In line with previous periods, we saw continued profitable growth during the first half of 2020. We processed €129.1 billion in the period, up 23% year-on-year. Net revenue for the first half of the year was €279.9 million, up 27% year-on-year, with EBITDA at €140.9 million. Due to the continued diversification of our merchant base across verticals and geographies, the business has proven itself especially resilient in the first half of the year, despite the COVID-19 pandemic. Illustrative to this resilience is how online retail and digital goods volumes accelerated while travel1 and in-store volumes slowed down after global lockdown restrictions went into effect.
Several historical trends did persist over the past six months, as existing merchants contributed to over 80% of our growth, overall merchant concentration continued to decline, and volume churn was below 1%.
For the long term, the payments space continues to benefit from several tailwinds including the shift from cash to cashless payments, the increase in cross-border commerce and the blurring of lines between the offline and online shopping channels. In addition to these trends, the reopening of physical stores increases the need for merchants to work with a tech-first payments partner to facilitate contactless shopping experiences.
Due to the COVID-19 pandemic, the day-to-day of many of our merchants changed drastically. Therefore, our focus was to meet their needs in this ever-shifting reality. We have found our product suite to be particularly suited to rapid adaptations during these challenging times. When stores shut down we were able to help merchants move volumes online quickly, and in recent reopening scenarios we have facilitated several contactless in-store set-ups.
1 Airlines, online travel agencies and accommodation
In line with previous years, enterprise merchants already on the platform continued to be our largest growth driver both in the form of us winning additional volumes with them and their organic growth. While merchants’ priorities shifted during the pandemic towards themes such as operational resilience and business continuity, their interest in partnering with us remained unchanged. We continued to focus on onboarding volume at scale and were able to add enterprise merchants to the platform with timelines largely unaffected by COVID-19. The addition of leading names such as iFood, Fiverr and Delhaize to the platform underscores the success of our strategy in this space – offering a best-in-class solution to large merchants looking to future-proof their payments.
We partner with our merchants to solve for their complexities and typically win additional volume after successfully doing so. Illustrative of this land-and-expand approach is how our partnership with Zalando evolved over the past year. As a result of our ability to clear potential regulatory hurdles in the form of PSD2 last year, we recently grew the relationship to the point where we now process their European acquiring volume.
In the unified commerce segment, shoppers increasingly expect seamless experiences across sales channels – continuously driving the blurring of lines between offline and online. This longer-term trend was clearly reflected on the platform as we saw the number of merchants adding a second channel continued to increase in H1 2020. Recent additions to our unified commerce portfolio are GoSport and Pandora – underlining the ongoing success of unified commerce in the retail sector.
The day-to-day of merchants in the in-store retail and quick-service restaurant sectors was dominated by lockdown restrictions. We saw that merchants with a unified commerce set-up (i.e. processing both channels with Adyen) were more robust than single-channel merchants, as they were able to efficiently shift volumes to the online channel. With lockdown restrictions easing in some geographies and in-store volumes coming back, we see the surge in online volumes persist. We are ready to help merchants reopen safely, as the full range of our POS devices facilitates contactless payments.
For merchants without the online channel that had to move volumes online quickly, we were able to use Pay by Link, an easy-to-implement integration of our Checkout product, to help them do so and keep sales flowing during global lockdowns. We have seen remarkable uptake from merchants in the high-end retail sector, which has traditionally been very focused on in-store. In this space, Pay by Link was instrumental in providing tailored shopping experiences – now online.
In mid-market, we continued to invest in our long-term approach of moving into the next-adjacent segment to enterprise. We are investing in our plugin solution, our approach to partnerships and the expansion of our mid-market salesforce. Our value proposition to mid-market merchants is grounded in our ability to future-proof their payments set-up and provide access to the full strength of the Adyen platform via simplified integrations – so they can focus on growing their business. In the current macroeconomic environment, this facilitative approach translated into us helping these merchants navigate challenging times instead of imposing stricter measures across the board.
We offer our merchants a membership to ongoing innovation and work to facilitate their growth through incremental innovations. In line with this philosophy we improved RevenueAccelerate, our revenue optimization product, with enhanced machine learning capabilities to facilitate higher authorization rates. RevenueAccelerate automatically tests and runs multiple optimizations for every transaction on both the gateway and acquiring levels. This means that even if a merchant sees a card for the first time, we may have seen that card before and thus know how to best treat that transaction – consequently uplifting authorization rates.
On Adyen Issuing, the first half of the year was momentous as we are now live with the first Adyen Issuing transactions. We are working closely with our pilot merchants to further build out the product and are very excited about potential future applications.
To accommodate for the trend towards stronger authentication across the industry, including but not limited to the PSD2 regulation in Europe, we updated our 3DS2 product with a whitelisting feature. Our merchants’ shoppers are now able to identify our merchants’ brands as trusted beneficiaries, and after an initial two-factor authentication transaction skip the need for future checks. We see whitelisting being significant moving forward as it removes barriers to completing a purchase and have seen impressive first results.
Equally solving for regulatory complexity is Adyen for Platforms’ hosted onboarding feature, with progressive information verification and checks enabling a smooth sub-seller onboarding process. Facilitating compliance with local requirements with minimal required development work, this feature enables our merchants’ growth into new geographies at a higher pace. This allows for increased scalability of Adyen for Platforms, making the solution more attractive to merchants that run platforms. Additionally, with the expanded roll-out of eBay volumes underway, there has been a strong focus on building out the robustness of our Adyen for Platforms offering.
Adyen’s H1 2020 FTE growth
Adyen’s net revenue in key regions (by billing address in EUR millions) in H1 2019 and H1 2020
Net revenue for the first half of the year was €279.9 million3, up 27% year-on-year.
Diversification across regions continued in the first half of the year. Europe is still the largest contributor to net revenue with 63%, followed by North America (18%), Asia-Pacific (10%), and Latin America (9%).
On net revenue growth, North America (58%) and Asia-Pacific (28%) outpaced Europe (21%) and Latin America (15%).
Take rate was 21.7 bps in the first half of 2020, up from 21.1 bps in the first half of 2019. This delta is mainly due to the increase in full-stack volume in H1 2020. As previously noted, this is largely caused by the negative impact of global lockdowns on travel volume. Take rate continues not to be a driver for us, as the low cost of operating the single platform allows for a focus on incremental net revenue.
3 On a constant currency basis, H1 2020 gross revenue of €1,560 million would have been approximately 0.5% higher than reported. Please refer to Note 1 of the Interim Condensed Consolidated Financial statements for further detail on revenue breakdown.
Total operating expenses were €152.5 million in H1 2020, up 44% year-on-year and representing 54% of H1 2020 net revenue. Employee benefits are the main driver of our increased operating expenses.
Employee benefits were €87.6 million in the first half of 2020, up 60% year-on-year. This increase is mainly driven by our accelerated hiring pace over the past year.
Other operating expenses totaled €51.6 million in the period, up 27% from H1 2019. Sales and marketing expenses make up the largest part of these, totaling €21.4 million in the first half, up 59% from €13.5 million in the first half of 2019. As we continue to expand into new geographies and verticals, we feel our marketing efforts are key in supporting this growth.
H1 2020 Income statement
All amounts in EUR thousands unless otherwise stated
EBITDA was €140.9 million in H1 2020, up 12% from €125.8 million in H1 2019.
EBITDA margin was 50%, compared to 57% in H1 2019. This decrease is a result of our enhanced hiring pace, as growth in employee benefits exceeded net revenue growth in the first half of the year4.
Net income in the first half of 2020 was €78.4 million, down 15% from €92.5 million in the first half of 2019.
This decrease is primarily driven by the movement in other financial results, largely caused by the increase in the derivative financial instrument as a result of the increase in the Adyen share price in H1 2020.
Free cash flow was €129.3 million in the first half of 2020, up 15% from €112.4 million in the first half of 2019. We have now excluded lease payments from our free cash flow, as the costs associated are not included in EBITDA due to the IFRS 16 accounting change.
Free cash flow conversion ratio ((EBITDA-CapEx-Lease payments)/EBITDA) was 92% in the first half of 2020, up from 89% in H1 20195.
Capital expenditures were 2% of net revenue in H1 2020, down from 4% of net revenue in H1 2019. This falls within our objective to maintain capital expenditure levels below 5% of net revenue due to the low cost of operating the single platform.
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 EDT) today (August 20) to discuss these results.
To listen to a live audio webcast please visit our Investor Relations page. A recording will be available on the website following the call.
As an addendum to this letter, please find our H1 2020 financial statements and three one-page updates on our growth pillars (Enterprise, Unified commerce and Mid-market).
Enterprise volume in EUR billions
We provide enterprise merchants with industry-leading technology – so they never have to rethink their approach to payments.
While expanding the global footprint of the platform, we were able to add household names across geographies with timelines largely unaffected by COVID-19.
Increased diversification across merchant base, geographies and verticals highlight the success of the Adyen platform.
We continued to benefit from secular tailwinds – including the shift from cash to cashless, the increase in cross-border commerce and the global digitization of society.
POS volume evolution, including share of total processed volume in EUR billions
We saw an increase in merchants already on the platform adding a second channel – opting for the full strength of our unified commerce solution.
Merchants with a unified commerce set-up were able to quickly shift volumes online during global lockdowns – underscoring the robustness of our unified commerce solution.
Our ability to offer frictionless shopper experiences across sales channels led to continued success in the retail vertical.
The longer-term trend of shoppers expecting seamless shopping experiences across the in-store and online channels persisted in H1 2020.
Mid-market volume in EUR billions. We define mid-market merchants as merchants processing up to €25 million annually on our platform. In H1 2020, 4,050 merchants met this definition.
We continuously work to build out the product for mid-market merchants with a strong focus on simplifying their integration.
Our plugin solution and approach to partnerships increases accessibility of the Adyen platform to mid-market merchants.
Mid-market volume growth already taking off at the same pace as that of the enterprise segment.
We saw a continuation of mid-market graduates growing into the enterprise space, organically funneling volume into this segment.