Paysafe Ltd current report, Q4 FY2023

Paysafe Ltd. Form 6-K Summary

Reporting period: Form 6-K filed November 14, 2023, containing unaudited condensed consolidated interim financial statements and management’s discussion for the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Paysafe provides payment processing, merchant acquiring, digital wallet, eCash and related solutions through its Merchant Solutions and Digital Wallets segments.

Financial Highlights

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Revenue	$396.4 million	$366.0 million	$1,186.6 million	$1,112.6 million
Operating income/(loss)	$43.2 million	$4.7 million	$112.4 million	$(1,890.2) million
Net income/(loss)	$(2.5) million	$1.0 million	$(8.1) million	$(1,828.6) million
Adjusted EBITDA	$116.1 million	$95.5 million	$336.9 million	$302.4 million
Net cash from operating activities	Not separately reported for the quarter	$(355.4) million	$1,373.2 million

Q3 revenue increased 8.3%; nine-month revenue increased 6.7%.
Calculated Q3 operating margin was approximately 10.9%, compared with 1.3% in the prior-year quarter. Nine-month operating margin was approximately 9.5%, compared with negative 169.9% in the prior year, primarily reflecting the prior-year goodwill impairment.
Calculated Adjusted EBITDA margin was approximately 29.3% in Q3 2023 versus 26.1% in Q3 2022, and 28.4% for the nine months versus 27.2% in the prior year.
Q3 transaction volume was $35.1 billion, up from $32.5 billion; nine-month volume was $104.4 billion, up from $97.0 billion. Total take rate remained approximately 1.1%.

Segment Performance

Merchant Solutions: Q3 revenue rose 6.4% to $216.8 million and Adjusted EBITDA rose 25.9% to $57.5 million. Nine-month revenue increased 6.9% to $651.1 million and Adjusted EBITDA increased 10.9% to $165.6 million.
Digital Wallets: Q3 revenue increased 12.2% to $182.9 million and Adjusted EBITDA increased 17.3% to $79.9 million. Nine-month revenue increased 6.7% to $543.4 million and Adjusted EBITDA increased 11.3% to $236.4 million.
Management attributed growth to higher payment volumes, growth initiatives, higher interest income and, in Q3, favorable foreign exchange. The nine-month Digital Wallets comparison remained affected by unfavorable foreign exchange.

Liquidity, Debt and Cash Flow

Cash and cash equivalents were $226.5 million at September 30, 2023, down from $260.2 million at December 31, 2022.
Customer accounts and other restricted cash were $1.292 billion, producing total cash and restricted cash of $1.518 billion for cash-flow reporting purposes. These restricted funds are principally held to safeguard customer and settlement obligations and are not fully available for general corporate use.
Total principal debt was $2.531 billion, compared with $2.658 billion at year-end 2022. Carrying-value debt was $2.515 billion, including short-term debt of $10.2 million and non-current debt of $2.504 billion.
The company had $255.1 million available under its $305.0 million revolving credit facility at September 30, 2023, with $49.9 million drawn. A separate $75.0 million settlement-related line of credit was outstanding.
Nine-month operating cash flow was an outflow of $355.4 million, principally due to a $529.9 million decrease in funds payable and amounts due to customers. Investing cash outflow was $125.6 million, including $69.4 million for intangible assets, $26.7 million for merchant portfolios and $24.4 million placed in a merchant-reserve account. Financing cash outflow was $120.3 million, including $124.3 million of debt repurchases.
Management stated that available cash, borrowing capacity and expected operating cash flows should be sufficient to fund existing operations and planned requirements for the foreseeable future and the next 12 months.

Material Changes and Unusual Items

Prior-year nine-month results included $1.886 billion of goodwill and intangible-asset impairment, primarily goodwill impairment in both reportable segments. No comparable goodwill impairment was recorded in 2023, and the October 1, 2023 annual goodwill test did not result in an impairment.
Interest expense increased 26.5% for the nine months to $112.6 million because of higher variable interest rates, partially offset by debt repurchases.
Other income declined to $19.6 million from $97.9 million, largely because of lower warrant and derivative fair-value gains and the absence of the prior-year foreign-exchange gain.
Effective April 13, 2023, the company amended applicable U.S. dollar debt and derivative arrangements to replace LIBOR with SOFR.
The company made mandatory debt payments and repurchased debt during the period, recognizing a $9.6 million nine-month gain on debt repurchases.
Share-based compensation expense declined to $23.1 million from $45.2 million for the nine months. The company also began an employee share purchase plan in April 2023.
In November 2023, the board authorized repurchases of up to $50 million of common shares, subject to available cash, market conditions and other requirements.

Outlook, Risks and Contingencies

The filing does not provide a clear quantitative revenue, Adjusted EBITDA or cash-flow guidance forecast.
Management cited seasonality, economic conditions, foreign-exchange movements, inflation, rising interest rates, competition, regulatory changes, relationships with banks and payment networks, cybersecurity, acquisition integration, substantial indebtedness and access to future financing as significant risks.
A 100-basis-point increase in interest rates was estimated to have an annualized unfavorable impact of approximately $16.2 million on net loss as of September 30, 2023.
The company was in compliance with its debt covenants as of the financial-statement issuance date. The principal financial covenant requires a defined first-lien debt ratio not to exceed 7.5x when specified revolving-credit utilization thresholds are exceeded.
A securities class action, consolidated as In Re: Paysafe Ltd. Securities Litigation, seeks unspecified damages relating to alleged misstatements between December 2020 and November 2021. Paysafe cannot currently estimate any potential loss, which could be material.
A cybersecurity incident involving a U.S. web application potentially affected approximately 91,000 merchants and agents. A preliminary settlement was reached in related litigation; the ultimate timing and amount of potential settlements remain uncertain.
Other recorded or disclosed items include a $2.2 million litigation provision, $19.0 million of contingent and deferred consideration payable, and a remaining $3.3 million accrual related to customer payments arising from foreign-exchange disclosures. Management does not expect additional liability from the latter matter.

Facts Investors Should Verify

Whether positive Adjusted EBITDA conversion into unrestricted operating cash flow improves after settlement-related working-capital movements normalize.
The sustainability of revenue and volume growth, particularly Digital Wallets growth and the impact of foreign exchange and interest income.
Debt-repayment capacity, variable-rate exposure, covenant headroom and the effect of future interest-rate changes.
The availability of cash for the newly authorized $50 million share-repurchase program without impairing regulated-business liquidity or customer-fund safeguards.
Developments, potential losses and insurance coverage related to the securities litigation and cybersecurity-related settlement.
Future goodwill and intangible-asset impairment sensitivity to share price, discount rates, projected cash flows and long-term growth assumptions.