Cross border payment processor Flywire (NASDAQ: FLYW) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 50.1% year on year to $84.9 million. On top of that, next quarter's revenue guidance ($124.5 million at the midpoint) was surprisingly good and 4.94% above what analysts were expecting. Flywire made a GAAP loss of $16.8 million, improving from its loss of $23.8 million in the same quarter last year.
Flywire (FLYW) Q2 FY2023 Highlights:
- Revenue: $84.9 million vs analyst estimates of $73.5 million (15.5% beat)
- EPS: -$0.15 vs analyst estimates of -$0.15 (2.5% beat)
- Revenue Guidance for Q3 2023 is $124.5 million at the midpoint, above analyst estimates of $118.6 million
- The company lifted revenue guidance for the full year from $389 million to $400 million at the midpoint, a 2.83% increase
- Free Cash Flow was -$7.81 million compared to -$21.3 million in the previous quarter
- Gross Margin (GAAP): 60.2%, down from 61.4% in the 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 impressive over the last two years, growing from $37 million in Q2 FY2021 to $84.9 million this quarter.
This was another standout quarter for Flywire with revenue up a splendid 50.1% year on year. Its revenue did decrease, however, by $9.49 million in Q2 compared to a $21.3 million increase in Q1 2023. Regardless, we aren't too concerned because Flywire's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.
Next quarter's guidance suggests that Flywire is expecting revenue to grow 30.7% year on year to $124.5 million, slowing down from the 40.5% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 19.1% over the next 12 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 60.2% in Q2.
That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, sales and marketing, and general administrative overhead. Flywire's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Flywire burned through $7.81 million of cash in Q2 , reducing its cash burn by 39.5% year on year.
Flywire has generated $446 thousand in free cash flow over the last 12 months, or 2.31% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Key Takeaways from Flywire's Q2 Results
With a market capitalization of $3.7 billion, Flywire is among smaller companies, but its $328.1 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by how strongly Flywire blew past analysts' revenue expectations this quarter. We were also glad that its full-year revenue guidance came in higher than Wall Street's expectations. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock is up 5.78% after reporting and currently trades at $34.03 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. We cheer for everyone who's making the lives of others easier through technology but in case of Flywire, we'll be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.
Given its price to sales ratio based on the next 12 months is 8.6x, Flywire is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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