Payfare Inc

TSX:PAY

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good evening, ladies and gentlemen. Welcome to the Payfare Second Quarter 2024 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 afternoon, everyone. Joining me on the call this afternoon is Marco Margiotta, Payfare 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, 2023, 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. I will now turn the call over to Marco for an update on Payfare's business.

[Marco Margiotta, executive]

Thanks, Cihan. Starting on Slide 3 of our presentation deck. I am once again proud to present another record operating quarter for Payfare. This was our sixth consecutive quarter of earnings -- or sorry, earnings positive quarter. Our profitability and free cash flow growth continues to be industry-leading in the Earned Wage Access space.

Our mission is to financially empower every worker with immediate access to earnings and wages in real-time as work has performed. Our primary financial goal is to maximize long-term free cash flow per share. Our total addressable market is significant with over 72 million independent workers in the United States alone, and we think each and every one of them will benefit from an Instant Pay solution powered by Payfare.

Moving to Slide 4. I would like to comment on the progress we have made so far in our 2024 strategic objectives. First, we reaffirm our 2024 revenue and adjusted EBITDA guidance of $235 million to $245 million and $30 million to $35 million, respectively, which equates the midpoint growth of 29% and 51% over 2023. In addition to growth, we recently signed a long-term contract extension with Lyft to continue powering the Lyft Direct platform.

When we launched the program in December of 2019, we revolutionized the Earned Wage Access industry by developing the first product in market to offer free instant pay after every ride at a no-cost -- with a no-cost companion bank account. Stay tuned for significant new product developments within Lyft Direct, including saving products and wealth management tools. These new features will further enhance the value proposition to Lyft drivers, fostering increased adoption of Lyft Direct.

On the topic extension, for commercial reasons, similar to the approach we took with our marquee -- other marquee clients, we are not able to comment further on contract discussions with DoorDash at this time. Having said this, we believe in the strength of our offering beyond a simple instant disbursement platform. Our secret sauce is bringing together a cutting-edge tech stack, value-enhancing ancillary benefits to cardholders such as cash-back rewards and insurance products and leading fraud compliance and AML tools.

I would especially like to emphasize our strength in compliance in AML, given the recent collapse of large-scale Banking as a Service fintechs and the corresponding regulatory actions taken by the fed, the FDIC and the OTC against underlying banks of large neobank-distributed card programs.

Our business development pipeline is as strong as ever with active opportunities in aggregate of close to doubling our current GDV, the strength and stability in our platform from a technology, operations and compliance perspective are standout differentiators from competitors and new contract discussions. We look forward to providing updates on new business development initiatives in the coming months.

Reviewing Slides 5 and 6, the second quarter was another record for revenue and GDV, both at 26 -- or sorry, 20% and 31% year-over-year, respectively. Our GDV growth continues to outpace our user growth, which demonstrates that -- Payfare's winning additional wallet share with our users. With that, I will turn it over to Charles to review our Q2 financials.

[Charles Park, executive]

Thanks, Marco. Turning to Slide 7. We generated record quarterly revenue of $56 million, up 20% year-over-year. This increase was primarily driven by ongoing marketing initiatives and organic growth in each of our programs. Gross profit in the first quarter -- or the second quarter was also a record $13.9 million at a 24.8% margin. Gross profit dollars were up 25% year-over-year. Our gross margin primarily benefited from volume-based pricing improvements with our higher active user base and GDV volumes.

Specifically, I would like to emphasize that we have crossed over $1.2 billion per month in GDV, which highlights the significant scale of our business. This is one of the key drivers in our gross margin expansion in the quarter and on a year-over-year basis. We continue to expand adjusted EBITDA, which was $6.6 million in Q2, up 39% year-over-year.

On Slide 9, we summarize our current financial condition. We ended the quarter with $67 million in cash and $28 million in liquid high-yield deposit investments. 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 will remain well positioned to deploy capital to grow our business.

Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from Joseph Vafi from Canaccord.

[Joseph Vafi, analyst]

Nice to see solid results. I was wondering if you could kind of -- I know you reiterated your guide for the year and the guide does imply acceleration during the year. Could you just kind of walk us through, again, some of the factors that are driving that, the reiteration of the guide and what's implied in acceleration? And then I have a follow-up.

[Charles Park, executive]

Joe, it's Charles here. I can take that question. Joe, so in terms of the guidance from a revenue perspective, as you know, our stronger quarters tend to be on the latter half of the year. In addition to that, we had a really successful launch of our most recent program, the Uber Pro Canada program, which has onboarded quite a few active users, in addition to the continuing growth that we've seen in our existing platforms as well or programs with both Lyft and DoorDash.

Those are the main drivers. As you know, those are our key clients that we have on board. So both kind of driven by kind of new programs that have launched and continuing growth with our existing programs with kind of the seasonality that we've always seen in the second half of the year. Those are the main drivers.

[Joseph Vafi, analyst]

Drill down on the Uber Canada. I know -- I believe the launch has gone pretty well and you're signing a lot of drivers because you're still really driving your business from these 3 big partners today. Maybe if you could provide a little more color on where Uber Canada sits today versus where it was under the previous program, that would be helpful.

[Charles Park, executive]

Sure, Joe. So we don't disclose specific numbers, but maybe I can take -- talk to you in quantums of percentages. Year-over-year, we're looking at an increase of over 400% just in terms of the user base. And quarter-over-quarter, we're looking at well over 100%, just to give you quantum.

[Joseph Vafi, analyst]

That's great. And then just maybe a quick update on your announcement with BDP Canada. I know that's set for a little later in the year. Any updates to provide to everybody here on progress on that?

[Marco Margiotta, executive]

Joe, it's Marco. I guess nothing more to update, at this point, other than we're on track to kind of hit the targets we had set out, which was to be live at some capacity beyond just testing in Q4. And so as that progresses, we'll certainly keep everyone aware of what the progress has been and then reaffirming the launch time of early Q4.

[Operator]

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

[Adhir Kadve, analyst]

My congratulations on the quarter. Just [indiscernible] big box retailer seems to be live now [indiscernible] Expectations for that kind of as we head into the back half of the year and beyond that.

[Marco Margiotta, executive]

Adhir, I'm not sure if it was just me, but it kind of cut out, but I think I got the bulk of it. If I haven't, maybe Charles step in. But I think the question was around the big box retailer we had recently launched. It is launched. I can confirm that. In terms of the opportunity itself, it's not going to have any meaningful implications as of right now, but there are already talks about expanding the program elsewhere potentially as well as giving good footprint into another market we're keen on entering into.

And so when that kind of becomes public knowledge and we're able to share what those details look like, we'll certainly do that. But the playbook for us there was launch the program with another marquee name and then rapidly expand it into other markets where we can actually pick up significant business activity and leverage the infrastructure we'll use in those new markets.

[Adhir Kadve, analyst]

Okay. Got it. Hopefully, you can hear me a little bit better. When you talk about the pipeline, I think you mentioned you have a pipeline that could potentially double the GDV. What verticals are those coming from? Is that kind of ongoing gig partnerships? Or is it kind of new EWA players from, like, maybe the ADP partnership that [indiscernible]

[Marco Margiotta, executive]

Yes, gig platforms, everyone would know. Yes, I mean we can leave it at that, but no surprise. There would be large-scale gig platforms delivery to be specific. And so yes, those are in the pipe. We're not banking on them just yet, but they are there, and there's significant volume as well as markets we're already established in. So it could come sooner than later, but we're just not sure on timing, and hopefully, we could get to a point where we could have that all signed up and announced in short order.

[Adhir Kadve, analyst]

Got it. And then maybe one last one just on the corporate development executive that you signed, Alex Ceballos. He's going to be leading our international expansion efforts. Is that largely also kind of to coincide with the international big box retailer and expanding that into new markets? Or do you see kind of stuff beyond just the gig platforms and that big box retailer in terms of expansion into international markets?

[Marco Margiotta, executive]

Yes. Alex brings a wealth of experience, as you can imagine in what was highlighted in the press release, even just the tenure of all the things he has done at Amazon as well as Nubank and several other companies that he's helped out over the years. He brings a wealth of experience that certainly aligns with what we're after right now, which is global expansion as well as inorganic expansion. And so we thought he would be an amazing fit for our strategic moves and where we're going next.

What specifics around the big box retailer? There is a market in there that he's very familiar with, and so that certainly does play a part. We were looking at that market irrespective for some other initiatives we have. And so it was just a perfect fit in that regard. So it's not just for that big box retailer. It's more of a global expansion effort, which, in order for us to do this efficiently, we are looking to grow organically -- or inorganically rather. And I think he could play a big part in that as well.

[Operator]

[Operator Instructions] Your next question comes from the line of Stephen Boland from Raymond James.

[Stephen Boland, analyst]

Marco, maybe just go back to the EWA, the ADP partnership. I mean, is that your preferred method to get more into payroll is partnering with, like, tech providers like that as opposed to some of the EWA providers out there that are kind of -- I think we've talked in the past like block-and-tackle, signing up restaurant chains on an individual basis? I mean is there a lot of ADPs out there that you can try and partner with, like, to offer similar products?

[Marco Margiotta, executive]

Yes. I think the clear path for us is partnering with major distribution channels. Well, when you think of payroll, I mean, obviously, we're speaking about payroll providers. And so in that regard, if we were to partner with payroll providers along the way, we would certainly get access to the data and infrastructure we need to actually execute those EWA advances. And so we wouldn't look necessarily to other EWA providers and assisting them, although we can, and we have looked at that for a certain number of players in the market.

The preferred path is definitely the major distribution channels. I know you mentioned restaurants and maybe following that path, to us, it's a bit more difficult just because of all the different platforms that those restaurants might be on, aggregating that kind of volume rather than finding one employer that might have 50,000 employees under 1 payroll program is a lot simpler than finding a few thousand restaurants that only have 20 to 30 employees each.

And so there are a number of different ways we can help the whole EWA market, but our preferred path to start is definitely leveraging the distribution from major payroll providers.

[Stephen Boland, analyst]

You mentioned on the GDV, [ how it's ] grown and how much you're doing on a monthly basis now. I think in the past, you talked about your ability to negotiate higher interchange fees when you hit a certain scale, are those discussions happening? Or has it happened? I'm just curious if you're in a position now to earn a bigger fraction of the pie from some of your gig partners?

[Marco Margiotta, executive]

I could take that initially, Charles, and then you could take over from there. But I guess we've already done a phenomenal job in prearranging what those scales could look like and what the different tiers could be. We've done that almost since day 1. But certainly, with the recent growth we've had over the past 2, 3 years, especially, we did go dead ahead of it and kind of anticipate that all those tiers should come down even further. And we extended out some of those tiers as well. But I'll turn it over to Charles to talk to any specific highlights he wants to mention.

[Charles Park, executive]

Yes. Thanks, Marco, and thanks, Steve, for the question. In terms of getting more out of the pie, we've obviously negotiated the additional tiers, as Marco talked about. But one thing, I think, we've done kind of year-in, year-out is we really revisited those numbers as our growth has increased as well. So the fact that we have certain kind of tiers in place doesn't necessarily mean that they're going to stay the same.

We are always having ongoing conversations, at a minimum, quarterly or annually that we have with all of our major vendors who contribute to the COGS line to get the best pricing. And I think history shows that we've done a pretty good job in terms of extracting additional value for our shareholders, and we'll continue to do that on a go-forward basis.

[Stephen Boland, analyst]

Okay. Just last one for me. There was -- this is probably a couple of years since I've asked this question, but Marqeta was a partnership you announced as a -- well, not a similar, but a relationship with DoorDash. You were looking at ways you could strengthen your relationship. Has anything progressed out of that? I probably asked you this a year ago, I'm just going back and looking at some of my old notes.

[Marco Margiotta, executive]

I could take that, Steve. I guess, what I would say, the relationship is still definitely there. We look at things on a program-by-program basis. And so when the need arises where specific functionality or benefits or economics could be different versus different providers or other processors specifically as it relates to Marqeta, we definitely look at that. And so there are paths right now that we are looking at with them. And so there is still that partnership that's not necessarily exactly where we wanted it to be, given the lack of kind of program activity that's there right now, but it's not -- I think that we purposely kind of drew out.

It just happened to be a matter of timing and when the opportunity arose amongst other things. So more of a timing thing more than anything else. But that relationship is there. We'll continue to look at different programs on a case-by-case basis and determine which provider provides a better stack in terms of what our offering needs to be and who could help accommodate whatever those new needs are for those specific programs that we expect to launch.

[Operator]

[Operator Instructions] Your next question comes from the line of Hal Goetsch from B. Riley Securities.

[Harold Goetsch, analyst]

Marco, great, great results and great commentary about the future potential. Could you just explain everyone, what are the technology resources or capabilities that a typical payroll company doesn't have that they need -- that they partner with you? Like, is it real-time capabilities? Is it real-time payments? Like, what are the assets you have that they don't have and they're not trying to develop those internally? What are your thoughts on that?

[Marco Margiotta, executive]

Hal, thanks for the question. Yes, I guess, it's dependent on each provider -- each payroll provider and what they have in their stack and what they may lack or may not or how they view EWA and whether they want to go all in on it. It's kind of -- the broad way I'll start it off by describing the landscape is there are providers like Ceridian that do have their own EWA advanced solution.

And then there are others that look at their platform as just a data gateway where they have all the payroll data and they're kind of monetizing access to that data, which is how they're earning their piece of the EWA market. And so depending on which partner you might get, different scenarios play out. But specifically, many for the most part, and this is kind of painting with a wide brush here, a lot of them don't want to enter the space.

It's much different than the current service offerings they have. It is more a financial service than a payroll product. And so with that comes all the different regulations and with the way the markets are now and the way EWA is right now, those regs don't exist, which is probably another reason why they're not willing to enter it right now.

Although they're playing in it, they don't want to go full tilt and do all this on their own. But it's more -- disbursements are part of it. They can certainly acquire those disbursement solutions and disburse to any bank account, but that's not all of it. There would actually be the wallet. And all the different details that they would need, especially around aggregating different time and attendance platforms, that might not be in their arsenal.

So if you think about it, some employers might have one company doing their payroll service -- or payroll services, but they might use someone else for a time and attendance platform. And the EWA companies that are involved take the data from both those sets in order to perform the EWA advances, where the payroll companies themselves might not have access to the time and attendance platform. And so all those integrations are different outside of their own stack.

And so it gets -- it's a long-winded answer, but it is a very different question for all the different payroll providers out there, but it's not technology that they possess and in many cases, nor do they want to have that necessarily on their books or managing that whole process that's not core to payroll as it stands today.

[Operator]

There are no further questions at this time. We will now conclude the conference call. Thank you. You may now disconnect.