Paysafe Ltd
NYSE:PSFE
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Paysafe Ltd
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Hello and welcome to the Paysafe Q1 2023 Earnings Conference Call and Webcast. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Kirsten Nielsen, Head of Investor Relations. Please go ahead, Kirsten.
Thank you, and welcome to Paysafe’s Earnings Conference Call for the First Quarter of 2023. Joining me today are Bruce Lowthers, Chief Executive Officer; and Alex Gersh, Chief Financial Officer.
Before we begin, a reminder that this call will contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the Company’s most recent SEC reports. These statements reflect management’s current assumptions and expectations and are subject to factors that could cause actual results to differ materially from those forward-looking statements. You should not place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. Today’s presentation also contains non-GAAP financial measures. You can find additional information about these non-GAAP measures and reconciliations to the most directly comparable GAAP financial measures in today’s press release and in the appendix of this presentation, which are available on the Investor Relations section of our website. With that, I’ll turn the call over to Bruce.
Thanks Kirsten and thank you everyone for joining us today. If you are following along our webcast let’s begin on Slide 3. After returning to growth in the back half of 2022, we kicked off 2023 by delivering our strongest quarter revenue since the IPO. First quarter revenue was $388 million exceeded our guidance range and increased 7% year-over-year on a constant currency basis. We recorded 8% growth in the Merchant Solutions segment including double-digit e-commerce growth. In Digital Wallets revenue increased 6% on a constant currency basis including strong performance from our classic Digital Wallets.
In first quarter adjusted EBITDA of $108 million was at the high end of our guidance, and increased 5% year-over-year on a constant currency basis. Excluding one-off personnel expenses related to executive severance, adjusted EBITDA would have increased approximately 7% in line with our constant currency revenue growth. Throughout the turbulence in the banking market Paysafe has been unaffected by the failures of SBB, Signature Silvergate or First Republic and we have no direct relationships with these institutions. We operate a network of roughly 100 banks globally and always look to build resilience into our payment flows so that we can route payments through other partners as needed. We have robust safeguarding in place to ensure the ring fencing of customer funds, and we operate our acquiring business in the U.S. through FBO accounts to further manage any risk of our customers. Our U.S. customer balances are supported by pass through FDIC insurance.
Turning to a few business highlights. In April, we welcomed Nicole Carroll, who joined us from Experian to lead our strategy and innovation for Paysafe, where she will support a key strategic vision that links our extensive set of APMs with our wallet technology across our core geographies and verticals. As I mentioned in our recent Investor Day, Paysafe was recently ranked third and well above the industry standard on the J.D. Power's Merchant Services Satisfaction Survey, a testament to the team's focus on the customer experience. We continue to see strong activity in regulated North American iGaming, including the launch of three states in Q1, expanding our payments partnerships with several major brands, including DraftKings, Caesars and PointsBet, among others. Paysafe now powers payments for 27 states, which is up from 22 states at the end of Q1 last year. Outside of regulated gaming, we're seeing strong growth in other sub verticals such as fantasy sports, social and skill gaming.
In Ontario, we launched three new merchants who are leveraging both our card acquiring and interactive e-transfer capabilities. We also activated e-cash for several existing clients and are excited about our Q2 launch of our Skrill Digital Wallet in Ontario. We also continue to make progress on our sales transformation to reinvigorate growth with a focus on building out our enterprise sales function, maintaining our plan to double the team's headcount in 2023. In the first quarter, we closed 30 enterprise deals with more than 100,000 each in annual contract value and 20 deals that included multiple Paysafe products. We also expanded our pipeline of cross-selling and geographic expansion opportunities from the prior quarter. I'll also highlight that we've improved our deal integration process, resulting in a 50% reduction in the average time to integrate a new merchant from the point of contract signing.
Turning to Slide 4 for a few examples of recent wins. At our Investor Day, we outlined three key focus areas as part of our sales transformation. First, cross-selling new Paysafe products to existing merchants. Second, expanding our existing merchant base into new geographies. And third, pursuing new merchants in our key verticals. While these specific examples are not material in size, they provide some color around the momentum we're seeing and why we're winning. Merchants are coming to Paysafe for the extensive set of payment options across our global footprint available through a single API, along with our ability to manage risk and deliver better customer experience. With our European gaming merchant base, we closed three smaller deals to add card acquiring to existing digital wallet clients, highlighting our progress in upselling into our large customer base, leveraging our long standing relationships and brand recognition across the region.
In the financial trading vertical, we expanded our relationship with ATFX and existing digital wallet client and leading FOREX merchant in the UK to support their growth aspirations in Latin America. As a final example, we recently entered into a partnership with Crypto Orange to provide an entire suite of Paysafe products, including our digital wallet as their main pay in pay out infrastructure, as well as our key payment methods, including credit card processing and e-cash across the entire geographical footprint. These wins were supported by our new go to market structure, which organizes the sales function by our core verticals and has improved our ability to sell Paysafe as a strategic payments offering while also improving deal execution and increasing the average deal size, global pipeline, and win rates.
Moving to Slide 5, consistent with the update we provided last quarter, this view is focused on our classic digital wallets. One of the repeated questions I was asked a year ago was could we get our classic wallet to grow again? Well, in Q1 not only did we see continued stabilization in our underlying active user base, but we recorded constant currency revenue growth of 10% from classic wallets supported by stronger engagement, including double-digit growth in transactions per active user and average revenue per user following a more pronounced seasonal uptick in Q4. Consumer deposits in classic digital wallets were also up double-digits again compared to Q1 of last year, excluding the Russia and Ukraine war and FX.
As we mentioned on the prior call, drivers of improvement include ongoing initiatives to enhance the user experience and reduce friction such as improvements related to onboarding, KYC, personalization, and customer service, as well as deposit success rates and merchant checkout conversion rates. We are also piloting new features that are resonating well with consumers, including new loyalty and rewards enhancements to support adoption and retention. Looking ahead, we will leverage our progress in user experience and product enhancements, broadening the appeal and the use cases of our wallet platform to adjacent markets, which may temper growth across our TPA and average revenue user metrics while driving growth. With that, I'll ask Alex to review the financial results.
Thank you, Bruce. Let's move to Slide 7. We are pleased with our financial performance for the first quarter with revenue above our guidance range and adjusted EBITDA at the top of the guidance range. Excluding approximately 2 million of non-recurring personnel costs, adjusted EBITDA would have exceeded the top of our guidance as well.
Moving to Slide 8 for the summary of our financial results. Volume was 33.8 billion, an increase of 8% year-over-year, reflecting continued strength in the Americas where the Merchant Solutions business saw strong growth in e-commerce and continued resiliency in U.S. consumer spend. In Digital Wallet we saw continued improvement with underlying growth from iGaming and digital assets offset by FX. Volume mix for the quarter was 84% from Merchant Solutions and 16% from Digital Wallets, reflecting a slight mix shift to the merchant segment compared to Q1 of last year or roughly flat sequentially, not adjusted for FX movement.
Total revenue for the first quarter increased 5% to 387.8 million on a reported basis. Excluding the impact from changes in foreign exchange rate, revenue increased 7% reflecting growth from both segments. Adjusted EBITDA for the first quarter was 107.8 million, resulted in adjusted EBITDA margin of 27.8%. Excluding one off personnel costs related to executive severance, the margin would have been at 28.3% or flat year-on-year. In Q1, we generated 70 million in free cash flow reflecting 65% conversion, which is 8 percentage points higher than Q1 last year. Free cash flow was 308 million on the LTM basis reflecting conversion of 74%. Adjusted net income for the first quarter was 33.1 million or $0.54 per share compared to 37.3 million or $0.62 per share in prior period, mainly reflecting the increase in interest expense.
Let's move to Slide 9 to discuss the segment results. Merchant Solutions delivered another quarter of strong growth. First quarter volume was 28.6 billion, an increase of 10% year-over-year and revenue for the first quarter was 208.5 million, an increase of 8%, reflecting continued strength in our U.S. SMB space, along with strong growth in e-commerce led by iGaming, including the launch of five new states over the same period last year, as well as the onboarding of new merchants. Adjusted EBITDA increased 8% to 52.3 million, reflecting a 25.1% margin, largely consistent with the first quarter of last year.
Turning to Digital Wallets segment on Slide 10. First quarter volume was $5.4 billion, flat year-over-year, which is not adjusted for FX headwinds. Digital Wallet revenue for the first quarter was $181.4 million, an increase of 6% on a constant currency basis. Adjusted EBITDA in the Digital Wallet segment was $79.2 million, an increase of 12% constant currency and reflecting a 43.7% margin, up 180 basis points. As Bruce highlighted, we are seeing continued progress led by our growth initiatives focused on user experience, product innovation, and sales transformation. Growth was also supported by interest revenue on deposit, which partly offset the headwinds from FX and the Russia-Ukraine war.
Turning to Slide 11 for the summary of debt and leverage. At the end of the first quarter, total debt was $2.6 billion, reflecting debt repayment and repurchases of roughly $50 million in Q1. Movement in FX increased our debt balance by approximately $15 million. Our net debt-to-LTM adjusted EBITDA ratio was 5.8 times at quarter end, and we remain highly focused on reducing leverage through further debt repayment and EBITDA growth in 2023. We continue to believe we will be in the range of 5.1 times to 5.3 times by year-end.
Moving to the outlook on Slide 12. Based on our Q1 results, we feel confident in maintaining our 2023 outlook. We continue to expect reported revenue in the range of $1.58 billion to $1.6 billion, reflecting growth above 6% at the midpoint. We continue to expect adjusted EBITDA in the range of $452 million to $462 million, reflecting at least 100 basis point of margin improvement.
Starting this quarter, we will be moving away from providing explicit quarterly guidance ranges and focusing on our full year guidance. That being said, our current view on the cadence of the year is broadly consistent with what we discussed on our last earnings call, which was that our full year guidance reflected low single-digit revenue growth in the first half and high single-digit growth in the second half driven by the ramp-up of our sales transformation and other strategic initiatives. And now I will turn the call back to Bruce.
Thank you, Alex. In closing, I want to thank our team for their hard work and reiterate that Paysafe is well positioned to reaccelerate growth and improve margins. We maintain strong positions in large attractive markets. We are fortunate to serve a premier global client base with about 70% of our revenue coming from online and when we see significant cross-selling opportunities across our core products and geographies. By continuing to prioritize client experience, product innovation, and our sales transformation, we believe that we can unlock meaningful opportunities and stakeholder value for years to come.
Lastly, with the acceleration of AI technologies, Paysafe has been actively engaged in the last two years in the development partnership of a range of AI tools to enhance our customer experience, manage risk, support sales growth, and deliver company-wide efficiencies. Today, we have over 50 active machine learning modules developed by our in-house data science team. We're seeing benefits of our risk models that analyze spending habits to provide a defense against money laundering and fight fraud as well as improved onboarding decision-making.
AI is also playing an important role in our customer servicing department where we have virtual assistance that use AI capabilities of machine learning and natural language processing to understand around 150,000 user inquiries and e-mails per month and respond appropriately. Our virtual assistance learn, adapt and improve over time to deliver advanced personalized service. We continue to be excited about the future developments, which will further enhance the areas as payment acceptance optimization, pricing, sales, and overall risk management. Now let's begin with the Q&A.
Thank you, Bruce. We'll take a couple of questions from the Say Technologies platform, which allows shareholders to submit and up vote questions. After that, we'll turn to questions from our research analyst community. Our first question is from Ivan who asked about the possibility of selling the company? Bruce, would you like to address this one?
Sure, Kirsten. So what I'll say right now is we are very focused on returning the company to a stronger growth profile while expanding margins, building on the progress that we had in the back half of last year and into Q1. We achieved our strongest quarterly revenue since the IPO in Q1. The leadership team and I have the full support of the Board, and we continue to be actively involved with our strategic priorities, and the Board remains excited about the opportunities across Paysafe.
Thanks, Bruce. Our next question is from Joshua, who asks what can we expect in 2023 versus 2022? Bruce, can you take this question as well?
Sure. Happy to do it. So Joshua, thanks for the question. I want to be clear that I believe that we're in a stronger position today than we were a year ago. We can't control the macro environment but we aren't seeing anything today that impacts our confidence in achieving the full year outlook to deliver 6% to 7% revenue growth in 2023, which is a strong improvement from effectively a flat growth rate in 2022. We also lapped some of the market headwinds that we saw last year like the Russian-Ukraine war, along with a couple of regulatory reforms in Europe. So what's different? One important change that you heard about is our sales transformation. While it's early days, we have a pipeline that's much larger than it was last year and the deals that we've already won and the opportunities we're targeting, we're seeing multiple product wins and cross-selling geographically within our existing merchant base. And that's going to ramp up more in the second half, but we like the early results that we're seeing. And then on the product side, we have key initiatives around global APM optimization, improving our authorization rates, leveraging our wallet platform to adjacent markets. So again, we really believe that we're positioned this year to reaccelerate growth and improve our margins.
Okay. We also have a couple of questions asking about the potential to redeem the warrants or potential for share buybacks. Bruce, do you want to address this topic?
Sure. I'll take that. And so as you probably know, we've talked about this a lot. We do not have a share buyback program in place. Our focus is reducing our debt level, and it's a higher priority at this time. Our leverage ratio is higher than we wanted to be. So we're focused on reducing that. I'm sure we'll continue to look at this as we renew or review our capital allocation priorities on a regular basis. But I would not expect us to put a buyback program in place. As we've said repeatedly from last fall, debt reduction is a primary focus for us, organic growth and debt reduction.
Alright. Thanks, Bruce. With that, let's turn the call back over to the operator to open up the lines to take questions from the analysts. Operator?
[Operator Instructions]. Our first question is coming from Jamie Friedman from Susquehanna. Your line is now live.
Hi, good morning and congratulations. Good results here. Bruce, I wanted to ask you, so part of the strategy articulated early on and at the Analyst Day in March and then repeated today is the sales acceleration and the product innovation. And I was hoping you could kind of unpack those two. In terms of the sales acceleration, for example, what you said at the time, new sales engine aligned by target verticals, how much of the growth is coming from those verticals, is it still as broad-based as it was, or is it really concentrated in the verticals that you articulated at that time?
Yes, Jamie. Thank you for joining us this morning. Thanks for the question. So look, starting with the sales question, I'm very excited about what Rob and the team have been doing. I think the team, building out the team, getting the right talent on the team, that has made great inroads here early on in our turnaround. I think when you look at the success that they're having, the pipeline has really built up considerably. As I said a couple of quarters ago, when we were really starting to talk about this, we're really going to go back to our existing customers and start focusing on how do we cross-sell into those customers. I think we talked a little bit in the prepared remarks about expansion for multi-product sales and cross-sell into our existing customers. So the vast majority of the stuff that we've been selling have been in our existing client base. So really very targeted. If you remember, Jamie, going back to when we did Investor Day and even last fall, we talked a little bit about being in those five verticals and 80% of our revenue coming from those five verticals and us being focused on maximizing the wallet share that we get from the customers that we have by going back and cross-selling. And the team has been very successful with that. So overall, I think the team is doing very well. We'll continue to focus on and continue to expand, but we want to be tight in those five verticals. As far as the product...
[Multiple Speakers]
Yes, I was just wondering, like is there a killer app on the innovation side, anything that you'd call out, the engagement statistics were really interesting, so what's going on in the innovation side, do you have the -- I know it's an evolution, but do you have the hand now that you need in the market on the product side?
Well, I think there's a couple of things that are happening, right. So when we went back and we talked about this a couple of quarters ago, what -- it's all that everyone is really going to focus on user experience on the wallet side, we're going to focus on authorizations, APMs. We're going to focus on our e-commerce site. And what you can see, even though it's early, you can see results coming from that. We're having great results with the core digital wallet product. You see double-digit growth out of that here in the first quarter. Really nice job focusing on Megan and her team doing great things around user experience. And so through that, it's driving transaction growth with that group, and it's also driving ARPU growth as well.
So overall, I feel very good about what we're doing from a product perspective there. Still more to come. We're very excited as we talked about at Investor Day, Wallet is a platform. We really believe we've got a nice pipeline there. We believe that, that wallet as a platform is going to allow us to do both branded and unbranded type of releases here. We talked about the Merchant Wallet that we're targeting towards the end of the year -- beginning of the year of 2024 to be delivered. We're still on pace with that, and we're very excited about the opportunity that's going to bring for our wallet business as we move forward.
So we have a lot of things that are in the pipe from an innovation standpoint, a product standpoint. We see strength building in our wallet. We see strength building in our e-comm site and feel good about the progress we're making on product and innovation throughout the organization, again, early on.
Thank you, I will jump back in the queue.
Thank you Jamie.
Thank you. Your next question is coming from Timothy Chiodo from Credit Suisse. Your line is now live.
Great, thank you, good morning everyone. I have first an industry question and then a quick clarifier on the guidance. So at your Investor Day you had a great slide, it was Slide 45. You might remember, it was the one that had the pie chart that had all the various payment methods that are used in iGaming today. I think a lot of people found that really helpful, ourselves included. I wanted to touch on the card acquiring portion of that. It was on that pie chart, it was about 40% or so of iGaming volumes going through card. From an industry perspective, are you seeing any changes at all in terms of issuers and their, I guess, ability or willingness or loosening of more comfort, I guess, with approving some of those transactions, in other words, do you expect card to become a bigger portion of that pie chart if we were to look at that pie chart in a few years?
Yes, Tim. Good morning and thanks for the question. So as the payment rail options continue to emerge and evolve, I do think you'll see some movement from card being that 40% number. What I would say is what you're going to see as things move forward in our industry, is really around experiences. And so you're going to see the importance of data and personalization really driving more things versus just using a debit card or a credit card. And so I believe that you will see some movement with that. I think you'll see the opportunities for wallets to really emerge over the coming years, and I think we're positioned very well for all payment types at this point. So feel good about where we sit as the crossroads of new payment types emerge.
Okay, great. Thank you so much for that. The follow-up is around the revenue guidance. So Q1 came in a little bit stronger, but you're talking about the low single digits for the first half. Maybe there's other moving parts, but it seems to imply a little bit of a slowdown in Q2 ahead of a reacceleration in the second half. Is the second quarter without giving a specific guide, is it sort of as you thought about it earlier in the year, were there some changes, and maybe you could just give some more context on that implied deceleration in Q2?
Sorry. Yes, look, I think what I can tell you is that second quarter so far is exactly to our expectations. And I just want to reiterate, I mean, it's very difficult to do it by quarter, which we decided not to. I just want to reiterate exactly what we said exactly what we said on the call, exactly what we said last time, low single digits, below our 6% to 7% rate for the first half of the year and higher than that as the -- some of these initiatives and sales for the second half of the year.
Excellent, thank you for that.
Thank you. [Operator Instructions]. Our next question today is coming from Aditya Buddhavarapu from Bank of America. Your line is now live.
Hi, thanks for taking my questions. Could you maybe touch upon a bit more on the growth in the different verticals, any change you're seeing there in the early part of 2Q compared to what you might have seen in 1Q? And then just second, touching up on the earlier question on the outlook, so you -- I guess you're sticking to what you said previously but if you could just comment on -- given the fact that you do have some of the Russia headwinds overlapping, sorry, not being [indiscernible] headwind, I mean, is there any particular reason why we should think you shouldn't be able to continue some sort of similar momentum in 2Q as you think about what you've seen so far?
Yes. Thank you, and I appreciate the question. So if I understand the first question really was around the product mix and growth mix. So when you look at the growth mix from Q1, what you saw really within the Merchant segment was an acceleration of our e-comm business to double-digits. So strong growth in e-comm. But we told you that was going to be a focus for us to improve that platform. We've done some great things operationally with that platform and feel good about what is happening there as we're moving forward. So a little bit of shift there from the SMB vertical to the e-comm vertical. And then on the Wallet side within that segment, you see a nice recovery there. I think we had probably a little stronger growth in the classic wallet than we anticipated, but very good growth there coming out of Q1.
I think on the back half of your question, it was really around geographies, if I interpreted that correctly. We see still solid growth in North America, really no real shift I would say, from a geographical standpoint, upper single-digits in North America. You've got a low double-digit growth in LatAm and the rest of the world, kind of where we thought it was going to be. So solid in the Americas consistent to how we saw the year starting off. So very much the way we saw at the beginning of the first half of the year kind of unfolding.
Great, thank you. I think my second question was more just on the outlook itself. Given you don't have some of the headwinds you still had in 1Q from last year, let's say, Russia. Just wondering, is there anything else which might cause that deceleration in 2Q apart from that just because you've maintained that outlook for low single-digit growth?
Yes. Alex, go ahead.
I think if you -- again, I think we talked a lot about in Q1, for instance, about growth in our iGaming, right. So as we get into more and more states, a Super Bowl and March Madness mean a lot to us in Q1 of this year versus say last year because we got into a lot more sales. I think if you look at Easter and you look at the fact that you may have an extra weekend, which is generally not the best time for Digital Wallet in April, right. So I think while you're absolutely right in saying that there are certain headwinds that go away in Q2 there are also some things that would be highlighted where the growth of Q1 maybe -- may not repeat itself, which is why, again, we just want to reiterate where we plan for all of this. We know this is how it's going to happen. And so again, I just want to make sure that everybody understands that our Q2 started exactly on our expectations and the guidance that we've given, we just reiterate.
That’s great. Thank you.
Thank you. [Operator Instructions]. If there are no further questions at this time, I'd like to turn the floor back over for any further or closing comments.
Yes, great. Thank you very much. Look, just a couple of comments here to wrap it up. We recognize that successful turnaround requires really a relentless focus on execution. It's not achieved in a quarter or two, but pretty sustainable growth and that's really what we're focused on. Our plan is beginning to bear positive results and then we remain optimistic that we're on the right path. Our management team appreciates the hard work of our employees and the patience and support of our customers and shareholders as we navigate through this transformative journey. So with that, thank you, really appreciate everybody's attention this morning, and have a great day.
Thank you.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.