Paysafe Limited (PSFE) Q2 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning and welcome to Paysafe's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matthew Parker, Investor Relations. Please go ahead.

Thank you and welcome to Paysafe's earnings conference call for the second quarter of 2024. 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 forward-looking statements. You should not place undue reliance on these statements. Forward-looking statements during this call speak only to 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 direct comparable GAAP financial measures in today's press release and in the appendix of this presentation which are all available on the Investor Relations website. With that, I'll turn the call over to Bruce.

Great. Thanks, Matthew and thank you all for joining us today. First, I want to take a moment and thank the Paysafe team for all their hard work and determination over the last 2 years. It is great to see their efforts driving our outstanding Q2 results. On today's call, Alex and I will walk through the results for Q2 and the first half of the year and update our full year guidance. Then I'll close with a reflection on the last 2 years of our transformation journey. While we're not done, we are excited about the progress and focused on getting better every day. We delivered strong Q2 results which reflect an acceleration of higher quality revenue. We achieved $440 million in revenue, growing 9% year-over-year, $119 million in adjusted EBITDA, growing approximately 5% year-over-year and we further reduced our net debt ratio to 4.8x, a 14% reduction from Q2 2023. These results reinforce our conviction that we have the right strategy and execution is working. In the first half of 2024, revenue grew 8.5% year-over-year, driven by a 12% increase in Merchant Solutions fueled by higher volumes across e-commerce and progress on our portfolio optimization efforts. Digital Wallets also grew 5.4% in the first half of 2024 from the same period in 2023, attributed to improvements in our eCash business, the return to double-digit growth in our LatAm businesses and continued growth of our classic wallet product. Additionally, adjusted EBITDA grew 4.6% year-over-year, while adjusted EBITDA margins declined by 100 basis points due to our planned incremental investments which we outlined at the beginning of the year. Adjusted net income grew 5.7% year-over-year and we recorded positive GAAP net income of $1.6 million in the first half of 2024. We also returned $25 million of value to our shareholders through our stock repurchase program. As part of our portfolio optimization and a move to higher quality revenue which will deliver higher long-term shareholder value, we are taking actions to limit volumes or exit relationships with certain higher-risk merchants. These steps will reduce risk in our business but create a short-term headwind to our revenue growth rate in the second half of 2024. The strength of our sales initiatives which has led us to increase our original revenue guidance for the year, will allow us to overcome the short-term headwind quickly. We believe these actions are the right steps to take for long-term sustainable growth as we refocus on our ideal customer profile. This brings me to our revised full year 2024 guidance. We are pleased to raise our full year revenue outlook range to 7% to 8%, up from our previous guidance of 5.5% to 7%, a 125 basis point increase at the midpoint, moving the high end of our former guidance to the bottom end of our range. We now expect adjusted EBITDA margins to be between 27.5% and 28%. Our updated guidance includes the impacts of the actions I previously mentioned. Alex will walk you through our quarterly results and guidance in more detail in just a moment. Slide 4. In Q4, we laid out 4 strategic priorities for the 2024 calendar year. And I'm pleased to say that we made great progress and remain on track or coming in ahead of expectations. Let's start with expanding our sales capabilities. We have hired 104 new sales reps year-to-date or 61% of our full year target. Our new hires in Q1 are ramping up as expected and we are pleased with the talent we've recruited. As a reminder, these sales reps take approximately 6 months to fully ramp up. The additional sales reps have allowed us to expand our vertical and geographic sales coverage, giving us more pats than ever before. In the quarter, we logged 74 enterprise wins which is over 2x greater than the prior year and executed SMB deals in 30 different states, a 58% increase versus that number last year. Our portfolio optimization efforts are coming along better than expected. Year-to-date, we have generated approximately $26 million of in-year revenue or 52% of our full year target. As you may recall, we initially expected the revenue to be weighted more to the second half of the year. During the quarter, we launched value-added services such as integrated loan program to our offerings. This loan program provides flexible short-term working capital for our partners and merchants to invest in and grow their businesses. Our ability to sell value-added services like these helped increase our take rate in Merchant Solutions from 0.78% from 0.74% in the prior quarter. Our third priority for the year was to revamp our consumer acquisition efforts which remain on track. Towards the end of the quarter, we entered a new partnership with Riot Games, becoming the main sponsor of the Valorant Esports tournaments. This tournament was broadcast across the EMEA region and generated an audience of 1.2 million viewers. This partnership allows gamers to use the paysafecard for a seamless and secure transaction experience during checkout. We've incorporated these sponsorships into our strategy and we're seeing nice results as we move through July. Finally, our efforts to deliver innovation and experiences to consumers remain on track. This next example could probably go under either customer acquisition or innovation experiences. As you may have probably read, we recently announced a partnership with Revolut. What's great about this partnership is it lets us bring our eCash services to Revolut's 9 million U.K. customers, in turn, providing Revolut's customers access to 12,000 of our eCash network locations. We expect this service to eventually roll out to other European markets. This product innovation is helping us generate revenue in new and exciting ways. This quarter, the amount of revenue generated from new product innovation grew by 50% over last year. Turning to our merchant business on Slide 5. We saw solid growth led by e-commerce which now represents just over 30% of our merchant portfolio by volume. Last quarter, we discussed that our SMB direct book was being impacted by one portfolio and we have taken a number of steps to stabilize that portfolio throughout the quarter. This stabilization along with volume increase and take rate improvement, have led our SMB direct book to grow 10% in Q2, roughly in line with our SMB ISO book. Our ISO book continues to show strength with another double-digit growth quarter. Our efforts to rebalance the portfolio continue to progress, expanding our sales presence across the U.S. and moving upstream the higher-value merchants is continuing to pay off. We saw a 5% increase in the revenue per new merchants signed in Q2. Acceleration of our enterprise sales continued as we executed 74 enterprise wins in Q2 across our key verticals and geographies, up from approximately 30 in Q2 2023. Approximately 30% of these deals were with our existing customers, highlighting the success of our cross-selling efforts which was almost zero 2 years ago. Additionally, our net revenue retention in the quarter was 103%, further proving that our efforts to sell additional products and services to existing customers drives higher revenue per merchant. Slide 6. A quick update on iGaming which saw another strong quarter. Global iGaming revenue grew 15% year-over-year, accelerating from 14% in Q1 2024 as we executed 64% more deals in the Q2 2024 quarter versus Q2 2023. North America iGaming revenue grew over 50% year-over-year from merchant wins that occurred in Q3 and Q4 of last year and assisted by 7 additional states legalized last year that came online this year. Our iGaming sales continue to find opportunities to cross-sell into our customer base with 44% of the deals won in the quarter coming from existing clients. These cross-sells allow us to take a larger piece of the payments cash register. As our merchants work to grow their revenue through product improvements, additional offerings and geographic expansion, we stand ready to help them be successful. Slide 7. In Q1, we started reporting digital wallet KPIs based on the segment to provide investors with a more holistic view of Digital Wallets' performance. In Q2, we saw transactions per active user grow 20%, driven by our core wallet, quick checkout and eCash. Additionally, average revenue per user grew by 6%, largely driven by the eCash product initiatives and more revenue attributed to iGaming. This marks the sixth consecutive quarter of year-over-year growth on both of those metrics. We saw 3-month active users remain flat year-over-year and we acquired approximately 1.2 million users in the quarter. This is in line with the seasonality we experienced in Q2 for active users, given the reduction of sporting events during the quarter. While our user base remains stable, this is not our goal. We are focused on returning our user base to growth. While we no longer break out our classic wallet, we did see 3-month active users grow 4% year-over-year and we have had 3 consecutive quarters now of growth, reflecting continued momentum growing our user base. We are also introducing a new KPI: consumer acquisition cost which was $17.60 in the quarter. When comparing ARPU and consumer acquisition cost, this provides us with an approximate 2-month revenue payback which is why this opportunity is highly attractive and highlights why returning our user base to growth continues to remain a priority. Overall, our current users are conducting more transactions and generating a higher ARPU which is a solid foundation as we focus on driving additional consumer adoption and engagement. So in summary, Paysafe had a strong Q2 by every financial metric. Year-over-year, we delivered quality revenue growth of 9%, adjusted EBITDA growth of 5%, net leverage reduced to 4.8x, 7% volume growth and a 3% take rate expansion, just to name a few. The strategy that we laid out 2 years ago of focusing on client experience, sales transformation and product innovation are taking hold and allowing us to build momentum, enabling us to raise our revenue guidance for the full year 2024 by 125 basis points at the midpoint to 7% to 8% from our original guidance of 5.5% to 7% and puts us in a great position for consecutive 7-plus-percent revenue growth years. With that, I'll ask Alex to review the Q2 results in more detail.

Thank you, Bruce. Let's move to Slide 9 for the summary of our second quarter results. Total volume increased 7% year-over-year to $38.1 billion. Total revenue grew 9% to $439.9 million or 10% on a constant currency basis. Revenue growth accelerated ahead of our expectations, led by double-digit volume and revenue growth in the e-commerce channel within Merchant Solutions as well as new product initiatives within Digital Wallets. Our take rate increased slightly to 1.2% from 1.1% in the prior quarter. Adjusted EBITDA was $119 million for the quarter, an increase of 5% year-over-year or 6% on a constant currency basis. Adjusted EBITDA margin was 27.1%, a decline of 100 basis points, primarily reflecting our incremental investment in sales and portfolio optimization. As Bruce mentioned, our initiatives remain on track and we expect to invest approximately $12.5 million throughout the remainder of the year. On an LTM basis, unlevered free cash flow grew 16% to $339.1 million, reflecting a 72% conversion rate. Adjusted net income increased 5% year-over-year to $36.3 million and adjusted EPS increased 5.3% to $0.59 per share. Let's move to Slide 10 to discuss the segment results. Starting with the Merchant Solutions, volume increased 8% year-over-year to $32.7 billion and revenue increased 13% to $255 million. Growth was driven by strong volume and take rate growth within our e-commerce business, led by contribution from iGaming. The remainder of the segment, our SMB business, grew revenue 10% year-over-year, reflecting our strategic initiatives to expand our sales capabilities and optimize the portfolio. Adjusted EBITDA was $56.5 million, an increase of 1%. Margin declined 250 basis points to 22.2%, reflecting continuous progress on our 2024 investment initiatives. Turning to the Digital Wallets segment on Slide 11. Volume increased 6% to $5.7 billion and revenue increased 6% or 7% on a constant currency basis to $189.7 million. Segment's performance was driven by strong results within iGaming and ongoing product and engagement initiatives. Adjusted EBITDA was $82.4 million, an increase of 7% or 8% on a constant currency basis. And adjusted EBITDA margin expanded 30 basis points, driven by improved digital wallet KPIs which drove revenue growth in the quarter. Turning to Slide 12 for the summary of our capital allocation. At the end of the quarter, total debt was just under $2.5 billion. During the quarter, net debt decreased by $26 million. Our leverage ratio stands at 4.8x adjusted EBITDA compared to 5.6x in the Q2 2023. Additionally, during the second quarter, we repurchased approximately 686,000 shares for approximately $11 million at an average cost of $16.03 per share, leaving us with $25 million remaining on our repurchase program at the end of Q2. To recap, since Q2 of last year, we have reduced our debt to EBITDA by 14%, while repurchasing $25 million of our shares in the first half of 2024. We remain confident that our solid cash flow generation and capital allocation discipline will allow us to continue investing in the business while also continuing to delever and return capital to the shareholders. Before going into the guidance, let me just remind you that in FY '23, excluding interest income and FX tailwinds, our top line growth was approximately 3.5%. In the first 6 months of this year, even with headwinds from FX and interest rates, growth accelerated to 9%. Now, let's turn to the full year guidance. We are pleased with our results and the ongoing progress of our strategic investments. Therefore, we are raising our revenue growth outlook to the range of 7% to 8% which implies a second half growth rate of 6.5% at the midpoint. The former top end of our range is now the bottom end. Our updated revenue outlook includes the impact of our portfolio rationalization efforts Bruce mentioned earlier. Excluding those impacts, we would have expected revenue to grow between 8% to 9% which is well ahead of our initial expectations. Despite these short-term impacts, we believe these actions will benefit the company in the long run as we reduce the risk associated with our business. We now expect adjusted EBITDA margin to come in between 27.5% to 28%, a reduction of 50 basis points from our prior guidance. Excluding our portfolio rationalization effort and severance-related costs, our full year margins would have been between 28.2% to 28.7%, still ahead with what we initially expected at the beginning of the year. Additionally, our updated guidance implies 170 basis points of margin expansion versus the first half of this year. We expect that our adjusted EBITDA margin exit for the year will be unchanged heading into 2025. Also, we now expect our net leverage to be between 4.6x to 4.7x at the end of the year. Finally, please see our appendix for other below-the-line assumptions. Now, I'll turn the call back to Bruce for closing remarks before we take questions.

Thank you, Alex. Just over 2 years ago, I was fortunate to join Paysafe and we've put forward a bold and aggressive plan to turn the company around. I stated it would take us 3 years, year 1 to stabilize the company; year 2 to return to growth; and year 3 to accelerate to our normalized growth profile. At our Investor Day in 2023, I reiterated that we would focus on client experience, sales transformation and product innovation. In addition, I stated that we would focus on recruiting talent to create the right culture and allow us to be competitive. I would like to offer some thoughts on our progress over the last couple of years. When I joined the company, we were a decentralized organization working in silos. We streamlined the structure and brought in the right talent who are eager to work as a unified team. We embraced metrics and became focused on improvement. Specifically, we reduced the layers of management by 22% and we had a 56% change in our operational leadership team. We brought our people together by reducing our office footprint by 43%. As a result, our offices have become a vibrant place where employees can build relationships, collaborate on our strategy and vision and deliver operational excellence. Finally, together, we've been able to drive efficiencies and reduce our back office expense using these savings to help grow our front office. The lifeblood of any business is to provide an experience that customers enjoy. We ranked number 2 in the J.D. Power 2024 U.S. merchant satisfaction study; a study we weren't even part of just 2 years before. Our focus on client experience and automation has helped reduce our call center interactions by 41%, reduced merchant onboarding times by 85% and increased our digital wallet merchant checkout conversion by 10%. These are just some examples of the improvements that we've been able to help drive consumer and merchant satisfaction but there's still much for us to do. Sales transformation gets a lot of attention. So I'll just point out that we have more than doubled our quota-carrying sales force and expanded our geographic footprint. We focused on cross-selling. And as a result, 30% of our Q2 2024 enterprise deals were sold into existing customers. We needed to rebalance our merchant portfolio while making good progress with our e-commerce book and now our SMB direct book which will help with margin expansion. We have a lot of momentum building. Product innovation must be a never-ending focus. In 2023, we focused on improving the usability of our wallet to drive better usage, more transactions and more ARPU. In Q4 2023, we wanted to take advantage of our wallet platform and help our community come together with the launch of our merchant wallet for SMBs. This wallet allows merchants to receive acquiring settlements, use their phone as a point-of-sale device and manage their business finances in one place. We see this as a growing opportunity in a fragmented market. Success with the merchant wallet will help drive growth in our direct business and rightsize the revenue mix which would be margin-accretive. We are just beginning in our innovation and feel that we're positioned well in the emerging experiential economy. It's worth remembering that before these changes, many of our business lines were declining. Our actions have had a decisive positive impact on our financial results. On a 2-year CAGR basis, volume grew 7%, while revenue grew 8%, driven by the turnaround of the classic digital wallet, SMB and e-commerce. This improvement in revenue plus improved utilization and headcount led to a 23% increase in revenue per employee and adjusted EBITDA growth of 7% on a 2-year CAGR basis. These improved financial results helped us drive down our net debt leverage ratio by 16%, while returning $25 million in value back to our shareholders. More importantly, these actions taken by the Paysafe team are positioning us to the future, building the foundation we need to scale and compete. It starts here. Another fun part of the job is seeing the team be recognized by outside organizations. We recently were added to the CNBC's list of the world's top 250 fintech companies. We're also named Payments Company of the Year by EGR and Software Company of the Year by Tech Elite. To close, we are not the same company we were 2 years ago. Our team is excited about the new possibilities. Today, we have grown revenues faster than many expected. Even in the high interest rate environment over the last couple of years, our strong free cash flow generation enables us to invest in our business, return capital to our shareholders and reduce our leverage. As we continue to deleverage, we believe the value of the business will increasingly be reflected in our share price. We see a significant upside in the future as we continue to execute on our strategic initiatives. With that, we will take your questions. Operator, if you would open the lines, please.

[Operator Instructions] Our first question is from the line of Andrew Harte with BTIG.

On the merchant side, you called out a lot of drivers. I think solid e-comm growth was the one main one but there was other things that -- the pickup on value-added services, you called out the charge-back protection, backup terminals, loan offerings. And then obviously, SMB direct growth accelerating at 10% was really nice, too. I guess can you kind of rank order some of those drivers of growth for us in this quarter which ones really stuck out the most? And I guess going forward, we're still yet to have this increased sales team kick in. So I guess, how is sales going to look different? What are the things this quarter that you saw that will drive future quarters? And then is it still kind of maybe 4Q, we'll start to see the increased sales headcount begin to contribute to growth there as well?

Yes, Andrew. Thank you very much. And I'll start this off and then Alex can add some color as we go along. But first, what I would just say is, look, I think overall, we're very pleased with the quarter, triple beat, we had really strong revenue versus consensus, EBITDA versus consensus and adjusted net income, all those things for the second quarter in a row. So we're building some good momentum. In regard to the merchant business, obviously, the e-comm business continues to show really solid growth, really driven in part by the iGaming growth in North America. So you're seeing a lot of growth there. I think the other piece that's driving a lot of the activity, we've got nice solid continuous volume but our optimization programs are really coming to bear and working out as we hoped, providing a lot of that take rate expansion. So the projects that we started, if you recall, we started talking about this in, I don't know, Q4, maybe Q1. We started talking about the optimization program and that we were going to invest both in optimization and our sales force, driving a $25 million investment with a $50 million return, right? So it was a great project. We're seeing great results from that through the halfway point. We look like we're right on target for the full year, maybe a quick more for the full year on that initial project. So we're feeling very good about that. I think when you talked about and touched on the direct SMB business kind of accelerating back up a little bit, that was a nice balance for us. So we'll continue to look at that and continue to hope that as we take these actions, to your last part of the question, with the sales force, that those things start really accelerating as we move into '25 and then ultimately to '26. So yes, we should see a little bit of activity in that cadence. What I would say, in the first half of the year, what Rob and his team were able to do is they hired a lot of the enterprise salespeople first. And so we should start seeing that towards the back half of the year, probably late Q4 as those people start coming on board. So we should see an acceleration really going into Q1 '25 from that team. I think as we touched on in the deck, we're seeing good progress there. We feel like they're right on track and so far, so good. So I appreciate the questions. Alex, anything?

Yes. The only thing I would say is that the portfolio optimization that Bruce talks about is showing great acceleration. So I think if you remember, we said in the first quarter that it delivered about $8 million of revenue or so, right? In the second quarter, it delivered $18 million of revenue. So the total of $26 million, you could see the acceleration from the first quarter to the second which is why when Bruce talks about the fact that we certainly would expect to make the $50 million target and maybe it's even slightly better than acceleration from $8 million to $18 million from the first quarter to the second quarter is a proof that that's exactly what's happening.

Hopefully, that answers everything, Andrew.

Yes. No, it's nice to see how quickly the portfolio optimization kind of flows through on the revenue side. And then on the high-risk merchant relationships that you're exiting, Alex, I just want to make sure we're quantifying that right. You said it's about a 2% headwind to growth, so about $32 million to revenue impact. I guess, can you just walk through the EBITDA impact as well?

No. So all of this is baked in our guidance. We expect it to be in the second half of the year. I don't know where the $32 million revenue coming from. We expect for the second half of the year to be -- that impact to be roughly $15 million. And it is -- and again, on the EBITDA side, it is in our guidance already. It is a higher-margin stuff but it is something that we need to get -- we need to do these things to make us more sustainable. So it will have a -- we're not disclosing specific EBITDA for this. It's in our guidance for the second half of the year but it is a higher margin revenue.

Our next question is from the line of Trevor Williams with Jefferies.

Great. Bruce, Alex, yes, if we could just go back to the decision to exit some of the higher-risk verticals, if you could just expand on why now, if there was any specific catalyst to spur that would be helpful.

Sure. Thank you, Trevor. I appreciate the question. So look, I think when we look at Paysafe historically, we've been very reactive to changes in the marketplace, whether they be market changes, regulatory changes. And so what we're trying to do here as we look at the -- going forward is being proactive. We can clearly see that there's some movements around consumer benefit across the globe. And we have some businesses that we just feel now, because we're growing and our sales are accelerating at such a pace, we have the confidence to take these out now, putting ourselves in a position for sustainable revenue growth as we're going forward into '24, '25 -- back up '24, '25 [ph]. So this is really about us driving -- yes, this is really about us looking at these higher-risk businesses. Higher-risk to us are things that have higher chargeback rates. And so we're trying to put ourselves in a position that we can drive sustainable growth as we go forward. And this is just part of that portfolio optimization as we look at it, trying to be aware of what the market is doing and us now being taking a different stance than we have historically and being proactive on our portfolio. I hope that helps, Trevor?

Yes. No, that's great. I appreciate that. And then, Bruce, I want to go back to the comments on the Digital Wallets and how the main focus there being on getting back to growing the user base. If you could just distill down maybe to the 2 or 3 things that you think are most important there? And as we think about the next year or so, kind of how you see the path playing out to getting the user base back to growth?

Yes. So look, I think in hindsight, I probably messed up my comment there. What I would say is we -- in the digital wallet product, we had a solid continuous growth there. So in our 3-month active, it's the third quarter in a row that we've had growth in that. We'd like that to accelerate. When you look at the number of users, so what we did is we switched to the Digital Wallets segment. So this is probably a little bit confusing versus the digital wallet product. But the Digital Wallets segment is what we're saying was 7 million to 7 million [ph]. And really, for us, we want to accelerate that with eCash, our products, partnering with others like we did with Revolut, what we're doing with Excela [ph]. Those type of partnership opportunities are going to allow us to grow and accelerate the number of consumers. We've also done a lot with our marketing team. And as I think I mentioned in the opening, we've had really good success with some of the new initiatives that we've taken. We've got a better handle under what our cost of acquisition is. We'll continue to shed more light on that as we go forward through the back half of the year. But we feel much better about where we're spending our money and the results that we're seeing as we've transformed our marketing group as well. And I think they're doing a really nice job. When you look at the results from Riot Games and some of the other things we're doing, our acquisition of customers is starting to accelerate as we move into Q3. So I think we're taking a lot of good steps. I think we're in a position where we can see those -- that 7 million number grow a little bit.

Our next question is from the line of Timothy Chiodo with UBS.

Great. The chargeback protection and part of the value-added services listed in the slides with the roughly $50 million revenue figure referenced there, for the chargeback protection, maybe you could just talk a little bit about the types of clients that are taking that. I'm assuming that's more in the e-commerce segment and if this is something that you're leveraging a combination of internal capabilities or third-party providers? And then a related follow-up is, as more and more of the e-commerce world moves towards the likes of Apple Pay, Google Pay [ph] and click-to-pay from the card networks, meaning aspects that basically shift the liability back to the issuer, do these services maybe take on a different form or maybe they're less needed? Or just -- was hoping you could shed some light on what that mix shift may or may not mean for chargeback services.

Thank you, Tim. Great question. So what I would say is the chargeback offering that we have is predominantly being taken by our SMB clients, not our e-comm clients. And so these are a lot of small businesses that are just trying to stabilize their revenue stream and not be exposed to anything that may appear in the chargeback arena. I think to your broader question, I do think that as technology continues to evolve and you see more and more regulatory scrutiny around consumer, whether it be the way the CFPB refers to it or the way FCA or any of the other global regulatory bodies refer to a consumer duty, you're going to see more and more emphasis around mitigating chargebacks. And I think technology will allow that over time. And I think you'll see revenue streams over an extended period of time, probably diminish from chargeback but that's just my own theory on how technology will impact that as we're moving forward.

Okay. I appreciate that context, Bruce. The follow-up is around another value-added service. So the working capital loans you mentioned which are contributing to the year-over-year increase in take rate. Can you just talk a little bit about the structure of that program on balance sheet, off balance sheet and how you went about that decision?

Yes. And Tim, I apologize, I think I forgot to answer a part of your other question. That is a third-party product that we are using, just like this loan product. So this is a third-party, we take no risks here. This is really just an origination fee for the loan. Tim, as you well know, most of our large competitors offer a similar type program to their customers. You'll see us start bringing more and more of these type of programs as we start filling up our product suite to be more commensurate with our peer group. So for us, it's a great program, we offer to our merchants. It creates good parity in what our offering is for, in particular, the SMB world. And we're having some good uptake in the first 30 days. Early -- too early to see what it ends up from a materiality perspective. But the first 30 days was very positive.

Our next question is from the line of Paul Obrecht with Wolfe Research.

This is Paul Obrecht on for Darrin. Can you just start by touching on the success you're seeing with cross-selling to existing merchants? Maybe just how you're approaching conversations with the existing merchant base and really driving adoption of these further products would be great.

Yes, Paul, thank you. So look, if you go back to the very beginning when I came in a couple of years ago, I think one of the first presentations I did is I talked about how we had Europe was predominantly wallet and we had the U.S. was predominantly acquiring. And because we had all these siloed organizations, sales organizations, nobody was really talking to each other with the products that we had. No one was talking to each other's clients. So as we've mentioned over the last couple of years, Rob's team -- our Chief Revenue Officer, Rob Gatto has brought those organizations together. We now have account managers on our largest accounts. They're going in and they're responsible for the growth of that account. And so what we're seeing is every one of our wallet customers, for example, certainly were using e-comm gateway of someone. And we weren't taking the opportunity to bring ours forward. And now we're doing that. We also added a new product, Pay by Bank, last quarter. And so those things give us the opportunity to go back to our existing customers, take more of the register and gain more market share of that register, whether it be in North America or Europe. So that will continue to be our strategy as we add Nicole Carroll's team, adds more products into the mix for us, we'll be going back to our existing customers. We have a great customer base. We've got a customer base that anybody would want and we really want to make sure that we're offering everything they need from a payment perspective to be successful with their respective businesses.

Great. And then as a follow-up, can you just provide some color on the e-comm growth and any trends you're seeing there? And then have you seen any shifts in consumer spend patterns, maybe both in the second quarter and thus far in Q3?

Yes. So on the e-comm business, it's kind of what we said in the prepared remarks. I think it's -- we see solid growth in our e-comm business across the board. We are seeing the -- some of the states that came online in North America. So you're seeing some lift from that. We had a little bit of lift from the euros in the quarter which was great. And now we're going into the back half of the year which is our normal busier part of the year due to the Premier League and sports in Europe. So e-comm, overall, just steady performance, continued really good results, maybe broadening out a little bit. But overall, it's doing very well in that regard. I think in regard to the consumer spend in July, look, we -- there may be something there on consumer spend but we're not seeing it. We're seeing a pretty solid quarter lining up for Q3 with the July results being in line with expectations. So nothing really materializing for us. I think we have a lot of good sales momentum. So we feel pretty good about where we are heading into Q3.

Our next question is from the line of Aditya Buddhavarapu with Bank of America.

Most -- a couple of them have already been asked, I do have a few. Firstly, could you just talk about, in Merchant Solutions, the direct business? I know you've been trying to get that business back to growth and that was up 10% in SMB in Q2. So maybe just talk a bit more about the initiatives there and how you're looking at that? And then maybe just taking a step back going to the CMD last year, you mentioned the midterm growth target of high single-digit to low double-digit. If you take out the impact of the merchant portfolio optimization, you did say growth would have been 8% to 9% for 2024. So could you just talk about how you get to that sort of, let's say, that low double-digit growth from the current levels heading into '25 and maybe '26? And then maybe just one last question. The partnership with Revolut on eCash, could you just add some color on that in terms of how that works in terms of the sharing economics? And in general, do you sort of see that as the future growth model for that eCash business, partnering with more of those fintech players?

All right. That was -- I will try to work my way through those. So I think the first one was around our Merchant Solutions direct business. We have changed a lot of the management of those teams. We have a gentleman running that for us now. We see that we've taken a lot of steps to bolster that business. We feel good about that. We have a lot of salespeople that we're adding into that. As I mentioned, historically, it's a place where we felt we were subscale. We like the direct part of our business. We like all of our business. I want to be very clear. We like all the business that we have. The reason that we're focusing on growing the direct part of that portfolio is it gives us a much better margin. And so that's really what drives that for us. So we're taking steps to scale up that sales force. We're adding new product into the direct team and allowing them to cross-sell. And so hopefully, we'll see results from that. The second question, I didn't quite understand, was about the double-digit growth in '25, '26. We won't comment on...

Maybe I can repeat that.

Yes.

Sorry, I was just going back to the CMD at the beginning of last year when you did speak about the ability to go back to high single-digit to low double-digit growth over the midterm. Now this year, you've raised the guidance but without the merchant termination impact, you would have been closer to 8% to 9%. So it seems to be you're getting closer to that midterm growth range. Just wanted to see what could drive you to get there as you head into '25, what's going to be the key drivers?

Yes. Look, so if I understand the question, it was really going back to what my midterm guidance was when we did Investor Day, I guess, a year ago. Look, we're still progressing. I want to enjoy this quarter first. And then we have a lot of momentum. We are trying to execute better each day. We still have a lot of work to do but we feel good about the progress of the company and we feel good that we're moving in the right direction and we'll give guidance on '25 in due course. But there's no question, when you look back over the prior years which we've had an opportunity to do now, we've accelerated quite a bit. We've talked about growing from -- our quality revenue growing from 3.5% to 7-plus-percent this year. So we see nice growth acceleration from last year to this year. So we'll continue to just keep doing what we're doing. We're seeing good results and we'll give the guidance for '25, '26 like we always do in our Q4 guide. And you had another question or no?

Yes. Just on the partnership with Revolut and on eCash product. Is that the sort of growth opportunity you would look at for eCash going forward, similar types of partnerships?

Yes. I think the Revolut program is a great program. It's very early but it certainly creates the opportunity for a blueprint to access partners, consumers, allowing us to accelerate growth, not only from what we do normally with our paysafecard and other products in eCash but it's another way to accelerate that growth. So I think Alisa Barber and her team are doing some great things with the marketing efforts they're putting forward. So -- but it's early. We'll see how all that plays out. But we feel very good about that. We had nice double-digit growth in our LatAm business. So we're seeing a lot of positive things starting to emerge in eCash. And I think if you reflect back on, at the end of Q4, we talked about eCash having to accelerate and we're now seeing some of that acceleration come to bear. So very excited about it.

Our next question is from the line of Dan Perlin with RBC Capital Markets.

I wanted to touch on this -- the new KPI you brought out, the customer acquisition cost, $17.60. And it looks like there's -- you're including like marketing expense and sales and third parties. So a couple of things. One is, can you just contextualize kind of the rank order of those 3, so we can think about how that scales? And then secondly, I think you said the payback period implies like a 2-month payback which is incredibly fast. So my question on that is, is that where you kind of want to be on the 2-month period? Or you're willing to kind of lean into the customer acquisition cost to expand that a little bit in order to ultimately drive increasing ARPU and activation there?

Yes, Dan, thanks for the question. Look, I think -- I'll let Alex also chime in on this. But I think what we're trying to do here is just as I mentioned in Q1, we're digging in more to consumer acquisition, trying to understand what's going on there, where we're putting our money, how do we kind of revolutionize our marketing approach. And so some of these metrics that we're bringing to market as we focus on our ideal customer profile, this is what we wanted to share with you. We'll share more as we go forward into Q3 and Q4 around this. But we agree, the payback is a great payback on the consumers that we're acquiring. And now it's how do we lean into it is what we're sorting through. We've got a series of test programs that are out there that seem to be having very good results but it's very early innings at this stage. I don't know, Alex, if you want to add any...

I mean the only thing that I would say is that in our digital wallet and our eCash business in that division, right, we have 2 ways of driving revenue. One is attracting new customers, right? And that -- we'll see how that goes and how expensive that is. But the other thing is converting our unregistered customers, customers who maybe use us once or maybe in a whole year, to register customers. We know that the ARPU of somebody who's registered with us, starts using us more, is much, much higher. So the cost of acquisition of acquiring a new customer could be very different than the cost of acquisition of having existing customers converting from being unregistered to being registered. So as Bruce said, we will -- it's a great payback. If it has to increase a little bit, I don't think it's a problem. I think we would certainly do that and we have the opportunity. What we're doing right now is finding new ways, more efficient ways to try to invest to grow that revenue. And that metric will show you that -- our progress going forward.

Yes. It seems like you've got plenty of room to continue to expand that to drive growth there. That's great to see. The other -- just a quick follow-up on take rate. It continues to march higher. I heard a lot about value-added services but you're also kind of mix shifting more to enterprise. And then I guess, just optically, as we think about the second half, given the portfolio pruning and getting rid of the kind of higher-risk profile customers and it does sound like that impacts EBITDA. Are there going to be some dynamics you just want to call out for us that maybe that's going down a little bit? Or is that kind of expected to kind of hold state, even though you're doing all these portfolio optimizations and then again, kind of mix shifting to some of the larger enterprises?

Yes. Look, I think our guidance covered all that, Dan. So we don't have any additional margin impact than what we already had in our guidance. So we feel very good about the guidance where we're at. I think, candidly, we are accelerating a little bit faster on our top line. That's allowing us probably, just being totally transparent, the luxury of being proactive and making these right decisions for the long-term stability of the company. So we think it's a great thing for us to be doing. And I think it's fairly contained and I think we'll grow over it very quickly because of the strength of the sales organization.

Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to Bruce Lowthers for his closing comments. Bruce?

Yes. Thank you. So first of all, a really strong second half of -- first half of the year as we start gearing up for the second half of the year. We're very excited about the possibilities. I just want to thank everyone here for all the preparation into pulling the quarterly call together; Matthew Parker, a great job of getting us here and everybody involved at Paysafe, everybody contributes. It starts here and we really appreciate it. So, thank you very much.

Thank you.

The conference of Paysafe has now concluded. Thank you for your participation. You may now disconnect your lines.