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Edited Transcript of ADYEN.AS earnings conference call or presentation 22-Aug-19 1:00pm GMT

Half Year 2019 Adyen NV Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Adyen NV earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ingo Jeroen Uytdehaage

Adyen N.V. - CFO & Member of Management Board

* Pieter Willem van der Does

Adyen N.V. - Co-Founder, CEO, President & Member of Management Board

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Conference Call Participants

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* Adithya Satyanarayana Metuku

BofA Merrill Lynch, Research Division - Associate

* Daniel Jacob Swart

Kempen & Co. N.V., Research Division - Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* Hannes Leitner

UBS Investment Bank, Research Division - Equity Research Analyst of Software

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* Jeffrey Brian Cantwell

Guggenheim Securities, LLC, Research Division - VP and Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Josh J. Beck

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Joshua S. Masser

Morgan Stanley, Research Division - Equity Analyst

* Nooshin Nejati

Deutsche Bank AG, Research Division - Research Analyst

* Ron Heijdenrijk

ABN AMRO Bank N.V., Research Division - Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

* Sanjay Harkishin Sakhrani

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding, and welcome to the Adyen First Half 2019 Results Conference Call. (Operator Instructions)

I would now like to hand over the conference to Mr. Pieter van der Does, CEO of Adyen. Go ahead, please.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [2]

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Thank you, and good afternoon, everyone. To start, I would like to give you a brief update on the first half. Then Ingo will take a deeper dive into the numbers. After that, we will be happy to answer any questions. For more detail on these results, you can find our shareholder's letter on our Investors Relations website.

We continue to see strong profitable growth in the first half. And as in previous periods, this was mostly from existing merchants. Processed volume for the period was EUR 105 billion with net revenues coming in at EUR 221 million. There's a lot to be excited about as macro trends continue to benefit us, including an increasing cross-border commerce and a general shift away from cash to cashless payment methods.

However, what excites us most is the ongoing trend of shifting shopping behavior and expectations. Shopping is changing, and we are at the forefront of helping merchants adapt to this new environment. Regulatory shifts increase complexity for merchants, too. One example is PSD2. Solving for all this complexity is what we're good at. We pride ourselves on preemptively clearing these hurdles for our merchants.

Meanwhile, we're also spotting new avenues for growth in evolving business models. Marketplaces and platforms are especially interesting as they allow us to cater for the smaller seller, unlocking the full Adyen solution for them. It's no longer just for enterprises. We also continue to invest in merchant-driven innovation, improving many of our key products to solve real problems. It's our belief that you will do well in this space if you make solving problems for merchants your core business.

We saw solid contributions from all growth pillars with main driver being the continued growth of the enterprise e-commerce merchants. Unified commerce is also developing positively. We're having success in the retail vertical with positive early signs in the quick-service restaurants and hospitality, too. As I mentioned, evolving shopping behavior is really a key accelerator for our growth in this space. Merchants are seeing that they need to adapt to new realities, and we can help them.

In mid-market, and remember that this is still very new to this space, we are seeing early traction with increased NPS scores for mid-market managed accounts and improved product tailored to these merchants and a volume share that's keeping pace with our overall volume growth. This is not yet up there with the other growth pillars when it comes to impact, but positive early signs.

We also continue to build a team in the first half. Our focus is on measured growth to maintain our culture. And as a Board, we still insist on seeing every new hire. We added 140 new colleagues in the first half, and we have since crossed the threshold of 1,000, something we're very proud of as a founding team.

I look forward to answering your questions, and I will now hand off to Ingo to discuss our financial results in more detail.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [3]

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Thank you, Pieter, and good afternoon, everyone. Thanks for joining.

Let's dive into processed volume first. We processed EUR 105 billion, which was up 49% year-on-year. This mirrors the 50% year-on-year growth we saw in the second half of 2018. Point-of-sale processed volume was up 67% year-on-year, totaling EUR 11 billion. It accounted for 11% of total volume for the first half.

Net revenue was EUR 221 million, up 41% year-on-year. The delta between processed volume growth and the net revenue growth is due to a slightly lower take rate for the first half mainly as a consequence of the tier pricing we have for enterprise merchants. Net revenue growth was well diversified regionally and across the merchant base. We're also happy to see merchant concentration continuing to decrease. This, we feel, is a testament to the merchants we have boarded and the increasing strength of our global offering.

OpEx were EUR 106 million in the first half, representing 48% of net revenue. These were up 17% year-on-year while we are still investing in growth, in our people and in marketing.

EBITDA was EUR 126 million, up from the EUR 70 million in the first half of 2018. This is a 79% increase as we continue to benefit from operational leverage associated with the low-cost base of a single platform.

On to our guidance. We stated at the IPO that we would not change guidance unless our view of the business changes substantially. And at this stage, it has not. We maintain the same long-term outlook.

So in the light of that and of these results, I would like to reiterate our financial objectives, which remain unchanged from our prospectus: on net revenue growth, mid-20s to low-30s in the medium term; on EBITDA margin, we expect EBITDA margin to increase to levels above 55% in the long term. And please do keep in mind that these objectives were set prior to the IFRS 16 accounting change that we benefited from this half year. Without it, EBITDA margin will be about 3% points lower; on CapEx, we aim to maintain a CapEx level of up to 5% of our net revenue.

We have posted these results on our website as well as the shareholder letter. You can find these at adyen.com/ir. Thanks all for your attention. Pieter and I will be happy to take any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Sandeep Deshpande of JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Yes. I have a couple of questions. Firstly, Pieter, when you talk about your customer base at this point, what has -- has anything significantly changed from 6 months ago? I mean you're continuing to see strong growth. You talked about growth in marketplaces. You're talking about fast service restaurants. Has anything in your customer base here in terms of your mix compared to last year changed significantly?

Secondly, regarding your take rate. Your take rate has, as you mentioned, slightly declined. Is there any impact from the airline vertical on this simply because you have full stack outside the airline vertical? And given that you grow -- I mean the overall industry e-commerce grows much faster than in airline, would we not be expecting to see that shift towards e-commerce from airlines? And -- which doesn't seem to have occurred. So does it mean that you got more airline customers during the first half of this year in terms of processed volume?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [3]

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All right. Let me answer the first question. Not all questions were very well audible, so I might have to ask you to ask on the following questions.

When you look at our customer base, I think it's very good to see that we grew on all aspects, so in all the pillars that we mentioned, in all regions. So your question is there anything specific to mention if you look at the delta from the last update, I think that we're very happy to announce that all segments grew nicely.

Could you please repeat the second question that you have?

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Yes. What I asked on the second question was on the take rate. And what we saw in your take -- what we saw was as you said that 71% of your overall volume came from full stack, which is not very different from last year. But what we do know is that e-commerce overall as a end market tends to grow much faster than airlines as such. And so does this mean that you either got more airlines onboarded or more regions as customers? Or is this something else in terms of the mix?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [5]

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So I think that's a direct result of our airline portfolio growing. We always said that payments has unpredictable element in there. So that means that this half year, if we board a few airlines, indeed, that percentage remains stable with the growth of the rest of the portfolio.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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And in terms of any new segments that you're targeting here, are there any new market segments that you're targeting and that you had success in?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [7]

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We talk a little bit also in the letter about marketplaces. That's an investment area for us. Also, if you look at certain industries, we see traction in quick-service restaurants and hospitality. And at certain point, I think we would be in a position also to give the names with it.

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Operator [8]

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Our next question comes from the line of Adithya Metuku of Bank of America.

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [9]

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I had 4 questions, if I could. Firstly, just on the eBay integration. I just wondered if you could provide any color on how that integration's progressing. If you could give any color on the ramp as well. Is it still expected to happen in the 2020 time frame? Any color around that to help us in modeling would be very helpful.

Secondly, just on PSD2. With that coming up soon, I just wondered if you could provide us with your thoughts on how you see that helping you potentially win share.

And I have a couple of follow-ups.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [10]

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Yes. Thank you for your question, Adithya. If we talk about eBay, I think in general, we're very happy with the project. At one hand, of course, we never really discuss individual customers. Of course, eBay is important to us. But the majority of the volume will come in 2020, at least that's for until that moment they're with PayPal, and nothing has fundamentally changed since the announcement last year. So we're really happy where we are at the moment.

On PSD2, PSD2 has been a real opportunity for us. We were first to market with the new 3DS flow that is needed for the stronger authentication, and that's a great discussion topic also for new merchants. We had a few customers that announced that they agreed to work with us, including Uber. But also I think it's a very nice testimonial from Zalando that we announced. And these are, I think, great examples where we work with our customers to improve the product and get more traction. And this also of course attracts new customers because we solved the complexity for our merchants, and that's what they like.

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [11]

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Understood. And I had a couple of follow-ups just very quickly. On the same-day payout (sic) [Sales Day Payout] product that you are going to offer with your Dutch banking license, I just wondered if you could give us an update there how the volume's ramping, how should we think about the impact on take rates as we look forward.

And also secondly, I understand you are getting a banking license in the U.S. to launch a similar product over there. I just wondered if you can give us an update on that.

And finally, just on cost into the second half. Obviously, you're not -- your margins were very strong, and I understand the impact of IFRS 16. But this became significantly higher than expectations. So I just wonder -- and if you could give us some color on the puts and takes on expenses into the second half to help us better understand how we should think about margins into the second half.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [12]

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Okay. Very good. On Sales Day Payout, I think the standard product that we offer to our merchants is that we pay out in -- after a couple of days. So let's say the standard is 2 days later, and we offer that product for free. So only if you like to accelerate that payment, we charge for it. And the take up of this product is great. I think it is fair to say that most of the merchants, they select this with the free flow. So we don't charge anything for this. But also, there's no cost to it to ourselves.

Of course, because we see so much traction, we always ask ourselves, "Okay. In other markets, could we replicate this?" This is one of the reasons why we indeed announced that we would look at a branch license in U.S. It's relatively early in the application process. These are typically processes that take quite a bit of time. So as soon as we can give an update, we will. There is nothing new to report since the press release.

And then on your third question, on the cost. We keep on investing in the business. Growing the team and also investing in marketing is key in growing this company. We feel that we are in a pretty unique position. And for that reason, I think it's hard to say like, okay, we will for sure, if you exclude the IFRS 16 effect, already this year get to the 55% EBITDA margin. It's also not how we manage the company. And I think that's very important to highlight. We manage the company on the long run. So we focus on growth, getting new merchants on our platform and do everything what's needed to invest in the business, to continue this growth. And to that extent, it would almost be better that we have sufficient opportunities to invest, find the right people, do the right marketing campaigns. And the 55%, getting there this year is not a goal in itself.

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Operator [13]

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Our next question comes from the line of Hannes Leitner of UBS.

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Hannes Leitner, UBS Investment Bank, Research Division - Equity Research Analyst of Software [14]

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Yes. I have also a couple of questions. The first question is could you remind us what your total merchant base is currently. The second one is maybe talk us through your Africa opportunity. And then the third question is maybe you can give us a better feeling for the current penetration of customer base -- of the merchant base, if you could categorize it where you have just like single products, like the PSD2 implemented, or how many of those you have already expanded in multiple geographies or in city, countries.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [15]

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Okay. So on the merchant base, so we don't disclose the number of merchants. We're not a company with a lot of merchants as you know, so we mostly focus on enterprise, but we have chosen not to disclose the number of merchants.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [16]

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Right. And on the question about so what should the rate of penetration in your current merchant base, that's a continuous process. So what you see in the large players is that the land and expand. So we typically open in the region and then we move to other regions, and that's a continuous process. So it's very difficult for us to measure in a specific merchant the take of -- the total share of wallet because they often don't disclose. Sometimes, we can see it because they publicly say something about it.

But what we do see is a healthy flow of new merchants from pipeline converting into customers. So we constantly see new companies being added where the land and expand continues. So this is not an ending process. This is a continuous process. And if you look at how much we're converting and if you look at the size of the pipeline, we're confident that this process will continue in the future as well.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [17]

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Your question on Africa. We -- I think it's a great example how we typically work. So we follow our merchants into new geographies. There were certain merchants that wants to do more in Africa. So that's why we signed a partnership, and we hope to further build our proposition. It's relatively early days there. But of course, we see the opportunity as our merchants see it.

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Hannes Leitner, UBS Investment Bank, Research Division - Equity Research Analyst of Software [18]

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Okay. Just a quick follow-up. Regarding the land and expand, do you see the opportunity currently bigger from moving across geographies within the installed base? Or is it rather more the cross-selling of products you have newly developed?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [19]

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The moving from geography to geography that's usually how merchants roll out because that's a fairly standard way of implementing. There's also the movement across channels, especially in the unified commerce. There's always the trend that you either start with your physical terminals or online, and then the other part follows. It's nice to see that we also have U.S. merchants which do not have an international business boarding on our platform. So it's not necessarily that it's always moving from geography to geography.

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Operator [20]

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Our next question comes from the line of Joshua Masser of Morgan Stanley.

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Joshua S. Masser, Morgan Stanley, Research Division - Equity Analyst [21]

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Two questions, please, if I may. I think the first one is just on the full stack. I know you said you've moved to 71% now, I think it was 70% at the full year '18 and 60% in 2017. So it looks as though the pace of that increase has slowed down a little bit. I just want to get a sense of if that's because -- has your credit appetite changed that you're now starting to acquire for airlines? I think an industry journal has said that you had signed Singapore Airlines as -- for credit card acquiring. Or is it just because airlines are slow -- are growing slow -- more slowly than your digital e-commerce merchants? So that's the first one.

And then second one is just on the mid-market. I know that's clearly a priority for you guys and expanding into that mid-market. Do you think that, that changes the business model in any way in terms of the amount of salespeople you need to hire? And could that impact -- have an impact on the margin going forward?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [22]

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Thanks, Joshua. I think on the full stack, we indeed saw the percentage now 71% compared to 70% for full year 2018. I think what you -- this is more like an outcome. So we tend to invest in both companies that like to process full stack, but we also are very risk aware to airlines because there are a lot of airlines that are not profitable. And we don't want to be in the risk chain for these airlines.

So I don't think that we will change our policy here very quickly. Of course, if there is a good opportunity or if there is a very stable airline, we would certainly consider it. But the majority of volume for airlines, we will never acquire because we think it is not -- whereas frankly, we don't have the balance sheet for it, we don't want to have these risks in our books.

I think for mid-market, I think if you look at what we've tried to accomplish over the past periods is that we work closely with customer success teams and our merchants to increase the way -- or the speed of implementation so that they can really -- that we can really help the mid-market merchants to get onto our platform quickly. For this, we also need close ties with integrators to make sure that they know how to integrate to our platform, that we work with the right plugins, that the implementation is easy.

And this is still early success. We were relatively, for a short time frame, focusing on this. We're further optimizing the product. The feedback is very positive. So if you look at NPS scores, NPS scores in mid-market is increasing and getting to the levels of enterprise. And that's exactly what we want to accomplish. So we're very happy where we are at the moment. We think that we have a scalable solution for mid-market.

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Operator [23]

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Our next question comes from the line of Ron Heijdenrijk of ABN AMRO.

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Ron Heijdenrijk, ABN AMRO Bank N.V., Research Division - Analyst [24]

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A few questions from my side. Starting off with mid-market clients. You are speaking in the shareholder letter of migration of mid-market clients from mid-market to enterprise. How many clients are we talking about? And what's the rough TPV that went from the one bucket to the other bucket?

And then secondly, coming back on this full stack versus processed only. Are there any new non-airline clients in the processed-only bucket that would explain the similar growth rates between the 2 buckets in the first half of the year? Or if the airline bucket has just grown by 50% just like the non-airline bucket?

Then thirdly, on the expense beat that you showed in the first half of this year, especially sales and marketing were a bit lower than expected with 19% year-on-year growth. Would that be a new run rate? Or should we expect this to accelerate in the second half and maybe into 2020?

And then finally, 2 small modeling questions. One is the tax rate, effective at 19.5%. Are there any drivers why it's a bit lower than what we've seen earlier? And secondly, on the CapEx. It's now at 3.7% of net revenues. Is there any seasonality in this CapEx line that we should take into account?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [25]

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Thanks, Ron. If you look at the mid-market percent-wise, I think it's more related to how we internally define mid-market. So if it gets to a certain size, we see it as enterprise, and it's current. We've defined it at EUR 1 million a month processed volume. So you have certain merchants that grow quickly and get them to the enterprise level or enterprise definition.

On your question for airline or non-airline volume or basically the gateway-only model, I think it's fair to say that the majority of the volume where we're gateway-only is airlines. But there is of course also another element here, which is the more immature markets where we gateway into other providers. I think the Africa example this half year is a great example where we gateway into Cellulant, which is a very good partner to work with but which is then seen as gateway-only volume. And we have more of these type of partnerships.

Then on the cost side, I think if you look at the cost, the current cost for this half year, it's not necessarily the run rate going forward. We see a lot of opportunities also in the sales and marketing cost where we can further invest in the business, and we will not hold back where we see the opportunity. I think that's fair to say we're in full investment mode, and I think that's also related to my earlier comment on the 55% EBITDA target. It's not a goal in itself to get there as soon as we can. It's a goal in itself to grow the company on the long term. That's what we want to achieve with this company.

Your question on tax rate. I think that the way how we look at tax is that we pay taxes as much as we can locally. Current tax rate is around 19%. There's important benefit here in the Netherlands that we benefit from the Innovation Box. And going forward, I would not assume big changes there unless of course our geographical mix completely changes.

And then your last question on the CapEx. I would not really assume seasonality in CapEx. We benefit a lot from having one platform. We only have to make investment just in one platform. So that's where -- why we have these economy of scale benefits. And we're really -- yes, I think this is why we are uniquely positioned.

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Ron Heijdenrijk, ABN AMRO Bank N.V., Research Division - Analyst [26]

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That's very clear. If I could have 2 small follow-up questions. The first one is combination between the expense and the CapEx. I'm not saying that you're under-investing or that you're holding back your investments. The question that I want to get my head around is can you spend quick enough to keep track with your net revenues actually. Or is your net revenues running away from you in a quicker pace?

And then on the mid-market to enterprise, that was very clear explanation. Can you share with me or are you willing to share with us the TPV that was actually shifted from the mid-market bucket into the enterprise bucket?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [27]

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If you look at how we can -- if we are under-investing or how we are raising our expenses, for us, it's very important to grow this company in a responsible way and in such a way that you can maintain culture. And that has always been for us the rate of growth. We are growing off a bigger base. So you can all see that this -- that we added 114 people to the company now, which is -- so you look at that as a percentage. The way you ask the question, we don't -- we look at growing this company at the maximum pace and that will decide our investment rate.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [28]

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Your question on migration from mid-market and enterprise, how many merchants these were or what the volume was, I'm afraid we can't share that at this stage.

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Operator [29]

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Our next question comes from the line of Nooshin Nejati of Deutsche Bank.

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Nooshin Nejati, Deutsche Bank AG, Research Division - Research Analyst [30]

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I have 3. First of all, on eBay again. Is it correct to assume the majority of eBay MP, managed payment, volume has been processed by you?

And then are you planning to expand the Sales Day Payout offering to any credit offering for merchants like what Klarna is doing?

And if you can give us an update on your RevenueProtect tool kit progress. As I remember, you said you want to use this as a means of attracting other merchants that are not currently on your platform to also get them on your platform. Can you update us on this as well, please?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [31]

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So your question on eBay. I think if you look at current situation of eBay, eBay is still piloting with us, early stage. Majority of volume is still with their old provider, so that's the difference. Then I think your question on Sales Day Payout.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [32]

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Sales Day Payout is, for a merchant, very -- is from a reconciliation point of view, a nice product because basically it means that your transaction of Monday, all those transactions, you see in your bank account on Wednesday. If you cannot -- for Sales Day Payout, that technically is that you prefund certain transactions. So technically, it will qualify as a loan. Hence, it needs a banking license. But we are not in the business of giving loans to merchants as a product, so we don't foresee to build up a portfolio with credit to merchants.

And I think you had a third question, but that didn't came through.

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Nooshin Nejati, Deutsche Bank AG, Research Division - Research Analyst [33]

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Yes. Sure. On the RevenueProtect tool kit. So if I get it correctly last time, you said that you also want to use this as an open API for the merchants that are not on your platform. Just basically to attract those and then they would also join as customers of yours. So I was just wondering if you have any updates on that.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [34]

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Yes. That's correct. We offer RevenueProtect separately to our merchants so that they can basically send all their fraud volume to our platform even if we don't acquire it. We sell this to our merchants. I can't give you individual numbers on volumes on this, but it's true that this is a separate product.

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Operator [35]

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Our next question comes from the line of Sanjay Sakhrani of KBW.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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I've got a couple of questions. One is some clarifying questions actually. So 80% of your growth has been coming from existing merchants, which is great. But I was wondering if at some point you expect that mix to sort of change, given all the new wins that you've had.

Secondly, you mentioned in the release that you're seeing change in the way that U.S.-only merchants are choosing you in the example of Restoration Hardware. So should we expect the change in terms of the growth in the U.S. market?

And then finally, I also have a clarification question on eBay, Ingo. So when we think about the second half of 2020, should we expect the majority of volumes that could shift over to you would shift over in the second half of 2020? Or should we expect that to sequence over 1.5 years or so?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [37]

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All right. Let me start. The -- your question around the percentage growth coming from existing, we are growing in all areas so that is difficult to forecast. What you see is that we're constantly feeding new merchants to that base that keep on growing as existing merchants. So that's not an ending process. But as you also see that we grow with unified commerce in the mid-market, those elements are growing as well. So then you're talking about relative growth, so that's more difficult to say something about.

The -- also, if you look at U.S.-only is that what is nice to see is that we grow everywhere and that we also grow U.S. domestically and that the product is not just interesting for unified commerce merchants or international merchants but also for domestic merchants. It's a trend we have seen in the past. We have seen various countries where that happened. Then you now also see that happening in the U.S. But again, you have to balance that off with other -- with all everything grows in this business. So if in percentage, we'll grow, it's difficult to say.

And Ingo, on eBay?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [38]

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Yes. So on eBay, I think it's a really good question, but I think it's also most fair to ask at eBay because we -- it's not under our control. And of course, we will be very happy to process all the volume. But for us, it's very difficult to predict. We're ready for it, and we hope to be good partners on the long term.

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Operator [39]

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Our next question comes from the line of Josh Beck of KeyBanc Capital Markets.

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Josh J. Beck, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [40]

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Yes. So I wanted to ask about the QSR wins. Pretty impressive that you won some names like Joe & The Juice. I'm just wondering when you look at the pipeline conversations that you're having in QSR, do you see the potential to scale to larger, more global type of QSR types of customers?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [41]

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The reason why we're excited about this part of the market is that their needs are indeed shifting. Their payment needs become much more complex as they -- indeed, a part of it is ordering mobile, so it's a unified commerce customer, and there are chains which are operating in many different markets. So their need is exactly what Adyen can offer. Hence, we are in it. We are excited about the market. We are investing in it, and we're confident that at certain point indeed also names will follow.

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Josh J. Beck, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [42]

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Okay. Very helpful. And then hospitality, I think is a vertical that you're excited about. Just wondering what are the challenges that those types of customers are facing. Obviously it's probably a bit different maybe in retail or QSR. Then why do you see such a good product market fit with your platform there?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [43]

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If you look at the hotel chains, one of the challenge that they have, it's being operational in multiple markets, that they take orders online, that they do payments in the hotels, that it's a very, very wide portfolio of payment methods being used because you usually talk about international travelers. So what they need is -- they have very complex demands. And if we can make it simple for them, that's extremely attractive.

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Josh J. Beck, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [44]

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And the last question from me... go ahead. Sorry.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [45]

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No. I just wanted to add like -- and that's very similar to what we see in retail and QSR. So we see -- I think a lot of the features that we developed on our platform can be used in multiple sectors.

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Josh J. Beck, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [46]

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Very helpful. And last question, just maybe could you talk about MarketPay a bit? Obviously, you have some very impressive reference customers with eBay and Etsy. Is that a pipeline where you see a number of opportunities as you look years down the road?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [47]

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Yes. Absolutely. MarketPay is an important product with us. We see also other type of models now evolving on our platform. I think a customer like Teesnap that we announced earlier this half year is a good example, where the offering has slightly changed, but we're in a very good position to help them. And we see MarketPay developing more broadly into a platform product where smaller merchants can make use of our technology.

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Operator [48]

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Our next question comes from the line of Joseph Foresi of Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [49]

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A couple of quick questions for you. On -- I just want to get an update on authorization rates and your ability to deliver higher rates and what your opportunity is there. So that's the first one.

On the second one, on the mid-market penetration. It's been at sort of a slow pace. Do you expect that pace to continue or accelerate?

And then thirdly, I know that you didn't change your medium-term margin trajectory, and you've been very clear about how you feel about margins. Should we think of that 55% as being the base and then there's going to be a certain percentage of upside coming from the accounting change?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [50]

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All right. Thank you for those questions. First, on authorization rates, this is not a product that is at a certain point finished. We're investing every day to release new functionality to further increase authorization rates. And consistently, we hear back from our merchants that we outperformed the competitors.

If you look at examples of that, for example, in our RevenueProtect, we have given the merchants more possibilities on the experiments feature to test how different settings would impact their authorization rates. If you look at -- we have launched the product to help merchants to -- subscription merchants to know when to -- to help them to capture transactions that didn't go through in the first time, and then they outsource that logic to us. So these are examples of things we do every day to raise those authorization levels.

Your second question, could you help me with that?

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [51]

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Yes. I'll slow it down a little bit. On the mid-market side, you've had a slow penetration rate there. I'm just wondering if you can expect that to accelerate or if that's the pace that you think it's going to go at. Will it be more gradual? Will there be an acceleration or an inflection point at that -- at some point there?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [52]

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If you look at the mid-markets, I think it's going to take a bit more time. We are investing in there. We're very happy to see the Net Promoter Scores going up. So we see we're on the right path. It's also helping us in the other segments because being able to service that segment is also ultimately like our other merchants. Yes, we have expectations of it, but not on the short term. It's early days.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [53]

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Got it. And then the last one was just on the margins. I know you kept the medium-term guidance. You've been very clear about how you look at margins. But just to be clear, you're looking at 55% and then the -- a possible 3%, 4% upside due to the accounting change. I just want to be clear on the way to look at it.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [54]

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Yes. I think that's a neat way to look at it. So it's currently 57%. If you would correct for the accounting change, it would have been 54%. We don't [stay around] it. Do we see -- do we expect a dramatic decline in EBITDA margin? No, because we see the operating leverage. But again, if we see an opportunity to invest, we will.

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Operator [55]

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Our next question comes from the line of Jeff Cantwell of Guggenheim.

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Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [56]

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And congrats on the results. I understand that managing to the takes rate is not your focus. You've been very clear about that. But I did want to ask you on that because we see you moving in-store. We see unified commerce taking root quite positively. We see you moving down market from enterprise. So what would you say is the biggest mover in the take rate if we think out over the medium term? Is it fair to say that you see opportunity to drive it higher? Or will it move lower over time as a result of mix?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [57]

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It's a really good question. But it's also because there are so many moving panels, it's hard to answer.

I think the most fundamental development on our platform is that on one hand, of course, working for large enterprises has a negative impact on take rate. But at the same time, we see that mid-market and also the fact that we're doing more and more full stack have a positive. It really depends on how this pans out on the long term, how faster then things go, whether that's a uptrending take rate or a downtrending take rate.

And I think that's exactly why we don't want to manage on it. We want to make sure that we have profitable contracts on the platform, that we work with our merchants and that we see the absolute invoice of our merchants growing. So that we -- if we do more for them, that we made more absolute margin with them, but also basically reward them for bringing more volume because I think that's also important in a partnership, that you give something back if volumes grow.

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Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [58]

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Okay. I appreciate that. The second one I have is on the competitive environment, given all the M&A in the space this year. What are your thoughts in terms of the competitor environment? Is it getting easier for you or tougher? Because from the outside, we could see it both ways, right? Sometimes large consolidations might lead to lags or maybe just a change in strategic focus by the companies that are merging, which could create opportunities for you to capitalize on, right, but it can also make things tougher as well. So would just love to get your thoughts there.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [59]

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Yes. I think we fundamentally look through a different lens at the market. From Adyen point of view, the market is complex and there are new products being launched, like think the shift to unified commerce, think about mobile payments, think about QR codes. There's a constant release of new products, and merchants need a company that can help them there.

But there's also another way of looking at this industry, and that is payment is a commodity and it's only about scale. If you're looking through that lens, then mergers make sense. If you look at the market through our lens, you would say, "But you just have as many platforms as you had before and now you have to manage all of those platforms. So that's probably a killer for innovation rather than helping innovation."

So we feel more confident having a single platform, making sure that we have more than 40% of our employees being engineers, that all those engineers, our merchants are benefiting from their effort. They're not working integration processes. They're not working keeping the weaker system up and running. They're working to their benefit, and we believe that, that is the right strategy. We've always said that we've never done an acquisition, and we believe that growing this business as fast as possible in a controlled manner is the best outcome for shareholders.

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Jeffrey Brian Cantwell, Guggenheim Securities, LLC, Research Division - VP and Analyst [60]

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And if I could just squeeze a last one in. You're highlighting a number of wins, and you clearly have quite a bit of traction now with in-store and QSRs. But in your shareholder letter, you called out Joe & The Juice. And I'm just curious, it seems like it's in the -- this section on unified commerce. Sometimes, payment companies talk about wins in different ways. So could you just clarify what your win is there to any extent possible? Is that the whole relationship including the POS piece? Is it just the order ahead online piece? Maybe just talk to us a little bit about that relationship would be very helpful.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [61]

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Yes. We don't really talk about individual merchants. Although if you go to an airport and you order a Joe & The Juice, it's always nice to see an Adyen terminal.

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Operator [62]

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Our next question comes from the line of Corey Gayle of Barclays.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [63]

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It's James Goodman actually on for Corey. Perhaps I could follow up firstly please on the full stack question. Apologies if I've missed it. Can you simply tell us what the percentage of full stack acquiring was in the first half last year? I'm just trying to work out how that changed over the course of last year and whether there was more of a tailwind perhaps in the first half this year to the settlement revenue.

Second question then just on the regional growth. You made some helpful comments around the U.S. But when I look at that adjusted for foreign exchange, it looks like it's pretty much in line with the group growth. I guess longer term, you still think of the U.S. as probably accretive to the overall business growth given your level of penetration there. So is there anything you can speak to there really in terms of the sort of trajectory of the ramp in the U.S.?

And then the final one for me was -- appreciate your commentary on the PSD2 advantage that you have. We've read a lot recently about delays in some of the secure customer authentication. Is that a frustration for you if that comes to pass? Or do you think the catalyst has already really happened for merchants to look for the leading solutions to deal with that issue?

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [64]

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Okay. Thanks for the questions. We haven't disclosed the full stack percentage over the first half. For the full year 2018, it was 70%. I think if you -- your second question on U.S., I think it is important to realize that we split revenues based on billing address. So if you look at our sales operations in U.S., they work closely with U.S. merchants. And sometimes, they win a deal and land it in a different region. So they work for -- so the U.S. merchants selects us, but we also have traffic, for instance, in APAC. And that's then recognized as a traffic or revenues in the APAC region.

So we keep on investing in U.S. The teams are growing. We're over 100 people in San Francisco, over 30 people in New York, and we think that we will also see more and more domestic revenues in U.S. But of course, we also see a lot of traction in the other regions because U.S. companies are expanding on a global scale. I think the domestic part, Restoration Hardware is the best example.

Your question on PSD2, yes, we're not frustrated at all. We like complexity. And if complexity kicks in, we like to help our merchants. I think one of the most important things is that the way how we've implemented the measures around stronger customer to engage in. Customers don't have to do a lot for it. We just help them to -- basically, if they're already integrated to us, the change is very limited. And that helps to solve complexity for our merchants. If there are different time lines, of course, we will respect it. But we're ready for it, and we're ready to support our merchants to accept it.

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Operator [65]

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Our next question comes from the line of David Togut of Evercore.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [66]

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Three questions, please. First, cost incurred from financial institutions as a percentage of processed volume increased 11 basis points year-over-year. Was that due to a mix shift toward credit versus debit?

Second, how can you extend your business model with the introduction of open banking in Europe, given your Netherlands banking license? Do you intend to build out more of a consumer-facing network, which you certainly have the capability to do?

And then third, we've seen a number of companies in the merchant-acquiring industry in the U.S. put a lot of resources into restaurants. If you could talk about how your approach, particularly in the QSR space, is differentiated.

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Ingo Jeroen Uytdehaage, Adyen N.V. - CFO & Member of Management Board [67]

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Your first question, I think if you look at costs incurred from financial institutions, these include the interchange and scheme fees. Depending on region, interchange can vary quite drastically. So for instance, interchange in U.S. is way higher than Europe. So this is mostly a mix effect. That's also why we internally only look at net revenue to assess the healthiness of the business.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [68]

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On open banking, this would be a consumer payment method. So we are not into the business of developing payment methods ourselves. We support payment methods. And there are merchants currently live with us with open banking in the U.K. It's a new payment method and still at this moment quite small.

And the restaurants, we support restaurants via their existing platforms. So we focus on payments, and we are not building the platforms for the restaurants.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [69]

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Understood. If I could just follow up on the open banking. From your response, I take it that you will stay 100% focused on merchants and not build out more of a consumer-facing network. I'm just curious how you might extend your business model with the Netherlands banking license. Or is that license really intended to be used for things like same-day settlement to cash?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [70]

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Yes. If you look at the reasons to get the banking license, it's to improve our services to merchants. And so that has been the reason, to be in the clear regulatory framework, to be able to do indeed Sales Day Payout, also to be in a clear regulatory framework to help marketplaces. And we didn't do that to start building consumer methods ourselves.

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Operator [71]

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Our next question comes from the line of Daniel Swart of Kempen & Co.

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Daniel Jacob Swart, Kempen & Co. N.V., Research Division - Research Analyst [72]

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A bit more general strategic question. Do you have a specific licensing strategy? What about regions, are you planning to obtain also direct acquiring capabilities in the U.S. amongst your French license application?

And second question is just out of curiosity. What's the average transaction size do you take compare when you IPO-ed?

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [73]

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All right. Our license strategy, we follow our merchants. We look where we can -- where it's useful to apply for license. It's a constant process. We didn't announce any new licenses now but it could well be that in the coming -- in the next update, there will be new licenses. It's not an objective in itself. Objective is the highest level to merchants and indeed often that can be followed by license. But in some regions, that's not opportunity to pursue.

Regarding ATV, we do not disclose the average transaction value.

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Operator [74]

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And this was our last question. I would now like to hand over to Pieter for closing remarks.

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Pieter Willem van der Does, Adyen N.V. - Co-Founder, CEO, President & Member of Management Board [75]

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I would like to round off this earnings call by thanking you for participating. Should you have any additional questions, please reach out to our Investor Relations team.

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Operator [76]

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Ladies and gentlemen, this concludes the Adyen First Half 2019 Results Call. You may now disconnect your lines, and have a nice day.