Paysafe’s turnaround is a game of two halves

Paysafe’s new CEO, Bruce Lowthers (ex FIS), has begun the turnaround of the underperforming payment processor promising a “laser focus on accelerating sales, innovative product delivery and operating at speed.” Commenting on the Q2 2022 results, Lowther said that the “organisation [is] still too complex and is operated in silos.” In product innovation, “bluntly, we have lost our way”. Lowthers was particularly critical of a failure to invest in its consumer-facing wallets, notably Skrill and Neteller.

Lowthers believes Paysafe’s unique selling point should be its two-sided business model and its ability to connect 250K merchants with 15m consumer wallet users. He sounded optimistic for the medium term when promising to simplify the organisation with new leadership appointments that would bring customer-focus to the investment challenges ahead.

Meanwhile, guidance for H2 was revised lower. Management cited the Ukraine war, the strong dollar/weak Euro and European gambling regulations alongside softer activity in financial markets and crypto trading.

Paysafe was formed by the merger of a European high-risk business with a background in consumer wallets used to fund gambling and gaming accounts, and a US acquirer with a heritage serving more conventional high street small businesses. Revenue is split 48% North America and 40% from Europe. 

The US SMB business is doing fine. But the European merchant services and consumer-facing wallets remain under severe pressure. One analyst wondered out loud whether “the merchant acquiring business in the US should be separated out, given the potential valuation opportunity in some of those businesses.”

Total payment volume in Q2 was up an anaemic 3% year on year to $33.4bn. The two sides of the business reported very different numbers. US acquiring volume was up 8%, boosted by “continued strength in US SME retail,” notably restaurants, retail and petrol. In contrast, the digital commerce division, which includes e-wallets and European merchant processing, saw volume fall 5%.

Total revenue was down 1% to $378.9. US acquiring sales were up 14% while digital commerce fell 13%. e-wallet revenue continues to decline and dropped 19% year on year. Even revenue from European integrated and eCommerce solutions was down 4%. That’s a very poor performance in a merchant payment market still generally seeing healthy double digit revenue increases. 

The company has a good position in gaming. US regulated iGaming revenues were up 70% as new markets open up. Paysafe recruited its first operators in Ontario and Arkansas. Ohio is coming later this year. On the other hand, the European gaming market, which is larger and longer established, has weakened as tighter regulations kick. Worse for Paysafe, its e-wallets and e-cash products are under pressure from alternative funding mechanisms such as account to account. 

Company specific factors apart, one reason for Paysafe’s problems is that it is highly exposed to the sort of digital merchant that prospers in good times but is vulnerable when consumers hold back discretionary spending. 80% of revenues are from what Paysafe describes as “entertainment” including the likes of Binance, Spotify and Fortnite. 

Adjusted EBITDA, the company’s preferred profit measure, fell 13.4%. US acquiring was up 30% with margins up 3600bps but digital commerce down 25% with margins falling 590bps. Capex ticked up 40bps to 6.4% of revenue.

Net income before exceptionals fell from $66.4m to $37.5m but the full picture was much worse. Safecharge booked a net loss of $631m after a “non cash impairment charge” of $676m due to “due to a sustained decline in Paysafe’s market capitalization, as well as current market and macroeconomic conditions.” If anyone can explain why a company takes a charge due to a fall in its own stock price, please let me know. 

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