Greetings, and welcome to the Flywire Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Akil Hollis. Please go ahead.

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 and fiscal year 2022 earnings press release, supplemental presentation and when filed associated annual report on Form 10-K 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. Risk factors associated with our business and required disclosures 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.

Thank you, Akil, and thank you to everyone that is joining us today. We are pleased to share our Q4 and fiscal year 2022 results here with you all today. These results continue to show strong performance across the business. We are also eager to share our business priorities and financial outlook for 2023, as well, during this call. In a few minutes, Rob Orgel, our President and COO; as well as Mike Ellis, our CFO, will go into greater detail about our results during the quarter. But first, I will start with a few financial highlights. First, let's start with the fourth quarter. Revenue less ancillary services was $67.4 million, representing year-over-year growth of 47% or 57% on a constant currency basis. Adjusted gross profit for the quarter was $44.5 million, an increase of 40% year-over-year and adjusted EBITDA was $1 million for the quarter. As our Q4 results now cap off another great year for Flywire, I want to take a few moments to talk about some of the things we were able to achieve in fiscal year 2022, a truly exceptional year for Flywire. Starting with our fiscal year 2022 financial highlights. Flywire revenue, less ancillary services, grew by 47% or 55% on a constant currency basis. Our adjusted gross profit grew 40%, and our adjusted EBITDA was $14.9 million despite our record investment year. In FY 2022, we also added more than 590 clients across all verticals and now serve more than 3,100 globally. We moved more than $18 billion around the world. We saw significant growth in our travel vertical, more than tripling the revenue of this business. And we completed the acquisition of Cohort Go and continue to successfully integrate the WPM business, finishing the year with over 40 clients for our combined solutions.…

Thanks, Mike. Good afternoon, everyone. Our strong results this year reflect continued execution of our growth strategies, carrying forward what was an excellent 2022 of execution and delivering results. After a significant investment year in 2022, we are working to scale our business efficiently as we move through 2023. We will focus on leveraging the incredible talent added to the company last year in this year's efforts. In terms of the core business, we will focus our teams on revenue growth and efficiency initiatives across our business. In terms of our innovation areas, such as strategic payables and payer services we are focusing on advancing revenue generation from these areas. There will be some hiring in 2023, but it is expected to be narrowly focused on areas of greatest need and highest return on spend. All in, the run rate spend added in 2023 is expected to be at least 60% less than last year's expansion, and that is into a much larger underlying business given the over 55% currency-neutral growth in 2022 that Mike referenced in his opening comments. As you will see further when we get to the guidance discussion, our strong underlying business and a focused and disciplined plan for 2023 position us for our forecasted adjusted EBITDA improvement in 2023 and also for continued growth and improved efficiency in 2024. Turning to the business performance in Q4 and 2022, we continue to see good results in 2 important metrics of our go-to-market performance. First, we grew existing clients with our NRR continuing for full year 2022 at 124%, supported by client volume growth and expansions and despite the offsetting impact from the FX headwinds we faced in 2022. In terms of new clients, we added over 145 new clients in the quarter, continuing our strong quarter-by-quarter…

Thank you, Rob. Good afternoon, everyone. Today, I'll provide a quick recap of a great 2022 and an overview of our excellent results for the fourth quarter. I will then discuss our outlook for full year 2023 and Q1 2023. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings press release for a reconciliation from non-GAAP to the most directly comparable GAAP financial measure. For full year 2022, we reported revenue less ancillary services of $267.1 million, representing an increase of $86.0 million in absolute terms and a 47% growth rate. Foreign exchange headwinds meaningfully reduced our revenue and revenue growth rate during 2022. Specifically, on a constant dollar basis, our growth rate would have been 55%, representing a full year 2022 FX headwinds of approximately $14.2 million. In addition, despite our record investment year, we generated adjusted EBITDA of $14.9 million, essentially right at the midpoint of our revised full-year guidance but well above the full-year guidance we provided at the start of 2022. Moving on to our Q4 2022 results. Revenue less ancillary services was $67.4 million, representing a 47% growth rate compared to Q4 2021. The FX headwinds also meaningfully reduced our revenue and revenue growth rate during Q4 2022. Specifically, on a constant currency basis, our revenue growth rate for Q4 2022 would have been 57%, representing an FX headwind of approximately $4.6 million during the quarter. However, compared to our guidance provided in November 2022 for Q4 2022, FX changes resulted in a tailwind of over $1.0 million. Our revenue growth rate was driven predominantly by an increase in total payment volume, particularly due to strong growth from our international cross-border payment volumes in our education and travel verticals. We processed $4.1 billion in total payment volume…

[Operator Instructions] The first question is from Dan Perlin of RBC Capital Markets.

I wanted to -- I just wanted drill down a little bit on the guidance for the moment in the range that you guys gave. What kind of assumptions are you making in terms of expectations from a macro perspective? And then, how much is kind of predicated off of, I guess, just what we might consider to be kind of like noncyclical growth from net new clients and things of that nature that are rolling on the system where you have good visibility today relative to just kind of the volume-based business?

Dan, thanks for the question. This is Mike. Obviously, we operate in markets that we believe traditionally have been quite resilient in kind of economic uncertainty or downturns. Our modeling for this year, obviously assumes these industries will continue to be resilient. People may remember we do our model builds kind of bottoms up. It starts with that strong net revenue retention number. That's the existing client number, as you mentioned, have good visibility kind of into those numbers and that strong client adds that we have there and how we can grow that revenue. And we obviously kind of add on top of that NRR. So you can look at the supplement material, there's a great NRR diagram in there as well. And then kind of look at where we finished FY '22 for new client signs, another kind of record year for us. So that's another good indicator, right? So NRR plus new clients going live -- and then we -- it is clearly critical in our model that we get these clients live, right? That's how you actually realize that revenue. So that's a big focus and obviously an assumption baked into the model for '23. And then you can also look at our pipeline numbers that we shared on the call earlier, where we're actually seeing pretty good growth in that pipeline, right, again, leading to confidence in 2023 client signs. And there isn't a huge part of revenue in a given year, as you're aware, that comes from net new client wins in that year, but that's another good indicator that helps in our model assumptions for growth. To just cover a couple of other assumptions, FX rates, our assumption is 12/31/22 rate stability and that will do what it does, and we'll continue to…

Just a quick follow-up on kind of the concept of expanding the Flywire Advantage. You mentioned a few times here kind of your ability to effectuate payments, but yet not have them as kind of Flywire, I guess, payment clients yet for schools. And I think you mentioned Cohort Go and then you also mentioned in the context of 529 savings plan. So my question, I guess, is that sounds like it's becoming a little bit of a bigger opportunity for you. I'm just wondering, how do you envision that building over time? Is your expectation that you're going to convert those over directly to Flywire payments within that -- within your network? And is that just like purpose built to build a much bigger funnel for your opportunities, going forward?

Yes. Sure thing. Mike, again. You’re exactly right. I mean one of the things we noticed, not only in the agents business, including the Cohort Go acquisition, but also the Flywire agent relationships we had prior to Cohort Go and in the 529 aspect. When we look at kind of enabling the broader vertical ecosystems in education, it’s kind of those connection points that people find really important, right? So if you think of agents helping a student or a family make a payment and then also that flowback of potential commission dollars, that’s an interesting part of an ecosystem, right? And so by being able to deliver a solution that not only streamlines the payments to our existing clients that we already have, but also sits there and says, “Hey, we’ve enabled this now where you can actually make these payments and we can help streamline them into other institutions we’re not yet working with.” That actually gives us an opportunity to revisit that conversation with those institutions we’re not yet working with. So already have a proven track record of being able to turn some of those into clients and we’ll continue to use that as a lever. And the 529 is just another great example of that, right? Like as you look at the problem we solve, right, think of our position, we can now go to not only our clients, but even institutions that haven’t yet decided to work with us, and say we’ve solved this, right? And we’re already helping drive value with our solution and they can come to us and say, “Geez, I thought they could do more. So it’s a great lever to fill that top of the funnel and just a way in which we look at the ecosystems and expanding our focus on them.

The next question is from Jason Kupferberg of Bank of America.

Maybe just starting, I wanted to actually come back to that chart, Mike, that you referenced in the deck, I thought that was pretty helpful on the NRR side. I mean how should we think about the potential for the NRR in the business in 2023 relative to 2022?

You want to [indiscernible] Rob?

Sure, I can jump in here. Hi, Jason. So NRR has been something that we've shared in, I think, every call now since we started, we've given you the annual figures, and you can see that the figures for this year once again are coming in, in the range that we've been sharing, and we've been guiding as sort of part of that 3-year average. We expect that there are sort of all the levers available to us to continue in that vein very much going forward. So when you look at geographic expansion, new product adoption, the ecosystem expansion, things like the 529 that we just talked about, all of those drive towards that same NRR. And so again, we see super positive results, stepping in just a little bit more operational. I think we continue to do what we've always done really well, which is serve our clients and deliver great results. And with that, we're continuing to earn the right to do more and more for them. And examples like St. Louis University that I quoted earlier, that's a client that many years later, chooses to do a major expansion with us, and that will be a client for which we'll see improved revenue opportunity. So net-net, expecting to see things very much in the spirit and that all is a main contributor to the growth algorithm for the company.

Yes. The only thing I would add, this is Mike Ellis, is that don't forget that the FX headwinds that we experienced during 2022 are, in theory, not going to be as significant in '23. So we remain bullish about our NRR prospects for '23.

And just any comments around free cash flow expectations for 2023?

This is Mike Ellis. So we have not guided on a free cash flow basis, but I can tell you that from a free cash flow standpoint, some of the areas, where we have capitalized cost, most simply, you think of the build-out of offices or computer equipment for our FlyMates. In addition to that, think of capitalized R&D development costs associated with internal software and then also in accordance with general accepted accounting principles, some of the capitalized sales commissions which get amortized. It's something, Jason that I'm happy to consider in the future, relative to disclosing what free cash flows would potentially look like for the business.

But no, like big items pending that are worthwhile calling out?

No.

The next question is from Ashwin Shirvaikar of Citi.

Good results, guys, congratulations. I wanted to ask about sort of the range of outlook that you've provided, what combination of factors might drive sort of the lower part of the range versus the upper part of the range? And in terms of just specifically the upper part, given you do have kind of a tendency to do better? Are there factors that are kind of external such as timing of new clients, M&A, things like that, that are embedded there? Or is it all organic and powering through with NRR and such?

Hi, Ashwin, it's Mike. So I'd go back and highlight a bit, we have pretty good confidence in the range that we put out there, obviously, because of the NRR, because of the new client signs we had, a record last year. And then on top of that being the strong pipeline numbers that we just reported. And so, from that is really where we get the confidence in the organic elements of it. Obviously, we're not making any big assumptions around inorganic moves. There's some lagging of the cohort numbers and that will obviously hit mostly Q1 and Q2, but it'd be a relatively small component of the growth. And when you really look at where could our performance come, I'll highlight a couple of areas. I mentioned that rolling recovery -- and I think it's the right thing to do as we model this business. You saw us do it in '21. You saw us do it in '22 as the world was recovering in different regions and different industries at different times. And we've made those similar assumptions. So again, if you see the APAC region, not only from a destination perspective for travel, which '23 is really the first opportunity for that region to come back as a tourist destination, right, didn't really happen in '22. So that's a good example of where that could happen faster than we think and potentially provide some upside similar in student numbers, right, good indications from places like Australia, and some of the traveling coming out of China. But at the same time, we've made assumptions that has -- that is kind of a rolling recovery through the year. And so we encourage people to really just remember the cyclicality of the business. And you could see our performance in, obviously, travel and the international student side. And B2B, for that matter, really seeing some great traction in the pipeline build in B2B. So that's what I'd highlight as potential areas there.

And in terms of just EBITDA margin, you're obviously getting to -- close to upper single digits, I think, at the middle of the range, if I'm not mistaken. And that's kind of on track with what you said what you said before. But underlying that, if you could talk about the key areas of investment that you're continuing to make, what are those areas? Maybe if you could potentially even size that -- those investments? Are those kind of -- would you consider those discretionary and you're doing them because you can -- can they be turned off, should macro get worse, things like that? If you could comment on that flexibility?

Yes. Ashwin, I’ll step in here and start. This is Rob. What I outlined in my comments was a plan for the year that involves significantly less hiring, significantly less investment than in 2022, but at the same time continuing to selectively add people, where they are most valuable to the business. That will take primary form in terms of continuing to invest in go to market. We have this incredible opportunity in front of us, and we want to continue to invest in that. We need to add sales reps to cover expanding quota and ARR expectations that we need to ulfil. So that’s a pretty significant charge. And then there’s very carefully placed roles that are important to us as we scale the company. But what you see overall is restraint in adding people and restraint in nonpersonnel expense that is also built into our plan. And obviously, if the world is a very different place than the one we’re planning on, we do have the ability to alter our plan, but the plan that we have is one that we think puts people in the most important spots. And again, with sort of 66 – sorry, sorry, more than 60% less in-year expense against a company that’s 55% bigger in constant dollar terms. We do hope that what you’re seeing in this is an impressive step towards scale and efficiency that is built into this plan.

The next question is from John Davis of Raymond James.

Actually, Rob, I wanted to follow up on that a little bit -- or Mike, too. But if we think about it, obviously, you've made significant investments in 2022 and some of those kind of [lab] you hired throughout the year. So as we kind of go into '24, all else equal, could we see a step up in kind of the margin expansion, obviously, the midpoint is 300 basis points this year. But just trying to think -- I mean, if we go back to Analyst Day, you guys talked about 300 to 600 basis points a year. I appreciate the 300 this year. But just trying to think about like how we see the cadence going forward. So any comment there would be helpful.

Yes, J.D. Thanks for the question. So obviously, we're not quite ready to talk about 2024 yet in terms of specific numbers. But you're right in calling out that as we look at this year's plan, we had a significant amount of annualization expense of the investments that we made last year that roll into this year. And obviously, that all factors into the plan that we presented to you and the guidance that we've given today. If you look at the effect of this year's hiring on 2024, it will be significantly lower. And so in terms of sort of that base that rolls, it will roll way less into next year. Now where we choose to go with that, we'll update you on a little bit later in the year because obviously, we've got to lay out our 2024 plan for you when the time is right. But yes, we understand your point around how essentially, there's a lot of OpEx efficiency opportunity that comes from us hiring this year.

And then I think yesterday, we got China's student visa update for January, and I think it was up pretty significantly, I think 150% over last year. Obviously, there was some Omicron issues and China is obviously reopening. But Mike Massaro, any comments on China reopening and what the impact is, kind of what you've seen quarter-to-date? Obviously, the 1Q guide is strong. But I'm just curious kind of what you're seeing out of China specifically.

Yes. I mean, J.D., we continue to be quite encouraged. I mean, we're seeing healthy revenue growth on China outbound volumes. I'd also say there's a lot of positive anecdotal statements, right? You're seeing internal travel numbers inside China get stronger. You're seeing flight numbers start to return. You're seeing a lot of good indicators. And so again, I think we made the right assumptions of this kind of rolling recovery. Remember, there's cyclicality to when students will start in Australia versus when they start in the U.K. and Europe and the United States. And so they don’t all show up at the same time, all the same times around the world, right? There’s that cyclicality that’s important to understand, and we bake that, of course, into our model. I’d also just highlight the impacts potentially for our travel business. It’s very positive as well, right? You have travelers that really in 2022 didn’t travel the world much. And so if you think of our client footprint and the success we saw in travel in ‘22, it was really heavy destination oriented to the U.S. and – the Americas and Europe effectively. And so now you’ve got Asia as a destination market, but you also have the travelers that were oftentimes heavily restricted leaving Asia, also hitting the other destinations where we have clients. So we feel really good with the trends we’re seeing. Again, you got to see how the year plays out, and we’re not expecting any significant change. We’re expecting this rolling recovery.

The next question is from Bob Napoli of William Blair.

Just wanted to follow up on the pipeline, the mix of the pipeline versus a year ago, I did miss the numbers you had at the beginning, but just any color on how that mix, what the size of the pipeline is? And have you seen significant changes in the mix, say, from a year ago by vertical?

Yes. Hi Bob, it's Rob. I'll start with this and others can jump in if they like. So pipeline overall growth number is super healthy. You heard Mike talk about the Q4 over Q4 100% growth, 70% growth for the sort of the full year as compared to prior. And so we feel really good that our investments in that sales team are yielding pipeline expansion and improvement. And so as it speaks to the verticals and the geographies, we are seeing a continued trend of the strength of Flywire's global business. So EMEA has been particularly strong for us. I'd say it has distinguished itself in terms of sort of the quantity of deals and ARR. The U.S., obviously, is also a major market for us continuing to see lots of deals across the verticals. I feel good about the ARR that we are signing on as well as the expansion of the pipelines across each of the verticals. So overall, I think sort of the last metric of that ilk, just to try to kind of give you the whole picture there, Bob, is when we look at the deal sizes, the deal sizes remain very healthy as well. We're actually seeing expanding deal sizes by our forecast ARR methodologies. And so we feel good about that dynamic that we're seeing in the market as well.

And Bob, this is Mike. The only thing I'd add is just great work by marketing and demand gen as well to fill the top of the funnel. That's another area that we get quite excited about as some of the comments earlier were about the building of that demand gen on the top of the funnel, too.

And then the follow-up, just the competitive environment, your win rate, I mean, obviously, nice revenue retention. I appreciate that chart. But any comments on competitive environment win rate? Any your thoughts on churn. I mean, as you're getting much bigger and lapping, I mean some -- you probably get some churn. But just anything on that point.

Yes, Bob, this is Mike. No big shift in competitive dynamics. We feel like we compete well. As folks probably know, we compete in the verticals, not really across verticals against many players. And so we feel like our investments in go-to-market have been good. If anything, we feel like we’re competing as good if not better than we have and continue to invest in that. We had mentioned – you mentioned churn, we’ve mentioned previously that we’ll be lapping some of the churn from health care from last Q4. And so feel good to be there, but it is, in general, low overall, not a lot of revenue concentration as we’ve talked about as well in the business at any given one client.

The next question is from Darrin Peller of Wolfe Research.

A couple of quick ones. Just one is on the margin outlook and the opportunities there. I know that you obviously are within that 300 to 600 basis point range, and you talked about there, potentially, even before, this being a little on the lower end just as you annualize all the hiring you did. So what's the structural? Like when we think about the annualizing impact, what's the structural profitability improvement that you see occurring in this year had it not been just for annualizing? And then, I guess, more importantly, your commitment to letting that profitability trend continue as well as obviously seeing not just on an adjusted earnings basis, but paying attention to stock comp and paying attention to a little bit more pure operating income.

It's Mike Ellis here. So essentially, most of our cost does come from the carryover impact of the investment year that we've had in 2022. And then you have -- what we're planning on 2023 doing. But essentially, it's the investment in our people. Really, as Rob indicated, that go-to-market strategy and to a lesser extent, our engineering and technical teams to kind of drive product enhancements, really trying to just wrap the entire Flywire Advantage in delivering to our clients. So that's where the most of the investment comes in, in 2022 and carries over into '23. Other than that, it really comes down to a normal operating cost business where you have your normal salary increases will have an impact. You have incremental revenue share agreements and commissions associated with the delivery of our revenue performance and then just your regular standard inflationary impacts.

Just one quick follow-up and probably more for Mike or Rob, but either one is fine. I guess when we think about the opportunity and the integration of some of the deal, basically, whether it's WPM or Cohort Go and what it's done for the business so far in terms of your expectations for '23. And I know, putting aside just the pure inorganic benefit, but I'm really referring to the revenue synergy opportunities to it. Just maybe you could touch on what's embedded, if anything, in there and how it's coming along.

Hi, Darrin, so this is Mike again. I would say the -- those 2 deals were not deals as you kind of highlighted, we did for the inorganic add benefit. It was -- there were strategic deals that fit kind of our 3 pillars we've talked about before. And as we've highlighted, are critical to future multiyear synergy really. So first, just starting in order WPM, 40-plus clients signed for the integrated solution. This year is about getting those clients live. I'm sure people will say, well, aren't you going to sign more? I'm sure we'll sign more. We're heading off to our big U.K. conference here in the next week or so, which is a great event, and we'll see a lot of those clients and talk a lot about how we're rolling out that integrated solution. So really excited about that, but I couldn't be happier with how we ended the year with the number of clients signed on to that integrated solution. The combined team in the U.K. is doing a great job working through that with the clients really coming together as a team. So couldn't be happier there. Shifting to Cohort, obviously, a little less time in July or so since that deal. So we talked on this call about our first step in the technology integration between the 2 platforms and getting all the kind of agent activity on one single platform. We talked about the pay-any-school capability that accelerates our ability to make more payouts. Those are all revenue increasing, revenue synergies for us. And then we also kind of gave out a bit of a nugget around payer services as well and just the fact that, that ties into expanding that Flywire Advantage and Cohort's really a cornerstone of that. And accelerating that across our entire payer base is another exciting part for 2023. So I feel really good about it. Our teams are really coming together well. I couldn’t be happier with how those deals went down in the integrations.

The last question is from Tien-Tsin Huang of JPMorgan.

Just on the -- building on Bob's question around pipeline and ARR. I'm just curious, '23, should we expect it to come more from upsell versus new clients? I'm asking, but I heard Bob, you say, deal sizes are up. So I wonder if we could see any risk of sales cycles or implementation cycles lengthening as we're also hearing enterprises. I'm sure schools thinking the same thing around being more careful around their spend. So just trying to understand those -- the interplay of all of that, if that makes sense.

Yes. Yes, Tien-tsin, let me see if I can try to sort of organize the pieces of the puzzle here. Remember, our growth algorithm, right, you're now well versed in it, but sort of that NRR is not really sort of subject to so much to the kind of dynamics you described, right? That is largely a function of our ongoing relationship and relationship building and there's some expansion in there, but that is mostly a function of just us keeping doing what we're doing for our clients. Then there's the full year growth of clients that signed last year. So those aren't included in the NRR, but they will have expanded revenue in the full year period this year. And then there's the new customer piece. And that new customer piece is the smallest of the 3 in our overall sort of growth formula. And so we're always paying attention to that. There has been, I think, general consistency around the sort of the patterns, especially around education, travel. We have very fast deployments around travel, those, as we said before, tend to range in a couple of weeks. I think the 2 areas where you're right, we have true enterprise class deployments in health care. They're hard. And we have seen occasions where those go longer than we expect. So there is absolutely sort of that possibility there. But again, it's inside the diversified business of everything we've got, that's really just sort of a piece of the puzzle, but not, I guess, I'd say, a determinative piece of the puzzle. So overall, we feel good about sort of the growth model that we've got here, and we'll tackle where we run into a little harder deployment here and there, but I don't think that's the -- don't look at that as sort of the major stressor of the year.

Just a quick follow-up, and I'll let you guys go. Just on the gross margin front. I know there's always puts and takes for that. Can you just walk us through what maybe the quarter and for the full year, what we might expect there?

Sure. It’s Mike Ellis here. Essentially, just as you’ve always heard me say, we’re really focused on driving adjusted gross profit dollars, but I will tell you that the reduction that we experienced in 2022 predominantly due to the transactional revenue growth outpacing our platform and usage-based revenue growth. And we do expect transactional to outpace in the 2023 year, but both growing nicely, but to a lesser extent. So as a result, we believe that adjusted gross margins will decline in 2023, but at a much lower percentage, somewhere in the 1% to 1.5% range is probably the right number to think about. And then the final thing I would just add relative to adjusted gross margins is just remember that there’s seasonality within that, right? So during Q3, a big educational quarter, big cross-border. So as a result, you’ll see the higher adjusted gross margins during the latter part of 2023.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Mike Massaro for any closing comments. Please go ahead, sir.

I know we’re a little bit over, but I just want to thank everybody for taking the time and spending time with us here and appreciate all the work going into learning more about Flywire. Thanks very much.

This concludes today's teleconference. Thank you for joining us. You may now disconnect your lines.