Remitly Global (RELY)

[wpr101]

Remitly Global (RELY) is a software company in the remittance payments space which competes with the likes of Western Union and Paypal. Their app has very strong reviews and a loyal and growing customer base. Revenue is growing at 49% so I think it may interest this board.

They recently reported Q2 earnings and raised guidance for the full year 2023,

Revenue 875-895M → 915-925
EBITDA 5-15M → 33-40

I saw this one had a decent price rise after earnings and the guidance raise has caught my eye. Additionally, international growth is over 100%: Our business outside North America was more than 20% of total revenue in the second quarter, and grew 120% year over year.

Some notes from the Q2 call are as follows,

• Our unit economics remain incredibly strong and are currently higher then the 6x LTV to CAC that we shared at our IPO
• We see word of mouth benefits across regions
• Geographic expansion strategy has delivered new markets and contributed substantially to growth and scale
• 1.6T remittance market and have 2% of it currently
• Improving customer activity and leverage in our transaction costs
• 234M revenue 49%+ yoy
• Scale efficiencies across transaction costs, marketing expenses, and other operating expenses resulted in exceptionally strong EBITDA of 20M in the Q
• Quarterly active customers grew 47% yoy
• 5M quarterly active customers and grew by 1.6M in last year
• Customer acquisition costs down 15% yoy
• International revenue grew 120%, makes up 20% of business
• Several key integration partners, including M-Pesa in Africa
• In largest end market, enabled Apple Pay and Google Pay
• more than 92% of transactions disbursed in less than one hour
• 1.2M ratings for app on Apple with 4.9 rating, 650k on Google play with 4.8 rating
• Sales volume grew 38% yoy to 9.6B
• GAAP net loss was 19M and included 35M of stock comp
• users continue to send money to support families regardless of economic cycles
• Digital options for sending have increased by 700 basis points
• Transaction expense as a percentage of revenue improved 440 basis points yoy
• localized digital marketing, increased creative velocity, improving brand awareness, word of mouth effect, and increasing scale in business outside north America
• improving returns on marketing has been a large driver of operating leverage over past few Qs
• scale has allowed optimizing and experimenting rapidly to determine highest returning marketing spend, highly efficient marketing engine
• Global diversification and increasing scale help mitigate localized macroeconomic issues
• focused on having strong unit economics
• Transaction expense improvement, transaction margin going up, fraud losses coming down, pay-in & payout costs improving
• Haven’t seen any short term fluctuations that have an impact on business, while legacy competitors have
• Added 1,600 payment “corridors” year over year, now in 4,800 corridors
• Focused on not just EBITDA but also operating income and making progress on reducing net losses

Since this is a SaaS company technically it’s on public comps and I compared it to other companies this board likes or previously was interested in.

RELY shines in valuation and revenue growth. Cash flows it looks quite poor on.

I’m definitely looking for some feedback on this one as it’s a small position for me now. Surprised to see there’s no thread on this one, is it just not on anyone’s radar or there’s reasons to stay away?

[CompoundingCed]

@wpr101

Remitly Global (RELY) is a software company in the remittance payments space…

@wpr101

Since this is a SaaS company technically it’s on public comps…

Hi @wpr101, thanks for bringing this company to the board! I took a position earlier in the year and have added as it continues to perform. I think you have captured good points in your write up.

I’d point out that it doesn’t sell software and and is not a SaaS company. What it does is it provides a service (i.e. remittance) through mobile and earns a fee from this service.

@wpr101

Cash flows it looks quite poor on.

Yes, the CF numbers don’t pretty at face value. The issue with these finance-type companies is that their business largely involves capital/cash flows. Hence trying to get a sense of the company’s true cash generation ability by calculating FCF directly from the CF Statement can be quite misleading.

In the case of Remitly, “Disbursement Prefunding” can cause huge distortions to Operating Cash Flow. What is this? The company uses its cash balance to pre-fund its disbursement partners in various countries, so they are able to fulfill customer requests in an expeditious manner. This allows funds to be made available to the recipients in minutes/hours. (The true flow of funds takes a much longer time as we would expect).

There are 2 factors that affect pre-funding requirements. First, as the business grows, one would expect pre-funding requirements to grow. Second, if the quarter ends prior to a long weekend (such as July 4th long weekend immediately following Q2 close), pre-funding requirements go up temporarily to cope with remittance over long bank holidays. This is what happened in Q2.

We could potentially reach a point where pre-funding requirements are larger than RELY’s cash balance but I don’t think it is a major issue at this point. The more immediate not-really-an-issue issue is that it distorts cash profitability of the business.

I guess the next question would be, can we adjust the cash flow statement to get a better picture of FCF profitability? I think we probably can, but that will also involve adjusting the “customer fund receivable” and “customer liabilities” line items.

Another rough indicator of whether the company is burning cash would be to look at their cash balance + disbursement pre-funding account on the Balance Sheet and track this over time. Combined, these two items show a more accurate picture of the company’s cash. We can see that this has increased over the past 2 quarters, in line with the company achieving NG profitability 3 quarters back.

In sum, while RELY is not highly FCF profitable at this stage, it is also not burning cash as what the CF Statement seems to imply.

There are a few other points I would add on RELY.

1. Moat. This is a pretty fragmented industry. Incumbents have offerings that are still plagued with poor offline experience (limited stores hours, long wait times, unsafe locations etc.), have high fees that lack transparency and offer poor customer service.
   From the Google store ratings (and perhaps revenue growth), we can see that RELY provides a much better customer experience through their mobile app. Users can send money home in minutes and with just five taps for repeat transactions.

2. In addition to sustained hypergrowth (>40% for the past 8 quarters of publicly available financials), the company has been steadily improving margins. They turned NG profitable 3 quarters back and margins have continued to improve.

3. While revenue is not recurring in a SaaS way, it is repeat in nature because customers will always have the need to send money back to loved ones and families. The company does not disclose retention metrics but had this to say in the Q1 call:

“As is typical, activity from returning customers contributed to a significant portion of total revenue in the first quarter, which reflects the non-discretionary nature of remittances and the loyalty of our customers.”

4. Revenue growth will be driven mainly from customer growth. This is not a land and expand business. Active customers currently stand at 5 million globally. This seems like a small base. I think it’s possible to continue hypergrowth for the next couple of years at least.

Ced