Remitly Global increases revenue but worsens operating losses (NASDAQ: RELY)

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A quick overview of Remitly Global

Remittly Global (NASDAQ: TRUST) went public in September 2022, raising approximately $523 million in gross proceeds from an IPO at a price of $43.00 per share.

The company offers a range of cross-border payment methods money transfer services worldwide.

Although the period ahead may present a variety of economic ripples and management continues to pursue a “growth at all costs” approach, I do not see any significant upside catalyst for the stock until Remitly take a significant step towards operational balance.

Therefore, I am waiting for RELY in the short term.

Remitly Global Overview

Remitly, based in Seattle, Washington, was founded to develop a platform that makes it easier and cheaper for people to send money across borders than traditional banking providers.

Management is led by co-founder, chairman and chief executive Matthew Oppenheimer, who has been with the business since inception and was previously employed by Barclays plc, a multinational bank.

The company’s main offerings include:

  • Mobile app

  • Website

  • KYC passbook and identity verification

In 2021, RELY’s sending and receiving country coverage map was as follows:

Enterprise market coverage in 2021

Enterprise market coverage in 2021 (SEC EDGAR)

The company focuses its development efforts on the more than 280 million immigrants and their families looking to send and receive money around the world.

85% of the user base primarily interacts through its mobile app.

Remitly Global Market and Competition

According to a 2020 market research report by Allied Market Research, the global remittance market was estimated at $683 billion in 2018 and is expected to reach $930 billion by 2026.

This represents a projected CAGR of 3.9% from 2019 to 2026.

The main drivers of this expected growth are an increase in population migration and growth in business remittances, as well as a greater number of businesses producing goods and services for export.

Furthermore, the graph below indicates that the banking segment will continue to dominate the global remittance market, at least until 2026:

Global remittance market

Global remittance market (Related Market Research)

Major competitors or other industry participants by type include:

  • Traditional service providers and banks

  • Digitally-focused cross-border providers

  • Cryptocurrency systems

  • Informal person-to-person channels

Recent financial performance of Remitly Global

  • The total turnover per quarter increased according to the following graph:

Total revenue for the 9 quarters

Total revenue for the 9 quarters (Looking for Alpha)

  • Gross margin per quarter also increased substantially:

Gross profit for the 9 quarters

Gross profit for the 9 quarters (Looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have recently increased, indicating that the business is becoming less efficient at driving revenue growth:

9 Quarter Sales, G&A % of revenue

9 Quarter Sales, G&A % of revenue (Looking for Alpha)

  • Operating losses per quarter have worsened sharply in recent quarters:

9 quarter operating profit

9 quarter operating profit (Looking for Alpha)

  • Earnings per share (diluted) remained significantly negative, as shown in the chart below:

Earnings per share over 9 quarters

Earnings per share over 9 quarters (Looking for Alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past twelve months, RELY’s share price has fallen 71.8% compared to the approximately 16% drop in the US S&P 500 index, as shown in the chart below:

52 week stock prices

52 week stock prices (Looking for Alpha)

Valuation and other measures for Remitly Global

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Enterprise Value / Sales

2.64

Revenue growth rate

55.3%

Net profit margin

-16.6%

% EBITDA GAAP

-16.1%

Market capitalization

$1,870,000,000

Enterprise value

$1,450,000,000

Operating cash flow

-$52,640,000

Earnings per share (fully diluted)

-$0.88

(Source – Alpha Research)

For reference, a relevant partial public comparable would be PayPal (PYPL); Below is a comparison of their main evaluation metrics:

Metric

PayPal

with moderation

Variance

Enterprise Value / Sales

4.19

2.64

-37.0%

Revenue growth rate

10.7%

55.3%

419.1%

Net profit margin

7.8%

-16.6%

–%

Operating cash flow

$5,980,000,000

-$52,640,000

–%

(Source – Alpha Research)

A full comparison of the two companies’ performance metrics can be viewed here.

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

RELY’s most recent GAAP Rule of 40 calculation was 39.2% in Q2 2022, so the company performed well in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

55.3%

% EBITDA GAAP

-16.1%

Total

39.2%

(Source – Alpha Research)

Comment on Remitly Global

In its latest earnings call (Source – Seeking Alpha), focusing on Q2 2022 results, management highlighted the growth of its active customer base, to 3.4 million active users.

The company continues to expand its geographic footprint, growing its usable addressable market by adding 900 new remittance corridors as people send money across borders more frequently.

Notably, management said they “did not notice a significant impact on customer behavior due to rising inflation or fears of a recession, as remittances are not a discretionary element from the client’s point of view”.

Additionally, the recent strength of the US dollar has actually helped increase customer activity, as customers in US dollar regions have likely increased their activity or rebate amounts.

Future growth markets include the Middle East and Asia.

As for its financial results, revenue rose 42% year-over-year to $157 million.

The company’s revenue retention rate was 90% and the Rule of 40 results were successful, almost reaching that important 40% metric.

RELY’s marketing costs increased in nominal terms, but management said in the quarter it produced new customers with an 11% lower CAC [Customer Acquisition Cost] from the first quarter as our teams identify efficiencies and raise our investment thresholds.

But operating losses rose sharply, as did negative earnings, in part due to the sharp increase in stock-based compensation.

For the balance sheet, the company ended the quarter with $429.7 million in cash and debt free.

In the past twelve months, free cash used was $55.4 million, so the company’s cash usage is increasing.

Looking ahead, management raised the midpoints of its full-year revenue and Adjusted EBITDA guidance, with revenue expected to grow 36.5% and Adjusted EBITDA (excluding actions and non-recurring items) of negative $32.5 million at the midpoint.

As for valuation, the market currently values ​​Remitly at a multiple EV/Revenue discount compared to PayPal, despite RELY’s revenue growing at a faster rate of growth.

The main risk to the company’s outlook is a slowdown in the global economy due to higher interest rates, reduced globalization and the fallout from the war in Ukraine.

Another risk is the company’s high and growing operating losses, which have been heavily penalized in the current stock market environment due to rising cost of capital assumptions.

A potential upside catalyst for the stock could include a “short and shallow” global slowdown if inflation is brought under control by mid-2023.

Although the period ahead may present a variety of economic ripples and management continues to pursue a “growth at all costs” approach, I do not see any significant upside catalyst for the stock until the company takes a significant step towards operational balance.

Therefore, I am waiting for RELY actions in the short term.

Sallie R. Loera