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Europe’s darling fintech faces big challenges

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Adyen reported a big miss on first-half sales on Thursday. The news led to a $20 billion rout in the company’s market capitalization.

Pavlo Gonchar | Sopa Pictures | Light flare | Getty Images

Morale was high when the Dutch payment company Adyen listed on the Amsterdam Stock Exchange in 2018.

The company was riding a wave of growth in the European technology sector and was facing competition from its mega US rival PayPal.

Since then, the company has gone through a turbulent period, including a global pandemic that has significantly reduced travel customer volumes.

The company has expanded aggressively in North America, where some of its most prominent merchants are based, and has hired hundreds of employees to accelerate growth.

As the macroeconomic environment has changed in 2023, Adyen’s growth strategy has been challenged significantly.

The company’s shares fell 39% on Thursday, wiping 18 billion euros ($39 billion) from Adyen’s market capitalization as investors dumped the stock after the company reported weaker growth in earnings. revenue never recorded.

The stock closed a further 2.9% on Friday after Thursday’s steep drop.

What is Adyen?

Identified as one of the Top 200 Global FinTech Companies by CNBC and Statista, Adyen is a payments services company that works with clients including netflix, Meta And Spotify.

It also sells point-of-sale systems for physical stores and handles online and in-store payments.

More than a processor, Adyen is what is called a payment gateway, meaning it uses technology to allow merchants to accept card payments and transactions through online stores.

The company takes a small share of every transaction that passes through its platform.

It was co-founded by Pieter van der Does, the company’s chief executive, and Arnout Schuijff, former chief technology officer.

What just happened?

Adyen last week reported first-half results well below expectations. The company’s revenue of 739.1 million euros ($804.3 million) for the period increased 21% year-over-year, but showed the weakest sales growth of Adyen never recorded.

The analyst had forecast 853.6 million euros in revenue and 40% year-on-year growth, according to Eikon Refinitiv forecasts.

Adyen has generally been viewed as a growth stock, having consistently posted 26% half-year revenue growth since its stock market debut in 2018.

“With higher inflation, leading to higher interest rates, there has been a bit of a shift in focus – less focus on growth, more focus on the bottom line,” the Adyen’s chief financial officer, Ethan Tandowsky, to CNBC’s “Squawk Box Europe.”

Tandowsky insisted the company had “limited attrition” and none of its big customers had left the platform.

But fears that competitors in local markets, particularly in North America, will come up with cheaper deals have weighed heavily on the company’s outlook.

Adyen said in a letter to shareholders this week that its EBITDA (earnings before interest, tax, depreciation and amortization) margin fell to 43% in the first half of 2023 from 59% in the same period a year ago.

The company said this was due to weaker growth in North America and higher labor costs such as wages as it increased hiring during the period.

Tandowsky insisted that the company focuses more on “functionality” than its peers, even though those peers may offer cheaper services.

“The efficiency with which we can develop new features, features that outperform our peers, will lead to us gaining the market share we expect.”

Structural challenges

At the heart of Adyen’s woes is a company heavily dependent on customers’ willingness to stick to a single platform for all their payment needs. The company must also convince these users that what it sells is better than what is offered by a competitor.

In its 2023 half-year report, Adyen said many of its North American customers were cutting costs to deal with economic pressures such as rising interest rates and rising inflation.

“Companies have prioritized cost optimization, while competition for digital volumes in the region has resulted in cost savings versus functionality,” Adyen said in a letter to shareholders.

“This dynamic is not new and online volumes are the easiest to push back and forth. Amid these developments, we have consciously continued to assess the value we bring.”

Adyen also said its profitability suffered from a push to aggressively increase hiring. EBITDA stood at 320 million euros, down 10% compared to the first half of 2022.

Adyen added 551 employees in the first half of the year, bringing its total number of full-time employees to 3,883.

Some of the company’s rivals have cut their hiring drastically. In November 2022, Stripe laid off 14% of its workforce, or about 1,100 people.

The main challenge that Adyen now faces is competition from challengers who are willing to offer lower rates than they are offering.

Speaking to the Financial Times on Thursday, Adyen CEO Pieter van der Does said traders were “trying to explore local suppliers” to cut costs.

“It’s not that we’re shrinking – we’re just growing at a slower rate,” he added.

Adyen has always been a lean company, opting to hire fewer people overall than its main competitor Stripe, which has roughly double its workforce.

Simon Taylor, head of strategy at Sardine.ai, said Adyen could face a “natural ceiling” on the size of the business it can reach before having to cut margins to expand again.

“At the end of the day, they’re subject to the same macro headwinds as everyone else in e-commerce,” Taylor told CNBC. “And they still went up 21%. The incumbents would kill for that.”

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