Adyen NV (ADYEY-OTC, $8.47 US). An EBITDA Decline Does Not Equate to a Change in my Investment Thesis.

(EU converted to USD at the rate of 1.0868 as of 06/30/2023).

Adyen NV, the fast growing publicly traded payment processor, reported a very disappointing first half 2023 fiscal result.

Net revenues, at $803.2 million US, increased by 4.4% as compared to the $769.4 million USD reported for the trailing 6 months of fiscal 2022. Processed transactions also were anemic, advancing to $463 billion US vs $449.9 billion USD in the last half of 2022. EBITDA declined from $396.6 million in the last half of 2022 to $347.8 million US for the first half of 2023, a decline of 12.6% over the back half of 2022. Net earnings for the first half of 2023 were $310.1 million US as compared to $295.4 million US in the final half of 2022, an increase of 5.3%.

The fiscal figures reported by the investment media seem considerably more gloomy due to foreign exchange.

Adyen is a European company (Dutch) and harmonizes its fiscal results by taking the considerable USD revenues generated from operations and converting it to Euros for the purpose of producing the fiscal reports. Therefore, any movement in underlying currencies should be taken into account. For the prevailing year over year comps, the Euro has appreciated by 6.2%, which serves to compress reported underlying growth in the US divisions. Nevertheless, revenue growth and processed transaction growth has decelerated to a level barely above that of inflation.

The reduction in EBITDA has been attributed to a hiring spree.

According to Adyen, the 2022 staffing levels had, more or less, advanced the company as far as it could go. The employee mix at the payment processing firm is a ratio of roughly four data and software engineering personnel for every sales or executive employee. Starting in early 2022, Adyen embarked upon a very ambitious program to scale up both the back and front end staffing levels with a goal towards producing an even better payment processor as well as having salespersons capable of touting the relative advances vs competitors. Thus far, the jury is out on the increase in overhead. If one accepts the executive commentary at Adyen at face value, the corporate belief is that it takes some time for the software developers and back office personnel to improve the offering, with a further lag for the sales team to sell the benefits for new contract wins. To this, there is the added fixed costs of equipment and infrastructure necessary to handle volume growth at both ends of the business model.

This could represent a point of inflection.

Adyen revenue growth was neither as good as reported in their fiscal result, nor was it as disastrous as indicated by many investment houses. USD revenues from core customers continued to grow well above 10%, but it appeared that some undetermined newish accounts, largely in online ventures, bailed out shortly after signup. New and smaller defections could be as a result of changeover issues (less than likely) but more likely, it would be from substantial incentives offered by the payment processors that Adyen poached the accounts from, in order to return.

Based upon EBITDA as a percentage of gross revenues and reported volumes, the processor is currently the low cost producer in the space, with net payment processing charges running sub-13.5% of revenues. Taking this to its logical conclusion, if Adyen has lost some business that it scooped from others, and the “others” have offered substantial financial incentives to recover lost volumes of processing, then it could be argued that the overall profitability of the entire payment sector that Adyen competes in is under pressure.

By inference, it could also be suggested that certain payment processors competing against Adyen might also be experiencing a reduction in EBITDA, even if not, as yet, declared publicly or via hints, to the street. If this is the case, then rather than looking at the volume and revenue components within the fiscal results of Adyen and calling them “company specific”, an argument could be made suggesting that the H1 2023 Adyen results are a harbinger of things to come for certain competing processors. This assumes competitors remain forthright with their own fiscal results, as opposed to burying a more competitive environment under a wave of non-GAAP obfuscation. That is a matter for some to ponder as fintech has some outright bad apples as well as a number of companies who boost earnings, not via actual revenue growth, but via accounting machinations.

I don’t see any reason, at this time, to dispute the long term business case supporting Adyen,

Markets were mightily disappointed in the first half results, as am I. Nobody is pleased with a rather calamitous share price decline.

That said, I see the math behind executive explanations for the shortfall YTD. Wages and salaries were 29% of total revenues in the first half of fiscal 2023. As wages are typically more fixed, less variable, should revenues increase, then margins will expand faster. Should the newish hires fail to produce, then they can also be let go, which will eventually serve to rebalance opex. Under either a growth based scenario or a layoff scenario, margins offer the potential to rebound rather sharply in the years to come.

The company has indicated that they have no interest in competing further on price. They do business, while ensuring profitability, cheaper than anyone else in the space. In order for old-line fintechs to compete against Adyen, it must be done at a loss; competitors hope for a dizzying array of service charge overages or price in value added offerings in addition, to offset loss leader core payment processing. That typically is a recipe for disaster, but companies in Fintech often subsidize operating losses with equity placements to cover the difference. Newer fintech that opt to compete directly in the space against Adyen don’t push through nearly the volumes, which make the prospects for equivalent or superior scale-up on a competitive basis to be ambitious at best, or unrealistic at the norm.

Instead of offering an already advantageous processing package at a loss, Adyen is, instead, further beefing up the financial value of their offering to merchants. Near-instant settlement of funds, rather than merchants being forced to “push” for settlement on a daily basis, represents a major competitive advantage vs other merchant processors, and should, in of itself, lead to new contract wins as well as solidify existing business relationships. Instant settlement is what all merchants, for years, have clamored to receive. All that is needed are competent sales staff to introduce the offering; time will tell if the many new hires at Adyen possess the core competency to inform merchants on the better mousetrap.

Differing from other fintechs, who represent serial acquirers of bad businesses, Adyen sticks to its core offering and poaches employees to grow organically. This approach increases Opex but results in a balance sheet largely unencumbered by an enormous goodwill line smothering peers.

Investment analysts love an M&A oriented fintech; they are rather standoffish when appraising the long term outlook for any payment processing firm that prefers to grow the old fashioned way, by earning it.

Many businesses would be mightily pleased to report a net, after tax, profit margin of 33.1% of revenues.

In the case of Adyen, where analysts not only have very high expectations, but also carry a bit of a grudge against a disruptive player in the space that has wrought havoc with more than a few competitors’ top lines; a 33.1% net profit margin is considered to be a fail.

I’ll take this fail and add to it.

https://investors.adyen.com/financials/h1-2023