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Good morning, ladies and gentlemen. Welcome to Payfare's 2022 Year-end Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today.
I will now turn the call over to Mr.Cihan Tuncay, Head of Investor Relations and Corporate Development. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Joining me on the call this morning is Marco Margiotta, Payfare's CEO and Founding Partner, and Charles Park, Payfare's CFO.
Payfare would like to note that the company's remarks and answers to your questions today may contain forward-looking statements that are based upon management's current expectations. All such statements are made pursuant to the safe harbor provisions of and are intended to be forward-looking statements under applicable Canadian securities legislation.
When relying on forward-looking statements to make decisions with respect to the company, you should carefully consider the risks set forth in the Risk Factors section in the annual MD&A for the year ended December 31st, 2022, which is available on www.sedar.com. Except as may be required by Canadian securities laws, the company does not undertake any obligation to update any forward-looking statements as a result of new information.
We would also like to remind listeners that Payfare uses certain non-GAAP and supplementary financial measures to arrive at adjusted results to assess its business and to measure overall performance. Payfare believes that these financial measures provide readers with a better understanding of how management views the company's overall performance. Throughout the call, we will also refer to a slide deck, which was posted on our website corp.payfare.com/investors last night.
I will now turn the call over to Marco Margiotta.
Thanks, Cihan. Let's turn to Slide 3. The fourth quarter was a record for Payfare on all of our operating and financial metrics. Looking back at the inception of Payfare, I'm extremely proud to present our first earnings positive quarter in our history as a publicly-traded company with a return on equity of 23.7%.
2022 as a whole was a landmark year for our company. I would like to take this opportunity to highlight our key achievements over the course of the year. First, we delivered a best-in-class digital banking and instant pay solution for our cardholders, supplemented by meaningful and robust cash back and loyalty rewards. The cardholder experience is at the heart of everything we do at Payfare, and we know we are executing on this front, a DasherDirect powered by Payfare was ranked as the top finance app in the U.S. for the month of August and December.
This, in turn, was the driving factor behind our user growth, which more than doubled by the end of 2022, breaking through the 1 million unit threshold.
Second, we worked extremely closely with our big platform partners to increase worker engagement and retention helping them reduce worker acquisition costs to all-time lows. With ongoing macroeconomic headwinds, more people are turning to give work than ever to supplement lost income. We think offering a free Instant Pay solution is absolutely critical for any game platform in 2023.
Third, we proved that our business is both profitable self-financing in 2022 and self-financing in 2022, generating record levels of adjusted EBITDA, operating cash flow and free cash flow well ahead of our competitors was helpfully back on growth or head count reduction is a testament to the robust nature of our business model.
Fourth, we couldn't achieve any of this without our amazing employees. Thank you to each and every one of you for demonstrating and executing on our core values on a daily basis.
We were active on our previously announced normal course issuer bid program in the fourth quarter. To date, we have repurchased almost 1.2 million shares at an average price of $4.54 per share.
Let's turn to Slide 4. We expect 2023 to be even more transformational for Payfare than 2022. We're introducing our guidance for the year of $185 million to $195 million in revenue with the midpoint of 46% year-over-year and $21 million to $24 million in adjusted EBITDA with a midpoint of 415% year-over-year. Our guidance is based on increasing penetration within our existing partnerships, which we believe have the potential to increase our user base by 25% to 50% over the course of the year.
Our sales pipeline remains robust. While our lead time on new contracts was extended beyond normal levels in 2022 due to elevated employee turnover within new prospective partners, 2023 has started with improved sentiment. as we have several active new meaningful opportunities, particularly with white label products. These opportunities include geographic expansion with existing global partners. In addition, we remain focused on payout, which will be supported by our recent new senior hire in marketing.
On the new product front, we have made progress with our gig platform and banking partners on new credit product development. These include overdraft and higher-ticket consumer credit products. Importantly, with Payfare take an asset-light approach to credit, and we do not expect to have any balance sheet exposure on potential product launches.
The economic opportunities on Payfare would be increasing funds loaded and spend on our cards and potential origination fees by marketing the product to our user base. Our significant user base of over 1 million cardholders is also compelling for new potential merchant partners to offer cashback and multi rewards directly within the Payfare ecosystem. We're having meaningful conversations with merchant partners in both U.S. and Canada to offer additional rewards on our top spending categories, including fuel and food.
Finally, we have always viewed Payfare's access for full-time employees as a natural extension of our business model. We are targeting 2023 to be the year where we take our first steps to enter this massive new market opportunity. The hurdle for most EWA players with access to the right funding model, we think we are taking the right strategic financing partners to make DWA work on a more profitable basis facing for updates on this front.
Turning to Slide 5. The fourth quarter was another record for revenue in GDV, both up 131% and 137% year-over-year, respectively. Our revenue and GDP growth continues to outpace our user growth, which demonstrates that Payfare is winning additional wallet share with our users.
Slide 6 highlights our user growth. As previously mentioned, macroeconomic headwinds are boosting our user growth as more people turn to gig work to supplement lost earnings as a consequence of elevated inflation and job losses. We also launched new cash back rewards for Lyft Direct right at the end of the third quarter, we let a meaningful growth in our Lyft user base in the fourth quarter. There is still a lot of room to increase penetration within our existing partners, and we remain bullish on organic user growth potential for 2023.
With that, I will turn it over to Charles to review our Q4 financials.
Thanks, Marco. Before we get into the results, I'd like to take a moment to mention that the company reclassified customer support fees earned from one of our partners from revenue to cost of services. The adjustment was made to better represent the economic terms of the agreement with the partner.
As a result, the adjustment of $3.84 million of revenue was reclassified to reduce cost of services in fiscal 2022 and $1.81 million of revenue was reclassified to reduce cost of services in fiscal 2021. A full breakdown of the reclassified quarter can be found in Payfare's 2022 MD&A. This reclass entry has no net impact on gross profit dollars, EBITDA overall earnings in 2022 or 2021.
Turning to Slide 7, you will see our summary income statement. In the fourth quarter, we generated revenue of $38.4 million, up 131% from Q4 2021. This increase was primarily driven by ongoing marketing initiatives and organic growth in each of our programs with DoorDash, Lyft and Uber.
On a full year basis, we generated total revenue of $129.9 million, up 210% from 2021, which was the high end of our guidance range. Gross profit in the fourth quarter was a record $8.3 million and 21.6% margin. Gross profit dollars were up 230% year-over-year and up 20% from the prior quarter. Our gross margin primarily benefited from volume-based pricing improvements with our higher active user base and GDV volumes. We continue to significantly expand adjusted EBITDA, which was $3.6 million in Q4 up 248% year-over-year and up 171% from the prior quarter. As we grew our users and GDV in 2022, we realized benefits in vendor pricing and scale. As such, we were adjusted EBITDA positive on a full year basis, generating $4.4 million in 2022, an increase of $14.4 million over 2021. There's significant operating leverage in our model as our platform can support materially higher users and GDV activity without material change in headcount. This in turn drives our 2023 guidance of adjusted EBITDA growth of $21 million to $24 million, the midpoint of which is 415% over 2022.
As Marco highlighted earlier, Q4 was our first earnings positive quarter as a public company. Below EBITDA, our only major expense item is stock com. We do not foresee any significant change to this line item on a year-over-year basis. As a result, we expect to be earnings positive per share on a full year basis in 2023.
I would also like to take a moment to speak about our operating and free cash flow. This was a record quarter on both metrics. Our operating cash flow of $6.3 million was up $10.6 million year-over-year and up $2.6 million from Q3. Our free cash flow was $5.4 million, up $10.2 million year-over-year and up $2.6 million quarter-over-quarter. Our core product is generating positive cash flow with minimal working capital and CapEx needs. As such, we expect operating leverage on adjusted EBITDA to drop down to both operating cash flow and free cash flow going forward.
On Slide 8, we summarize our current financial condition. We ended the quarter with over $42.6 million in cash. Our financial condition is strong. We had minimal capital needs to fund our organic growth opportunities as our core business is self-financing. Our balance sheet is well capitalized, and we remain debt free.
I will now turn it over to Cihan for a capital markets update.
Thank you, Charles. Let's flip to Slide 9. This is a familiar chart that compares our share price performance to the ESG Prime mobile payment ETF since our IPO. We are happy to see that we have outperformed our benchmark by 33% over this period despite elevated market volatility seen over the last 12 months.
Since IPO, we have achieved positive adjusted EBITDA generation, positive free cash flow generation and positive earnings while exceeding that.
Slide 10 shows where our stock is trading relative to other small-cap payments companies and recent payments M&A transactions. I want to point out that all the figures on this table are in U.S. dollars, and all forward-looking information reflects analyst concussive estimates and our 2023 revenue and adjusted EBITDA gain.
While we can't control market multiples, we have levers to pull to close the valuation gap is. The first lever is expanding our adjusted EBITDA, cash flow and earnings profitability, which we expect to continue in 2023. And the second lever is expanding our gig platform partnerships. As Marco mentioned, we are excited about the current sales pipeline. The third lever is new products. We have crossed the 1 million user threshold, which gives us the opportunity to develop new products for incremental user monetization, including credit. We look forward to delivering updates on these initiatives over the coming months.
Operator, we are now ready to take questions.
[Operator Instructions] Your first question will come from Stephen Boland at Raymond James.
First question. You mentioned some new opportunities, white label, geographic expansion also through paid out. I'm just wondering, Marc, where in the process? Are those contracts signed And at this point, you are in development Or you're still at that point of -- in the sales process of getting those up and running?
This is Marco. Yes, at various stages. So through the pad, there's executed contracts in there. On the white label side, a lot of them, I would say, are closer to the beginning or midpoint of the discussion or exploratory kind of iterations are kind of beyond to a point where it's kind of written down and we're kind of mapping everything out kind of getting to the stage where we can kind of move forward. I would say, as a general statement, Steve, much like I highlighted earlier. 2022 was a year where it wasn't a question of if the gig platforms we're excited about what they've been seeing, it really was a question of when. And so now in 2023 to start the year, turn over a new calendar year in a new fiscal and a new budget and new kind of guidance from their headquarters kind of giving them the green light to kind of move forward. We're definitely seeing a very robust pipeline of white label solutions that are coming to us mainly through inbound efforts. We have a marketing role. I mentioned that as well. We're starting to get that engine up and running so that we can build a proper sales funnel. But yes, we're definitely seeing a lot of inbound interest now as the calendar year has turned over.
I mean you've been doing this a long time, Marco. I mean some of these -- I think your goal in 2022 was to have some of these, I think, up and running or announced or to that point, I mean it's just the nature of the game that things take longer than maybe your expectations?
I think it's a combination of a few things. I think the macro headwinds didn't help. I think a lot of big platforms new now was [indiscernible] that the numbers we see with us driving lower cost of acquisition for a lot of our clients or all of our clients, in particular. DoorDash is the first one to kind of mention most of the earnings calls, how effective the program has been for them. I think that gave them the confidence they needed to kind of push forward just some macroeconomic headwinds means that they had to delay things a bit just because other buyers were there. And there was more need to kind of shift for a different focus. But now in 2023, we're definitely, definitely seeing an immense amount of interest inbound and some of those conversations picking back up.
Okay. And just in terms of your guidance, I just want to be clear, there's no new products in your guidance. That's just more penetration from existing partnerships. Is that correct?
Yes, I'll go over to Charles. Charles, do you want to walk through a bit of the build out of the guidance? I would talk to that.
Yes, sure. Steve, in terms of the guidance, you're 100% right now, we do not have anything that has not been signed or currently up and running, included in the forecast numbers that were provided. So as those come live or turn on, we will update our finance cordial in future periods. In terms of the guidance itself, though, I know you didn't ask this question, but to provide a little bit of guidelines in terms of how that was built. Our expectation is the existing logos that we have up and running, we're probably safe to assume that we get high single-digit quarter-over-quarter growth on the revenue line. And obviously, with the margin profile that we have and the low fixed cost on the operating side, that margin within flow down to the adjusted EBITDA line, but is included in our forecast numbers as well in our guidance.
Okay. That's helpful. And just one more for me. Marco, you always looked at earned wage access, and I guess, we've talked over the past year or so that just it's a block and capital type of business. You didn't really have the resources I mean, can you just explain how you enter that business? Is it through partnership? Or is it -- like you said, you build out your sales team to go out and get those contracts. But maybe you can just explain how you enter that business.
Yes. Sure, Steve. Look, we've mentioned this in the past we would look to acquire something if -- or a company, especially on the macroeconomic conditions and the backdrop. There's a view that we're very emphasis with our expectations and now that they're running out of cash, mainly because of more of a timing function. I think there's a big transitional kind of tipping point in the EWA space. It feels like it's this year. Certainly, with all the backdrop of all the inflation and pressures on lost income due to job losses. There's a big, big, big demand and appetite for earn wage access more than ever. And so we do feel like there's opportunities out there to look for some of these companies that have kind of got ahead of themselves and unfortunately, need capital. But it provides an opportunity for us to acquire plummeted of building up ourselves. And so the first approach, we definitely take a look at some of these smaller organizations that would be a nice tuck-in. We've looked at a couple. There's some that are ongoing in terms of having us take a look at 1 or 2 in particular. But if all else fails, then we don't find what we need or we don't want to kind of stretch the pocket book to make that happen. We can certainly go direct and kind of build ourselves. Now that the paddock is built and behind us, we do have the capacity to kind of bring in more of that development in terms of integration with payroll partners and having that kind of flow through that in addition to building out a sales team, which now we're building up for the Paid App platform as well. And so it depends on what the call, Steve, is it's a kind of a broad overview. It's really targeting an acquisition would be the ideal scenario. But if all else fails, we definitely have the capacity to kind of go into it on our own as well.
Your next question comes from Adir Kadve of Eight Capital.
Congrats on the quarter here. Obviously, operating model is really shining through. But I wanted to ask a question on the rideshare side. Obviously, we're seeing strong travel tailwinds for you guys. Travel is really coming back strong. Marco, where you have mentioned in the past that as travel comes back, kind of rideshare also kind of follow suit. How are you -- what are your expectations? Or what are you seeing from that segment right now?
Yes. Rideshare was the strongest growth out of all these subjects -- or sorry, all the partnerships we have blip in particular, was the strongest in terms of the U.S. business and travel coming back to life was the main driver behind it from what we've seen. I would say there's still a significant amount of penetration that could be had in that customer base. You've seen we've had the #1 app with DasherDirect. There's a lot of things we have there that are market-leading, where other customers of ours can kind of pick up and adopt and actually introduce new product features like we've mentioned earlier in the call. And so I would say there's a lot of room for penetration. We've kind of highlighted that further in the call as well. There's a substantial amount of opportunity that we haven't baked in.
Okay. Great. And then maybe just kind of -- can we get a little bit of additional color on kind of how you increase that penetration from current levels? And what kind of stuff that you can kind of pick up from DoorDash kind of cross not cross-sell but cross platform.
Marco, I can maybe answer that. Dear has going. So maybe for starters here, what I can comfortably say is that at the end of the year, as we kind of forecasted, we got Lyft really back to pre-pandemic levels, right? COVID really hit that business part, as you mentioned, and the fact that we're kind of at the pre-COVID levels that we ended -- or started off with, that's our new basis. And I've kind of mentioned this in a few calls, but really we see this as an opportunity as a relaunch of the national program. So Marco mentioned that we had hired a new marketing resource, he's working very hard with counterparts on the Lyft side to come up with new initiatives to kind of relaunch this program so that we can get part of the success in terms of penetration and adoption that we saw on the DoorDash program. So -- and we definitely see that as a great opportunity for this year. You're right. We're lagging a little bit the overall rideshare industry itself in terms of their bounce back, but that's largely because from a marketing perspective and just priorities perspective, our partner and other things that they had to focus on in 2022. But 2023 is effectively the relaunch of the program, and we feel the penetration will show through in the coming quarters.
Okay. Excellent. And then just maybe on the Paid App lots of good things happening there. Can you -- when can we kind of expect some sort of like announcement with a partner or something around that effect?
Yes, I would say there's a few M&A contracts we would have coming in the -- sorry, in the month of April. It's a function of getting all the right pieces in place to when you want to really kind of ramp up. And so there's a few last additional development pieces that we're trying to put in place before that ramp really takes off. And so with that being said, there's a few customers that are there waiting to have that launch over that ramp kind of take place. And so contracts will come in. Some of them will be announced depending on the gate platform partner that is coming in then. Some of them want to keep it under the radar, some of them don't. So just because there might not be any announcement, it doesn't mean that there's more activity that's being had, just not announced.
[Operator Instructions] Your next question will come from Mehmed Rizvanovic at KBW Research.
I wanted to go back to the penetration rates on DoorDash and Lyft. I don't know how comfortable you might be to actually give us some numbers, but I get the compelling upside here, the potential upside, but we really don't have any context on where those numbers currently are. I don't think you've disclosed exact figures. And more importantly, where has that penetration rate trended, say, over the past couple of quarters or past year? And then finally, when you provide your guidance, what are you embedding in terms of your expectation of that penetration rate?
Mike, it's Charles here. Thanks for your question. You're right. In terms of the actual active users, like that number is not publicly disclosed by any of our partners. When we speak about penetration of the active base, we're largely going off of conversations we've had with our partners and guidance we've got in there. So in terms of communication of penetration we've shared in the past, we believe at the end of the year for DoorDash, if we can speak to that first, we're probably sitting at a 30% to 35% penetration of the existing active base that they have. Now that base continues to grow quarter-over-quarter, year-over-year. So just applying the same consistent penetration on a larger base, you get natural growth just from that as well. We've talked about in other calls, however, that our partners are looking to increase that penetration to much higher levels in the 50% to 80% range. So if you extrapolate that out, obviously, there's a lot of upside in terms of the revenue penetration that we can get there as well. In terms of how we've taken that and applied it to our model, in terms of the active base, that's a little bit difficult to kind of predict because that's something that's outside of our control. And assuming kind of a modest kind of single-digit quarter-over-quarter increase in that base, we've basically model did out similarly that we would get the same percentage penetration with a slight uptick of increase year-over-year from versus 2022. So that's on the revenue side of things as well. Based off of that, you can assume that, that's probably a conservative view. That's why we believe we gave that $10 million range in terms of upside really to kind of gauge over the next few quarters how that growing base materializes. And as I said, obviously, as you get closer to the year-end and we see the progress our partners are making in terms of their active users or active drivers, we can then, in turn, kind of update our model accordingly to the percentages that are provided. So that's on the DoorDash front, which still represents the lion's share of our revenues. On the Lyft side of things, really penetration is probably not the right word to use at this point in time because relative to the active base, it's a very small percentage. But generally speaking, on national launch, we usually get about 10% to 15% penetration of the active base that continues to kind of scale upwards towards kind of that 30% to 35% that we're currently seeing in the DoorDash program, right? So if you use that as kind of a metric, and I mentioned earlier that we're looking at 2023 being kind of a relaunch of the Lyft program, you can kind of do the math yourself and figure out what we have planned in the forecast. Obviously, we've taken a bit of a haircut on that because we want to see how each quarter kind of goes. But I would say that from a guidance perspective, we're pretty comfortable with the ranges that we provided, especially on the revenue side.
Okay. That's very helpful color. So just so I get this right. So the 30% to 35% is currently for DoorDash and just as an approximation. And it sounds like you're trending to that level on lift just as far as where that's gone throughout COVID and like if you can maybe give us a reference point over the past year, have you seen that number improve for DoorDash? Or has it been relatively stagnant?
Well, what I would say is DoorDash is active base has grown tremendously. So we have seen an overall increase, I would say, in the penetration, but the bigger component of it was the actual underlying base was what grew substantially. So even if we stayed at the same penetration, we would have seen massive growth, but we did see an increase in penetration if you compare us to this time last year, if that's what your question is.
Okay. That's helpful. Awesome. And then maybe just 1 follow-up, just a numbers question. Just on the margin. So I know the previous guidance had always been you're exiting the year or you're looking to exit the year at 25%. I think you came in at about 21.5% this quarter. So it was up quarter-over-quarter, but it seems a little bit shy of where you probably were thinking you would be. Can you give us any color on that margin? And I know you're now at a point in time where you got, as you mentioned, the 1-plus million user -- active users and a lot of traction on that end. But just in terms of how much you're able to keep, it looks like the actual revenue line as a percentage of GDV came down -- not going to say materially, but I think 1.60 percent is down about 10 basis points or 9 basis points quarter-over-quarter. What would have driven that? Is it just the type of spending that shifted to lower interchange? And what's your margin outlook coming out of the quarter going forward for 2023?
Yes. Thanks, Mike. So in terms of the margin profile, what I would say is for 2023, what we have baked in that translates to the adjusted EBITDA guidance that we provided as well is probably more trending in the 22% to 23% range for most of the year, probably ending the year at more of that run rate that we talked about at 25%. Now the reason for the change is largely because some of -- in Q4, in particular, there were some onetime adjustments. It is kind of a audit quarter as well. So there's a little bit of noise in there that kind of somewhat trend of the more positive number that probably would have come out in that Q4 gross margin percentage. But also in terms of realizing kind of that 25% margin, how we get there, it's just a function of the volume that we're driving towards of volumes in terms of GDP spend and net new users joining the programs and seeing those thresholds were there's a lower cost base associated with the processing and the bank fees.
Okay. And just maybe one more final quick follow-up. So that 25% level, is that a level that's based on some sort of cap? What I'm wondering is, I know that GDV is growing nicely here, and you've got a lot of upside there, but does that 25% represent somewhat of a cap with respect to your current business profile and what you could attain with your existing partnerships? Or does the 25% have even more upside as you reach the next level of GDV?
Yes. There definitely would be kind of additional benefits that we would get as we hit the new volume levels, Mike. The only other thing I would just add, though, is as we get to those higher volumes as well, we're simultaneously also going back to our vendors and extracting more benefits there as well. So regardless of what our legal contracts state right now, this was the case even last year as well. We went back to our vendors to say, listen, we're giving you guys more slice of the business. We want to get more benefits from a cost savings perspective as well. So on both fronts based on existing contractual kind of terms, and then over and above that with rising volumes, you have more pressure to go back to your vendors and extract even more benefits, I would say, we will benefit on both fronts.
Your next question will come from Joe Vafi at Canaccord.
This is Paulo on behalf of Joe. Congratulations on a solid quarter here. Maybe I'll start with the Lyft program that was launched in Q3. Any color on how much Lyft non intended you've seen in your active user growth from Lyft since that launch? And is this an ongoing program or there is a deadline to it? And then I have a follow-up.
Paulo, it's Charles again. Yes, in terms of the Lyft growth, I would -- the user base has grown to 64% year-over-year. And as I mentioned, in terms of actual numbers, we're really at the pre-pandemic levels that we saw post a few months of national launch into the program. In terms of kind of the end date for Lyft. I mean all of our contracts have end dates, but there's renewals that are kind of built in there. And we are working with Lyft to basically work on those extensions and renewals that will come in time as well, but we don't anticipate there being any issues with that as well.
And maybe one for Marco on the competition front. Marco, how do you feel about your competitive amount today than perhaps a year ago?
Yes, I would say, look, we created this space. we certainly knew that at some point, competition would come. We have seen some players come in the market, no one substantive as of yet that we're really concerned about. But we do think we have seen some other challenger banks and even other programs out in the marketplace that haven't had success providing us with opportunity. If you look at some of the programs that are out there with some other big white label opportunities, in particular, one of them being a chartered bank in the U.S. that was trying to target this market. They didn't have great success. So it's a testament to what we've built and what we stand by, which is strictly focusing on the gig economy. That provides a tremendous amount of opportunity to kind of show that we're different than handling just a generic prepaid card program management solution. And so that all being said, I think I mentioned this before, with the numbers we have in proving out the business model and proving out that we can provide a substantial decrease in user cost of acquisition for the gig platforms really sets the stage for a tremendous amount of opportunity for this year and beyond, especially given the macroeconomic backdrop. And so I think as an industry that we've created, we've certainly punched well above our weight to kind of get it to where it is. We continue to see the momentum in the space, and we continue to see interest from all over the place. We'll keep an eye out for competition, but or now it's not a concern. It's just providing us with a really good backdrop to kind of further penetrate the market and get more big platforms up and running.
Ladies and gentlemen, at this time, we have no further questions. So this will conclude today's conference call. We would like to thank you all for participating and ask at this time, you please disconnect your lines.