Cross border payment processor Flywire (NASDAQ: FLYW) reported Q4 FY2022 results that beat analyst expectations, with revenue up 42.1% year on year to $73.1 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $88 million at the midpoint, 10.8% above what analysts were expecting. Flywire made a GAAP loss of $1.13 million, improving on its loss of $11.3 million, in the same quarter last year.
Flywire (FLYW) Q4 FY2022 Highlights:
- Revenue: $73.1 million vs analyst estimates of $65.5 million (11.5% beat)
- EPS: -$0.01 vs analyst estimates of -$0.12 ($0.11 beat)
- Revenue guidance for Q1 2023 is $88 million at the midpoint, above analyst estimates of $79.4 million
- Management's revenue guidance for upcoming financial year 2023 is $382.5 million at the midpoint, beating analyst estimates by 10.8% and predicting 32.2% growth (vs 44.8% in FY2022)
- Free cash flow of $30.7 million, up from negative free cash flow of $1.69 million in previous quarter
- Gross Margin (GAAP): 59.5%, down from 62.5% same quarter last year
Originally created to process international tuition payments for universities, Flywire (NASDAQ:FLYW) is a cross border payments processor and software platform focusing on complex, high-value transactions like education, healthcare and B2B payments.
Over the past two decades, digitization of payments has seemingly permeated most aspects of the global economy - which is relatively true when thinking about digital commerce or banking. But certain sectors, with very high value transactions, can’t adopt a “one size fits all” approach, often due to currency impacts. As a result, many organizations with the greatest need to facilitate online digital payments either have to resort to building their own processing solution from the ground up or stick to cashing checks, and the customer service headaches that come with them.
Flywire was created to facilitate cross border tuition payments for the global education market, international students studying in the US, or attending elite boarding schools. It has since found similar use cases internationally in healthcare, travel, and B2B payments, but education still remains its core market, accounting for the majority of its revenues.
Flywire has spent over 10 years developing a proprietary global payment network that operates in almost every country in the world, supporting more than 130 currencies and connecting all of the key global banks, as majority of Flywire’s high value transactions payments are not card-related and rely on bank transfers. The benefit of owning the network is that Flywire has full visibility over its fund flows and can better manage currency exchange risks on transactions for both itself and its customers, as managing FX rates on large dollar payments is particularly important.
Consumers want the ability to make payments whenever and wherever they prefer – and to do so without having to worry about fraud or other security threats. However, building payments infrastructure from scratch is extremely resource-intensive for engineering teams. That drives demand for payments platforms that are easy to integrate into consumer applications and websites.
Flywire’s competitors in the education space are largely in house legacy systems and legacy cross border payment systems like Western Union’s GlobalPay (NYSE: WU) along with many next generation B2B payment providers like Bill.com (NYSE: BILL) or Coupa Software (NASDAQ: COUP).
Sales Growth
As you can see below, Flywire's revenue growth has been impressive over the last two years, growing from quarterly revenue of $33.2 million in Q4 FY2020, to $73.1 million.
And unsurprisingly, this was another great quarter for Flywire with revenue up 42.1% year on year. But the revenue actually decreased by $22.2 million in Q4, compared to $38.7 million increase in Q3 2022. However, Flywire's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.
Guidance for the next quarter indicates Flywire is expecting revenue to grow 36.3% year on year to $88 million, slowing down from the 43.5% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $382.5 million at the midpoint, growing 32.2% compared to 43.9% increase in FY2022.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Flywire's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 59.5% in Q4.
That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Flywire's free cash flow came in at $30.7 million in Q4, turning positive year on year.
Flywire has burned through $2.21 million in cash over the last twelve months, resulting in a negative 0.76% free cash flow margin. This below average FCF margin is a result of Flywire's need to invest in the business to continue penetrating its market.
Key Takeaways from Flywire's Q4 Results
With a market capitalization of $2.67 billion Flywire is among smaller companies, but its more than $349.2 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
We were impressed by how strongly Flywire outperformed analysts’ revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, we think this was still a strong quarter, that should leave shareholders feeling very positive. The company is up 4.73% on the results and currently trades at $25.9 per share.
Is Now The Time?
Flywire may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Flywire is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
The market is certainly expecting long term growth from Flywire given its price to sales ratio based on the next twelve months is 7.8x. We can find things to like about Flywire and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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