Flywire Corporation Shares: Growth Outlook Remains Robust (NASDAQ:FLYW)

Investment summary

My previous investment thought of Flywire Corporation (NASDAQ: FLYW) (published June 2024) was a buy rating as we were bullish on its growth prospects, supported by its scale advantage and also a clear path to margin expansion. I remain confident from a fundamental business perspective, underlying growth metrics remain solid and there are visible growth catalysts to support near-term growth. The recent acquisition also makes FLYW a much better business with additional growth opportunities to pursue.

Canada headwind

Canada’s FLYW operation has been a headache for the equity narrative in recent history due to the cap rate set by the government, which indirectly influences growth potential. However, I think expectations have been well reset by management. Latest guidance calls for full-year impact of >$30M (representing a headwind to single-digit percentage growth) – a major step up from millions of mid-teens mentioned in the previous guide because they no longer assume any recapture of Canadian foreign students in other markets (ie those students who wanted to study in Canada but are now unsure whether they should look to other markets where FLYW can capture this opportunity). This is a very conservative guideline, which I believe may be too conservative, as it is likely that some of the affected students will seek opportunities in other countries. In any case, with this guidance, I think the risk of FLYW missing near-term (FY24) consensus estimates is fairly low.

FLYW is still growing very healthy

Investors should not simply focus on FLYW’s operations in Canada and forget that the regions are still growing very healthy. For reference, total revenue growth in 2Q24 accelerated from 20.9% in 1Q24 to 22.2% in 2Q24. Additionally, on a two-year basis, total payout volume increased from 59.4% in 1Q24 to ~63% in 2Q24. Apparently, FLYW is still showing very strong growth and I remain optimistic that FLYW will have continued strong growth in the coming years.

First, FLYW’s key operating metrics are still very healthy, which supports my initial bullish view that FLYW’s scale and large presence can continue to capture demand. Indeed, FLYW showed strength in customer acquisition in its latest quarter, adding >200 customers across all verticals, following the same trend in 1Q24, which saw a similar level of acquisition and an increase from the >170 additions observed in 4Q23. The growth implication of this is huge, as these additions in 2Q24 represented ~40% y/y growth in total projected ARR (annual recurring revenue) for new signings and additional sales signed.

Furthermore, taking a step back and looking at the combined revenue from transactions in markets outside of Canada, FLYW sees no signs of demand slowing at all. These markets grew well above the rate of consolidated revenue growth by expanding contracts by cross-selling/up-selling new products with customers signed last year (annual net customer retention rate remains at 125%, consistent with last 6 quarters ) and signing new clients. In particular, transaction revenue in Australia increased by more than 50%.

Looking ahead, there are three growth catalysts that should support FLYW’s growth:

1. One is that FLYW has partnered with India’s first independent student loan provider, HDFC Credila, to help students digitally pay their Indian rupee loan payments to higher education institutions. This should significantly reduce the friction in acquiring and repaying loans.
2. The second is that the UK government has reaffirmed its support for the graduate pathway, which should remove any uncertainties students may have. This should translate into a short-term tailwind for FLYW as students who have delayed their decisions begin applying to schools.
3. Expanded partnership with Global University Systems Canada, a network of 40 higher education institutions globally. This is absolutely great from a fundamental perspective. This improves business distribution capabilities, which should translate into growth, and if we use Australia (which saw >50% growth in 2Q24) as a case study (FLYW worked with Studylink in Australia to- and expanding distribution capabilities), FLYW could see similar upside growth.

The invoiced purchase is a positive addition to the FLYW business

I’m also bullish on FLYW’s recent acquisition—Invoiced—a SaaS platform that automates the critical cash ordering process. Essentially, Invoiced allows a company’s finance department to automate accounts receivable (AR) processes by managing invoices, communicating with payers and reconciling payments with their ERP systems. To achieve this, Invoiced is deeply integrated with both business accounting systems and ERPs. I believe that adding it to the FLYW portfolio has significantly advanced FLYW’s competitive position in the industry as it is now able to offer a healthier product – basically helping FLYW close a gap in its payments ecosystem.

Moreover, with this acquisition, it also means that FLYW can pursue opportunities in the B2B AR solutions space, which is a large and growing market (expected to grow at ~14% CAGR from $3.3 billion in 2022 to $6.5 billion in 2027). Eventually, FLYW will be much more integrated into its customers’ operating systems, making it harder to extract and replace.

Companies are increasingly investing in accounts receivable (A/R) solutions to improve their financial operations and cash flow management. According to industry research, the global Accounts Receivable Automation revenue market size is projected to grow from USD 3.3 billion in 2022 to USD 6.5 billion by 2027, at a CAGR of 14 .2% in the forecast period. This investment includes spending on software, cloud services and integration with existing financial systems, highlighting the critical role of A/R solutions in increasing efficiency, reducing errors and supporting better financial decision-making. In addition, the global drive for tax compliance and the need to streamline cross-border transactions further increase the demand for sophisticated invoicing solutions.

Outlook and assessment

Looking ahead, I still think the growth algorithm that management provided during its 4Q23 earnings call is plausible, whereby key growth drivers: NRR remains at >120% and customer numbers continue to grow in the mid-single digits, should drive my expectations. 28% revenue growth rate for the next few years. That said, there is much more growth potential than I expected because: (1) the travel segment—Flywire’s second-largest vertical today—grew 55% in 2Q24, and projected average ARR for new customers increased by 15%; (2) average deal size increased across the business and global go-to-market teams increased by >50% in the new pipeline; (3) whether it can capture the demand in the AR solution space. It may also have underestimated FLYW’s ability to expand adjusted EBITDA margins, as management raised its FY24 guidance to $64-75 million from $72-80 million. Assuming the $76 million midpoint, this implies an adjusted EBITDA margin of 16% based on my FY24 estimates.

Finally, FLYW also announced the first share buyback program to buy back up to $150mm of outstanding common shares if a certain hurdle is reached. $150 million is about 6% of the current market cap, and given the growth prospects, we have conservatively assumed that FLYW will buy back half of the announced rate (3%).

As I see it, there is no compelling reason for FLYW to cut its valuation in recent months (from its 18x EBITDA peak in June). Growth prospects remain robust and I expect multiples to return to at least 18x ​​in the coming quarters as FLYW continues to post robust growth.

Risk

The Canadian headwind may be more than expected and this may affect FY24 revenue growth. Management has revised the headwind twice, so they may have underestimated the impact this time. In addition, the global macroeconomic slowdown may force students to prefer studying at local institutions to save costs in the short term.

Conclusion

My opinion of FLYW is a buy rating. Business fundamentals remain solid with a robust growth outlook. While the Canadian business may experience some short-term headwinds, FLYW’s performance outside of Canada continues to post impressive growth momentum. Therefore, I maintain a positive outlook and believe its valuation will reflect this potential as it reports solid growth going forward.