Cross border payment processor Flywire (NASDAQ: FLYW) beat analyst expectations in Q2 FY2022 quarter, with revenue up 52.9% year on year to $56.5 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $96 million at the midpoint, 10.6% above what analysts were expecting. Flywire made a GAAP loss of $23.7 million, down on its loss of $18.1 million, in the same quarter last year.
Flywire (FLYW) Q2 FY2022 Highlights:
- Revenue: $56.5 million vs analyst estimates of $47.6 million (18.7% beat)
- EPS (GAAP): -$0.22
- Revenue guidance for Q3 2022 is $96 million at the midpoint, above analyst estimates of $86.7 million
- The company lifted revenue guidance for the full year, from $274 million to $288.5 million at the midpoint, a 5.29% increase
- Free cash flow was negative $12.7 million, compared to negative free cash flow of $18.3 million in previous quarter
- Gross Margin (GAAP): 61.4%, down from 64.5% 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).
As you can see below, Flywire's revenue growth has been exceptional over the last year, growing from quarterly revenue of $36.9 million, to $56.5 million.
This was another standout quarter with the revenue up a splendid 52.9% year on year. But the revenue actually decreased by $8.01 million in Q2, compared to $13.1 million increase in Q1 2022. However, Flywire's sales do seem to have a seasonal pattern to them, and considering 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 41.6% year on year to $96 million, slowing down from the 61% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 20.3% over the next twelve months.
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 61.4% in Q2.
That means that for every $1 in revenue the company had $0.61 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 follow 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 burned through $12.7 million in Q2, increasing the cash burn year on year.
Flywire has burned through $3.56 million in cash over the last twelve months, resulting in a negative 1.48% 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 Q2 Results
With a market capitalization of $2.59 billion Flywire is among smaller companies, but its more than $360.5 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, there was a deterioration in gross margin. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is flat on the results and currently trades at $23.62 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.
Flywire's price to sales ratio based on the next twelve months is 8.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Flywire doesn't trade at a completely unreasonable price point.
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