Thanks for joining us. 9:15 A.M., we're gonna get started here. Michael Infante, I'm an analyst covering Fintech here at Morgan Stanley. Very pleased to be joined by Cosmin Pitigoi, Flywire's CFO. Before we get started here, I just have a quick disclosure to read. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, Cosmin, thanks for joining us.
Awesome. Thank you. Thanks for having me.
Maybe before we get into the details, just stepping back to 2025, obviously a lot of external noise around international student visa trends. You guys still ended up delivering 17% organic RLAS growth and an average of about 6% estimate upside through the course of 2025. Maybe for those in the audience that are a little bit newer to the story, can you just sort of unpack what your initial assumptions were for revenue growth in some of your core education markets in 2025 relative to the results that you ended up delivering?
Yeah. I think to some extent, maybe we need to reintroduce ourselves a little bit 'cause I think if you look over the last few years, we've just become, and I've heard it from a lot of folks, that we've been so much more diversified than if you think even three or four years ago, everyone thought of us as sort of a cross-border, mostly education sort of business. Now we're diversified beyond not just the cross-border business into other verticals that have become a bigger portion. We've also seen a lot of growth on the domestic side, increasingly enterprise-sized clients, and increasingly more and more software than in the past. We've certainly evolved from that and increasingly, you know, talk a lot more about free cash flow and margins that continue to do quite well.
That's sort of the backdrop of kind of how we've evolved. If you think, yes, to your point, you know, early 2025, you know, certainly a lot of uncertainty in the environment. What we did was we took a very prudent approach, given that to the guide, and listen, at the time, what I said is, "Well, I'm gonna take sort of three principles. One is prudent, two is data dependent and very transparent." What we did is, yes, we assumed both Canada and Australia will be down around 30%. You know, what we saw there is, you know, Canada was a little bit better than that, even though actually the visas were down more than that. We actually performed better than that.
At the other extreme, Australia, where, again, looking at early trends in 2025, it, you know, it looked like maybe it could have gone the same as Australia, as the same as Canada. It did not. Actually, Australia was a growth market for us in 2025, and their visas actually are relatively flat.
Yeah.
Those are some of the drivers. Look, at the same time, what we also did is we took, you know, we assumed U.S. was gonna be down. It didn't. Ended up being actually better, and U.K. continued to outperform. At the same time, though, we really emphasized a lot of the sort of fundamental aspects of the business. We did a restructuring. We announced that we're looking at sort of everything in the business, and we executed on a lot of those margin and cash-driving components, which again, these are the things that focus on what we can control to show the value in the business.
That's the thing 'cause you exit the year, we're not just more diversified, more of a margin-driving business, but also a much stronger kind of foundationally business, you know, exiting the year, coming out of that.
It's helpful context. As we think about 2026 and the outlook that you just gave to investors, market by market, you expect U.S. visas for first years to be down about 30%, Canada to be down around 10%, and U.K. and Australia to be flat, respectively. I know we're early in the year, but maybe you can help sort of investors, understand how you sort of formulate some of those assumptions. What are you seeing on the ground in your own deposit data? What are the conversations.
Yeah.
with agents look like, et cetera?
Yeah. Look, taking the same approach, again, sort of very prudent, data, dependent and transparent. When we look at some of the assumptions, around the U.S. being down 30%, right, we talk to agents. Of course, we have our own agent networks. We talk to them. We look at Common App data, which is available out there. What we're hearing on the U.S., for example, is, and you've seen this in the F1 data over the last couple of years, some pressure in the India channel. Some students from India choosing to perhaps go to other locations. We're seeing diversification, which again, works kind of in our favor too because we have the footprint globally.
Yeah.
We're seeing that a bit play out. It was already playing out in Canada. We saw that. It's been playing out in the U.S. We look at Common App data. It's a good indicator. It's again, a lot of these things are indicators until you kinda see the actual seasonal peak play out. It's kinda tough to call how these things play out, and that's kind of the data-dependent piece of it. Look, at the end of the day, we're continuing to take a very prudent approach around it. Again, in Canada, we're assuming some small pressure there, but you've seen in all of these cases, we've taken a, you know, a pretty prudent approach around the assumption, then we'll see how things play out, and we'll update everyone.
Along the way, we are seeing students apply to more. I guess the summary is students are applying to more destinations around the edges. Obviously, the big, you know, there's a lot of demand for still international education in general, 'cause you're always gonna have an imbalance of talent in different countries.
Yeah.
I think, and I still believe as, you know, including myself as an immigrant a little bit, but I believe in the strength you build in your ability to attract the best talent, you know, to the country that you want to kind of, especially as we're AI conference, you know, and tech talent and talent in general, I think, will be still a demand for it. I think a diversification of those is kind of what we're seeing, especially from the India channel.
How about from the actual spread between your own visa assumptions and the revenue growth that you end up delivering, right? If we break it down market by market, the spread between, you know, the U.S. visa degradation and your assumptions for U.S. revenue growth, it's, you know, in the low 30% range, right? If we take the Canada market, it's closer to 20, U.K. similar, and the Australia a little bit lower. Can you just sort of unpack why the spread between visas and revenue in the U.S. is so large and maybe why it's so narrow in Australia?
Yeah. Let's start with that. If I start with the U.S., you know, that's our longest and most mature market. We've built many years of cohorts of students over time. The things that play into that are some of that retention of some of those cohorts. As you would realize, obviously, the visa component mostly impacts your first year kind of cohort. The other cohorts and the retention of those offsets some of that pressure. When we talk about last year, assuming visas were down 20%, again, we're still waiting for the data, but just looking at our own data on first payers, so it's down in the sort of high teens.
Offsetting that, we do see this retention aspect where about half of our revenue in cross-border U.S. comes from existing kind of cohorts, and the other sort of less than half is from new. That enables us to then have, you know, improved, or lower sort of impact from that. Then, of course, you have the tuition aspect where, you know, undergrad is still pretty demand. It's a higher tuition kind of opportunities. Also we have other levers, right? We continue gaining share. We announced, you know, continue to win in cross-border.
Then we have the domestic aspect in the US where, especially I think, you know, we've sort of given these metrics, but specifically for 2025, if you look at the US business, the domestic portion is in kind of low-teens share of revenue. Sorry, the cross-border business is low-teens re-share of revenue, while the domestic is sort of mid-single-digits. That domestic portion is growing much faster and also upstate. Again, we're continuing to win enterprise SFS clients. All of those things play out into that spread for the US. In Australia, it's a bit different. They have not seen as much even though we thought they would, but they haven't seen as much pressure on the visa side. We have larger clients there in particular.
And we also have an insurance business, if you recall the Cohort Go acquisition. That is impacted by sort of volume of students. All of that kind of plays into Australia having kind of a narrower spread. Although if you think of 2025, if you've seen visas are roughly flat in Australia and we grew in the low teens. Again, Australia, you know, the market did better than we thought, and we also did. We had kind of a higher spread. Again, as we get into this year, you know, we wanna be prudent.
Look, U.K. and then U.K. and, sort of, you know, the Canada is, you know, it's kind of a different aspect where U.K. we've continued to outperform significantly the visa market because we've got, you know, product is great, lots of interest, very different competitive dynamic, and then in Canada has obviously just been very volatile. You know, we've continued to win share there, and now as they've come off of this volatile kind of time, we expect, as you saw, so with visas down 10%, to continue having that spread, that kind of works in our favor. That's where, again, it's sort of structural and share gains, you know, and the more so than anything driving this.
Before we pivot to F- SFS, I just wanted to hit on the U.K. market in particular. One of the concerns that we tend to hear from investors about the U.K. specifically is sort of just looking at, you know, the major schools in terms of the composition of international students and, you know, investors coming to the conclusion that you already have a fair amount of those universities. What would you sort of say, you know, to investors that are concerned about the, the client penetration levels within the U.K. and how you're thinking about, you know, incremental revenue growth in that market?
Yeah. I mean, listen, if you look, you know, we've heard this, sort of question for several years. To some extent we, you know, we did disclose, the U.K. this year for the first time to show that it is not only our largest education market, but also growing at 25%, which is obviously ahead of, company average. Still a lot of growth, strength there given the, you know, the product, you know, penetration that we have there with the domestic business. Now with the, you know, cross-border and domestic together with SFS. I think the right way to think about it is if you just look at number of clients or schools, what you're maybe missing is our penetration within those schools.
The stat that we. For us, there's the opportunity to sort of call it, you know, if you think of it, a share of the student financial flows at a particular school is more important than You know, you could have all the schools, but if you don't have the full share within those schools, then that's less relevant. For us. The what one metric to keep in mind is last year, I think we said about a dozen or so schools, and now there's a bit more. We have about 90% of their student, kind of financial flows. If you think of that, obviously, a dozen is obviously a pretty small number generally related to the entire market over there.
For us, that opportunity in the U.K. remains to continue, gaining more share within those schools because we have those integrations that are very unique that no one else, tends to have. That's the way to think about it, and we'll continue to unpack that. We feel the U.K. should continue to grow at pretty healthy rates. For this year, we said U.K. plus EMEA will grow at or above the company average.
Helpful. On the SFS product, what % of your education clients are using that product today, and how should we be thinking about SFS penetration as a % of education revenue and where you might expect that to go over the near to medium term?
Yeah. In the U.S., we've given the stat where we have about 1,000 institutions on our sort of legacy cross-border. By the way, we keep adding that. Then of those, we have about a 10% attach rate. About 110 signed 13 SFS clients last year in the U.S., which is a record number for us, and we continue to see strong pipeline demand there as the perception of us has shifted from it used to be again, it's not just I think the perception for, to some extent, shareholders and investors and others, but also I think for our clients is shifting from, oh, you're not just the cross-border provider, you can also do domestic.
Those conferences, and we had, again, our conference this week in the U.K., we have a similar one in the U.S., so we see that capture. You know, look, 10%, adoption is still early, and in the U.K. is even sort of lower. In the U.K., we started with, we have now six live on SFS with four kind of design partners. Where we kind of test the product and launch, and the demand there is quite great. Again, U.S., we differentiate on a number of, kind of product and innovation, capabilities. We continue to see, you know, a long runway there now that especially that kind of, that, mindset has shifted around kind of how people view us.
Continue to expect, you know, like I said, in the U.S., even this year, if you're, we're saying low single-digit growth despite a 30% visa, you have to assume that the domestic business is assumed to be growing pretty healthy. Again, that's, you know, us again remaining quite prudent around it, but the team is quite excited around the opportunity on SFS. It's a longer cycle, but we like it 'cause then it's, you know, those clients stick with you for a very long time.
On the scaling cadence, how important is ERP coverage there to sort of scaling SFS, and what do you have to do internally from an integration milestone perspective to make sure that those integrations are in place and you can continue to get the attach that you want?
Yeah. I mean, the integration is an incredibly critical differentiator, and that last mile of any payment that we always talk about is in many... For us, there's a last mile in both directions. There's a last mile as far as the university receiving that money and having to book it into a system of record, and that system of record many times, again, and we gave this picture of the U.K., for example. We have four or five different types of integrations and building those, whether it was Tribal, Unit4, Agresso, and now increasingly you've heard us talk about Oracle Fusion. All those are super critical, and they're difficult to build, and you have to actually work with those partners. That creates a very unique differentiator for us.
Then by the way, on the customer side, providing the banking relationships and, you know, on that side and being able to connect, again, that last mile on both sides is a big differentiator, but the ERP piece is very critical. Differentiator huge in the U.K. In the U.S., our competitors have that also, but that's where kind of our product and innovation and, sort of, you know, that's kind of what's been, what's been driving our differentiating factor there too.
As students establish local banking relationships in years two to four, you obviously have, you know, really healthy net revenue retention metrics, even with the macro headwinds that you saw, still delivering 110% plus NRR. How do you think about that payer retention piece and just the dynamic of students establishing those local banking relationships and what you internally can do to drive higher share of wallet?
Yeah. NRR increasingly now as we diversify is obviously there's a number of components driving it. Within education we still see healthy retention and NRR because, one, you have on the enterprise side, obviously you have very low churn which plays into that. There's a few things that drive sort of student retention for us, and these are levers that, you know, we obviously push quite a lot to make sure that we do create these long-term relationships with the students. First, SFS adoption. That is, you know, as you go from being just a cross-border provider to then processing kind of all the student flows, I think you see, and we talked about it, and there's a few slides you can look at as far as how that plays out.
Imagine it's a sort of a 3-5x revenue multiplier and sort of a 2-3x gross profit multiplier as you shift. We do see just more retention even in the cross-border students from first to second year because of that, because we now, you know, sort of processed their payments then. The second thing is managing sort of presentment at checkout. Obviously, we cannot always optimize that and, you know, provide a better experience for the student, and that's another way to obviously help manage that sort of retention. Third, which again is kinda unique to us, is partnerships, where our partnerships with the banks up front.
That was kinda my point around the last mile on that side, where, you know, we have partnerships with the biggest banks in India, with banks in China and other places. Creating that sort of level of comfort with the student and knowing the name and feeling sort of safe with obviously your life savings in many cases that you're transferring, creates that, you know, that sort of, again, retention in future years for us.
Helpful. Maybe pivoting to more thematic topics with both AI and stablecoins. As you sort of think about, the opportunities and risks to Flywire, from an AI perspective, how should we be thinking about, you know, things like your routing economics, some of the reconciliation productivity, you know, the efficiencies that you're seeing with the sales organization and customer support. Maybe just sort of like rank order, you know, some of the buckets where you see AI, you know, being a tailwind to the business and/or, you know, areas that, you think sort of reinforce the stickiness of the platform.
Yeah. I mean, as I, as I, as I said, you know, I'm a data platform and machine learning sort of guy for over 20 years. These are exciting times for me in terms of what you can do. I've always tried to automate myself, you know, if I can and in every situation, and these are. Now you have the tools and the ability to move even faster. Look, I think, I think of it as AI as sort of there's the fluency and then there's the accuracy aspect of it. Wherever there's a number of documents that need to be summarized and synthesized, those areas are gonna be very quickly automated. For us, the customer service is obviously the easiest first place to go.
For us now, I think of something like almost half of our calls are, you know, through kind of, you know, some sort of automation. Routing economics, you know, although obviously AI can accelerate this, that's been something that we've, you know, as being in payments for 20 years, you know...
Yeah
that's been an area of always an optimization through a number of different models. You can think of any, you know, sales also, we've now implemented a number of tools for the sales team. If you're managing multiple, you know, relationships and documents and, you know, obviously you can automate. Those are, you know, the fluency level kind of areas or one aspect. Then there's coding itself. Obviously, our engineers can be, you know, used I would say, majority of our teams are basically used AI-enabled, you know, almost for everything, for every coding kind of activity. is kind of AI enabled. They already are accelerating everything they're doing through that. That becomes kind of an opportunity to continue, optimizing the R&D function, if you will.
On the G&A, I think the last bucket where a lot of my passion and history is around data architecture, and data governance, where rebuilding and improving your data, your data architecture underneath, kind of your systems of record and rebuilding the systems of record and consolidating that, you can actually build agents on top that can communicate with all of that data at scale. You know, if right now your HR data is separate from your finance data, separate from your treasury and so forth, or marketing and risk in other areas, you miss the opportunity to really see end-to-end. Part of that is, one is data architecture, two is data governance.
Sure.
That you set the right definition. When you send an AI agent to say, "Hey, give me the revenue for this market, this product, tell me the risk related to it, and did we run a marketing campaign in that region?" Like, all of these sort of, you know, definitions are key. I see that as improving the G&A function then, you know, even faster, but it requires some investment. That's one of the things that I've done in my career, my past, but we're doing here too. You've heard me talk a lot about that investment in terms of the digital transformation architecture.
It's helpful. On the stablecoin topic, I was actually somewhat surprised to hear Mike talk about the demand that you're already seeing, for stablecoin-based payments. How are you thinking about that more as a, as a customer-facing payment method versus, you know, more of an internal settlement rail where you have an opportunity to sort of, you know, reduce some of the payments and settlement-oriented costs? Where do you think we'll see, you know, the impact show up first?
Yeah. Look, while we haven't heard a lot of our clients come to us and say, you know, "I wanna pay my tuition or pay for this very large, sort of, you know, vacation that I've saved up my sort of life savings for with stablecoin yet," we have a partnership with BVNK and are already testing that. The way we think of this is yet another, you know, rail that we can enable for our clients. Look, this will be actually incremental for us 'cause if you think of countries where it's either high inflation or volatility, this could be an actual incremental rail for us that is helpful. We'll be ready for it.
You know, from an economics standpoint, it's not, you know, very different than sort of our lower cost. I would say the thing on this is kind of the main takeaway is that, you know, the rail is not, you know, the value that we provide, it's the orchestration and the integration with the client that really matters, and it's that end-to-end workflow. That's kinda going back to the, whether it's the AI conversation on the software side or stablecoin, it's the end-to-end orchestration and integration, and we're solving that workflow, kind of the workflow point, and in a regulated industry that really matters. The compliance, the regulatory, the FX, the integration are all the things that our clients pay for, and that's the value we bring more so than just, you know, the rail.
We'll be ready. You know, our chief payments officer has been on this and we're excited to, you know, continue you know, unveiling kind of as we, as we innovate in this area.
Helpful. On that sort of, like, disintermediation topic, any updates on just the overall competitive backdrop? We obviously, at this conference, have widely heard about, you know, the pace at which, you know, new businesses can get formed and sort of, you know, try and attack some of these industries with more AI-native solutions. How do you sort of think about, you know, the stickiness of Flywire? You obviously mentioned the breadth of the payments network and the infrastructure that you have developed, but, how should we be thinking about that structurally?
Look, I mean, I think there's a number of different, you know, scenarios that we've all played out. To me, it's interesting that we've had better software for, you know, decades and always had that argument to say, "We've got better software than the incumbent." I'm excited to hear that, you know, the better software should win faster. For us, that actually works in our favor. We've looked at it. You can look at it from a checkout, from a stablecoin, from a, you know, the banks and the ERPs, who's going to play in that space. Look, it's not just checkout.
Checkout is one step in the process, as I said, you can white-label the checkout maybe experience, once you receive that money, if you're an educational institution, Great, now you've got $10,526.51 from somebody, you know, some name. You know, you gotta go reconcile that into your system of record to the penny. That is a differentiating. That's one of the many steps in the process that we solve for, which, again, would not necessarily be solved by just the checkout experience. The same with, again, the stablecoin. We sort of talked through the rail kind of example. Look on banks and/or ERPs.
Banks are not necessarily gonna build software and the vertical integration and domain expertise, 'cause we are in very unique domains that require very specialized knowledge to even interact with, whether it's a school or a travel operator. Again, we're not standing still here either. On the ERP side, most of those folks don't really wanna deal with the payments and regulatory issues and licenses and all that stuff that comes with it. We, you know, obviously we play in those and we've been playing in those areas, and obviously we're not standing still. We keep moving quite fast in terms of our own innovation and we are in very unique unique verticals that play to our strength.
The last thing I'll say is we are focused on that accounts receivable piece, which is also a little bit of a differentiator. We can do the payable side too, but the AR side of it is also kind of a unique thing. I know we're hard to compare to anybody else, and that's the way we kinda like it. You know, we feel like this is an environment that actually works in our favor as kind of the being the disruptors.
Helpful. On the gross margin topic, you obviously have several puts and takes this year. You also have the structural dynamic where, you know, things like B2B and travel are growing quite quickly and are therefore a gross margin headwind, but still dollar accretive. How, how should investors be thinking about, you know, the ramp that we're seeing this year in terms of domestic payments processing with the client ramp that you mentioned? What's specifically driving that drag? You know, when should we be thinking about that outsized headwind, you know, sort of lapping that dynamic?
Yeah. One of the things going into this year that we wanted to do is also remind people that, look, what really matters, yes, we look at revenue and gross margin, but gross profit dollar growth is actually, you know, one of the key metrics, and you've heard Mike talk about as one of the areas and metrics that we're, you know, focused internally. Balancing that, gross profit dollar with every dollar of revenue, is key. I would say that is, you know, not so even sort of directionally guided, the mid-teens kind of gross profit dollar. But sort of the dynamics on gross margin are sort of threefold. One is kind of mix, which we've always talked about, so it's business mix. Second is FX. Then, third is this temporary kind of payment processing ramp.
If I unpack those briefly, those three, in Q4 last year, you saw about a 600 bps decline, and the breakdown is about a third across each. There's about, you know, a third of it was kind of our normal mix of business. About a third was this FX on settlement, which we'll talk briefly about. Another third was this payment ramp from Cleveland Clinic in particular, and the B2B Invoiced cross-sell that we've started. The way to think about the three components. Mix is mainly driven by, you know, domestic and EDU growing faster, SFS and others. Still positive gross profit growth as you saw. Whether it's travel or B2B, those growing faster than the company average with the lower gross margin.
It's not sort of pricing pressure or anything like that. It's sort of, you know. Spreads are, you know, quite stable as you saw in our, you know, supplement. It is just, you know, that mix is kind of a function of just business mix. Overall that... That's the part that will continue to be sort of 100 to 200 bps into next year. FX, there's actually two pieces to FX. One, gross profit is at spot, so we're not, you know.
Sure.
It has very similar dynamics as kind of the revenue side somewhat. This FX on settlement is, and we've talked about this briefly before, is the timing between when we pay a client and we get paid, and it's a few days, and we hedge that on gross profit on the cost of sales line, but then the hedge shows up in OpEx. Actually on EBITDA, those are pretty well hedged. What happened there is then in Q4, what you saw was a bit of a headwind for about two points 'cause the prior year kind of versus year-over-year impact was impacting that. What you'll see this year is first half actually will reverse, and it'll be actually a tailwind 'cause last year was kind of a negative in FX on settlement.
First year will be a little bit positive, a couple of points or so, and then the second half will be sort of offsetting that. For the full year, that kind of neutralizes. Last thing, again, payment processing, again, we kind of unpacked it in the guidance to the point of being transparent. Again, more of a first half. By the time we get to Q4 and exit Q4 should kinda normalize back into that 100-200 bps kinda range.
Helpful. On free cash flow generation, obviously I know it's a priority for you in terms of ramping that. Can you just talk through some of the nuances with the 2025 free cash generation? I know there were some internal initiatives to sort of, you know, prepay expenses to achieve more favorable rates on a go-forward basis. How should we be thinking about, you know, what you're expecting in terms of the ramp of free cash flow generation as that prepayment dynamic normalizes?
Yeah. I would say, 2025, the lower conversion versus we guided 70%-75% for this year, which implies, yes, I realize a pretty big jump versus 2025. 2025 was depressed by a number of things. One was the restructuring.
Sure
... that was a big chunk of it. Second, we did have some M&A costs and related costs that were sort of one-time in nature. There were, you know, some prepayments where, you know, we can lock in a contract for longer by prepaying and getting a better rate. We, we did take some of those there. You get back to a similar range of already kind of a sort of normalized basis, even last year was kind of above 70%. It, you know, getting to 70%-75% this year doesn't become, you know, quite as big of a stretch.
In addition, we have an opportunity to, as we move from just revenue and EBITDA to really look at gross profit, free cash flow, you know, heard me talk more about the importance of gross dilution and net dilution, and now free cash flow. All these metrics that are kind of foundational, are something that we're gonna look at. For free cash flow, working capitals, obviously there's lots of opportunities there to also tighten up, you know, the working capital levers to continue improving. 70%-75% for the year is, you know, kind of the right, the right range for now.
Lastly, from a capital allocation perspective, obviously with the expected ramp in free cash flow, how are you sort of thinking about the decision framework about, you know, reinvesting in the product, things like ramping SFS penetration, et cetera, relative to, you know, continuing that, you know, that sort of historical acquisition cadence that you historically have been on, as well as just the buyback itself? How are you sort of thinking about the puts and takes across those three?
Yeah. I mean, I think we're still in that same order, organic investment first. Whether it's the, you know, domestic penetration and SFS or travel is a key area, obviously combination of Certify and Legacy for travel luxury for us. Third is kinda this, more foundational investment in kind of AI and data architecture. All those are key, that's number one. Two, buyback, you know, as Mike sort of said on the earnings call. You know, obviously the most dislocated thing we see right now is kind of our own, our own stock, we'll remain kind of, you know, the buyback will be a big focus.
Third, look, we'll continue to be, you know, looking at the M&A market, obviously we have the Certify acquisition, to some extent the Invoiced acquisition that we are focused on from an integration and getting the synergies, there. That'll be a big focus. Certainly always looking in the market to see if anything interesting comes up. Yeah, the first two are gonna be our main focus.
Awesome. Well, Cosmin, I think we're gonna wrap it there. Thanks very much for joining us.
Appreciate it. Thank you.