Paysafe Holdings (PSFE)

[Dietl]

Forecast for results from H2 2021 Paysafe

 

[Dietl]

The biggest issue with the Q3 release was not the financial result, but the difficulty to understand the shift from an already low growth story to a no-growth condition. The surprise was so big I started questioning the sustainability of the business in current shape with word reset being used too many times in the presentation and the call. The capitulation trading of 254M shares with a 42% drop in price, and even today minuscule % increase on very heavy to average volume, indicates almost a loss of purpose/direction for the market and doubt the company can rebuild itself to growth, and compete effectively with others. The stock has attracted many who saw the caving, now trading for quick cash. The chaos now got messier. The retail which we all thought was going abandon the ship reinvaded the space based on cheap shares being dropped in millions per hour.

The big question is are we looking at existential risk, where Paysafe is going to try/fail to reinvent itself or a year-long temporary setback with set objectives and a strong comeback? It is hard to convince myself the comeback has the plan and I think many feel the same. But I am shell shocked. The complete trashing by analysts with $4 targets was likely a display of anger, a shock of being surprised by bad guidance, missed across four timelines, wow. No longer an investor can think the market does not understand, the fundamentals are great. The shrinking business model during the euphoria of online payments is an awful condition, which has troubled Paysafe, PayPal, and Square. However, the momentum and scale have devastated Paysafe, while just chipping some pedestals away from the other two. 

Using Twitter to address CFO Dawood was an interesting experience. Unusual and weird. Not that good in the afterthought as an opening to the public is also somewhat an act of desperation. Showing that shares were bought in DM format, seems that someone is also struggling to re-establish his purpose as an executive and to mingle with the troops/shareholders. The sense of massive screwup up is just irreparable at this point, no matter of social media acceptance of the guilt by him. I think McHugh got simply caught in the lie to deliver results, hoping for the best and planning for the best. As the tweets will show, now they are completely opposite. Sandbagging seems to be the game now.  

Interestingly, financial Q3 was not bad at all. Some points on the financial picture. $705M of new debt has been drawn. The debt analysis is in the pic. Looks like it can be managed painlessly in comparison to the horrors of expense in H1. Nobody cares about it. Dawood thinks Paysafe is a $8 company, he still thinks this has to be earned and not today.  

[Dietl]

Follow the answers as many were ask https://twitter.com/IzzyDawood/with_replies

[Dietl]

[Dietl]

Up to Nov 12th, Q3 IO. This update is only till Nov 12. Empty space means it was not filed yet. 

 

Paysafe IO Q3 Nov 12.pdf

[Agave1]

That's showing we lost a lot of institutions including Russell funds? 

[Dietl]

1 minute ago, Agave1 said:

That's showing we lost a lot of institutions including Russell funds? 

No, this is only up to Nov 12 filing, everything which is empty in Q3 column has not filed. Nobody to this point showed zero shares. So empty means not filed yet. 

[Dietl]

@Agave1According to Dawood, they have de-risked the guidance. It is too little too late, but they will meet every quarterly result. If they fail in Q4 I doubt any of them will have a job. I thought about something and I think it maybe crazy, but we all know Paysafe was manipulated like crazy from the day it become Paysafe. What if problems are real but they are exaggerated?  What if this entire situation was created to break the hold of manipulation? Very cynical, but how you explain a CFO suddenly popping in day before release socializing with shareholders. Then talking about issues, failures essentially being supportive, and buying 140K shares today? At this point nothing would surprise me. 

[Agave1]

15 minutes ago, Dietl said:

No, this is only up to Nov 12 filing, everything which is empty in Q3 column has not filed. Nobody to this point showed zero shares. So empty means not filed yet. 

Oh gotcha. That makes me feel better. 

[Agave1]

5 minutes ago, Dietl said:

@Agave1According to Dawood, they have de-risked the guidance. It is too little too late, but they will meet every quarterly result. If they fail in Q4 I doubt any of them will have a job. I thought about something and I think it maybe crazy, but we all know Paysafe was manipulated like crazy from the day it become Paysafe. What if problems are real but they are exaggerated?  What if this entire situation was created to break the hold of manipulation? Very cynical, but how you explain a CFO suddenly popping in day before release socializing with shareholders. Then talking about issues, failures essentially being supportive, and buying 140K shares today? At this point nothing would surprise me. 

So. I've thought about this as well. Look at most charts in their infancy and you'll see the same type of price action. 

If you knew it was manipulated why not just sink the ship temporarily anyways.

They get a cheaper entry for insiders and more stabilization. 

I believe they intentionally sunk the digital wallet and saved that news for Q3 ER. Look at the timing on the chart. It's all strategically done. 

They know it will drop the price. They can load up on shares etc and then rebuild the digital wallet. Everything else is performing well. They gave clues that businesses is booming. 

They probably know without sinking the ship now they would never have the momentum and would just float below $10 a shares for forever. 

They reset the game. Gave shorts the win now to get rid of them so they could win big in the next decade.  Izzy dropping a buy for 152k is almost 3/4 million dollars. You don't just do that randomly. 

They rebuild now. The story begins now. Retail is too scared to buy. But institutions and insiders can now just slowly accumulate. 

 

Sorry sounds crazy 🤣

 

 

 

 

 

[Dietl]

sounds crazy but not impossible. If I was Foley, would I be pissed, of course unless I knew. This may sound like Stockholm syndrome,  falling in love with the abuser (Paysafe stock) but selloffs were happening for no reason anyway. 333M shares traded, unless one held through, everyone else acted. The financials look pristine, but the write off, I hate those intangible assets, software companies have to write those costs off all the time. They removed $361.7M in 3 quarters, or 23%, a much better balance sheet to be honest. The debt is manageable. The integration is their next step, three acquisitions in 2 quarters. I think the journey continuous. If there was an air in the Paysafe balloon it is all gone. 

[Dietl]

[Dietl]

[Dietl]

[Dietl]

[Agave1]

14 minutes ago, Dietl said:

sounds crazy but not impossible. If I was Foley, would I be pissed, of course unless I knew. This may sound like Stockholm syndrome,  falling in love with the abuser (Paysafe stock) but selloffs were happening for no reason anyway. 333M shares traded, unless one held through, everyone else acted. The financials look pristine, but the write off, I hate those intangible assets, software companies have to write those costs off all the time. They removed $361.7M in 3 quarters, or 23%, a much better balance sheet to be honest. The debt is manageable. The integration is their next step, three acquisitions in 2 quarters. I think the journey continuous. If there was an air in the Paysafe balloon it is I dkt

If you step back and remove the FUD and WSB squeeze nonsense you can see they are simply rebuilding. 

Our mistake was we got in to early. 

Izzy said Phil is very competitive.  That's not the vibe I get. Which makes me think they are showing us an illusion.  Izzy seems confident as well. 

So. That leads me to my gut. There is obviously some opportunity happening here and it's probably something we aren't aware of yet. 

[Dietl]

10 hours ago, Agave1 said:

Izzy said Phil is very competitive.  That's not the vibe I get. Which makes me think they are showing us an illusion. 

Can you explain this statement? Are you saying they lied to us about the state of the business by creating an illusion of doing well? They have. All my analysis was based on what they provided, I would not buy a stock if they admitted that "they have work to do" If Paysafe was a house and basement needed a work, but seller described it as luxury renting opportunity for basement level apartment, then it would likely null the contract. I get work in progress lack of revenue and seen SPACs with plans like that but not coverup. They said it started in July? They made personal changes for this reasons in August, stock price was giving the signals and we all thought it was manipulation, but sellers knew. There was a behind the close door network who knew. But if Loeb knew, Tepper new, others knew why they held on October 4th? So now I am left with the bag thinking if they knew and they did not sell this is salvageable or is there something else? But 330M shares traded says someone did not know and sold, or perhaps they sold too, one can only learn between January and March 2022. Horrible live through unknown.   

[Dietl]

I see a discussion on Cannae selling shares in Q3 this link should help to explain it is an error ( I also saw this) https://www.sec.gov/edgar/search/#/q=Paysafe&dateRange=custom&category=custom&ciks=0001704720&entityName=Cannae%20Holdings%2C%20Inc.%20(CNNE)%20(CIK%200001704720)&startdt=2021-06-01&enddt=2021-11-13&forms=13F-HR

[Dietl]

I am going to be working on balance sheet review and draw some opinions. I must warn I have studied accounting, I have no accounting degree. I am married to accountant, with two designations, and can stand to her in accounting conversations, so anyone looking at this should not assume I am right. It is an opinion. 

Just a simple breakdown of the balance sheet for assets and liability and equity sections. salmon color indicates negative undertone, green positive undertone.

Customer accounts, very likely a snapshot, which may not be meaningful to anything dramatic however, it shows that this line dropped by $174M. I would not go that deposits has shrank in the wallets as an example but it less and it is worth watching. On the other hand the snapshot may also show improvement in completion of time for transactions. This is not a bank so money flows fast, and does not stay in the account for long. 

Settlement would be accounts in progress also lower, it would be seasonal versus end of the year, when more transactions to be had. Contingency dropping down is good. Below funds payable and amount due to customers shows a positive balance of $149M (sum of assets vs liability for the same assets). Paysafe has no deficit, this is a good sign.

Intangible assets, consist of Brands, software development costs, customer relationships and computer software. out $361M taken out from this account, $322M was taken for digital wallets in Q3. They have not shown what was impaired specifically for each line, likely software development and customer relationships as they seem to be the reset objectives. Ugly app/ and new ways to manage gateway for customers. 

The reduction of debt is a SPAC transaction result. I suspect number in Q4 will look like as $2.7B. If one assumes prior debt at $3.2B as something of a ceiling, there is clearly half a billion space for more borrowing. The rates are still great at $27M of interest expense quarterly or less for that $2.7B. For those who are curious what needs to happen to bring $2.765B from 5.4x, math looks like $2,765M debt-$262M cash= $2,503M/ $460M EBITDA, 5.4x, reverse this formula $460*3.5x =$1610M debt plus $262M cash =$1872M. In order to bring this down to level of 3.5x, $893M cash would have to be paid against the principal. In my estimates this is around $893M/($460M*70% or $322M) =2.8 years of free cash flow based on current dynamic. Bringing warrants to be exercised would produce some $603M, but it appears a very long order for the execution(5 years before expiration currently). 

The 2021 guidance does not include SafetyPay. The acquisition has not concluded yet, but 2022 guidance assumes it is concluded in 2021 and adds to 2022 guidance. Adjusting 2022 by $50M contribution, apparently de-risked so considered as bare minimum from SafetyPay, the organization is growing at the rate of 3% year over year. 

[Dietl]

Analysis of the 2021 guidance plus 2022 guidance and digital wallet impact. The company has lost $$2.2B in value because one segment is declining by 8% year over year. That is $31M. If the impact is greater than 8% it means other segments are doing better, hence a fix will have even better outcome. Looking at this I have a bit more hope. It will take 2 to 3 quarters of rebuilding of the reputation, any misses will be catastrophic. De-risking means to avoid that, but nobody is believing it. 

 

[Agave1]

1 hour ago, Dietl said:

I am going to be working on balance sheet review and draw some opinions. I must warn I have studied accounting, I have no accounting degree. I am married to accountant, with two designations, and can stand to her in accounting conversations, so anyone looking at this should not assume I am right. It is an opinion. 

Just a simple breakdown of the balance sheet for assets and liability and equity sections. salmon color indicates negative undertone, green positive undertone.

Customer accounts, very likely a snapshot, which may not be meaningful to anything dramatic however, it shows that this line dropped by $174M. I would not go that deposits has shrank in the wallets as an example but it less and it is worth watching. On the other hand the snapshot may also show improvement in completion of time for transactions. This is not a bank so money flows fast, and does not stay in the account for long. 

Settlement would be accounts in progress also lower, it would be seasonal versus end of the year, when more transactions to be had. Contingency dropping down is good. Below funds payable and amount due to customers shows a positive balance of $149M (sum of assets vs liability for the same assets). Paysafe has no deficit, this is a good sign.

Intangible assets, consist of Brands, software development costs, customer relationships and computer software. out $361M taken out from this account, $322M was taken for digital wallets in Q3. They have not shown what was impaired specifically for each line, likely software development and customer relationships as they seem to be the reset objectives. Ugly app/ and new ways to manage gateway for customers. 

The reduction of debt is a SPAC transaction result. I suspect number in Q4 will look like as $2.7B. If one assumes prior debt at $3.2B as something of a ceiling, there is clearly half a billion space for more borrowing. The rates are still great at $27M of interest expense quarterly or less for that $2.7B. For those who are curious what needs to happen to bring $2.765B from 5.4x, math looks like $2,765M debt-$262M cash= $2,503M/ $460M EBITDA, 5.4x, reverse this formula $460*3.5x =$1610M debt plus $262M cash =$1872M. In order to bring this down to level of 3.5x, $893M cash would have to be paid against the principal. In my estimates this is around $893M/($460M*70% or $322M) =2.8 years of free cash flow based on current dynamic. Bringing warrants to be exercised would produce some $603M, but it appears a very long order for the execution(5 years before expiration currently). 

The 2021 guidance does not include SafetyPay. The acquisition has not concluded yet, but 2022 guidance assumes it is concluded in 2021 and adds to 2022 guidance. Adjusting 2022 by $50M contribution, apparently de-risked so considered as bare minimum from SafetyPay, the organization is growing at the rate of 3% year over year. 

Thank you. What do you think about warrants and expiration? 5 years and they go worthless correct? They would need to turn this ship around within the next 4 years and get the stock price up to over $18 to be called. 

Is there any benefit to Paysafe to let warrants expire worthless? Might be a dumb question but I honestly don't know.  

[Alex R]

Dietl, I really appreciate the work you did. I am less optimistic than you are.

The reason is 3% growth and 2.7 B of debt. For the company with just over

350 million FCF it is too much. It is a long time till 2029 but they have to start

repaying the principal at some point. they can refinance of course but who knows

what be the rate in 2025 or 2026. I am going to give them a couple of years to see

what happens. Meanwhile I am going to sell Jan 2023 calls. What is your opinion 

on the SP in a year?  

[Dietl]

50 minutes ago, Agave1 said:

Thank you. What do you think about warrants and expiration? 5 years and they go worthless correct? They would need to turn this ship around within the next 4 years and get the stock price up to over $18 to be called. 

Is there any benefit to Paysafe to let warrants expire worthless? Might be a dumb question but I honestly don't know.  

The warrants are there for the reason. In general terms allowing to buy in cheaply when shares get pricey. Expiring warrants worthless is a bad business, so I would say moving them cashless would be the worst thing, in my opinion. There is a lot of chaos around Paysafe, a company and the stock. In my opinion a legit concern about quality of communications, fudging essentially, and not calling it a lie. However, I do not think this is business model. Yes there is a hiccup, nobody knows if fix will work, but my math shows 8% decline for 2022 on digital wallets is not a huge trauma to the system. It would be best if they changed the leadership, though.  CEO and CFO will go as he said and that is probably good, while CFO shows good abilities. At the end it would allow for a fresh air in the room. Then rebuild starts. As much as it sounds crazy today, $18 is not particularly high target, this is only $13B, can they do it, sure they can, but nobody believes it today, so counting on it is not a great strategy. Everyone is hurt, thinking straight is difficult. Stock is vulnerable, no surprise many are silent or retreating. Selling into panic is likely the worst thing to do, but holding is also sickly feeling nevertheless. 

[Dietl]

37 minutes ago, Alex R said:

Dietl, I really appreciate the work you did. I am less optimistic than you are.

The reason is 3% growth and 2.7 B of debt. For the company with just over

350 million FCF it is too much. It is a long time till 2029 but they have to start

repaying the principal at some point. they can refinance of course but who knows

what be the rate in 2025 or 2026. I am going to give them a couple of years to see

what happens. Meanwhile I am going to sell Jan 2023 calls. What is your opinion 

on the SP in a year?  

$350M is seen as next year, assuming they will never recover and have zero growth it would take them to pay it 8 years. right for renewal. I do not think this is that bad, because they will grow, or someone will grow them after they get sold. Dawood thinks they should be $8, if they get back trust. So he is very down to earth here. I have no price in mind for the next year as I do not know what they will do, but $4.50 they are cheap, At $5.7B PayPal could pay $10 per share plus the debt that's only $10B and many would love it. They are great target now, and M&A is certainly on agenda. There are many options on a table to get this fixed. Management has lied, and that is not cool. If I new they had issues, I would not buy it. They denied me that choice, that's almost criminal, almost because many companies in the course of business change guidance, but they should be more careful especially when stock was dropping like a stone. They should have warned in August, not a word. 

[Dietl]

I guess they have warned about Q3, which cause the drop. Now they did not communicated the struggles. They kept the 2021 guidance unchanged. If they changed it then likely we would get one 30% drop accumulated and we will be thinking of rebuilding now. Their actions has caused 42% drop. Perhaps they believed it was a quick fix, do not know how, as Patel joined in September when Q3 was done. Was he the one to say we are fucked? Another reason for McHugh to hit the road. 

[Alex R]

23 minutes ago, Dietl said:

$350M is seen as next year, assuming they will never recover and have zero growth it would take them to pay it 8 years. right for renewal. I do not think this is that bad, because they will grow, or someone will grow them after they get sold. Dawood thinks they should be $8, if they get back trust. So he is very down to earth here. I have no price in mind for the next year as I do not know what they will do, but $4.50 they are cheap, At $5.7B PayPal could pay $10 per share plus the debt that's only $10B and many would love it. They are great target now, and M&A is certainly on agenda. There are many options on a table to get this fixed. Management has lied, and that is not cool. If I new they had issues, I would not buy it. They denied me that choice, that's almost criminal, almost because many companies in the course of business change guidance, but they should be more careful especially when stock was dropping like a stone. They should have warned in August, not a word. 

What do they have Paypal has not? I do not think it might be 7 times revenue.

[Dietl]

6 minutes ago, Alex R said:

What do they have Paypal has not? I do not think it might be 7 times revenue.

Igaming, ecash, share of the market. Think at $1.5B revenue, PayPal spends $10B, that is around 7 times. It is a bargain, to corner the market as Paysafe will grow. Having it under one roof makes Paypal a bigger threat to anyone else. 

[Dietl]

Overlap of Q3 and Q2 slides show 200K users loss, 3.4M to 3.2M, that is about 5% down. 2022 has a guidance drop of about 8% for digital wallets.