Paysafe Q4: Operating Momentum Meets Improving Financial Conditions (NYSE:PSFE)

Introduction

Paysafe (NYSE:PSFE) recently reported Q4 2023 earnings, which I will cover below. Paysafe stock reacted negatively to the announcement, and the company is down 40% over the past year, worse than the 22% drop observed at larger peer PayPal (PYPL):

However, when you factor in the capital structure of the two companies, Paysafe has actually outperformed PayPal on an enterprise-level valuation, considering Paysafe’s 2.3 billion in net debt relative to PayPal’s equity-heavy capital structure:

Click to enlarge

Source: Seeking Alpha

Given Paysafe’s operating results and 2024 outlook, coupled with easing financial conditions from central banks, I think this enterprise level outperformance is set to continue.

Company Overview

You can access all Paysafe results here. The company reports results in two main segments – Merchant Solutions at 54% of 2023 revenues and Digital Wallets at 46% of the company’s 2023 topline.

Despite accounting for a smaller share of company revenues, Digital Wallets is Paysafe’s higher margin business, bringing in 59% of 2023 adjusted EBITDA, compared to 41% at Merchant Solutions.

Operational Overview

Merchant Solutions grew revenues by 9% Y/Y in Q4 (2023: +7.5%). Adjusted EBITDA increased 11% in Q4 (2023: +9.4%) The strong performance was due to strength in e-commerce sales.

Digital Wallets increased revenues by 8% Y/Y in Q4 (2023: 7.1%). Adjusted EBITDA was up 6.9% in Q4 (2023: 10.1%). The robust results were “driven by classic digital wallets with progress across initiatives, including new products and customer experience; further supported by interest revenue on consumer deposits” (Q4 2023 Presentation).

On a company level, revenue grew 8.1% in Q4 (2023: +7%), Adjusted EBITDA increased 13.1% (2023: +11.9%), Adjusted EPS increased 22% Y/Y to $0.66/share in Q4 (2023:$2.33/share, +4% Y/Y).

2024 Outlook

Looking ahead, the company expects revenue growth to moderate in 2024, at about 5.5-7%, while Adjusted EBITDA is forecast at about $480.5 million, 4.7% higher than 2023:

Considering that Revenue and Adjusted EBITDA growth both accelerated in Q4, I would characterize the 2024 guidance as conservative and easily attainable.

Debt position

Paysafe ended 2023 with a net debt of $2.3 billion, down 6.6% Y/Y. The company remains significantly levered, with a market capitalization of just $750 million. The average interest on the debt was 5.8% at the end of 2023 (2022: 4.1%).

Despite the significant leverage, the company has authorized a repurchase program of $50 million. The buyback is well covered by free cash flow, at just 16% of the 318 million in unlevered 2023 free cash flow:

The free cash flow yield of 10.4% relative to the company’s enterprise value remains highly attractive, considering it is set to increase further in 2024.

Easing financial conditions

Paysafe has no substantial debt maturities until 2028 and 2029. Until then, the Federal Reserve and other central banks are highly likely to have substantially reduced interest rates from current levels:

As of Q3 2023 (no update was provided in Q4 results), 29% of Paysafe debt was floating rate, while 71% was fixed-rate, implying immediate benefits for the company on the floating level-debt as soon as rates are cut this summer:

Risks

I think the main risk facing the company is a significant deterioration of the revenue growth outlook, driven by a potential recession or acceleration of competitive pressures. This would affect the company very severely, potentially wiping out its market capitalization in light of its debt-heavy capital structure and no tangible shareholders’ equity (shareholders’ equity is negative $2.3 billion when you remove intangible assets and goodwill):

Furthermore, central banks may cut rates less than expected, reducing the benefit from interest rate savings.

Conclusion

Paysafe had a strong 2023, with revenue, adjusted EBITDA and unlevered free cash flow all increasing relative to 2022. On an enterprise-level basis, the free cash flow yield in the low double digits is highly attractive. Relative to the company’s market capitalization, the free cash flow yield is over 40%, implying significant upside as long as operating momentum remains robust.

While growth is set to moderate to the mid-single digits in 2024, I think the opportunities outweigh the risks, and hence rank the shares a buy.

Thank you for reading.