Flywire Corporation (NASDAQ:FLYW) Q4 2023 Earnings Call Transcript
Flywire Corporation (NASDAQ:FLYW) Q4 2023 Earnings Call Transcript February 27, 2024
Flywire Corporation beats earnings expectations. Reported EPS is $0.01, expectations were $-0.08. 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 the Flywire Corporation’s, Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Akil Hollis, Vice-President Investor Relations and FP&A. Thank you. 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 Mike Ellis, Chief Financial Officer. Our fourth quarter 2023 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 and 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.
Michael Massaro: Thank you, Akil, and thank you to everyone that is joining us today. We are pleased to share our Q4 and fiscal 2023 results with you all, showing strong performance across the business. We are also eager to share our business priorities and financial outlook for 2024. In a few minutes, Rob Orgel, our President and COO, and Mike Ellis, our CFO, will go into greater detail about our results for Q4 2023. We will try to keep our prepared remarks short to leave more time for questions. I will start with a few financial highlights from Q4 2023. Revenue less ancillary services was $96.1 million in Q4, an increase of 43% year-over-year. Adjusted gross profit for the quarter was $63.5 million, an increase of 42% year-over-year.
And adjusted EBITDA was $7.7 million for the quarter, increasing by $6.7 million year-over-year. These Q4 results now cap off another great year for Flywire. I will take a few moments to talk about some of the key achievements in fiscal year 2023. First, starting with our fiscal year 2023 financial highlights. Flywire's revenue less ancillary services grew by 43% year-on-year, and our adjusted EBITDA increased to $42 million, or 11% of revenue less ancillary services. Both results were well above our targets discussed at the beginning of the year. In FY 2023, we also added more than 700 new clients across all verticals, and now serve more than 3,800 clients globally. Finally, we moved more than $24 billion through our global payment network in 2023, a 33% increase year-over-year.
We also achieved a number of business highlights across all verticals and geographies. In education, we continue to expand our higher education footprint globally, including notable growth in the United Kingdom and throughout Asia Pacific. We also continue to see success in our land and expand strategy in the United States, increasing the footprint of our full suite solution, landing many blue chip clients. In travel, we experienced strong growth in terms of new clients signed, most notably with tour operators and destination management companies. In EMEA and APAC regions. In B2B, we continue to sign large enterprise deals and see success in our partner strategy. In healthcare, we accelerated our partnership strategy, solidifying relationships with Cerner and FinThrive.
We bolstered our global payment network with a focus on supporting our strategic payer markets like India and China, enhancing our relationships with WeChat Pay, as well as three of the largest banks in India. Lastly, we continued our strong track record of strategic M&A with the acquisition of StudyLink, and our sizable cash position allows us to pursue additional M&A that fits our core thesis. Now let's look ahead to 2024. Mike Ellis and Rob Orgel will talk about full year 2024 guidance in detail, but our plan anticipates strong growth numbers in a complex macro environment, further expansion of EBITDA in alignment with our multi-year expectations, and delivering positive net income. We are truly excited for what is ahead for Flywire. As we look at 2024, we remain focused on optimizing our go-to-market capabilities, expanding our Flywire advantage, and strengthening our FlyMate community.
We are continuously working to optimize and invest in our go-to-market efforts to sustain our growth algorithm. For example, in fiscal year 2023, we improved our sales ramp time from higher date to first deal close by more than 30%. This year, we plan to increase our investment in sales and relationship managers by more than 15% in aggregate, spread across all verticals and geographies. As we continue to grow, we will do so in the context of a very disciplined hiring plan that focuses on key roles to meet our objectives. Another area of investment in go-to-market is our channel partnership strategy. We plan to grow our channel effectiveness and deepen partnerships by investing in channel sales teams, integration engineering resources, and building more certified integrations with our partners.
Today, we have more than 90 partnerships and tech ERP integrations across our verticals that help us identify new clients, find clients faster, and accelerate our implementations. We have seen significant success with partners like Ellucian and Bank of America, and we strongly believe further investment in channel partners can be a significant driver of future revenue. As for expanding our Flywire advantage, we remain focused on product and payment innovation to power the vertical ecosystems in the industries that we serve. This year, we are focusing on our ability to embed payments into the existing software and workflow processes of clients, partners, and payers to add more value to our growing ecosystems. A cornerstone of us capitalizing on this opportunity is our API strategy to better serve our clients and partners and complement the Flywire software solutions they use today.
In 2023, we began to invest in building a public API to surface the power of the entire Flywire payments platform. This allows our customers across all verticals to integrate our API into their existing ERPs or software to leverage everything from our KYC and AML processes all the way through our global payment net so they can control their workflows and user experience in a PCI compliant fashion. We believe Flywire will be even more unique in our ability to provide a ready-to-use platform for complex domestic and cross-border payments, along with optional flexibility to use components of our powerful API when clients seek deeper integrations into their workflows. Likewise, we will be exposing our new payables platform as an API, which can embed into any AP process of an ERP.
We have proven our ability to identify new use cases where software drives value and payment, and we'll continue to invest more to drive growth and value for our clients. One example is our investment in StudyLink, which we acquired in Q4, and whose software connects agents in Australian education institutions and powers the application and offer of admission and acceptance process for their international students. Embedding Flywire's payment technology into StudyLink's international admissions application and agent management software unlocks our opportunity to monetize the nearly $1 billion in deposit volume their platform is involved in today. Our vision is to extend the StudyLink platform beyond Australia, leveraging Flywire's global clients and team.
We will also focus on the strategic payables’ opportunity, particularly around commission payments in our travel and education verticals. As a reminder, we are applying our existing framework of using software in our global payment network to solve specific payable use cases for our clients. In travel, payables volumes, clients, and our network of beneficiaries continues to grow since we piloted the solution last year. For many European DMCs, Flywire is the only way they can both receive and pay out cross-border high-value travel payments. And in our education vertical, we are growing the number of clients who are using our solution to pay commissions to international education agents. We are also expanding our partner ecosystem of U.S. investment savings accounts.
We're using Flywire's payable solution to digitally disperse 529 plan payments to U.S. colleges and institutions. Finally, we also continue to be focused on strengthening and growing our FlyMate community. As I've referenced in the past, our culture and FlyMates are what makes Flywire successful. We believe that our financial success enables us to give back to our communities and empowers our FlyMates to build their careers of a lifetime. As we continue into 2024, we remain committed to building and maintaining high-performance teams, developing exceptional talent, and having a positive impact on the world around us. In closing, I could not be more proud of the progress we made in 2023. I am excited for the years ahead as we seek to continue to grow Flywire into one of the leading global payments companies of our generation.
Before turning the call over to Rob, I wanted to officially welcome our incoming CFO, Cosmin Pitigoi, who will officially join Flywire on March 4. Most recently, as Senior Vice President in Finance at PayPal, Cosmin brings decades senior financial leadership and a proven track record of scaling organizations in complex global environments. He is the ideal CFO to help us achieve the next level of scale and solidify our leadership position in the global payment’s ecosystem. I wanted to also thank Mike Ellis for his many contributions to Flywire over the past nine years, including establishing many of our finance functions, taking the company public, and managing many strategic acquisitions. He has been a trusted partner to me, and we appreciate the seamless CFO transition that he is enabling.
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. After another strong year as a public company, I'd like to start today by revisiting the algorithm we use to achieve sustained long-term growth. Our model includes, first, expansion with our existing clients, second, annualization of clients signed the prior year, and third, revenue from clients signed in the current year. We are also adding new payer and non-client services as a fourth component that feeds our annual growth. Our growth starts with expansion with existing clients, which is driven by our primary focus on delivering exceptional solutions and service for our clients across all of our verticals. For fiscal year 2023, we recorded net revenue retention of 125%, continuing in a favorable range denoted by the 123% three-year average between 2019 and 2021 we shared at our Analyst Day, and the 124% we reported for 2022.
Our technology and client service teams are obsessed with meeting our clients' needs. Their hard work and our new solutions allow us to earn clients' trust, deliver client retention that exceeds 95% per annum, grow clients effectively, and produce a net promoter score in the 60s. Next in the growth algorithm, we benefit each year from the annualization and growth of clients signed in the prior year. As Mike mentioned, we signed over 700 clients in 2023, including over 170 in the fourth quarter. Our expected revenue per client signed in 2023 remains strong, and as usual, we only realized a fraction of that revenue last year. In 2024, based on our track record of positive client experiences, we expect to benefit from both a full year's revenue from these clients, as well as further penetration of our clients' payers.
Third in the algorithm, we recognize a portion of the revenue from new clients in the year we sign them. We invest in our go-to-market capabilities to maintain our long-term growth. We estimate that our penetration of the total addressable market across our four verticals is in the low single-digit percentage range. We see opportunity everywhere and plan to continue to build go-to-market teams to capitalize on these opportunities and increase our market share. Finally, as we address the needs of payers in our ecosystem, we have begun to generate meaningful revenue that is not associated with any particular client. For example, as we grow our pay-any-school capabilities rapidly, we recognize revenue from tuition paid to schools that are not Flywire clients.
In other examples, we are helping students procure other needed services, such as student health insurance required in Australia, and with moving money from India to cover living expenses outside of tuition. We are excited to layer in payer services to our solution set and believe there can be a multi-year roadmap in this area. Next, I'd like to briefly discuss how we grew across our four verticals during the fourth quarter. In our education vertical, we estimate our TAM to be about $660 billion. This TAM includes U.S. cross-border education, international cross-border education, and domestic education both in the U.S. and internationally. It includes higher ed, K-12, trade schools, summer programs, and more. We are penetrating our TAM through broad integrations with best-in-class enterprise systems, as well as deeper relationships with education agents prevalent in international education.
We are also expanding our TAM by offering new solutions to payers and schools. During the fourth quarter, we signed several new clients in our U.S. cross-border and domestic subsegments, as well as across Europe, Asia Pacific, and Latin America. Recently, we went live with our domestic solution at Adelphi University, a private university based in Long Island, New York, with over 7,500 students. Adelphi had been a cross-border education client of ours since 2013, representing another example of where we had been able to leverage our trusted relationship that originated with our cross-border solution to expand into a much broader offering. For our U.S. cross-border segment, we went live with Florida State University and Oklahoma State University.
Outside of the U.S., we went live with George Brown College. George Brown College is a publicly accredited top 10 research college in Canada with nearly 27,000 full-time students. We are now live with both our cross-border and domestic education solutions. GBC chose to work with Flywire to add more payment options, enhanced functionality support education agent-related payment flows, and top-notch customer support. George Brown was one of the education clients that was signed in Q3 but went live after the peak season. All delayed education implementations that we referred to in our Q3 call have now gone live. In healthcare, we estimate our TAM to be about $500 billion, and we are serving many of the largest U.S. hospital systems. We are expanding how we work with partners in this channel to provide deeper integrations and even more flexible affordability solutions.
We are also expanding into specialty subsegments. During the fourth quarter, we went live with OrthoNebraska, a specialty hospital based in Omaha, Nebraska, focused on orthopedic care. In implementing Flywire's payment solutions, OrthoNebraska saw nearly 80% of all payments come through the patient self-service portal. Flywire's solution has helped the specialty providers significantly reduce staff hours spent on manually reconciling payments and has received high patient satisfaction scores. Overall, we are seeing early traction in new subsegments of the healthcare market as our receivable software solution helps reduce outstanding patient balances and increase collection rates for specialty hospital providers. In travel, we estimate our TAM to be about $530 billion.
We have categorized our clients as destination management companies, or DMCs, global travel operators, and accommodations providers. During the fourth quarter, we signed new clients in each of our existing subsegments. We are also exploring new areas of focus, such as ocean experiences and niche online travel agencies, or OTAs. Recently, we went live with Aqua Expeditions, a luxury travel company specializing in small ship cruises in remote and exotic destinations, such as the Peruvian Amazon and Mekong Delta of Vietnam and Cambodia, along with yachting experiences in Indonesia and the Galápagos Islands. Integrating with Flywire has helped Aqua Expeditions streamline their accounts receivable payment reconciliation process, enabling faster payment notification and funds disbursement capabilities.
We are excited to tap into this new subsegment of travel and expand with ocean experience providers around the world. Finally, our B2B vertical covers a broad TAM estimated to be about $10 trillion, where we focus on providing mid-market enterprise clients with a sophisticated and integrated accounts receivable solution. Although starting from a smaller base currently, our B2B business is our fastest growing vertical, and we believe has a very promising future impact for Flywire. Within this massive B2B TAM, Flywire is gaining traction in various subsegments of the market, including insurance, software and tech, manufacturing and distribution, franchises, and others that include the public sector. We recently went live with the European Union Aviation Safety Agency, or EASA for short, which is an agency of the European Union responsible for overseeing and coordinating aviation safety across its member countries.
Flywire is directly integrated into EASA's SAP instance to ensure a consistent billing and payment workflow with their existing ERP system, with a key benefit being automated payment reconciliation to remove manual processes around accounts receivable. While on the topic of ERP integrations, I'll also mention that we built out and are live with an integration with Workado [ph], a cloud automation and integration platform for enterprises that seamlessly connects to widely used enterprise accounting systems such as SAP, Sage Intact, Microsoft Dynamics 365 Business Central, Intuit QuickBooks Online, and Oracle NetSuite. We believe that further building out our integrations with leading ERP integrators and systems will help us further penetrate our large TAM opportunity.
Stepping out of the verticals and moving to our efforts towards efficiency and scale, I would highlight that in 2023, while we grew revenue less ancillary services by 43%, we reduced our hiring by almost 50% in terms of incremental run rate spend versus what we added in 2022. Our paced hiring in 2023 helps drive personnel expenses as a percentage of revenue less ancillary services down by over 530 basis points when comparing 2023 to 2022. We generate these scale efficiencies by working as a very collaborative team that is focused on careful pacing of hiring and managing of expenses. We expect to continue this focusing on managing all expenses, including personnel expense, in 2024 to produce additional improvement in run rate and personnel expense relative to revenue and to improve adjusted EBITDA margin.
I will now turn the call over to Mike Ellis to go over our results for the quarter and year as well as provide guidance for 2024. Mike?
Michael Ellis: Thank you, Rob. Good afternoon, everyone. Today I will provide an overview of our results for the fourth quarter and then discuss our outlook for Q1 and the full year. Revenue less ancillary services was 96.1 million in Q4, representing a 43% growth rate compared to Q4 2022. On a constant currency basis, our revenue less ancillary services growth rate for Q4 2023 was 41% compared with Q4 2022. Our revenue growth rate was driven by increases in total payment volume due to strong growth from our international cross-border payment volumes in our education vertical, particularly with our U.K. higher education clients as well as growth from our travel clients. FX rate changes represented a tailwind in comparison to Q4 of 2022 and a tailwind against the guidance we provided for Q4 and full year on our last earnings call, which were based on prevailing rates on September 30, 2023.
For purposes of comparing our Q4 2023 reported results against our most recent Q4 guidance, we had an FX tailwind that amounted to approximately 0.7 million on Q4 reported results. Q4 revenue less ancillary services outperformance compared to our expectations was driven by stronger than expected volumes from new U.K. higher education clients, strong monetization of payment volumes, better than expected utilization of our payment plan capabilities in the United States and higher Canadian volume, which we believe was driven by students accelerating some 2024 payments. With respect to payment volumes, we processed 5.4 billion during Q4 2023, which represented an increase of 33% from the 4.1 billion processed during Q4 2022. Specifically, transaction revenue increased 45% compared to Q4 2022 driven by a 46% increase in transaction payment volume.
Platform and usage-based revenue increased 32% compared to Q4 2022 driven by a 5% increase in platform and usage-based payment volume, as well as from platform fees that do not carry any associated payment volumes, including revenue associated with the contributions of our payer services offerings and our recent acquisition of study length. We generated $63.5 million in adjusted gross profit during the quarter, representing a 42% increase compared to the $44.5 million earned during Q4 2022. Specifically, our adjusted gross margin was 66.1% for Q4 2023, up 10 basis points from 66.0% as adjusted for Q4 2022. The year-over-year change in adjusted gross margin was driven primarily by monetization rates on transactions and improved economics with our payment partners.
However, this was offset by strong growth of our transaction revenue versus our platform revenue, particularly from our travel vertical where credit cards are predominant. Adjusted EBITDA for the quarter was $7.7 million, an increase of $6.7 million over the $1.0 million reported for Q4 2022. With respect to capitalization as of December 31, 2023, we had $655 million in cash and equivalents, no long-term debt, and 122.5 million shares of common stock outstanding. We also increased our borrowing capacity to $125 million through an updated credit facility with an expanded five-year term. While we're not planning to draw on the facility in the near term, it provides financial flexibility for funding M&A and other strategic investments. Moving on to guidance.
The full year 2024, which is based on foreign exchange rates as of December 31, 2023, we expect revenue-less ancillary services to be in the range of $483 million to $509 million, representing a year-over-year growth rate of 30% at the midpoint. This growth reflects continued confidence in our go-to-market and ongoing penetration of the TAM across our verticals. Our guidance reflects a net reduction of low-teens millions of dollars to revenue related to recent announcements that the Canadian government will reduce applications for international study permits. We expect to deliver full year 2024 adjusted EBITDA in the range of $65 million to $76 million. At the midpoint of our full year 2022 guidance range, we expect to generate approximately 320 basis point improvement in adjusted EBITDA as a percentage of revenue-less ancillary services for the year.
We expect to achieve adjusted EBITDA margin expansion through strong revenue growth in discipline spending offset in part by the adjusted gross margin impact from our ongoing shift in revenue mix. In addition to the impact on our full year revenue guidance, the Canadian regulatory changes are expected to impact the seasonality of our business in 2024. Ordinarily, revenue from education customers in Canada is earned relatively evenly throughout the year. Under the new Canadian undergraduate student permit policies that were announced in late January, provinces are not expected to allocate study permits to schools until late Q1 or early Q2. This is reducing applications, admissions decisions, and payments for many international students so far in Q1.
These dynamics are expected to push some payments in subsequent quarters as permits are available in Canada or students seek alternative destinations. With that context, Q1 2024 revenue-less ancillary services is expected to be in the range of $106 million to $111 million. This guidance reflects a reduction of Q1 revenue in the mid-single-digit millions due to changes in Canada. Rounding out the guidance discussion, we expect Q1 adjusted EBITDA to be in the range of $9 million to $11 million. Overall, we are excited about a strong 2024 and look forward to what we expect will be a strong year of revenue and adjusted EBITDA growth. I want to finish by saying that it's been a great honor to be Flywire's CFO for the past nine years. Flywire is well positioned for continued success and I will continue to cheer them on.
I'll now turn it back over to the operator for questions. Operator?
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