Earnings Call Transcript - RVYL Q3 2024

Operator, Operator

Good afternoon, everyone, and welcome to Ryvyl Inc. Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's remarks. The second quarter end results press release accompanying this conference call was issued at the close of the market today. Our quarterly report on Form-10Q, which includes the company's results of operations ended September 30, 2024 was filed with the SEC today. A replay of this call is available at the Investor Relations section of the Ryvyl website in the Events/Quarterly Results session. As a reminder, this call is being recorded. Before we begin, I would like to remind you that today's call contains certain forward-looking statements from our management concerning future events. These forward-looking statements are based on the company's current beliefs, assumptions, and expectations regarding future events, which in turn are based on information currently available to the company and contain projections of future results of operations or financial condition or state other forward-looking information. By their nature, forward-looking statements address matters that are subject to risks and uncertainties. A variety of factors could cause actual events and results to differ materially from those expressed in or contemplated by the forward-looking statements. Other risk factors affecting the company are discussed in detail in the company's filings with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise except to the extent required by applicable laws. I will now hand the call over to Ben Errez, Chairman of Ryvyl. Please go ahead.

Ben Errez, Chairman

Thank you, operator. We delivered sequential revenue growth in the third quarter of 2024, driven by consistently strong international performance. In conjunction with recent business development successes, we believe we reached a turning point. We expect Ryvyl's top-line growth trajectory will continue to gain momentum exiting 2024 and into 2025. Our third quarter 2024 international revenue grew 96% year-over-year, even with two European software integrations postponed to Q4 2024, offsetting some challenges in U.S. operations. In October, these two European partners started activating business on these new platforms, marking a pivotal achievement that sets the stage for continued expansion in the region. In Q3, our North American licensing partner nears launch, building momentum and expanding our pipeline of opportunities. International transaction volumes continued a strong growth trajectory, rising from $781 million in Q2 2024 to an impressive $952 million in Q3 2024. This remarkable growth reflects the rapidly increasing demand for our PayFac licensing, banking as a service, and comprehensive support for money remittance across global markets with powerful API integrations, seamless foreign exchange, and real-time electronic fund transfers. We're delivering compliance and operational efficiency, empowering our clients to excel in global finance. Additionally, we expanded our Visa Direct integration to new countries, bringing our footprint to 13 of the targeted 80 countries. Through this initiative, we're tapping into Visa Direct's extensive network capabilities to fuel revenue growth and showcase our value to Visa. By leveraging Visa's payment enabler network, we're providing the infrastructure for efficient, secure electronic payments, empowering banks, merchants, and consumers to transact seamlessly across Visa's global platform. In the EU, we've experienced strong growth over recent quarters and developed a robust pipeline to drive further expansion. In the U.S., our business grew more than 10% sequentially in the third quarter. This is marked improvement, and we continue to diversify our business and gain traction into other verticals. I am pleased to report our private label partnership announced in August went live this week, and we expect to see initial licensing revenue starting in December 2024. This licensing arrangement enables us to reenter a high-risk vertical to a third-party partner via a private label approach under our payment processing as a service model. It highlights the power of a fully branded rollout of our e-wallet and POS merchant management system and website support. In this model, we handle deployment, maintenance, and system integration. Our partner is responsible for banking and operations of consumer transactions, ensuring merchant connectivity and compliance. This approach allows us to receive per-transaction fees, reduce our operational costs, enhance our margins, and minimize compliance risk. I'll now turn it over to our CEO, Fredi Nisan, for further insights into our competitive position, operations, and business development activities. Fredi, the floor is yours.

Fredi Nisan, CEO

Thank you, Ben. In recent months, we have achieved significant progress in winning new business deals and expanding our pipeline, both in the U.S. and internationally. Our focus remains firmly on onboarding new clients across multiple jurisdictions, laying the groundwork for what we anticipate will be a strong growth year in 2025. We are positioned to capture substantial opportunities as we continue expanding our reach. I would like to take a moment to highlight our competitive edge, value proposition, and the strategic focus behind our growth. First, our approach is targeted. We focus on high-margin market segments, specifically merchants and retail clients who are underserved by traditional processors or have lost access to the ecosystem altogether. By offering robust banking and payment solutions, we are able to target 40% gross margins. Our value is clear. We provide end-to-end processing and banking solutions for clients that larger processors prefer to avoid and that smaller competitors cannot support at sufficient scale. We deliver transparency, speed, and specialized processing capabilities for verticals that others cannot reach, along with customized turnkey solutions powered by advanced technology. No other acquiring solution leverages the blockchain ledger like we do, reducing overhead and errors, making it highly efficient and scalable. For example, through Hyperledger, we're now processing at speeds of over 3000 transactions per second, with regulatory compliance and rapid onboarding core to our business model. We excel in both areas, creating a significant competitive advantage in this high-potential market. Demand in this space is strong. We're well-positioned to meet these clients' unique needs, further securing our leadership in this growing market to maximize the impact of our resources and technology. We recently entered into a strategic partnership with a firm specializing in payment tech and digital processing. This collaboration allows us to onboard new verticals in North America. We will begin with an initial rollout for 1000 merchants across the U.S. and have significant potential for future expansion. Our product and service initiatives are generating enthusiastic responses and making a strong impact across key markets. I review some recent accomplishments in Q3 2024. We successfully launched Manna Card, offering a seamless alternative to traditional cash or card payments, and providing enhanced security and flexibility for users. This innovative app, complete with the new website and mobile capabilities, enables merchants to process prepaid gift cards with ease. By targeting high-demand sectors, NanoKard is positioned to capture high-margin processing opportunities for us and our partners. Our payback as a service model has also rapidly expanded our merchant network in Europe. We recently onboarded two large payback accounts. One is already actively processing, while the other is set to go live shortly. A third major account is in the final stages of closing. Together, these European accounts are expected to contribute $50 million to $70 million in monthly processing volumes, significantly strengthening our presence in this critical market. Without banking as a service offering supported by a robust API and global integration, we are enabling banks to extend their reach more effectively. This solution has gained strong traction in Q3 2024 with six new clients onboarded across Europe, underscoring the scalability and demand for this service. Central to our infrastructure, Ryvyl Fabric acts as our transaction highway, providing a cost-effective platform that simplifies blockchain integration with a multi-layered security structure, compatible with both Threes' Quota and Hyperledger frameworks. Ryvyl Fabric is set to power all of our product lines. We are fully prepared to support new partnerships reflecting our commitment to secure scalable blockchain solutions. Additionally, we started onboarding on NanoKard, further supporting our clients with secure streamlined payment solutions that are customized to meet their specific needs. These developments underscore our strategic focus on high-margin, high-demand sectors, positioning us to deliver industry-leading solutions that resonate across multiple markets. With this momentum, we are laying a strong foundation for sustained growth and further establishing our leadership in the global payment and banking solutions arena. I'll take a moment to add some context about why we are so excited about our current position in the industry and our growth opportunities. The shift toward credit cards, mobile wallets, and real-time payment systems is accelerating consumer adoption of new technologies, which aligns perfectly with our core strength and longstanding investment in proprietary payment and banking technology. While real-time platforms such as the FedMail service offer faster transactions, they face gradual adoption given the enduring popularity of credit cards. Meanwhile, increased regulatory scrutiny and antitrust actions are beginning to reshape competition and operations across dominant networks, impacting the broader payment processing and banking landscape. Advancements in AI and blockchain are driving improvements in fraud detection, transaction security, seamless banking integration, and Fintech startups are adding competitive pressure with their innovative cost-effective solutions. These trends are transforming the payment processing and banking landscape, creating an environment that favors agile innovators like Ryvyl. Looking ahead to 2025, we're excited by the momentum we're building. With recent deals closed and strong visibility into our pipeline, we are well-positioned to further diversify our customer base and revenue streams. This trajectory strengthens our business relationships and amplifies our reach through private and white-label licensing, setting the stage for continued growth and influence in the payments and banking industry. With that, I'll now hand the call to George Oliva, our CFO, who will review the financial results and provide an update on our 2024 financial guidance.

George Oliva, CFO

Thank you, Fredi. I'll review our third quarter of 2024 financial performance. Processing volumes across all channels reached a total of $1.123 billion, 6% higher than the second quarter of 2024 and 31% higher than the third quarter of 2023. International processing volumes were $952 million, up 6% from the second quarter of 2024, and North America processing volumes were $171 million, up 12% from the second quarter of 2024. Third-party software implementation slowed growth in the EU from our original expectations. However, those issues were resolved in October and we believe the double-digit gains in processing in North America point to the return of growth in the U.S. business. Revenue in the third quarter of 2024 was $12.6 million compared to $17.5 million in the third quarter of 2023. International revenue increased 96% to $9.8 million for the third quarter of 2024 compared to the third quarter of 2023. Cost of revenue decreased by $3.1 million to $7.7 million for the third quarter of 2024 compared to the third quarter of 2023, due to lower processing in North America, partially offset by an increase in processing volumes in the International segment. Gross margin in the third quarter of 2024 was 38.5% versus 38.2% in the third quarter of 2023. Operating expenses in the third quarter of 2024 were $7.3 million compared to $9.1 million in operating expenses in the third quarter of 2023, reflecting lower G&A expenses, professional fees, and R&D expenses. Other expenses totaled $2.1 million in the third quarter of 2024 compared to $600,000 in the third quarter of 2023, increasing primarily due to changes in debt discount accretion and in fair value of the derivative liability. Adjusted EBITDA in the third quarter of 2024 was a negative $1.7 million compared to $50,000 in the third quarter of 2023. During the third quarter of 2024, we repatriated $3.8 million from Europe to support U.S. capital resources. At the corporate level, as of September 30, 2024, the cash and restricted cash balance was $91.5 million, unrestricted cash was $4.3 million, and networking capital was negative. Most significantly, this week we announced a memorandum of understanding to restructure our balance sheet, which will strengthen our financial foundation and increase our financial flexibility for funding growth. Under the terms of the MOU, $16.5 million is to be paid for termination of our 8% senior convertible note and redemption of our series B convertible preferred stock. As of October 31, 2024, the outstanding note principal was $19 million and the liquidation value of the preferred stock was $53.5 million. For the full redemption of the preferred stock and redemption of a portion of the outstanding balance of the note, $12.8 million is to be paid in a first tranche on or before November 22, 2024. The remaining principal balance of $3.7 million of the note is to be paid on or before January 31, 2025. Turning to guidance, we reiterate that we anticipate processing volumes to grow year-over-year to over $4 billion in 2024. However, as discussed, several factors impacted revenue in the third quarter and the start of the fourth quarter. Thus, we are adjusting our revenue guidance for the balance of the year. Now, we expect 2024 total revenue to be in the range of $56 million to $60 million. Based on recent contracts and ongoing business development activities, we do expect to gain momentum throughout Q4 to be very strong with accelerating momentum into 2025. With our international segment comprising the largest portion of revenue in 2024 and 2025, we expect to resume substantial revenue growth in 2025 compared to 2024.

Ben Errez, Chairman

Thank you, George. In conclusion, Ryvyl is poised to resume strong growth in 2025. Europe has established strong growth trends and proven execution, and our North America segment appears to have bottomed from the downturn experienced earlier this year. As reported, double-digit sequential growth in revenue with recently closed transactions and our growing new business pipeline, we are excited about our plan for 2025 and look forward to updating you on our progress in the coming months. Before we open the call to analysts, there are several questions we received in advance of the call that we will address.

George Oliva, CFO

Yes. We're looking at approximately $1.3 billion of processing in Q4, 85% of that will be in Europe. The residual rate in Europe is about 1%, and the U.S. is closer to 2%. So, a blended average of just over 1.1% is how I would model the volume to revenue.

Fredi Nisan, CEO

Thank you very much, Ben. The most of the challenges we had were in Europe. Companies like ACI and Visa had a lot of different delays in going live and implementation. On our side, we didn't have a delay, but now Visa finalized their certification of Visa Direct. ACI received all their certification at the end of last month from First Data, and we turned this on and we start moving our merchants into ACI, and every new customer gets onboarded directly through the new gateway. So now we see a much faster onboarding, faster deployment, and implementation of our merchants. In regards to banking as a service, we had some delays with new banking relationships due to compliance. We overcame those as well, and we got some new banks that allow us to operate in different countries, especially in the Latin American side of that. But we are now back on track and we see the results already in November. Thank you, Ben.

George Oliva, CFO

Well, we are starting the planning process for 2025. It's not completed yet. There are a lot of moving parts and we will have that completed by January. But I think most companies don't have their plans yet at this point.

Fredi Nisan, CEO

Thank you, Ben. That's a great question. As we mentioned already, the first license deal went live. We're very excited about that. We have a few more in our pipeline. We cannot disclose them at the moment, but we're working really hard to bring more of such business. As for the verticals, some of them are in high risk, and some are in lower risk. What we like about the license deal is that we don't have the burden of compliance of the vertical itself. We're just providing the software, the infrastructure to move money, and we make money on every transaction that goes through the ecosystem. Most of that money is pure profit. So, we're really excited about the opportunity of other license deals that we're working on. Thank you, Ben. Thank you, Ben. What we see based on what we track as a company, we see huge growth in the cryptocurrency sector. The demand for converting fiat to crypto banking for consumers is something really big. We're also seeing a lot of money remittance in Latin America gaining a lot of traction as well. Regarding credit card processing, we see a huge shift, and many companies getting out of certain verticals that we are servicing today, resulting in a huge demand from our partners. We're building a very large pipeline for the next year. Thank you. Thank you, Ben. Yes, that's a great question. We have a great team in-house that specializes in unpacking the data. We have great tools and dashboards that we monitor daily. We have access to all data points of the company in real-time from volume, transaction, risk, compliance. We're monitoring all aspects of the business, and we can adjust as needed based on data that we receive. We can project numbers into the future, understanding what the business is going to look like in every quarter and every year, and we're getting better and better at that. It took us a little longer, but now we have full visibility into all data points of the company. Thank you.

Operator, Operator

Our first question comes from Michael Donovan with H.C. Wainwright. Please proceed with your question.

Michael Donovan, Analyst

Freddie, George, congrats on the quarter. Could you provide more details on the potential licensing partnerships in North America and their expected impact on revenue? Also, how do you foresee regulatory changes in the U.S. under the incoming administration?

Fredi Nisan, CEO

Okay. I'll deliver the mic to George.

George Oliva, CFO

The primary licensing agreement we are focusing on involves the exclusive processing of the vertical we exited in the first quarter. At its peak, we were handling a million transactions per month, and we are optimistic that we can reach that level again over time. This would primarily contribute to our profits. While we may see slightly lower revenue per transaction, we won't incur any associated costs. This process will take time, but I anticipate that we should observe significant volumes over the next year. The other licensing agreements are likely to be more modest, resembling a mini ecosystem where companies want to manage their own payments within their customer base. We will issue a press release regarding the next licensing deal as soon as it is finalized.

Michael Donovan, Analyst

Very good. Thank you, George. And then, just the second part of that question about incoming administration. How do you foresee any regulatory changes there?

George Oliva, CFO

Well, we're happy about the potential changes coming to the industry in general and the technology that pertains to our business in particular. We don't have any details as of yet, but we are familiar with the individuals involved and we look forward to their ideas and guidance for this industry moving forward.

Michael Donovan, Analyst

Fair enough. Appreciate that. What sort of M&A opportunities do you see for 2025?

George Oliva, CFO

I don't know that we're prepared to answer that question at this time. We have not looked at the M&A opportunities domestically or internationally for 2025. And even if we had one on deck, we would not be able to discuss it before disclosing it to the market at this time. So, I'm going to skip that question.

Michael Donovan, Analyst

Can you provide an update on Coyni?

George Oliva, CFO

So, we decided not to spin out Coyni. We have adopted Coyni technology throughout the company in the U.S. and Europe, and we've rebranded it internally. So, we're taking advantage of the technology, but it's not something that we're going to really talk about individually.

Fredi Nisan, CEO

We're going to have to say as well how the U.S. regulation will play out with the new White House and understand what is our next step. But at the moment in the U.S., it's a little difficult. Europe is still working on the infrastructure, but the technology is here live, and we're going to see what's going to happen next year.

Michael Donovan, Analyst

Thank you. I have one final question before I return to the queue. What sets apart the latest NanoKard platform upgrade from the NEMS score regarding market demand and competitive positioning?

Ben Errez, Chairman

That's a great question. Thank you. NanoKard is a closed loop that we are focusing that technology into more high-risk with gift card processing. It's a more aggregate, but we aggregate the payment. NEMS score has two sides to it. NEMS score, you have the acquiring side and the payment, what we call core banking. NEMS score offers payment wire ACH real-time payment, and the acquiring side offers licensing opportunities for pfacs for ISOs and agents. It offers streamlined onboarding and new technology that can help us onboard faster. Our main goal with NEMS is to offer those services and technology to our ISOs so they can onboard faster on their side, but NanoKard is focused on more high risk in a closed-loop environment.

Michael Donovan, Analyst

Appreciate it. Thank you, gentlemen, and congrats again on the quarter.

Operator, Operator

Our next question comes from Howard Halpern with Taglich Brothers. Please proceed with your question.

Howard Halpern, Analyst

Congratulations on the quarter. In terms of new customer acquisitions and using ISOs and using the technology to get new customers, how should we view that going into 2025, in gaining new customer acquisitions throughout the different verticals?

Ben Errez, Chairman

That's a great question. We don't disclose the amount of ISOs we have, but we are gaining more and more momentum with those partnerships, especially in Europe, due to some changes over there. One of the biggest changes is Worldpay, which belongs to FIS. They are shutting down in Europe and communicating with ISOs and partners that they are no longer going to support. So, we see a huge demand there in the U.S. under names. We appointed Christian Murray as the Managing Director. He is a veteran in the industry, and his goal is to bring as many ISOs and what we call super ISOs into NEMS. One of the new products that we put together is the ability for local ISOs and partners to submit and get access to Europe. That's something very unique that doesn't really exist in the U.S. today. We are leveraging our license in Europe, plus we created a bridge between the U.S. and Europe to open up for our ISOs that side of the world, and we see a huge demand for that. We are very excited about it. And the other side of the ISO is what I just mentioned regarding NEMS core. We're working very hard on onboarding new verticals, for example, insurance companies that want to be their own normal processors. They want to offer services to their own sub agents, like a franchise type, for example. They don't have the capability to build and manage on their own, and we're going to offer our technology as a white label for them to manage their kind of business under the NEMS umbrella.

Howard Halpern, Analyst

Okay. That sounds really good. And I'll go back and maybe try to enhance a little bit on the data science question. Is there a place or are you finding a place for like generative AI technologies in terms of the customer base, and maybe internally developing new technologies or getting technologies to market faster?

Fredi Nisan, CEO

Absolutely, actually, that's my kind of goal for 2025. In our business, one of the areas that takes the longest is development when it comes from idea to deployment. AI offers amazing opportunities to streamline and accelerate, especially in the front-end design, UI design, and go to market, actually, coming up with concepts that can be in the market not in six months, but maybe in a couple of months. So, we're absolutely researching that and looking into how to streamline and how to use those tools compliantly, but our team is on top of it. Additionally, we're using AI for earning calls. We're using AI in management, the dashboarding. We're using AI in KYC and underwriting. We're using it for transaction monitoring. We see a huge impact for 2025 that will be in the development side, to accelerate and reduce the costs and go to market faster because the market keeps shifting, and we need to be innovators and have our product ready as soon as possible.

Howard Halpern, Analyst

Okay. Well, thanks, and keep up the great work guys.

Fredi Nisan, CEO

Thank you.

Operator, Operator

There are no further questions at this time. I would now like to turn the floor back over to Ben Errez for closing comments.

Ben Errez, Chairman

Thank you, operator. I would like to thank everybody on this call for their time and attention. We appreciate each and every shareholder for the company. Anticipate further comments from us that pertain to the restructure of our notes coming next week. We will see you otherwise in the next earnings call. Thank you all for coming.

Operator, Operator

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