Paysafe Limited (PSFE) Earnings Call Transcript & Summary

Well, thanks for coming back after lunch. I suspect there'll be people that will be coming in. I know there was a big group that was still finishing up. So -- thanks for coming back in. My name is Dan Perlin. I Head of the Fintech practice here at RBC, and we're delighted to have Izzy Dawood, who's the CFO of Paysafe joining us today.

And it's been an interesting story for a little while, and you've had some changes at the top. And so what I thought I would actually start with and you can elaborate as much or as little as you like. It's just with the new CEO, with Bruce coming on, what have you seen kind of as the insider and partner to him that are making some potential changes structurally, philosophically whatever -- whatever you'd be willing to share would be great?

Sure. So Dan, thanks for having us here. As I mentioned bunch of blue blazers and stuff. It's been a while, I think it's in 2 years when this mass election. So yes, I got to be here. With Bruce, he started about 6 weeks ago. And I'd say there are 2 things he's really been focused on. The first, obviously, is meeting all our customers, the key customers, our employees, visiting locations. I think he finishes up that trip next week, where he have visited most of our major locations, and I meant basically second or third level guy employees. So he's really taken an active role in 6 weeks to basically get as many places as possible. That's one. Second, he's really realized -- and the second 2-part answer is really realized the fact that we have really 2 distinct large groups of, he call it, untapped potential. One is we have over 200,000 merchants globally, a lot of the U.S. but globally that really haven't used or developed tool sets to grow with them. right? Are you talking about the SMB space. Do we talk more about they get more omnichannel? Do you actually do more services as opposed to basic car terminals right? So there's a B2B aspect that he feels untapped. The second piece, and we've talked about snippets, but he really kind of honed in on it is in our consumer side, which is eCash and wallet. So we have 20 million customers. We don't talk about it because in the past, it's always been a single-use product. But over time, those businesses have built up 20 million customers that use our product pretty frequently, right? And you think, okay, we have a -- why is it 20 million, should it be larger? What can we do with them? If you combine those together, you can tell his focus is really tapping the potential of the assets we have and really driving top line growth. And that's been refreshing a positive, and the teams are acting to that as well.

That's great. That's great to hear. Now he's a great guy, great leader. So let's talk on a couple of the business segments, starting with U.S. Acquiring -- the first quarter was particularly strong. You had, I think, 21% volume growth, about 10% revenue growth. So I wanted to just walk through some of the dynamics here again that were driving that growth and maybe some of the vertical mix exposures that may or may not have helped that?

So for us, I've described the U.S. Acquiring business, it's [ Americana ] it's retail, it's gas station, it's hotels, it's restaurants, no enterprise clients. So in the vernacular SMB, really on the S side. As I mentioned, 200,000 merchants, annually $700 million or so of revenues. So if you just did the math, these are not large clients. And what we're really seeing is the following is really the strength of the U.S. economy, it leaks year-over-year comp, just working through our financials. And going further, it's in Q2, and I think a bunch of us talked about it last night ,even now, hotels are busy, restaurants are busy. The apocalypse that was talked about in Q4 has not arrived in the U.S. yet. We see that strength. We'll see how it progresses. But we're seeing that in the U.S. acquiring business. So no real concentration risk we see there, it's just a matter of the U.S. consumer continuing to basically stay active. That being said, we have seen year-on-year for most of our tickets prices go up like about 4% like retail hotels. But petro is probably in the high teens. So the average petro ticket has gone up. So you see that inflation coming in. At some point, it will kind of eat into the buying power. Again, we don't see it yet, but we're being cautious about kind of where that goes.

What -- I guess, what has been your past experience when you think about average tickets jumping around. Now we never had inflation like this, but there are some views, I guess, as to what it starts to kind of approach. So are you seeing discernible differences in terms of how consumers are spending that maybe aren't necessarily slowing more transactions as an example in grocery and things of that nature and/or trade downs and different types of....

Like, for example, the average price of let's say, hotel, retail, grocery, restaurants, up 4%, right? That's not as alarming. But petro being up high teens or so, that is alarming as eventually that is a big part of our consumer spend. And eats away into the other places, right? So until we see like the average ticket of all the other probably start going up. We think this got right now a bifurcated impact from the consumer in terms of how inflation is affecting your pocket.

Any updates you could share with us around April, May trends.

Yes. The volumes have stayed strong when we've had the call last month on our Q1 earnings, we saw a trend continuing for April. May has looked up pretty okay as well. We are keeping a closer eye on petro. Obviously, tickets are going up. But again, not having a large e-commerce exposure or enterprise exposure, we've seen a little insulated from some of those activities.

How do we -- I guess, for context, how do we break down the business percentage of the face value of the average ticket versus per transaction?

Yes, it's about 70% volume, 30% transaction -- that's kind of a good back of the envelope breakdown.

Got it. Okay. So that should be a pretty good tailwind for you in many...

And I think that explains why our volumes are up higher than revenues, right, in Q1. We have that mix.

Yes. Yes. And then I just want to make sure we touch on the direct marketing business. That had been a drag. Maybe you can actually explain a little bit about why it was and why it's going right now? So we can kind of move beyond.

It's a long story. I think I've told many times, but you don't mind repeating it but folks want to hear it again. So in Q4 of 2020, Q1 2021, we saw a lot of card compliance rules being changed. And just to -- for folks who are not familiar in direct marketing, this is a business which is respectively subscription-based, where your free trial for like 1 month, 2 months, 3 months and they start charging you, right? So you think about weight loss, share gain, supplements, anything along those lines. And some of the way it's marketed or sold to individuals has very strict rules around it for fraud and not pulling people in for the wrong reason. So some of those rules are going to change. So we got ahead of it and said, there are a select group of merchants through our CRM that we feel will be in violation of it. So we pulled back from the marketplace because we didn't want to end up on the wrong side of Mastercard or Visa being fined. What we saw is that the market effectively reacted 6 months later. So the first 3 or 4 months, we were like, "Oh my gosh, we're losing this business and they're going elsewhere." But by the fall, what we saw was that effectively, most of the other CRMs were also pulled back, and we start seeing better business come our way since we have a pretty broad volume as U.S. Acquiring, it will balance out the high risk and low risk. And so we've seen a really good pickup back in the business. And it's enough on what I'd say it's at or slightly ahead of what we thought would be.

It's good to hear. Finally, we can [indiscernible] I think the restoring.

Yes. It's a business you have to grow carefully, right? Because -- there is risk of charge backs there, right, primarily. And you want to make sure you work with your bank partners. So a good balance of good and bad business, right from their perspective. Yes. So yes, knock on wood, it's come back in a good way.

Okay, good. So let's talk about digital commerce for a second. And we think about kind of the plus and minuses that came out of the quarter Volume was up about 2%. Constant currency revenue was down 6%. So maybe let's put some framework around where that came from, headwinds from FX, European regulation and so forth. So if you could maybe walk through that list with us.

Yes, I'd say there's 3 elements to it, especially when we look at year-on-year comps going back to Q1 2021. And actually play through at least the first half of 2022 as well. One is the post-COVID versus pre -- I mean post-COVID opening up versus where we were in the first half of 2021. If you recall, Europe was still in shutdown until May of '21. So a lot of online gaming, a lot of online activities. So that's just one tough comp. The second part is the regulations that came through in Germany and Netherlands, one expected, one unexpected that started in Q3 and Q4, respectively, of last year, so it becomes a tougher comp. And the third one is currency headwinds, right? So when we did print like on a constant currency down 6% year-on-year, in our digital commerce business, if you look at a lot of the gaming operators year-on-year, they had a pretty rough year-on-year comp for the same reasons I described. No other reason. So that shows we have a little bit of momentum in the business. We feel good about it. We're not declaring victory special on digital wallets. We're making the UX conversions. A big thing in the wallet that we're really focused on which was true out coming on board in September last year, is we had a product that folks went in for effectively a single use case. I want to put money in the wallet, make a bet, hopefully make money, pull out my bet and then do something with it. Chirag is really focused, again, given us Amazon experience on keeping that customer engaged in the app, right? They want to open it for us, maybe sports scores, deposit conversions are better, how do you create a loyalty program? How do you make it from -- a what you call, a 12-month active user to a daily active user, right? How you transition that? It doesn't happen overnight. But the fact is we still have in the wallet itself 3 million customers. We're still using it. There's still a purpose to it. And that's the transition we're going through. So to make that happen, how do you make it relevant in individual lives every day, right? And that's where the UX is important, adding crypto, crypto trading, peer-to-peer crypto transfers, is important, adding other services and promoting it loyalty programs potentially with your favorite sports team or what have you, personalized widgets on your screen. So when you open up, it's specific to you what you're interested in, promotions specific to you, those are some of the things that Chirag is slowly implementing that we are seeing, again, cautiously optimistic towards the plan to get that user engagement up.

Got it. So that's in reference to the digital wallet where you had seen a little bit of a decline in the number of users, but coming back in. So the idea is kind of capture, trap, engage. And when that happens, you can kind of ping around and have more money...

We think that Q4 is when we kind of see that stability.

Yes. Okay. All right. So on guidance for a second here, you maintained it, and you talked a little bit about kind of some of the attributes maybe that gives you some confidence, but there is a lot of momentum that you outlined, certain companies coming online in terms of partnership, enterprise sales, those types of things. So -- as we sit here today, the world has gotten even a little more volatile since last time you reported. Are these -- maybe can you run through this list and do they still have the same level of conviction?

So we'll talk more about it, obviously, on our Q2 call. I'll give you the pluses and minuses, right, how do you think about it? -- and maybe a little walk on 6 months of history. I know I have a short memory, some people may as well. When we talk about our outlook in November of last year we haven't started talking about rate hikes yet. There was no war in Eastern Europe right? Cryptocurrency wasn't melting down. A lot of things have happened in 6 months, as we all know. But the outlook, we took a balanced approach knowing -- hey, good things will happen within our control, bad things could happen, whether it be another regulation comes about or some of the initiatives you put in place doesn't execute, right? There's an execution risk. We have some new things going on. So it took a balanced approach. And since then, since November to where we are as our May call, obviously, we had the rate hikes go up, the dollar strengthened, which is a big deal. And we had a war in Russia and Ukraine. And actually, we've given everybody the math around it, we believe that between the Russia, Ukraine and the strengthening dollar, we roughly absorbed $60 million to $70 million in revenue and like $30 million of EBITDA. right? And still, as of May we have maintained our outlook for the full year, which says probably good things are happening in other places better than expected, right? Currency is still something we keep an eye on, right? Who knows where things go if the [indiscernible] starts accelerating its rate hikes. It could be a further drag. But we'll give more color on the Q2 call. But the way I describe it, it feels a lot better than it appears.

Got it. Do you feel you have a lot more control over the business today than you did maybe a year ago?

Yes, absolutely, 100%. I think the way I described how Bruce was looking at it, the true assets, our really focus on top line growth. It feels a lot better that way.

Is your expectation that from a guidance perspective that revenue and EBITDA, at least from a trajectory perspective, can be similar? Or is there meaningful levers that would need to be pulled or investments that you would want to put in there that...

Yes. So great question there, Dan. So I'd say, last year, we had some 1 or 2 big things that need to occur. Right now, we need like 5 or 6 small things to occur, which feels a lot more manageable lot less risk, right? So if we have 4 out of 6, 5 out of 6, we still feel pretty good about it and where we are. The trajectory to your point, yes, a couple of things working out well, Q3, Q4 become better comps for the reasons I mentioned. Right on our regulatory side and a post-COVID fair comparison. We are definitely getting, definitely the pipelines coming through on our sales side. Binance is growing with us. So we feel pretty good about that. We signed FTX. We signed Bitpanda. Our North America iGaming has pretty good momentum. We just announced a Barstool really go live with them here pretty soon. Actually live in the sense where you'll see the Skrill app on their website, integrated as a way to actually transact. We have the Netherlands piece turning around because the legislation has gone through. A lot of little things, which kind of gives you comfort. There's no one big thing that needs to happen, right? And then I think probably the newest thing is given the economic backdrop, we are going to get more aggressive on costs as well. right? I think it's prudent for sure that we have to make sure we maintain the cost discipline or accelerate it as well.

You touched on iGaming. So let me just stay there for a moment. In particular, I guess, both in North America and internationally, you had already talked about Ontario with 10 new operators. But is Skrill gaining some traction in terms of brand in the United States, do you think at this point? What do you got to do in order to get people to be a little more involved and there's some I think there's a lot of strategy around the VIPs and those that I don't think are always well understood. So maybe if you...

Yes, the VIP client base is definitely interesting in the sense that it's a pretty meaningful part of the checkout. So maybe a few users, but it's -- but from what we can tell 20% to 30% of the checkout, it's similar to where you have high rollers in casinos, right? It's a small population, but they do a lot of volume in the casinos. I just think about it similarly. And you cater to them differently than you do an average person coming in. So we've got good traction there, especially with the Tier 2 operators. Zak has done a great job in terms of getting engaged, going to instant funding, really taking the pressure of underwriting of the merchant or the operator on to us.

Yes. What are you doing differently? That's what I wanted to ask in this context. Like so what are some of the things that you're doing differently for that type of individual such that they wouldn't go to just PayPal or something like that?

Right? I think the biggest thing is the ability for them to move money from banks, primarily bank transfers without fees and in sums of 10,000-plus. If anybody's tried to move more than $500 on to your PayPal account, it's not easy. But these are sophisticated betters, right? And they want to pass money and money out. The operators like them because they bring in volume, right? And they are pretty careful to operate in terms of which VIPs they open you up to because they don't want us to go and like share with others. But with Barstool, interesting enough, that's our foray into the mass market. We see how that goes. And that's why we're cautious about it, right? We are doing a lot of co-branded stuff for guys who follow Barstool and those guys who had a couple of things with Skrill on the front there in some live streams. They're slowly building a brand with them. It's -- it's the next 6 to 9 months, we'll get the NFL season with them. And we'll see how the mass market responds, right? Is there that loyalty to the Barstool brands will, can we do promotions with them and see if we can get the engagement there as well.

What are some of the KPIs or things we should be looking at as outsiders looking in to see the success in that kind of relationship, but also the development in the iGaming market?

Yes. So that's an interesting question. At the end of the day, for us, North America iGaming is still relatively small. right? So for us to disclose public metrics on it, it will be great, but you'll say, wow, that's really, really small. So internally, this is what we're looking at. We're looking at basically Skrill volume. Since Q4 to Q1, we're up 2.5x, in terms of Skrill -- volume coming through Skrill. Since Q1 of last year to Q1 this year, we're up 10x, right? We see really strong -- we probably see stronger growth there in Skrill than we do just in North America iGaming volume as a whole. Just 2 reasons why it's coming off a low base. And we believe that VIP space in the iGaming segment is underserved. It's very bespoke. It's very -- it's particularly each merchant. So that's where we see some benefit there. But at the end of the day, it will take a couple of years before it's meaningful to our overall results.

How important is crypto to the story of Paysafe? It seemed like you're gaining a lot of momentum with partnerships. The users of the digital wallet seem to want to use it, right, and participate. So maybe just talk through, one, maybe your vision of what you think that means for the company longer term? And then two, kind of other near-term things we need to be watching that could potentially be additive to results.

Crypto comes to us in 2 different aspects. Actually just what we talked about, is a B2B piece and the B2C piece, right? On the B2C, the consumer, why did they open up the app? Okay, well, I can see my crypto prices. I can trade crypto, I can move it. I can do a pure transfer, right? So that's a B2C piece. On the B2B piece, it's an embedded finance and card processing, allowing money to move out to move in and out of the exchanges. The embedded finance piece is really interesting in the sense that we have helped financing our FTX, create an ecosystem where they can sign up new clients get free money in and out. Right now, it's only bank transfer till we progress that further. But then all the trading that occurs, occurs on our technology, on our platform. So it stays within Binance, right? They're not going elsewhere. And it's pretty seamless. So we've enabled or allowed Binance to basically create an experience for their customers that we're trying to replicate in our independent wallet as well. And that application goes beyond just Crypto. Crypto is important, but it's -- think about it as an additive. It's not like a just separate vertical with a separate focus, but it's part of the individual that B2C customer that we think are really entertainment space. We're in video gaming, we're in iGaming, we're in crypto. That consumer base wants all of that that's part of their experience.

So what are the investments that you need to make over the course of the next 12 to 18 months in order to both achieve your growth objectives? But also set up the business such that it's going to have sustainable growth for the next couple of years?

So baby steps right there, right? So of course, we're really kind of beefed up our crypto knowledge and exposure with hide Elbruz from Bitpanda who's been a great ad. Megan Oxman for new products from Amazon as well to bring some like product marketplace perspective. The big investments there are really going to be around working with card schemes and with how we deploy regulatory or KYC/AML comfort in a scalable way. right? Because at the end of the day, it's about getting money into crypto is easy, getting Fiat out is challenging. Bank-to-bank transfers is easier because all the KYC/AML has been done. But when you start doing credit card and wallet, that's when it steps up. One of the really interesting innovations recently has been around Visa Direct, Mastercard Send, right? So you are funding and paying out back to the same source right? That eases some of the regulatory burdens, right? And with Mastercard and Visa, they're both working directly with us kind of roll that out, primarily in Europe right now. So those are the investments, again, relationships -- in terms of big investments on our side, there not any big investment, just more on the focus and making sure we execute.

Okay. Let me just pause there and see if there's any questions in the audience, if anyone has any or anything? Quite group, as usual.

It's post lunch.

It's definitely the post-lunch man. Blood pumping to the stomach. So -- let's talk about leverage targets for a moment, right?

We have some.

You do. And let's address those here. So I think you're running on an LTM basis around, I don't know, 5.5, 5.6 something to that effect. Your long-term goal is getting down to like 3.5 turns. So how do we think about the progress that can be made in any one given period of time? And what are the things that are necessary to achieve that?

Yes. So I'll answer that about, let's say, 3 parts, right? And first of all, we're fortunate our business is not a capital-intensive business. So we generate a fair amount of cash flow. And we believe on an annual basis, without growth, we probably have $75 million to $100 million in excess cash flow we can use to pay down debt, which we will. That's currently the best use of cash that we have in terms of bringing that leverage down. That's one. Second, there is a numerator and denominator effect right? For the denominator, some of the investments we're talking about or some of the areas of focus that Bruce is going to drive will definitely help the denominator to accelerate that. And the third part is, even without that, I think our normal course of just general growth and us paying down debt , we probably have a time line that's probably 2 years where we get down to that leverage target. One thing that we are not considering is raising any additional capital to pay down the debt. We don't think that is necessary at this time.

Good. And then you mentioned free cash flow. And so that leads me to the free cash flow conversion argument which we get a fair amount of questions on right now. So in the first quarter, it's 55%. I think you're still targeting 60% to 70% as we think about those kinds of levels. So how do we get -- how do we get from where we are today to kind of those levels in the back half?

They really got 2 aspects. One is in a negative way. The growth in our U.S. Acquiring business really pulls on our working capital because of settlement and the like. So that growth has accelerated balancing out some of the declines in wallets and other places, right? So all things being equal, also in our working capital needs have gone up. But that should kind of balance itself out on a trailing 12-month perspective. The second one more is the timing. We have prepaid some taxes in Q3 last year that we expect to recover. So it kind of falling into our overall time line. So 60% to 70% is kind of what we target internally on a trailing 12-month basis, and we should be there by Q2, up in Q3 working -- and like I said, nothing from a outsized expense has kind of shown up. Again, our business model should not drive that either. So we feel pretty strong.

Generally, you feel like one is more in your control.

Absolutely.

And to everything that still points in that direction or achievable.

And we are trying to focus more on what's in our control, especially in this time.

Let's agree with me. Let's -- for the last 1.5 minutes here, talk about some of the acquisitions that you've done, SafetyPay and PagoEfectivo. Just remind us of the strategies behind these 2 -- what you think you're expected to get out of them? How quickly are they going to be accretive to the company?

So let's talk about Latin America ones, talk a little bit about viafintech first, whatever. That's the one in Germany. So that's really a consolidation play, where viafintech was basically because of the cash-in, cash-out solution for new banks and 26 monies and the like. And that's been going well. It's a smaller acquisition. But that really gets us in terms of the cash solution for newer banks. And that's, I think, a future that is going to keep growing as newer banks are growing. They move to Latin America. There are really 2 major drivers. One is following our customers. If you think about our iGaming customers, Latin America is the next big market, right? And there's positive news around them actually legalizing iGaming or legislating in a positive way. So following our customers there. As a matter of fact, we've already taken 20 of our customers to eCash and gotten live in Latin America already since we've announced the acquisition. So there is a positive momentum there. The second thing is with SafetyPay really got us into open banking in a meaningful way, in terms -- definitely in Latin America and parts of Europe as well. So really not taking that open banking. Now we have a leader of platform to kind of really drive the open banking growth. And by the way, as you all know, that's super for everyone right now, right? That's the next big thing. So that was the second part of that happens to be the company is in Latin America, right? So it comes to Latin America strategy, but that's really -- those are 2 aspects that are going in. And we have knocked on wood, they're going pretty well. They're growing really fast and -- we're pretty excited about what they're going to deliver.

Okay. So in the last 10 seconds here, what do you think the market is missing misconceptions on the name, the company debated name period?

I think a misconception is -- and we have to take ownership for it. So, first of all, our story is not that clear in terms of the disappointing digital wallets has clearly been a surprise only to us but the market. But the other pieces that we talked about almost 1.5 years ago, actually have delivered at, if not better. But again, that does get muddied up because of the digital wallet's performance. That's one. Second, I think we've been more -- our store on kind of product focus as opposed to really talk about our 200,000 merchants and 20 million customers right? So really getting more focused in how we present ourselves and our assets in the markets we're in and what we can drive, right? So to some degree, there is at least -- you can see from misconception, but we definitely could have done a better job making sure that we get that story across as well. At the end of the day, we're generating cash, we're profitable, which in this environment feels pretty good.

[indiscernible] agree. We'll work on simplifying and distilling the complexity of the story down to the more usable sound bites.

So that I think that should help a lot as well.

Awesome. Thank you so much for your time in I really appreciate it. Always a pleasure man to see you.

Thank you.