Adyen reported revenues and profits for the first half of fiscal 2024 somewhat ahead of previously reduced guidance.
First half revenues surpassed $1 billion US with EBITDA pushing past $460 million US, for an overall EBITDA margin of 46.3%. Net income (excluding reported finance income, which is quite irregular) advanced by 34% over the same period of 2023 and the net, after tax profit margin (including finance income) was 37.8% of net revenues. There was a small USD headwind in the first half of 2024 vs the same period of 2023, as Adyen reports in Euro.
Diluted EPS, which includes a healthy contribution from finance income, advanced by 45% in the first half of 2024. Growth in the US processing, at 30% during the first 2 quarters of 2024, greatly exceeded rates in the remainder of the corporate processing footprint.
Competitors, such as PayPal, report gross volumes of transactions and then remove third party processing fees down the expense line, which greatly distorts/overstates top line revenues. As a company primarily serving as a VAR (value added reseller of Visa and Mastercard transactions), the overwhelming bulk of reported gross revenues does not belong to PayPal; they have zero legal claim on 3rd party reported fees.
Adyen, in contrast, only reports revenues that they receive after third parties have been paid out on any transaction, which is the way that revenues are supposed to be stated. The company is building out a fully integrated debit platform in each market, although they do rely upon the interchange network for credit processing access through Visa and Mastercard, as do most firms.
While Adyen reduced hiring initiative growth in the first half of 2024, I anticipate a significant return to employment growth in the latter half of 2024 and throughout 2025.
The Canadian divisional employment growth will be augmented by new hiring initiatives in India and Mexico. Adyen greatly prefers to run a fully integrated operation from end to end. This requires more back-office teams and carries with it higher ongoing costs. From a shareholder perspective, once break even status has been achieved in new markets, EBITDA growth and net profit growth improves faster when outsourcing does not occur (third party expenses typically move fully in-line with volume improvements).
The corporate goal of achieving a 50% EBITDA margin by the end of 2025, on top of the rapid continued increase in processing volumes, despite what looks to be a significant foray into two new and large markets, suggests that scale has been reached as expected in several newer markets.
India and Mexico represent about 19% of the population of the planet and feature significant manufacturing and service businesses. As the absolute lowest cost payment processor among large global players, Adyen is poised to gain profitable market share in these new jurisdictions. Mexico is, more or less, an add-on to US processing as the multinationals already in the Adyen platform can tie in Mexican subsidiaries to divisional processing. A Mexican processing unit provides Adyen with total North American coverage.
India is a completely new market for Adyen and represents a booming producer and consumer economy. Consumers rely heavily on debit for transactions, as opposed to North Americans, who primarily are credit driven purchasers. In India, consumers and merchants alike expect processing savings and only demonstrate loyalty to the lowest cost offering. From India, Adyen can next service other South-Asian markets, also primarily reliant upon debit much more than credit, for transactions.
DEBIT: this is the secular, structural, theme at play with Adyen.
Visa and Mastercard have a stranglehold, essentially unassailable, in credit interchange. What Adyen is doing differently, from the myriad of other payment processors, is more than just piggybacking on credit processing through the incumbent networks; rather, the company is methodically building a primary, global, interchange network specializing in debit payments. Visa and Mastercard also talk up their debit offerings; where they differ is that their products are largely a locked-in platform with an astoundingly high debit fee structure, with the fees being carved up among offering banks to ensure retention. Adyen is more analogous to an open source offering; one featuring all the bells and whistles of the competitors, delivered, profitably, for a fraction of the price of competing networks. Yes, there are several regional interchange networks also attempting to grow out. Would anyone in their right mind, in Asia, trust China Unionpay with confidential end-to-end processing, starting in their country, then routing through China, and onto the final destination, for payment clearing? Will domestic payment networks that have outsourced all their mission critical systems to vendors such as Crowdstrike (and similar) have an edge over a fully “in-sourced” seamless network; one that offers processing for a lower fee?
Buildouts of a full interchange, on a global scale and scope, are initially costly; so much so that few are attempting it, preferring to cobble together disparate networks and platforms that are prone to error and prey to hackers, many are reliant on antiquated legacy tech from contract vendors. Far too many processors are locked into a pricing strategy that is increasingly uncompetitive. Adyen has determined that they will spend annually about 5% of revenues on expansion. Yes, on annualized revenues of $2 billion, that might seem modest. Now, compound that spending, on a 20% plus annual revenue growth rate, for a couple of years, and get back to me with objections about modest expansionary capex. Differing from Visa and Mastercard, who have spend umpteen billions of dollars in the prior decade on largely wastrel acquisitions of back-office firms, Adyen intends to build, so capex will actually go towards network rollout.
Despite ongoing roll-out expense, the growth story in revenues at Adyen is about to be exceeded by growth in the bottom line.
The “proof-of-concept” validation is evident in semi-annual reports on the number of contract wins by Adyen.
Adyen’s H1 2024 report seems different from prior issuance; management is considerably more forthcoming with their end goal, without directly stating as much. It is a confident tome, one that quite clearly states the growth runway to be extensive. Management indicated that they presently have a sub 10% global market share in primary online processing; such inference, when pushed out to a logical conclusion, should presume that the near term goal of Adyen is to surpass a 10% market share. As a primary processor in debit, that will quickly propel Adyen towards name recognition along the lines of UnionPay, Visa, Mastercard for interchange. Brand name recognition more readily opens doors with multinational and regionally significant retailers alike. A top 5 global primary payment processor, without any the baggage attached to a Chinese interchange; that will be the sort of equity automatically held within globally relevant exchange traded funds. Should analysts wrap their heads around the big picture expense initiative underway, with a design upon achieving a globally unified debit interchange network, there may be less quarterly focus upon EBITDA margins; perhaps analysts might, eventually, start modeling the profit potential consistent with a monopoly status debit processing business of global, as opposed to regional, scale.
When will the first North American money center bank analyst achieve a “EUREKA, I’ve got it” moment regarding the Adyen business thesis? Certainly not soon, maybe never, given their attention to the many, easily replaceable, VAR processors competing against one another for credit payments, in the public traded payment space. I am, personally, quite fine with the standoffishness of the North American analytical community regarding this business model; I am afforded time to build a position without the extraneous herds of “Barneys” attempting to board a secular wave, only to fall off on the first run and never return.
Legacy competitors rely too heavily upon outsourced vendors and processors to compete on price.
Their high cost structure does not identify a path to reasonable profitability on low cost debit, so they chose to ignore the space. In doing so, they left the barn door wide open for a disruptor, a disruptor offering a gateway fully capable of processing “bricks and mortar” vendors, over and above online processing.
Surf’s Up.
https://investors.adyen.com/financials/h1-2024
https://investors.adyen.com/
Leave a Reply
You must be logged in to post a comment.