Hello and welcome to the Paysafe Q1 2023 Earnings Conference Call and Webcast. [Operator Instructions]. 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 turn the call over to Kirsten Nielsen, Head of Investor Relations.

Please go ahead, Kirsten..

Thank you, and welcome to Paysafe’s Earnings Conference Call for the First Quarter of 2023. Joining me today are Bruce Lowthers, Chief Executive Officer; and Alex Gersh, Chief Financial Officer.

Before we begin, a reminder that this call will contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the Company’s most recent SEC reports.

These statements reflect management’s current assumptions and expectations and are subject to factors that could cause actual results to differ materially from those forward-looking statements. You should not place undue reliance on these statements.

Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. Today’s presentation also contains non-GAAP financial measures.

You can find additional information about these non-GAAP measures and reconciliations to the most directly comparable GAAP financial measures in today’s press release and in the appendix of this presentation, which are available on the Investor Relations section of our website. With that, I’ll turn the call over to Bruce..

Thanks Kirsten and thank you everyone for joining us today. If you are following along our webcast let’s begin on Slide 3. After returning to growth in the back half of 2022, we kicked off 2023 by delivering our strongest quarter revenue since the IPO.

First quarter revenue was $388 million exceeded our guidance range and increased 7% year-over-year on a constant currency basis. We recorded 8% growth in the Merchant Solutions segment including double-digit e-commerce growth.

In Digital Wallets revenue increased 6% on a constant currency basis including strong performance from our classic Digital Wallets. In first quarter adjusted EBITDA of $108 million was at the high end of our guidance, and increased 5% year-over-year on a constant currency basis.

Excluding one-off personnel expenses related to executive severance, adjusted EBITDA would have increased approximately 7% in line with our constant currency revenue growth.

Throughout the turbulence in the banking market Paysafe has been unaffected by the failures of SBB, Signature Silvergate or First Republic and we have no direct relationships with these institutions.

We operate a network of roughly 100 banks globally and always look to build resilience into our payment flows so that we can route payments through other partners as needed. We have robust safeguarding in place to ensure the ring fencing of customer funds, and we operate our acquiring business in the U.S.

through FBO accounts to further manage any risk of our customers. Our U.S. customer balances are supported by pass through FDIC insurance. Turning to a few business highlights.

In April, we welcomed Nicole Carroll, who joined us from Experian to lead our strategy and innovation for Paysafe, where she will support a key strategic vision that links our extensive set of APMs with our wallet technology across our core geographies and verticals.

As I mentioned in our recent Investor Day, Paysafe was recently ranked third and well above the industry standard on the J.D. Power's Merchant Services Satisfaction Survey, a testament to the team's focus on the customer experience.

We continue to see strong activity in regulated North American iGaming, including the launch of three states in Q1, expanding our payments partnerships with several major brands, including DraftKings, Caesars and PointsBet, among others. Paysafe now powers payments for 27 states, which is up from 22 states at the end of Q1 last year.

Outside of regulated gaming, we're seeing strong growth in other sub verticals such as fantasy sports, social and skill gaming. In Ontario, we launched three new merchants who are leveraging both our card acquiring and interactive e-transfer capabilities.

We also activated e-cash for several existing clients and are excited about our Q2 launch of our Skrill Digital Wallet in Ontario. We also continue to make progress on our sales transformation to reinvigorate growth with a focus on building out our enterprise sales function, maintaining our plan to double the team's headcount in 2023.

In the first quarter, we closed 30 enterprise deals with more than 100,000 each in annual contract value and 20 deals that included multiple Paysafe products. We also expanded our pipeline of cross-selling and geographic expansion opportunities from the prior quarter.

I'll also highlight that we've improved our deal integration process, resulting in a 50% reduction in the average time to integrate a new merchant from the point of contract signing. Turning to Slide 4 for a few examples of recent wins. At our Investor Day, we outlined three key focus areas as part of our sales transformation.

First, cross-selling new Paysafe products to existing merchants. Second, expanding our existing merchant base into new geographies. And third, pursuing new merchants in our key verticals. While these specific examples are not material in size, they provide some color around the momentum we're seeing and why we're winning.

Merchants are coming to Paysafe for the extensive set of payment options across our global footprint available through a single API, along with our ability to manage risk and deliver better customer experience.

With our European gaming merchant base, we closed three smaller deals to add card acquiring to existing digital wallet clients, highlighting our progress in upselling into our large customer base, leveraging our long standing relationships and brand recognition across the region.

In the financial trading vertical, we expanded our relationship with ATFX and existing digital wallet client and leading FOREX merchant in the UK to support their growth aspirations in Latin America.

As a final example, we recently entered into a partnership with Crypto Orange to provide an entire suite of Paysafe products, including our digital wallet as their main pay in pay out infrastructure, as well as our key payment methods, including credit card processing and e-cash across the entire geographical footprint.

These wins were supported by our new go to market structure, which organizes the sales function by our core verticals and has improved our ability to sell Paysafe as a strategic payments offering while also improving deal execution and increasing the average deal size, global pipeline, and win rates.

Moving to Slide 5, consistent with the update we provided last quarter, this view is focused on our classic digital wallets.

One of the repeated questions I was asked a year ago was could we get our classic wallet to grow again? Well, in Q1 not only did we see continued stabilization in our underlying active user base, but we recorded constant currency revenue growth of 10% from classic wallets supported by stronger engagement, including double-digit growth in transactions per active user and average revenue per user following a more pronounced seasonal uptick in Q4.

Consumer deposits in classic digital wallets were also up double-digits again compared to Q1 of last year, excluding the Russia and Ukraine war and FX.

As we mentioned on the prior call, drivers of improvement include ongoing initiatives to enhance the user experience and reduce friction such as improvements related to onboarding, KYC, personalization, and customer service, as well as deposit success rates and merchant checkout conversion rates.

We are also piloting new features that are resonating well with consumers, including new loyalty and rewards enhancements to support adoption and retention.

Looking ahead, we will leverage our progress in user experience and product enhancements, broadening the appeal and the use cases of our wallet platform to adjacent markets, which may temper growth across our TPA and average revenue user metrics while driving growth. With that, I'll ask Alex to review the financial results..

Thank you, Bruce. Let's move to Slide 7. We are pleased with our financial performance for the first quarter with revenue above our guidance range and adjusted EBITDA at the top of the guidance range. Excluding approximately 2 million of non-recurring personnel costs, adjusted EBITDA would have exceeded the top of our guidance as well.

Moving to Slide 8 for the summary of our financial results. Volume was 33.8 billion, an increase of 8% year-over-year, reflecting continued strength in the Americas where the Merchant Solutions business saw strong growth in e-commerce and continued resiliency in U.S. consumer spend.

In Digital Wallet we saw continued improvement with underlying growth from iGaming and digital assets offset by FX. Volume mix for the quarter was 84% from Merchant Solutions and 16% from Digital Wallets, reflecting a slight mix shift to the merchant segment compared to Q1 of last year or roughly flat sequentially, not adjusted for FX movement.

Total revenue for the first quarter increased 5% to 387.8 million on a reported basis. Excluding the impact from changes in foreign exchange rate, revenue increased 7% reflecting growth from both segments. Adjusted EBITDA for the first quarter was 107.8 million, resulted in adjusted EBITDA margin of 27.8%.

Excluding one off personnel costs related to executive severance, the margin would have been at 28.3% or flat year-on-year. In Q1, we generated 70 million in free cash flow reflecting 65% conversion, which is 8 percentage points higher than Q1 last year. Free cash flow was 308 million on the LTM basis reflecting conversion of 74%.

Adjusted net income for the first quarter was 33.1 million or $0.54 per share compared to 37.3 million or $0.62 per share in prior period, mainly reflecting the increase in interest expense. Let's move to Slide 9 to discuss the segment results. Merchant Solutions delivered another quarter of strong growth.

First quarter volume was 28.6 billion, an increase of 10% year-over-year and revenue for the first quarter was 208.5 million, an increase of 8%, reflecting continued strength in our U.S.

SMB space, along with strong growth in e-commerce led by iGaming, including the launch of five new states over the same period last year, as well as the onboarding of new merchants. Adjusted EBITDA increased 8% to 52.3 million, reflecting a 25.1% margin, largely consistent with the first quarter of last year.

Turning to Digital Wallets segment on Slide 10. First quarter volume was $5.4 billion, flat year-over-year, which is not adjusted for FX headwinds. Digital Wallet revenue for the first quarter was $181.4 million, an increase of 6% on a constant currency basis.

Adjusted EBITDA in the Digital Wallet segment was $79.2 million, an increase of 12% constant currency and reflecting a 43.7% margin, up 180 basis points. As Bruce highlighted, we are seeing continued progress led by our growth initiatives focused on user experience, product innovation, and sales transformation.

Growth was also supported by interest revenue on deposit, which partly offset the headwinds from FX and the Russia-Ukraine war. Turning to Slide 11 for the summary of debt and leverage. At the end of the first quarter, total debt was $2.6 billion, reflecting debt repayment and repurchases of roughly $50 million in Q1.

Movement in FX increased our debt balance by approximately $15 million. Our net debt-to-LTM adjusted EBITDA ratio was 5.8 times at quarter end, and we remain highly focused on reducing leverage through further debt repayment and EBITDA growth in 2023. We continue to believe we will be in the range of 5.1 times to 5.3 times by year-end.

Moving to the outlook on Slide 12. Based on our Q1 results, we feel confident in maintaining our 2023 outlook. We continue to expect reported revenue in the range of $1.58 billion to $1.6 billion, reflecting growth above 6% at the midpoint.

We continue to expect adjusted EBITDA in the range of $452 million to $462 million, reflecting at least 100 basis point of margin improvement. Starting this quarter, we will be moving away from providing explicit quarterly guidance ranges and focusing on our full year guidance.

That being said, our current view on the cadence of the year is broadly consistent with what we discussed on our last earnings call, which was that our full year guidance reflected low single-digit revenue growth in the first half and high single-digit growth in the second half driven by the ramp-up of our sales transformation and other strategic initiatives.

And now I will turn the call back to Bruce..

Thank you, Alex. In closing, I want to thank our team for their hard work and reiterate that Paysafe is well positioned to reaccelerate growth and improve margins. We maintain strong positions in large attractive markets.

We are fortunate to serve a premier global client base with about 70% of our revenue coming from online and when we see significant cross-selling opportunities across our core products and geographies.

By continuing to prioritize client experience, product innovation, and our sales transformation, we believe that we can unlock meaningful opportunities and stakeholder value for years to come.

Lastly, with the acceleration of AI technologies, Paysafe has been actively engaged in the last two years in the development partnership of a range of AI tools to enhance our customer experience, manage risk, support sales growth, and deliver company-wide efficiencies.

Today, we have over 50 active machine learning modules developed by our in-house data science team. We're seeing benefits of our risk models that analyze spending habits to provide a defense against money laundering and fight fraud as well as improved onboarding decision-making.

AI is also playing an important role in our customer servicing department where we have virtual assistance that use AI capabilities of machine learning and natural language processing to understand around 150,000 user inquiries and e-mails per month and respond appropriately.

Our virtual assistance learn, adapt and improve over time to deliver advanced personalized service. We continue to be excited about the future developments, which will further enhance the areas as payment acceptance optimization, pricing, sales, and overall risk management. Now let's begin with the Q&A..

Thank you, Bruce. We'll take a couple of questions from the Say Technologies platform, which allows shareholders to submit and up vote questions. After that, we'll turn to questions from our research analyst community.

Our first question is from Ivan who asked about the possibility of selling the company? Bruce, would you like to address this one?.

[Operator Instructions]. Our first question is coming from Jamie Friedman from Susquehanna. Your line is now live. .

Thank you. Your next question is coming from Timothy Chiodo from Credit Suisse. Your line is now live. .

Thank you. [Operator Instructions]. Our next question today is coming from Aditya Buddhavarapu from Bank of America. Your line is now live. .

Thank you. [Operator Instructions]. If there are no further questions at this time, I'd like to turn the floor back over for any further or closing comments..

Yes, great. Thank you very much. Look, just a couple of comments here to wrap it up. We recognize that successful turnaround requires really a relentless focus on execution. It's not achieved in a quarter or two, but pretty sustainable growth and that's really what we're focused on.

Our plan is beginning to bear positive results and then we remain optimistic that we're on the right path. Our management team appreciates the hard work of our employees and the patience and support of our customers and shareholders as we navigate through this transformative journey.

So with that, thank you, really appreciate everybody's attention this morning, and have a great day..

Thank you..

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today..