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Flywire (NASDAQ:FLYW) Delivers Strong Q3 Numbers, Stock Jumps 12.5%


Full Report / November 09, 2021
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Cross border payment processor Flywire (NASDAQ: FLYW) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 61% year on year to $67.7 million. Flywire made a GAAP profit of $9.99 million, improving on its profit of $5.22 million, in the same quarter last year.

Flywire (FLYW) Q3 FY2021 Highlights:

  • Revenue: $67.7 million vs analyst estimates of $52.3 million (29.4% beat)
  • EPS (GAAP): $0.08
  • The company lifted revenue guidance for the full year, from $175.5 million to $191.5 million at the midpoint, a 9.11% increase
  • Free cash flow of $36.5 million, up from negative free cash flow of $750 thousand in previous quarter
  • Gross Margin (GAAP): 67.9%, up from 67.2% 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.

Flywire benefits from the broad adoption of financial technology software in an ongoing drive to reduce costs and improve the speed and security of payments, while reducing the friction in cross border payments.

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 exceptional over the last year, growing from quarterly revenue of $42 million, to $67.7 million.

Flywire Total Revenue

This was another standout quarter with the revenue up a splendid 61% year on year. On top of that, revenue increased $30.8 million quarter on quarter, a strong improvement on the $8.01 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 15.8% over the next twelve months, although estimates are likely to change post earnings.

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 67.9% in Q3.

Flywire Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 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.

Key Takeaways from Flywire's Q3 Results

With a market capitalization of $4.75 billion Flywire is among smaller companies, but its more than $449.1 million in cash and positive free cash flow over the last twelve months give us confidence that Flywire has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Flywire outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 12.5% on the results and currently trades at $49.9 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 we have other favorites, we understand the arguments that Flywire is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Flywire given its price to sales ratio based on the next twelve months is 25.3x. There are things to like about Flywire and there's no doubt it is a bit of a market darling, at least for some. But considering the valuation we are wondering whether there might be better opportunities elsewhere right now.

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