Payfare Inc

TSX:PAY

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Payfare's 2023 Q1 Financial Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session with prequalified analysts on the call and instructions will be provided at that time for your 2Q for questions. If anyone has any difficulties during the conference, please press star followed by 0 for operator assistance at any time. I'd like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Cihan Tuncay, Head of Investor Relations and Corporate Development. Please go ahead, sir.

[Cihan Tuncay, executive]

Thank you, operator, and good morning, everyone. Joining me on the call this morning is Marco Margiotta, Payfare's CEO and Founding Partner and Charles Park, Payfare's CFO. Please I would like to note that the company's remarks and answers to your questions today may contain forward-looking statements that are based upon management's current expectations. All such statements are made pursuant to the safe harbor provisions and are intended to be forward-looking statements under applicable Canadian securities legislation. When relying on forward-looking statements to make decisions with respect to the company, you should carefully consider the risks set forth in the Risk Factors section in the annual MD&A for the year ended December 31, 2022, which is available on www.sedar.com. Except as may be required by Canadian securities laws, the company does not undertake any obligation to update any forward-looking statement as a result of new information. We would also like to remind listeners that Payfare uses certain non-GAAP and supplementary financial measures to arrive at adjusted results to assess its business and to measure overall performance. Payfare believes that these financial measures provide readers with a better understanding of how management uses the company's overall performance. Throughout the call, we will also refer to a slide deck, which was posted on our website, corp.payfare.com/investors last night. I will now turn the call over to Marco Margiotta.

[Marco Margiotta, executive]

Thanks, Cihan. Let's start on Slide 3. I am once again proud to present our second consecutive earnings positive quarter and our third consecutive free cash flow positive quarter while generating a return of equity -- on equity of 26.5%. Our ROE profile over the last 2 quarters has exceeded some of the largest financial institutions in Canada and our free cash flow growth is industry-leading in the earned wage access debate based on industry data that we track. During the quarter, we made several new integrations to enhance our value proposition to both gig platforms and gig workers. Our cardholders can now access free and low-cost health and wellness perks through our partnership with Avibra. These benefits include life and accidental death insurance, prescription drug savings programs, personal budget counseling and more. We also announced an integration with Upside to offer our cardholders additional savings at 50,000 gas and food retailers nationwide in the U.S. directly within our digital banking apps. Finally, we also recently announced an expansion to our partnership with NCR to provide additional self-service financial tools for our cardholders. Under the expanded partnership, our users will be able to deposit cash in their accounts and access cardless cash withdrawals. Each of these integrations are specifically tailored to fulfill the unique needs of gig workers, which enhance Payfare's value to its users and gig platform partners at no cost, while boosting adoption of our cards. Turning to Slide 4. First, I would like to reiterate our midpoint revenue guidance of $190 million and our midpoint EBITDA guidance of $22.5 million. In the first quarter, we made the decision to accelerate hiring to support new late-stage contract opportunities. Specifically, we have opportunities with large brands that we are actively working to bring to the finish line in the second half of the year. We also continue to receive product enhancement requests from our existing partners. Our track record indicates we do not hire additional staff or spend development dollars unless we have a clear path for near and medium-term profitability, and these decisions are no different. While the technology sector continues to see new mass layoffs week after week, we are seeking an opportunity to secure high-quality talent to meet our growth opportunities ahead. Our new credit offerings on new credit offerings, we have made progress with our gig platform and banking partners on overdraft, which we expect to launch in the second half of the year. Each of our platform partners have expressed their desire for an overdraft feature, and we continue to work with our processing and banking partners to deliver on the needs of our customers. Finally, on earned-wage access for W-2 or T4 employees. Large employers are knocking on our door, asking us for a solution given our leading track record in Instant Pay for the gig economy space. In order to realize these opportunities, we have to build our own API connections to payroll and time and attendance platforms. This takes additional resources without sacrificing coverage of our existing partners, which is why we made the decision to accelerate hiring in the quarter as we grow into opportunities that are placed in front of us.Turning to Slide 5. The first quarter was another record for revenue and GDV, both up 76% and 86% year-over-year, respectively. Our revenue and GDP growth continues to outpace our user growth, which demonstrates that Payfare's winning additional wallet share with our users. Slide 6 highlights our user growth, which was up 62% year-over-year and in line with expectations we communicated on our last conference call. The macro backdrop continues to be positive for gig worker supply, and we saw healthy gains from both our DoorDash and Lyft programs. With that, I will turn it over to Charles to review our Q1 financials.

[Charles Park, executive]

Thanks, Marco. Turning to Slide 7. I'd like to take a moment to highlight the addition of free cash flow and adjusted earnings as key performance metrics in our MD&A. Our adjusted earnings normalizes IFRS earnings for noncash and nonoperating expenses, which can be volatile in nature and difficult to predict. And in our view, better demonstrates the operating performance of our business. Our definition of adjusted earnings is consistent with our peers in the North American payment sector as well as the Canadian technology sector. With respect to free cash flow, we felt it was important to highlight the cash flow generation of Payfare, which we believe is well ahead of peers in earned wage access space. As a free cash flow positive company, we are not dependent on external financing to operate our business and as our current and prospective partners evaluate the financial condition of their vendors, and they can rest assured that Payfare will be there for the long term despite a challenging fundraising environment. In the first quarter, we generated record revenue of $42.3 million, up 76% year-over-year. This increase was primarily driven by ongoing marketing initiatives and organic growth in each of our programs with DoorDash, Lyft and Uber. Gross profit in the first quarter was a record $9.4 million at a 22.2% margin. Gross profit dollars were up 119% year-over-year and up 13% from the prior quarter. Our gross margin primarily benefited from volume-based pricing improvements with our higher active user base and GDV volumes. We continue to significantly expand adjusted EBITDA, which was $3 million in Q1, up 453% year-over-year. As we grew our users and GV in the quarter, we realized benefits in vendor pricing and scale. This was slightly offset by additional hiring in the quarter to deliver on new contract wins and product enhancements for existing partners this year, which we believe will drive long-term EBITDA and cash flow growth. On Slide 8, we summarize our current financial condition. We ended the quarter with $52 million in cash. Our financial condition is strong. We have minimal capital needs to fund our organic growth opportunities as our core business is self-financing. Our balance sheet is well capitalized, and we remain debt-free. We are also well positioned to deploy capital to grow our business. I will now turn it over to Cihan for a capital markets update.

[Cihan Tuncay, executive]

Thank you, Charles. Let's flip to Slide 9. This is a familiar trend that compares our share price performance for the ETFMG, prime mobile payments ETF since our IPO. We're happy to see that we have outperformed our benchmark by 51% over this period despite elevated market volatility seen over the last 12 months. Since IPO, we have achieved positive adjusted EBITDA, positive free cash flow and positive earnings while exceeding expectations. Slide 10 shows where our stock is trading relative to other high-growth payments companies. I want to point out that all figures in this table are in U.S. dollars and the forward-looking information reflects analyst consensus estimates in our 2023 revenue and adjusted EBITDA gain. The key control market multiples that we have levers to pull to close the valuation gap with our peers. The first lever is expanding on adjusted EBITDA, cash flow and earnings profitability, which we expect to continue in 2023. The second lever is expanding our Gate platform partnerships. As Marco mentioned, we're excited about our current sales pipeline. The third lever is new products. We're well through the 1 million user threshold at this point, which gives us the opportunity to develop new products for incremental user monetization, including credit or overdraft as previously discussed. Our share price performance this year has also expanded our opportunity set to deploy capital strategically, and we look forward to delivering updates on these initiatives over the coming months. Operator, we are now ready to take questions.

[Operator]

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. Your first question comes from Joseph Vafi with Canaccord Genuity.

[Joseph Vafi, analyst]

Guys, good morning. Nice to see continued good progress in the business. I was wondering if we could get maybe -- I know there's a lot going on with the product roadmap and expansion. Maybe an update on the credit product and maybe an update on the paid app and a follow-up. Thanks.

[Marco Margiotta, executive]

Thanks, Joe. It's Marco. Yes, on the credit front, we have gone back and forth with a few of our clients, all of them seem to be interested in doing it. We keep those conversations going. The back and forth is mainly about how it's structured. We're trying to get innovative here. We're not trying to offer a standard off-the-shelf product. We're really tailoring it towards the needs of the gig workers and our cardholders specifically. So there's a lot of back and forth. There's a lot of different ways we can go about doing it. We've talked to a number of different partners that can help us not just from a lending perspective, but also from a technology perspective to have something that maybe is off the shelf, so we could speed things up. The challenge has become the way we want to do it is then typically out there in the marketplace today, it would be a very unique opportunity to kind of look at credit in a way that's very unique to our cardholder base. That all being said, as we mentioned, we will be looking to launch something in the later half of the -- or the back half of this year. So those conversations are ongoing as well as taking a deeper dive into the technology needed and some of the partners that might be needed to go along with that as well as a bunch of different funding partners that might have to come into the realm. As we've always indicated, we don't really want to take that balance sheet risk we think it will be very tight. But at the same time, we like being on the technology side and using our technology to advance products like the one we'll be launching as it relates to credit.On the Paid App side, the Paid App itself should be available based on the conversations I've been having with the team. Sometime in Q2, if not early -- very early Q3 in July, call it. And what that will entail is that app will then be available to any consumer or any gig worker that's out there looking to have a segregated bank account with access to Cashback royalty awards, early ACH to at least get their payout out of the gate a couple of days earlier. And then really, the next initiative on that is the Paid Connect side, which is where we want to partner with gig platforms to offer all those gig platforms, any type of disbursement, whether it's the card we've created or to an existing bank account. And that really allows any get platform of any size to integrate and pay out their workforce, 100% of the workforce instantly as well as using our Paid App collection of users as a workforce they could tap into to supply them a workforce, they wouldn't have to go find on their own, which is really kind of the cuts of what we're really helping a lot of the gig platforms we work with today do, which is bring down that worker -- or sorry, cost of acquisition on the workforce front. So a lot of moving parts. But in terms of the 2 things you highlighted credit and the Paid App, that's kind of where those 2 things sit right now.

[Joseph Vafi, analyst]

Sure. Thanks for that update, Marco. It sounds like that it's early days, but if you could be in the middle of a network between gig workers and various platforms that are hiring gig workers, that would be a powerful position over time. So we'll look for progress there. And then just kind of noticed that revenue and GDV are trending higher both-- great growth on both active users and revenue in GDV, but obviously, GDV and revenue growing faster kind of suggests more use by the -- of your cards and of your services by the user base. I was just wondering if you had any more detail there as to what's driving the extra usage versus just growth in the users.

[Marco Margiotta, executive]

I can kind of take an overarching theme and then Charles, if you want to highlight after that some of the details you might want to share as well. As a thought Joe, just when we launched a product, obviously, we get it out to market. We kind of tweak things as we see the user experience kind of grow and get feedback from. Obviously, cash back and loyalty rewards, including some of the integrations we made over the past quarter with Avibra and Upside would certainly help. Anything we could do as a general rule of thumb to get more penetration through new products and features as well as more spend off the card by motivating behavior with deeper discounts, we'll continue to do, and that will continuously evolve. So no surprise that there's growth on both of those fronts. But Charles, anything you want to add in particular?

[Charles Park, executive]

Yes. I would say that for existing base that has their cards, we're seeing that they continue to spend and onboard the GDV as usual. And the great news is we still continue to onboard new existing users with the partnerships we already have set up, particularly with Uber -- or sorry, with DoorDash and Lyft as well. So I think the positive trend continues. I think that our thesis all along was that once users use our product, they really can't go back to how it was prepaid for cards. So we hope the trend continues, and we know that with the new offerings and enhancements, it'll only make our product even stickier going forward.

[Joseph Vafi, analyst]

Sure. Thanks, guys, and keep up the good work.

[Operator]

Thank you. Your next question comes from Adhir Kadve with Eight Capital.

[Adhir Kadve, analyst]

Let me add my congrats as well. The business just continues to scale extremely well. I just wanted to ask a little bit on the EBITDA step-up in G&A this quarter. Do you guys mind just kind of unpacking that a little bit and how you're kind of thinking about that towards -- for the balance of the year. You kind of kept the guidance the same. So just trying to see -- understand all the puts and takes around that.

[Charles Park, executive]

Yes. Thanks, Adhir, for your question. I can take that. In terms of the adjusted EBITDA guidance, you're right, for the full year guidance, we haven't moved from the guidance that was provided for the year-end earnings call. And the reason for that is although Q1, there were some investment in some of these enhancements and new kind of opportunities that we mentioned in the script, really in Q2, we expect there to be a bit of a carryover of that additional heightened spend for some of these initiatives that are kind of in the pipe. But really, we expect to see the fruits of our labor kind of come through later half of the year in Q3, Q4. So from a growth trajectory perspective, I would expect Q2 to be kind of similar high single-digit kind of adjusted EBITDA percentages relative to revenue for Q2 and then kind of creeping back up to the levels that we would expect on a go-forward kind of high double-digit percentages on a go forward with that run rate of 15% that we've kind of always targeted and talked about being hit kind of later in Q4 of this year.

[Adhir Kadve, analyst]

Excellent. I appreciate that color, Charles. And then just maybe just on the pipeline when we're thinking about both the paid up as well as the white label partnerships that you guys have kind of alluded to in the past. How is that pipeline developing? How is that pipeline looking?

[Marco Margiotta, executive]

It's Marco. Yes, it's looking just as robust as it was at the beginning of the year when we mentioned we flipped the calendar year. We got a whole new school of activity that came in. I would say the white label slide, especially around some of the new initiatives related to EWA as well as other gig platforms, large gate platforms we were speaking to earlier have definitely picked up. There also seems to be extensive urgency around expanding globally with existing partners. And so it's gotten more robust as the year has gone on. In terms of the Pay App itself, we know getting the app up and running on the App Store to attract those first few thousand users is going to be an important step in attracting new small to midsize gate platforms. We have a bunch in waiting, and that list will keep growing in anticipation of launching the Paid Connect side. And so that will be a little bit more groundwork needed to get to a spot where next year, the Paid App will make some noise in terms of volumes and what we think the potential there could be. But more imminently, we see a lot of activity from large workforces, both on the gig platform side as well as the large employer side.

[Operator]

Your next question comes from Josh Siegle with Cantor Fitzgerald

[Joshua Siegler, analyst]

Great to see all the growth initiatives laid out this quarter. I'd love to dive a little deeper into earned wage access opportunities. So can you provide us with an update on your progress in expanding into this large addressable market and if you expect it to provide a tailwind in 2023?

[Marco Margiotta, executive]

Josh, I would say we're pleasantly surprised ever since we even made the announcement publicly, we had a lot of regions, and that was the intent. It was to put the market unnoticed, not so much investor focused, but more the broader market and potential employers seeking something on both sides of the border, whether it's Canada or the U.S. I will say we've gotten a significant amount of attention from large employers here on the Canadian side of the border with ambitions to also use it sells the border. And I think that's where already we're starting to see where an EWA solution from someone like Payfare would be hugely beneficial, not only from handling both sides of the border, but even within large employers, they might have a scenario where they run into different payroll providers within their same work or within their same employee base. And that leads to a few different issues, but one that we can address right away is irrespective of which payroll platform you're on, you shouldn't have discrepancies between what you offer certain employees because of them being on one payroll provider versus another. And that's where through an aggregator, like a Payfare model would have, we can aggregate those employees and make it one consistent offering across both sides of the border, regulatory permitting as well as from a product look, feel and pricing perspective so that they don't have to worry about differences in different payroll providers. They might have under one employee base.

[Joshua Siegler, analyst]

That's some really helpful color there. And then Charles, I'm curious, given the strong free cash flow of this business and the liquidity on the balance sheet, how are you thinking about capital allocation right now?

[Charles Park, executive]

Yes. So Josh, in terms of capital allocation, really, we're open to all revenue and profit-driven kind of opportunities that are presented to us. So to date, we've kind of largely just relied on organic growth to kind of grow the business to the states at now. But I think with the profitability kind of locked and loaded and with our business model, existing as a business model kind of running on all cylinders, it's time to look out strategically for opportunities that are presented to us. So not too much in the details until obviously, we get into the weeds and ready to announce. But I would just say that we're looking at all opportunities both inside and outside kind of our regular kind of radius or a circumference of like issues that are presented to us.

[Operator]

Thank you. Ladies and gentlemen, [Operator Instructions]. Your next question comes from David Pierse with Raymond James.

[David Pierse, analyst]

Just one question for me. It's just around the life contract. I think you spoke about last quarter that, that was a focus area for you guys in 2023. Just looking at the last couple of quarters for Lyft, I think they've been losing market share at Uber. Rider growth was down quarter-over-quarter. They're sort of struggling to stay competitive. If those trends continue, is there a point where you start revisiting your strategy on the life contract.

[Marco Margiotta, executive]

David it's Marco. The short answer is no. I never like highlighting each specific contract, but the reality is it still has a very relevant presence in the market. We see it. We also know that just given where they are, we know that if more effort was put towards the program, we see a lot more upside even with the existing user base. We know that actually. So I would say we're hoping that there's a bigger place. There's been a management shake up there. There's also a renewed focus on where the business is at and what the strategic direction is. I think you can only get more positive from where they're at. If it was just where it is today, like I said, there's a lot of upside already just by bringing up the program to where we think it could be based on what we see with other customers. But over and above that, any strategic move in the right direction would provide us a lot more upside than what we would already see today.

[Operator]

Thank you. There are no further questions at this time. Ladies and gentlemen, this will conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great...