Not So Deep Dive: Remitly Stock
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(Ryan) What they do: “Remitly is a leading digital financial services provider for immigrants and their families in over 135 countries around the world.” For anyone that’s unfamiliar, remittances (in the context we’re using today) are money transfers to other countries primarily from immigrants. So a family member will leave their home country for a new job and every once in a while send back money to their family.
I’m going to steal a passage from a writeup that our friend Luis did when he covered Moneygram, “The cross-border money transfer industry has significant barriers to entry. Every country requires a money transfer license and there are strict and specific compliance standards due to the need to ID customers and trace funds in order to prevent money laundering and other illicit financial transactions. Furthermore, there are significant operational and logistical challenges involved in operating a global payments network with hundreds of local and regional partners.”
So Remitly offers a simple and reliable way to send money over a mobile-centric platform. The way it works. (1) someone sets up and makes an account (2) They choose the recipient they want (3) they choose how much money they want to send and how fast they want it to get there (either express or economy) and (4) the method of delivery. (either a bank deposit, a home delivery, a cash pickup, a mobile delivery, or a debit card deposit).
And Remitly generates revenue in two ways from that process. The first is transaction fees charged to customers. These rates can vary depending on the corridor and the delivery method. And the second way is foreign exchange spreads. This is the difference between the FX rate offered to customers and the FX rate on the company’s currency purchases.
(Ryan) History: Remitly was founded by Matthew Oppenheimer, Shivaas Gulati, and Josh Hug. Because of the problem that Matt (the CEO) was able to identify, the 3 of them began working on a solution to solve that problem in 2011. According to GeekWire, “The initial idea for Remitly was not actually a remittance service itself, but a search engine to find remittance services.” But they quickly pivoted away from that when they realized that wouldn’t work.
When they started building the product that exists today, they came across tons of legal hurdles. Another anecdote from GeekWire stated, “Chris DeVore, the lead investor for Remitly’s seed round, recalled having fingerprints taken and completing personal financial disclosure for regulators in each U.S. state. “Building a regulated financial services company like Remitly isn’t for the faint of heart,” he said.”
But eventually, they tacked on new corridor after new corridor, and today, they offer exchanges over 1,700 different corridors. Those come from 17 “send countries”, most notably the US, and 115+ “receive countries”, and they comprise over 75 different currencies. And they went public on Sep. 23rd. (HQ’d in downtown Seattle)
280 million immigrants globally, up from 180 million in 2000, so this is a growing market
$1.5 trillion in remittance volume annually
$40 billion in transaction fees annually
Competitors: Moneygram, Western Union, Wise, Xoom are big competitors
Cryptocurrency and/or any central bank digital currencies could prove as a competitor too
Banks are technically competitors but are way behind the ball on this stuff
(Ian) Management and Ownership:
The CEO and one of the co-founders is Matt Oppenheimer
The inspiration behind Remitly came when Matt was working for Barclays in Kenya and saw how difficult it was to send and receive money overseas. He saw all of the hurdles that people had to overcome just to transfer money.
The other co-founder and COO is Joshua Hug
Combined, they own about 6% of the company
Very focused on building peace of mind with customers
They’ve highlighted it as the major key to their business
Market cap of $4.65 billion, ticker RELY
Based on FY 2021 revenue guidance, P/S of 10.3
P/GP of 22 using trailing gross margin
Not many other relevant valuation metrics but market expense decreasing as a % of revenue is likely how they will get to strong profit margins
(Ryan) Earnings: Only been public for a quarter, so I’m gonna give mostly trailing numbers
For the full year of 2020, Remitly processed $12.1B in send volume (70% more than 2019)
On that, the company generated $257M in revenue, up 103% YoY
The gross margin for the year was roughly 57%. Up slightly from 2019. (but the company has to pay substantial transaction expenses, so that’s going to cap gross margin potential) (Also customer support costs could be included here since they seem to be pretty variable).
$29M operating loss for 2020
Adjusted EBITDA, which actually isn’t all that bad of a metric for this business, was -$20M for the year. (-8% adj. EBITDA margin)
And they had roughly 1.9M active customers by the end of 2020. Double the 2019 figure.
Most recent Q:
2.6M active customers (Up 8.5% QoQ and 51% YoY)
Positive adj. EBITDA for the Q. (That’s fine just track SBC. Last year it accounted for 2% of revs and this Q accounted for 4%). If that gets out of whack, Adj. EBITDA might not be a great measurement.
And they’re projecting between $445-$450M in revenue for the FY
(Ian) Balance sheet and liquidity:
Cash of $443mm
Disbursement pre-funding of $109mm
Basically, these are the funds that have already been transmitted to recipients, before it has received the cash from the customer
Also about $80mm of Customer funds receivable
I think it's related, maybe a different stage in the process, but I’d like to know more about that
It does seem somewhat capital intensive. Need to have funds to transfer.
Have a low-interest rate, undrawn revolver
(Ryan) Never used it. But I’ve seen advertisements for it at LA soccer games. LA and SoCal in general are one of the largest immigrant areas in America, so that seems like a logical place to advertise.
Future growth opportunities:
(Ryan) To touch on Brett’s point, I think the API segment could be massive if I’m understanding it right. This would offload the legal hurdle for new fintech and would enable cross-border payments. “Can’t someone just do it themselves?” Venmo and Cash-app can’t even do it aside from 1 corridor. Aside from that, I think the name of the game is expanding within existing corridors. And I think that the referral program might be the best way to do that. If these customers are sticky, why not pay up a little bit.
(Brett) Remittance for Developers. This is a new segment that offers an API to allow businesses to hop on Remitly’s platform and bring remittances and international transfers to their banking account or mobile wallet. I’m unsure what the unit economics of this are but I bet Remitly is getting a take rate on all payment volume and/or when the API is pinged. For example, Novi (which is owned by Facebook) is a digital wallet that uses a stablecoin for cross-border transactions, and they are using Remitly’s API. Highlights that not even Facebook can replicate this business easily.
(Ian) Lending. There have been hints that Remitly is going to get into lending. In doing research I stumbled across a job listing for “Head of Lending.” “Reporting to Passbook's VP of Product, you will lead a team to launch our lending program and own the P&L. Going from zero-to-one will require you to be hands-on day-to-day while simultaneously charting a longer-term vision and strategy.” They could be the major lender for immigrants, and as I am sure someone will touch on Passbook, this fits in nicely to the finance app for people who have to send remittances.
Highlights and lowlights:
(Ryan) Highlights: Great branding. Robinhood-like marketing with an actually helpful product. Financials really check out. All in all, the business passes with flying colors. Lowlights: Feels like every business looks good in their S-1. There’s probably some low-hanging fruit that still needs to pivot to a digital solution, but they’re going to have to win market share from Wise and Moneygram. 2 material weaknesses recognized.
(Brett) Highlights: The industry checks off the “durable” and “moat” boxes, easy path to growth if they can execute, and I love the Remitly for Developers idea (although I do not know how large it is). Lowlights: Hard to determine who is the clear winner among the competitors, unproven profitability, and they haven’t had a 10-K yet.
(Ian) Highlights: I like their pillar of being “mobile-centric.” The bet on mobile in the developing world seems smart to me. Higher revenue per customer than Western Union despite lower fees. Lowlights: I think they are right about pricing (can’t just charge a fixed percentage), but that may limit growth potential. Fees per customer will likely be capped.
(Ryan) They continue to grab market share. This is a big market. There are apparently 47 million immigrants in the US alone. The bull case is pretty optimistic. They can get to 15 or 20 million active customers globally and sustain their annual ARPU. Add on any growth from API’s and you’ve got a business that should be substantially larger than $4.5B.
(Brett) Volume, customers, and revenue durably grow at a 20% - 30% rate over the next five years. At a P/GP above 20, that seems to be what you need to be confident in. They create a different/better experience for all parties with the stuff we outline above.
(Ian) Remitly becomes the bank and financial center for anyone who sends remittances. They are able to add profitable services to the remittance business which serves as customer acquisition. Grow from 3% market share to 20% market share (WU at ~17%)
(Ryan) Either competition minimizes Remitly’s ability to grow or the legal hurdles come down and Remitly’s value to immigrants isn’t as valuable. I don’t think that 2nd one is a big concern.
(Brett) Competition from Wise, Moneygram, and Western Union makes this a tough business to gain share without an established brand. The other bear case is cryptocurrency but I would fade that because they already have crypto partners for Remitly for Developers which shows that the crypto companies need them. However, there also could be a world where Diem dominates and kills a lot of this business.
(Ian) This turns into a commodity, remittances are free, and the global, fee-free option emerges, killing Remitly’s business before they add additional services.
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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.