Flywire Corporation (NASDAQ:FLYW) Q1 2024 Earnings Call Transcript

Flywire Corporation (NASDAQ:FLYW) Q1 2024 Earnings Call Transcript May 10, 2024

Flywire Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Flywire Corporation First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Akil Hollis, VP, Financial Planning and Analysis. Thank you, Mr. Hollis. You may begin.

Akil Hollis: Thank you, and good afternoon. With me on today’s call are Mike Massaro, Chief Executive Officer; Rob Orgel, President and Chief Operating Officer; and Cosmin Pitigoi, Chief Financial Officer. Our first quarter 2024 earnings press release, supplemental presentation and when filed Form 10-Q can be found at ir.flywire.com. During the call, we will be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these forward-looking statements. We will also be discussing certain non-GAAP financial measures. Please refer to our press release and SEC filings for more information on the risks regarding these forward-looking statements that could cause actual results to differ materially in the required disclosures and reconciliations related to non-GAAP financial measures. This call is being webcast live and will be available for replay on our website. I would now like to turn the call over to Mike Massaro.

Mike Massaro: Thank you, Akil, and thank you to everyone that is joining us today. We are pleased to share our Q1 FY ‘24 results with all of you here today, showing strong performance across the business. In a few minutes, Rob Orgel, our President and COO and Cosmin Pitigoi, our new CFO, will go into greater detail about the quarter. But first, I will start with a few financial highlights from Q1 2024. Revenue Less Ancillary Services was $110.2 million, increase of 24% year-over-year. Adjusted gross profit for the quarter was $71.9 million, an increase of 20% year-over-year. And adjusted EBITDA was $13.2 million for the quarter, increasing by $6.2 million year-over-year. These Q1 results are a great start to the year for Flywire.

Let me start with some of the core fundamentals that continue to drive our strong results. As a company, we have now exceeded over 4,000 clients. This is nearly a 2x increase since the IPO in 2021. We continue to strengthen all four verticals in numerous sub-verticals. We now have clients in over 50 countries. They have the ability to process payments in over 140 currencies from over 240 countries and territories, providing strong global diversification. We also enjoyed great revenue diversification with no client generating over 2% of FY ‘23 Revenue Less Ancillary Services and top 10 clients accounting for less than 13% of Revenue Less Ancillary Service. All combined with great NRR, logo retention and LTV to CAC. Our FlyMate span across 25 different countries, representing more than 40 nationalities and languages spoken, with a culture centered around execution and ambitious innovation that we believe continues to be a real advantage.

We are confident in our revenue momentum this year on a constant currency basis, as you will see from the guidance Cosmin will review. We also expect adjusted EBITDA margin expansion in line with our prior guidance. Now much has been written in Q1 about tightening student visa policies in many key education markets, the overall environment and numbers for international students are indeed important factors for Flywire’s education business. I want to reiterate my confidence in our ability to navigate these Visa changes, highlighting a few key reasons. First, our business has demonstrated resilience throughout other periods of visa-related change, a benefit of having an increasingly global and diversified business. In the UK, for instance, we nearly doubled our higher education revenue in the quarter, growing this market well above the company average, with outperformance driven by winning new clients and strong NRR.

In Canada, a number of our clients say that recent government study permit allocations are better than they previously expected, with a rolling ramp back to a normal admissions, speed and cadence. Second, we believe in the long-term growth of the international student market. Students wanting an international education will find it somewhere. We expect the existing Flywire footprint will capture a sizable portion of these payments. Our agent partners globally who help students in the application process, support this view that students are inclined to adjust their plans as needed to continue their education. We also believe that international students have a great value to their host countries and are the lifeblood of many universities and colleges.

Our clients will deal with the rephasing and period of adjustment, but expect in the long term, the policies we are discussing now will be moderated in the long-term growth trajectory of international education will continue. Lastly, we are still early in our journey to penetrate our large end markets and are demonstrating strong organic growth in the industries we serve. We also continue to grow with existing clients and win new clients, thanks to an effective go-to-market strategy and ongoing product innovation across our business. We also made great progress in Q1 against our 3-pronged strategy of optimizing our go-to-market capabilities, expanding our Flywire Advantage and strengthening our FlyMate community. As for go-to-market, we continue to optimize and invest to support our growth algorithm.

As I said last quarter, throughout 2024, we plan to increase our investment in sales and relationship managers by more than 15% in aggregate, spread across verticals and geographies. For example, in travel, we are already seeing early returns from this investment. We started the year with strong momentum in our new sub-vertical of ocean experiences, investing in a combination of marketing and sales efforts. We opened up some net new travel geographies, allowing our team, for example, to bring on new clients in Chile and Indonesia. Additionally, we continue to see great success in South Africa, another investment market for us, which has seen a 3x increase in clients over the last 12 months. While expanding our Flywire Advantage, we remain focused on product and payment innovation to power our vertical ecosystems.

For example, in healthcare, we rolled out integrated patient financing option funded by a third party to augment our powerful affordability suite. Our clients see this as a clear solution for providers and patients to balance affordability and increase collectibility. As our non-recourse patient financing solution gives patients longer payment terms and lower monthly payments to fulfill their financial responsibility. One client reported a 16% increase in cash from payment plans in just 6 months from our integrated financing solution, among other benefits. We go into more detail about our healthcare business in this quarter’s supplement. And we continue to be focused on strengthening and growing our FlyMate community. As I’ve mentioned before, we have a values-driven culture here at Flywire, which is a critical component to maintaining high performance teams.

Living our values like execution and ambitious innovation empowers FlyMates to collaborate and move quickly to solve hard problems for our clients. For example, this was prominently on display this quarter when a team of global FlyMates came together to sign a full suite deal for a large education institution in the United States. After meetings with our global team of sales, product, legal and implementation experts, the client was so convinced of the benefits of Flywire that they ended a multiyear relationship and contract. Our team is now underway with what is on track to be the company’s fastest enterprise-level deployment ever. Our culture is also underpinned by our commitment to giving back to the communities we serve. Last quarter, FlyMates from around the world came together to build a school and library for local students and families in Panama through a nonprofit partner of ours called School the World.

FlyMates came back with a new sense of perspective on the world, motivation in their work and fulfillment in their lives. As one FlyMate put it, I’m proud that Flywire is a global company with such strong social responsibilities and supports its employees in making the world a better place. The experience left an indelible mark on me, and I learned that my fellow FlyMates are endlessly supportive in kind and willing to do whatever it takes to get the job done. In closing, we are pleased with how the business performed during the first quarter, underscoring the resilience of our business and winning strategy across our verticals. I would now like to turn the call over to Rob Orgel, our President and COO to review some operational highlights from the quarter.

Rob?

Rob Orgel: Thanks Mike. Good afternoon everyone. It was another quarter of strong performance for the company with good results on both revenue and adjusted EBITDA. Our sales, client service and delivery teams delivered great results during the quarter. Here are just a few of the highlights. We added over 200 new clients, mostly signed in a single quarter. We saw particular strength in our travel vertical with an all-time high projected ARR signed during the quarter. We generated over 20% year-over-year pipeline growth across all verticals with B2B and healthcare giving their highest all-time pipeline creation in a single quarter. This quarter’s strong growth was driven by the continued execution of our five strategic growth pillars.

As a reminder, those pillars include growing with existing clients, adding new clients, expanding our ecosystem through channel partnerships, expanding to new industries, geographies and products and finally, strategic value-enhancing acquisitions. I’d like to briefly discuss how we grew across our four verticals during the first quarter, in line with those growth pillars. Starting with education with an estimated TAM of $660 billion, we saw an increase in new clients signed and an increase in our percentage of win rate compared to Q1 of last year. For example, we went live with Kookmin University in South Korea, which is a solid growth region for us. Kookmin University is a leading private university founded in 1946 and is the seventh largest university in Seoul.

It is home to over 24,000 students. With Kookmin University on board, Flywire now supports several prestigious universities in South Korea, bolstering our position as a leading provider of payment solutions in the Korean higher education market. We also signed our first K-12 school in Korea in Q1, expanding our reach beyond higher end into another active sector of Korean education and a testament to our growing recognition and impact in the region. We also continue to identify new use cases in education, where software drives value and payments, and we’ll continue to develop solutions drive growth and value for our clients. For example, we expanded the availability of our third-party invoicing solution, parsing the power of the Flywire platform to enable sponsors such as employers, government agencies or other organizations to pay students tuition and fees directly.

Institutions are reporting lower administrative burden, ease of reconciliation and increased revenue as part of their early benefits. One of our clients, which is a large Elite Research Institution is leveraging Flywire’s third-party invoicing solution to better serve their global student base. They have seen a 70% increase in timely third-party tuition collections after requesting payment via Flywire, and we are helping them manage these for more than 500 unique third-party vendors and organization. Once again, showing that Flywire has a proven track record of software drives value and payment and delivering strong NRR. In healthcare, with an estimated TAM of $500 billion, we saw a record new pipeline creation, which grew over 100% on a year-over-year basis as we generated momentum with specialty providers in the U.S. During the quarter, we signed several new healthcare clients.

We are continuing to expand with Conifer Health Solutions client, United Surgical Partners International. USPI is the largest ambulatory network in the United States with over 480 ambulatory surgery centers and surgical hospitals and over 50 health system partners across 35 states in the U.S. We are currently live with a portion of USPI’s network for surgical centers with more on the way. We also went live with a handful of Oracle Health CommunityWorks clients during the quarter. For example, we went live with the Henry County Medical Center, a large CommunityWorks facility, providing rehabilitation focused care in West Tennessee. There are hundreds of CommunityWorks hospitals on the Oracle Health platform that are well suited to become future users of the Flywire Health platform.

In travel with an estimated TAM of $530 billion, we generated an all-time record of projected ARR signed during the quarter as we brought on new clients across all our sub-verticals. In terms of expanding into new geography, we went live with Cruce Andino, one of South America’s oldest travel companies, providing travelers with sailing experiences among the lakes and ancient trade routes of The Andes Mountains and our first ever travel client in Chile. Flywire strategic partnership and integration capabilities with Art2Travel, a travel software company based in Santiago, Chile helped us win Cruce Andino. Our team is excited to work with new clients and our partners to deepen our local expertise in this corner of the global travel market. As Mike mentioned earlier, we are seeing early success in our ocean experiences sub-vertical and saw strong traction in Japan during their peak ski season in January and February.

Finally, in B2B business, which covers a broad TAM estimated to be about $10 trillion. We increased the average deal size, increased our number of client wins, increased projected ARR compared to Q1 of last year and had our highest pipeline generation quarter-to-date for our B2B team. We continue to have great traction in manufacturing and distribution clients, which now represent roughly quarter of our clients in B2B, by providing sophisticated and integrated accounts receivable solutions. Flywire stands out in our ability to tackle the complex payment challenges of distributors and manufacturers with global customer bases, where our combination of international and domestic payments capabilities, our ability to accept card and non-card payments and our integrated cloud-based payments platform infrastructure enables us to deliver seamless solutions that are a major step forward for many B2B companies built in the early phases of digitizing their financial systems and processes.

For example, this quarter, we added MOCAP, a Missouri-based manufacturer of plastic and rubber components. MOCAP transacts in 18 countries outside of the U.S. and we using Flywire as their exclusive payment platform for both e-commerce and traditional invoice flows. Additionally, we went live with MC3 Group, a computer hardware distributor formed in 2002 with over 4,000 wholesale clients globally. Flywire has helped MC3 expand local payment options for international customers and reduce cost to receive these payments. Stepping out of our verticals and moving to our efforts towards efficiency and scale, we remain committed to control costs and invest prudently. We continue to improve the scalability of our business model as operating expenses as a percent of revenue continue to fall.

In Q1, expenses as a percent of revenue were down 6 points versus Q1 2023 and down 5 points sequentially. More than half of our hiring this year has been in our go-to-market teams reflecting Flywire’s commitment to revenue and customer growth and also showing that our operational teams are scaling cost effectively. Flywire enjoys operating leverage because of our shared service model around 2 of the 3 core elements of the Flywire Advantage. That is our global payment network is shared by our verticals and our core payments platform is leveraged as part of the solution for each of the verticals as well. We remain vigilant to deliver on the top and bottom line growth, reflecting the strength of our business and business model. With that, I will now turn the call over to Cosmin to go over our results for the quarter as well as discuss guidance for Q2 and 2024.

Cosmin?

Cosmin Pitigoi: Thank you, Rob, and good afternoon, everyone. As many of you know, I joined about 2 months ago, and I’m incredibly excited about the long-term potential of the business as I will outline shortly. And especially energized by the culture at Flywire, I look forward to helping provide leadership to Flywire through the next phase of growth and to continue to deliver value for our clients, payers, partners, FlyMates and shareholders. Today, I’ll provide an overview of our results for the first quarter and then discuss our outlook for Q2 and the fiscal year. As Mike and Rob mentioned, we had a strong start to the year across many of our operating metrics and financials. Payment volumes during the quarter were $7 billion, which represented an increase of 23% compared to Q1 2023.

From a monetization standpoint, our spreads have remained relatively consistent and stable over the last several reporting quarters. Revenue Less Ancillary Services was $110.2 million in Q1, representing a 24% growth rate compared to Q1 2023. Our revenue growth rate was driven by increases in transaction payment volume as well as our StudyLink acquisition, which contributed $2.1 million to platform and other revenue in the quarter. We saw strong growth despite a high single-digit percentage headwind related to our Canadian higher education business. Our Q1 Revenue Less Ancillary Services outperformance compared to our expectations was primarily driven by stronger-than-expected volumes from UK higher education clients and stronger-than-expected growth from new travel accommodation clients in Europe and Asia.

FX rates were relatively flat year-over-year. However, FX was a $1.2 million headwind against the guidance we provided for Q1 based on December 31 exchange rates. During the quarter, transaction revenue increased 26% year-over-year, driven by a 33% increase in transaction payment volume, primarily in our International and U.S. education vertical as well as travel. Platform and other revenues increased 16% year-over-year, primarily driven by a 6% increase in platform and other revenues volume as well as from platform fees that do not carry payment volumes, specifically revenue associated with the contribution from StudyLink. Adjusted gross profit increased $71.9 million during the quarter, 20% above the $59.9 million generated in Q1 2023. Adjusted gross margin was 65.2% for Q1 2024, down 200 basis points from 67.2% for Q1 2023.

The year-over-year change in adjusted gross margin was driven primarily by the strong growth of our transaction revenue versus our platform revenue, particularly from the success of our travel vertical and of our land-and-expand strategy, where we won U.S. domestic higher education business, both areas where credit cards are more prevalent. As we’ve highlighted in past quarters, FX shifts occurred during settlement of transactions. This quarter, these shifts resulted in losses that impacted our cost of sales. In prior quarter, these impacts were largely offset by FX hedges, resulting in a mitigated impact on adjusted EBITDA. Adjusted EBITDA grew to $13.2 million for the quarter, almost double of $7 million generated in Q1 2023. Adjusted EBITDA margin was up over 400 bps year-over-year.

The increase in adjusted EBITDA was driven by revenue outperformance and cost management. With respect to capitalization as of March 31, 2024, we had $619 million in cash and cash equivalents, no long-term debt and 122.3 million shares of common stock outstanding. Similar to adjusted EBITDA, we have seen strong cash flow generation and growth over the last 12 months. In short, we have ample opportunity to further build on our capital allocation strategy and execution, both organically and inorganically. Moving on to guidance. For full year 2024, we expect Revenue Less Ancillary Services to be in the range of $478 million to $498 million based on spot foreign exchange rates as of March 31, 2024. This represents a year-over-year growth rate of 28% at the midpoint.

The $8 million reduction at the midpoint from prior guidance is driven by changes in FX. This is due to the strengthening of the dollar since our last projections based on the spot FX rates as of December 31, 2023, which reduced our international revenue when reported in U.S. dollars. Please note that the U.S. dollar has continued to strengthen since March 31. We expect to deliver full year 2024 adjusted EBITDA in the range of $64 million to $75 million. At the midpoint of our full year 2024 guidance range, we expect to generate approximately 320 basis points of adjusted EBITDA margin improvement, which is in-line with our prior guidance. Q2 2024 Revenue Less Ancillary Services is expected to be in the range of $96 million to $104 million. This guidance relative to our thoughts earlier this year is primarily impacted by the change in the FX spot rate, as already discussed and Canada.

We expect more of our Canadian higher education revenue to be realized in the second half of the year versus more evenly distributed as we previously expected. Rounding out the guidance discussion, we expect Q2 adjusted EBITDA to be in the range of $1 million to $4 million. As a reminder, Q2 has been the lowest quarter for adjusted EBITDA over the past few years due to the seasonality of our business. And we expect that our traditional seasonality will be repeated. In closing, I want to step back and provide my early perspectives on the long-term growth opportunity of Flywire. Starting outside and it’s clear that while Flywire has continued to gain market share given its compelling client value prop, our four unique verticals are in very early stages of automating their payment capabilities, with a much more customized approach than other verticals that benefited from standard and legacy payments offering.

So as we look ahead, we have low single-digit penetration in these large verticals and we believe we’re uniquely positioned to continue to capture share given our software solution. The opportunity to solve these multidimensional customer problems starts with large, complex cross-border payments, but increasingly opens the door to cross-selling into domestic capability. I’m committed to continue to drive internal and external transparency in how we are executing our strategy against our growth algorithm. First, we’ve talked about net revenue retention rate, or NRR, which has been stable over the years. To unpack that, there are two main components. First, as I just mentioned, we see high single to low double digits TAM growth in our four verticals based on external factors, including secular trends.

Second, we believe we can add meaningful growth from expanding with our existing clients. These two drivers combined have been driving approximately two-thirds of our growth, which has been quite stable over the years. In addition, roughly one-third of our growth comes from the combination of ramping last year’s client additions and new clients added in year. On top of this, we can accelerate even further through early innovations, such as our payer services. Finally, we’re continuously evaluating strategic value-enhancing acquisitions. All of this topline growth is expected to result in even faster bottom line growth as we drive productivity through investments in scale, data, systems and automation. I am excited about the journey ahead as we are clearly still early in solving unique customer problems at scale.

I’ll now turn it back over to the operator for questions. Operator?

See also 15 Highest Paying Countries for Interior Designers and 10 Best States for Technology Careers in the US.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from the line of Dan Perlin with RBC Capital Markets. Please go ahead.

Dan Perlin: Thanks. Good evening, guys. I just wanted to go back to the Canadian market issue. Mike, I just want to talk a little bit more, if you could, about just how comfortable you are ultimately with those trends? I mean, understanding like student visas are being used as kind of immigration tools and other things. And it seems like that was getting a little more pervasive. So just maybe remind us the visibility that you have. Part of the second half recovery it looks like you got a recapture rate assumption in there. Where is that coming from? Is that from your agents where you get the visibility there? Just anything incremental there would be helpful.

Rob Orgel: Hey, Dan, it’s Rob. I’m going to jump in here. And why don’t I start with giving you some sort of that perspective from the market, from the clients from the understanding of the regulatory conversations that are happening in Canada, and then we can also get into sort of the guidance piece so that you can have clarity on that. So from the last time we all talked about Canada, there’s considerably more clarity around sort of what’s happening for the schools and how they are able to move forward. So they have clarity on their allocations, they have clarity on the process. They are allowed to use for admitting students, and they’re moving forward with what we’re calling a ramping return. And what that means is they now are able to pursue what you’d call a normal set of activities that leads to enrollment, that leads to payments, obviously, taking into account what are the caps and allocations that they were given under the announcements became right around the end of March, beginning of April.

And I was up in Canada. I spent time talking with our client teams and the general sense of things is that the actual results are sort of less extreme and more manageable than what they feared when they were operating with sort of almost complete uncertainty. And so that understanding, the understanding from talking to our agents about their plans for being able to resume activity gives everybody more comfort for how they move forward. So the way we do our modeling, and I’ll hand off to Cosmin here in just a second, is that we build our guidance based on a bottoms-up model. So there’s been lots of discussion about sort of how do you approach this, we’re able to approach it from essentially a school-by-school perspective, understand their allocations – their allocations and what that will mean relative to their expectations.

And with that, we’re able to build up, obviously, what was summarized at the province level, but we’re actually doing it from a bottoms up, essentially school-by-school level inside our guidance. So with that, Cosmin, do you want to just add?

Cosmin Pitigoi: Hey, Dan, thanks for the question. So let me put some numbers around kind of how we’re thinking about the guidance and then as it relates to Canada. So first off, for the full year, as we’ve said, that we’ve maintained the guidance based on a constant currency basis. So the main driver there is FX. As we think about Canada, and you’ve sort of heard Rob talked about it, let me just talk about 3 specific areas that I think were called out. So Q2, full year and then second half recapture in particular. So for Q2, we – what we’re seeing is more of a gradual rolling ramp in enrollment. So rather than sort of a bounce or surge. So with that, we’re assuming is roughly a mid-single-digit negative revenue impact in Q2.

Second, for the full year, if you recall, we talked about low teens in the past – what we’re seeing now is closer to a mid-teens million revenue impact. So again, you’ve heard us talk about Q1 initially, it was sort of mid-single and then we updated everyone to sort of be mid to high single digits in Q1 impact. All of those things, again, as you saw in Q1, we outperformed. And so that was the impact in Q1. Now – to your question on recapture and how we think about second half, that, as you see in our supplemental materials, we wanted to make sure that we add a lot more transparency on this point. So what we have right now as far as recapture in international students going to countries outside of Canada is a mid-single-digit million dollar revenue in second half.

So that is international students going into those other countries. So again, as we step back, we feel good about the range that we have around the midpoint and also just that Canada will be a growth market for us as we get through some of these external events.

Dan Perlin: Great. That’s super helpful. Just quickly, Cosmin, since I’ve got you there. Maybe as you said, you’ve been there for a couple of months now. FX definitely plays a big swing factor in a lot of different areas for the company. And I’m just wondering, as you think forward about like philosophically, how you want to present guidance and maybe numbers or KPIs? Have you given any thought to other ways in which to do that, FX-neutral guidance etcetera? Just anything around what you might be thinking would be helpful there as well? Thanks.

Cosmin Pitigoi: Yes, of course. And that was probably one of the first things I heard when I came in and I come from sort of a background of talking about FX neutral or currency – constant currency, growth rates. So that’s something that we will be looking to build and be able to start looking at that going forward. So that is, in principle, how we think about the true kind of growth of the business outside of the noise of FX, especially as you think about our business, as you know, more than half of our revenue is outside the U.S. So obviously, that’s going to have a pretty large impact. So maybe since I realize we have a big FX factor here for the full year. I can just unpack that for you quickly in terms of how we think about currencies.