Payfare Inc

TSX:PAY

Earnings Call Analysis

Payfare Navigates Contract Loss while Pursuing Growth Opportunities

In its latest earnings call, Payfare announced disappointment over the nonrenewal of its DoorDash contract, emphasizing productive negotiations to enhance features. Despite this setback, the company expects revenue between $50 million to $60 million for 2025, excluding DoorDash contributions. The transition from DoorDash remains unresolved, but discussions are ongoing. Payfare aims to alleviate concentration risk through a strategic review, exploring acquisitions, partnerships, and new revenue streams. Active gig economy opportunities are under review, with potential to offset DoorDash's impact. Meanwhile, programs with Uber and Lyft show strong user growth, indicating resilience and future growth potential.

A Turbulent Transition: DoorDash Nonrenewal

Payfare's recent earnings call was significantly shaped by the announcement of the nonrenewal of its contract with DoorDash, which has been a key partnership for the company. This development is disappointing, particularly given the previous success of the DasherDirect program, which achieved penetration levels nearing 60% among active Dashers. CEO Marco Margiotta emphasized that the nonrenewal was not due to unfavorable economics but rather a shift in DoorDash's strategic direction. Despite the loss, discussions regarding transition terms are still ongoing, and the current agreement remains active until early 2025.

Strategic Review Process Launched

In response to the loss of the DoorDash contract, Payfare has initiated a strategic review process aimed at diversifying its revenue streams. Margiotta indicated that the review encompasses various options, including potential acquisitions, strategic partnerships, and other business opportunities. There has been considerable inbound interest following this announcement, suggesting that investors and potential partners are keen to engage with Payfare during this transitional phase.

Active Business Development Pipeline

Despite the setbacks, Payfare remains hopeful due to an active business development pipeline. The company is currently engaged in negotiations with two significant opportunities within the gig economy. Margiotta noted that any combination of these opportunities could potentially offset the lost gross dollar volume (GDV) from DoorDash. Additionally, Payfare is also considering a third opportunity that is at an earlier stage, with expectations of concluding discussions by either late Q4 or early Q1.

Financial Outlook: 2025 Revenue Projections

Looking ahead, Payfare has provided a positive financial outlook for 2025, projecting revenue of between $50 million and $60 million from existing programs, excluding any contributions from DoorDash. CFO Charles Park affirmed that the company can rightsize its general and administrative expenses based on the revenues generated from ongoing programs, providing further stability to its financial position. Notably, Payfare's strong balance sheet, which includes over $100 million in cash and equivalents, enhances its liquidity amid these changes.

Focus on Cost Management and Profitability

Payfare's leadership acknowledged the importance of controlling operating costs, especially with the potential loss of DoorDash-related revenue. Currently, the company spends approximately $5 million to $6 million annually in costs associated with DoorDash, which may drop off due to the nonrenewal. The earnings call highlighted the commitment to achieving an adjusted EBITDA breakeven point, primarily through cost-saving levers while expanding the penetration of other successful programs like Uber Pro and Lyft Direct.

Continued Growth in Key Partnerships

The ongoing performance of Payfare's partnerships with Lyft and Uber is noteworthy. Both platforms have shown increased user engagement, with active users on Lyft Direct increasing by over 50% year-to-date. Additionally, deployment of new product features is expected to enhance user experience and retention. Margiotta expressed confidence that accessibility and enhancements will continue to drive growth in these segments, providing Payfare with continued revenue stability even without DoorDash.

Exploring New Product Opportunities

In light of the changes impacting DoorDash, Payfare is also exploring broader market opportunities with its Paid App, intended as a Neobank option catering to gig workers. Notably, the company is developing an earned wage access product aimed at T4 employees, which is seen as a significant growth opportunity given the potential reach within ADP's payroll processing capabilities for millions of Canadians. As this strategy develops, it could diversify revenue beyond the gig economy.

Conclusion: Navigating Change with Optimism

In conclusion, while the departure from the DoorDash partnership presents challenges, Payfare's leadership demonstrated a clear focus on capitalizing on new growth opportunities and cost management strategies. With a robust balance sheet and a proactive approach to business development, the company is well-equipped to navigate this transition. Stakeholders can look forward to updates on ongoing negotiations and potential partnerships as Payfare aims to bolster its market position moving into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good evening, ladies and gentlemen, and welcome to Payfare's 2024 Third Quarter Earnings 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 evening, everyone. Joining me on the call today 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 of 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 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 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. Good evening, everyone. First, I would like to address the DoorDash nonrenewal. The outcome is, of course, disappointing for all Payfare stakeholders. I want everyone to know that we did absolutely everything we could to extend the contract. We offered all of the same product enhancements launched in our other programs, including credit, savings accounts and other financial and wellness benefits. To be clear, the outcome was not a function of program economics. We would have considered and accommodated any such requests. We also know that DasherDirect has been incredibly successful with penetration levels approaching 60% of active Dashers and being consistently ranked top financial services app in America according to unitQ. The details of their new product have recently been announced publicly. Dashers have also made their opinions known on social media. Based on what has been announced and taking into account user feedback, we continue to believe DasherDirect is a superior product. Ultimately, DoorDash wants to take the product in a completely different strategic direction. We thank DoorDash for its partnership over the past 4 years and wish them success in the future.

Having said this, DoorDash and Payfare have not yet agreed to transition terms and the existing agreement expiring in early 2025 remains in effect. We will continue to pursue the best outcome for Payfare stakeholders. Given the sensitive nature of these discussions, we are not able to address any questions related to transition negotiations. Following the DoorDash nonrenewal announcement and the impact of the share price, the Board of Directors agreed to launch a strategic review process that was in the best course of action to chart the path forward for Payfare.

We like the gig economy space and there are significant new opportunities in our pipeline, but there are only so many potential customers in that space. The concentration risk may continue to be an overhang in our business. The ultimate goal of the strategic review process is to diversify our revenue streams, all options being reviewed, including acquisitions, strategic investments, commercial partnerships, and the sales of business.

Following the announcement, we have had a significant amount of inbound and outbound interest. We are working through all possible options with our advisers, KBW, and we'll update the market accordingly if there is something to share. Given the confidentiality of these discussions at this stage, we are not able to take questions on the strategic review process.

Looking ahead, our business development pipeline remains active. As previously discussed, there were 2 significant U.S.-based gig economy opportunities under review. These have progressed to technical, operational and commercial due diligence. During the third quarter, we were also invited to participate in the third new RFP process. We believe any combination of 2 of the 3 pipeline opportunities could offset the lost DasherDirect GDV on a fully ramped basis.

On ADP, we have launched our pilot, Earned Wage Access product to offer EWA T4 employees in Canada. This is a significant opportunity with ADP processing payroll for approximately 4 million Canadians. We will provide more detail on the rollout of our EWA offering in the coming weeks.

Our program with Lyft and Uber continue to achieve record activity levels. As a reminder, we announced long-term extensions for both these programs earlier this year, and the associated cash flows from these programs are expected for the years ahead.

For Lyft, we also announced new value-added product enhancements to Lyft Direct, including balance protection, Lyft Direct savings and more. Active Lyft Direct users have increased more than 50% year-to-date, demonstrating the ongoing success of the programs. Users on Payfare's Uber Pro Card program have increased by more than 5x compared to the legacy program that was replaced by Uber Pro earlier this year.

I will now pass the call over to Charles for our financial outlook.

[Charles Park, executive]

Thanks, Marco, and good evening, everyone. With respect to our financial outlook for 2025, we have visibility to achieve $50 million to $60 million in revenue on our existing programs excluding any contribution from DoorDash. As Marco mentioned, the discussions with DoorDash are still fluid and we expect DasherDirect to continue contributing to revenue at a minimum through the end of the term of the existing contract, which expires in early 2025.

With respect to cost savings, we are in a position to rightsize our G&A expenses to match the revenue profile of our ongoing business. This is entirely within our control and dependent upon visibility of the pipeline opportunities that Marco discussed.

In an extreme conservative scenario, if all of those pipeline opportunities are pushed out to future periods, we have levers support on OpEx cost savings to operate the business at adjusted EBITDA breakeven and profitability growth as penetration of Uber Pro and Lyft Direct expands in future periods.

Our balance sheet remains as strong as ever to facilitate a transition period for our business. As at September 30, 2024, Payfare has over $100 million in cash, cash equivalents and guaranteed investment certificates. We do not expect any significant changes to our liquidity position going forward, considering the ongoing contribution of DasherDirect through sometime in Q1 2025 and the timing of OpEx cost saving initiatives that we -- as we get visibility in our business development pipeline.

Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Adhir Kadve from Eight Capital.

[Adhir Kadve, analyst]

I fully appreciate that you won't be taking any questions on DoorDash. So maybe I'll just ask on Marco's final comments there in his prepared remarks on the new RFP process and any combo of those 2 offsetting the loss of GDV from DoorDash. Can you give us a sense of time line as to when those programs would be potentially announced? Or kind of give us a little bit more granularity on where you are in those -- in the RFP process? And ultimately, of course, when an announcement could potentially come up?

[Marco Margiotta, executive]

Adhir, thanks for the question. I would say in terms of a definitive agreement, we're probably looking at late Q4, very early Q1. If that's the stage it gets to -- we are very late stage. We're doing technical and other forms of diligence as part of that process. Those are later stage. Those have been around for quite some time. There's a third RFP that we mentioned that we're in the mix floor. That 1 is much earlier stage, but could equally be in a definitive agreement stage, maybe mid-Q1.

[Adhir Kadve, analyst]

And then what would you have to, I guess, see from these 3 programs in order to give you a sense of the level of investment that you will have to make? Or do you guys kind of already have a lot of good visibility on that? I guess what I'm wondering is, like, let's say, by the Q4 call in March '25, will you have visibility on what you would be spending on for fiscal 2025 and beyond?

[Charles Park, executive]

Adhir, it's Charles. I can answer that. If you're talking about the ramp-up costs for the programs, we have a pretty good history in terms of ramping large programs. So we would have a general visibility into that, just knowing what the parameters are of the programs that Marco mentioned or kind of highlighted. If you're referring to kind of more on the OpEx side and the rightsizing, that will have clear visibility into as well, depending on the timing of the different programs or at what stage we're on in that pipeline. So I don't know if I've answered your question, but if I missed -- if I haven't, you can just maybe clarify, and I'll try to be more specific to it as well.

[Adhir Kadve, analyst]

No, I think that was good, Charles. I guess maybe then I'll ask the question in a different way. Was there a level of investment that you intended on making for the DoorDash program next year that you can potentially see falling off, like just using your Q3 -- Q2 numbers, you had approximately a run rate of, call it, $40 million in OpEx. Was there a -- what portion of that, I guess, were you intending on giving our spending towards the DoorDash program because I guess that's the 1 thing that we can kind of talk about that may not be continuing next year that you could definitively drop off at this point right now.

[Charles Park, executive]

Yes. So for that specific question, Adhir, I would say that we spend roughly $5 million to $6 million a year kind of in capital intangible assets and capitalized labor. Most of the work, if any, would it come in the form of capitalized labor, that's capitalized in our intangible assets and kind of amortize over a 2-year time period. So it would have kind of been in that kind of ballpark high level, but that would have been combined with some of the other programs that we are looking to onboard.

I believe if we were to have extended the agreement with DoorDash, so there probably would have been changed to kind of more of the OpEx economics that would have just flowed through on a quarterly basis as opposed to kind of a lump sum amount.

[Adhir Kadve, analyst]

Got it. And then last question, and I'll pass the line, guys. Just I guess on the ADP ramp, do you guys still kind of continue to see the program ramping here in Q4 and through fiscal 2025? Or is there any update to that time line?

[Marco Margiotta, executive]

I can take that. So I would say the path is still what we had highlighted earlier, which was Q4, nothing meaningful. It's still going to be much more of a trial period, if you will, with much more activity coming in Q1 and Q2 and forward from there. But I wouldn't expect anything material to transpire in Q4 from the ADP side of things.

[Operator]

Your next question comes from the line of Joseph Vafi from Canaccord.

[Joseph Vafi, analyst]

And once again, sorry about the DoorDash contract. I know you guys worked really hard on it. On these new logos, just maybe just 1 other follow-up from the previous questions. Are there existing providers in there right now? Or are these kind of -- and are they gig or are they kind of more T4 W-2 opportunities? Just trying to frame where they may be coming from in terms of what they already have in place? And then I have a quick follow-up.

[Marco Margiotta, executive]

Joe, it's Marco. Thanks for the question. The 2 that are late stage are in the gig space, like we have mentioned. There is another 1 that just came in, that's not gig. But for the 2 that are -- a little bit different in each scenario, 1 of them has more of a program that's out in market, probably with not the success that they expect just given all the numbers and metrics that we could produce and have produced since we've pioneered the space. And so that word is getting out there. We've had a ton of success. It's not only just a function of what we did for DoorDash, but even with the more recent success with what we have with our 2 other clients and the numbers we highlighted there, we think we'll get to those levels and beyond at some point in terms of penetration levels for those programs.

But to stick to your -- the question you had asked, the penetration rates that we would expect under our ecosystem and our offering would be substantially different than what these 2 gig players have in the market today.

[Joseph Vafi, analyst]

Got it. And I know you're going -- undergoing a strategic review, and obviously, I can't talk about that. But if you come out the other side and indeed, you're still cranking away. Are you -- I know you had your Paid App, your kind of product into the broader market outside of the mega gig platforms. Wondering if you're looking at that as an opportunity to kind of recharge and move forward here in 2025.

[Marco Margiotta, executive]

Yes, the way I sum it up for the Paid App, we've built that with the purpose of having more of a Neobank off the shelf -- for an offering off the shelf that we could provide, both in Canada and the U.S. markets. In Canada, that will come through the form of our EWA product, which will use the full technology we've built for that and some, and we'll continue to layer on new products and services.

On the U.S. side, that Paid App could become a Neobank offering for gig workers, specific to gig workers, taking everything we've learned under these white label scenarios. And figuring out what the commonalities would be for a 1099 and something to that effect. So there's definitely a lot of thought around it. And as the strategic review process kind of goes through its course, we're definitely seeing a lot of opportunities to use the Paid App in different facets, and that's what's of interest to us. Most of it would be 1099, but there's very specific niches of groups of 1099 independent contractors that the Paid App would be useful for, whether it's Paid App on its own or taking that same platform and then creating a specific Paid App tailored towards those certain niche opportunities, much like we've done for the gig space itself on the rideshare and food delivery side. So it's built and it's ready to be deployed on any distribution channels that take us outside of just the gig economy that we've been focused on and had a lot of success with.

I hope that answers your question.

[Joseph Vafi, analyst]

Yes, that was helpful, Marco. Thanks a lot, guys, and best of luck here through the end of the year.

[Operator]

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

[Stephen Boland, analyst]

I appreciate you can't comment on a few things here, Marco. But I'm just wondering if we could take a step back in terms of the progression of, like -- with the DoorDash, was that a public RFP? Or was that exclusive negotiations? Or did you find out later that there was somebody else in the tent? I'm just curious what the timing of that happened because I think even in the last call, you kind of talked about that maybe negotiations were ongoing. So maybe you could just give us a little bit of a time there -- time line.

[Marco Margiotta, executive]

Yes, Steve, thanks for the question. We have been pushing -- we typically -- in any contracts that we renewed, including the 2 that we just renewed, we try to get well ahead of it and have those negotiations ahead of time. So we kept going back with a number of different -- like we said in the script, products, features, functions that we wanted to add, knowing that we've seen success in other areas where we think we can add more product features and functionality to take the penetration rates even north of where we have them, which is close to 60%. That was ongoing. That continues to be ongoing as a rule of thumb. That's just not for renewals. That's in any program we have, we're always kind of reinventing and kind of staying ahead with technology and what we could offer. So that obviously ends up during a time we're getting close to renewal, and that's where we've been focused on trying to throw as much as we can. We had discussions around economics and willing to kind of listen and hear where that could go.

In other renewals that we've been through, it necessarily wasn't about economics. It was more of a product features and functions, and that's where we kind of stuck. But we did make it clear that we would be looking at economics if that was a pain point as well. It just became clear to us more recently that there was another player in the mix and that the contemplation was there. And so knowing what we know now and what's in market and what they think they're going to go to market with, it's substantially different than what we would offer. I think they've taken a path that they want to be parlaying the success we've had and taking much deeper look at how they want to offer this and the different products that they want to offer as part of it. And so -- we don't know the exact details of what that entails. But just looking at what they've announced to date, I would say it's substantially behind the current offering we have. So I would expect there's more to come.

[Stephen Boland, analyst]

But I mean you announced the strategic review, but you're also trying to get new customers on board. Is that not a barrier? Like are the companies or these gig platforms not coming to you and saying, like I mean strategic reviews can include a lot of things, including sale of the company, strategic partnerships, things of that sort. Is that not a question or a barrier to landing some new material contracts.

[Marco Margiotta, executive]

No. I mean, at this point, it hasn't been. There will be questions at some point. If anything, the way we've addressed it is by highlighting that this will be a net benefit to all stakeholders. So including potential new customers that are inbound potentially.

And another clarity on that, Steve. It's just to be very specific because -- one thing I didn't appreciate before knowing a strategic review process the way I do now at this point. There's an automatic assumption that strategic review involves selling the company. We have every option on the table, much like we've highlighted, every option out there, it's not to trigger any sale, it's to trigger whatever extracts the most value. We've been trying to fight concentration risk for some time. Even if we landed these other customers, we're still going to face that same battle. And so long-term contracts are the ones we have, hopefully, some new contracts with more long-term value to be added there. But we have to take the technology we have and kind of move away from this concentration risk. So with that in mind, if anything, if you could start a more long-term view of what the success of the company will be even for potential new inbound clients, I think they get comfort more than fear from that.

[Operator]

[Operator Instructions] There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.