Flywire

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Flywire is a leading global payments enablement and software company. Its next-gen payments platform, proprietary global payment network, and vertical-specific software help its clients get paid and their customers pay with ease—no matter where they are in the world. Their integrated solutions that are engaging, secure, fast, and transparent are tailored to key industries like education, healthcare, travel, and B2B markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Moat Assessment: Flywire operates a specialized platform for high-value and complex payments, mainly serving sectors that are often overlooked by traditional payment processors. The key idea is to create value where other payment processors are unable to. This focus has led Flywire to carve a niche, especially in education and healthcare. The firm leverages technology and data analytics to offer more streamlined and transparent cross-border payment experiences.

Moat Rating: 2 / 5

Flywire’s moat is not wide, it’s closer to narrow, owing to a combination of factors, that offer a certain degree of competitive advantage. Its main advantages consist of: * Network Effects (Moderate): They benefit from network effects since a greater number of payment processors on the platform may attract more clients, but these effects are not fully formed and other platforms can also quickly grow its users and clients. * Customer Switching Costs (Moderate): Integrations between businesses and platforms often result in stickier customers, making it slightly challenging to move to another platform. But, its not high enough to lock in clients for long and customers can move to competitors. * Proprietary Technology: Flywire has developed a comprehensive platform and proprietary software which will be very challenging to fully duplicate for new players. However, these factors do not create a strong economic moat. So, for these reasons, we assign Flywire a narrow/moderate moat, which could face some challenges over the long term.

Risks and Business Resilience: * Technological Disruption: While Flywire invests heavily in its platform, the pace of technological advancement in payments is high, so, a new platform could quickly displace Flywire, unless, they innovate. * Competition: Legacy payment providers, new fintech companies, and companies in adjacent markets all pose a great threat to Flywire’s marketshare. These companies are heavily incentivized to come in and fight for their space in the financial services sector and can offer similar services to Flywire, thus, they have the potential to erode Flywire’s niche. * Regulation and Compliance Landscape: Financial regulations are very fluid, which creates an ever-changing compliance landscape. Flywire is subject to international and domestic regulations (including AML, data privacy, etc.). These regulations and noncompliance could make Flywire’s business unprofitable.

Flywire has a demonstrated record of adapting to market changes and expanding its solutions, which makes it moderately resilient to competition, however, the inherent risks present above could make them vulnerable.

Detailed Business Explanation:

Revenue Distribution: Flywire’s revenue is derived from multiple verticals, notably education, healthcare, and travel. In addition, their global payment platform and software are used across verticals to streamline the payment experience. Their global payment volume for 2023 was approximately 25 billion, growing at 33.9% over prior year, which resulted in transaction revenue of $396 million and $175 million from platform and usage based fees.
Industry Trends: The financial services industry is rapidly evolving as globalization creates a need for cross-border payment solutions. Additionally, the rapid growth of e-commerce and e-learning has significantly boosted the demand for digital payment platforms. Within the sectors where FLYW operates, healthcare and travel are experiencing an increase in digital transactions and payments. The regulatory landscape is also evolving rapidly, with increased attention to data privacy and security.
Margins: Flywire is focusing on growing in a sustainable manner, with more focus on high gross margin products, to lower the cost of revenue, while improving scalability. As of Q3 2024, transaction revenue gross profit was $97.9 million, with a gross margin of 75.4%. Platform and Usage-Based Fees gross profit was $54.7 million, with a gross margin of 86.7%.
Competitive Landscape: Flywire is competing with legacy providers and a new generation of fintech companies. This creates a highly competitive environment, as new players are incentivized to go after the same market share. But, its focus on specialized verticals gives them a slight upper hand.
What Makes Flywire Different: The focus on highly specialized payment processing in niche industries which involve high-value payments such as those in healthcare, education, or travel differentiates Flywire from mainstream payment processors. By providing industry-specific software, Flywire streamlines processes that are often difficult to tackle using a general-purpose payment platform. The integrated global payment network along with data-driven optimization also gives them a competitive edge.

Financial Analysis:

Profitability: Flywire’s profitability is mainly driven by their transaction volume and ability to capture gross profit. While their current EBITDA is in the loss making range, their adjusted gross profit is trending upwards, as mentioned above.
Revenue Growth: Flywire has displayed impressive revenue growth. Revenue for the first three quarters of 2024 came in at $327 million, an increase of 28% year-over-year. Transaction revenue grew by 27%, and Platform and Usage-Based Fee revenue grew 31%. A strong YoY growth like this demonstrates they are capable of getting new clients, while upselling and cross selling existing ones.
Cost Analysis: While revenue growth has been strong, it comes at a cost. The company’s operating expenses are high at approximately 75% of the revenue as compared to 85% a year ago. They are also making a lot of investment in their software and technology and hiring employees. As of their last 10-Q form, they had a headcount of 4356 employees.
Balance Sheet: The company has a very strong balance sheet, with cash and short-term investments of $372 million. However, they also hold a considerable amount in operating liabilities, totaling $301 million. They are actively managing their capital structure. Although the company is not generating net income, they are in a good position to continue their growth plans. As of last quarter, long-term debt stood at $188.4 million.
Free Cash Flow: Flywire has been burning cash, as they are heavily investing in building out the business and acquiring other companies to scale faster. This can be concerning, if the company is unable to become profitable in the coming years. However, the free cash burn is decreasing as the company starts realizing the rewards of its investments.

Understandability Rating: 3 / 5 The business model itself is quite easy to understand. The difficult part lies in determining the long-term implications of the regulatory and technological factors in play, as well as the implications of intense competition. They are not in a business that is intuitive for most users. So, all this results in a moderately complicated business model.

Balance Sheet Health Rating: 4 / 5 Flywire’s balance sheet is quite strong, with plenty of liquid cash, but that may change as it burns through cash while making the required investments for growth. As their free cash flow improves, this rating could move to 5 as their long-term position becomes more stable.