Greetings, and welcome to the Paysafe Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kirsten Nielsen, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Paysafe's Earnings Conference Call for the Fourth Quarter and Full Year 2024. Joining me today are Bruce Lowthers, Chief Executive Officer; and John Crawford, 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 of this presentation, which are available on the Investor Relations section of our website. With that, I'll turn the call over to Bruce.

Thanks, Kirsten, and thank you all for joining us today. We had a very active quarter and released much of the 2024 results and 2025 guidance last month. So I'll start off with a few simple messages that we'd like for you to take away from the call. In 2024, we delivered 7% organic revenue growth, supported by all key regions and product lines. Last month, we announced the divestiture of our direct marketing payment processing business, which marks the completion of our portfolio rationalization and sharpens our focus on Paysafe's ideal customers and verticals. This represents an important step forward to enhance our financial performance and valuation by eliminating a declining noncore revenue stream and reducing our exposure to higher-risk merchants. We continue to reduce net leverage, which is 4.7x at year-end, down from 5x at the end of 2023. At the same time, we made significant investments while returning more than $40 million to shareholders through our first-ever share repurchase program. We have a few puts and takes across the numbers in Q4, which John will take you through in more detail, but I want to reiterate that we've made incredible progress delivering on our priorities and executing our 3-year growth plan. Turning to Slide 4. Our fourth quarter and full year results are consistent with our press release last month, so I'll keep this brief. Revenue in the fourth quarter increased 1% year-over-year, resulting in full year revenue of $1.7 billion, an increase of 6%. When we look at the organic growth, excluding impacts from disposed business, FX and interest, our revenue growth would have been roughly 6% for the fourth quarter and 7% for the full year. Adjusted EBITDA was $103 million for the fourth quarter, resulting in $452 million for the full year, down 1%…

Thank you, Bruce. Let's move to Slide 13 for a summary of our fourth quarter performance. The financials presented here include the results of the recently divested direct marketing business, which was impacted by accelerated merchant exits and associated credit losses as described in our press release. I'll provide some color on those impacts and what our growth would have looked like excluding this business. Additionally, in the appendix of this presentation, you'll find a quarterly summary of its financial contribution for 2023 and 2024. In Q4, revenue increased 1% to $420.1 million on a reported basis, which included about $16 million of inorganic headwinds from FX, interest and the disposed business. So when you look at our performance on an organic basis, growth would have been roughly 6% in Q4, driven by strong double-digit growth in e-commerce and low single-digit growth from SMB merchants in the Digital Wallet segment. Adjusted EBITDA declined to $103.3 million compared to $121.7 million in the fourth quarter of last year, reflecting a $15 million increase in credit loss expense largely associated with our portfolio actions in direct marketing. Excluding the impacts of direct marketing, adjusted EBITDA margin would have been 26.9%. We generated $70.5 million in unlevered free cash flow for the quarter with a 68% conversion of adjusted EBITDA. The decline in free cash flow from Q4 of last year mainly reflects the lower adjusted EBITDA as well as increased CapEx. Adjusted net income was $29.6 million or $0.48 per share, down from $0.66 in Q4 of last year, reflecting the adjusted EBITDA performance, partially offset by a reduction in interest expense. Moving to Slide 14 for a quick recap of the full year. For the full year, revenue increased 6% to $1.7 billion in 2024. Excluding impacts from FX, interest in…

Thank you, John. To summarize here, we see significant potential in Paysafe, having increasingly improved our investment thesis. We have proven our ability to accelerate growth while also making significant investments and completing our portfolio rationalization. With our foundational turnaround now behind us, we are looking forward to our third year of growth, focusing on Paysafe's biggest opportunities in the experienced economy. This is underpinned by the exceptional talent and strong free cash flow, which allows us to continue to delever and create equity value for our shareholders. I want to thank all of the Paysafe employees for embracing our need to change. I am more optimistic today than I was when I joined the company almost 3 years ago, and I'm excited to enter this new chapter alongside the Paysafe team. Now let's begin the Q&A session.

[Operator Instructions] Our first question today is coming from Timothy Chiodo from UBS.

This is Jing on for Tim. I wanted to touch on your SMB channel. On Slide 8, I appreciate the full year growth rate, 6% for 2024 and the updated mix. So for 2025, how should we think about the growth drivers for SMB to potentially see acceleration again in your strategy around your SMB direct channel versus your ISO book?

Yes. So I think as we look at the '25 SMB channel specifically, there's a couple of things that I would point out. We continue to have solid growth, low teens growth with our Clover sales. So we continue to see significant expansion there. One of the things that we focused on was moving upstream within the SMB channel. So getting a little larger SMB client, we've been able to do that. We see revenue per merchant up in the upper single digits going into '25. And then lastly, I would say we've also added quite a bit of sales help in the SMB channel. So we continue to see solid growth in our ISO part of the book. On the direct basis, we're doing really well selling Clover and adding more salespeople, and we've had a lot of success moving upstream within that SMB channel. So overall, we feel very good about our SMB channel as we move into '25.

Got it. Appreciate the color. And a quick follow-up on the mechanics for the direct marketing business sale. So in the press release, is that the consideration for this transaction is largely annual earn-out payments over the next 5 years. So could you please touch on the income statement geography and how that's impacted the -- I assume below the line items?

Yes. So as far as the geography, that will be below the line, below EBITDA line as we're moving forward into '25 and beyond. So I think that was the question. I don't know, John or Nicole, if you guys want to.

I think that's fair.

I shouldn't be answering the accounting question.

But I hope that answers your question.

Yes, that makes sense. So just confirming that's in the adjusted EPS guide for 2025?

Yes, that would be in the adjusted EPS guide for '25, correct.

But not -- it's not -- just to be clear, it's a de minimis number expectation in 2025.

Next question is coming from Andrew Harte from BTIG.

I guess, Bruce, just maybe first one, getting a handful of questions on the comments in the press release about the takeover interest before and after the Bloomberg report. Anything incremental you can share with us on potential profiles of the bidders or any details you can share about those conversations?

Andrew, thanks for the question. I would -- I think we're going to stick to no real comment there at this point. We've had some unsolicited proposals come in, inquiries come in. We feel very good about the business. We feel like we're creating a lot of value with the business, but the Board will -- as we said in the press release, the Board will execute their fiduciary responsibility and take a look at anything that gets thrown over the rail. So right now, we're just executing, trying to execute at a high level, and those things will work themselves out over time. I will just add that it was anticipated that as we were having success with the turnaround that those type of opportunities would arise as we created more value in the company and so I think it was not unexpected, but we feel very good about where we are right now.

That's helpful. And then I guess with the portfolio now cleaned up, can you just talk about some of the target customers and area of focus you want to have in 2025? I think one of the comments you made was the [ experience ] economy and this bridge of the '25 outlook drivers is great. There's 10% growth from new customers. So can you share with us kind of who the target customers are for the refocus sales team in '25?

Yes, absolutely. So a couple of things you'll notice in the slides this time. One, I think we probably do a better job explicitly commenting on the cross-sell opportunity into our customers. So if you recall, when we came in just a couple of years ago, there was virtually no cross-sell because of the siloed entity or the siloed structure of the entity. And now we've got about 1/3 of our customers are buying multiple products from us. So that's a huge transformation in the way the company is -- sales motion is operating, and we expect that, that will continue as we continue to add more and more products in, whether it be LPMs, local payment methods or new products as we are moving forward. I think what is also probably helpful in the '25 outlook drivers that Kirsten and John put together is it makes it very simple to see we're performing consistently with '24 to '25. We see similar same-store growth moving into '25 with the businesses that we have remaining. And we see new customers and new product growth coming on board at a similar clip. So we feel very good about the sales motion. We feel good about the verticals that we're in the SMB, e-com. We see real nice growth in the Digital Wallet starting to reemerge and eCash. So overall, there was another slide that kind of depicts the major product lines. You can see that there's now growth across the balanced portfolio, which is really what the goal was, and it sets us up very well as we move into '25 and into '26.

That's super helpful. And if I can just squeeze one more. John, I appreciate the '25 guidance you gave, the breakout between expectations for revenue on merchant versus Digital Wallet. I guess, can you just expand a bit on the Merchant segment kind of expectations for gross profit growth? And then on the earn-out of the divested business, I guess my question would be as a follow-up to the first one. What is the dollar amount expectation that you could get from the earn-out, both in 2025? And what's the maximum longer term?

I'm going to go in reverse order, sorry. On the divestiture, I would expect, as I mentioned on the earlier question, that the impact in 2025 will be minimal as the buyer works on ramping that business and then over the 5-year period, we can make up to $50 million on our earnout. And then on the -- sorry, back to your prior question on the gross profit growth for merchant, we expect the merchant business to be growing robustly in 2025. I think similar, though, to my comments on the call, it is going to be a little bit back-end loaded as the merchant business accelerates into 2025. So we're expecting second half gross profit growth in that segment to be more robust than the first half, but growing throughout the year.

Next question is coming from Darrin Peller from Wolfe Research.

This is Paul Obrecht on for Darrin. Can you provide some more color on the VAS capabilities you've talked about as part of your 2024 investment strategy? Just curious what the merchant adoption and response has been like to those products? And if there are any other products in the pipeline that maybe merchants seem to be demanding?

Yes, Paul, thank you. So in regard to the products, we've had a lot of success in '24, driving into '25 with our account and card product, our [ ePIN ] product and particularly on both on the Digital Wallet side. Those have been received exceptionally well. We talked a little bit about ePIN, which really changed the distribution model for our card -- eCash product line. So continue to see growth there, expecting that to continue well into '25, '26. We have some new products that we're very excited about as well. I think the overarching theme is we're continuing to try to leverage our white label wallet. And so with that white label wallet platform, it gives us the opportunity to go into Peru, for example, where Peru, we have a really strong presence in e-com. We're going to launch. We've already soft launched Pago wallet. And so we're very excited about that. It will be a wallet down there that takes advantage of the market share that we already have. So today, we do quite a bit of the pay-in part of the business in e-com down in Peru. We have a big brand name in that country. And so we'll be taking advantage of that brand name and now incorporating the payout. So we'll have a complete service and we think that's going to be a great product for us as we launch fully in Q2. So that's just one example. We also have another product that we will be launching here in March. Again, soft launch has already happened, but launched on a general release basis really with our [ lockable card ] and this is a product, especially for our video game customers, which is a large portion of our eCash business, 42% of our users. This will allow them and streaming customers to help manage their subscriptions. We think this is -- the feedback has been wildly positive. So we're very excited to see that rollout on a general release basis and see what that product can do. So just a couple of examples we can keep going on. I think the other focus would really be around the e-commerce side, which you're seeing really solid growth with our e-com business, north of 30% year-over-year growth. So we feel very good about continuing to expand there. And we have a great product with Clover in the SMB space. So we're very excited to continue our partnership with Fiserv, and we look for big things as we expand that relationship in '25.

Got it. That's helpful. And then as a follow-up, can you update us where we're at from a sales productivity standpoint? I think in the deck, you said you were targeting a 20% increase in the pipeline per employee. So I'm just curious on the time line for ramping these hires that you made in 2024.

Yes. So in regard to the sales team, we had everybody hired, as we mentioned in the Q3 call, by the end of Q3. So the team has been ramping up as we're moving into '25. As you saw from some of the metrics that we put out there, really solid growth numbers. When you look at the enterprise sales team, approximately 40% growth on productivity. When you look at the in-year contribution going from '23 to '24, you see over 100% lift in contribution. So we feel very good about the people that we're bringing on board and scaling them up, seeing a lot of growth in LatAm. And so that's been great to see. It will be a double-digit growing business for us in '25. So overall, I think we're very pleased with the sales hires and the progress they're making. And this year in '25, it will really be about continuing to ramp them up, continuing to get the maturity into that organization to drive what we need for '26 and beyond. So overall, so far, it's gone exceptionally well.

Next question is coming from Aditya Buddhavarapu from Bank of America.

A couple for me. Firstly, on Digital Wallets, you said you expect that to grow low single digit this year. Can you just talk about the moving parts there? And how should we think about that business sort of over the midterm? Second, you also spoke about self-funding some of your investments through internal efficiencies. So what's the scope for further efficiencies as you go into '25 and beyond? And John, anything you've noticed, I guess, since you've joined in terms of areas where you can be more efficient from a cost base perspective?

You want me to jump in or you do wallet. All right. So on the wallet side, growth around the wallet, you see continued growth through transactions. When you look at our TPA, I believe it's in the appendix. But if you look at our TPA transactions per account, you see really kind of steady growth throughout '24 with that -- with that in the wallet segment. So that continues to drive really the growth. And the driver of that has been we've made a lot of improvements in the functionality and usability of the Digital Wallet and eCash products. And so that's really what's driving the transactions going up. That's also helping drive up the ARPU. So you have those 2 great mechanics. I also touched on the digital -- classic Digital Wallet, broke 1 million users in Q4, first time in several years. So we really have some good momentum finally building in the Digital Wallet. As we look at the new product releases as well with Pago, we should see continued acceleration with the Digital Wallet side of the business.

Yes. And then to your questions about self-funding investments and efficiency opportunities, I'd say, I think big picture, think about it to some extent as a redeployment or reallocation of spend from back of the house to front of the house as we continue to look at driving sales and marketing to grow the business on a go-forward basis. And some of that, I mentioned on the last quarter call in my brief remarks about some of my priorities, one of which was some systems migration work and that sort of thing and as those projects continue to deliver over the next few years, we will create additional opportunity that we can then redeploy for growth in the business. So there's not one big thing to your question, but there are a lot of medium-sized small projects.

Next question is coming from Trevor Williams from Jefferies.

This is Spencer James on for Trevor Williams. Maybe just to start, I wanted to ask about your assumption for attrition in FY '25. It was helpful to get the summary of the expected drivers on Slide 19. It looks like you expect an 11% headwind in '25, which is less than the 13% headwind in '24. I was just wondering if you could comment on the strategy for managing that attrition and how the underlying drivers of it may look different this year versus last year.

Yes. I'll start off and John can add color to it. So if you think back and play kind of the earnings calls from 2024, you heard me talk about throughout the year, us trying to delever -- derisk the company -- sorry, not delever, but derisk the company, but we delevered as well. But derisk the company. And so there was a lot of involuntary attrition that we drove in the business, meaning literally, we decided to part ways with customers that did not meet our risk profile as we are going forward on the new strategy that we outlined. We believe that, that is 2 to 3 points of attrition that we added to the mix in '24. And so we're expecting attrition to settle back down at kind of a normal rate as we go forward. So that's the gist of it. We intentionally accelerated attrition to rebalance our portfolio. We now believe that that's done, and we feel very good about the attrition assumption that we have.

The only color I would add to that is that -- understand that some of that voluntary attrition that Bruce mentioned actually was on the wallet side of the business. So I think geographies or specific product areas where we are deemphasizing.

Fair enough. Appreciate it. And then as a follow-up, maybe just on credit losses. Could you give a bit more color on what drove the uptick in Q4 and comment on what gives you confidence that it can normalize this year?

In Q4, this was driven by the direct marketing business, the vast majority of it. And that's -- apologies, I think we kind of hit it, but we were working through some voluntary attrition and exits of merchants through that period that causes significant disruptions and in this case, significant losses in the period. And so our assumption around normalization is over the last several years, the company has had a fairly stable loss rate, when you look at it as a percentage of volume or a percentage of revenue. And on the merchant side of the business, it has tended to run 2% to 3% of revenue, closer to 2% most of the time. And then you saw a large spike in Q4 last year related to the direct marketing business, as mentioned.

Our final question today is coming from Jamie Friedman from Susquehanna.

Good results here, good year in 2024. Bruce, I wanted to ask, in terms of Slide 10, is there any way to -- what you say here that new products are now mid-single digits as a percentage of revenue versus 0% in '22. Is there any way to unpack at least qualitatively, which of those are the biggest at this point? And then I have a quick follow-up.

Yes, Jamie. And so great question. I think we can have Matthew follow up with you and give you a little more color on that. The biggest probably impact from a new product perspective has definitely been the accounting card, which has expanded across Europe in '24. That, coupled with ePIN, probably are the 2 biggest drivers for us, but we can probably funnel some additional information on -- on the product side. But we continue to expand those as we move into '25. So we're looking for that to continue to grow as we move into '25, '26.

And then in terms of the white labeled wallets, that topic, not just for you, but for the industry is kind of evergreen. What's the right to win at Paysafe? How do you see your competitive advantage? What are the conversations like on the client side? How is that going because you sound pretty excited about it, but it's never clear at the industry level who wins and why?

Yes. Jamie, that's a great question. I think some of the differentiators that we have is really around our regulatory strength and strength around AML. We're obviously regulated in Europe. We do a tremendous job around the AML issues, put a lot of effort into that. And that gives us a tremendous framework for us to leverage with our white label wallets as we move that across geographies and create kind of new affiliate wallets as we're moving forward. So Pago is really -- the Pago wallet is really a white label wallet, and we're very excited about that, launching that fully here in Q2 down in Peru. So it should have some good metrics around Pago Wallet as we're moving through '25.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Yes. I just want to thank everyone. Obviously, the team here for all the preparation that goes into quarterly earnings. I also want to thank the employees for just a tremendous year as we bring a close to the transformation of Paysafe, and we now move forward focused on growth, focused on bringing new product to our customers, and just very excited about the future. So thank you all for joining us today, and we look forward to talking with you again soon.

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