Cross border payment processor Flywire (NASDAQ: FLYW) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 40.4% year on year to $95.2 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $70.9 million at the midpoint, 8.67% above what analysts were expecting. Flywire made a GAAP loss of $4.27 million, down on its profit of $9.99 million, in the same quarter last year.
Flywire (FLYW) Q3 FY2022 Highlights:
- Revenue: $95.2 million vs analyst estimates of $87.8 million (8.39% beat)
- EPS: -$0.04 vs analyst estimates of $0.05 (-$0.09 miss)
- Revenue guidance for Q4 2022 is $70.9 million at the midpoint, above analyst estimates of $65.2 million
- Free cash flow was negative $1.88 million, compared to negative free cash flow of $12.9 million in previous quarter
- Gross Margin (GAAP): 66.1%, down from 67.9% 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 quarterly revenue of $42 million in Q3 FY2020, to $95.2 million.
And unsurprisingly, this was another great quarter for Flywire with revenue up 40.4% year on year. On top of that, revenue increased $38.6 million quarter on quarter, a strong improvement on the $8.01 million decrease in Q2 2022, and a sign of acceleration of growth, which is very nice to see indeed.
Guidance for the next quarter indicates Flywire is expecting revenue to grow 38% year on year to $70.9 million, slowing down from the 54.6% 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 21% 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 66.1% in Q3.
That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
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 $1.88 million in Q3, with cash flow turning negative year on year.
Flywire has burned through $42.2 million in cash over the last twelve months, a negative 15.7% free cash flow margin. This low FCF margin is a result of Flywire's need to still heavily invest in the business.
Key Takeaways from Flywire's Q3 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Flywire’s balance sheet, but we note that with a market capitalization of $1.93 billion and more than $349.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were very impressed by the strong improvements in Flywire’s gross margin this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a good quarter that could have shareholders cheering. The company is flat on the results and currently trades at $18.09 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 is making the lives of others easier through technology, but in case of Flywire we will be cheering from the sidelines. 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, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its growth is coming at a cost of significant cash burn.
Given its price to sales ratio based on the next twelve months is 6.0x, Flywire is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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