Flywire Corporation (FLYW) Earnings Call Transcript

So really excited to have Flywire here for this session. We're going to do fireside chat. We'll take questions from the portal and, of course, from the audience. With us from Flywire, we've got Mike Massaro. And we've put together a lot of the questions, so hopefully cover all that. So again, don't be afraid to ask. But Mike, thank you for being here. Welcome.

Thanks for having me. Excited to be here. Home turf for us, so it's nice to not travel far.

Easy. So I feel like we've done this trip and this meeting a few times, even back when you guys were private. So it's great to see the company has evolved. So I know people are still filing in, and I know I've usually asked you the question around what problem is Flywire trying to solve or the founding of the company. But I feel like the most common question I get, Mike, is sort of what's moat, right? And think of Flywire doing complex payments in some important verticals, whether it be education, B2B, health care, travel, but why those verticals and what's the moat? Why are you doing it and others can't?

Yes. So if you look at payments, if you look at what's happened in certain types of payments that you interact with, whether it's e-commerce and purchasing things online, it's gotten almost too easy, right,; too easy to click and buy something and have boxes show up at your house. You're tapping and paying more places than ever before. So there's been parts of the global economy that have been digitized quite well in the last 2 decades. Flywire kept finding industries, large parts of global GDP, that were not well digitized. And so things like education payments, health care payments, certain types of travel payments, certain types of B2B payments. And our belief is that there are different types of payments. They're a bit harder to digitize. You have lots of complex enterprise software in the middle. You have typically large transaction size, lots of cross-border, lots of bank wires have historically been there in those payments. And so what we built is a series of software targeted at those industries, a core set of payment functionality and probably what's most unique is this global payment network. So when you think about how we get deployed, we end up with these kind of multiple moats to our business. And so you deploy software first in between our customer system of record and their client, their customer. So whether that's a consumer paying a university from overseas to send their student abroad, whether it's a business paying another business in a different country, all good examples. That software is connecting to the system of record of our client. It could be a student information system, an ERP system, a health system, bookings platform for a travel company. And we're delivering payment experiences straight through so their payer can pay quickly, easily, no matter where they are in the world, through all different types of methods. So you got the deeply embedded software, kind of first moat. Second moat you have is that we bring with us our entire payment network. And so think of that as 50-plus local bank accounts. Think of them as ACH equivalent local rail accounts all around the world, acquiring, processing relationships with some of the top credit card processes within the world, third-party payment methods like China UnionPay, Alipay, WeChat, all the local methods people would want to pay around the world. And so we're taking those actual relationships as well from our customer, just offloading them from that burden. So to beat Flywire, you got to get our deeply embedded software out of this critical spot in their infrastructure. You have to develop a payment network that took us 12 years to build and that replaces so many relationships that our clients hand over to us effectively with an agreement. And then we have vertical teams, and these teams are just experts. So that's almost the third moat, right? If you can get our software out, if you can replicate our network, and if you can outcompete our team of vertical experts. And so think of these as individuals who have spent 10 or 20 years in education, health care, certain types of business payments and they really understand these industries. And so we're not sending generic client service team members or salespeople into these accounts. And so when we say moats, we mean that and we mean we have kind of multiple sets of them that you have to clear to compete with us.

Yes, because I get a lot of questions, people are asking about real-time payments and low-cost networks, intelligent networks, and there's a lot more to it than just the transaction. So is the competitive advantage, Mike, if we were to rank it, is it more the software, in your mind? Or is it -- was it more the network? Because we hear companies trying to build out networks or they're really strong on the software, but you obviously do it all.

Yes. I really believe it's a combination, right? Obviously, there's companies that have all started building these kind of white label networks. There's so many of them. There seems like there's a new one every day. Some are regional. Some are focused on certain types of transactions or certain types of methods. The thing you often realize there is that you then have to -- an ISV or a software vendor tries to embed one of those networks into what they're doing, right? But usually, that software vendor is not an expert in payments. And so you kind of have this disconnect where you don't really penetrate the market, you don't really solve. It's kind of hit or miss success. And so by having that combination together, you actually understand what problems are you trying to solve within that industry. You build that in the software and then the software effectively controls the routing of the payment. And so that combination is so important. And we just see it time and time again. Payments are complex. Our university clients, our hospital clients, businesses, they don't want to understand payments. They don't do what they do to be payment experts. They don't understand interchange. They don't want to negotiate it. They don't want to have a primary acquirer, backup acquirer. They don't want to deal with all the complications of global payments, and that's what we can take that burden away. So I really believe it's the combination of those 2 things together, the vertical software plus having the capability to clear the payments.

Good. So I know there's a lot of questions around cyclicality and the health of the consumer and that kind of thing. Your business seems to be pretty defensive given the industries that you're in. How resilient do you think the business is have? You seen any changes in consumer behavior?

Yes. I mean, we continue to be really strong. As you said, we are defensive. The industries are traditionally very defensive in nature. Sadly, with a kid going off to college, I joke, I haven't seen a tuition bill ever go down. And so things like that continue to go up over time. And so when we look at the industries, our clients have often been around quite a long time. 7 of the 8 Ivy Leagues use Flywire technology, for instance. Like these are organizations that have been around for decades and are quite robust in kind of going through ups and downs. Also, when you just look at education, typically, if there is a softening of the economy, typically people retool and go back and get further education. And so it's typically been something that has been kind of the opposite side, seeing actual growth and expansion in a recessionary environment. So again, we feel -- continue to be really good. B2B payments don't see it. Even in travel, we still see a huge surge as many companies report in travel. We're focused on a particular area of travel that is a bit, we believe, more defensive. So it's more luxury travel experiences. So think of if you've ever gone to a big family trip in a foreign country, if you've ever gone on an African safari, family vacation in Iceland, any of those types of things, rented a vacation property for an extended period of time. Those are all areas in which we actually work in travel. So we're not competing with like general consumer low-ticket travel dollars. We're really owning those kind of once-a-year life experience type trips where, again, the transaction size is very high. And typically, the consumer is able to make those purchases just based on net worth.

Good. Makes sense. So how about flipping around for the client side? How big of a strategic priority is it for these education clients, travel clients, et cetera, to say, hey, we've got to modernize and think about a solution here and choose Flywire?

Yes. I mean, navigating the pandemic and kind of coming through that, you saw everybody have to do more with less. And I think that trend has continued, right? Everybody is looking at their back office, people are being careful about how they're hiring. That's what our clients are going through, right? So if they can automate a process, if they can take away manual work that was part of their day-to-day and help automate that or take -- work off their plate, that's where they see an opportunity for Flywire to help them. So we see that consistently across industry. And remember, a lot of the payment volume that Flywire processes has been legacy bank volume. So over 80% of our volume is bank volume. So again, it's not a traditional card transaction. These are typically bank wires, typically thousands, tens of thousands, hundreds of thousands of dollar transaction sizes. And so again, oftentimes, historically, very manual. A lot of work to reconcile, identify those payments post them to the right system, and we can automate that.

So how would you characterize pipeline, ARR, those kind of metrics in the funnel?

Yes. I mean, we're 8 quarters of being public. So far, so good. As we've looked at that kind of execution, we've been able to invest. And even last year, we stated it was our largest investment year ever as a company by percentage of revenue, by dollars spent. And our 2 big areas of investment were go-to-market expansion and product and technology. So being able to invest, going into more geographies, adding more sales, client service, implementation teams. We've seen growth in pipeline. We've seen record number of new client signs in a quarter and growth in pipeline. So not kind of pulling in pipeline, but actually expanding total pipeline while also increasing record number of quarterly signs. So we feel really good about it. It's not just more people. It's also a better process. I did joke earlier, I'm no longer the sales force admin in my company. I love revenue operations, but we have an amazing team that's also been just helping scale how we handle these multiple verticals, multiple geographies, and it just helps us grow pipeline. Our marketing is very efficient. I think there's a stat that we've shared, $1 million of marketing spend resulted in over $10 million or $11 million of pipeline in Q1. So very efficient use of digital marketing, targeting these industries all around the world, great word of mouth as well that just drives low LTV to CAC. So really great business when it comes to adding more pipeline and signing clients.

Let's -- before we get into the verticals, like maybe I like to look at NRR, and it's been -- I think you trained us to look at it. I think there's been a lot of -- but we've sort of moved away from it at the same time, if you like, sometimes. But we've seen it sort of peak out, I think, at a pretty high level, 107 and something in its own and it sort of drifted a little bit down but still very, very strong. Can you build up for us the NRR? Because I get questions around same-store growth and upsell, cross-sell, churn, that kind of thing. How do you build it up?

Yes. So net revenue retention is a number we report quite a bit, have since the IPO. 3-year average kind of in that mid-120s. It's the cornerstone of our growth algorithm. So since IPO, even on the last earnings call, we continue to tell people, think of us as a 30%-plus organic grower. And then on top of that, inorganic moves can even bring that number up higher over time, right? So the cornerstone of that growth algorithm for people to get comfortable is that NRR. So that is -- think of it as almost like a sale -- same-store sales number. And so when you start with something in the kind of mid- and 3-year averages in that mid-120s range, so you're already in that kind of proven ability time and time again, to grow revenue at existing accounts. Then you're adding on top of that full year effect of clients signed in the prior year. And then you're adding on top of that new clients signed in a given year and the revenue associated to those clients, right? So you can kind of very easily map how you can get to that kind of 30-plus percent organic growth. And then you also have all these great drivers of NRR. A lot of companies just have a price lever they can use to push it. Maybe it's another product capability some companies have. We actually have like 5 or 6 different things that are driving NRR where you get macro conditions, right? I mentioned tuition bills go up, right? That does help. You've got geographic expansion. You could have signed a client in -- a good example is Hilton for us in our travel business. We signed Hilton doing their European and U.K. properties for their Vacations Club business and then expanded to Rest of World properties. So same product deployed in multiple geographies for the same client grows NRR. You can layer in a new product, right? You can do the cross-border tuition product like we did at Stanford and then add in the domestic payment processing for Stanford, again, driving more NRR. Sometimes, you'll get a hospital where you're deployed in all their -- Flywire is deployed in 4 of the top 10 U.S. hospital systems. And sometimes, you'll get one state or one EHR system like an Epic, but you don't have the Cerner deployment for that same hospital where you'll get a different state or region of the country that you can expand to. So sometimes, it can be a geographic, sometimes it could be functional. And so all these different levers, even our payment network drives NRR. If you think of our ability to process payments for all over the world, if we get a new node in that payment network, if we're monetizing a new country like Vietnam or Nepal, all of a sudden, that's volume that was already going through Flywire, but it wasn't being monetized. If we can turn on a new node that -- new bank account, a new payment partner in a given geography that can create NRR across our entire customer base because now we're monetizing payment volume that we weren't monetizing before. So all of those are kind of feeders into that NRR number. It's what gives us such confidence in it. And then again, that 3-year average is -- we've proven it twice as a public company to be able to maintain it, which we think is pretty impressive.

Good. So let's talk about education. I'll start with that. That's how I got to know the company with the cross-border servicing international students. You just mentioned, right, in the Ivy League side, you guys quite a bit of penetration there. So how much more room is there to go with the cross-border piece? But I always like to ask you the question, Mike, right, it feels like you're just beginning to transition and start to do domestic payments as well about your existing accounts and doing payment plans and designing that. And I'm sure there's a lot of pain at the AR side. So talk us through both those things, if that's okay.

Sure. Yes. So Flywire started probably first 6, 7 years, we're only with one product in one geography, so in one vertical, and that was cross-border education. So it's where we started. We saw the use case of university struggling with the ability to get paid from all over the world. Their students and families were having to do very manual processes, high-cost payments. And we looked and said, geez, if we can solve that, we can be the pay button for the international student and parent and then streamline the back end operations, that seems like it would be a good business. It took us time to actually then realize we needed a payment network to monetize that. You couldn't borrow someone else's network to do this accounts receivable transaction in many, many places around the world. But the beauty of that model, it's a B2B2P, B2B to payer, right? So we're getting the university to make us the bill and/or the pay button and we're getting put in front of the parents and the student for that transaction. And so a great way of growing the business. And then our clients effectively kept saying we kept looking for another product. I remember my head of sales, Sharon, telling me, I need another product to sell, right? I have all these amazing clients. They love our first product. They're like, I can upsell them with something, what are we going to kind of build out? And we thought of all these different ideas, other things we could do. And our clients just kept saying, just domestic payments. Why don't you just do all my payments, right? It was something that we had thought was already solved in almost a commodity. And the reality was a lot of the legacy vendors in that space had relatively dated technology. And so people looked at us as being a modern vendor of software, someone that could deploy all the payment methods and just standardize across cross-border and domestic payments. And so we started to add that as an offering. We also went global. So we took the education business outside the United States and had this question of, could we get universities around the world using this product? Is it hard to get a Canadian University or U.K. or a Spanish university or one in Singapore, Malaysia, Australia, using the same product? And so we started seeing success globally and doing both domestic and cross-border. And so that's been a huge growth lever for us. If you fast forward today, you're sitting with -- across our industries, 3,500 clients, over 30 -- I think it's 35 countries now. So it's a significant global footprint in client base. But now we're actually moving all the tuition dollars for huge U.S. universities like Texas A&M, Stanford, UVA, where my son is going next year. So it's a really great growth strategy for us, to be able to deliver software that doesn't just monetize the domestic payments, but also the cross-border side. And when you think of the penetration level, to finish your question, we're still single-digit penetrated within our total addressable market for education. And the number of clients that have taken are all our capabilities is still single-digit percentages inside education. We actually shared a stat that without signing another customer, we could 3 to 5x revenue in the company, never signing another customer, just by getting all our existing clients to use all our capabilities, which is a pretty powerful step.

Yes. So you talked -- you gave that metric, around $1 million, translating to $11 million in pipeline, right, Mike? So the temptation, I'm sure to spend more, right, to drive growth has got to be there. And I think you've also talked about the partner model and the potential to get more through partners. So where are you in that?

Yes. So we have bucked the trend. I mean, we continue to have really great growth numbers. And as I said, last year was a record investment year. So even as you saw companies starting to pull back, we continue to talk to the market about why we wanted to keep investing around go-to-market and product because we just saw so much opportunity continuing to penetrate the total addressable market we had. And we're seeing some of those continued benefits this year, and we're even being -- even though our spend, our hiring spend, for instance, is down 60% or so from last year, we're still hiring, right? Because we see that opportunity to invest for the future. These aren't investments we're making for '23 or even early '24. These are investments we're making for multiple years out. And so the beauty of those investments are -- they aren't massive dollars, right? You can actually expand geographically in a country with a handful of new hires, and you could turn that into a market that's not just initially generating 6 figures of revenue but 7, 8 figures of revenue with just a handful of clients and salespeople. And so those kind of investments we want to continue to do, we see the opportunity, and we've proven to be able to do it in over 30-plus countries across multiple industries. And so those are the types of investments we're making. But it's not just people, it's also process, being smart about our tooling. I think every company is looking at SaaS-based tooling and what is critical software you're using in the company and how are you negotiating those agreements and being efficient. We're looking at all areas of spend to just really be great stewards of capital, which we have been historically as a private company. But we continue to show not only great growth numbers, I think it was 57% constant currency growth, but also EBITDA margin expansion. So we've committed to 300 to 600 basis point EBITDA margin expansion. And so we're able to show these growth numbers with positive EBITDA and EBITDA margin expansion, which we think is pretty unique.

Before we leave education, anything else to call out that I didn't cover? I know you get questions on China.