The Quick Read #2

On Adyen and Basic-Fit

Reflections on Adyen’s Capital Markets Day

The CMD of Adyen was a great moment for the company (and investors!). Adyen recalibrated its revenue and ebitda margin forecasts to more realistic levels, down from the previous revenue growth (in the +25-35% range) and ebitda margin targets (above 65%). The new targets—a net revenue growth in the low to high twenties and an EBITDA margin of over 50% by 2026—appear more attainable and grounded in current market conditions. I believe this move bolstered investor confidence, which was much destroyed after the recent earnings debacle, as it demonstrates Adyen’s ability to adapt and plan (…this time keeping shareholders in mind).

They also provided Q3 results, which surpassed street estimates, signaling a robust growth trajectory. The processed volume (TPV) grew 21% yoy, reaching €243bn, while net revenue grew 22% increase to c. €414m. These figures indicate not just a recovery, but an acceleration in growth.

I believe that Adyen’s operational strategies, particularly around hiring and cost management, are now reflecting a more balanced approach. While they have slightly reduced their hiring pace, they continue to invest in new staff, particularly in sales, to drive future business growth. Despite the lower revenue growth, Adyen has not announced significant cost-cutting measures, choosing instead to focus on strategic investments that will yield long-term benefits.

Another significant development is Adyen’s shift to (finally) providing quarterly business updates. For a company experiencing rapid growth in a market that is often not fully understood by investors, such regular and detailed disclosures are crucial to gauge progress. This move also shows Adyen’s commitment to transparency and accountability—the former being subpar in the past in my view.

As expected, Adyen is not resorting to drastic cost reduction measures, an approach that might seem counterintuitive given the revised (lower) revenue growth expectations. Instead, they continue to invest heavily in staffing, especially in sales roles, to fuel future business expansion. Their hiring patterns in 2022 and plans for 2023, though slightly lower compared to earlier targets, suggest an alignment with current market dynamics and a response to inflationary trends. From my perspective, this indicates a balanced approach, but time will tell if this is the right choice.

Adyen was very clear that it will continue to steer clear of dividends and share buybacks (in the near term). This choice aligns with their strategy to reinvest in the business, focusing on expanding their embedded finance offerings. I believe this reinvestment strategy, while potentially limiting short-term returns, positions Adyen to launch new products more effectively and maintain a solid capital base, the latter being crucial for regulatory compliance and long-term growth.

Adyen’s response to the competitive pricing environment in the US market (training their sales team to better handle pricing negotiations and competition) seems like a smart move. The company has refined its sales strategies to better communicate the value of its services, such as omnichannel capabilities and higher approval rates, to its clients. By emphasizing the value-added aspects of their services, Adyen is trying to differentiate itself from low-cost competitors. I believe this approach, balancing value with competitive pricing, is key to retaining and growing in the US—vital in a market where competitors like Braintree (owned by PayPal) offer aggressively low-cost services.

Lastly, the focus on embedded finance is a pivotal aspect of Adyen’s strategy. Offering a comprehensive suite of financial services is crucial for attracting and smaller companies on their platform and increasing ‘stickyness’. But this is not just about adding service value, but also about positioning Adyen competitively in the market (especially against firms like Stripe).

Overall, it is clear that Adyen’s sight remains on long-term success. This is a large, fragmented and rapidly growing market. There will we enough room in the future for a few select big players, and I believe Adyen will be one of them.

Some thoughts on Basic-Fit

One of the companies on my watchlist is Basic-Fit. The information released on its CMD provided some intriguing insights of what might lie ahead for the company.

One of the things that stood out was their intention to explore franchise opportunities (beyond their current markets). This strategic move to potentially expand into new countries aligns with their ambitious goal of reaching 3,000-3,500 clubs by 2030. This expansion strategy could significantly accelerate Basic-Fit’s growth and market penetration.

A critical point of discussion has often been Basic-Fit’s guidance for maintenance capex per club, which some have argued is too low. The company confidently reiterated their expectation of an average maintenance capex of €55,000 per club per year until at least to 2030, an extention of their previous guidance (to 2026). I believe this target was intended to address the concerns raised (since their IPO) about Basic-Fit’s commitment to maintain high-quality facilities (without overstretching the balance sheet).

The company’s outlook for 2023 includes achieving over €1bn in revenue and a >30% ROIC in mature clubs. Despite their impressive ytd network growth, with 202 new clubs (totaling 1,402), Basic-Fit provided relatively low guidance on underlying ebitda. But what’s more important is the projection of increasing memberships and average member revenue, pointing towards a robust growth trajectory.

Basic-Fit’s fine-tuning of overhead costs to 6-7% of revenue (down from the current 8%) and maintaining marketing costs at 5.5-6.0% of revenue indicates a strategic approach to cost management. Additionally, their plan to fund 1,600 new club openings until 2030 through cash flows underscores their operational efficiency (target). Not to forget, the leverage target of below 2.0x adjusted ebitda.

I believe the announcements at Basic-Fit’s CMD provided confidence and showed necessary stability, signaling new growth avenues for the next years. The franchise model, in particular, is an exciting development, and I’m eager to learn more about their specific plans. Despite the perhaps dissapointing ebitda guidance, I’m keeping this one of the watchlist. I believe that the market of discount fitness centers has much room to grow. This company has the potential to become a cash flow machine once the average number of mature clubs increases within the mix—but we are still far from reaching that moment.

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