Payoneer Global Inc. (NASDAQ:PAYO) Q1 2023 Earnings Call Transcript

Payoneer Global Inc. (NASDAQ:PAYO) Q1 2023 Earnings Call Transcript May 9, 2023

Payoneer Global Inc. misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.03.

Operator: Good morning. Thank you for standing by. Welcome to Payoneer’s First Quarter 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers’ remarks, we will open the line for your questions. As a reminder, this conference call is being recorded. I would now like to turn the call over to Michelle Wang, Payoneer’s VP of Investor Relations.

Michelle Wang: Thank you, operator. With me on today’s call are Payoneer’s Chief Executive Officer, John Caplan and Payoneer’s Chief Financial Officer, Bea Ordonez. Before we begin, I’d like to remind you that today’s call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available in the Investor Relations section of our website. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today and the company does not assume any obligation or intent to update them, except as required by law. In addition, today’s call may include non-GAAP measures.

These measures should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today’s earnings press release, which is available on the company’s website. Additionally, in line with our commitment to enhancing investors’ understanding of our business, please note we have posted a new earnings presentation supplement alongside our earnings press release on investor.payoneer.com. With that, I’d like to turn the call over to John to begin.

John Caplan: Good morning, and thank you all for joining us today to discuss our first quarter 2023 results. On today’s call, I will discuss our business momentum and provide a progress update on the priorities we outlined in February. Bea will then cover first quarter financial results and our increased 2023 guidance in more detail. Payoneer is helping SMBs in the fastest-growing emerging markets to compete in the global economy. We enable customers in over 190 countries and territories to pay, get paid and manage their funds and scale their businesses. Our opportunity is significant. There are hundreds of millions of emerging market businesses, who need a modern global financial operations partner, and Payoneer is the best positioned company globally to serve them with our trusted financial platform, scalable network and infrastructure.

In February, we articulated three core strategic priorities. Number one, deliver strong and sustainable revenue growth; two, focus our acquisition, product road map and service model on Ideal Customer Profiles or ICP and three, build our next-generation technology platform. Taken together, this work is positioning our company for step function growth in future years. Our team is making strong progress at a good pace. Payoneer started 2023 with strong financial and business results. We generated 40% revenue growth year-over-year in the first quarter, driven by new customer acquisition, adoption of our high-value services, diversification toward higher take rate geographies and interest income from increasing customer balances held on our network.

Adjusted EBITDA increased $28 million year-over-year to $39 million, representing a 20% adjusted EBITDA margin. We generated over 25% year-over-year revenue growth in each of our six regions, including over 70% growth in Latin America. We drove over 50% year-over-year growth in key countries, including Vietnam, Argentina, Mexico, Colombia and UAE. Payoneer’s revenue is more diverse geographically than ever before. We are focused on this and will continue to drive our revenue diversification. In line with that strategy, we are now providing revenue by geography in our quarterly reporting. Payoneer continues to lay the foundation for multiyear growth. There are a few specific highlights that I’d like to share. We extended our global partnership with Airbnb for another three years and expanded the number of routes that we serve.

We extended our relationship with Upwork for another three years and expect our business to continue to benefit from the global shift towards remote and outsourced work. We added new marketplace relationships across the globe, including Miracle [ph] in the US, OnBuy in UK, and PKay Fare [ph] in China. We launched a collaboration with Zoho to provide payment solutions to SMBs and freelancers working globally in India, Australia, New Zealand, the UK, and the Philippines. Zoho customers are now able to leverage an integrated solution to invoice their customers via the Payoneer platform. We expect, over time, this will increase both our AP and AR volumes. We established a new go-to-market team on the ground in Poland and underscored high-growth, large potential market for us to penetrate.

And lastly, we are incorporating AI in our onboarding processes. We expect this will drive increased efficiency, lower our CAC and reduce the time it takes to onboard ICPs. Led by our newly hired Chief Growth Officer, we are taking a rigorous data-driven approach to evaluating our sales and marketing resource allocation with a view towards optimizing for growth and ROI. We are actively evaluating and adjusting how we allocate resources across the emerging markets we serve. This includes assessing our spend related to certain acquisition channels that we have determined to deliver customers that do not meet our ideal customer profiles. Additionally, we are assessing how we can further bundle our suite of services to grow share of wallet to drive retention and most importantly, increase ARPU.

I’d like to dimensionalize the scale of our cross-sell opportunity. Today, nearly two-thirds of our customers get paid into their Payoneer account from only one source of accounts receivable, and they utilize only our withdraw to bank feature. While the impact will not be immediate, we are working to drive more AR into each customer’s account to increase the adoption of our commercial MasterCard. We think how we market and price our capital solutions, introduced pricing frameworks that incent adoption of multiple products and most importantly, simplify the bundles of products we sell depending upon industry, geography and size. We’re strongly encouraged that a greater percentage of our B2B customers use multiple products, and they generate a 50% higher effective take rate versus non-B2B customers.

B2B AP/AR volumes increased 23% year-over-year on an apples-to-apples basis, which adjusts for the impact of customer terminations in Q3 of 2022. Overall, B2B volumes increased 2% year-over-year. It’s important to note that the size of the average receivable is down approximately 11% for our B2B customer portfolio likely reflecting external macroeconomic factors. While volume growth is below our expectations, we exited the quarter with strong customer acquisition momentum. It requires focus and time to build strong, scalable processes for a new business line B2B AP/AR, we have demonstrated momentum in our B2B business, and we believe these long-term investments will drive growth and serve as a competitive advantage in the over $5 trillion cross-border B2B market.

We continue to see strong adoption of our commercial card and checkout products. The penetration for each is in the low single digits, again, highlighting the opportunity to deliver enhanced value for our customers and increase our ARPU. For our virtual Commercial card, we increased usage by over 50% and more than doubled penetration year-over-year, and we see a lot of exciting growth and runway ahead. Today, our card is used by only 2.7% of our customers. We continue to enhance this product. For example, we recently enabled customers to self-serve on board to our cashback program via their Payoneer account. This will enable interest received rewards monthly and enable Payoneer to increase card usage and maximize customer acquisition and retention.

Payoneer Checkout continues to generate positive early results and we have increased the number of merchants using Checkout by over 50% quarter-over-quarter. We continue to monitor progress and traction closely and remain optimistic about the long-term potential of our merchant services. Lastly, we continue to evaluate product-driven M&A opportunities that are core to our strategy and will help us deliver continued revenue growth and grow the moat around our emerging markets infrastructure. We believe M&A will play a meaningful role in our growth strategy and are actively evaluating opportunities. As we shared in February, approximately a quarter of our customers generate most of our volume and revenue. Today, we have approximately 500,000 of these customers that fit our Ideal Customer Profile or ICP.

And beginning in 2023, we are actively shifting the way we acquire engage and manage our business to focus on this cohort. That is why we are sharing as a new disclosure, the number of active ICPs, and we believe this will be a useful metric going forward in measuring our progress. In the first quarter, we grew active ICPs by 9% year-over-year, 50% faster than overall customer growth. I am encouraged that the number of the largest of these active ICPs, those with greater than $120,000 of trailing 12-month activity grew twice as fast at 18% year-over-year and reflecting our continued investment in high potential regions. In the first quarter, we grew the number of active ICPs by approximately 20% year-over-year in Latin America and EMEA. One note, it is important for investors to understand that our strategic shift and focus on ICP is new.

And as a global organization, this is an early step towards driving profitable growth for Payoneer. As we drive increased monetization and efficiency, our definition of what constitutes an ICP will evolve with time with many variables considered as we adjust, improve and scale our business. In addition to focusing on ICPs, we are also actively experimenting with pricing strategies, including annual account fees for specific cohorts as we work to more effectively monetize all of our customer cohorts. As we shared in February, we believe pricing will be a multi-quarter transformation that will drive improved monetization and reduce our CAC. To more efficiently capture the opportunity from the extraordinary inbound interest we get from prospective customers I remind shareholders that over 400,000 SMBs apply for Payoneer account every month.

We have begun rolling out new machine learning models to predict registering potential profitability. When these are fully rolled out, this will enable more scalable and efficient operations. We will be able to quickly filter applications, identify the highest value potential customers and reduce our cost to process. We continue to make progress on our multiyear platform transformation led by our Chief Platform Officer. We are focusing in 2023 on building a scaled, cloud-based onboarding platform. We expect to roll out our best-in-class new onboarding platform in select countries towards the end of 2023, in line with our original expectation and to fully launch globally in 2024. To sum up, we are in the early innings of unlocking our full potential.

We believe we have the global scale, bank and regulatory infrastructure, trusted brand and strong and aligned team to successfully execute. We are confident about our ability to drive long-term revenue growth and future profitability reflecting our conviction in our ongoing strategy, our Board of Directors recently approved a share repurchase authorization, which we will discuss shortly. I’ll now hand it over to her to discuss financial results and forward guidance in more detail.

Bea Ordonez: Thank you, John, and thank you to everyone for joining us. Payoneer delivered another strong quarter of results with continued top line revenue growth and significant EBITDA margin expansion. For the eighth consecutive quarter since going public, we are again raising our revenue and EBITDA guidance. Additionally, in line with our commitment to enhancing investors’ understanding of our business, we have made several disclosure updates this quarter. We believe the incremental data points provided will be useful in measuring our business momentum going forward. Q1 revenue increased 40% year-over-year to $192 million, driven by net customer acquisition, the growth of high-value services, growth in certain key markets and accelerating interest income from rising interest rates and growing customer fund balances.

Note that revenue and ICP growth were partially offset by a 2% impact in each case from the closure of payments into Russia at the end of 2022. Q1 volume increased 8% year-over-year to $15.7 billion. Volume growth year-over-year was driven by a recovery in travel and mid single-digit growth from large e-commerce marketplaces. As John discussed, versus the prior year quarter B2B APAR volume growth has slowed due to the impact of customer terminations in Q3 of last year as well as declines in average invoice sites likely related to macro concerns driving a pullback in spending. With that said, B2B revenue growth continues to significantly outpace volume growth driven by mix shift into higher take rate customer types and geographies. Our Q1 take rate was 122 basis points, up compared to 94 basis points in the first quarter of last year and up sequentially versus 109 basis points in Q4.

The year-over-year take rate expansion primarily benefited from higher interest income as well as from take rate expansion from our B2B business. Customer funds held by Payoneer increased $837 million, or 18% year-over-year to $5.5 billion. Sequentially, customer funds declined 6% and reflecting a normalization from seasonally elevated levels at year-end, something which we called out during our February call. Against the backdrop of extreme volatility in the U.S. banking sector, the stability in the customer funds held on our network highlights the trust our customers have in Payoneer and underscores the fundamental utility we deliver to our customers via our operating account offering. We have grown customer fund balances on our platform at nearly twice the rate of volume over the past three years.

Most of our customer funds are held at global systemically important banks and over 80% of customer funds continue to be in interest-bearing accounts. We earned $50 million of interest income from customer fund balances in the first quarter, up from less than $1 million in the prior year period and $36 million in the fourth quarter of 2022. We continue to explore opportunities to reduce our sensitivity to changes in interest rates and to optimize our ability to monetize customer funds held on our platform. Q1 transaction costs were $27 million and increased 6% year-over-year. This represented 14.1% of revenue, an improvement from 18.7% in the prior year period, benefiting from higher interest income as well as our ongoing focus on driving operational efficiencies and our ability to leverage our scale to drive down costs.

Bank and processor fees, the largest component of transaction costs increased 1% year-over-year with higher transaction costs associated with high-value services driving that increase. This was partially offset by mix shift into lower take rate geographies and the impact of improved pricing with our partners. Q1 revenue less transaction costs increased 48% year-over-year to $165 million. Q1 total operating expenses, including transaction costs were $177 million, up 24% year-over-year. Excluding transaction costs, operating expenses of $150 million increased 27% year-over-year. Excluding the $16 million of discretionary investments in the fourth quarter, operating expenses, excluding transaction costs were relatively flat sequentially, reflecting a more disciplined approach to spending in our business.

Our sales and marketing costs in the first quarter increased $13 million or 39% year-over-year, representing approximately half of the total year-over-year increase in Q1 operating expenses, excluding transaction costs. Higher sales and marketing costs were primarily linked to higher headcount in our go-to-market organization from hiring in 2022 and reflects our ongoing focus on driving acquisition of ICPs and high-value partners. Q1 adjusted EBITDA was $39 million compared to $10 million in the first quarter of last year and $11 million in the fourth quarter. Q1 net income was $8 million compared to net income of $20 million in the first quarter of last year, which included a gain of over $30 million from the change in fair value of warrants.

Q1 basic and diluted earnings per share was $0.02. We ended the quarter with cash and cash equivalents of $545 million, a $79 million increase year-over-year. We continue to actively evaluate and adjust our capital allocation strategy to ensure that we continue to invest to drive organic revenue growth including in our platform and in executing on our product road map. We also remain intently focused on M&A opportunities. In 2022, we saw public company valuations for fintech companies dropped significantly, while a similar correction in the private market has lagged the public market. We are, however, beginning to see signs of downward pressure on private company valuations with the shifts accelerating following the collapse of SVB. We have seen an uptick in inbound opportunity and are actively evaluating several potential targets.

We are growing our capabilities in this area and further refining our strategy and road map. At the same time and as part of an investor focused data-driven and balanced capital allocation approach, we announced today that our Board of Directors has approved an $80 million share repurchase authorization. Turning to our outlook. We are raising our guidance for the eighth consecutive quarter since going public. As a reminder, we do not provide quarterly guidance at this time. For full year 2023, we expect revenues to be between $810 million and $820 million. Transaction costs as a percent of revenue to be approximately 15.5% and adjusted EBITDA to be between $140 million and $150 million. We expect revenue growth to be driven by continued ICP acquisition, growth in our B2B business and other high-value services and from interest earned on our customer balances.

Our revenue growth expectations, excluding interest income, are slightly softer relative to our prior guidance, reflecting a slight deceleration in volume growth in the first four months of the year and ongoing macro headwinds that could constrain consumer and business spending. We expect interest income to be approximately $200 million for 2023 based on exit balances at the end of the first quarter, moderate balance growth in line with volumes for the remainder of the year and current anticipated Fed funds interest rate changes. In line with market expectations, we anticipate interest rates will begin to decrease in the back half of the year. Assuming flat balances, we expect this would drive a $20 million revenue headwind in 2024, as compared to 2023.

Based on our stated guidance, we expect cash OpEx, less transaction costs to be $540 million to $550 million for 2023. This is $10 million lower than our prior guidance, reflecting a greater degree of operating discipline and one which we believe is appropriate given the current environment. We believe Payoneer has near and longer-term opportunities to optimize operating efficiency. Work is underway to assess our spending across every function in category, including headcount, third-party vendor costs and related to our real estate footprint. We continue to evaluate our long-term hiring needs, including in the context of the macro climate. And as of May 1, we have restricted our hiring plans across the organization. We expect this will generate approximately $5 million of savings in 2023.

We will continue to ramp up our R&D team to support our ongoing platform transformation. We are also actively evaluating further headcount efficiencies, as we look to delayer our organization, streamline our operations and reduce redundant roles. We expect to exit the year with headcount modestly lower versus the prior year. Finally, we continue to localize our operational support with service centers in Latin America, Eastern Europe and Southeast Asia that will better serve our customers while driving additional operational efficiency. Our latest guidance for 2023 adjusted EBITDA is between $140 million and $150 million. This guidance reflects a nearly threefold increase in adjusted EBITDA versus 2022. In conclusion, Payoneer first quarter results underscore our ability to consistently deliver strong financial results.

We have built a broad, diversified and resilient business and we continue to see significant customer demand for our financial operating solution. We have confidence in our ability to meet our updated 2023 financial targets, while we remain focused on investing to position Payoneer for long-term profitable growth. Lastly, I’m excited to announce that Payoneer will be hosting its first Investor Day on September 21, 2023, in New York City. We look forward to seeing many of you in person in the fall. We are now happy to answer any questions you may have. Operator, please open the line.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question today comes from Darrin Peller from Wolfe Research. Please go ahead.

Operator: Our next question is from Trevor Williams at Jefferies. Please go ahead.

A – John Caplan: Yes. Yes, it’s a great question, Trevor. So we’re an early mover in the highest growth emerging markets around the globe, as we shared on the call, 25% growth in all of our regions, which I think highlights the diversity of industries we serve, size of companies we serve, the potential of our global platform. I am personally super excited about Latin America, CEMEA and APAC, and we are investing heavily to further penetrate these markets 50% growth in Vietnam, Argentina, Mexico, Colombia and UAE speaks to the productivity of our go-to-market organization and the product market fit that we have. There are ICPs in every region of the globe. And it’s early days for us thinking about how ICPs translate to specific countries and geographies.

But we are very committed to building and expanding the transparency, the focus on ICP is so that our shareholders can understand the breadth and depth of our service and the potential of our business. There are 300 million potential customers globally for Payoneer to serve and we have just gotten started. As we were saying, we are in the earliest of the early innings here, and this kind of focus is extraordinary, and we have our teams around the globe, employees in 28 countries, all focused on ICP. And I think that’s — the magic in that is the 18% year-over-year growth we saw in the largest of those ICPs, those doing over $120,000 a year in trailing 12-month volume potential of where we are, and we’re just getting started on it.

A – John Caplan: Yes. So — and I’ve shared this, I think, with you in the past, where I visited generally is a pretty good indication of our focus, and I spent time on the ground in India, time on the ground in Argentina and CEMEA [ph] and APAC are getting tremendous focus. That does not — is not to undercut the momentum and power and leadership position we have in the Greater China region, it just speaks to the extraordinary opportunity we have globally. But I am very excited about Latin America and the momentum we have there to continue to penetrate that market significantly.

Operator: Our next question is from Will Nance at Goldman Sachs. Please go ahead.

Operator: Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead.

Operator: Our next question is from Mayank Tandon from Needham. Please go ahead.

Operator: Our next question is from Bob Napoli of William Blair. Please go ahead.

Operator: The next question is from Sanjay Sakhrani from KBW. Please go ahead.

Operator: Our last question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead.

Operator: This concludes the Q&A session. I will now hand the floor back to John for closing remarks.

John Caplan: Thank you all for your questions and for joining us this morning, and thank you to my Payoneer colleagues around the globe who are tuning in for your hard work, dedication and focus on our customers. We are moving forward at pace and I’m proud of our progress. I’m incredibly excited about Payoneer’s growth trajectory and the significant and sizable opportunity we have to help even more of the world’s SMBs do business globally. We’re just beginning our next leg of our exceptional growth and appreciate our shareholders’ continued support. Thank you all

Operator: This concludes today’s conference call. Thank you very much for joining. You may now disconnect.