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Adien (OTCPK:ADYEY) continues to perform well as management executed well on the medium-term targets set earlier in the company’s investor day.
Additionally, the company just concluded a two-year ramp-up Over the investment period, investment returns are likely to come in the form of accelerated net revenue growth and improved EBITDA margins in 2025 and beyond.
Finally, in North America, where most investor concerns led to the sell-off earlier in 2023, Adyen showed that the competitive landscape remains stable and that the company is executing well in the region and can continue to gain market share.
Strong results in 2H23
Adyen’s net income is 887 million eurosan increase of 23% over the previous year.
The increase in net income was due to As its existing customer base continues to grow, management emphasizes exceeding 80% Part of its growth comes from existing customers on earnings calls.
Processing volume increased by 29% compared with the previous year, reaching 544 billion euros, of which total point-of-sale transaction volume increased by 37% compared with the previous year, reaching 93 billion euros.
EBITDA increased by 14% over the previous year to 423 million euros, with an EBITDA profit margin of 48%.this is an improvement 43% EBITDA margin appears in the first half of 2023. The improvement in EBITDA margin was the result of Adyen slowing its hiring and accelerated investment phase in the second half of 2023, which it achieved despite two years of investment by its team.
Net profit exceeded EBITDA growth due to significant interest income earned during the period. Net profit increased by 48% to 416 million euros. Interest income grew significantly in the second half of 2023, increasing 450% from the previous year to 153 million euros.
Adyen continues to achieve a high free cash flow conversion rate of 93% and spends 2% of net income on capital expenditures.
For the full year of 2023, net revenue increased by 22% from the previous year to 1.626 billion euros, and processing volume increased by 26% from the previous year to 970 billion euros.
EBITDA in 2023 is 743 million euros, an increase of 2% from the previous year, while the EBITDA margin in 2023 is 46%, which is lower than the EBITDA margin in 2022 of 55%.
Capital expenditures as a percentage of revenue will decline significantly from 7% of net revenue in 2022 to 4% of net revenue in 2023.
Among the different pillars, digital sales grew strongly in the second half of 2023, up 33% from the previous year, as existing large customers grew well in the quarter. In the second half of 2023, unified business volume will grow by 24%, a stable growth, but it will be affected by the pillar retail business. Finally, platform sales grew 19% as the company continues to gain traction as SaaS businesses continue to view embedded payments as highly strategic to their business.
All in all, I think this is a very positive development for Adyen, leading not only to solid top-line growth but also the opportunity for margin expansion.
As hiring slows, operating leverage will emerge
Adeen introduced 313 New entrants will be welcomed in the second half of 2023, ending the company’s two-year accelerated investment period.
In the second quarter of 2023, Adyen gradually slowed down its recruitment in accordance with communication and expectations.
This marks the end of the recruitment cycle, as Adyen has now taken the company to the next stage of maturity, with the talent and expertise needed to achieve its goals.
As you might expect, the majority of employees in Q2 2023 came from outside Amsterdam in technical and commercial roles. This will continue to be a recruiting focus in the near term as Adyen looks to continue growing its workforce outside of Amsterdam.
Throughout 2024, Adyen plans to recruit only “a few hundred new joiners.”
This will allow operating leverage to play a role in the 2024 financials as hiring and investment phases slow down.
Management said the impact will be more significant in 2025 and 2026 than in 2024, given that hiring in 2023 will take time to ramp up, so it will take some time to show up.
While it may seem counterintuitive, Adyen’s profitability and balance sheet allow it to invest in a counter-cyclical manner when other companies are aggressively laying off employees and laying off employees.
I think this helps Adyen prepare for its next phase of growth while giving it the flexibility to make investment decisions and recruit in favorable markets.
Positive business indicators
In 2Q23, Adyen proved that its land and expansion strategy was on track, with over 80% of growth coming from existing customers.
Adyen’s customer base churn rate is less than 1%, which is consistent with trends the company has seen on its platform for some time.
Given Adyen’s investments in North America, North America remains an important growth driver. One of the main concerns for investors about Adyen is the North American market and whether the company can gain market share there given the competitive landscape.
Overall net income increased by 23% in the second half of 2023, while net income in North America increased by 27%.
Additionally, management emphasized that North America remains a strategic market, and Adyen continued to gain share in this market in 2H23.
One of the key drivers of net revenue growth in the second half of 2023 is the expansion of customer relationships in the U.S., which appears to be cash app.
Cash App has been an Adyen customer for years, initially starting on the international side, and now Adyen supports Cash App domestically in the United States as well.
Cash App’s win shows that its land and expansion strategy is working well for its largest enterprise-sized digital customers, as those customers still have significant numbers to add to the Adyen platform.
This victory in the United States also shows that Adyen still has an important position in digital markets such as the United States, so Cash App is willing to provide Adyen with large sales.
At the end of the day, most of these enterprise customers are working with multiple partners, and Adyen’s goal is to lower the total cost of ownership by becoming the largest and most important partner to these enterprise customers.
Management emphasized that the competitive landscape in the United States has not changed, and the growth we’ve seen from Adyen certainly doesn’t reflect that.
The growth we’ve seen from Adyen reflects the company’s focus on lowering total cost of ownership for customers, and as a result, this has resulted in Adyen gaining market share in the U.S., although it remains competitive.
Lower cost of ownership
I think Adyen has been trying to emphasize this point: customers are ultimately most impacted by total cost of ownership, and Adyen has been focusing on that across multiple of its pillars to drive market share growth.
Especially in today’s uncertain market environment, Adyen’s strategy of helping customers reduce total cost of ownership and thereby improve cost efficiency is effective.
For example, through S Group, Adyen is able to assist them both in-store and online, thereby increasing their loyalty and reducing total cost of ownership.
Within the digital pillar, Adyen helps clients such as World Remit and Klarna reduce fraud rates and increase authorization rates, thereby lowering total cost of ownership.
Finally, through the platform pillar, Adyen is helping customers like Centtrip embed payments into their products and expand embedded financial products.
Upside to 2025 and beyond
During its investor day, Adyen said it expects net revenue growth to average between 20% and 20% over the next three years.
For 2024, while management expects net income to be at the lower end of that range, they remain confident in this mid-term target as investments over the past two years are expected to bear fruit in 2025 and beyond.
Most of the investments and hiring made over the past two years won’t pay off until 2025 and beyond.
It’s a similar story when it comes to EBITDA margins.
While management expects EBITDA margins to grow in 2024 compared to the previous year, EBITDA margins will not increase as much in 2024 as in 2025 and 2026.
I do think the 2024 guidance is somewhat conservative.
The primary driver of net revenue growth in 2024 continues to be wallet share growth within the existing customer base. That said, Adyen is not factoring in strong growth from small customers in the second half of 2023, but rather an uncertain macro backdrop.
Valuation
As highlighted previously, given my conservative approach to Adyen’s financial forecasts, early financial forecasts are actually in line with the company’s medium-term plans, with revenue CAGR of 24% and EBITDA exceeding 50% in 2028.
My 3-year price target for Adyen is $21.85.
This is based on 35x 2026 P/E. For reference, Adyen has been valued at a premium over the past six years, with an average price-to-earnings ratio of 159 times over the past six years. Therefore, 35x is a reasonable P/E for the medium-term expected revenue CAGR of 24%.
in conclusion
Adyen has been officially re-rated following strong investor day and 2H23 results.
2H23 results were strong across the board, and while meeting expectations, 2024 guidance also looks conservative.
The key here is that, despite a similar competitive landscape, Adyen continues to gain market share in the U.S. as its continued focus on lowering total cost of ownership pays off.
Adyen’s improved communication with investors is also welcome as the market becomes more aware of the company’s business health. Arguably, investor uncertainty about Adyen’s competitive advantage and the competitive landscape in North America fueled the 2023 sell-off.
Additionally, I’m very happy to hold Adyen for the long term, as most of the net revenue growth and operating leverage gains will only be realized in 2025 and beyond as investments and new hires ramp up.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
