Greetings. Welcome to the Paysafe fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Kirsten Nielsen, Head of Investor Relations. Thank you, you may begin.

Thank you and welcome to Paysafe’s earnings conference call for the fourth quarter and full year 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 may 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 measures and reconciliations to the most directly comparable GAAP financial measures in today’s press release and in the appendix to this presentation, which are available in the Investor Relations section of our website. With that, I’ll turn the call over to Bruce.

Great, thanks Kirsten, and thank you all for joining us today. We’re pleased with our fourth quarter and full year ’23 performance, which reflects the achievement of our financial guidance. 2023 marked a year of continued improvement for Paysafe with better growth and better execution. Our team has a lot to be proud of and I want to thank them for their hard work and dedication. While we’ve made progress in many areas of the business, there is more to be done and we are excited to deliver on our goals for 2024, which are well underway. Alex will take you through the financial results in more detail, but the headline is that we delivered a strong fourth quarter with 8% revenue growth, or 6% on a constant currency basis, resulting in full year revenue of $1.6 billion, a 7% increase compared to 2022 and 6% on a constant currency basis. Fourth quarter adjusted EBITDA increased 13%, leading to full year adjusted EBITDA of $459 million, an increase of 12% compared to 2022 or 11% on a constant currency. This resulted in adjusted EBITDA margin of 28.6% for 2023, an increase of 120 basis points. We also reduced our net leverage, which was 5.0 at quarter end, over-achieving our original target for 2023 and down from 5.8 at the end of last year. Turning to Slide 4, I’ll recap the highlights of our achievements in 2023, which provide us with a solid foundation to build upon on 2024. First starting with enterprise sales, we closed roughly 160 enterprise deals in 2023. This was supported by a 58% decrease in our quota-carrying sales reps to 71 team members, which is nearly double the comparable headcount from the second half of 2022, when the plans for our sales transformation were first established,…

Thank you Bruce. Let’s move to Slide 13 for the summary of our fourth quarter financial results. Volume was $35.8 billion in the fourth quarter, an increase of 8% year-over-year, and total revenue of $414.5 million increased 8% or 6% on a constant currency basis. Growth was led by double-digit volume in revenue growth in ecommerce within the merchant solutions segment as well as classic digital wallets, included interest revenue on consumer deposits which was a year-on-year benefit of $6 million in Q4 or $32 million for the full year compared to 2022. Excluding the year-on-year benefit from tax and interest, Paysafe revenue growth was approximately 4% for both the fourth quarter and full year. Adjusted EBITDA for the fourth quarter was $121.7 million, an increase of 13% year-over-year or 11% constant currency. Adjusted EBITDA margin was 29.4%, an increase of 140 basis points primarily driven by operating leverage, including lower credit losses which more than offset a decline in gross margin. Our total SG&A was 30.2% of revenue in the fourth quarter, down from 35.7% of revenue in the prior year quarter. We generated $89.6 million in unlevered free cash flow for the fourth quarter, reflecting 74% conversion of adjusted EBITDA. I’ll note that we have changed our naming convention from free cash flow to unlevered free cash flow for clarity purposes. Additionally, we elected to re-classify the presentation of settlement receivable and funds payable due to customers from operating activities to present them as financing activities within the cash flow statement. As a result, the reconciling item related to movement in customer accounts and other restricted cash is no longer required in our non-GAAP unlevered cash flow reconciliation. You can find more information on our non-GAAP definitions and reconciliations in the appendix of our presentation. Adjusted net income…

Thank you Alex. In closing, I’d like to reiterate that we see significant value potential in Paysafe with a lot of runway to accelerate growth. We maintain strong market positions in high value markets. We serve a premier global client base with significant cross-selling opportunities across our geographies. We are entering 2024 in a solid financial position with strong cash generation while also deleveraging the business to create shareholder value. By continuing to prioritize client experience, product innovation and execute our go-to-market strategy, we believe that we can unlock meaningful opportunities and stakeholder value. Now let’s begin the Q&A session.

Thank you Bruce. We’ll take a couple questions from the Say Technologies platform, which allows shareholders to submit and upvote questions. After that, we’ll turn to questions from our research analyst community. As a reminder, we may pass over questions that were already addressed on this call or in prior recent quarters. We may also group together questions that share a common theme. Our first question is from Matthew, who asks, what goals have we set in order to restore investor confidence in Paysafe? Bruce, could you take this one?

Sure. Thank you Kirsten. Look, I think the question that Matthew’s posed, what goals have we set, I think we clearly said that as we started out, going back a couple years, we’d stabilize the company, we would then begin to grow our revenue streams and then accelerate growth once we had done that. I think as you look back at the achievements and the financial results that we highlighted in our remarks, we can see that our results of improved growth in ’23 across essentially all key metrics, while also reducing our debt and net leverage ratio, we continue to deliver on that progress in ’24. We’re really advancing our go-to-market strategies on both sides of our ecosystem to expand the reach with new and existing merchants to kind of strengthen our consumer and merchant acquisition. We’ve gone under significant operating changes during the past year and I’m highly confident that we are in a stronger position today and well positioned for the future.

Okay, thank you Bruce. Our next question is from Daniel, who asks about adding Web3 or cryptocurrency capabilities, and asks if Skrill users will be able to invest in equity markets. Bruce, do you want to address this one as well?

Yes, happy to, and Daniel, thanks for the question. I think we have the right talent, assets and regulatory experience to enable new ways to buy and sell in a virtual environment and to serve the new generation of digital entrepreneurs in the experiential economy. The combination of crypto and Web3 is part of that, I would say. We’re very focused across the entertainment space and we do think about the future functionality quite a bit as to how that’s going to evolve over time. To address the question more directly, crypto is today a very small piece of our business, less than 2% of our revenue. Our wallet does offer crypto trading with 50 different cryptocurrencies available in over 80 countries globally, including features complementary with Web3, but we don’t really have any interest at this point of offering equity trading, as we’re looking at our feature functionality as we’re moving forward. We feel very strongly about the emergence of crypto and Web3, especially in the gaming space on Web3, and we do plan to be part of--have that as part of our offering as we’re moving forward.

Okay, thanks Bruce. Lastly, we did have a couple questions on the nature of capital allocation from Ganesh (ph) and Viknaswaram (ph), who ask about the strategy for repaying debt, and had another question on our plans to initiate the recently approved stock buyback program. Alex, can you take this one?

Sure, happy to take the question. Just to recap what we’ve shared in our prepared remarks, at year end our leverage ratio was reduced to 5.0 times compared to 5.8 times at the end of 2022. In 2023, we repaid approximately $174 million of our debt, and this was actually better than what we initially targeted for the year. We remain focused on reducing net leverage in 2024 and we’ll continue to work towards our midterm target net leverage of 3.5 times. As you saw in our last earnings release in November, the board authorized a $50 million share repurchase program which we expect to commence in the coming weeks. We plan to maintain flexibility and continue to focus on reducing leverage while we continue to invest in innovation to drive long term growth.

Thanks Alex. Let’s open up the line for our analyst Q&A. Operator?

Thank you, we will now be conducting a question and answer session. [Operator instructions] Our first question is coming from the line of Dan Perlin with RBC Capital Markets. Please proceed with your questions.

Thanks, good morning. I just wanted to touch on the payback period, so to speak, on the $50 million of in-year revenues. I appreciate the cadence commentary on the investments - I think you said 60% of the $25 million will happen in the first half. I guess this implies kind of a second half ramp, but it also seems to be a pretty quick turnaround, so I’m just wondering the efficiencies that you’re expecting from the sales team, and maybe just putting a finer point, is that something that we would see really ramp aggressively in the fourth quarter or should we be thinking third, and maybe even before that?

Okay, well I think you’re right, Dan, that we do expect this to be a pretty quick payback, and obviously with $50 million this year and $100 million next year, the payback occurs somewhere within the 12 months of incurring the cost. It is a no-brainer, quite frankly, from our perspective.

Yes, okay. Then just a follow-up on gross margins, I know you said there’s going to continue to be a headwind there. Is there any way to kind of quantify or help us with the pacing of that and maybe what that might look like in totality, given some of the moving parts? Thank you.

I think on the gross margin, and I think we’ve said this before, we’re very much focused on the obviously revenue growth and EBITDA margin. As you see us moving into different verticals and to different customer bases, both in digital wallets--particularly in digital wallets, we could see and we have seen some deterioration in margin. It’s really--I would almost call it deterioration that is really expanding our wallet capabilities significantly from where it was a few years ago, so that may continue. But what we’ve also said is we will continue to focus on efficiencies in terms of SG&A costs to make sure that we continue to improve operating leverage and EBITDA margins. On the merchant solution side, of course, we’ve already mentioned that what we really need to do is really ramp up the SMB direct channel, which is a higher margin channel than the third party channel. We are working on this, as you can see right now. We still have a lot of work to do and we will be reporting on this on a quarterly basis, and as you see that turn around, you should see some improvements in the SMB margin, gross margin.

Got it, thank you.

Thank you.

Thank you. Our next question is coming from the line of David Togut with Evercore ISI. Please proceed with your questions.

Thank you, good morning. Could you discuss the drivers of digital wallet take rate compression in the fourth quarter, and what are your expectations for digital wallet take rate for this year as a whole? Thank you.

Yes, Alex, do you want to go ahead?

Sure Bruce. I think as we’ve said, I think in our remarks, and as I’ve just alluded to the strength, we are--we have significant growth in our digital wallet segment, right, and we are re-accelerating that segment. We are looking at different products and are targeting different parts of the ecosystem to drive that growth. Some of those products--and therefore the simple answer is gross margin--take rate deterioration is the product mix. But again, we see it as a really good story because what we’re really expanding is the use case for the digital wallet, but with some of those customers and some of those products, it does come with a little lower take rate.

Got it.

Probably just to clarify for you, we’re not seeing pricing pressure with our existing product. What we’re seeing is, as Alex has said, us bringing new product to market at different price points and different margin profiles, so when we look at our take rates on an apples-to-apples basis, we’re seeing stability within our rates, but we’re introducing new things at different price points and different margin profiles.

Understood, thanks for that clarification. Just as a follow-up, what are your 2024 expectations for unlevered free cash flow and then year-end 2024 leverage targets?

Again, what we are--you know, because of the buyback and because of the--you know, we’re really focusing and optimizing our balance sheet as much as possible, it would include the buyback, it would include the leverage. We aren’t really giving a target for 2024 in terms of the net leverage, but we continue to focus on reducing the net leverage. The midterm target, as we said, is 3.5 times, and we stand behind that target. The expectation would be that our EBITDA increases, so I would expect our unlevered cash flow to continue to stay stable, maybe increase a bit from where it is now, so overall we continue to see 2024 as a very strong cash generating year where we are able to invest in our business, deleverage, and execute on the buyback.

Thank you.

Thank you David.

Thank you. Our next questions come from the line of Scott Wurtzel with Wolfe Research. Please proceed with your questions.

Thanks, good morning guys, and thank you for taking my questions here. Just wanted to start off on the SMB side of the business. You talked about introducing value-added services to your merchant base, and I know you’re rolling out the merchant wallet, but just wondering if you can maybe share some color on any of the other value-added services and products you could be introducing into the ecosystem this year.

Yes Scott, good morning and thanks for the questions. Yes, we’re very excited about what is evolving with our SMB business, our merchant business in total. I think what you’ll see us focus on are a lot of ancillary services around those businesses, so we’ll look at working capital, partnerships that we’re creating where we’re really facilitating a third party opportunity for our merchants to access working capital. We have some PCI, we have some supplemental POS device program that’s being launched, so we have a lot of smaller programs that we’re bringing to the market around things that our merchants are asking for and how to help them run their business a little bit better. We’ll give a lot more color as we go through the year on the progress of these programs, but early on, we’re very bullish on the success of the programs that we’re launching.

Great, that’s helpful. Just a follow-up on the classic digital wallet segment, it looks like you guys had some good success in this top-of-funnel campaign. Just wondering almost where we are with that, are there--you know, in terms of the two markets that you did it in, is there still more room to go in those markets, and then do you have plans to expand this campaign to incremental markets going forward?

Yes Scott, thank you for that as well. As we talked about last quarter in the last meeting we had, we really were focused on centralizing our marketing organization and bringing a higher discipline to what we were doing, and focusing in on our consumer cost of acquisition and how we were going about it and modernizing the impact of our marketing efforts, and we’ve really started to do that. This is one proof point. We will continue to do these types of programs. I love the program that we did, where we launched our own tournament and it was really a great partnership for us to do, where they had 100,000 members within that community that we were sponsoring the e-sports tournament for, so these were our target customers. Every one of them had the opportunity to use whether our e-cash product or even our wallet product, so we’re really bringing a more sophisticated approach to our marketing efforts and we will absolutely be expanding these types of programs across our profile as we’re moving forward. I’m very excited about really maximizing the marketing funds that we have, not necessarily increasing them in aggregate at this point but really getting higher throughput on the spend that we have today.

Great, that’s very helpful. Thanks guys.

Thank you. Our next questions come from the line of Andrew Harte with BTIG. Please proceed with your questions.

Hey Bruce, you mentioned how the enterprise base had about 19% cross-sell. Can you just unpack that a bit further? How do you see that opportunity evolving in the year ahead, and maybe where were we a year ago on that cross-sell opportunity?

Yes, good morning Andrew. As we came in now 18 months-plus ago, one of the things that I noted when I started here was that we had very little cross-sell, because of the silos of the businesses that we had. It was really almost less than 1% opportunity there that we were executing on cross-selling product into our various existing customer base, those top 800 customers, so going from just a year ago less than 1% or 2% to 19% this year is a huge step forward, and it really underscores the point that I was trying to make a year ago, that we knew there was a great amount of opportunity for us to go in and sell our digital wallet customer, that was their primary revenue stream with us, go in and sell acquiring to them and start moving our e-cash and digital wallet business into some of our existing merchant customers, so feel very good about the progress. I would expect that this is going to continue to expand as we’re moving forward, especially now that Nicole and her team are starting to ramp up with new product, and we absolutely will be focused on selling into our existing base, so we think there’s a lot of runway for us. We’re very excited about the opportunity and really proud of Rob Gatto’s team and what they’ve been able to do through ’23, and now it’s about scaling up and driving a better quality revenue stream for ourselves in ’24 and ’25.

Thanks. Then Alex, the comments on the guidance page about the gross margin headwind as a function of mix, is that more just merchant solutions outpacing digital wallet on top line, or is there anything you’d call out within each segment on kind of margin trends?

It is all of those things. It is absolutely merchant solutions outpacing growth in digital wallet as a first thing. It is then inside merchant solutions, our opportunity to improve this margin by driving the growth faster in the direct segment versus indirect segment, which you see right now indirect is growing much faster, so that obviously has an impact on the margin. On the digital wallet, it’s exactly as I said - it’s the product mix as we expand the usage of the wallet and getting new customers and attacking new markets.

Thanks guys, appreciate it.

Thank you.

Thank you. Our next question is coming from the line of Timothy Chiodo with UBS. Please proceed with your questions.

Great, thank you for taking the question. A similar question around the ISO versus the direct channel in the U.S., looking at the growth divergence there. Can you just characterize some of the reasons for the growth divergence? Is it related to either gross adds, is it churn of the underlying business, is it pricing? What are the reasons? Maybe it’s a different product being sold direct versus through the ISO channel. What are the reasons why the growth is so divergent?

Yes Tim, good morning, and thank you for dialing in and asking the question. When we look at the SMB channel, there really is a couple things that are going on there. One, in our direct book versus our ISO channel, there is--the underlying merchant is a much smaller merchant in the direct book than in the ISO book, so the ISO book is about four times larger merchant than what we experience in the direct book. Our direct team is actually selling very well. Those smaller merchants just churn at a higher rate, candidly, than the other. We’re not experiencing much pricing pressure. We see good stability in our take rates across the board both in the ISO and in our direct book. I would say there is a little bit of product difference between the two in the direct book because we’re selling it to a smaller merchant in the direct book. They’re not looking for necessarily the same things that the larger SMB client is, that we’re servicing through our ISO channel, so there’s a little bit of each of those things going on within the profile. We feel good about our ability to correct the direct channel. Certainly as we expand into new markets, each state gives us great opportunity to adjust who we’re going after, where we’re going after, the type of merchants that we want, and to help mitigate that attrition and churn on the direct side.

Excellent, thank you. As a related follow-up on the ISO side, you mentioned that the revenue take rates are stable across both the direct and the ISO channel. Could you talk a little bit about the trends and the commissions being paid out to ISOs, maybe over the last five to 10-year period how much that might have changed, and if there’s been any change at all in the last, call it year, two or three years.

Yes Tim, I would say there’s been little to no change in the last two years that I’ve seen on the rates that we’re paying out on the ISO channel. Certainly, as you know, and you know this industry as well as I, that ISO channel has changed quite dramatically over the last 10 years as far as what the percentage payout residuals are. Our book is not really any different than anybody else’s - they escalated over time going back five, seven years ago and have been relatively stable in the last couple years here. It’s a higher percentage, so it really impacts the margin of that book.

Thank you Bruce - yes, exactly, would have thought more stable more recently, but over the longer term might have stepped up, but completely checks out. Thank you so much for the time.

Thank you Tim.

Thank you. As a reminder, if you would like to ask a question, please press star, one on your telephone keypad. Our next question is coming from the line of Jamie Friedman with SIG. Please proceed with your questions.

Good morning, and congratulations on 2023. There was obviously a lot of hard work here.

Thanks Jamie, good morning.

I wanted to ask Bruce first about the digital wallet. I’m looking at Slide 8, and I was wondering if you could help us think through how you think through the inputs to the revenue flywheel. Is it the average transaction per user, is it the growth in the users or is it the ARPU? What would you advise if we’re trying to think through those inputs?

Yes Jamie, so me personally, I focus on the ARPU number. That’s kind of where I gravitate in as I try to look at my litmus test of whether things are going well or not going well. I really kind of dial in on that, then I really click into our three-month active and consumer acquisition, is really where I’ve been focused on as I look at the business and how we continue to turn this business around. Those are really the metrics that I follow. I think as we think about ’24, we’ll continue to evolve some of these slides so that you guys can track more easily our progress in this digital wallet side of the business, the consumer side of the business, especially as we get into e-cash as well and the continued turnaround of that business as we move into ’24, so we’ll be probably introducing some new slides to help you guys as we’re moving forward.

Then I did want to ask about the merchant take rate. Just looking at the appendix, and it did increase to 80 basis points. Alex, I think you alluded to some of the inputs there, but what should we be contemplating as we model, because we model volume with the take rate to get to revenue, so how should we be thinking about merchant take rates in ’24?

Yes, I think you’re going to see them to be stable where we are. I think we’re having the opportunity to introduce some new product into the merchant side. We feel good--we’re not seeing a tremendous amount of pricing pressure in the SMB space, and in the ecomm space we’re doing very well. I think as we mentioned previously, we’ve had really strong growth in our ecomm book. We feel that that will continue and feel very solid about the merchant business.

And the only thing that I would add is that portfolio optimization that we’ve talked about as part of our incremental $25 million investment, some of that will also go to support that take rate stability.

Got it, thank you both. I’ll drop back in the queue.

Thank you Jamie.

Thank you . We have reached the end of our question and answer session. I would now like to turn the floor back over to Bruce Lowthers for closing remarks.

Thank you. I just want to tell everyone, I appreciate how much work goes into these quarterly calls. Thank you for joining us today. I want to thank Kirsten and her team, Matthew is here with us this morning, for helping us pull all this together. Really appreciate their hard work in each and every one of these quarterly calls that we have. I also want to just thank our team for a great year. We really appreciate all the work in this transformation year, and we’re very excited about 2024. We’ll see you in a couple months. Thank you very much.

Thank you, that does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.