be. People expected us to beat the consensus. I think that's almost the new baseline in some corners of the market. And then two, we've had some legacy that we've had to get behind us. When I came into Paysafe, it had great assets, but there are really 2 things that were on my docket to drive. One is really scale and consolidate the business to create global platforms, not individual businesses, take out costs and drive the margin. We feel extremely good about the direction of that. We've got a great cost takeout program. We've been moving all of our back-end process into cloud. We actually just migrated all of our digital wallet on the cloud this week, which is in line with what we've been talking about. So that program is going really well. The second one was derisking. When I came in, there are some higher risk markets that we knew that we didn't want to. We didn't see as viable for the long-term growth of Paysafe because we want to double or triple the size of this business over time. So we made some hard calls. We exited some markets. We exited some channels. And those exits have been costly as well. So that creates some noise in our performance, which we talked a lot about in the second quarter. I think we gave a lot of transparency and insights into the drivers of the business. And what do we see? We really want to focus on a strong Q4. We think that's going to be a much cleaner read of the business. We see some nice seasonality there. We see some of the -- lapping some of the issues that we've talked about in the second quarter. And most importantly, we really like our pipeline. We like our pipeline in iGaming. We like our pipeline in crypto and ForEx trading. We like our pipeline in digital goods. And we're really targeting bigger global enterprise deals where the combination of our products are very attractive. So we see those items coming into place and giving a clean readout on Q4 and what I'd call kind of a nicer exit rate conversation for 2022.

So reaffirming full year guidance was a weaker 3Q, but a bigger bounce back in the fourth quarter. What would you say is the one thing you'd use to buttress the confidence of investors in that ability to bounce back in the fourth quarter more than you were expecting at the beginning of the year?

Yes. I think there -- I think it's just the 3 things. One is the direct marketing has been a subsegment of our business that has had more than its fair challenges. I think we showed quite a bit of detail on that in terms of volumes and take rates and also just account -- net account growth. So we'd certainly like to be able to show that, that trend continues, and we're getting into a nice high growth, and that's creating momentum to recovery and lap that issue. So that's certainly one data point that we see. The second one is just the fourth quarter seasonality and growth. And the third one is landing the pipeline, landing these clients and starting to see the volumes, particularly in e-commerce. That's where a lot of the deals are happening, seeing this happen and show up in our numbers. Those would be the 3 pieces that give us confidence and that we certainly want to talk about as we talk about performance.

Well, the discounted valuation has inspired some interesting conversations that I've been having with our clients, specifically related to the potential to buy back your shares as a new opportunity for investment and to create value for shareholders. And the other with the lockup expired for both Blackstone and CVC, whether or not they'd be not sellers but buyers at these levels and whether or not you've had any discussions with your private equity partners in terms of their interest to increase, not decrease their stakes. So sort of the inverse of the hangover you talked about before. So any comments that you might want to make about potential buybacks or incremental interest from private equity would be very helpful to our clients?

Yes. I don't have much to add on that, James, unfortunately. We have very -- Blackstone and CVC remain incredibly engaged in the business. We talk regularly. I'm actually meeting with Blackstone right after this meeting to kind of -- in one of our regular chats. So they remain very engaged. But they're not -- it's not for us to opine on what Blackstone and CVC want to do with their shares. We're very focused on the capital to drive the business, paying down debt. That's where we're going to deploy our capital. So more on that versus kind of share buybacks. And then Blackstone and CVC, right now, I don't see some kind of big reinvestment right now. They're holding the shares. They like it. They see the growth. They see the pipeline, they see the direct marketing turnaround, they see all the data points that I talk about. So they see the opportunity for the growth in the stock. But ultimately, I think long term, what's healthier is we let us play out. Let's de-SPAC, let's start to rebalance what the investor role looks like in terms of who owns Paysafe. And let's prove out the Q4 growth and the story that we've kept talking about. I think those are the elements that really, really matter here.

Boy, we're excited about U.S. or now we can call it North American iGaming, most very excited about that, which is awesome. The growth rate there in that third segment that you talked about, which is now only 2% of your business, but the growth rate is extremely exciting, an incremental to growth potential in most of our models. So can you just talk about what inning we're in right now? You said we could be half the states done by Q1. Is there upside from there for even more legalization by state? Also wanted to understand that when this nascent business matures, what sort of concentration should we expect from competition? What sort of market share could you target? And who are your competitors right now?

Yes. It's -- there's a lot in that question. So it's clearly an extremely exciting market. It's moving very fast. And there's consolidation happening. You see announcements almost on a weekly basis or certainly on a monthly basis of large players consolidating with other large players. In terms of the outlook, we certainly have a pretty bullish view in terms of states continuing to open up. It's just proven to be incredibly attractive. When a state opens up in sports betting, it's not just the sports betting revenues that go up, but other revenues have also popped up. So traditional sports viewership goes up as well because people are more engaged. The big trend we see here, James, is there is a blending of almost video gaming, sports betting, entertainment and almost investments, NFTs get involved in this now. So there's a real blending in all of this, and it's a big market, and we see this continuing to grow more and more. And we think states recognize this. There's plenty of bills in other states who are really looking to open. Each state has its own politics, their own like who gets -- how do you open up? Do you let multiple players in? Do you allow a monopoly or maybe 2 or 3 players to own it? But the conversation is all about opening and regulating gaming. So we do think about half the states will be open sometime in Q1 or Q2 of next year. And we think that there's still more to come. The big states of California and Texas still haven't happened. Those are massive markets. Obviously, Arizona opening is exciting. We've got Maryland coming onboard. Louisiana, Florida is clearly a big area of focus as well. So we'll continue to see not only growing in our current markets, not only adding more products in our current markets, or adding other revenue streams, but also adding other markets as well. And we see the same thing happening in Canada. And for what it's worth, these customers are global clients of ours. So we have the relationships in Europe in many markets. And Latin America now is becoming a conversation for them as well, a very similar type of view of regulation of markets. One market opens up and then multiple markets open up. So having a partner that you already integrated into that has these multiple products and footprint is key. In terms of competition, I always describe this. I always take a step back, you have to look at this from the point of view of the operator. And we spent a lot of time now, right? We recently announced the hiring of Zak Cutler. He helped build out DraftKings from day 1. He is a very senior person at Jackpocket. And you're not going to find someone that knows and lives and breathes the industry better than him. And we've really started to build up our team and invest with talent not only from payments but from the gaming industry. And that gives us -- I think that gives us some real uniqueness, to be honest, against a lot of competitors. And so we look at what does the operator need. And they look at it from 2 ways. These guys just want to grow. They're growing, they're investing, they want customers in. Payments is a point of friction. They want the consumer to pay with as much ease and as much choice as they want. So they can get to the real business of actually gaming on their site. So that is #1. Consumers are going to use credit cards. So debit and credit cards is going to be the #1 choice. Two, real-time banking or bank transfer payments is a fast-growing and appealing payment type. Refunded solutions like PayPal which is clearly the biggest in the U.S., like Skrill which our digital wallet, are very powerful for people that like to play a lot and like to play on multiple platforms. ECash accesses are very unique and harder to get to consumer that either doesn't want their credit card or has limited access to credit cards to play. So a player that can come in and give the full gamut of solutions is key. And with Paysafe a single integration, you get credit and debit card processing at scale across markets. You get the wallet to the single integration, you get eCash. In Canada, there's Interact. In the U.S., we have guaranteed ACH, and we'll be expanding some other options there as well. So a single integration gives you the widest reach. And for us, that's the competition is to be able to give more with a single plug-in. The second piece is to look at it from a consumer profile. You've got these amateur players that might bet -- they might do the lottery once a month. They might bet on a hockey league or NHL kick, season kick starts. Two, you have your more regular players. The fantasy football league and they bet every weekend. And then three, you've got your VIPs, these are the high-frequency betters, and they can represent anywhere from 10% to 40% of the cash here for an online sports betting company. And this is where our Skrill Wallet really focuses. It's about instant funding, it's about large ticket instant funding, it's about VIP support. And that's the playbook we've used in many other markets. We're developing that rapidly in the U.S., and we have 8 pilots now. We'll grow that business, and then we'll start to get more traction in 2022 and even more in '23. Then we certainly see that being a possibility to grow in the Canadian market, but we want to work with operators to see what they need first as we develop that product. But that holistic approach makes us unique. In the U.S., I'd say PayPal with Braintree is the most pertinent competitor we have in that front.

Well, guys, thank you so much. On behalf of BMO, on behalf of our clients on both sides of the border, Philip and Izzy, we really appreciate you coming and participating once again. So thank you to you both. And we remain very excited about your story and look forward to hearing from you very shortly. So talk soon, and thanks a lot.

Appreciate, James. Enjoyed the conversations. Bye.

And for the rest of the group, Thanos Moschopoulos who is my colleague up in Toronto, we're going to pass it back to Thanos. We'll be starting again at 1:30. So standby. Thanks.

Thanks, James. Good to see you again. Bye.