Yahoo Finance

John Crawford

Thank you, Bruce. Let's move to slide 12 for a summary of our first quarter results. On a reported basis, revenue declined by 4% to $401 million. When we exclude the inorganic headwinds from FX, interest, and the divestiture, revenue increased 5% organically. This was a little better than we originally expected, driven by modest outperformance from the ISO sales channel.
Overall organic growth in Q1 reflects continued double digit growth in e-commerce and 3% organic growth in digital wallets. This was partly tempered by flat performance in SMB. Adjusted EBITDA was $95.2 million and adjusted EBITDA margin was 23.7%, which was also slightly ahead of our expectations due to the timing of certain cost items that fell into Q2.
When we exclude the impact of the divestiture, adjusted EBITDA would have been down 3% on a constant currency basis, driven by a 190 basis points decline in gross margin, primarily due to two factors: lower interest revenue, which accounts for 40 basis points of the decline, and business mix, which accounts for 150 basis points.
Specifically on the business mix, we were mainly referring to an unfavorable mix within the merchant solution segment due to growth in the ISO channel. To summarize, the underlying EBITDA was impacted by $17 million of inorganic items, 70% of which were attributable to the divestiture. And would have been roughly flat year over year excluding those impacts with the margin decline reflecting business mix.
Turning to cash flow, we generated $57 million in unlevered free cash flow for the quarter with a 60% conversion of adjusted EBITDA and relatively inline Q1 of last year, which was 62%. On an LTM basis, unlevered free cash flow was $288 million, reflecting 66% conversion and in line with our expected conversion range.
Adjusted net income was $20.9 million or $0.34 per share, down from $0.57 in Q1 of last year, as the adjusted effective tax rate increased to 25% compared to 21% in the prior period. Absent the inclusion of the beat tax provision this period, the tax rate would have been 22%, roughly in line with last year.
Turning to slide 13 for a breakdown of our Q1 revenue drivers. Existing customers contributed 13% to our growth and embedded in this category is also the remaining contribution of direct marketing, which was about $5 million and more than offset by the headwind from interest revenue and FX.
As you can see, this offset the impact of attrition, which reduced revenue by approximately 12% in the quarter, slightly higher than what we expect for the full year. We also have modest growth from new customers and NPI contributing 2% to revenue growth, which we expect to accelerate to double digits as the year progresses, given our new sales pipeline, recent product launches, expanded partnerships, and other initiatives.
Turning to slide 14 to discuss the segment results. Merchant solutions volume increased by 11% to $34.3 billion, reflecting strong growth in e-commerce, resulting in organic revenue growth of 6%. As a reminder, e-commerce verticals such as North America iGaming, bring a lower take rate profile, and this is largely why volume growth outpaced revenue.
Adjusted EBITDA for the segment was $29.4 million with an adjusted EBITDA margin of 13.5%. There's a lot of noise here, but looking past the impact of the divestiture, the main driver is the mix headwind due to softer performance and SMB direct channels versus the ISO channel.
Aside from that, SG&A for the segment was elevated in Q1, largely explained by the hiring across the sales organization in 2024, as well as some stranded costs related to the divestiture. Going forward as the sales productivity improves and we lack the investments, we expect the margin to increase throughout the year.
Turning to the digital wallet segment on slide 15. Volume increased by 5% to $5.9 billion and revenue from digital wallets was $187.6 million, an increase of 3% on an organic basis, with a stable user base of $7.3 million. Adjusted EBITDA was $82.5 million, down 1% year-over-year, reflecting a $6 million headwind from interest in FX, while the margin increased slightly to 44%.
Turning to slide 16 for an update on our capital allocation. At the end of the quarter, total debt was just under $2.4 billion, reflecting principal prepayments of $23 million during the quarter. Net leverage increased slightly to 4.9 times driven by the divestiture of our direct marketing business as well as the strengthening of the euro at quarter end. The stronger euro at the end of March impacts our euro debt balances translated back to US dollars.
Our average interest rate is just north of 5%, which is 70 basis points below the interest rate at this time last year. Lastly, we repurchased 613,000 shares during the first quarter and an additional 693,000 shares in April, returning approximately $20 million to shareholders year-to-date.
That brings me to our 2025 guidance on slide 17. We are pleased with our first quarter results, which came in slightly ahead of our expectations, and growth in April trending largely in line with growth in Q1. We remain confident in delivering our full year guidance while also being mindful of macroeconomic dynamics. We've had some puts and takes since the time of our initial guidance.
FX rates have been volatile, and while the EUR is somewhat stronger than we saw at the beginning of the quarter, this modest potential tailwind is partly offset by a decrease in interest revenue given where the rates have moved and the fact that interest revenue contribution flows straight through to EBITDA.
The attrition in SMB has been slightly higher than our original assumption, but as we drive our initiatives and implement new tools for relationship management and service with SMBs, we expect this to improve. With that said, we remain confident in our full year guidance, which you'll see on this page is a repeat of what we said on our Q4 call.
Finally, turning to slide 18, we're providing additional color on what we expect for the rest of the year, appreciating that we've already guided to an acceleration for the second half. Based on our year-to-date results and what we see for the remainder of the second quarter, we expect the second quarter organic revenue growth to be similar to Q1, with adjusted EBITDA margins in the first half to be around 24%.
So that leads to organic growth in the second half, accelerating to the range of 8% to 10% as we said on the Q4 call. With adjusted EBITDA margins exceeding the guidance range in the second half. We expect the fourth quarter to be our strongest quarter for reported growth, organic growth, and margin performance.
So let me walk you through the drivers. First is the overall growth and operating leverage as we deliver on our existing contracts, execute on our sales pipeline, and drive revenue from partnership collaborations, as well as product initiatives that are already in the market. As we continue to make progress towards our long term target to generate annual revenue contributions of at least 10% from products released in the last three years.
The second driver would be a slight mixed improvement at the segment level, where we expect a stronger contribution from digital wallets in the second half. The third major driver is marginal improvement in merchant solutions, with an expectation that our initiatives to improve the growth profile, attrition, and channel mix will lead to an acceleration of gross margins in the second half.
Finally, we continue to be focused on operating expenses. Fortunately, we completed our key investments last year and with that behind us, we're focused on being very disciplined on the cost side.
With that, I will turn it over to Bruce for final remarks.

Bruce Lowthers

Thank you, John. I want to thank our team for staying focused and executing our strategy while successfully completing the sale of our direct marketing business. We remain confident that we'll see acceleration in the second half as we deliver on our product and sales pipeline. Launch new partnerships and drive greater scale and efficiency throughout the organization.
Now, let's begin the Q&A session.

Question and Answer Session

Operator

(Operator Instructions)
Andrew Harte, BTIG.

Andrew Harte

Hey, thanks for the question. It's good to hear how the sales pipeline remains strong. I think last quarter you called it record levels. I guess, Bruce, can you frame up how much of that pipeline you would consider booked but yet to go live? I guess, ultimately how much visibility do you have in that pipeline of actually achieving the second half acceleration and that's embedded in guidance. Thanks.

Bruce Lowthers

Yeah, Andrew, good morning and I'm a little bit under the weather, so bear with me if I cough here. But, what I would say we have pretty good visibility. We had a really strong quarter as you heard in the prepared remarks from a sales perspective, right now in Q1, we had a really strong enterprise sales, even as we looked into, April we had the strongest SMB sales that we've had in over a year.
So we have really nice visibility as we on board these merchants, and really start ramping up the production, of those. So I think it's really a nice chart that John and Kirsten put together, talking about, the revenue walk and you can see very clearly, where you had the existing customer base performing a little better than anticipated, which is really a good sign for the back half of the year. And then you can see the new customers coming on, that obviously will ramp up as the year goes through. So we feel very good and have very good visibility so far strong pipeline as we had headed into Q2, so overall it's looking very good.

Andrew Harte

Thanks. And then, John, I appreciate the comments about EBITDA the margin moving parts throughout the year. Some of it, I think segment mix. The other part you talked about SMB versus, the ISO channel. Can you just maybe share with us your early expectations for 2Q EBITDA margin and kind of where you think it could be exiting the year at based on those different moving parts? Thanks.

John Crawford

Sure. So I think our expectation is Q2 EBITDA margin is going to look largely as it did in Q1, and then in the second half of the year I think we ramp to levels both in Q3 and Q4 that are kind of above our full year guide. So I think -- also think about it as, we continue to say it's a little bit more Q4 weighted than Q3, so we -- our expectation is Q3, the margins are going to be a little above our guide and Q4 higher than that. So probably closer to a [$28 million to $30 million] range.

Andrew Harte

Thank you.

John Crawford

And that's maybe give a little color there. It's probably obvious based on our discussion of the cost structures, but we see the elevated cost in the merchant segment in Q1, largely working out in Q2 and Q3, so that -- as the gross margin improves that we're talking about that should start to flow through, with gross margins in the merchant business going up from the low 40s into the mid-40s.

Andrew Harte

Thank you.

Operator

Trevor Williams, Jefferies.

Trevor Williams

Great thanks. Hey guys, I wanted to ask on e-commerce within merchant if we could just get an update on what the e-comm mix is within the merchant segment today and then bigger picture, clearly you're still having a lot of success within the iGaming vertical, but if you could remind us just on how you're primarily coming to market both within iGaming and kind of more broadly and the key points of differentiation, what sets you guys apart? Thanks.

Bruce Lowthers

John, do you want to just give a revenue mix of the e-comm?

John Crawford

Sure. Thanks, Bruce. I'd say it's about 25% on a revenue basis in Q1 of the merchant segment.

Kirsten Nielsen

Of the merchant segment.

John Crawford

And that's slightly higher than that on a gross profit basis, if that's helpful.

Kirsten Nielsen

Right, and then within the e-commerce, just to click in on that, you've got iGaming is one of the biggest single vertical, right, probably half of that e-comm, and then the rest would be really split amongst our other core verticals.

Trevor Williams

Okay, perfect. And then maybe if we could go back to some of the new distribution partnerships within merchant Bruce, maybe if you could frame for us just the significance kind of at the partnership level if any of those in isolation are expected to be kind of needle moving over the course of the year. Yeah, and if you could just kind of frame a longer term significance of some of those with Clover Tilled. Thanks.

Bruce Lowthers

Yeah. Look, I think as we moved into this year we really were focused on a few things. One of those were really our product initiatives or MPI initiatives, a new product initiatives, and part of that is the build out of our partner organization and trying to drive more product into our sales people's hands to go help our merchants really be successful.
So as we looked at this function we see things like Tilled which open up new TAMs for us that allow us to go after some of these Payfac's that we didn't really have the products for now that we do. We've got great partnerships and expansion. I think probably everybody saw some of the announcements in recent days with Fiserv and expanding our capabilities with them and offering their capital product to extend loans to the SMBs.
So we think that the -- all of these things are going to contribute as we move forward -- excuse me, in a significant way. And very optimistic about -- this is part of kind of TAM expansion as we look at it, is things that we have not done historically but were needed and really part of that long term driver of driving revenue from products released in the prior three years to north of 10%. So this is really going to be a focus for us as we go forward and something that we view as a critical component of our growth strategy.

Trevor Williams

Great. Okay, thank you guys.

Operator

Darrin Peller, Wolf Research.

Darrin Peller

Hi, thank you. Bruce, maybe we could just go back and hone in a little more onto the SMB side. You touched on it just a moment ago with incremental product you're putting in their hands, in the hands of your reps, but thinking about, what you -- what the strategy is for the SMB piece of the business now going forward and what you -- what kind of prospects you see for it?
And if it has enough product whether it's Clover Capital or like you just mentioned, what other needs do you have to find to really provide the best service, the best offerings that can compete effectively, and what should we expect as investors and analysts in the SMB side of the business in terms of market share going forward.

Bruce Lowthers

Sure Darrin. So let me back up and when we look at the SMB space, traditionally we have or historically we have been a reseller of other solutions. We're very fortunate to have the opportunity to sell Clover. Clover does very well for us from a growth profile. We've also talked about the fact that, when you look at our SMB portfolio, we are subscale from a sales perspective, historically, and we were really driving the vast majority of our revenue through the ISO channel and what we're trying to do is rebalance to sell more direct on the SMB side.
So we made an investment last year to really increase the size which we still be on the small side in comparison to others, but build up that small side to really drive the SMB direct versus the ISO. It's not that we're trying to move away from the ISO. We love the ISO organization that's doing a great job. We just want to be more balanced and the reason of that, going direct is the margin is much greater for us if we're going direct than through the ISO channel.
And so we're really focused on a couple of things one building up that SMB direct side. We also, if you remember last year we talked a little bit about when you looked at our SMB direct channel we were really, driving a lot of micro merchants and we've started moving upstream a little bit on that.
And so you can see that our revenue for mid has increased and the team is really repurposing or refocusing our sales efforts on channels that are still small businesses but they're bigger than the micro merchants that we had before. Another reason for that one, obviously the revenue is larger but two, that little larger SMB is a more stable merchant base for us. So it doesn't turn over as much.
So we feel like we're making some good progress. We've tried some things candidly that were very new to us. Didn't pan out the way we wanted. We regrouped and made some adjustments to what we were doing, as I alluded to earlier or stated earlier, we had a really strong March and April. April was the best SMB mid-month that we've had in well over a year. So it's nice to see that the actions that we're taking or are starting to come to fruition. So we feel very good about the SMB space. We have a very small market share but we have a world class product that, we can go sell and we feel very good about our opportunities to sell in that space.

Darrin Peller

Yeah, it's good to hear about April and the strong bookings and sales. I guess, just to be clear, it sounds like what you're saying is you believe you have the product now you need to have to go to market and be as differentiated as you need to be. I mean that still sounds like, just because we hear more and more about competition at the point of sale with newer POS systems, obviously global's trying, Clover now saying they're going to allow others to resell. So is Clover still have what it takes for you guys to be a differentiated asset, I guess is my question. And I mean, are there areas you still need to invest further from a tax standpoint, in that piece of business.
Thanks again, guys.

Bruce Lowthers

Yeah. Again, I'm a big believer in Clover. I think when you look at the growth profile of Clover is, a mid to kind of growth profile for the midterm. We think we can continue to get better at selling that and expand our footprint. So we feel that Clover's got a great product. They're investing a lot into the product. We love the fact that they're adding surround services. We're adding some surround services in as well, and, we feel very good with that product.
Not to say that there aren't others, not everybody's going to want Clover. I think that is a differentiator for us is that we have other point of sale systems as well. So it allows us to compete on the optionality standpoint, but, we feel very good about the product sets that we have, as we line up in the SMB space today.

Darrin Peller

Thanks.

Operator

Timothy Chiodo, UBS.

Timothy Chiodo

Great, thank you. Also I want to hit on the Clover part -- hey, good morning. Thank you.
Also want to touch a little bit on the Clover partnership. So clearly capital is one of the offerings, right? But there's also software packages and there's payroll. There's their recent partnership with ADP. There's the whole cash flow central offering, so there's a lot more there to Clover than just a point of sale.
And now that you're adding the Clover capital aspect, can you talk about what of the other aspects that I mentioned? Are some of those available to merchants that receive Clover through Paysafe? Are those other software packages available? Are those on the com that would be really helpful.

Bruce Lowthers

Yeah. Tim, a great question. What I would continue to say is we have a very strong relationship with Fiserv. They're wonderful partners. We look to continue to expand our product offerings from them. I think just last week we did a press announcement about doing a digital wallet for Clover customers. So you'll start to see us, pushing some of our product into the Clover base as well.
So but overall, I would expect to continue to see that evolve and strengthen, and we will be hopefully talking about this relationship for a very long time. They're just an outstanding partner and we're delighted to have the opportunity to be one of their primary resellers of the Clover solution.

Timothy Chiodo

Okay, all right. Thank you, Bruce. The follow up is more of a -- I mean, it's a Paysafe question, but it's also sort of an industry question. And you talked about direct and indirect and talking about how the margins are much better for you on direct, but could you talk about the commission payout/unit economics.
So on the indirect side, I gather there's an upfront bounty and then there's this kind of residual that gets paid out for some period of time and I don't know if that period is forever if it's a certain amount of years, but until that merchant churns or how the time is agreed to there and then how that's different on the direct side, meaning a sales person I'm assuming has a salary and some commissions but what is the balance of upfront commission versus trailer and how do the timing differences look across direct versus indirect meaning you get one forever, you get one for a certain period of time, that sort of thing.

Bruce Lowthers

Yeah, -- excuse me. On the residual, the ISO channel, the ISOs do have a payment -- each one of them is different, so it's difficult to say, just the exact construct of them. And probably don't want to go into too much detail to be candid with you. Just everybody has a different spin on how they do it. But there is an upfront piece that happens with each deal, and there's a residual that goes over an extended period of time on their book of business.
On the direct side, the amount is very different. So the residual is -- usually if there is a residual is very short term, these commissions on the direct side of the house are all paid just as the ISO, they're all paid on actual revenue process, not ACV. So this is just they only get paid a piece of what actually happens with the deals that they signed.
So the commission structures are very different from ISO structure versus the direct channel, largely because the ISO is handling a variety of different functions around the go to market strategy versus on the direct channel we're handling all of those things ourselves. So there's more opportunity for us as we drive that. I don't know, if John wants to comment any further on the commission structures.

John Crawford

Yeah. Bruce, I would just say it's probably obvious based on what Bruce said, but to put a math point on it, that you're going to then see the margin flow through on the direct business accelerates as the commission payouts roll off because those are shorter term than the residual structures on the ISO side. So obviously your commissions will continue to build the sales are growing, but over time that should that should benefit margins.

Timothy Chiodo

Perfect. That was really helpful. Thank you both.

Operator

Matthew Inglis, RBC Capital Markets.

Matthew Inglis

Hey, good morning. This is Matthew Inglis, on for Dan at RBC. So on the 10% growth for the full year for new customers and products, can you give us a deeper sense and maybe some specific examples for what gives you the most conviction for growth to ramp, specifically with the new products, part of that 10%?

Bruce Lowthers

Well, yeah. So a couple of things I would say, one, we're having a very strong sales start to the year. We had a very strong Q1 on sales that happened obviously in that column everything is really driven off of new sales. The product gives us things to go sell, but it's really all sales driven.
We have a bigger sales team. As we pointed out, we've been more productive with the sales team on the enterprise side. They're producing more per rep and producing more in aggregate. So that gives us a great, visibility into how things are moving forward.
We're also adding a lot of new product either through partnerships as we just talked about a little bit on the partnership side things direct, one thing that we just launched is the PagoEfectivo wallet. We feel very excited about the opportunity with our team in Peru to really expand our product offering down there. We see a lot of activity around our wallet platform. So there's a lot of growth opportunities there as we're signing up new customers, new opportunities, like with Fiserv on the Clover side.
So we feel very good about the products that we have, and the opportunities that are emerging for us as we go into the back half of the year. But I would say that we have very good visibility right now on kind of the sales and product side, as we go -- we're halfway through Q2, so we feel pretty solid about the products that we have, what's on our road map and what's coming in Q2 and Q3 to kind of finish out the year from a product standpoint.

Matthew Inglis

Got it, thanks. And on that, the Pago wallet in Peru, can you give us any sort of expected timeline and maybe a magnitude for growth contribution from it and I guess more broadly how much of LatAm is part of that 10% expected growth from your customers and products, employer '25?

Bruce Lowthers

Yeah. So I think LatAm has been a nice producer for us and mid to upper single digits, in Q1, I think as we go forward we're looking at to expand into kind of low double digits, mid teen double digit growth as we go through the year.
So overall that's nice growth business for us. It's doing very well and we're excited about Pago, as far as what -- PagoEfectivo wallet, but that'll add to that dimension down in that market. So as you know we also got a licensed in Brazil. So the LatAm market is one that we're very bullish on. We feel like solid growth opportunities in the LatAm market.
John, anything you want to add?

John Crawford

No, I think it's clear.

Matthew Inglis

Got it. Thanks guys.

Operator

(Operator Instructions)
James Friedman, Susquehanna.

James Friedman

Hi, good morning.

Bruce Lowthers

Good morning, James.

James Friedman

I'll let Bruce -- I'll let you save your voice. John, I'll ask you a couple of financial ones. I want to ask you about this slide 23, the merchant KPIs that you're introducing excluding direct marketing. I was just wondering how though -- I think there's a new slide it's new to me at least. So I'm wondering how you would have thought of this prior to the direct marketing disposition versus now and yeah, maybe if you could just elaborate on a couple of these like the, the billable mids target and the revenue per merchant.

John Crawford

Apologies, Jamie I'm trying to make sure I'm on the right slide.

James Friedman

(multiple speaker) the merchant KPI is Q1 2025. It's page 23. Yeah.

John Crawford

So I think -- but this is what you're seeing is like a couple of things that were mentioned in the call earlier around, where we're doing some work, the billable mids number in the low single digits down is a number we obviously need to move the other direction and that's largely driven by the attrition being a little higher than we thought as well as the SMB.
Sales being a little less than we thought so far. Those are -- those tend to be big chunk -- chunky groups of merchants and as Bruce mentioned, sometimes on the much smaller end, we think the net revenue retention level is still very healthy like that, that's something that we're looking at, as we think about kind of each different sub-segments of our business as a health indicator.
And then, on the revenue per merchant and revenue per new merchant, these are metrics as Bruce was talking about is trying to go a little bit upmarket, not really upmarket outside of SMB but into the larger of the small. Those are metrics we're going to be looking at there too.

James Friedman

Okay. And then maybe midway through your prepared remarks, it sounded like you had for our introducing some additional incentives or systems to the sales force to accelerate production. Could you just elaborate on what those are and how the investment that you had made in sales. And I think the second half of 2024 is returning relative to what you had expected.

John Crawford

Sure. So I think the -- and I guess, I think of it as really the investment for the whole of '24 but also including the first quarter because we had -- that those we had a number of hires in the in Q1 of 2024 as well. So as we look at -- as we look at that, I probably want to be a little general about the specific things we're doing in that area, but I think as Bruce mentioned, we tried a number of things late in '24 on the marketing side, lad gen side, some of those things we're going to potentially get us better productivity at lower cost. Those things didn't work.
We moved back to some of the metrics that we know and have worked. I think that's shown -- as Bruce mentioned in April, it showed as we got through Q1 as well, but those are the kinds of things that tend to have a tail for several months into the beginning of '25.
I think we're also -- to be specific, doing some things on the personnel side in the mix over there on the SMB piece and where they're deployed, how we're hiring that sort of thing. So I'm not sure, we should think about it as a change in -- a major change in comp structure or incentives in the sense that we think our financials are going to be different is really just trying to find the right dials to turn to get those different, sort of subsegments of SMB performing as well as the pieces that are -- because we have several that are performing very well.

Bruce Lowthers

Yeah. I just add that, when you look at the enterprise side from the investment of sales people, that has worked wonderfully, right? So that is not only are we seeing expansion of our ACV that we've signed up, but we're seeing expansion of the ACV per rep that we've signed up.
When you look at our tele sales or direct sales and the SMB, we're seeing the same thing. We're seeing really nice production out of that group. We're seeing expansion within that group. We have an in-market group, that we also invested in, that still work under process, but we have a lot of confidence around. What we've been doing, how we're redeploying, some of the assets where they didn't work in particular markets, into markets that worked perhaps better than we anticipated, such as Latin America and some of the enterprise things or even in the tele sales.
So I would say as we look at it, we're probably at expectation but with the possibility of outperforming what our expectation was on the return on the investment as we move forward.

James Friedman

Got it. Thanks Bruce. Thanks, John. I'll drop back in the queue.

Operator

Thank you. At this time I'd like to turn the floor back over to Mr. Lowthers for closing comments.

Bruce Lowthers

Yeah, thank you. And first of all, I just want to thank our team for the wonderful job this quarter. Really a lot of distractions whenever you're divesting a particular asset or business. The team did a remarkable job working their way through that, and we have really a nice clear path for growth as we're going forward. So, really solid quarter. I want to thank everyone and I look forward to talking to everyone soon. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.