Sustained profitable growth and evolving applications of the single platform
August 22, 2019
In a continuation of historical trends, we saw strong profitable growth in the first half of 2019, predominantly due to enterprise merchants already on our platform. This growth came in the form of the organic growth of these merchants, as well as through winning additional volume with them in new geographies, channels, and product lines. While existing merchants were the main contributors to growth in the first half of 2019, we also added a number of household names to the platform, including Postmates, Muji and OYO Rooms.
We processed €104.6 billion in the first half of the year, as we continued to benefit from several secular tailwinds, including the increased digitalization and internationalization of commerce. As in previous periods, volume churn was <1%.
We continued to follow our merchants’ expansion into new regions in the first half of the year – notably adding capabilities in Africa. We view the build-out of our global payment processing capabilities as an ongoing process, led by the needs of our merchants. Our innovation is always aimed at solving their pain points. Following this merchant-led approach, we also added key local payment methods to our platform in the first half of 2019 – including Open Banking in the UK, M-Pesa in Kenya, and several local partnerships with Apple Pay and Google Pay. These local payment methods are essential to increasing conversion and authorization rates, especially in markets with lower credit card penetration.
In a reflection of our changing merchant mix and maturing acquiring capabilities, full-stack volume share (volume for which we earn both a processing and settlement fee) increased to 71%, up from 70% for full year 2018 and 61% for full year 2017. This full-stack, or end-to-end, solution delivers most value for merchants, so we are excited to see this trend continue.
Over the past 18 months, we saw increased traction in the domain of marketplaces. This business model evolved rapidly over the past decade with the development of large marketplaces empowering smaller sellers on their platforms. Never before has global commerce been so readily available to so many buyers and sellers. Catering to the increasingly complex needs of these marketplaces requires a unique combination of expertise in payments, regulatory environments and technology – all capabilities we have proven to possess. To help these marketplaces grow, we launched our MarketPay product, and have been able to land leading companies, including eBay and Etsy.
As a result of our philosophy of building to benefit all merchants - and iterating based on merchant needs - we are now seeing new applications of our MarketPay product, beyond the realm of online marketplaces. Across many geographies and industries, commerce platforms are emerging that cater to a large number of smaller businesses. These platforms often have vertical-specific capabilities (e.g. Teesnap for golf courses) and include payments in their service offering. In the first half of the year, we adapted the MarketPay product to also support these platforms – even including in-store payments. This marks a real shift in the space – as small business owners now have access to the full Adyen solution through these platforms, allowing them to offer their shoppers a unified commerce experience.
These enterprise-level partnerships with marketplaces and platforms allow us to empower smaller sellers without running into the scalability issues that building out an SME-focused support organization would bring about.
We believe that our success in this arena is due to our speed of innovation, facilitated by our flat organizational structure. In this environment the best ideas gain traction quickly and development is fast. This allows us to react to market developments – like the evolution of new business models – with more speed and more deliberately than others in the industry.
Our speed of innovation is also a strength when dealing with shifting regulatory environments, such as the upcoming introduction of PSD2 (Payment Services Directive 2) in Europe and the associated SCA (Strong Customer Authentication), a source of much consternation in the industry. This speed is illustrated by our first-to-market 3D Secure 2 product; an expansion of our product suite which has seen impressive early traction. Uber, Match.com and Zalando are among the leading names deploying it globally. Our speed, combined with our merchant-focused development philosophy, allows us to turn regulatory shifts like PSD2 into an opportunity. Preemptively clearing potential hurdles like these is a crucial part of the membership to innovation that we offer our merchants.
While we continue to grow the business, we believe that maintaining our culture is critical to our success. We only hire up to our rate of absorption. Following this approach of measured growth, we added 114 FTE in the first half of 2019, to a new total of 987, which is consistent with earlier half-year periods. For reference, end of year 2018 was 873, and end of year 2017 668 FTE.
Our new hires in the first half of the year were mostly in tech (41%) and commercial (39%) roles. Senior management continued to invest significant time and energy into our rigorous hiring process, ensuring every prospective Adyen employee meets with at least one board member prior to being hired.
With our June 2018 IPO now in the rear-view mirror, we see that going public did not markedly impact the way in which we work together at Adyen. We are delighted to see our focus paying off here. This is a company that we want to build for the long term.
Adyen’s H1 2019 FTE growth to 987 (873 FTE as of end of year 2018)
Adyen’s H1 2019 FTE growth to 987 (873 FTE as of end of year 2018)
We processed €104.6 billion on our platform in the first half of the year, an increase of 49% year-on-year, mainly as a result of the growth of merchants already on our platform. This growth mirrors the 50% year-on-year processed volume growth we saw in the second half of 2018. As mentioned previously, settled volume (i.e. ‘full-stack’ volume for which we earn both a processing and settlement fee) was up to 71% in the first half, reflecting our merchant mix and growing acquiring footprint.
First half point-of-sale (POS) volume totaled €11.0 billion – accounting for 11% of total first half processed volume, and up 67% year-on-year.
Net revenue was €221.1 million in the first half of 2019*, up 41% from the first half of 2018. Illustrative of the strong net revenue growth over the past years, first half net revenue was higher than full year 2017 net revenue of €218.3 million.
Net revenue growth was again well-diversified across regions, with double digit year-on-year growth across North America (46%), Asia-Pacific (43%), Europe (41%) and Latin America (36%).
Europe remains the largest contributor to net revenue, comprising 65% of total net revenue for the first half of 2019, followed by North America (15%), Latin America (10 %) and Asia-Pacific (9%).
We saw a continuation of the trend of decreasing merchant concentration on the single platform in the first half of 2019. This evolution underscores the strength of our global offering, and the quality of the merchants we have continued to board onto the platform over the past years.
* On a constant currency basis, H1 2019 gross revenue of € 1,144.2 million would have been approximately 3% lower than reported. Please refer to Note 1 of the Interim Condensed Consolidated Financial statements for further detail on revenue breakdown.
Adyen’s net revenue in key regions (by billing address in EUR millions) in H1 2018 and H1 2019
Total operating expenses were €105.6 million in the first half of 2019, up 17% year-on-year. These represented 48% of H1 2019 net revenue. Employee benefits were €54.8 million in the first half of the year – up 26% from €43.6 million in the first half of 2018 – as we continue to invest in the growth of the team.
Other operating expenses totaled €40.5 million in the first half of 2019, down 5% from €42.7 million in the first half of last year. This was mainly due to the adoption of IFRS 16, an accounting standard in which costs related to lease contracts were previously included in other operating expenses and are now primarily included in depreciation and amortization expenses*. As previously disclosed, there was also a contribution from higher housing costs associated to our Amsterdam office and costs associated with the IPO in the first half of 2018.
Sales and marketing expenses in the first half of 2019 were €13.5 million, up 18% from €11.4 million in the first half of 2018 – as we continue to invest in increased brand awareness, especially in regions outside of Europe.
* Due to the effects of IFRS 16, EBITDA margin is 3% higher than it would have been without the adoption of this new accounting standard.
EBITDA for the first half of the year was €125.8 million, up from €70.3 million in the first half of 2018. This is an increase of 79% year-on-year on the back of operational efficiency and the accounting change resulting from IFRS 16 explained above. EBITDA margin was 57% for the period.
Net income for the first half of 2019 was €92.5 million, up 92% from €48.2 million in the first half of last year. This trend mirrors the 90% year-on-year net income growth we saw in H2 2018.
Free cash flow was €117.6 million in the first half of 2019, up 88% from €62.7 million in the first half of 2018. Free cash flow conversion ratio ((EBITDA-CapEx)/EBITDA) was 93% in the first half of 2019, in line with what we reported for the second half of 2018.
Capital expenditure remained stable at 4% of net revenue, primarily due to the scalability of the single platform.
* Please refer to Note 13 of the Interim Condensed Consolidated Financial statements for further detail.
We have set the following financial objectives, which remain unchanged from our IPO prospectus.
Net revenue growth: We aim to continue to grow net revenue and achieve a CAGR between the mid-twenties and low-thirties in the medium term by executing our sales strategy.
EBITDA margin: We aim to improve EBITDA margin, and expect this margin to benefit from our operational leverage going forward and increase to levels above 55% in the long term.
Capital expenditure: We aim to maintain a sustainable capital expenditure level of up to 5% of our net revenue.
We will host our earnings call at 15.00 CEST (09.00 ET) today (August 22) to discuss these results.
To listen to a live audio webcast, please visit our Investor Relations page at adyen.com/ir. A recording will be available on the website following the call.
As an addendum to this letter, please find attached our H1 2019 financial statements and three one-page updates on our growth pillars (enterprise, unified commerce, mid-market).
Pieter van der Does
Solving problems for enterprise merchants continues to be our bread and butter. We have seen this segment develop positively in the first half of 2019.
Enterprise volume evolution, including share of total processed volume on the platform (%) in EUR billions.
Shopper behavior is evolving, and new shopper expectations are pushing merchants to new frontiers. We are at the vanguard of this shift – helping merchants navigate the new age of retail.
POS volume evolution, including share of total processed volume on the platform (%) in EUR billions
Access to the full Adyen solution is now available to more businesses and sellers than ever before. We have simplified the integration process and we are focusing on educating merchants to get the most out of our platform.
Mid-market volume evolution, including share of total processed volume on the platform (%) in EUR billions.
Focus on plugins and partnerships, increasing availability of Adyen solution to mid-market merchants.
Continued innovation in product, simplifying integration process and back end
Build-out of Customer Success team focused on mid-market merchant education
High-growth mid-market merchants now contributing to enterprise volume due to their success.