Paysafe Limited (PSFE) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thanks again for joining us on Day 2 for the Wolfe Fintech Forum. As I mentioned, we have over 100 companies participating. We have over 800 investors participating. And so really happy to have everybody with us. And especially happy to have Philip and Izzy from Paysafe with us, Philip, the CEO; and Izzy the CFO of the company. And Paysafe's a company I've followed in different forms through the years, private and public, doing a lot of really interesting things across the U.S. and European markets, primarily. But really happy to have you guys with us to talk about the business, the strategy and where we go from here. So thanks again.

Thanks, Darrin. Good to see you.

Glad to be here. Yes.

Philip, maybe we'll just start with you. If you could talk about -- I guess it's been almost a year now since the de-SPACing has happened for Paysafe and you've become a public company. When you think about it, just looking back, touch on what surprised you over the year. I know there's been fits and starts in different parts of the business. But net-net, I know the underlying trends still seem pretty strong when you look at what you're really operating on and looking forward, given you just gave us guidance. But if you could just give us a sense of what surprised you either positively or negatively since you've been a public company.

Yes. No, absolutely. It's been -- I mean, look, there's no way to sugarcoat it. It's absolutely not the outcome we had hoped or expect, especially in terms of share price. Obviously, that's been -- a large part has been market-driven as well, right, kind of all kind of fintech shares have had a pretty tough time. But we've obviously had a tougher time and our valuation kind of multiples kind of show that. If you kind of take a step back and you look at it, on one side, all the things we talked about, about winning in digital commerce, winning in USI gaming, driving a disciplined kind of consolidation platform and cost program, all those things did incredibly well, right? Our eCash business performed well, our IBS business U.S., acquiring the cost initiatives. So the kind of the investments and the actions we are taking as a team worked really well and continue to work incredibly well. And so that's been very positive. Two, I think the -- we're pretty pleased with the USI gaming progress. And frankly, the kind of growing opportunities in crypto and the power of selling as one solution across the board, I think those things are -- or actually the upside and the potential for that is actually more exciting now a year later than what I had imagined or hope for this time last year, right? So that's kind of one piece. Obviously, there are 2 surprises, right? One was kind of a one-off surprise. One was a deeper hit. So we had the issue in our direct marketing business. That happened at the very end of 2020 into January '21. We had already kind of through the SPAC given guidance. And we took a hit, a surprise hit. And frankly, it's something that we could absorb. We could have absorbed with the upside from the cost, the upside from e-cash but it was certainly an unwelcome headwind as we're going into -- going public and start to kind of size up that impact. But clearly, the biggest one was digital wallet. We talked about that at length in the third quarter. And at the end of the last year, we had made some big changes to digital wallets. We had exited some pieces. We had derisked the business. And these are the right things to do. We are very confident on that. We remain very confident on that. You may have seen today, we announced kind of a big global partnership with JPMorgan as our back-end bank. That's a big change for Paysafe to get that type of scale and support from big global banks. A lot of that has to do with the actions we've taken to build the company the right way and derisk things. So we are very focused on that. I think the bigger thing we saw was we took that hit with the network accounts. We saw lapping. We saw numbers stabilize and start to grow, but we took that dip in the second and third quarter in volumes. And it was really about some of our exposure to mature markets. There was more cleanup to do and the customer user experience. We had to make the management changes to the team to turn it around faster and more boldly. And that -- doing that in the public market was tough. That was kind of the surprise that we didn't like.

Okay. That's helpful, Phil. I think before we go too much further into the details or the strategy, just given what's everyone -- what we're all seeing in the news. Maybe Phil, you provided some disclosure on the exposure to Russia and Ukraine for the business. If we could revisit that, what's included in that higher level thoughts on the impact of the Russia invasion of Ukraine as well on your business? And cross-border macro overall? And maybe just updated thoughts broadly?

Yes. It's -- we kind of break it down into kind of 1 or 2 categories. So the very explicit piece. Our exposure to Russia and Ukraine is just over 1% of revenue. We talked about kind of circa $20 million of revenue annualized, right? And so the worst case scenario for 2022 would be, let's say, all of that were to disappear from, let's say, March onwards, so on an EBITDA basis, you're talking kind of $10 million to $15 million of risk, which would be the -- that's the atomic version, right? Just everything is gone. And we -- when we look at our business the way things are performing, the acts of taking digital wallets, we certainly see a line of sight to absorb that sort of headwind within the guidance that we've seen. So that's our kind of initial point. Drilling down on that, we're not seeing a total shutdown of everything, right? We're still seeing activity. We're obviously staying well ahead in terms of sanctions. We monitor it every single day. We're not opening accounts in Russia. Funding into and out of Russia has been limited and stopped. But you do have consumers that are non-sanctioned consumers. They have their money in U.S. dollar or euro accounts. We still allow them to have activity. That's no different, let's say, a customer having a bank account at a major bank and they're KYC, they're non-sanctioned, it's a dollar deposit. So we still have that activity, and we're not seeing that end right now, but we track it every day. And then in the Ukraine, we're seeing actually some slight activity in funding and remittance. We're also -- we've released consumer fees in the Ukraine to support our Ukrainian consumers. So we're doing those types of actions. So we're seeing some impacts, but they're a fraction of the kind of worst-case scenario. That's one very kind of explicit to Russia and Ukraine. We're following it, lots of activity. We had about 20 colleagues and contractors that we've supported to exit the country and dozens of family members as well where people have -- might have a cousin or a mom or something. So the company is really going above and beyond. It's a pretty exciting, pretty wonderful kind of human stories of getting families across into Poland, into Austria and Bulgaria. So that's what's going on. In a wider scope, we're taking a step back, starting to look at scenarios and understand: one, obviously, inflation, what's the cut through here; two, are there changes in behaviors in other markets in Eastern Europe. Right now, we're not seeing anything that -- any kind of change in trend in terms of flow of volumes or change in discretionary spend. Right now, it all seems there's ups and downs, but nothing -- no major change in the trends. But we're monitoring that. And then the last one is the euro-dollar, right? So we definitely saw the euro-dollar dip down. All those recovered in the last few days. So those are the type of items that we're tracking. Nothing that makes us change our outlook, but we're running scenarios to be prepared.

That's really helpful, Phil. All right. Let's take it a step back and start with your fourth quarter results and '22 guidance. I mean, look, we obviously thought your fourth quarter results were encouraging, and I think the market reacted that way also, given the concerns that we've been seeing over the past couple of quarters, specifically the stabilization of the digital wallet side. If you could just talk about trends you saw in that segment and how they developed through the quarter within that segment, I think. And then maybe we'll follow that up with a question on your assumptions around '22 guidance for that in a moment.

Yes. And I think we were -- I mean we spent -- we really did unpack digital wallets in the third quarter, right? We went into quite a lot of operational detail about what was going on. And we broke it down into the short-term actions and then the midterm actions. And so the short-term actions were actions to stabilize, right? So we certainly felt some of our pricing was not competitive, especially in the more mature European markets. The team had pursued too many new ideas instead of focusing on the core wallet, the customer user experience, improving the onboarding flow, improving the checkout flow with the merchant. So you're quite -- not huge -- apologies, sorry. Not huge development, a very focused tactical development. We talked about the team needed to be reorganized and rightsized as well. And we talked about engaging merchants where, frankly, the Skrill proposition in Europe had lost some traction. So that's the first in terms of more tactical immediate, and then I'll talk about the bigger picture. So the more tactical immediate, we came in, we reorganized the company. We brought in new management with Chirag. He reorganized the entire team around end-to-end user experience and pricing and then another team on new initiatives. And it does show. It's much more analytical, campaign by campaign, and we are very encouraged by the bank deposits. We made bank deposits much more competitive. That drove a huge flow of new bank deposits and it lifted net deposits 10% during the period. So it's a good proof point. Is it done? Are we saying now it's -- everything is fixed? No, we're going to continue to monitor this. We're going to continue to make improvements with merchants. We're going to look at this pricing in other markets as well. So there's a whole series of small initiatives where we continue to track it. And what we'd like to see is active accounts not -- stop going down, stabilize and then start to get to growth with deposits. So that's the plan there. The team executed well on costs. We took out basically the bottom 10% of performers and restack the company around that. We did that in November literally the week after earnings just went ahead and did that. And that's really kind of flown through. So that's been a good piece for us. So we've got a nice kind of cost base in that business going into the year. And then on the bigger items, this is where I think the excitement factor for the team really, really is abuzz. We flipped digital wallets and created an entire white label capability in the fourth quarter with the Binance deal. And this is opening up new opportunities, is one. And two, the way we are selling the product holistically with our e-commerce gateway, with our eCash, it's just giving us a lot more flexibility. It's giving us a lot more open conversation with merchants as well about where we can help them. And you can do trade-offs in pricing and flows and volumes and really push products much more aggressively by selling, is one. So those 2 pieces, the white label and selling as a single enterprise are the 2 things where we see the ability for some real pop. And then the last one is Skrill US. It's been a journey. I think the kind of market had expected that gaming would open up, Skrill would take off and there'd be huge amounts of money, and the fact that it's taken longer to happen. We really like the proof points. Like we said, we've proven it. The VIP response is really good. For some of the smaller players, the share of cashiers is 15% to 20% of their cashier, which is exactly the playbook we've talked about consistently. What we need to do now is get Tier 1s signed up and start advertising, which are the 2 things we talked about at our earnings call that we are doing. So you'll see us advertising on Barstool Sports as the only financial payment partner on that site. And that is an incredibly well-targeted customer growth, right? They love sports, there's betting. We're working on some Tier 1 conversations right now. So we'd love to get at least 1 announced maybe and then get 2, get 3 and you get to the next level of volumes. You start to see Skrill US become a reality.

It's great to hear. So there's a lot happening at once that hopefully causes that inflection that we've talked about. I think you mentioned on your earnings call, user growth hopefully could inflect in the second half of the year.

Yes. So think of it as kind of a very kind of focus executing on tactical items on the core Skrill, NETELLER, you're blocking and tackling and you stabilize and start to push to growth, then you layer on a Binance deal and other similar deals like that, that will build up over time and then you layer on Skrill US. So those are -- that's kind of the layers you see to get the business back to some exciting growth. But it's...

To be clear -- that's really helpful, Philip. To be clear, I mean, do you feel like you've corrected the downward trend in terms of users or attrition levels you were seeing? I know some of it was related to those partners that you had to discontinue last year. Are we through that at this point?

Yes. I believe so. Obviously, I'm a little burnt because I said that last year. I said that we took the hits on the network accounts. We hit the bottom and then we were there, and then we took another dip. And so we've spent a lot of time looking at this. The -- on the markets, the merchants that we have in Europe, the reengagement with them has been very, very positive. They're seeing a change. They're seeing a change in flow. So we do see there's a chance to rebuild there. Obviously, the German and Holland impacts, we've got our time line to lap those impacts as well. And we don't see any as impactful large regulatory hits in Europe like that. So the view is, yes, we get that kind of flat and stabilization, and then it's a game of how does that recover? How fast is a Binance build? How fast is a Skrill US build. And so we just got to -- you've got to work those layers out for our forecasts.

Very -- it's definitely a lot happening at once. Before we go further into the weeds on that, Izzy, just to remind us, when you think about '22 guidance for a minute, I mean, your assumptions for EBITDA growth through the year implied an acceleration as the year progressed, okay? If you could just remind us of the building blocks for that bridge, that EBITDA step function, higher as the year progresses, that would be helpful.

Sure. So Darrin, it's a couple of things, Philip mentioned, but I'll lay out. And almost each one has an equal impact, the first is like the Binance deal. We see that ramping up in late Q2, really to Q3, Q4. So that's a step up from where we are right now. That's one. The second one is we have, outside of Binance, a pretty strong pipeline in our integrated e-commerce business, which is going to help as well as many of these merchants start coming live as the year goes on, as you kind of build on that pipeline and execute on it. That's the second element. Third, it's small, but the Skrill USA, the growth in USI gaming, it steps up the run rate a little bit as well as the year goes on. That's number three. Number four are the 3 acquisitions. I mean they're not a low single-digit growth. They've been growing 30%, 40% historically. So if you look at their contribution in Q1 versus the contribution in Q4 -- Q3, Q4, it will be higher relative to run rate basis. So when you stack those 4 up, you kind of get to that acceleration as the year goes on.

All right. That makes sense. Phil, maybe we can dig it a step further into the wallet now because, again, you mentioned Binance, you mentioned the U.S. Skrill. I'd like to kind of dive into those. I think if -- I think it's pretty fair to say that if we see the inflection on user growth in your digital wallet side of the business, that's probably the major driver for the stock. And so from my perspective, that's something we really want to understand. So when we think about, number one, the core you suggest, it sounds like it's been stabilizing. You're seeing the traction with your merchants in Europe and that's basically come down in terms of the attrition from those legacy partners that you wanted to discontinue last year, right? So looking at the newer opportunities now, saving -- the deposit rates are up and that's been pricing-oriented and just, I think, some element of behavior for consumers. But then you're also talking about Binance and you're talking about U.S. So let's touch on first Binance. Why did they choose you? And talk about the white labeling effort, then what that's going to really mean.

Yes.And before I go into that, just one comment. The user base increase to digital wallet is actually the major driver in seeing that turn around. But I would say when we look at it internally, the major driver for growth for us is selling our digital commerce is one. Our gateway, our eCash, our real-time banking and wallet combined. That is why we're winning deals. That includes the Binance deal. That includes the Hard Rock deal.

Okay. That's fair.

So that's just -- so I...

It's a bigger picture than just the users on Skrill. I agree.

And that's why we're winning deals, right? So we came into Binance, and it started off as a card processing deal. They're really card process with a few players in the market at very, very large volumes, and these drive revenues for some companies quite materially. But as we had the conversations, we can compete toe-to-toe with some of these good global gateways in specialized areas. But their real need was that they're kind of fiat to crypto services were really, really blocked. And they had a wallet, they had licensing issues, they've had challenges with regulators. They really needed to mature rapidly with compliance and regulatory knowledge. And so the conversation started to shift with them in a very constructive way. And we kind of started to focus on -- I'd like the white label idea for a while, but it's really finding the right partner. And as we sat down and really worked on what a good customer flow could look like and the white labeling of the wallet really worked. So -- and this is a challenge for us. Binance is an extremely fast-growing company. There's 50%, 60% of crypto volumes and very, very aggressive. And to keep up with them technically and their product development at their speed, we sat down and looked at it and really felt confident we could do it. It was an actually awesome challenge, awesome process in the fourth quarter. So we white labeled the product, so you have a Binance wallet. You fund into that wallet, right, with bank payments and SEPA payments, expanding to card payments and other APMs. They're building out the wallet.

And you're helping them build that out?

The entire thing is us. The entire tech frame of that wallet is the Skrill platform. It's -- they...

Again, to be clear, the reason it makes sense for you guys because there's a lot of wallets out there, right? But the reason is because you're very good at risk management in certain verticals. This is the kind of high traffic, higher -- a little bit higher -- perceived as at least more volatile, higher risk category, right?

Yes. This is much more than I can build a stored value app, right? You've got to have all the payment plug-ins. You have to have the deep bank relationships that can do crypto. You have to have a scaled KYC and AML back end that could do millions and millions of consumers. You have to have a pretty wide regulatory set of licenses and relationships that you can manage. So what is -- I can -- anyone can kind of tee up a little wallet, but it's pretty useless. Like Binance needed a lot more than that. And so we were able to provide all of our experience in Skrill. So the Binance wallet is the Skrill platform. It's their user experience. They KYC, but we oversee. It's our policies. It's ultimately our call and our oversight on this. It's our regulatory license and then it's all of our payments. So it's our real-time banking payments put in. But as you saw in recent announcements, we are expanding to Latin America because of the deals that we did. And we are expanding into card processing as well. And so the economics for us as we expand markets and you expand product types, it starts to build and grow and build and grow. And that to us is the exciting part. I think the other 2 elements, right -- so that's specifically to Binance is watching this thing grow over the next 2, 3 quarters to a point where we do see this being a material client -- a customer of ours. It does 2 other things. One is big picture and one's more immediate. Big picture, we are definitely of the view that this kind of Web 3.0, it's kind of a catch-off race. The metaverse or buying virtually, digital products like NFTs and digital currencies or crypto currencies, they are combining and you are seeing this becoming a really important sector. I think it could be tremendously huge. It will unleash millions of digital entrepreneurs. The way people buy with MetaMask, as an example, is actually fundamentally different than a typical e-com shopping experience. And being a payment player that's on right at the edge of that trend and could be your fiat on and off ramp platform in multiple markets and multiple payment forms, we think is the big play. We actually think that could be potentially bigger than iGaming over time. So this really positions us there, and it's creating pipeline for us, right? And then the other piece is white label now gives us another commercial lever not only in crypto but with other players. So you have kind of Skrill...

And are you having those kinds of conversations already with others?

Yes, yes.

Okay. All right. We got to keep going just to keep on schedule since we have 10 minutes here. But maybe we could just touch for a minute on what you talked about with Barstool and US Skrill for a minute. I mean,I know that we've been looking forward to that for a long time, to your point. So what brought that deal? And do you see others coming down the pipe just like it?

Yes. And so we've been -- I think we've been really, really consistent here saying, look, we're going to reposition Skrill in the U.S. where PayPal is there, Venmo, there are big P2P players out there but no one is really truly focused on the operators. We have people on our team, they come from the operators. They come from DraftKings or Jackpocket, et cetera. So they know the industry incredibly well, and there's a definite gap for instant funding for VIPs, where we felt Skrill could really grow. It's very similar to how we grow in other markets traditionally. So we reworked the product. We launched it with pilots and the pilots took off. And the theory basically worked, right? It really worked and we've seen some nice growth. Now NFL and Super Bowl clearly help, but tripling off a small base, it's still organic tripling...

So you're seeing a flywheel element start though, right?

People are coming back, VIPs are coming back. You're starting to get low and grow. So 2 things. One, the Barstool ad, we felt was the best way to advertise, Trying to advertise like the other operators is tons of money. You just can't do it. So this is a very effective piece. It's based on strong relationships we have with them in the industry. So we're going to start seeing that probably after March Madness. There's a little bit of a timing with some other things they're doing. But we'll start to build that and advertise through the year. At the same time, this really opens up conversations with Tier 1s. So now you go back to Tier 1. Skrill is different, team is different, the way we're approaching is different. Two, here real proof points that you can see and VIPs are using this and look what's happening with this partner here, how much they're growing from it. Three, we are advertising in an area that a lot of people would like to access and get to those customers. So the conversation with Tier 1s is fundamentally changing. It takes time to get on their road map to when they plug us in and these things take time. But we really like where we are in the conversation.

And the legalization process in the U.S. is -- is it -- I think it's been moving pretty well, actually, right?

Yes, it's been good. New York has been great. There's a lot of -- New York cannibalized New Jersey. It's -- no, it's new customers into the piece. So you're seeing -- continue to see growth. Obviously, Florida was something we would have loved to have seen. That's a massive state, but they've got lawsuits and that's out of our league. We're going to watch that. That probably delays it to probably end of next year, if not early '24, is the view. So that's disappointing. But we see Maryland. We see Ohio. We see a couple of nice big states adding on. And I think there's a referendum in California that we should expect. We're hoping to expect end of year and they'll have a little bit of a Florida feel to it. There's tribes and there's all sorts of politics. So it'll take longer but that's okay...

It's progressing, but I mean but there's -- it's taking its time.

Canada is great, too. Ontario is a big state, right?

Is that right? I wanted to ask just one follow-up on this topic, and then I want to really find -- squeeze in time for the merchant business and eCash. But when we think about the different funding mechanisms out there, have you -- consumer preference staying with wallets to some degree, are you actually -- are you seeing that real-time payments funding, open banking, direct-from-account taking share at all? I'm just -- especially...

Yes, my view on this is there's always this view of this kind of a binary -- there's a winner and a loser in payments in the -- and my experience is always that it's always wrong. People choose multiple payment types. So credit cards are not going away, but I think -- and they'll continue to grow. But their share of the pie of digital payments I think will shrink over time. I do think real-time payments as mobile phone and integrations in the gateways get better, people will be able to pay directly with their bank account. And I think that will be a very, very fast growing piece. We've seen it in Europe. In Latin America, it's very big. Pix is a massive hit in Brazil as an example. So that's going to take share. But then the wallet still allows very rapid pay-in, payout. It allows much higher confidence on -- or assurance in approval rates. It stores fund as an account as well. You can access it in multiple ways. So all of those features of wallets do not change. I don't think PayPal is going away anytime soon. And we're certainly seeing Binance as an example, how critical it is to the experience they want to deliver. So we see the demand there going...

Especially if there is going to be more on a white label manner, I think it's -- it could be really helpful for these companies. Let me shift to the merchant side of the business. First of all, the trends you're seeing through -- I mean we heard from Visa and Mastercard yesterday, and February was a pretty good volume month at least coming out of Omicron. When you think of your business, and obviously, you have your e-com side and you have your more traditional merchant acquiring side of the business. Talk about trends you're seeing in the market and the consumer demand. And then I also want to follow up on interchange updates because my understanding is this could be a benefit for a number of merchant acquirers in terms of Visa lowering its interchange rates on SMBs with 250,000 of credit card volume or lower by about 10%. I would think for iPayment, it could be a decent tailwind. So I'm just curious if you can comment on both.

Yes. So the kind of trends we've seen with Mastercard and Visa really over the last couple of years, the last 2 years, in January and February, extremely similar. We really are mirroring those trends. So January had a dip. There's been some recovery in February as well. So you're kind of seeing that kind of call it a mini Omicron wave in Q1. So we mirror that. Everything we see, this publish...

So the bounce back in February is similar? Yes.

Yes, the processor and the scheme data and our data correlate really high. So that's that piece. Yes, the Visa repay, I think the net is it's too early to tell. We see it as neutral to positive. So most of our business interchange plus-plus. So you pass through schemes. So that would -- safe to say, that's...

Okay. So you're not bundling that much?

We've about 20% is more kind of fixed pricing, but most of it is plus-plus. But even then, though, that could be a benefit because the merchant gets a benefit there. And then the 20%, it could be a benefit. But it's a rebate. There's a link with the processors versus the kind of ISOs like ourselves. So we've got to dig deeper and really understand. I think it's too early to tell. It's neutral to positive is kind of our reaction.

Yes, that's kind of what we're hearing in the industry. And then the e-com side or broadly speaking, the gateway element of the business is positioned well from your perspective? Anything new?

Yes. The big thing there is selling as a single unit. It just goes back to all digital commerce fee. So the single API absolutely works. And you go in and you get 1 integration. You can win a card processing deal, but the ability to put an eCash or a wallet solution or a real-time banking solution, and the flexibility of pricing or service or some sort of solution gives a lot of breadth. So we really like the pipeline in gaming. We've recently signed a pretty big gaming client in Europe that gets us right into the kitchen of a big competitor. So we like that. The crypto pipeline is...

That's for online processing -- payment processing?

Correct. For card processing. And then travel as well, we're seeing some lift. So we like some of the pieces. For us, it's converting the pipeline to live, we got to keep pushing that harder. That's where our focus is. It's not lack of opportunities. It's getting them to monetize and lift up is where our push is.

Darrin, I'm just going to add one other thing, Philip just brought up around. You talked about a gateway and the likes. What's interesting, Binance, again, bring that back in, what we're finding is as we grow like gateway business, the card processing, we are going to take a lower price on wallets because overall, we do better. Binance grows is benefit. And those are kind of conversations for having as we talk to other merchants as well. It's like there's card, there's real-time banking, there's cash, there's wallets. But it's a holistic pricing. We get more here, I think less that, right? And that's kind of movement to digital commerce. Obviously, working with you guys. We'll give you the revenue details for the year. But as time goes on and these merchant or enterprise level relationships grow, that becomes more fungible in terms of how we think about the products themselves.

That makes sense. Listen, we didn't get to everything I wanted to get to, but I think we hit on some, honestly, very important topics. And this was extraordinarily helpful to understand some of the new initiatives under the business and how it's progressing. It sounds like -- it was pretty constructive actually in terms of what -- where we're coming from and where we could be headed. So I really appreciate that, guys. I would normally take a couple of questions from the audience, but we're already a minute over. So why don't we leave it there for now. I know you're meeting with investors also. And anyone that's on this chat, if you want to e-mail me or -- I'm sure we can get the questions to Paysafe and we can get answers. So for everyone, on the next sessions, we're going to be with the CEO of Green Dot starting at 10:25 Eastern. And then there's another -- there's also -- with the CEO of Jack Henry also at 10:25. So there's 2 sessions happening at once next. Philip, Izzy, thank you very much for joining us, guys.

Stay safe, Darrin. Take care. Bye.

See you later. All right. Thanks, guys.