Prepared remarks
Greetings. Welcome to the Paysafe Second Quarter 2026 Earnings Conference Call. Operator provided instructions. Please note, this conference is being recorded. I will now turn the conference over to Kirsten Nielsen, Head of Investor Relations. Thank you, Kirsten. You may begin.
Thank you, and welcome to Paysafe's Earnings Conference Call for the second quarter of 2026. Joining me today are Bruce Lowthers, Chief Executive Officer; and John Crawford, Chief Financial Officer. Before we begin, a reminder that this call will contain forward-looking statements and should be considered in conjunction with cautionary statements contained in our earnings release and the company's most recent SEC reports. These statements reflect management's current assumptions and expectations and are subject to factors that may cause actual results to differ materially from those forward-looking statements. You should not place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. Today's presentation also contains non-GAAP financial measures. You can find additional information about these measures and reconciliations to the most directly comparable GAAP financial measures in today's press release and in the appendix of this presentation, which are available on the Investor Relations section of our website. With that, I'll turn the call over to Bruce.
Thank you, and good morning, everyone. If you're following the webcast, let's start on Slide 3. The second quarter and first half of 2026 marked an important inflection point for Paysafe. We delivered strong first half revenue growth of 7%, while adjusted EBITDA was essentially flat year-over-year, even as we deliberately increased marketing and IT investment to support the next phase of growth. Just as important, we have now resolved the major inherited matters that have weighed on the company for some time. This summer, we resolved the final legacy overhang from the SPAC through a settlement in principle with the Farzad litigation which involved legal claims brought by pre-SPAC shareholders. John will take you through the financial implications, but this resolution addresses a significant restructuring expense tied to our indemnification obligations related to this case. We also successfully refinanced a significant portion of our debt. We believe the trajectory of our net leverage ratio is the most important near-term driver of equity value, and we remain focused on reducing leverage as a meaningful value creation opportunity over the next 24 months. Together, these actions put us in a much stronger position to focus on what matters most from here, consistent execution, sustainable growth and disciplined deleveraging. In our view, the SPAC era is now behind us. We have returned the company to consistent growth, completed the portfolio rationalization and made major rebuilds across talent, technology, sales and product delivery. This is evident through our product vitality index, which is tracking towards 20% for 2026 compared to less than 2% just 3 years ago. Finally, I want to welcome Naj Atkinson, our new Chief People Officer. Naj brings nearly 30 years of global HR experience, including leadership roles at Hasbro and Dell. She joins Paysafe at an important time as we continue to strengthen our culture, develop future leaders and build on our recognition as one of the 2026 Top 100 Inspiring Workplaces in North America. Turning to Slide 4. I'll share a few additional highlights on our recent progress. We had another strong quarter with 3-month actives at 7.8 million, reflecting 5 quarters of growth, and we continue to see double-digit user growth in Latin America. While it's still early, the initial results of our incremental marketing spend across priority countries in Europe have shown double-digit growth in consumer acquisitions, which has translated into active user growth in those markets. Across these markets, our World Cup marketing initiatives helped drive customer engagement, acquisition growth and brand awareness. Through brand campaigns, strategic partnerships, influencer activations and targeted consumer offers, we expanded our reach to new audiences and strengthened our acquisition engine. These investments are delivering results today while creating a stronger foundation to drive long-term customer value. Our PaysafeWallet solution also continued to gain traction in Europe, where we are now live in 19 countries. The recent launch in Poland demonstrates how we can build on the strong consumer trust and adoption of PaysafeCard while extending that relationship into a broader wallet experience. By bringing everyday money movement into a single familiar platform, PaysafeWallet increases consumer engagement and expands our opportunity to deepen customer relationships over time. Finally, as a forward-looking highlight, we're pleased to preview our new partnership with Envision Racing, one of Formula E's most successful and innovative teams. This investment reflects our strategy of building brand awareness, reaching new audiences and fueling long-term customer growth across our priority markets. Formula E is one of the fastest-growing global motorsport platforms with an audience of over 550 million. They attract a highly engaged digital-native fan base at the intersection of sport, gaming and digital commerce, closely aligning with Paysafe's target audience and existing customer base. Through fan engagement, gaming, rewards and digital commerce experiences, we see an opportunity to introduce millions of consumers to our brands, strengthen customer acquisition and deepen engagement across our portfolio. More broadly, the partnership demonstrates how we are bringing our marketing and product strategies closer together to create differentiated customer experiences and support sustainable growth. With that, I will turn it over to John to discuss the financial results and outlook.
Thank you, Bruce. Let's move to Slide 6 for a summary of our second quarter results. Revenue for Q2 was $447.4 million, an increase of 4% on both a reported and organic basis. The FX tailwind in the second quarter was relatively small and last year's business disposal is no longer relevant to the comparisons since we lapped that in Q1. Our Q2 results also benefited from additional licensing data deals, which contributed $12.5 million as we continue to advance our strategy to commercialize data assets. This brings our first half growth rate to 7% on a reported basis and 6% on an organic basis with continued traction across our priority markets and products. This is consistent with the 6-K we issued two weeks ago in connection with our refinancing and in line with the expectations we communicated on our last earnings call. Adjusted EBITDA decreased 2% to $102.8 million in the second quarter and adjusted EBITDA margin declined to 23% compared to 24.5% in the prior period. As we previewed with you on our last call, this included an increase in marketing and IT investment of $7 million in Q2 and an incremental $16 million for the first half of 2026. Turning to cash flow. We generated $45 million of unlevered free cash flow with a 44% conversion of adjusted EBITDA. Q2 is typically a lighter cash flow quarter seasonally, coupled with some timing effects on receivables and capital expenditures. On a last twelve months basis, unlevered free cash flow was $298 million, an increase of 10% compared to the prior year and reflecting 69% conversion. I do want to point out that we expect to have a cash payment in the second half of $39 million related to the preliminary legal settlement. As a reminder, on an LTM basis, we had cash outflow of nearly $19 million and significant restructuring expenses of $57 million on the P&L related to our indemnification agreement and the associated legal costs for this case. So, this removes a significant drain on cash flow and the GAAP P&L. Adjusted net income for the second quarter was $23.1 million and adjusted EPS was $0.43, a decrease of 7% as the benefit of our reduced share count was offset by the decline in adjusted EBITDA and other income as well as a modest increase in interest expense. Turning to the segment results on Slide 7. Starting with Digital Wallets. Volume in Q2 was $6.6 billion, roughly flat year-on-year. Revenue from Digital Wallets increased 3% to $206.6 million with organic growth of 1% when normalizing for currency movement and interest revenue. Growth for the segment was driven by continued momentum and active user growth from both Latin America and PaysafeWallet in Europe. As we expected for Q2, the strong double-digit growth in these areas was partly offset by a decline from rest-of-world markets in which we're largely not active, coupled with short-term carryover effects in certain subverticals such as sweepstakes and cryptocurrency trading, which were relatively strong in Q2 of last year. Three-month actives increased 8% year-over-year, again, led by strong growth in Latin America and PaysafeWallet in Europe. Transactions per active user were stable year-on-year and average revenue per user decreased 5%, with both metrics influenced by the regional and product mix, including the strong growth from Latin America. Adjusted EBITDA for Digital Wallets was $74.9 million, down 9% year-over-year, and adjusted EBITDA margin for the segment was 36.2%, reflecting higher investments in consumer marketing, a VAT accrual adjustment related to distributor commissions and product mix. Without the VAT adjustment, which was approximately $4 million, and the increased marketing investment of $3 million, adjusted EBITDA margin for the segment would have been about 40%. Turning to the Merchant segment results. Volume increased 5% to $37.3 billion, resulting in revenue of $246.1 million, an increase of 6%, driven by iGaming volumes in North America and the benefit of additional data licensing deals, while the SMB business line was flat for the quarter. Adjusted EBITDA for the segment was $50.6 million, an increase of 28% and adjusted EBITDA margin for the segment increased 350 basis points to 20.6%, reflecting favorable mix as a result of the licensing deal and the release of a previously recorded accrual that was resolved during the quarter. Normalizing for the accrual release of approximately $6 million, the segment margin would have been around 18% for the quarter. Turning to Slide 8 for a summary of debt and leverage. At the end of the quarter, total debt was $2.5 billion, down $106 million versus Q4, mainly reflecting net repayments of $79 million as well as FX fluctuations which reduced total debt by $34 million. Our net leverage ratio was 5.3x at quarter end compared to 5.5x at Q4. And now factoring in the preliminary legal settlement and the debt refinancing fees, we expect to end the year with net leverage in the range of 5.1x to 5.2x. Lastly, on the right-hand side of this slide, we've included a supplemental cash walk in response to investor interest in better understanding our own cash balance. This separates Paysafe's own cash from customer accounts and other restricted cash, which is not available for general corporate use, making own cash the relevant measure for tracking net debt and leverage. Additional details for this walk are included in the appendix. Let's turn to Slide 9 to cover the refinancing. We are very pleased to have completed this transaction, which underscores our prudent approach to managing the balance sheet and liquidity. The refinancing extends our debt maturity profile, refinances a significant portion of our capital structure and upsizes our revolver while supporting our priorities to invest in the business and reduce leverage over time. We were also pleased with the reception in the market. Beyond the strong support from our existing lenders, we attracted a number of new bank and lender relationships as part of this transaction, pointing to confidence in the business from the debt community. Turning now to our full year outlook on Slide 10. We are reaffirming 2026 guidance for revenue and adjusted EBITDA while updating adjusted EPS to account for the refinancing, including the incremental interest expense in the second half. I will also note that next year, on a cash basis, the incremental interest expense is largely offset by the removal of the lawsuit indemnification costs I spoke about earlier. As for cadence in the second half, we expect revenue growth to be supported by continued traction across our priority markets, growth from recent client wins and continued delivery on our product priorities. We expect Q4 to be our strongest quarter of the year, consistent with the seasonality of the business and key sporting events, coupled with the benefit of the targeted marketing investments we have made on the consumer side. The business trends over the course of June and our early read on July's data support this outlook, including higher growth in iGaming from Merchant Solutions, continued strength in Latin America on the consumer side and double-digit growth in 3-month active users in July. Turning to SG&A. We expect roughly $25 million to $30 million of reduction in operating expenses in the second half compared to the first half. This reflects the elevated credit losses in Q1, the front-loaded marketing and IT investments as well as some additional operational efficiencies. Putting that together, our full year outlook is intact, and we're focused on strong execution in the second half to build momentum for 2027. Now I'll turn the call back to Bruce for closing remarks.
Thank you, John. To wrap up on Slide 11, the message is straightforward. With the refinancing complete and the significant litigation matters resolved, we are entering the next phase of Paysafe's evolution from a stronger position. Sustainable growth and continued operating excellence remain essential. They generate the free cash flow that funds deleveraging, which should ultimately support a higher valuation multiple. A simple illustration, we believe every $200 million reduction in net debt, holding all else equal, equals roughly $3 to $4 per share without multiple expansion. But for shareholders today, we believe the pace of deleverage is the primary value driver. Our capital allocation priority is therefore clear: generate strong free cash flow and direct the substantial majority of it to debt reduction while continuing to invest in the high-return initiatives that support growth and product vitality. With that, John and I are happy to take your questions.
Questions and answers
Operator provided instructions. Our first question is from Matthew Inglis with RBC Capital Markets.
This is Matthew Inglis on for Dan Perlin at RBC. Can you just walk us through some of the factors that give you confidence in the second half adjusted EBITDA ramp? In the past, you've talked about a portion of that second half ramp coming from new products being rolled out in the back half of the year. So I'm just curious if that's still on track.
Yes, Matthew. I'll let John walk you through the walk for the back half of the year. But yes, we remain confident in our NPI; our vitality index is tracking as we expected, but I'll let John walk you through the mechanics.
Yes. I think of it as two components. On the revenue side, think of it as roughly one-third, one-third, one-third between scheduled launches and ramps, customers that are signed and active and ramping, one-third of pipeline which is new sales and forward ramp, and one-third of current trends, which are the items we're seeing and highlighted from July: continued strength in Latin America, robust consumer active growth and so forth that are ahead of what we expected. On the cost side, we had some substantial fraud losses in Q1 and front-loaded marketing and IT investments. Those combined to about $26 million, and that's roughly how we get to our $25 million to $30 million of SG&A-related improvement in the back half of the year. Q4 should be the largest beneficiary if you're thinking about the shape of that SG&A, where we'll be coming out of the year in Q4 at a run rate that's substantially below the full year SG&A number and probably below 2025's SG&A number on a run rate basis.
And just as a follow-up, on the Digital Wallet side, how much of Digital Wallet growth is now actually coming from Latin America at this point? And as that Latin America portion of the Digital Wallet business increases, what does that mix do to the margin profile?
It's a meaningful piece, but Latin America is still relatively small. Even with LatAm growing north of 30%, you're talking about a P&L that's north of $100 million against a multi-hundred million dollar overall P&L. So it's impacting, but it's not the only source. The gross profit profile in LatAm is generally in line with the overall segment margin. It's lower than the core wallet solutions and more in between the two: some of it looks a little more like eCash, and as PaysafeWallet ramps and scales, it ought to look and feel more like the core wallet businesses. But today, it's in between the eCash and core wallet business from a gross margin standpoint.
Operator provided instructions. Our next question is from Jamie Friedman with Susquehanna International Group.
I appreciate the incremental disclosures and these slides are really helpful, like this cash walk on Slide 8. But John, if you could just walk us through what the interest expense obligations look like going forward versus what they were previously. Am I reading this right that there's a $30 million to $35 million step-up in interest expense going forward? Or am I oversimplifying it?
You are reading it correctly. That number includes some amortization of upfront costs and that sort of thing. On Slide 9, we tried to clarify the roughly cash increase in interest costs. In simplest math, if we did all of the term loans without a stub and with a plus or minus a 200-basis point increase in spread, we would have been looking at about $30 million all in. We've got a stub that's going to continue to run here at the lower rates. And so that's how we get to the roughly $25 million of incremental cash interest.
And then your math, Bruce, is interesting on the equity — the value that accrues to equity from the debt reduction. So do you have long-term objectives in terms of that 5.1 net leverage ratio that you're targeting for year-end?
Thank you for asking that. So it was a question that came up often during the lender process. Our midterm goal is 3.5x net leverage.
I think of it as about the same as before. The difference now is we're really focused on a few other things than that and we're trying to make that messaging clear. With Bruce's illustration at the end of the call, and certainly at today's stock price, there's a lot of value we can drive without multiple expansion, just paying down debt and growing EBITDA by about the same amount that we're trying to grow EBITDA this year. So that's why we're trying to get that messaging really clear externally as well as internally.
Operator provided instructions. Our next question is from Timothy Chiodo with UBS.
I was hoping we could take a little bit of a deeper dive into the 5% Merchant Solutions volume growth and break down some of the components broadly speaking. So the contribution coming from newer customer additions of the new cohort, particularly with some of the sales efforts, there would be a same-store sales component and then, of course, a churn component. And then for this quarter in particular, particularly at the latter part of the quarter, there was the iGaming bump from the World Cup. I was hoping you could just quantify what that might have contributed to the 5% alongside those components.
Thank you, Tim. So we have a general walk we use. On the SMB side, there was a slight improvement in attrition. You see a little bit of a slowdown in the existing customer same-store sales category. Then you're still seeing strong growth in new sales and NPI initiatives. So generally in line with what we had forecasted previously and consistent with our expectations in that space. Regarding the World Cup, it was successful and exceeded our expectations in Q2 and candidly into Q3. For us, that is a small piece of our total revenue stream. When you look at sports betting as a whole, it's a small component of what we do. So while it exceeded our expectations, it doesn't drive a material impact in the quarter.
No problem. And we didn't talk about Clover much, but is there any broader update you could give on your Clover trends or if there's anything changing there from either a pricing or competitive aspect or any comments around Clover capital traction? Any broader update around the Clover portion of your business would be appreciated.
Clover is still doing exceptionally well. It's a great product and performs very well in the marketplace. We're not seeing pricing pressure. Our Clover revenue is up double digits. We feel very strongly about the continued success of Clover. One of the questions that came up in the lending process was just pressure around pricing of the point of sale; we don't see that. We also buy in bulk, which offsets some pricing narratives. We feel very good about Clover and our relationship with Fiserv. We also see some nice lift from value-added services, especially the lending product which has done exceptionally well.
Operator provided instructions. Our next question is from Leah Rosenstein with Susquehanna.
So my question is, could you quantify the licensing revenue you discussed and by that I mean, what was that from? And do you expect these to recur?
Yes. In the past, we started a variety of new product initiatives, which we categorize under a vitality index. Data is one of them. We have access to a tremendous amount of data, both on the merchant and consumer side. We began about 18 months to almost two years ago building out a data foundation layer that allows us to monetize the data in a variety of ways. Internally, we use it for algorithms on attrition and fraud, customer engagement, and we drive a lot of value out of the data infrastructure we've built. About a year ago, we reached the point where we could start monetizing it as a product. We anticipate this is going to be a recurring revenue stream. Over time, as we build this new product, we think it could be north of a $50 million annual run rate product for us, maybe a little more as we uncover the true value around the consumer side of the data.
We have reached the end of the question-and-answer session. I would like to turn the floor back over to Bruce Lowthers for closing comments.
Thank you. To summarize, we delivered second quarter results in line with expectations and first half growth of 7% continues to reflect solid progress across our priority markets and products. We've also taken important steps to strengthen the balance sheet. The refinancing of our term loans and revolving credit facility extends our maturity profile to 2030 and increases financial flexibility while preliminary resolution of our major legacy litigation removes significant overhang. These actions leave us with a more resilient capital structure and clear strategic foundation. We remain focused on disciplined execution, continued deleveraging and durable growth opportunities as we look ahead. I want to thank the team for their work with the refinancing and also with the litigation resolution. It's been a really busy second quarter to say the least, and I truly appreciate everyone here at Paysafe and the work they put in to get us to this point, closing out our SPAC era. So, thank you very much for joining the call today.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.