Nuvei Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. Welcome to NewWave Corporation's 2nd Quarter 2023 Earnings Call. As a reminder, this conference call is being recorded. I'll now turn the conference call over to Chris Mormony, Head of IR. Please go ahead, Mr.

Operator

Mormony.

Speaker 1

Thank you, operator, and thanks to everyone for joining us this morning. With us today are Philip Fair, Chair and CEO I'm David Schwartz, CFO. As a reminder, this conference call is being recorded and webcast and is copyrighted property of Nubay. We broadcasted this information in whole or in part without written consent of Nuve is prohibited. Earlier this morning, Nuve issued a press release announcing financial results the period ended June 30, 2023.

Speaker 1

The release as well as an accompanying supplemental slide deck is available on the Events section of our Investor Relations website, investors. Nuve.com. During this call, we may make certain forward looking statements within the meaning of the applicable securities laws. Such forward looking statements involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the business or developments in NewWave's industry to differ materially from anticipated results, performance, achievements and developments expressed or implied by such forward looking statements. Information about these factors that could cause actual results To differ materially from anticipated results or performance can be found in Nuve's filings with the Canadian Securities Regulatory Authority and on the company's website.

Speaker 1

Our discussion today will include non IFRS measures, including but not limited to adjusted EBITDA, adjusted net income and adjusted net income per share. Management believes non IFRS results are useful in order to enhance our understanding and ongoing performance, but they are not a supplement to and should not be considered Reconciliation of these measures to IFRS measures is available in our earnings release and MD and A. We'll open up the call to your questions after our prepared remarks. During that portion of the call, in order to get to as many people in queue within the allotted time, We ask that you limit yourself to one question and one follow-up. And with that, I'd like to now turn the call over to Phil.

Speaker 2

Thank you, Chris, Thank you all for joining the call this morning. We have a lot to share with you today. As you have seen, Nuvve had a solid quarter with total volume up 68% and revenue up 45 Organic revenue growth excluding digital assets and cryptocurrencies was 20%. This growth underscores The continued strength and momentum in the business as we advance our strategic initiatives while reaching a number of significant milestones along the way. Furthermore, we have now both lapped and outgrown the digital assets and cryptocurrency headwinds over the past 12 months.

Speaker 2

With Paya largely integrated and now in the fold, my prepared remarks today include an additional one time disclosure to expand on NewWave's evolution, Our channels and related go to market strategies and current trends, which shape our outlook for the remainder of the year as well as our medium term targets. As I think you'll appreciate, we have fundamentally changed the business and are favorably positioned for future growth. And given our strong and consistent financial performance, cash flow generation and deleveraging, we will discuss some important announcements made today with respect to future capital Starting with our market position. Nuve is a global payments platform with category leading modular technology, Growing rapidly with the addition of new end markets and use cases, geographies and capabilities, we are one of the few single global platforms today. This year alone, we have accelerated our offering in Colombia, in Chile, Peru, Brazil, Singapore, Hong Kong, Australia, UAE, South Korea, France and Japan, just to name a few.

Speaker 2

We are focused on being the technology partner of choice and are Scaling the business with over 16,000,000 daily interactions supported by more than 3,000 servers, 10 global data centers and innovating with 36 Releases year to date driving 2,500 new features, functionality or enhancements. As you can see, we are constantly innovating. Importantly, with every passing day, we are increasing our product and technology gap versus the competition. The reality is that we have only 4, competitors who are able to serve their customers globally. This is not a segment where we can easily be disrupted by new entrants Nor can someone easily acquire their way into the space, our right to win in this market is more compelling than ever.

Speaker 2

For those that have been tracking our progress, you know that we have spent a lot of effort building a world class go to market playbook and have successfully made the NewWave brand famous for all the right reasons integrity, transparency and capability. We are considered a prominent voice in payments today with large customers as well as known brands across a mix of discretionary and non discretionary as well as cyclical End market use cases. As a brief update on PAIA, the overall integration and achievement of our estimated $21,000,000 cost synergy target is on plan and we've begun to execute on our strategy to realize up to $100,000,000 of incremental revenue by 2027. We are at a new and exciting juncture in our company's evolution. With Paya now in the fold and having lapped the full year's impact of digital assets and cryptocurrencies.

Speaker 2

We want to share some incremental insights into how we've organized our commercial organization, reframe the market opportunity, Explain why we're winning and help you better understand the growth drivers and trajectory of the business. Today, we operate the commercial organization 3 defined channels: our core channel, which is global commerce our emerging channel, which is comprised of B2B, government and integrated payments and our legacy channel, which is our SMB portfolio. Our core and emerging growth channels address a large and underpenetrated global tab, which on a combined basis equates to more than $100,000,000,000,000 for which we believe we have a unique modular platform to compete and win, providing ample white space with deep pools of opportunity globally. As I'll describe, the key tenets that have made us a category leader in our core global commerce channel, Great technology, capabilities, global reach and investment in our go to market function are 100% applicable to our emerging B2B, government and integrated By applying the same playbook that significantly accelerated our growth following the SafeCharge acquisition just a few years ago, we expect to accelerate the growth profile of our emerging channel. Now double clicking on the results for the quarter by channel, starting with our core channel, global commerce, which is our largest and fastest growing channel.

Speaker 2

Revenue grew 16% to $172,000,000 35%, excluding digital assets and cryptocurrencies and represented 56% of We are very pleased with these results as we continue to take market share and outgrow our peers. To reiterate, We have now both lapped and outgrown the digital assets and cryptocurrency headwinds in the past 12 months. With the introduction of our unified commerce As one of our many product enhancements, which offers card present solutions, single token and unified reporting, we've expanded the scope of this channel beyond global e commerce to global commerce As we believe that our unified offering now opens entirely new tab previously unavailable to Nueve. In terms of new As you may have seen from the mirror press releases, we had an exceptional number of wins across all regions, including The signing of 1 of the fastest growing global online marketplaces with more than 800,000,000 users. This new enterprise customer partnered with Nuve to expand globally and its rapid growth in Europe and the U.

Speaker 2

S. And comes on the heels of our win with global marketplace Sheen just a few months ago. We partnered with cart.com, an incredible opportunity to integrate payments, fulfillment, shopping cart and marketing capabilities into a single offering with Nuve becoming its exclusive payments partner. In online car rentals, we partnered with RentCars, the largest online car rental platform in the Americas and a global leader in the segment for whom we will be providing our full set of capabilities across LATAM. In Mobility, we welcome inDrive, international ride hailing service more than 175,000,000 downloads operating in 47 countries and which partnered with Nuve to improve their checkout experience and loyalty programs.

Speaker 2

Incidentally, Indrive was the 2nd most downloaded mobility app globally in 2022. On the travel side, We won several major airlines and now servicing 4 of the top 20 global airlines. And as part of our efforts to Ample opportunity for wallet share expansion. We also saw significant wallet share expansion opportunities with existing customers. Our engagement levels with existing customers remain strong across all region and capabilities.

Speaker 2

We are now firmly at the table with Fortune 500, Fortune 1,000 and Internet top growth stars globally. And while just a sample of what we have listed above is not live yet, There are various stages of activation. We feel really good about our growth sectors across the four regions of operations today. When considering the mix of growth in this channel, Approximately 80% of our growth comes from existing customers, where we expand wallet share by cross selling new capabilities or geographies, while new customers represents approximately 20%. One thing we've learned more recently is that implementation timelines are equal across all This is something that is relatively new for us and something we will strive to communicate better to our shareholders.

Speaker 2

The fact is That takes more time to activate large global customers and our prior expectations for the timing of implementation was too aggressive. Nevertheless, We have approximately $100,000,000 in annualized bid revenue in various stages and are highly confident we will activate these customers over the next few quarters. Turning now to our emerging channel, which includes B2B, government and integrated payments. We believe this is the next frontier to monetize NUVE's unique capabilities with our deep ERP integrations and proprietary software, which we expect to accelerate by enabling our commercial playbook. Emerging channel revenue grew 13% on a pro form a to $54,000,000 and represented 18% of the total revenue in the 2nd quarter.

Speaker 2

Starting with B2B, there's strong momentum in B2B payments given the enormous white is driven by the ongoing shift away from inefficient check based payments towards the conversion and accelerating adoption of electronic payments, which drives greater automation and efficiencies for For perspective, it is estimated that B2B represents a $25,000,000,000,000 TAM globally. Today, Our proprietary accounts receivable automation module that sits on top of the ERP and in between our payment engine is designed specifically for the nuance and complex use cases For B2B transactions and acts as a billing engine providing our customers enhanced tools to collect receivables more quickly, streamline back office processes and reconcile order cash data within their core ERP accounting platforms. With deep integrations into our ERP partners, we facilitate the customer While helping our ERP partners create stickier offerings and increase their software win rates in the market. As you can appreciate, leveraging Nuve's many existing Competencies with our seamless global reach, our vast local payment acceptance options, our instant and automated payout capabilities and our embedded finance With specific focus on factoring, in addition to AR automation, drive a comprehensive suite of solutions to enable our B2B customers to grow efficiently. Historically, we have focused our commercial efforts primarily within the Sage, Acumatica and ECI ERP Ecosystems.

Speaker 2

This quarter, we greatly expanded our TAM by adding 2 other global ERP leaders, In for and SAP to our list of partners. And We plan on adding Microsoft Dynamics, the largest ERP player in the world later this year. We have now expanded our ERP engagements beyond the U. S. To all reaches of the globe.

Speaker 2

Combined, we estimate these expansions will increase our ability to reach more than 3,000,000 ERP customers globally. With respect to the performance in this year's Q2, new account onboards were up 27% versus the previous year same period, which we believe lays the foundation to expand our growth in 2024. In government, we helped 2,000 agencies, public utilities Municipalities in 30 states create streamlined engagements with their citizens. Our government offering is powered by our recently enhanced proprietary applications Utility Connect and Citizens Portal, which seamlessly bolt on top of the agency's ERP software and offers an instant digital experience to enhance Citizens engagements that streamlines and reports applicable usage, account invoicing, autopay capabilities and simplified workflow, thus eliminating the cost and hassle with late and paper based payments. Here, we go to market both directly to the agencies and more recently via software focused partnerships.

Speaker 2

Post acquisition, we are enhancing the payment functionality to include open banking payments and payouts wherever applicable, along with expanding the footprint of offering beyond the United States. In the quarter, new client wins included the U. S. Virgin Islands, the cities of St. Petersburg, Florida and Erie, Colorado to support the main public water in those municipalities and Llano County, Texas for processing property taxes amongst many other wins.

Speaker 2

In total, the earlier results here too are compelling. This quarter alone saw more than 10% in annualized new business growth as we're successfully winning both new partners and municipalities. We believe government growth can also accelerate to over 20% in the medium term. Moving now to Integrated Payments. While it's early days, the monetization Opportunities for Nuve with software partners based on embedding our unified commerce capabilities into the ecosystems of global software and technology partners are very compelling.

Speaker 2

Integrated payments is an enormous global market opportunity with a TAM of approximately $35,000,000,000,000 and like global commerce and B2B, We believe our capabilities are uniquely suited to help our integrated partners thrive globally. To support the varying business models of our integrated partners, We launched this quarter our fully managed PayFac as a Service offering, which includes onboarding, reporting, fraud management and configurable funding options with a comprehensive roadmap of additional functionality under development. This quarter alone, we onboard 2 very large ISVs, both processing over $1,000,000,000 in annual volume and servicing over 20,000 unique locations across North America. Based on our current capabilities coupled with our investment roadmap, we believe we have the potential to be the partner of choice for mid market integrated partners globally. In summary, we think there's enormous opportunity here for Nubay to accelerate the growth of our emerging channel to 20% plus over the medium term.

Speaker 2

Finally, turning to our legacy channel, which predominantly consists of our non integrated standalone SMB portfolio, Pro form a revenue declined 5% to $81,000,000 and represented 26% of the revenue in the 2nd quarter. Specifically, The legacy business is more sensitive to the prevailing macro conditions that can impact same store sales trends. As such, Q2 marked the 2nd straight quarter where we saw a slowdown in same store sales versus the previous year. NewWave's legacy channel is a mature business and while we'll continue to provide full support and remain loyal to our customers, It is not expected to be a key focus of our growth. Bring it all together, you now have better visibility for each of our channels, which should give you more insights into our overall growth.

Speaker 2

To summarize, we have fundamentally changed our business, significantly increased our TAM and expanded our technology use cases. We have category leading growth in our core global commerce channel with 35% growth excluding digital assets and cryptocurrencies and $100,000,000 in pending new business. We also have a defined path to accelerate growth into the 20% range for our emerging channel of B2B, government and integrated payments. Finally, Over time, as the legacy channel becomes a smaller portion of the overall business, the impact to our consolidated growth rate will become less meaningful. As it relates to the medium term outlook for our consolidated growth, while we execute on our expanded distribution and end markets in pursuit of these growth initiatives, We feel that it's prudent for now to amend our medium term revenue growth target to a range of 15% to 20%.

Speaker 2

We remain confident that we can grow consistently within this range. Turning now to an update on technology product innovation, a few key highlights for the quarter include,

Speaker 3

We are on track to

Speaker 2

in source North American processing with Canada being finalized by year end and the United States by mid-twenty 24. This is an important As it will allow us to normalize all operational functions globally, drive greater efficiencies and standardize processes in addition to improving our operating margin in the region. We're continuing to invest in our BaaS APM offering, now supporting 6 34 alternative payment methods available to our customers globally. We have also launched self APM enrollment functionality in our merchant dashboard, allowing our customers to select and enable additional payment methods instantly. We've launched our AI driven data analytics platform providing insights that help optimize approval rates for customers by as much as 1% to 2%.

Speaker 2

But here we are just scratching the surface and continue to identify new opportunities in traditional AI, machine learning and generative AI to improve the outcomes and the overall customer experience. For generative AI in particular, we're starting to use it in customer service queries to support our compliance and legal teams as well as for customer onboarding to name just a few of the emerging use cases. But unlike others, we don't necessarily believe AI is Surely a cost reduction opportunity, but rather it will help us scale the business faster and provide greater efficiencies thereby allowing us to expand our operating margins over time. Additionally, we continue to advance our domestic processing capabilities for global airline customers, providing them with more compelling acceptance offering across And finally, we have released the first phase of our new global chargeback suite, which we expect to benefit our customers by automating significant portions of the dispute resolution process. So as you can appreciate, we are not standing still.

Speaker 2

Every new capability drives greater opportunity to deeply engage with our customers as we focus on helping them grow their businesses. Turning now to capital allocation strategy, we continue to be highly disciplined in our approach. During the Q2, we focused on deleveraging, repaying $55,000,000 of our outstanding debt, Bring our leverage ratio down to 2.76 times at the end of June. This puts us in a very comfortable leverage ratio and gives us optionality. While we expect to continue prioritizing debt repayment, we will also explore opportunities to expand our use cases, end markets, capabilities and geographic reach via strategic M and A as appropriate.

Speaker 2

In terms of our ongoing commitment to returning excess capital to shareholders and giving careful consideration to our limited float, We are introducing a quarterly cash dividend, which for this quarter is $0.10 per share. With a dividend in place And as one of Nuve's largest shareholders, I have elected to forgo any stock based compensation going forward, thereby further aligning my compensation with the interest of all shareholders. I'll now discuss recent market trends and how that informs our views of the current quarter and the rest of the year. Daily average volume 3 July early August have remained solid and we're not seeing any signs that the near term macro environment has changed. We are, however, revising our full year outlook driven by two factors.

Speaker 2

1st, the delayed timing of new business units versus prior expectations and second, our recent decision to off board a large customer. Dave will cover the updated outlook in more detail. Despite this near term revision, I've never felt better about how NewWave is positioned to accelerate its growth potential over the long term. We have a rapidly growing core global commerce channel and a phenomenal potential in our emerging B2B, government and integrated payments channel, and we're executing very well against a wealth of opportunities across the entire business. Before turning the call over to Dave, I'd like to welcome our new recently appointed Board member, Karitha Rushing.

Speaker 2

Karitha joined the NUVE Board with over 36 years of human resource experience. She is a former Chief Human Resource Officer at Equifax and serves on the boards of both thredUP and 2U Inc. She also further strengthens our corporate governance by increasing the number of independent directors and advances our board diversity. As Chair of Nuve, I look forward to working and learning from her. And to our Nuve colleagues, I want to thank you for all your hard work and dedication.

Speaker 2

You guys With that, I'll now turn over the call to Dave.

Speaker 3

Thanks, Phil, and good morning, everyone. I'll start by reviewing our financial performance for the Q2. I'll then discuss our outlook for the Q3 fiscal year 2023. Looking at our performance during the quarter, we are pleased with our execution through the first half of the year. For Q2 specifically, it is notable that we realize Very significant milestones.

Speaker 3

We achieved in excess of $50,000,000,000 in total volume, dollars 300,000,000 in revenue and $100,000,000 in adjusted EBITDA for the first time in the company's history. These quarterly accomplishments speak to our success in scaling our platform. And yet in terms of our overall runway for growth, we are in the early innings with so much opportunity still ahead of us. For the Q2, total volume increased by 68% to $51,000,000,000 and was within our outlook range. Results were driven by our focused investments and execution within our global commerce channel and the inclusion of PAIA for the 4th quarter.

Speaker 3

E commerce volume represented 88% of total volume in the period. Revenue for the quarter was $307,000,000 up 45% year over year and essentially aligned with the high end of our outlook range. Hyatt contributed $76,000,000 of revenue during Q2. As a reminder, all revenue figures for Paya are expressed net of interchange to be consistent with our accounting for revenue. Excluding Paya, organic revenue growth was 9% in the quarter.

Speaker 3

This reflects the impact from the decrease in revenue relating to digital assets and cryptocurrencies. Adjusting for this factor, organic growth at constant currency and excluding digital assets And cryptocurrencies was 20%. From a regional perspective, we experienced strong growth. In North America, revenue grew by 108%, Latin America grew by 77% and Asia Pacific grew by 67%. In the Europe, Middle East, Africa region, reported revenue was essentially flat year over year due to the $15,000,000 revenue decrease relating to digital assets and cryptocurrencies.

Speaker 3

Excluding the impact from digital assets and cryptocurrencies, the EMEA region growth would have been 17% the quarter. Consistent with our focus on driving incremental gross profit dollars through expanding wallet share with our customers, Gross profit increased by $78,000,000 to $253,000,000 compared to last year's Q2, representing gross margin in excess of 82%. Selling, general and administrative expenses in the 2nd quarter increased by $75,000,000 or 51% year over year to $222,000,000 Of this increase, dollars 63,000,000 can be attributable to the contribution of SG and A from Paya across all expense items, including commissions, employee compensation and depreciation and amortization. Share based payments increased by $3,000,000 versus last year. The majority of this increase is due to the contribution from share based payments related to the PIA team members who joined NewWave.

Speaker 3

As a percentage of revenue, share based expense continued to decrease from 15% in Q2 last year under 12% in the Q2 of this year. We expect share based expense to continue declining as a percentage of revenue over time. Adjusted EBITDA for the quarter was $110,000,000 and was above the top end of our outlook range, representing an adjusted EBITDA margin of 36% in the quarter. Looking at other line items on the income statement, net finance cost was $28,000,000 compared to net finance income of $4,000,000 in last year's Q2. Main driver of this delta was an increase in finance costs to service our outstanding debt, including the new $800,000,000 credit facility we entered into in late February in connection with financing the Paya acquisition.

Speaker 3

Going forward, as we use excess cash to delever, we expect this will have a positive impact on finance costs. Net income for the quarter was $12,000,000 or $0.07 per share compared to net income of $35,000,000 or $0.23 per diluted share. As I just mentioned, the $31,000,000 increase in net finance costs was the largest contributor to the reduction in net income. Adjusted net income was $58,000,000 or $0.39 per diluted share for the quarter. Turning to the balance sheet.

Speaker 3

As at June 30, 2023, we had cash and cash equivalents of $118,000,000 and term debt of just under $1,300,000,000 Meanwhile, our cash generation remains strong. Free cash flow increased by 19% to $96,000,000 representing an 87% conversion rate from adjusted EBITDA. Cash flow from operating activities for the 3 month period was $60,000,000 versus $91,000,000 for the comparable prior period. As I mentioned previously, this year's figure was impacted by financing costs related to the Paya acquisition. In Q2, interest paid increased by $29,000,000 During the second quarter, As part of our capital allocation strategy, we deployed $55,000,000 of cash towards reducing our outstanding debt, bringing our leverage ratio down to 2.76 times.

Speaker 3

Of this $55,000,000 $44,000,000 was voluntary, which shows the magnitude of our cash generation and our approach to delevering. Our financial profile provides us with enhanced opportunities to return excess cash to shareholders in several ways, while still maintaining the flexibility to invest in our business in pursuing both organic and inorganic growth. Through the first half of the year, We chose to use excess cash to further reduce our leverage from current levels and to repurchase almost 1,400,000 of our shares under our normal course issuer bid. Today, we announced a quarterly cash dividend of $0.10 per share payable on September 5, 2023 to shareholders of record as of August 21, 2023. The aggregate amount of the dividend is expected to be approximately $15,000,000 I will now turn to our outlook and would refer you to our forward looking information disclosure in our press release and MD and A.

Speaker 3

We are revising our growth expectations for the back half of the year, primarily due to 2 factors. The first and more significant relates to longer lag times than we anticipated between signing and implementing new in year business. As we've come to appreciate, the nature of serving larger enterprise customers is that the timeline to go live and begin generating revenue tends to be longer. The second factor stems from our recent decision to exit a relationship with a large customer. For the Q3, we expect total volume of between $47,500,000,000 $49,500,000,000 representing a year over year increase of 69% to 76%.

Speaker 3

Revenue of between $300,000,000 $308,000,000 representing a year over year increase of 52% to 56% Revenue at constant currency of between $294,000,000 $302,000,000 representing a year over year increase of 49% to 53% And adjusted EBITDA of between $105,000,000 $110,000,000 representing an adjusted EBITDA margin of approximately 35% to 36%. For the full year 2023, we are revising our outlook to reflect the two reasons I just mentioned. We now expect total volume of between $193,000,000,000 $197,000,000,000 representing a year over year increase of 51% to 54%, Revenue of between $1,170,000,000 $1,200,000,000 representing a year over year increase of 39% to 42%, revenue at constant currency of between $1,160,000,000 and $1,180,000,000 representing a year over year increase of 37% to 40% and adjusted EBITDA of between $417,000,000 $432,000,000 representing an adjusted EBITDA margin of approximately 36%. In addition, we now expect full year organic revenue growth at constant currency and excluding digital assets and cryptocurrencies to be between 16% 20%. In addition, as Phil mentioned, we are amending our medium term revenue growth target to be between 15% 20% and are reiterating our long term adjusted EBITDA margin of greater than 50%.

Speaker 3

Overall, we are pleased with our results and continue to be excited about our prospects going forward. I'll now turn the call back over to Phil for closing remarks.

Speaker 2

Thanks, Dave. Before opening up to questions, I'd like to reiterate the key takeaways from today's call. 1st, Our category leading global e commerce business had 35% organic revenue growth excluding digital assets and cryptocurrencies. 2nd, We're well on our way to accelerate the growth profile of our emerging B2B, government and integrated payments channel to 20% plus over the medium term. 3rd, our revised outlook is due to 2 near term transitionary effects with no bearing on our robust pipeline of high profile customer opportunities.

Speaker 2

And 4th, our strong cash generation provides us flexibility to delever our balance sheet quickly and return excess cash to shareholders via dividend. With that, operator, we're ready to take questions.

Operator

Thank you. We will now be conducting a question and answer session. Starke. One moment please while we poll for questions. The first question comes from the line of Will Nance with Goldman Sachs.

Operator

Please go ahead.

Speaker 4

Hey guys, good morning. I wanted to ask on some of the building blocks Of the updated target, the vertical disclosures over the last couple of quarters have been helpful. I just If we think about SMB, it sounds like that is going to be relatively flat. The Pie Hand business kind of been growing at low double digit. It would seem like the updated guidance implies something like high 20s growth on the 55% of the business that's global e commerce.

Speaker 4

Is that the right way to think about growth going forward? Or are there any refinements to that framework you would make?

Speaker 2

Good morning, Will. It's Phil. I think you have it in the right zip code. So for us, we tried to do a channel disclosure to highlight the different segments of the business now with Hi, fully in the fold. Our core channel, we're expecting between 20% 30% growth.

Speaker 2

In Our emerging channel, we are accelerating the growth. It's today 13%. We believe we can accelerate it. And SMB, Relatively flat. It is down 5% this quarter, predominantly just because of same store sales movement, but we expect it to be relatively flat.

Speaker 2

And one thing as you build your models is understand that core is 56% of our revenue today. But as it continues growing, it's going to be a larger and larger part of Revenue. So the impact from SMB over time will decrease. And certainly, as Paya and our emerging channel continue to drive momentum, Combined, we believe that our hydro channels will both be 20% plus and SMB will be a lesser part of the drag on growth In the outer

Speaker 4

years. Got it. That's helpful. And then if I can just follow-up on the $100,000,000,000 pipeline disclosure that you guys gave, How do I think about that in the context of the updated medium from Target if we're maybe thinking about some of the out years in our model? I know you mentioned in the script that Like new business is only 20% of the growth.

Speaker 4

So if you think about that being a contributor to new business, What can you tell us maybe about wallet share expansion opportunities with the existing customer set that could kind of bridge the rest of that delta?

Speaker 2

Yes. So revenue opportunities for us are always built into existing customers and new customers. And I think you've seen just the mirror to press releases that have come up. I'm so proud of this team. We are winning ultimately the who's who across all of our regions and it is taking a little bit more time for those clients to activate.

Speaker 2

But the opportunities and the quality of business that we've been onboarding this year is truly exceptional. But the onboarding doesn't end, right? So it's taking a little bit longer for Onboard and that's something that we are reflected in the revised outlook for the remaining of the year. But the interesting thing is client opportunities have tentacles of continued growth. So it's interesting.

Speaker 2

They onboard for a particular feature functionality and drive forward as they too have experience with Nuvei, enter new countries or consume new solution. So the $100,000,000 revenue is a mix of both new. In year new, you typically see a smaller percentage of the full potential of the customer. And it takes 2, 3 years to really drive the full potential of the customer's existing profile. And naturally, as we add capabilities and geographies, wallet share opportunities as that customer So it's a fascinating business.

Speaker 2

It's not a sign and done. It's a sign, engage and grow with, which is such an interesting component to the end market that we're servicing in our core channel.

Speaker 4

Got it. Appreciate you taking the questions.

Operator

Thanks, Will. Thank you. Next question comes from the line of Darrin Peller with Wolfe Research. Please go

Speaker 5

ahead. Hey, guys.

Speaker 2

I think we'd love to just get a

Speaker 6

little bit more color on what actually drove The cut to the medium term guide in terms of the change from what you had anticipated even at the time of the Paya close to now was saying the 15% to 20% versus the 20% not too long ago, was it is there something competitively changing? Was it Something about just maybe a little more color on what the actual drivers were first would be helpful.

Speaker 3

Good morning, Darren. It's David speaking. So we obviously spent time looking at the medium term targets. It's important to make sure that we're in line. We talked about in our prepared remarks kind of the great quarter that we had.

Speaker 3

And I think we should start there. Just thinking about the growth that we've seen, right, 45% Revenue growth in the quarter on a reported basis, organic growth 20%. And then if you think about that core Global commerce channel on an organic basis excluding digital assets is 35%. So those last two Data points, the 20% organic growth and the 35% organic on Global Commerce excluding digital asset type, that's kind of where I'd frame in terms of what our growth profile looks like. When you think about that growth profile and the scale that we're at from a revenue perspective, we think that It's class leading and quite impressive.

Speaker 3

And then Phil talked about, I won't believe, but when you think about the channels, I think that's probably the best way to think about that medium term revenue growth target that we've set. And you look I'll quickly say it just to make sure that it's clearly understood, but Those three channels, the core channel at 56% of total revenue now, it grew at 35%, pro form a was 16%, But $35,000,000 excluding digital assets. And digital assets, we're going to lap that, right? This is the last There was really an impact starting in Q3 that's pretty much muted. And then think about the traction that we've just seen in that channel on Some of the we had a whole bunch of PRs that we mentioned and that we had and wins, whether it's sheen, cart.com or in drive, those are pretty Good names.

Speaker 3

You can see the traction that we're building up in that channel. The downside, at least for the current year is that we did see learn a bit more about how timing of some of those larger merchants, how long it takes to kind of get them up and running. But we do have line of sight on $100,000,000 of revenue opportunities. So that's kind of the core channel and emerging again B2B ISB and gov. That grew on a pro form a basis 13%, but we certainly have line of sight to 20% plus growth.

Speaker 3

We talked about the Expansion of the ERP platforms, we talked about some of the government wins, and then as well on ISV, some of those 2 large $1,000,000,000 plus of partners that we signed. And if I kind of remind you of the $50,000,000 to $100,000,000 of incremental revenue So that's also on the Paya side that really plays into that emerging channel. So if you do the math Kind of weighted average with those growth rates, you get a pretty good sense that 15% to 20% is something we feel really confident about achieving. And we want to be Discipline in our approach and make sure that the expectations are appropriate. And so that's kind of a logic of how we got to that 15%, 20% medium term, which is Effectively, what we're growing at today, and of course, for the rest of this year and even when we think about medium term, we obviously want Be cautious of how we kind of set expectations.

Speaker 6

Okay. And then Guys, just a little more color on the decision to exit this large customer. What exactly drove that? And is that anything is that really just one off to be clear?

Speaker 2

We strive to be, Darren, the North Star in all verticals and use cases globally. I mean, that is our commitment Across all stakeholders around NewWave, we have a team of 200 in compliance, risk and underwriting focused on doing the right thing for the company regardless of size. I think the biggest takeaway is exiting this merchant relationship. Is this the right thing for NewWave? These things happen all the time, Darren, in terms of onboarding, offboarding.

Speaker 2

This just Happens to be a top 10 customer, but I would come back and just say that these things are not scheduled, right? This was NewWave's decision to exit that particular We show strongly that it was the right thing to us, Suneet.

Speaker 6

All right. Thanks, guys.

Operator

Thank you. Next question comes from the line of Joseph Vafi with Canaccord Genuity, please go ahead.

Speaker 7

Hey guys, thanks for the extra color here this quarter. I thought maybe we just 1st start on Paya here. The large ISV is expanding into some other ERP platforms. Just would like to know were these some of these endeavors underway pre acquisition or How much of that, I guess, extra roadmap of progress that we're seeing there is kind of post Acquisition and perhaps maybe the beginning of your revenue synergy endeavors here and then I have a follow-up.

Speaker 2

Good morning, Joe. I think it's the beginning of our revenue synergy target. We've been adding resources into The emerging channel, we feel that our technology and additional use cases really combine well together, and we're very excited about what The overall opportunity is for Nueve. So 2 additional ERP platforms, significant ERP platforms With the introduction of Sage and In for, we think Microsoft Dynamics will be material as well. But let's not also forget, we've expanded the relationship with Sage into new geographies.

Speaker 2

We have active discussions on other ERPs for new geographies. So it's part of the marriage between what Paya brought to the table and what Nuve is able to deliver together. And we think that is ultimately the foundation for accelerating our footprint in Our footprint in B2B.

Speaker 7

Fair enough. And then, I guess, if we look at The business moving forward, I mean, I guess, I think Dave, you said that you framed maybe a little bit The headwind here to be more on the ramp of new customers versus that customer loss. I guess just wondering is that customer now Exited and we think about lapping that in 4 quarters or timing there relative to exiting that customer? Thanks a lot.

Speaker 2

Hey, Joe. The customer has been we started the exit process in the second quarter, believe it will be done this quarter. So it's a process to exit clients. But the majority of the client volume has been moved off today.

Speaker 7

Thanks very much.

Operator

Thank you. Next question comes from the line of Dan Perlin with RBC Capital Markets. Please go ahead.

Speaker 8

Thanks. Good morning. There's a lot to digest here. I wanted to jump into the guidance And specifically maybe start with Q3.

Speaker 1

So it looks like pro form

Speaker 8

a growth at the midpoint is calling for kind of 14 And I think you just did 9%. So I guess, one, what's driving the kind of 500 basis sequential acceleration. I know FX is about 2 points of that, but it's still like 300 basis points. So I'm just trying to understand why that would accelerate. And then the implied Q4, at the midpoint

Speaker 4

looks like it gets back

Speaker 8

to about 8% with a much bigger Benefit from FX. So that looks like a bigger deceleration. I'm assuming that's the client deconversion, but Phil, you just sounded like most of the volumes are off. So maybe you can help understand the cadence of that.

Speaker 3

Hey, good morning. Good morning, Dan. It's David. So obviously that for the Q3, we have pretty good line of sight. We're in the quarter now.

Speaker 3

We feel really comfortable kind of the growth rate that we're seeing. Certainly, there's going to be some variability Within the quarters, Q3, like we said, we lapped crypto, so Q2 is impacted by crypto, so there's some variability there. And then when you look out into Q4, And then when you look out into Q4, from a revenue perspective, that's typically seasonally a strong quarter for us. So there is some uptake there From a seasonality perspective, if you're looking purely on the revenue side, of course, we can get into the take rate discussion as well. That's A little bit different.

Speaker 3

There's obviously seasonally some lower take rates we see in Q4. But generally speaking, from an organic perspective, the In Q3 and Q4, certainly the loss of the customer impacts and then of course, the off boarding sorry, the new business kind of timing, Both of those transitory. And so granted over time, we see that the revenue starts to come back up to that 16% 15% to 20% level that we have on the midterm target. But effectively, there's nothing specific to call out other than Crypto impact in Q2, of course, you mentioned that the FX impact that is more impactful in second half. As you can see, the first half impact Was somewhat of a headwind, second half is somewhat of a tailwind.

Speaker 3

Overall, when you look at that FX impact on our total revenue from a percentage basis is not huge, but it does add up in terms of dollars. So there is some fluctuation there On the FX side, both in Q3 and slightly more in Q4.

Speaker 8

Okay. That's helpful. Just philosophically, I was a little surprised to see you guys starting to pay a dividend kind of this early in your growth, I guess, algorithm. So Phil, can you just maybe talk about how that discussion even came about? Obviously, you have the free cash flow to handle it, but Most companies at this growth stage are probably not dividend payers yet.

Speaker 8

So anyway, you can just kind of contextualize how that conversation went to arrive at this point? Thank you.

Speaker 2

We strive to set the pace, guys. I think that's the biggest thing. But in all seriousness, people forget that we're high growth and we're highly profitable, And we're generating a tremendous amount of free cash flow that provide us flexibility. I think as we started exploring returning cash to shareholders Via buybacks or dividend, the dividend voted better for us just because of limited float. And we do think it will open up a new line of investors for us, and it's just a continuation of our capital allocation strategy of how we intend on returning capital to Dividend and or buybacks.

Speaker 8

Got it. Thank you.

Speaker 2

Thanks, Dan.

Operator

Thank you. Next question comes from the line of Todd Coupland with CIBC. Please go ahead.

Speaker 4

Great. Good morning. I wanted to circle back to the lost customer. If you could just Maybe I missed it.

Speaker 2

Talk about what

Speaker 4

were your own decks at that relationship?

Speaker 2

Todd, just out of respect, it's nothing that we would consider doing. These are all great businesses that have their own success journey, but it was no longer a fit for NewWave. I'm proud of our team for making the right decisions. We expect this customer to continue thriving, But from a profile perspective, it's not a client for NewWave and we'll leave it at that.

Speaker 4

Okay. But There should be not any impression left that this is a competitive exit. This is a NewWave decision.

Speaker 2

We've talked about that, correct.

Speaker 4

Yes, okay. Secondly, I wanted to You got the breakdown on growth by your new segmentation. Can you just talk about The EBITDA margin profile or path in those segments maybe qualitatively to start to get you towards your longer term target? Thanks a lot.

Speaker 3

Hey, good morning, Todd. It's David. So in terms of the channels, I mean, we don't So if we talk to the EBITDA margins of each, we really there is infrastructure across the company that really supports all those channels. Of course, we talked about the growth profile in both the core and emerging channels. So those profiles and that growth rates Certainly, we'll contribute more so as we look forward to our both the revenue, but also to adjusted EBITDA margin, especially as the legacy business is flat to declining.

Speaker 3

In terms of that, the long term, the 50% plus long term EBITDA margin target, That's something that we still feel very strongly in. This is a business that is it is at scale and continues to grow. And nothing has changed fundamentally nothing has changed in the business. So that target still holds well. We talked a bit about the incremental revenue.

Speaker 3

We talked about last quarter. We mentioned it again a bit this quarter. But On the prior revenue synergy opportunities, there's about $150,000,000 to $100,000,000 of incremental revenue that's there. So that will certainly Contribute not just to growth, but to EBITDA margin expansion as we have the platform that can scale and absorb that revenue with a high Contribution to EBITDA margin. So we feel very good about and very confident about that long term 50% EBITDA margin And correspondingly, our growth rates are going to get us there.

Speaker 2

Great. Thank you.

Operator

Thank you. Next question comes from the line of Bob Napoli with William Blair. Please go ahead.

Speaker 9

Thank you. I was going to dig into margins a little bit. Just any commentary kind of on The path the what we should expect on an annual basis? Do you have a target for expansion on an annual basis? Or I mean, obviously, there's a lot of operating leverage and 15% to 20% growth is still very good growth.

Speaker 9

So just any commentary on what we should expect on as we look at 2024 kind of margin expansion from current levels And it may be annually.

Speaker 3

Good morning, Bob. It's David. Nothing specific that we've Targeted externally, of course, internally, we have our own expectations. That ramp to get to 50%, of course, there There'll be certain things that will result in maybe step ups, so incremental. So as we do certain things from, let's say, from an Integration, implementation, in sourcing perspective, we think about costs.

Speaker 3

So there could be some one step items that happen along the way. But at the same time, there will also be some gradual increase in margin just as we continue to scale and grow on the top line. So it's a bit of a function of both. And certainly that 50% plus target is, like we said, it's over the longer So think about that as 5 to 7 years out, but nothing specific and nothing that's a large one step, Bob. It's more kind of incremental Steps along the way as we continue to do the things we do from a product technology integration perspective.

Speaker 9

Thank you. And then I don't I think you said what sector the customer that you deconverted Is in what vertical they were in? And just as you adjusted your guidance this year, how much of the change is from the timing, I guess, Of onboarding versus the deconversion?

Speaker 2

Yes, Bob, we're not going to double click on the customer specifics. And I would tell you just for the second question, it feels about 2 thirds, 1 third, 1 third customer, 2 thirds delayed in implementation.

Speaker 9

Great. Thank you. And I guess if I could sneak one last one in. Geographically, where are you Doubling down or and given the lower growth rate profile that you're targeting, which is still very good, are you pulling back on investments in any area?

Speaker 2

What's interesting, Bob, is we've made the investments already. So we actually have lots of white space in APAC and LATAM as we You're growing. We feel North America has a lot of opportunity for us as well. So we have pending licenses and

Speaker 5

other infrastructure

Speaker 2

that's actually already been That's actually already been expensed, so we're going to execute on those.

Speaker 9

Great. Thank you very much. Appreciate it.

Speaker 3

Thank you.

Operator

Thank you. Next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Speaker 5

Good morning, guys. Phil, I'm just curious what's your overall assessment of execution across the organization? Seems like the market opportunity is very real, but forward looking expectations have been a bit of a moving target.

Speaker 2

Yes, it's a good question. I think ultimately as we're moving upmarket and just how fundamentally the business Just changed, Jason. We're learning as we go through it. But I think you have to keep in mind, right, over $1,000,000,000 of revenue, over $400,000,000 plus of EBITDA, Yes, significant free cash flow and profitable growth. I think we're in a very unique zip code, Jason.

Speaker 2

And our disciplined growth in terms of meaning not revenue at all Our disciplined growth is staying, we think is a very compelling path for future growth. Our objectives are high, and we think that there's a lot of left for us in every one of our regions in our channel. So I think the team is doing a really great job, and I'm really proud of every NewWave employee in terms of execution.

Speaker 5

Okay. And then, I guess just coming back to guidance, I guess if we look at the second half in aggregate, The implication is that organic growth ex crypto will be around 13% on average in the second half. So That's below the updated medium term revenue guidance and I respect some of the factors impacting you this year are transitory. But just How would you encourage investors to get comfortable that the growth can really reaccelerate comfortably and sustainably into that 15% to 20 Percent range as we look at 2024 and beyond?

Speaker 3

Good morning. It's David. The yes, I think that observation is correct, Jason. But really, when we think about it's like you said, when we think about The rest of this year, it's really those 2 transitory factors, the off boarding of the large customer and then timing of new business. So that's really the impact what we see for the rest of the year.

Speaker 3

That will lap as we go forward. And I guess the way that I would frame it is coming back, as we said at the beginning, 2 things. 1, thinking about the channels I'm thinking about how those the growth profiles of each one, specifically core and emerging. And if you drill down just the Drill down and kind of strip away the onion and you can see the growth of those businesses, right? So 35% excluding digital assets, cryptocurrencies and Just overall in the business 20% and then the emerging business again at 13%, but with really good upside and line of sight on the 20%.

Speaker 3

So That's what I would say in terms of how to think about the go forward and the medium term. We're in that zip code now to 15% to 20%, or even to some degree above if you look at the core business. So we feel really confident about that medium term target and we feel that that's going to be Very achievable for us. And if you still mentioned in the prepared remarks, like we'll continue to look at that target, but there's Certainly, we feel good about it. And I'd say also this rest of this year, especially as it relates to Q4, I think we have some Caution built into our outlook.

Speaker 3

I think that's another important factor to think about when you think about Q4.

Speaker 5

Okay. Appreciate the color.

Operator

Thank you. Next question comes from the line of Tim Chiodo with Credit Suisse. Please go ahead.

Speaker 10

Great. Thank you. I think we kind of covered this in terms of what's implied in the medium term. But if we look at those, The 3 buckets, so core global commerce ballpark 55%, emerging ballpark 20%, and legacy ballpark about a quarter of the revenue just using round numbers. But core global commerce implied in the guide, I'm assuming it's in sort of the 20s to low 30s emerging is Potentially approaching back towards 2020, I believe you said.

Speaker 10

And then I guess the main question was for legacy SMB within the medium term guide, are you implying that it will be Maybe a slightly negative rate over the coming years in the medium term. And then the brief follow-up is on the legacy SMB. I know you mentioned that it is non integrated into software. Can you just talk about how that business is or was Distributed, was it direct sales going to SMBs? Was it through 3rd party ISOs?

Speaker 10

Or just in general, what the distribution approach was for that portion of the business?

Speaker 3

Good morning, Tim. It's David. On the first part of your question, kind of what we baked into the guide. So on the SMB on the legacy business, like we said, like Phil mentioned it earlier, it is kind of mid single digit decline now is what we're seeing. A lot of that is driven by same store sales.

Speaker 3

We suspect that from a go forward perspective, it's flat to maybe slightly negative is kind of where we see That business. In terms of distribution in the legacy side, it was really all through indirect. I mean, these are really SMBs indirect. So we're going Through partners, through relationships to the feet on the street to win that business. And so that's kind of that distribution model, which is slightly different, of course, And our core, which is really direct.

Speaker 3

And then on the emerging side, it's indirect, but it's through technology providers, let's call it technology partners, if you think about ISDs And that's sort whereas on the SMB, it's more of a feet on the street indirect relationship. So it's Kind of a one to many through our partners that are on the street.

Speaker 10

Perfect. Yes, that's exactly the context I was looking for. Appreciate that on both. Thank you.

Operator

Thank you. This concludes today's question and answer session. I would like to turn the floor back over to Chris Mamoni for closing comments.

Speaker 1

Thanks again to everyone for joining the call today. The IR team, both Anthony and myself are available for follow-up calls and questions. We look forward to speaking and seeing you out on the road. Bye for now.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Nuvei Q2 2023
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