Payfare Inc

TSX:PAY

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to Payfare's 2023 Q2 Financial Results Conference Call. [Operator Instructions] I would 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.

[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. Payfare 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 of, 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.sedarplus.ca.

Except as may be required by Canadian securities laws, the company does not undertake any obligation to update any forward-looking statements 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 views the company's overall performance. Throughout the call, we will also refer to a slide deck, which is posted on our website, corp.payfare.com/investors, last night. I will now turn the call over to Marco Margiotta.

[Marco Margiotta, executive]

Good morning. Thanks, Cihan. Let's start on Slide 3. I'm once again proud to present another record operating quarter for Payfare. This was our third consecutive IFRS earnings positive quarter, while generating a return on equity of 32%. Our ROE profile in 2023 continues to track well ahead of the largest financial institutions in Canada, while our free cash flow growth is industry-leading in the Earned Wage Access space based on industry data that we track.

Profitability is always at the heart of every decision made at Payfare. That includes signing on new partners, entering new markets, and as we review capital deployment opportunities. That being said, we also take a long-term view on enhancing our ROI, and we will make upfront investments required to build long-term value as we have done in the first half of 2023.

Moving to Slide 4. I am pleased to announce that Payfare successfully won 2 RFP processes to deliver instant payouts and digital banking experiences for globally recognized strategic partners. Both of these opportunities were in our own backyard in Canada. In the second quarter, we were heads down working on setting up and integrating these new programs. In terms of impact to Payfare, at scale, the combined opportunity can account for 10% to 15% of our active user base over time. We expect to announce further details on these programs with our partners closer to commercial launch, which could be late 2023 or very early in 2024.

On new credit offerings, we have made progress with our gig platform and banking partners on an 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 continue knocking on our door, asking us for a solution given our leading track record in Instant Pay for the gig economy space. We are actively working to build payroll and time and attendance platform integrations to deliver on this massive market opportunity.

Turning to Slide 5. The first quarter was another record for revenue and GDP, both up 43% and 46% year-over-year, respectively. Our revenue and GDP growth continues to outpace our user growth, which demonstrates that Payfare is winning additional wallet share with our users.

Slide 6. Slide 6 highlights our user growth, which was up 34% year-over-year and in line with expectations we communicated on our last conference call of mid-single-digit quarter-over-quarter growth levels. Our second quarter user growth reflects normal seasonality in the gig economy, which has been echoed by each of our current partners in their second quarter earnings releases. Each partner has also reiterated plans for worker expansion in the back half of the year, which we believe is a positive tailwind for Payfare's user growth potential through year-end. The macro backdrop continues to be positive for gig worker supply and we saw healthy gains across the board in the second quarter.

With that, I will turn it over to Charles to review our Q2 financials.

[Charles Park, executive]

Thanks, Marco, and good morning, everyone. Turning to Slide 7. We generated record revenue of $46.5 million, up 43% 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 second quarter was also a record $11.1 million at a 24% margin. Gross profit dollars were up 74% year-over-year and up 19% 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 $4.8 million in Q2, up $4.2 million year-over-year and achieved a record margin of 10.2%. As we grew our users and GDV in the quarter, we realized benefits in vendor pricing and scale. This was slightly offset by additional hiring in the quarter to deliver our new contract wins and product enhancements for existing partners this year, which we believe will drive long-term EBITDA and cash flow growth.

I'd like to take a moment to highlight free cash flow growth in Q2. Our operating cash flow before noncash working capital adjustments was a record $4.2 million in the quarter. This was primarily offset by a temporary increase in noncash working capital consumption of $2.2 million. From time to time, our working capital fluctuates based on the timing of our big platform partners funding their MFA accounts with our banking partner. This will reverse over time over the balance of the year, and on a full year basis, our free cash flow generation should continue to closely track our adjusted EBITDA after CapEx investments.

As a free cash flow positive company, we are not dependent on external financing to operate our business and our current and prospective partners, as they evaluate the financial condition of their vendors, they can rest assured that Payfare will be there for the long term despite a challenging fundraising environment.

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 continue to remain debt-free. We are well positioned to deploy capital to grow our business.

I'll now turn it over to Cihan for a capital markets update.

[Cihan Tuncay, executive]

Thank you, Charles. And let's flip to Slide 9. This is the familiar chart that compares our share price performance to the ETFMG Prime Mobile Payments ETF since our IPO. We're happy to see that we have outperformed our benchmark by 42% over this period despite elevated market volatility seen over the last 12 months. Payfare has seen best-in-class share price performance for technology companies that IPO-ed in 2021 in both Canada and the U.S. Our performance is a direct function of achieving positive adjusted EBITDA generation, positive free cash flow generation, and positive earnings while exceeding guidance.

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 all forward-looking information reflects analyst consensus estimates and our 2023 revenue and adjusted EBITDA guidance. While we can't control market multiples, 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 gig platform partnerships. As Marco mentioned, we successfully won 2 RFPs in the second quarter. Third lever is new products. We are well on our way to launch an overdraft product for our current programs, which should maintain our momentum and increase penetration with our partners.

Our share price performance this year has also expanded our opportunity set to deploy capital strategically. We look forward to delivering updates on these initiatives over the coming months.

And with that, operator, we are now ready to take questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Hal Goetsch from B. Riley Securities.

[Harold Goetsch, analyst]

[Technical Difficulty] in this quarter. Just wanted to get your perspective on how that might continue? And what are the gaining factors for that?

[Cihan Tuncay, executive]

Apologies. You came in a little bit choppy there. If you could please repeat your question.

[Harold Goetsch, analyst]

Certainly. Wanted to get your perspective on the volume-based discounts. And is there any additional visibility you can share with other volume points you might hit later on in the year in 2024, 2025.

[Charles Park, executive]

Thanks for your question, Hal. So Hal, in terms of additional kind of volume tiers, we definitely have them with all of our major vendors on the COGS side. In terms of when we will hit them during 2023 and 2024 and beyond, we definitely will hit some additional tiers later this year, and the forecast is for 2024 and beyond that we would hit the upper tiers as well, where we would benefit from additional savings.

One thing to kind of note is that in addition to our existing kind of agreements and our existing terms and levels, we continue to work with our vendors to extract maximum benefits for us from a COGS perspective as well. So over and above legal agreements or amendments that have been made, there's always an opportunity for additional savings that we can negotiate as we continue to grow our base and our GDV volumes.

[Harold Goetsch, analyst]

Okay. Great. And if I could ask one follow-up. Could you just give us a perspective on the work that's going to go into leveraging the Payfare platform and the Earned Wage Access to integrate into a payroll company that employers want to offer this to their employees.

[Marco Margiotta, executive]

Hal, it's Marco. Thanks for the questions. Yes. I would say the vast majority of the technology we have today, if that's what you meant from a technology perspective, will be utilized for that. So at its core, we have the digital banking app, which for us, we've taken the white label solution, converted that into the Paid App. The Paid App is now going to be used on both sides, the EWA side as well as the gig side.

So on the consumer-facing front, the vast majority of the technology is there. It's just when we're talking EWA, there's obviously some time and attendance and payroll integrations that we need to accommodate, both the view of what they've earned as well as being able to make sure we get repaid back any advances that go out to more on the payroll side.

I think, yes, there's not much CapEx there required even to do the latter in terms of the integration of the time and attendance platforms. Each one will probably take anywhere from 3 to 5 weeks, would be our best guess, but we'll do that on a customer-by-customer basis depending on where those payroll platforms reside within that employer, or which employer has which payroll platform or time and attendance platform needed.

So we're talking about a long kind of grind to kind of get there, one platform at a time. But like we've mentioned before, our path is still looking at different targets through M&A and finding some of those EWA players that have all the integrations done for us where we can ingest that plumbing.

[Operator]

And your next question comes from the line of Joseph Vafi from Canaccord.

[Joseph Vafi, analyst]

Guys, nice to see the continued good results. So congratulations on that. Maybe just we start on GDV growth here, another nice gain. Maybe you could parse out a little more color here on how you look at that in your customer add contribution versus, I guess, per user spend or revenue driving the GDV growth. And then I have a quick follow-up.

[Charles Park, executive]

Joe, it's Charles. Thank you again for your question. In terms of GDV breakdown, Joe, obviously, in MD&A, we don't really break it down by program, but I can provide a little bit of color that might help answer your question in that one of the positives that we've kind of noted in 2023 is the growth of our Lyft business as well. Obviously, our Lyft user base was hit pretty hard during COVID time and we're happy to report that we've gone to pre-COVID levels by the end of last year, and we continue to see growth in that program.

And what's typical or different about Lyft relative to, let's say, DoorDash is, a typical Lyft driver tends to earn more money and puts more money on their card as a result. So that would be kind of a direct driver of kind of GDV growth per user. If you look at it from that perspective, that will ultimately lead to additional revenues as well. So to the extent that our Lyft business continues to grow and we roll that out in terms of a relaunch of that program, we expect to see healthy growth on the top line on both GDV and the resulting revenue from that as well.

[Joseph Vafi, analyst]

Great. And then just maybe 1 follow-up here. I know, Marco, you mentioned an overdraft product, which makes sense. Could you maybe drill down a little bit more in the rollout strategy -- on the rollout, how you may market it to the user base and then what it may mean for margins and the P&L.

[Marco Margiotta, executive]

Yes, the white label side of things, where we're offering overdraft, but we'll call it the existing gig platform partners would probably want a product that's not really offering this as a tool that kind of generates meaningful revenue from, it's more to incentivize and motivate their best-performing workers out there. And so from that perspective, we think it will mainly benefit us from increased penetration into adoption of the product or the DasherDirect app or Lyft direct app, if you will, as an example.

Over and above that, overdraft on the Paid App side would be something we could definitely monetize, and probably have a different view on what the ultimate goal is and seek high margins. We're not looking to kind of take advantage, if you will, of any of the cardholders that are out there. This is something that's meant to be a product where we're trying to innovate and offer something that we think could be super compelling at a very reasonable offering or price point where they otherwise wouldn't get it through any of their traditional financial institutions that they might be dealing with.

So on the Paid App side, I would say there's a lot more room for margin where the goal there would be more of a long performance kind of view as opposed to some of our white label partners that would want more of a retention and the loyalty back to their main or top-performing gig workers that are out there.

So different view on things, but ultimately, I think it boosts the profile of not only the adoption of the product across the gamut, whether it's white label or through the Paid App, but ultimately, the margin expansion will definitely come more from the Paid App side than the white label solution.

[Operator]

Your next question comes from the line of Adhir Kadve from Eight Capital.

[Adhir Kadve, analyst]

Let me add my congratulations on the quarter, just solid execution. I wanted to ask on the 2 RFP wins. I understand the private label partnership. Can you unpack the embedded finance portion of it? I didn't quite understand that.

[Marco Margiotta, executive]

Yes. Thanks for the question. The way the embedded finance piece, there's certain customers or potential customers in the pipeline that don't want a separate app to deal with. They'd rather have an integrated solution within their own app or native to their own app. It reduces a lot of friction. It reduces a ton of different flows that are likely unnecessary if you had it all embedded within the same app. But ultimately, it's the exposure that they want through their own app. 100% of the user base will see it. Whereas if you break that apart and create a separate app, the chances of that diminish.

And so a lot of interest in terms of the RFPs we're seeing, and some of the ones that are deeper along in the process, in our sales pipeline are requesting embedded finance, and it's certainly getting a lot of traction and we definitely see the need for it. So for us, it's just changing where the user interfaces with us. And from what we're seeing early days, obviously, it makes a lot of sense. When you can be directly embedded within an app, the exposure and related penetration gets a lot greater.

So we need to have both. We need to equip ourselves with everything in order to make those platforms or potential customers more of an easy layup kind of decision when it comes to getting involved and kind of rolling out these programs. So having that in our arsenal is definitely going to help us going forward.

[Adhir Kadve, analyst]

Understood. And then from, call it, the margin profile, would we kind of see any maybe degradation to the margins as this program ramps outside of like marketing costs or some of the extra personnel you've had to hire as the program really starts to ramp?

[Charles Park, executive]

Adhir, it's Charles. I can answer that. What I would say right now, it is from a modeling perspective for the 2 RFPs that we outlined in our MD&A, we're still working out the details. And obviously, in the coming months, we'll share some more details in terms of how we're forecasting that and their contributions to kind of the bottom line, both on the gross margin side and on the adjusted EBITDA side. So I would just say, be patient, and we'll share more details as they come, but we're still working through those details right now.

[Adhir Kadve, analyst]

Understood. And I'm just going to sneak last one in here. We've seen the DoorDash program really start to ramp significantly after you had announced it. Do you guys have a kind of like a time line to that 10% to 15% user penetration number? Would it be similar to a strong ramp we've seen in the past with the DoorDash program? Or would it kind of take a little bit longer? Just any color around that would be super helpful.

[Charles Park, executive]

Yes. I think for forecasting into the future, we would like all of our ramps, new ramps to mimic what happened with DoorDash as well. So that's obviously the model that we are looking to follow and execute on. So that's our hope. But in some cases, Adhir, it may take a little bit more time to do the ramp, Adhir. So we'll kind of wait and see. But all efforts are going to be put into kind of executing the same way we did on the DoorDash side of things and hopefully get similar success as well.

[Operator]

[Operator Instructions] And your next question comes from the line of Josh Siegler from Cantor Fitzgerald. Please go ahead.

[William Carlson, analyst]

This is Will Carlson on for Josh Siegler. First question, how have you been effectively deploying marketing spend to lower your customer acquisition costs and higher LTV? And how do you see this trending throughout the remainder of the year?

[Charles Park, executive]

Will, it's Charles. Thanks for your question. In terms of marketing spend, well, what I would say is that it is kind of we work in partnership with our customers, our partners to kind of roll out various programs throughout the year. The second half of the year is probably going to be a busy one for us and that our partners have said even in their publicly released results and commentary that they're looking to invest more in the second half of the year in terms of customer acquisition and retention.

So to the extent that we participate to a certain extent in that process, there may be some elevated levels of marketing, but nothing that would be historically off from a percentage of revenue perspective, is what I would say. But if there's a specific opportunity that's presented to us that we feel will have an outsized kind of return, we would definitely make that investment every single time.

[William Carlson, analyst]

Great. And then second question, could you possibly walk us through the process of being selected for these 2 RFPs. And do you expect these programs to act as a launch point of future embedded offerings moving forward?

[Marco Margiotta, executive]

I can take that. Thanks, Will. Embedded finance seems to be a big shift where not only people are recognizing that Earned Wage Access is here to stay, but a lot of them are looking at it as a crucial cornerstone anchor of their product offering to the marketplace, whether it's the gig side and even on the payroll side. So I think embedded finance is going to be a big part of what's happening over the next few years. And so naturally, the answer would be yes. I can't see it going away. I don't think this is a one-off. We're seeing a lot of activity around a lot of different companies looking at integrating it directly given how impactful it is and what they've seen in the marketplace through our white label products.

As far as the RFP process, it's pretty standard. I think a lot of it, I will say, comes -- it's no surprise to anyone. We have a Salesforce team of 2. We get a lot of inbound interest with very little effort just given who we are and how we're in the payments ecosystem. A lot of the referrals have them directed towards us just given the traction and success and leadership in the space. So it usually starts off with a very warm introduction. And then within there, they're obviously going to do their efforts to kind of bring in some other players just to make sure they've selected the best man there possible.

And so in many ways, we have a very good head start going into the process. But certainly, once we're involved and they find out more and they see how innovative and how much success and the volumes we're doing relative pricing, all those great things that make us who we are at certain times. So there's not too many formal RFP processes we go through. But so far, the hit rate has been exceptional. And so we have a slew of other RFPs that we're looking at. We also have dozens of inbounds that have requested access to the Paid App, which is also going to keep us quite busy for the second half of the year.

[Operator]

And your next question comes from the line of Stephen Boland from Raymond James.

[Stephen Boland, analyst]

First question, Marco, is the relationship with Marqeta. I'm just wondering if it's not something that's been talked about, I think, in 2 or 3 quarters. Maybe you could just talk about it. Is there any progression with the partnership? Has it borne any fruit yet? Is that still to come? Maybe just give a little bit of an update on that.

[Marco Margiotta, executive]

Morning, Steve. It's still to come -- that there's still aspects of Marqeta that handle certain processing capabilities that other vendors might not. That's where we see a fit. It's not to say that we wouldn't partner with them on things that they would bring to us or certainly certain items that we need certain capabilities on where we would go to them. And so it's still there. There hasn't been an immediate need to utilize some of their infrastructure just yet. But there's so much opportunity in the pipe that I'm sure at some point that would make sense. So outside of just having another second processor in the mix to make sure that we have every aspect of processing capabilities covered, and you may include geography as well, that partnership is still going to be there for quite some time.

[Stephen Boland, analyst]

Okay. And maybe my second question, and hopefully, this is not too delicate, but certainly, we get calls from investors about your share sales in the market. I know it's a program. I guess, we are getting questions about, is this an ultimate -- that you're still committed to the company for a good portion. I don't know how much color you can give, but if you can provide a little bit, that would be great, just to see what's happening there.

[Marco Margiotta, executive]

Okay. No problem at all, Steve. Yes, happy to talk about that. It's not a Payfare issue, certainly. I mean, the numbers speak for themselves. We're feeling incredibly bullish on what we see. I've also put well over $1 million into the stock at higher prices just a few months ago. So the awkwardness is it's not a Payfare related issue, it's more of a Marco Margiotta's personal situation.

I have $1.2 million or so to exercise in options before the end of the year with minimal trading windows from here to there. And with minimal volumes, I don't want to kind of wait until the end because that might put pressure. So I'm slowly trying to build up cash, so that by the end of the year, I can exercise those $1.2 million of options. Yes. it's sticking to me, but it is what it is. I can't frown upon it. We just got to keep executing, and I do believe in the past where eventually, these numbers will pan out and give us the higher share price we're all after.

[Operator]

At this time, this concludes our question and also session. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.