Payfare Inc

TSX:PAY

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to Payfare's Fourth Quarter and Full Year 2023 Unaudited Financial Results Conference Call. [Operator Instructions] This call is being recorded on Monday, April 29, 2024.

I would now like to turn the conference over to 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 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 such statements are made pursuant to the safe harbor provisions of and are intended to be forward-looking statements under applicable Canadian securities legislation. In addition, all financial metrics discussed on this call are based on unaudited results for the quarter and year ending December 31, 2023.

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 SEDAR, 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 was posted on our website corp.payfare.com/investors.

I will now turn the call over to Charles for an update on the filing of our audited financial statements.

[Charles Park, executive]

Thanks, Cihan.

As referenced in each of the previous press releases on this issue, the delay is solely due to the delay in receiving the system and organization controls, or SOC1, auditor's report from Payfare's material vendor which is required in order for our auditors to issue their opinion. By way of background, the SOC1 auditor's report evaluates the vendor's business process and information technology controls that are relied upon by all the vendor's customers, including Payfare. For reference, the vendor has provided the SOC1 auditor's report by December or earlier since we began doing business with them over 4 years ago. We are in daily contact with the vendor's senior executives as they work with their external SOC1 auditor to complete the report.

Based on the updated timing for the delivery of the SOC 1 report as confirmed by the vendor's auditors, Payfare now anticipates it will complete its annual filing by May 22, 2024. Importantly, this delay has no impact in our financial results, and we have reiterated our revenue and adjusted EBITDA guidance throughout this period.

To further demonstrate our position, we have elected to release summary unaudited financial results for the quarter and year ended 2023. And we have also introduced 2024 financial guidance. While this unfortunate issue has been entirely outside of our control. We look forward to submitting our audited financial results in the coming weeks.

I will now turn it over to Marco.

[Marco Margiotta, executive]

Thanks, Charles.

Starting on Slide 3 of our presentation deck, I am once again proud to present another record operating quarter for Payfare. This was our fifth consecutive earnings positive quarter. Our profitability and free cash flow growth continues to be industry-leading in the earned wage access space based on industry data that we track. 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'm pleased to say that we have delivered on every strategic objective we set out for ourselves in 2023. This was by no means an easy task. Last year, we spent the bulk of our time, energy and effort rebuilding our entire Canadian platform from the ground up to match all of the value and capabilities we offer within our U.S. programs. We did this to realize value on the two new partnerships launched shortly after year-end with more opportunities in our pipeline as well.

Our announcement with Uber to launch the Uber Pro Card was significant. I want to be clear, that this is not -- this is a net new program with a brand-new digital banking app built on an entirely new tech stack and payments infrastructure base. Most importantly, our Uber Pro Card is now distributed by Uber to their entire workforce and as part of the new driver onboarding flow.

In the first two months of launching the Uber Pro Card, we have already almost tripled our Canadian user base. Post year-end, we also successfully launched our embedded finance offering with a global big box retailer to provide instant pay for their newly introduced last mile gig delivery workforce in Canada. We look forward to sharing more details of this program as our partner continues to build out its gig platform. These new Canadian programs are major new growth avenues for Payfare and could account for over 10% of our active user base at scale compared to less than 1% of our business coming from Canada today.

We are also pleased to launch our first Canadian -- or sorry, our first credit-like product called Back Up Balance with the new Uber Pro Card. Cardholders that utilize this feature can get up to $50 when they need it most. Early indications suggests that the Back Up Balance is providing a key benefit to our cardholders while boosting card adoption levels.

Our earned wage access for W-2 and T4 hourly employees, we successfully executed a commercial agreement with ADP to offer EWA to the Canadian market. With our first distribution channel in place, we will continue to build our necessary payroll and time and attendance integrations to begin rolling out EWA in Canada. I would like to congratulate our entire team for all of the efforts they put into executing on these initiatives.

Turning to Slide 5. I would like to talk about our strategic objectives for 2024. First, we have introduced 2024 revenue and EBITDA guidance of $235 million to $245 million and $30 million to $35 million, respectively, which equates to a midpoint growth of 29% and 51% over 2023. We have given ourselves more flexibility on our adjusted EBITDA guidance to allow us the opportunity to continue investing in growth in infrastructure when appropriate or where appropriate to expand our long-term free cash flow generation.

In addition to growth, 2024 will be a pivotal year in extending our existing gig platform partnerships for the long term. With the launch of the Uber Pro Card, that will take the total tenure of our relationship with Uber to 12 years. Our partners prefer to work with us because of the superior value-add service delivered to our cardholders as demonstrated by our #1 financial services app ranking on Unit Q which is in turn -- which in turn enhances their profitability by significantly increasing worker engagement and reducing turnover. We expect to announce meaningful progress on this front over the coming course of the year.

Turning to Slide 6. The fourth quarter was another record for revenue and GDV, both up 30% and 36% year-over-year, respectively. Our GDV growth continues to outpace our user growth, which demonstrates that Payfare is winning additional wallet share with our users.

With that, I will turn it over to Charles to review our unaudited Q4 financials.

[Charles Park, executive]

Thanks, Marco.

Turning to Slide 8. We generated record quarterly revenue of $50 million, up 30% 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 was also a record $13.2 million at a 26.4% margin. Gross profit dollars were up 59% year-over-year. Our gross margin primarily benefited from volume-based pricing improvements with our higher active user base and GDP volumes.

Specifically, I would like to emphasize that we have crossed through 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. We continue to significantly expand adjusted EBITDA, which was $7.5 million in Q4, up 108% year-over-year and achieved a record margin of 14.8%.

On Slide 9, we summarize our current financial condition. We ended the quarter with $78.2 million in cash. I would also like to point out a positive change in our balance sheet, restricted cash has been reclassified to prefunded deposits. The prefunded deposit balance represents the funding of earnings payout by our gig platform partners and is now equal to the prefunded liability line item in our balance sheet. Previously, the restricted cash balance would run higher than the prefunded liability because it included gross program fees held by our bank sponsors to be remitted to Payfare after settlement of networking issuer charges. This update positively impacted our cash balance by approximately $17 million at the end of the fourth quarter.

Our financial condition is strong. We had 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 remain well positioned to deploy capital to grow our business.

Finally, I would like to comment on our guidance for fiscal 2024 and our outlook for the first quarter. Our gig platform partners invested heavily in worker acquisition campaigns around the holiday season, which in turn drove strong financial performance for Payfare in the fourth quarter of 2023.

As end user demand for delivery and rideshare normalizes for first quarter seasonality, our Q1 2024 revenue is tracking at mid-single-digit percentage growth over Q4 2023. In addition, the first quarter of the year captures both bonus incentive compensation for our employees for the prior year and is the period in which we hire for growth initiatives for the year ahead. Both of these points will increase our G&A expenses in the first quarter. Directionally, we expect a 20% to 25% decline in first quarter adjusted EBITDA relative to Q4. This is in line with normal seasonality in our business.

Q3 and Q4 represent the strongest quarters in terms of profitability for Payfare as demonstrated in 2023. Importantly, our full year revenue and adjusted EBITDA guidance reflects very strong year-over-year growth of 29% and 51%, respectively, and incorporates the quarterly seasonality in our financial performance.

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

[Cihan Tuncay, executive]

Thanks, Charles.

With respect to the share price, 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 through 2024 as per our updated financial guidance. The second lever is expanding our gig platform partnerships and winning business in new verticals, including EWA. The third lever is new products, which should maintain our momentum in increasing adoption rate.

In addition, we remain ready to deploy capital for growth initiatives. That said, we're also disciplined with our capital. Our objective is to become the largest EWA operator as the only player in the space capturing both gig workers and regular W-2 or T4 employees.

We have the resources to achieve this organically over time or inorganically with the right partner. Our advantage is that we are a self-financing business and as private market valuations pull back, we will be ready to act on inorganic growth opportunities as they arise. And with that, operator, we are now ready to take questions.

[Operator]

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

[Joseph Vafi, analyst]

Thanks for posting the results before the audit. Number one, I just wanted to -- could you go into a little more detail for us on some of these new partnerships? And are they included in your guide? And then secondly, on the new partnerships, should we expect as those ramp to see any kind of a different gross margin profile for them, and that would be ADP, the Canadian big box retailer and the new Uber program? And then I'll have a follow-up.

[Marco Margiotta, executive]

Charles, do you want to go ahead with the guidance?

[Charles Park, executive]

Yes. So I'll answer the first part of that, Joe. In terms of guidance, some of these new initiatives, other than the Uber Pro, are not included in the guidance that we've kind of provided to date. ADP, as an example, they'll likely be build required in 2024, that's commenced, but the majority of the revenues and profitability will see coming through likely in 2025. On the other piece on the margin profiles, Marco, maybe you can speak to that a little bit just in terms of what the new programs we do. But obviously, there will be a diversification there coming through once the builds are up and running.

[Marco Margiotta, executive]

Yes, Joe, just in general, the EWA space as it stands today and how things are being done there. We won't get too much color on how we'll be a little bit different when we go about doing it. It is a higher-margin business. And we expect to play initially just like the other players are in terms of how they operate and how they provide that product and that service offering in market today in Canada and the U.S. But we do have other opportunities where maybe you scale back some of that margin in order to pick up a longer-term relationship and pick up that consumer as an anchor kind of banking relationship that parlays into other services offered. But at least out of the gate, we expect the margins to be significant. Probably in the 70% plus range.

[Joseph Vafi, analyst]

Great. That's great to hear. And then just as a quick follow-up, are there any plans to roll out this credit product with Lyft and DoorDash that you're rolling out with the new Uber program in Canada?

[Marco Margiotta, executive]

Thanks, Joe. I guess the short answer would be yes. Obviously, it depends on the appetite of each of our clients. But it is something we have available to not just the current program, but also other programs on both sides of the border. So the short answer would be yes, but obviously dependent on each client.

[Operator]

Your next question comes from Adhir Kadve with Eight Capital.

[Adhir Kadve, analyst]

I'm going to ask on the Uber Pro business in Canada. It's good to see the 3x growth in the Canadian users. But when you think back to the DoorDash program, for example, when you compare the kind of adoption rate, the user ARPU, how does this kind of compare to that program and the rollout of the Lyft and DoorDash programs before it?

[Charles Park, executive]

Adhir, thanks for your question. In terms of the rollouts, what I would say is relative to, let's say, a Lyft or a DoorDash program rollout, definitely, for the Uber program, early days, we're seeing a higher adoption percentage conversion rate. Part of that could just be that we had an existing program that we were running obviously in the past. So we had a little bit of name recognition. But I think a secondary part of it really have to thank Uber in terms of their commitment to this product and getting this launched and the marketing efforts that went behind us as well. So we've definitely seen a historically higher conversion rate early days in the program.

As far as ARPU, we had line of sight into kind of the ARPU based off of the lower user base that we had in the legacy program. But I'll probably hold off on commenting on that until we have a little bit more traction. So probably in a couple of weeks when we do our reporting for Q1, we can maybe elaborate a little bit more in terms of what those numbers look like for any case.

[Adhir Kadve, analyst]

Okay. Great. And then just on the core business right now, the Lyft and the DoorDash, obviously, you guys highlighted massive user base growth. How are those guys kind of thinking about fiscal 2024? And what are the conversations you're having with them on continuing to scale those programs and just any conversations you're having with Lyft and DoorDash that we could continue to see. I think, last quarter, you mentioned 20% kind of growth coming into -- coming from those programs? Are you kind of still seeing it around that level? Or is it kind of accelerating? Any color again the core programs would be great.

[Charles Park, executive]

Go ahead, Marco. I can actually let you say...

[Marco Margiotta, executive]

Yes, I can kind of kick it off. I think a lot of what we're doing with those other two clients in the U.S. in particular, is really focusing on new product features and enhancements to kind of keep those adoption rates getting higher and higher. And so -- but in terms of baseline growth in terms of the underlying business, we don't really get into details about that with them specifically. But we're doing everything in our power to try to make sure that any user that's onboarded sees our product and then also follows up if they had hesitation in the first initial impression was in front of them, there might be an opportunity to add new products and features that entice them to get them across the line. .

So you'll be seeing a ton of new product features and enhancements with all our programs across the board. And so stay tuned, there's a ton of them that we've been working on that will get out to the market. You'll be made well aware of what some of those enhancements are. But Charles, I don't know if you had anything to add there.

[Charles Park, executive]

Yes. If I can make a distinction maybe between Lyft and DoorDash. Obviously, DoorDash, we've enjoyed a great success in terms of the early and continuing penetration. Lyft, we saw significant growth on a percentage basis. I think we mentioned in prior quarters, exceeding kind of our pre-COVID levels and then going well past those numbers as well. On a percentage basis, probably we're looking at Lyft in a higher percentage growth. But in terms of aggregate net new users, obviously, DoorDash is going to bring in that lion's share of the business as well.

But to answer it in an overall sense, Adhir, I think there's still continued growth opportunities and are expanding that penetration and growing the business. We work closely with our partners to see how we can access the untouched markets there and go after the users who have not signed up today as well through various innovative marketing programs and different reach outs as well. So existing business, I think, lots of opportunity. And obviously, the new stuff that we've announced, we're very excited about in 2024.

[Operator]

Your next question comes from Hal Goetsch with B. Riley Securities.

[Harold Goetsch, analyst]

I was hoping you can maybe help us understand the unit economics of the credit product. And I know it's a small dollar amount that's terrific. Can it, over time, if successful grow larger than the, I think, the dollar nominal amount. And -- but can you just basically describe the economics of it and how you get paid for this?

[Marco Margiotta, executive]

So we're offering the program as more of an ask from some of our big platforms in this stage, Uber Pro had what they thought would be a very compelling opportunity to have those drivers kind of get access to cash than they immediately needed. Hopefully, for when they need fuels, they can keep both or keep going out and driving more. But the economics for us, it's more about adoption rates and having a product feature that might entice and then retain that user where they can get access to things like this $50 credit with us versus anywhere else. And so for us, there is no unit economics other than the fact that the other things I mentioned would kind of increase the adoption and retention.

So with that, we're now also taking the credit risk associated with it. But over time, as we see fit and as the opportunity arises, obviously, we'll learn a lot from what these metrics tell us and maybe diversify away from just offering just this to just one partner, spreading it around and then offering different credit products that have a very good risk/reward relationship based on the data that we're collecting at this point.

[Harold Goetsch, analyst]

You wouldn't see like maybe you get a $50 advance. You drive all night, you repay like $52.50 or something like that. That's not part of -- that's not.

[Marco Margiotta, executive]

No.

[Harold Goetsch, analyst]

Okay. Okay.

[Operator]

Your next question comes from Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Just to start, Marco, did you say you are taking the credit risk for the initial rollout of the $50?

[Marco Margiotta, executive]

No, we are not.

[Stephen Boland, analyst]

Okay. Can I ask then, is it the platform that's taking the credit risk? Or is there a third party in there?

[Marco Margiotta, executive]

Platform.

[Stephen Boland, analyst]

Okay, that's great. And maybe you could just go -- like you mentioned ADP and the rollout of EWA, not just to delivery, but you also mentioned T4. Maybe you could just explain the partnership there and the economics maybe A little. I know you probably won't get into too much of it, but maybe you can just explain how that would work.

[Marco Margiotta, executive]

Yes. I'll explain the relationship, Stephen. Yes, I won't speak too much about the economics just because it's kind of confidential at this point. We'll learn about it as different things kind of arise. But at this point, we'll stick to the overall structure and the relationship. So we will be an ADP marketplace partner. There is currently no dominant relationship in that mix. There's a great opportunity for us to be that dominant player, not only just with ADP, but in the broader Canadian market. Huge market, I mean, 40 million population and to start with a partner like ADP, where there's the lion's share of that market available through this partnership is a great start to get into the space.

We've been looking at many inorganic opportunities to kind of tackle the whole EWA space. It's always been in our strategic road map. It's -- the timing is perfect, the timing now. That space continues to grow enormously. And so to start with a leaker in the space like ADP in Canada, is a great way to also utilize the infrastructure we built out last year, which is predominantly used to launch the Uber Pro Card as well as the big box retailer.

And so -- that whole partnership with ADP or TSP in their marketplace as well as when sizes of employers get to a point where there's other solutions that could be had something more tailored, we'd also tap into what we've done for gig partners in terms of customization and branding. So it's putting us in around -- not only be there just on the marketplace, but as well as provide different opportunities for larger employers that want their own kind of personalized approach on how they approach EWA.

[Operator]

Your next question comes from Mike Rizvanovic with KBW.

[Mehmed Rizvanovic, analyst]

Just to get into the weeds a little bit on this ADP to the extent that you could tell us, do you have a sense of timing on size of this market? When do you think it could become a meaningful contributor? Do you have any numbers or parameters you can give us? I'm just trying to think about like what's -- how big this opportunity is for Payfare in Canada?

[Marco Margiotta, executive]

I'll keep it super high level, Mike, just to highlight that the TAM available through the ADP partnership we'd probably see more workers in that than we have aggregated in our gig economy partners. And so it's extremely sizable. It won't launch likely until early Q4, late Q3 would be the expectation. We'll keep the market updated as we get through it. It's a big undertaking to kind of get there. The backbone with the card and the mobile app and all the distribution in terms of payouts is in place, thanks to a lot of work we did last year to build up the Canadian infrastructure. But in terms of meaningful numbers, that won't happen until next year.

[Mehmed Rizvanovic, analyst]

Okay. And is it Payfare -- is it -- you guys will be driving that customer pickup? Or is it both Payfare and ADP -- just in terms of how you get the clients, is it paid [indiscernible] or both?

[Marco Margiotta, executive]

It will be both. It will definitely be both.

[Operator]

There are no further questions at this time. Please proceed.

I'm sorry, there's another question from Hal Goetsch with B. Riley Securities.

[Harold Goetsch, analyst]

Is there any color on your capital allocation, stock buyback you could share with us at this time? Thanks.

[Charles Park, executive]

It's Charles. Just to clarify, when you mean capital allocation, just -- are you just talking about our CapEx spend for 2024 forecast?

[Harold Goetsch, analyst]

No I mean the share repurchase, you had to have approval, I think, last -- announced it late last year. Can you give us any color on...

[Charles Park, executive]

So the NCIB has just been paused, obviously, until we get some of the annual reporting sorted out house. Once the reporting is completed, we'll probably issue new updates in terms of what the plan is on the NCIB. So I won't speak to that just yet just because we're in a bit of a holding planning at this point in time. But once the annual filings have been done, we'll make sure that there's a press release that gets sent out regarding that.

[Operator]

There are no further questions at this time. Please proceed.

[Cihan Tuncay, executive]

Thanks, everybody, for joining us today. Have a great day, and we look forward to reporting our Q1 results in the near future. Thanks very much.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.