Adyen’s “gaze fixed on the horizon” despite deteriorating margins

Investors took fright at the latest earnings report from Adyen showing declining take rate and EBITDA margins as the Amsterdam based processor continues to invest heavily in market expansion and product development. Making a contrast with the layoffs and cost cutting elsewhere in the sector, Adyen made a plea for shareholders to back its long-term thinking, stating: “This philosophy, which often necessitates greater and more lengthy investments, has ultimately come to differentiate us.

Nobody can argue with the operational success of the business – happy customers, market-leading technology and strong market share growth. Customer churn is less than 1% and 80% of new volume comes from existing merchants. Yet Adyen is finding it tougher to turn fast growing market share into revenue, and incremental revenue into profits.

Payment volume grew 41% to €422b for H2 2022. Adyen’s core customer base of digital merchants continues to trade strongly but, encouragingly, the business added as much incremental volume from the unified commerce segment which includes omni-channel merchants such as H&M, Levi’s and Lacoste. Management points to the success of its in-house POS solution as vindication of its long-term investment theses. The product was first launched in 2016. In H2 2022, Adyen processed a very impressive €64bn of POS transactions from omni-channel merchants, up 57%. Unified Commerce was recently extended to Mexico and Japan.

The platform segment, which is hoped to become a major growth engine in coming years, reported only 16% volume growth although management says this would have been 79% excluding the eBay relationship.  

Net revenue grew 30% to €722m, a healthy number in normal circumstances but 11pts behind volume growth. Take rate (net revenue as a share of payment volume) dropped a further 2bps to 17bps. The fall was blamed on “continued growth of customers already on the platform” and “increased overall ATV due to travel volumes rebounding.” Although management stresses that it sees take rate as an outcome not a target, the continued decline in this metric suggests Adyen is finding it harder to convert market share gains into revenue.

Revenue growth was particularly strong in North America (up 45%) where future sales will be boosted further by a new partnership with Oracle. Europe, Adyen’s largest market saw sales 20% higher than H2 2021. Adyen’s investments in Latin America and Asia Pacific are also beginning to pay off with revenues up 44% and 36% respectively, albeit from a relatively low base.

Operating expenses rose 78% to €388m with the continued fast pace of hiring resulting in employee costs ballooning 92% to €193m. Total staff numbers grew from 2,180 to 3,392 during 2022 with average cost per staff member up 17% to €65K. Management says its “deliberate decision to continue scaling the team… further situates us to capitalise on the sizeable opportunity at hand.”

Adyen has also stepped-up sales and marketing activity, with spend growing 64% to €31m “as we invest in driving brand awareness to unlock commercial growth at a global level and were able to host events to meet our customers in-person again.”  Travel expenses more than trebled to €23m as teams got back on the road. 

Income before tax was down 1% at €334m while EBITDA, the company’s preferred measure of profitability, was up just 4% to €372m. EBITDA margins dropped to 52% from 64% “driven by employee benefits exceeding net revenue growth as we accelerated our hiring pace.”  Management says it could return to c.65% EBITDA margin “if we shifted to optimizing for this metric, but our gaze is fixed on the horizon.”

The staff may be expensive, but they have not been idle. Adyen has launched its one-click checkout (to match Stripe’s USP) and rolled out new in-house designed payment terminals. Merchants baffled by 3DS complexity will be pleased Adyen has also followed Stripe in taking on the responsibilities of delegated authentication itself. And, in the platform segment,  Moneybird, an Dutch SME accounting software provider, is piloting the SME finance tools, including card issuing and business accounts that Adyen announced in November 2022.

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