Greetings and welcome to Flywire Corporation's First Quarter 2024 Earnings Conference Call. Please note that this conference is being recorded.

Thank you, and good afternoon. With me on today's call are Mike Massaro, Chief Executive Officer; Rob Orgel, President and Chief Operating Officer; and Cosmin Pitigoi, Chief Financial Officer. Our first quarter 2024 earnings press release, supplemental presentation and when filed Form 10-Q can be found at ir.flywire.com. During the call, we will be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these forward-looking statements. We will also be discussing certain non-GAAP financial measures. Please refer to our press release and SEC filings for more information on the risks regarding these forward-looking statements that could cause actual results to differ materially in the required disclosures and reconciliations related to non-GAAP financial measures. This call is being webcast live and will be available for replay on our website. I would now like to turn the call over to Mike Massaro.

Thank you, Akil, and thank you to everyone that is joining us today. We are pleased to share our Q1 FY '24 results with all of you here today, showing strong performance across the business. In a few minutes, Rob Orgel, our President and COO; and Cosmin Pitigoi, our new CFO, will go into greater detail about the quarter. But first, I will start with a few financial highlights from Q1 2024. Revenue Less Ancillary Services was $110.2 million, an increase of 24% year-over-year. Adjusted gross profit for the quarter was $71.9 million, an increase of 20% year-over-year. And adjusted EBITDA was $13.2 million for the quarter, increasing by $6.2 million year-over-year. These Q1 results are a great start to the year for Flywire. Let me start with some of the core fundamentals that continue to drive our strong results. As a company, we have now exceeded over 4,000 clients. This is nearly a 2x increase since the IPO in 2021. We continue to strengthen all 4 verticals in numerous sub-verticals. We now have clients in over 50 countries, they have the ability to process payments in over 140 currencies from over 240 countries and territories, providing strong global diversification. We also enjoyed great revenue diversification with no client generating over 2% of FY '23 Revenue Less Ancillary Services and top 10 clients accounting for less than 13% of Revenue Less Ancillary Services. All combined with great NRR, logo retention and LTV to CAC. Our FlyMate spans across 25 different countries, representing more than 40 nationalities and languages spoken, with a culture centered around execution and ambitious innovation that we believe continues to be a real advantage. We are confident in our revenue momentum this year on a constant currency basis, as you will see from the guidance Cosmin will review. We also expect adjusted EBITDA margin expansion in line with our prior guidance. Now much has been written in Q1 about tightening student visa policies in many key education markets, the overall environment and numbers for international students are indeed important factors for Flywire's education business. I want to reiterate my confidence in our ability to navigate these Visa changes, highlighting a few key reasons. First, our business has demonstrated resilience throughout other periods of visa-related change, a benefit of having an increasingly global and diversified business. In the U.K., for instance, we nearly doubled our higher education revenue in the quarter, growing this market well above the company average, with outperformance driven by winning new clients and strong NRR. In Canada, a number of our clients say that recent government study permit allocations are better than they previously expected, with a rolling ramp back to a normal admissions speed and cadence. Second, we believe in the long-term growth of the international student market. Students wanting an international education will find it somewhere. We expect the existing Flywire footprint will capture a sizable portion of these payments. Our agent partners globally who help students in the application process support this view that students are inclined to adjust their plans as needed to continue their education. We also believe that international students have a great value to their host countries and are the lifeblood of many universities and colleges. Our clients will deal with the rephasing and period of adjustment, but expect in the long term, the policies we are discussing now will be moderated in the long-term growth trajectory of international education will continue. Lastly, we are still early in our journey to penetrate our large end markets and are demonstrating strong organic growth in the industries we serve. We also continue to grow with existing clients and win new clients, thanks to an effective go-to-market strategy and ongoing product innovation across our business. We also made great progress in Q1 against our 3-pronged strategy of optimizing our go-to-market capabilities, expanding our Flywire Advantage and strengthening our FlyMate community. As for go-to-market, we continue to optimize and invest to support our growth algorithm. As I said last quarter, throughout 2024, we plan to increase our investment in sales and relationship managers by more than 15% in aggregate, spread across verticals and geographies. For example, in travel, we are already seeing early returns from this investment. We started the year with strong momentum in our new sub-vertical of ocean experiences, investing in a combination of marketing and sales efforts. We opened up some net new travel geographies, allowing our team, for example, to bring on new clients in Chile and Indonesia. Additionally, we continue to see great success in South Africa, another investment market for us, which has seen a 3x increase in clients over the last 12 months. While expanding our Flywire Advantage, we remain focused on product and payment innovation to power our vertical ecosystems. For example, in healthcare, we rolled out integrated patient financing options funded by a third party to augment our powerful affordability suite. Our clients see this as a clear solution for providers and patients to balance affordability and increase collectibility. As our non-recourse patient financing solution gives patients longer payment terms and lower monthly payments to fulfill their financial responsibility. One client reported a 16% increase in cash from payment plans in just 6 months from our integrated financing solution, among other benefits. We go into more detail about our healthcare business in this quarter's supplement. And we continue to be focused on strengthening and growing our FlyMate community. As I've mentioned before, we have a values-driven culture here at Flywire, which is a critical component to maintaining high-performance teams. Living our values like execution and ambitious innovation empowers FlyMates to collaborate and move quickly to solve hard problems for our clients. For example, this was prominently on display this quarter when a team of global FlyMates came together to sign a full suite deal for a large education institution in the United States. After meetings with our global team of sales, product, legal, and implementation experts, the client was so convinced of the benefits of Flywire that they ended a multiyear relationship and contract. Our team is now underway with what is on track to be the company's fastest enterprise-level deployment ever. Our culture is also underpinned by our commitment to giving back to the communities we serve. Last quarter, FlyMates from around the world came together to build a school and library for local students and families in Panama through a nonprofit partner of ours called School the World. FlyMates came back with a new sense of perspective on the world, motivation in their work, and fulfillment in their lives. As one FlyMate put it, I'm proud that Flywire is a global company with such strong social responsibilities and supports its employees in making the world a better place. The experience left an indelible mark on me, and I learned that my fellow FlyMates are endlessly supportive and kind, willing to do whatever it takes to get the job done. In closing, we are pleased with how the business performed during the first quarter, underscoring the resilience of our business and winning strategy across our verticals. I would now like to turn the call over to Rob Orgel, our President and COO; to review some operational highlights from the quarter. Rob?

Thanks, Mike. Good afternoon everyone. It was another quarter of strong performance for the company with good results on both revenue and adjusted EBITDA. Our sales, client service, and delivery teams delivered great results during the quarter. Here are just a few of the highlights. We added over 200 new clients, mostly signed in a single quarter. We saw particular strength in our travel vertical with an all-time high projected ARR signed during the quarter. We generated over 20% year-over-year pipeline growth across all verticals with B2B and healthcare giving their highest all-time pipeline creation in a single quarter. This quarter's strong growth was driven by the continued execution of our 5 strategic growth pillars. As a reminder, those pillars include growing with existing clients, adding new clients, expanding our ecosystem through channel partnerships, expanding to new industries, geographies, and products, and finally, strategic value-enhancing acquisitions. I'd like to briefly discuss how we grew across our 4 verticals during the first quarter, in line with those growth pillars. Starting with education with an estimated TAM of $660 billion, we saw an increase in new clients signed and an increase in our percentage win rate compared to Q1 of last year. For example, we went live with Kookmin University in South Korea, which is a solid growth region for us. Kookmin University is a leading private university founded in 1946 and is the seventh largest university in Seoul. It is home to over 24,000 students. With Kookmin University on board, Flywire now supports several prestigious universities in South Korea, bolstering our position as a leading provider of payment solutions in the Korean higher education market. We also signed our first K-12 school in Korea in Q1, expanding our reach beyond higher education into another active sector of Korean education and a testament to our growing recognition and impact in the region. We also continue to identify new use cases in education, where software drives value and payments, and we'll continue to develop solutions to drive growth and value for our clients. For example, we expanded the availability of our third-party invoicing solution, parsing the power of the Flywire platform to enable sponsors such as employers, government agencies, or other organizations to pay students' tuition and fees directly. Institutions are reporting lower administrative burdens, ease of reconciliation, and increased revenue as part of their early benefits. One of our clients, which is a large elite research institution, is leveraging Flywire's third-party invoicing solution to better serve their global student base. They have seen a 70% increase in timely third-party tuition collections after requesting payment via Flywire, and we are helping them manage these for more than 500 unique third-party vendors and organizations. Once again, showing that Flywire has a proven track record of software driving value and payments and delivering strong NRR. In healthcare, with an estimated TAM of $500 billion, we saw a record new pipeline creation, which grew over 100% on a year-over-year basis as we generated momentum with specialty providers in the U.S. During the quarter, we signed several new healthcare clients. We are continuing to expand with Conifer Health Solutions client, United Surgical Partners International. USPI is the largest ambulatory network in the United States with over 480 ambulatory surgery centers and surgical hospitals and over 50 health system partners across 35 states in the U.S. We are currently live with a portion of USPI's network for surgical centers with more on the way. We also went live with a handful of Oracle Health CommunityWorks clients during the quarter. For example, we went live with the Henry County Medical Center, a large CommunityWorks facility providing rehabilitation-focused care in West Tennessee. There are hundreds of CommunityWorks hospitals on the Oracle Health platform that are well-suited to become future users of the Flywire Health platform. In travel with an estimated TAM of $530 billion, we generated an all-time record of projected ARR signed during the quarter as we brought on new clients across all our sub-verticals. In terms of expanding into new geography, we went live with Cruce Andino, one of South America's oldest travel companies, providing travelers with sailing experiences among the lakes and ancient trade routes of the Andes mountains, and our first-ever travel client in Chile. Flywire's strategic partnership and integration capabilities with Art2Travel, a travel software company based in Santiago, Chile, helped us win Cruce Andino. Our team is excited to work with new clients and our partners to deepen our local expertise in this corner of the global travel market. As Mike mentioned earlier, we're seeing early success in our ocean experiences sub-vertical and saw strong traction in Japan during their peak ski season in January and February. Finally, in B2B business, which covers a broad TAM estimated to be about $10 trillion, we increased the average deal size, increased our number of client wins, increased projected ARR compared to Q1 of last year, and had our highest pipeline generation quarter-to-date for our B2B team. We continue to have great traction in manufacturing and distribution clients, which now represent roughly 1/4 of our clients in B2B, by providing sophisticated and integrated accounts receivable solutions. Flywire stands out in our ability to tackle the complex payment challenges of distributors and manufacturers with global customer bases, where our combination of international and domestic payment capabilities, our ability to accept card and non-card payments, and our integrated cloud-based payments platform infrastructure enables us to deliver seamless solutions that are a major step forward for many B2B companies built in the early phases of digitizing their financial systems and processes. For example, this quarter, we added MOCAP, a Missouri-based manufacturer of plastic and rubber components. MOCAP transacts in 18 countries outside of the U.S. and will be using Flywire as their exclusive payment platform for both e-commerce and traditional invoice flows. Additionally, we went live with MC3 Group, a computer hardware distributor formed in 2002 with over 4,000 wholesale clients globally. Flywire has helped MC3 expand local payment options for international customers and reduce costs to receive these payments. Stepping out of our verticals and moving to our efforts towards efficiency and scale, we remain committed to controlling costs and investing prudently. We continue to improve the scalability of our business model as operating expenses as a percent of revenue continue to fall. In Q1, expenses as a percent of revenue were down 6 points versus Q1 2023 and down 5 points sequentially. More than half of our hiring this year has been in our go-to-market teams, reflecting Flywire's commitment to revenue and customer growth and also showing that our operational teams are scaling cost-effectively. Flywire enjoys operating leverage because of our shared service model around 2 of the 3 core elements of the Flywire Advantage. That is our global payment network is shared by our verticals and our core payments platform is leveraged as part of the solution for each of the verticals as well. We remain vigilant to deliver on the top and bottom line growth, reflecting the strength of our business and business model. With that, I will now turn the call over to Cosmin to go over our results for the quarter as well as discuss guidance for Q2 and 2024. Cosmin?

Thank you, Rob, and good afternoon, everyone. As many of you know, I joined about 2 months ago, and I'm incredibly excited about the long-term potential of the business as I will outline shortly. And especially energized by the culture at Flywire, I look forward to helping provide leadership to Flywire through the next phase of growth and to continue to deliver value for our clients, payers, partners, FlyMates, and shareholders. Today, I'll provide an overview of our results for the first quarter and then discuss our outlook for Q2 and the fiscal year. As Mike and Rob mentioned, we had a strong start to the year across many of our operating metrics and financials. Payment volumes during the quarter were $7 billion, which represented an increase of 23% compared to Q1 2023. From a monetization standpoint, our spreads have remained relatively consistent and stable over the last several reporting quarters. Revenue Less Ancillary Services was $110.2 million in Q1, representing a 24% growth rate compared to Q1 2023. Our revenue growth rate was driven by increases in transaction payment volume as well as our StudyLink acquisition, which contributed $2.1 million to platform and other revenue in the quarter. We saw strong growth despite a high single-digit percentage headwind related to our Canadian higher education business. Our Q1 Revenue Less Ancillary Services outperformance compared to our expectations was primarily driven by stronger-than-expected volumes from U.K. higher education clients and stronger-than-expected growth from new travel accommodation clients in Europe and Asia. FX rates were relatively flat year-over-year. However, FX was a $1.2 million headwind against the guidance we provided for Q1 based on December 31 exchange rates. During the quarter, transaction revenue increased 26% year-over-year, driven by a 33% increase in transaction payment volume, primarily in our International and U.S. education vertical as well as travel. Platform and other revenues increased 16% year-over-year, primarily driven by a 6% increase in platform and other revenues volume as well as from platform fees that do not carry payment volumes, specifically revenue associated with the contribution from StudyLink. Adjusted gross profit increased to $71.9 million during the quarter, 20% above the $59.9 million generated in Q1 2023. Adjusted gross margin was 65.2% for Q1 2024, down 200 basis points from 67.2% for Q1 2023. The year-over-year change in adjusted gross margin was driven primarily by the strong growth of our transaction revenue versus our platform revenue, particularly from the success of our travel vertical and of our land-and-expand strategy, where we won U.S. domestic higher education business, both areas where credit cards are more prevalent. As we've highlighted in past quarters, FX shifts occurred during the settlement of transactions. This quarter, these shifts resulted in losses that impacted our cost of sales. In prior quarters, these impacts were largely offset by FX hedges, resulting in a mitigated impact on adjusted EBITDA. Adjusted EBITDA grew to $13.2 million for the quarter, almost double the $7 million generated in Q1 2023. Adjusted EBITDA margin was up over 400 bps year-over-year. The increase in adjusted EBITDA was driven by revenue outperformance and cost management. With respect to capitalization as of March 31, 2024, we had $619 million in cash and cash equivalents, no long-term debt, and 122.3 million shares of common stock outstanding. Similar to adjusted EBITDA, we have seen strong cash flow generation and growth over the last 12 months. In short, we have ample opportunity to further build on our capital allocation strategy and execution, both organically and inorganically. Moving on to guidance. For full year 2024, we expect Revenue Less Ancillary Services to be in the range of $478 million to $498 million based on spot foreign exchange rates as of March 31, 2024. This represents a year-over-year growth rate of 28% at the midpoint. The $8 million reduction at the midpoint from prior guidance is driven by changes in FX. This is due to the strengthening of the dollar since our last projections based on the spot FX rates as of December 31, 2023, which reduced our international revenue when reported in U.S. dollars. Please note that the U.S. dollar has continued to strengthen since March 31. We expect to deliver full year 2024 adjusted EBITDA in the range of $64 million to $75 million. At the midpoint of our full year 2024 guidance range, we expect to generate approximately 320 basis points of adjusted EBITDA margin improvement, which is in line with our prior guidance. Q2 2024 Revenue Less Ancillary Services is expected to be in the range of $96 million to $104 million. This guidance relative to our thoughts earlier this year is primarily impacted by the change in the FX spot rate, as already discussed, and Canada. We expect more of our Canadian higher education revenue to be realized in the second half of the year versus more evenly distributed as we previously expected. Rounding out the guidance discussion, we expect Q2 adjusted EBITDA to be in the range of $1 million to $4 million. As a reminder, Q2 has been the lowest quarter for adjusted EBITDA over the past few years due to the seasonality of our business. And we expect that our traditional seasonality will be repeated. In closing, I want to step back and provide my early perspectives on the long-term growth opportunity of Flywire. Starting outside, it's clear that while Flywire has continued to gain market share given its compelling client value proposition, our 4 unique verticals are in very early stages of automating their payment capabilities, with a much more customized approach than other verticals that are benefited from standard and legacy payment offerings. So as we look ahead, we have low single-digit penetration in these large verticals, and we believe we're uniquely positioned to continue to capture share given our software solution. The opportunity to solve these multidimensional customer problems starts with large, complex cross-border payments but increasingly opens the door to cross-selling into domestic capability. I'm committed to continue to drive internal and external transparency in how we are executing our strategy against our growth algorithm. First, we've talked about net revenue retention rate, or NRR, which has been stable over the years. To unpack that, there are 2 main components. First, as I just mentioned, we see high single to low double digits TAM growth in our 4 verticals based on external factors, including secular trends. Second, we believe we can add meaningful growth from expanding with our existing clients. These 2 drivers combined have been driving approximately 2/3 of our growth, which has been quite stable over the years. In addition, roughly 1/3 of our growth comes from the combination of ramping last year's client additions and new clients added in the year. On top of this, we can accelerate even further through early innovations such as our payer services. Finally, we're continuously evaluating strategic value-enhancing acquisitions. All of this topline growth is expected to result in even faster bottom-line growth as we drive productivity through investments in scale, data, systems, and automation. I am excited about the journey ahead as we are clearly still early in solving unique customer problems at scale. I'll now turn it back over to the operator for questions. Operator?

The first question comes from Dan Perlin with RBC Capital Markets.

I just wanted to go back to the Canadian market issue. Mike, I just want to talk a little bit more, if you could, about just how comfortable you are ultimately with those trends? I mean, understanding like student visas are being used as immigration tools and other things. And it seems like that was getting a little more pervasive. So just maybe remind us the visibility that you have. Part of the second half recovery it looks like you got a recapture rate assumption in there. Where is that coming from? Is that from your agents where you get the visibility there? Just anything incremental there would be helpful.

Dan, it's Rob. I'll provide some insight into the market, client perspectives, and ongoing regulatory discussions in Canada before we discuss guidance for clarity. Since our last conversation about Canada, there is significantly more clarity regarding how schools are progressing. They understand their allocations and the processes for admitting students, and are moving towards what we refer to as a ramping return. This means they can now engage in what would be considered normal activities leading to enrollment and payments, while also considering the caps and allocations announced around late March and early April. During my recent trip to Canada, I spoke with our client teams and found that the actual results are proving to be less extreme and more manageable than originally feared during periods of uncertainty. Our discussions with agents regarding their plans to resume activity also provide a sense of comfort moving forward. Our modeling approach relies on a bottoms-up method. Many have discussed how to tackle this, and we analyze it from a school-by-school viewpoint, understanding their allocations and what this means for their expectations. From this, we construct our guidance, which has been summarized at the provincial level but is grounded in detailed school-by-school analysis. Now, Cosmin, would you like to add anything?

Dan, thank you for your question. Let me provide some details regarding our guidance, particularly in relation to Canada. Firstly, for the full year, we have maintained our guidance based on constant currency, primarily affected by foreign exchange. Regarding Canada, Rob has mentioned a few points, and I'd like to elaborate on three specific areas: Q2 performance, the full year outlook, and recapture in the second half. For Q2, we are observing a gradual increase in enrollment rather than a sudden spike, leading us to anticipate a mid-single-digit negative revenue impact. For the full year, instead of the previously expected low teens, we are now looking at a mid-teens million dollar revenue impact. Initially, we forecasted mid-single digits for Q1, but updated it to mid- to high single digits, and as we noted in Q1, we surpassed expectations. Concerning recapture and our outlook for the second half, we've included more transparency in our supplemental materials. Currently, we expect a mid-single-digit million dollar revenue impact in the second half from international students studying in countries outside of Canada. Overall, we are confident in our range at the midpoint and believe Canada will remain a growth market for us as we navigate these external challenges.

Great. That's super helpful. Just quickly, Cosmin, since I've got you there. Maybe as you said, you've been there for a couple of months now. FX definitely plays a big swing factor in a lot of different areas for the company. And I'm just wondering, as you think forward about like philosophically, how you want to present guidance and maybe numbers or KPIs? Have you given any thought to other ways in which to do that, FX-neutral guidance et cetera? Just anything around what you might be thinking would be helpful there as well?

Yes, absolutely. That was one of the first things I noticed when I joined. I come from a background focused on FX neutral or constant currency growth rates, so we will work on developing that going forward. This is essentially how we view the actual growth of the business, disregarding the FX noise, especially considering that over half of our revenue comes from outside the U.S., which has a significant impact. To elaborate on the big FX factors for the full year, we focus on four main currencies: the Canadian dollar, the Australian dollar, the British pound, and the Euro. When we provided guidance earlier this year, it was based on the rates as of December 31. The dollar had weakened considerably by that date, and we observed a gradual strengthening of the dollar throughout the next quarter. By the end of the quarter, some of these currencies had improved by about 1% to 4%. This situation resulted in a $1.2 million pressure in Q1. Since that was a gradual shift, it affected Q1 specifically. As we anticipate Q2, Q3, and Q4, our guidance is based on rates from March 31, and the dollar has actually strengthened slightly since then. However, if the impact in Q1 was $1.2 million, and the rates shift gradually throughout the quarter, it could lead to nearly double the headwind in the subsequent quarters. We aim to transition to an FX-neutral growth rate focus for our guidance and presentations, which should help reduce some of this noise. For now, as an international business, these factors do impact our results. Nevertheless, as you noted, we managed to offset much of this while maintaining our margins and meeting our commitments for the year regarding topline performance. Does that clarify things?

Yes, that's very helpful.

Next question comes from the line of Will Nance with Goldman Sachs.

Maybe I'll start with a more numerical question regarding foreign exchange. I want to ensure we're all on the same page. I took a quick look at the FX rates for this quarter so far, and I know you're using the Q1 quarter in spot rates for your guidance. It seems the magnitude of the FX rate is approximately half of what we experienced during the quarter. Could you clarify what the incremental impact on revenue guidance would be if we were to apply current FX rates instead of those at the end of the quarter? I believe you mentioned an adjustment of around $8 million for the full-year guide based on Q1 movements.

Yes. Right now, we have observed a slight weakening of the dollar in the past few days. As of today, there is a bit of pressure, but it's very minimal, around $1 million or less for the entire year. It's an insignificant impact, though it is still pressure. Overall, I would estimate it to be less than $1 million for the full year, somewhat evenly distributed across the quarters.

That sounds good. That's helpful. I have a broader question. You mentioned the total addressable market growth in the range of high single to low double digits. Could you elaborate on that in terms of pricing and tuition increases on college campuses worldwide? Additionally, how much of that growth is driven by the increasing number of international students in various regions? I'm particularly interested in this second point, especially considering the rising immigration restrictions globally. What kind of growth in international students are you anticipating in the coming years? Also, when analyzing the components of net revenue retention in the education sector, what is the contribution from same-store sales based on the number of students?

Will, sure, I'll jump in and take that. So again, if you look over international since the last couple of decades, right, you'll see kind of a low single-digit, low mid-single-digit variation if you'd normalize out for the COVID period. And so that, I would say, is our broad view of international student growth over time. And then when you kind of break down some of the information that's in the supplement, I think when you think through just where we're seeing growth, right, there's obviously going to be industry-based dynamics that help drive it, right? So whether that's tuition increases, again, you're going to see relatively modest growth there, but I always joke I've never seen a tuition bill go down. And I've got 4 kids. So again, you're going to have some component of average transaction size increase over time. You're going to see growth of international students. And the other thing I'd just tell you to remember, especially in the education vertical, is just that land-and-expand strategy being a huge area for TAM expansion for us there. That's a significant part of that TAM and kind of the explanation of the single digits where we are today and the opportunity we have embedded in that customer base. So hopefully that helps...

I would say that many players and clients in various sectors are lagging in adopting automated payment solutions. However, we are now seeing an increase in interest, as many are seeking cost savings and automation capabilities. This trend is evident across all sectors, with a strong focus on saving money, which drives the demand for automated solutions. As a result, they will be looking for customized software solutions, and this is where we fit perfectly. In addition to the overall growth in these areas, we offer targeted solutions for their needs.

Next question comes from the line of Darrin Peller with Wolfe Research.

Look, I just want to be clear for everyone. I mean it sounds like you're trying to make the point that it's 100% guidance change associated with purely FX as you said, constant currencies unchanged and then maybe Canada, but nothing else is impacting the business from what you could see. So number one, I just want to make sure is that right, there's nothing else impacting? And then maybe just beyond the timing on Canada ramp, if you could just remind us the components of the reacceleration, just the implied growth rates obviously accelerated by a few hundred basis points or more in the second half of the year. So again, just year-over-year, not forgetting about seasonality, would be helpful.

Yes, let me begin by discussing the impact for Q2. We mentioned foreign exchange as one factor, and Canada is another. We are observing that effect, as we previously noted. Additionally, there are several other factors influencing the portfolio, but I would highlight that the softness in the healthcare sector is a significant reason for this. This ties into your second question regarding the acceleration from the first half to the second half of the year. The acceleration in the healthcare sector contributes to understanding the implied growth rates between these two periods. If we analyze that, we see a mid-single-digit acceleration from the first half to the second half, largely driven by Canada, as we have disclosed in our numbers. Another factor is the recovery in the healthcare sector during the second half. Furthermore, we are witnessing strength across various areas, including new client signings and overall robustness in some of our faster-growing sectors, which is also contributing to the mid-single-digit acceleration. We believe we have accounted for many of these elements. Obviously, there is a wide range of potential outcomes as the macro environment remains uncertain, but overall, we feel confident that we have captured these components.

Can I provide some additional context? The acceleration we expect in the second half is primarily due to two factors. First, we have successful client go-lives scheduled for the second half. Second, there was a cyber incident affecting Change Healthcare, which, while unrelated to Flywire, impacted many hospitals by delaying their ability to issue patient bills. As we mainly assist in collecting the patient responsibility portion of these bills, this incident caused a shift in some hospital billing from the first half to the second half of the year. So, while this is not as significant as other contributing factors we've discussed, it is an important piece of the puzzle in understanding our growth for the second half.

That's helpful, Rob. Guys, just a very quick word on the new customer additions being so strong, 200. Is it broad-based travel across segments? Was it education? A little more detail would be great.

Yes. I can jump in with that one as well, Darrin. So for this quarter, travel was the winner in terms of the most count, but only beat out education by a little bit. If you remember, our Q4, we said education beat out travel. So they're pretty close in that mix. I would comment that B2B added a good number of clients. Healthcare added, I think the same number of clients that they added in the prior Q1 period. And so overall, travel won out and had a great quarter, but education was very strong as well.

Next question comes from the line of Nate Svensson with Deutsche Bank.

I wanted to clarify something you said in response to one of Dan's questions earlier. So you called out a less extreme impact in Canada in terms of the number of permits being issued than what was originally feared. But at the same time, you just moved the full-year guide from a low teens impact to a mid-teens impact. So I'm just trying to understand what the delta is there that's causing it to be worse for the full year? Is it that the first half of the year is worse than you had expected? Is it lower recapture assumptions? Or is it just more uncertainty on sort of the timing of when that revenue comes through?

So this is Rob. I can jump in. So again, that commentary about the perception was trying to give people an understanding that there is more confidence in Canada that they now know how to proceed, they know how to proceed with their more standard processes, they do still need to work inside the cap, and they still need to undergo this ramp and comply with the new rules. Keep in mind that Q1 is behind us, right? So in terms of that effect in Q1, having grown slightly, that's what explains the expansion from low teens to mid-teens.

Okay. So all due to Q1 being worse than expected. Got it.

I mean there's multiple dynamics here, but that is the way to understand the overall effect. I mean the big picture trajectory here is Q1 is behind us and they are doing their ramping back for the rest of the year dealing with the new set of rules that they operate under.

I understand, thank you. My follow-up question is regarding your growth outlook for Q2. You mentioned the impact of foreign exchange in Canada, which explains why Q2 is expected to be slightly lower than your initial projections from three months ago. Observing the growth range, it appears there is roughly a 10-point difference between the lower and upper ends of your guidance, which is wider than the typical 6-point range you've provided in recent quarters. I’m curious about what you're observing across the business, beyond the foreign exchange situation in Canada, that might be contributing to some hesitation in your forecasts for the next two months of the quarter.

Thank you for your question. This is Cosmin. There are several factors to consider for Q2, and we want to ensure that we address them. As Rob mentioned, Canada is experiencing a gradual recovery, and we want to reflect that in our scenarios. Overall, we feel relatively optimistic about the midpoint as we are one-third of the way through the quarter and monitoring the trends closely. There's still more time to evaluate, and we want to ensure that we consider all factors as we move forward in the quarter.

Yes, Nate, this is Mike. The only thing I'd add is that we did not see a snapback in Canada. We made it clear that we are observing a return to a normal cadence of the admission process, and that's what we are aiming to address in our guidance.

Next question comes from the line of Jeff Cantwell with Seaport Research.

I want to confirm my understanding of your comments and see if there's anything that needs clarification. You provided an update in March regarding Canada. Since then, the situation in Q1 has deteriorated slightly more than initially anticipated, but it is now stabilizing and there are some signs of improvement. You mentioned that for the full year, there will be a mid-teens revenue impact in Canada, which is partially balanced by some recovery in other countries, referred to as mid-single digits. Is that correct?

That's spot on, Jeff.

Yes, exactly.

Okay. Great. My follow-up is, how do you arrive at a mid-single recapture? Additionally, are you currently noticing any areas similar to Canada emerging, or do you believe the global situation is more stable overall, particularly outside of Canada? Also, do you anticipate an increase in international student numbers in the medium to long term?

Let me begin by addressing the modeling question. In general, we communicate with our agents and others to understand how they plan to assist students in finding alternative destinations if they cannot go to their original choice. We believe this is a continuing macro trend. Based on our experience and discussions with our contacts in the field and agents, we have developed an estimate that aligns with our guidance for the year. We feel confident that we have adequately accounted for this. However, estimating students' behavior patterns and the various impacts can be challenging. Nonetheless, we believe we have effectively reflected this in our expectations for the year.

Yes. And I'd just say, Jeff, I mean, when we look at other markets, I mean, I made some commentary earlier around just the U.K. strength as an example. And so again, we see other markets. We know there's headlines out there, but again, we've continued to see really good strength. Canada was a pretty unique situation just with the way in which the permit allocations were not known, it kind of put a delay in that admissions process for the year that obviously impacted Q1, we still outperformed even with that mid- to high single-digit impact in millions in Q1 and the $1 million plus FX headwind in Q1. And so again, we're looking at the full year with strength and confidence knowing that it is a unique macro environment for us.

Next question comes from the line of Chris Kennedy with William Blair.

Rob, you talked about the pipeline in healthcare is up 100% year-over-year. Can you just talk about the changes in go-to-market strategy that's driving that type of growth in healthcare?

Yes, I'm happy to answer that. Thank you for the question. A couple of quarters ago, we mentioned that we were implementing several strategies to improve performance in that area. First and foremost, we made some changes to our team and appointed a very strong new head of sales for that division, and I think we're starting to see the positive impacts of that. The most noticeable change is evident in our pipeline, which has seen significant growth during the past period. That's likely the most important factor. Additionally, you can see from the supplementary materials we provided that we've put considerable effort into repositioning the business. We have demonstrated excellent returns based on our existing clients' performance and have introduced innovations in our integrated financing offering. All of these efforts are undoubtedly supporting our sales team's initiatives to enhance the pipeline. I would highlight that the combination of these factors is contributing to the growth in our pipeline.

Next question comes from the line of Andrew Bauch with Wells Fargo.

I just wanted to follow up on some of the remarks you made around the education environment and the uncertainty around where the regulatory environment would go. And you characterized it as a rephasing of policy. I'm trying to understand what is kind of the barrier we need to clear as far as getting that visibility, is it just the U.S. election? And are there any other historical patterns that we could look to, to kind of get a sense of like how this can kind of resolve itself?

Yes, it's Mike. In general, we've observed shifts in government policy for over a decade across various countries globally. Canada has been somewhat unique due to a government-imposed restriction on study permits. This led to uncertainty among clients and universities regarding the number of students they should admit, which affected Q1. However, the Canadian government has since provided clarity. This contributes to a gradual recovery. Our business is geographically diverse, as well as diverse in its sub-verticals and industries, which we see as a strength in navigating different climates. Last year, despite various geopolitical and macro events, we achieved 43% growth and a 540 basis point increase in EBITDA margin, even in Q1 amid two challenges. We're pleased with our growth and EBITDA expansion during these times. We view our diversity as a valuable asset, and it's not unusual for us to encounter changes in government policies and macro conditions over the past 12 years. Therefore, we are comfortable operating in this environment.

The Education business performed well in many areas. We mentioned the overperformance in the U.K. and we haven't specifically discussed Australia, but it also had strong growth. The U.S. experienced growth as well. All of these markets are doing well despite any climate concerns that may exist. China performed excellently for us, significantly contributing to our growth in the U.S. and the U.K. All of that remains strong.

Got it. I appreciate that. The follow-up question I had was on your capital allocation strategy. Given the valuation of the stock and your M&A strategy, how are you thinking about revisiting that strategy going forward? And where would you potentially lead into?

Yes, the Board has consistently engaged in discussions regarding our capital structure and will continue to do so. We have a proven history in mergers and acquisitions, and our strong cash position along with solid EBITDA generation provides us with various options. While there is nothing to announce at this moment, discussions at the Board level are ongoing. Additionally, we feel confident about the growth in our pipeline for potential deals. However, as I mentioned previously, we have strategic pillars and maintain financial discipline concerning those deals, which we consider in our investment decisions.

The next question comes from the line of Jason Kupferberg with Bank of America.

This is Tyler DuPont on for Jason. I wanted to start by just following up on Jeff's question. I know we talked about Canadian Visa permits repeatedly on the call. So I want to ask outside of Canada. There's been talk of similar legislation in some shape or form to limit the number of international students in other geographies, particularly U.K., Australia. And given that the U.K. was a meaningful contribution to the outperformance in the quarter, and you mentioned just on the last question that Australia has also seen strength, which is good to see. How are you seeing education in those regions, how that might be impacted by potential legislation and just sort of how we should think about growth in those regions if legislation like that does get passed?

Yes, this is Rob. I can expand on my earlier comments regarding Australia. Australia performed exceptionally well for us, showing growth that exceeded the company average. It has a substantial total addressable market with many students. We are continuing to grow with both existing clients and by adding new ones. It's important to note that, similar to many other places, our business tends to favor high-quality institutions. The regulatory discussions in Australia primarily targeted a different audience. Overall, we have experienced significant growth across Australia, and while we recognize that it could be even larger without these influences, we have factored this into our guidance. Meanwhile, our U.K. business has also been very strong, demonstrating solid growth. Recent policy changes in the U.K. over the past six months haven't hindered our performance; instead, we are successfully expanding our relationships with existing clients and activating new ones.

Yes. The only thing I'd add is just, I mean, international students' education, kind of the lifeblood of a lot of universities and colleges. I mean there are huge positive factors to the countries in which they're studying in. And I think you're going to see a shift. You're seeing different policies around the edges to tweak and adjust where those students are going and potentially areas of study and where those will be in different countries around the world, but it's a very positive trend that students want to travel and they want to further their education and places want them to come study there. And so I think you're going through some shifting of that. But again, shifting like this that we've seen over the last 10-plus years.

Okay. Understood, Mike. I have a quick question regarding free cash flow. What trends do you anticipate as we move into 2024 and beyond? Specifically, how should we view conversion rates or any insights on free cash flow?

We don't typically provide guidance on that. However, I would suggest that our EBITDA margin and trends offer a solid general outlook on our cash flows. So, that's a useful perspective to consider, even without delving into specific guidance regarding free cash flow. Adjusted EBITDA serves as a good reference point.

We have time for one more question. The next question comes from the line of Tien-Tsin Huang with JPMorgan.

I know the call is getting long, I want to add something separate, not Canada, just on network settlement, the Visa MasterCard credit card settlement of MDL 1720, I think the interchange reduction is straightforward. But I'm curious to hear your thoughts on surcharging. It feels like that would be a positive for your business. I know there's some of that happens now, but I guess to the extent that you embrace that or work with your partners and clients that could be an opportunity. Am I reading that correctly? I know it's early, but would love your thoughts, Mike, Rob, and Cosmin?

Yes, Tien-Tsin, thanks for the question. I would say, in general, I think we're supportive to see this kind of come to a resolution, and we're here to support our clients and however they choose to handle payment transactions. So I think I'd say probably too soon to say whether kind of positive trends for us or not. But again, we focus on what the customers want to do, how they want to deal with those transactional fees. And we can obviously do that and can implement that within our system. But again, kind of defer to our clients to handle those decisions.

Yes. Looking at the situation overall, we've mentioned before that our gross margins are under pressure, mainly due to the mix from some of our faster-growing businesses with a higher credit card mix. This results in a year-over-year decline in the range of 100 to 200 basis points. In Q1, we experienced a 200 basis point drop, nearly half of which was due to the foreign exchange settlement I mentioned earlier. This has impacted gross margin but is offset in our operating expenses. On an adjusted EBITDA basis, we do mitigate some of this, so the gross margin for Q1 was actually down closer to 100 basis points. However, looking at the longer term, we believe that the 100 to 200 basis point decline remains a reasonable estimate. Nonetheless, there are many factors at play, which may push us toward the higher end of that range as we progress through the year.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.