Hey, everybody. Thanks for joining us this afternoon. Very pleased to have Flywire and Cosmin Pitigoi, new CFO, relatively new CFO of the company, here to join us. Before we get started, just as a matter of introduction, I'm James Faucette, a Senior Fintech Analyst here at Morgan Stanley. Before I launch into my prepared questions here for Cosmin, I do need to read the following. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Cosmin, great to have you here at our fintech conference. You're here for the first time, so I appreciate that. Maybe for those that are newer to the Flywire story, can you give us a brief overview of your background prior to Flywire, who Flywire is, and what initially attracted you to Flywire?
Three-part question.
Three-part question.
I love that. So thanks, James, for having me. It's been great kind of meeting a lot of the investors here. It's been fun t hree months in the job, so still in my 90-day, i guess journey so far. Look, maybe I'll go back a little bit. I started 25 years ago in financial services. I was sort of E*TRADE, Barclays, and then started at PayPal right the year after they got acquired by eBay. 20 years at PayPal with parts of that at eBay. I'll describe my career as a rotational exercise. I've been through every function imaginable at the company, but sort of very operationally, commercially, and to some extent really deep in the data and insights. So I've had the privilege to kind of be able to build my career with a lot of great leaders.
I've both had the fortune to be at the right time sort of in the history of those companies. So if I have to date myself a little bit, when I started at PayPal, put in place a lot of our foreign exchange capabilities, which again, sort of the second part of your question around why Flywire and FX in particular. And so I did that at eBay i was there and again maybe dating myself a little bit i was there when we put the first--we were the first app on the iPhone. It was eBay, and so worked very closely with the product team. And so a lot of these experiences where I was part of the function when we were transforming it, in addition to spending time in investor relations and treasury and others. So a lot of different areas.
And that sort of has shaped, I guess how I think about the role that finance plays. I see finance as the sort of capability that I think helps a business scale. And so I'm excited about bringing that to Flywire, especially as I see this part of their journey. I think the journey to scale, having seen PayPal over that time, it's a really exciting time. So a little bit about Flywire for those of you who don't know. It's really, I think of it as that business that's able to bring capabilities to these verticals that have historically been somewhat ignored by the legacy capabilities. So sort of from a payments perspective. So if you think of education, travel, and others, it's these complex, large cross-border payments. I know how hard it is to do a cross-border payment with maybe $100.
When I heard that there's a company that does it with $50,000 tuition payment, you realize the complexity that you have to build as far as the banking network, the software on top of that, along with the global network, and then the expertise for each of those verticals, that's what differentiates. It's basically in these areas that have been historically basically neglected from a payments capability o ur focus is on the receivable side to differentiate a bit w e help these verticals get paid t hat's sort of a unique aspect. That's sort of a little bit to the second part of your question. I think the third part for me and why I joined is, again, my background around being able to scale and bring businesses to scale. I met Mike, who's the CEO, and the rest of the executive team.
Just an excellent team. So for me, it was sort of a great business with great potential and great people. That's a unique combination. And so, yeah, personally, I packed up the family from California. I moved to Boston immediately, sort of on a Sunday afternoon. I showed up in Boston in March. Very excited to be here.
Love it. So as you said, you've been in the seat for a few months now. You've already gone through an earnings cycle. I'd love to hear just what your thoughts are on your early learnings thus far. And clearly, you had a lot of conviction, as you just said, to join the firm. But what have you learned thus far? What's been different than what you expected? And some of the key items you've decided are worthy of your focus on a day-to-day basis?
Yeah. I mean, I think a little bit splitting out things internally and externally. I think internally, I bring to bear sort of what the finance team can do and influence. So I think the role that finance can play is to help scale the business. And so what I've done initially internally is look at the finance function and build up that mindset of start building up the mindset of we're a business partner. We are a strategic partner to the business, bringing all those capabilities that finance can. My background is also in data. So I've spent a lot of time in data and analytics. And the power that you can unleash if you first structure your data well and then you build capabilities on top. I think people talk about AI.
I think that's sort of a secondary view for me: is building that data structure is something I did in my past at PayPal and eBay. So I think the capabilities internally and then sort of the team and what the value that the finance team can bring. So that's on the internal side as I've come in. I think it can make a really big impact. Externally, I think I come from a maybe more traditional finance, sort of you call it old-school finance view, where you sort of create a discipline of three-year guidance, three-year plans that you serve every 90 days. You tell people how you do. And you balance, obviously, great top-line growth with solid sort of return to shareholder metrics, adjusted EBITDA being just one.
But I think increasingly free cash flow and ROIC and things that maybe have been lost along the way is maybe less sexy. But for me, they're really interesting components of how you think about returning cash to shareholders and return to shareholders a nd so being able to put that discipline externally and starting to show kind of here's what are the parts of the business that we feel good about and how you should feel about it and creating that predictability a little bit. I think where we've seen some volatility over time, I think we can create that predictability by communicating more strategically across time.
Got it. So I want to ask you, we get a line of and I'm sure you get the same questions from investors a nd we get a lot of hemming and hawing and a lot of, on the one hand, this seems good o n the other hand, I'm worried about these other things, et cetera. The fundamental performance of the business has been pretty resilient and healthy in terms of net retention and net new wins. But as I said, there's always this other hand i t seems like there are other things that people are worried about, including the prospect of student visa growth, the potential impact of upcoming presidential elections, or not even in the U.S. There's also elections in other key markets that are coming up in the next year or so and a handful of things that we could consider to be exogenous.
How do you think about these factors and specifically whether or not additional disclosure or non-region-specific commentary can be provided to really help reassure investors and address some of these concerns?
Yeah. I love the multi-part question. So [crosstalk] . So I think, so first off, as you said, I think we have a track record of beating expectations. And if you look at what we said at IPO, I believe we beat every one of those expectations so far. And so that is one of the differentiating factors as we think about the moving pieces within the portfolio. Now, to your point around how do we manage some of these uncontrollables, I think the way I would break it out is, look, there's going to be some macro factors always that you have to take into account. And the way I think about those is we take a balanced view. At any point in time, you only know so much.
Obviously, the visa aspect is tied into i 've talked to a lot of people around just the fact that so much of the world right now is going through an election cycle. There's a lot of headlines i t remains to be seen how many headlines actually sort of convert into actual actions. And so I think the best principle that I can put out there is look we're going to look at those factors that are mostly out of our control, external, and say, look, we'll take a balanced view. And then we'll tell you what our key assumptions in that. So for example, as far as disclosures, what we said is for second half from Canada, we'll have mid-single digit recapture from outside the U.S.
That's an assumption that we felt it was important to disclose and to sort of show kind of here's the impact of that, again, sort of a macro aspect. The other piece, which as far as disclosures go, feedback that I got is around FX. I don't think maybe the market appreciated how diversified we are in terms of international revenues. If you look at our disclosures right now, it'll show that Americas is about half of the business. We've actually said externally that Canada higher education is about 14% of the business. So if you combine those two, you realize it's over 65% or so of the business is outside sort of the U.S., which of course means that when you're translating those into US dollars, you're going to have an FX headwind or tailwind.
And so that's something that as I've come in, I'm looking at shifting to a currency neutral kind of stance in terms of guidance. So that's something that we're building. So as we look into next year, move away from providing these sort of spot dollar ranges that are hard to manage as far as anyone to predict what FX is going to do. So again, coming from background at PayPal and others where we had this kind of FX neutral guidance methodology, easy to kind of build that in. So those are the things that I think we can do with disclosures is to just help people connect some of those dots and build some predictability into it.
And then on the rest of the business organically, I think, again, we feel that track record that I talked about. We feel like we're going to focus on executing. We know long-term, that's a huge opportunity that kind of cuts through all this noise. When you look long-term, we feel pretty good about the position that we're in and our ability to execute through a lot of this because we have been.
Right, right, right. So those are kind of the big picture questions that we get. Some of the more specific questions we get are around NRR versus payer retention. I think it's well known that your NRR in the low- to mid-120s range is robust, particularly when we look at historical cohorts that are still growing in that high teens range. What are your feelings about NRR over the long term? And what are the building blocks to get to that low- to mid-120s range?
It's a good question. And one that we get a lot more. And we've tried to disclose some of it. So what I'll try to do is maybe give you the three components, at least the way I think about it. And maybe coming from a different place than in my e-commerce background, we used to talk about e-commerce growth, the same store sales growth. And so I think of NRR in those same components. So the three that I think of is one is what is the secular growth in the verticals that we're in? Second is what is churn? Because churn is sort of one big negative potentially for certain players. And then third, what are the levers internally to grow that same store sales number?
So if we break those out specifically to give you a sense of the 120+, so first in terms of secular growth, even education, if you look at education, if you look at Open Doors, I think dot com, I believe, has just the 10 to 20 year line of international students growing in the sort of low single digit. So the assumption is obviously countries, despite sort of the short-term headlines, will want intellectual capital to grow. They want sort of students to come study in their countries. So that's one layer. Second is tuition. So tuition, I have four kids, by the way. And I don't think I remember ever seeing tuition going down. I would love for it to go down at some point, but I don't plan that. So tuition continues to go up.
So if you add those two up, you get to kind of a mid-single plus kind of growth rate of just secular growth. And that's just education. If you look at travel, B2B, and others, I think you can get to that sort of component of that 120 just being secular growth, which you have to look at it multi-year. When I get the question on an in-year, who knows? It's going to be choppy, perhaps, depending on what happens in each of these. But multi-year, you can see that growth. Second, where we're different than others, and I think this is maybe also misunderstood, is we have very high retention. So if you look at our retention, it's like 95% on a per client basis. On a TPV basis, it's even higher than that. So in education, we have a lot of clients that stay with us.
We have exclusive contracts that go for years. And so you don't have a big negative to sort of offset that initial secular. So that's sort of the second piece. And then the third is the levers that we have to grow is not just one. It's multiple. And that's why we haven't necessarily broken this out externally because it's not just cross-sell across geographic. So if you start with one part of the world as your first introduction to a client, you can go geographic cross-sell. You also have product cross-sell. We're continuing to add products. You have expansion. We talk about land and expand in the U.S., EDU. You have all of those opportunities.
And then you have payment, even the payment network itself, as you add capabilities to do payments in Malaysia and other countries, for example, where maybe we didn't have that. That becomes something that's a monetizable kind of flow for us as opposed to where it wasn't. So really the benefit is that you have multiple levers there. It's not just one silver bullet. And so that's why you've seen this consistency over the years and why we sort of talk about that being pretty stable over time is, again, sort of the growth secular with low churn and then multiple levers on top of that kind of creates a pretty consistent we talk about sort of coming into any year with 85%-90% kind of visibility into the revenue for the year because it's somewhat stable and consistent.
Got it. So I do want to touch on each of the verticals quickly. Can you speak about what you're seeing thus far in terms of some of your existing customers offering alternative payment mechanisms from some of your education competitors? This is something that we get a lot of questions about as well. I think there's this perception that there's an increase in competitive intensity with some of your education customers and partners starting to offer alternative payment schemes. How much are you seeing that? And how much is that impacting your growth from your seat, if at all?
Yeah. And it's helpful to get these questions. I think people don't realize that we've been building this network for 10 years competing with those same competitors along the way. And it's the same two or three names that we've seen that have been around for a while. So it's not a.
So it's not a new.
It's nothing new. And if you think I go back to the beginning, building that global sort of network of banks across 140 currencies and 200+ jurisdictions, software that is sort of specific to the verticals, plus the capabilities on a vertical basis from those, and plus the unique AML, KYC, and capabilities that you need there, you can't just build this overnight. It takes time. And for EDU, it's been the same three for the most part. And it's mostly in the U.S. So you have to separate kind of U.S. sort of competitive landscape versus international. In the U.S., for the most part, we've come in with the early on, that was our initial entry through the cross-border product. And so we have kind of high single-digit penetration of sort of the market there.
So it's sort of, let's call it thousands sort of university out of the 4,000. We have that. Then out of that, we have about a high single digit that use domestic. And our ability to then cross-sell that domestic into that cross-border side is why we've said that we can basically triple or more the size of the business just by doing that. And it takes time. It's a slow ice cube to melt. And we feel good about it. And we've competed with these folks for the last 10 years. And we feel good. If you look at our user experience and the capabilities that we have versus, again, and you can look at these sort of legacy players. We feel pretty good about those. And it's not like we're stopping innovating.
If you talk about alternative payment methods, I mean, we have all of them. We have like 15 hundreds ways you can pay. We are actually different as to which one you use. For us, it's sort of the benefit as being sort of the platform provider. We feel pretty good about continuing to compete as we always have. We're not standing still. We keep adding like the 529 product. When we hear about an opportunity like that, we immediately can turn around. That's, again, what a unique thing that I love about Flywire and learning as I've joined. The team can come together and do something incredible really fast. That agility, I would say, is pretty unique. It's hard to find in a lot of other places where you can immediately get the team together and do something.
In the last earnings call we mentioned, where we had a case where one of a sort of educational institution that's a large known name basically was looking for a quick sort of turn. So we were able to put together our software in like 30 days. But it took basically every team coming together and saying, "We're not going to do something that usually takes 2-3 months. We're going to get it done in 30 days." And if you have a culture internally that says, "We all work together. We'll do what it takes," it's amazing what you can do. We'll sacrifice whatever. We'll work through weekends and we'll figure out a way to do it and you get it done. I think that's, again, it's inspiring to see that internally.
So what do you think are the biggest threats within the education vertical? I mean, what would cause that vertical as a whole to maybe underperform on a performance basis if things do go poorly there or if something were to go poorly, I should say?
Yeah. I mean, look, we look at both opportunities and threats in the education side. Obviously, that's still kind of our biggest vertical, although increasingly, obviously, it's becoming less of a component of our business. So I think in terms of opportunities, obviously, the cross-sell is the biggest component in the U.S. And then it's expanding internationally. And then short term, there's going to be macro factors. So I think that's probably the only thing that we're watching is how many of these headlines actually turn into anything relatively practical. Because again, it is an election year and there's going to be a lot of headlines. But it's hard to know which one of these actually plays out the way governments are saying it will. So I'd say it's short-term macro headwinds, but it's not something that, again, we're not focused on that.
We're focused on building the business for the long term. So I think the piece that people miss too is just the low penetration in each of those verticals gives us that opportunity to say, "Fine, there's some headwinds in the short term." But that doesn't change the fact that we see the opportunity to continue growing with new clients. We keep adding a lot of new clients. And EDU was the biggest client to add last quarter in Q4, Q1. It was not far off of travel. So we keep adding a lot of new clients in these areas. So they're offsetting some of these macro kind of one-off short-term headwinds.
Got it. Talking about healthcare, and you mentioned that briefly, can you speak what you're seeing from a healthcare utilization perspective? The business declined slightly in 2023, but do you think the business has troughed or that segment has troughed?
Yeah. So again, new coming in, I think what I've seen on the healthcare side is the team went through a transition through last year. I think we talked about a few different areas of improvement. One is change the sales leadership and the sales team. Second, I think it was around the product specifically and building out this new third-party kind of sort of in this integrated financing that we do through a third party. So that itself is a capability that our customers obviously want. And then third is we started looking at we had sort of four of the big 10 kind of providers. And so we started looking more down market, smaller providers, orthopedic kind of clinics and other surgery centers that maybe have a shorter kind of cycle time that you can kind of accelerate some of that.
And so that's what we talked about, healthcare having one of our highest pipeline builds coming in. So feel good that one of the reasons for the acceleration in the second half, if you look at our guidance, people are asking us like, "How do I think about the future?" I mean, just look at sort of the build-up of what we have. Again, realize it's sort of across the industry, a lot of second half. But for us, we feel good about it because we've seen this kind of stabilization.
We're seeing the client build. And so healthcare is one of the drivers of that second half acceleration that we have built in. So again, I feel like we'll be able to tell pretty well as we get into second half how they're performing. Long-term look, I think healthcare, we've said it may not be as the sort of 43% that we grew last year, but it can still be sort of a mid-teens plus sort of grower for us.
Interesting. Let's talk about travel. I know you recently added ocean experiences to that vertical. What's the overall opportunity and competitive environment like for travel? What do you think its growth rate should be?
Look, so last year, travel and B2B were about 13% of the business, but a lot of that was travel. And there was growing at 120% combined. So it remains sort of a very, very high growth vertical for us. I think we talk a lot about luxury travel experiences. I sort of describe it as a multi-day bespoke travel, which they think of it as a few families get together. I have kids, so I don't really get to travel. But for those of you who travel, you get a group together of people and you decide, "Hey, we're going to go do an ocean experience," or you do a safari or something, and then you want to split up the payment and you want to pay half of it upfront and half of it later.
You can see how those capabilities basically sound exactly like what you're trying to do with the payment plan that you need or with a healthcare kind of payment plan. So what I like about it is, one, I think travel in itself, coming out of COVID, I think it will remain an area where people want to spend money on experiences as opposed to spend money on stuff. And so I feel good about that. And I think increasingly these more sort of bespoke type travel experiences are good. Now, I think we've said that could be it's a pretty large TAM. But we're going in a very targeted way after the ocean experiences. I think we've said it's like a mid-teens billion kind of TAM in itself. And so the way we approach this is the same as we approach different parts of our business.
It's a very targeted investment kind of philosophy where we test and learn. And if it starts to get kind of traction, then we go a bit faster and faster. So that's the way to think about this. The ocean experience is one where, again, it looked a lot like the rest. And travel, by the way, when we look at the curves for travel, it looks very similar to an early education kind of profile. So for us, again, that's and still secular growth there is also probably in the single-digit plus category.
And so feel good that, again, it's adding that long-term trajectory, but at a much faster growth profile. Maybe with the lower to be sort of the offset of that is more credit card balance. So that's one of the reasons for the margin mix that we've talked about. But feel good that on a gross profit dollar basis, that's still very high growth.
Got it. I want to make sure to open it up to questions from the audience. If anybody has any, I can grab those. You mentioned margins. Once again, recognizing that you're early in the sea, but it'd be great to get your perspective surrounding the long-term margin and earnings power of the business. 2023 adjusted EBITDA margins were close to 10%. The company has talked about being a 25% adjusted EBITDA margin business by 2026 or 2027. Walk us through some of the key drivers of that margin expansion. What has to happen to get us to that kind of mid-20s range?
Yeah. Look, I think there's drivers on the sort of top line and how we think about the growth there, along with being more like operational excellence on cost, if I was to break it out into two. So on the top line, if I go back to that point I made earlier about the data, think of how much you can be so much more efficient with a salesperson or a marketing dollar if you can use data to sort of turbocharge those investments or to focus the pipeline or the marketing dollars. And same with engineering too. So I come from sort of a mindset of test and control, A/B test everything you do. And so again, using data and using your platform to make those investments work for you even more, I think is a huge opportunity.
And putting that, again, maybe my time spent in investor relations, but I start with everything outside in. So you put sort of the veil over all this. So what is the bigger opportunity on each of those vectors of investment at the top line? And then look, on costs, I think we have an opportunity to be more efficient. A lot of our costs are people overall. So you can see that where we can be more and more efficient with each of the different teams, if you put in some automation, just simple stuff like automation, reducing some manual work, data systems, putting bigger systems in place. So you have an opportunity to maybe, again, make each one of those teams even more efficient as you keep growing.
Y ou don't have to add an extra person because that platform does actually scale can actually build capabilities on top of the existing layers of the cake, if you will, in terms of that platform. It's got natural kind of which, again, that's what we keep beating. We've beat the EBITDA margin significantly. Even this year, we've held that 320 basis points. They get you to sort of the 14% or so EBITDA margin. And feel good that we'll continue to see that going forward and drive cash flow positive too.
So let's talk about another metric beyond just cash flow and adjusted EBITDA, which is GAAP. Investors are increasingly focused on trying to identify long-term earnings power when we're kind of at a more mature level within the overall profitability of the business. I know there have been periods where the company historically has been profitable on a GAAP EPS basis. But what are you thinking about a timeline to achieve that consistently and where GAAP EPS can trend if you are successful in getting to your 25% adjusted EBITDA margin target?
Yeah. Look, like I said, I'm more of a traditional finance guy. So I think I look at both GAAP EPS and stock-based comp as a dilution factor and then free cash flow. At the end of the day, I think what everyone wants is free cash flow. So that's a focus metric for me, free cash flow per share or ROIC also. So these are some of the metrics that I will look at in general. But on stock-based comp, I think after the IPO, we expect to get to a level where it sort of levels out, obviously, as you kind of give out stock-based comp over a certain period of time. So as that settles in, it's about the same time as we've become more and more sort of cash flow positive and earnings per share.
So as I think about when we decide to do our next kind of three-year kind of outlook, we'll put some of these metrics out and start to sort of balance out how we think about, again, maybe capital structure tied into profitability to make sure that we balance how we think about giving back to shareholder returns adjusted for that stock-based comp dilution factor overall.
So what is your philosophy around capital allocation? And how do you balance that potential returns, at least offset some of the dilution from stock-based comp versus M&A? I know that you've hired some senior corporate development personnel to help prosecute that effort. So what's the balance for you, do you think?
Yeah. Look, I think as we get into next year, and like I said, more and more cash coming off the business, I think we have an opportunity to look at sort of in my past, I was sort of, again, maybe dating myself. I was there when we put in place the first buyback at eBay. And it was with the view to offset shareholder dilution from stock-based comp. And so then familiar with doing that, I think you would want to balance those types of things sort of on capital structure with continuing to stay relatively focused on M&A opportunities. So we wouldn't want to do anything that kind of stops the team from being able to find those great acquisition targets that we've shown that we can execute on. So that remains a big focus.
But as you look at our sort of cash profile and cash generation profile, being able to use that cash to offset some of that dilution, it could be something that we would look at. But again, it's something that we're still talking through. But that's sort of been a philosophy in the past for my time so far.
All right. You came in, you had an initial to-do list. You've outlined after three months a few things. You're kind of evaluating how do you want to formulate the outlook or at least give benchmarks to people. You talked about; you're still figuring out capital allocation. What's the to-do list, though, that's most urgent for you right now between now and the end of the year, let's call it?
Yeah. Look, I think partially, I think the second half of this year is a mystery for all of us to some extent, geopolitically speaking. So watching how all that unfolds is one piece. But for me, it's going deeper with the finance team now into our data, into the growth of the business and unpacking it and then sort of connecting what is the long-term view of the business. So putting together a multi-year kind of view of the business so that the way people ask me, what's your disclosure kind of principle? And for me, it's like tie the drivers that you look at and how you manage the business to how you talk about the business externally.
So now with sort of the finance team in place and the management team kind of embracing kind of this new way of working, I think it's creating and looking long-term and sort of creating a view of the future and making sure that we continue to communicate that externally in a way that helps for me ultimately drive predictability and consistency, which are big factors for me in terms of how we talk to investors.
That's great. Cosmin, that's all the time we have. Thank you very much for joining us today. Appreciate it and look forward to it.