Payoneer Global Inc. (NASDAQ:PAYO) Q1 2024 Earnings Call Transcript

Payoneer Global Inc. (NASDAQ:PAYO) Q1 2024 Earnings Call Transcript May 8, 2024

Payoneer Global Inc. misses on earnings expectations. Reported EPS is $0.0119 EPS, expectations were $0.05. PAYO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thank you for standing by. Welcome to Payoneer’s First Quarter 2024 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, which are subject to risks and uncertainties. For more information, please refer to our filings of FDC, which are available in the Investor Relations section of payoneer.com. 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 in addition to and not instead of GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today’s earnings press release, which is available on our website. Additionally, please note we have posted an earnings presentation supplement alongside our earnings press release on investor.payoneer.com. All comparisons made on today’s call are on a year-over-year basis, unless otherwise noted. With that, I’d like to turn the call over to John to begin.

John Caplan: Good morning, everyone, and thank you for joining us today. We begin 2024 with strong momentum. In Q1, we grew customers who fit our ideal customer profile, or ICPs, by 8%. We continue to drive even faster growth among larger ICPs and those in regions with higher take rates. Our volume increased by 21%, marking the highest growth rate in nearly three years. We generated strong growth across every channel. We grew in our higher take rate B2B and merchant services businesses, as well as in our marketplace and enterprise payout channels. Total revenue grew 19%. Excluding interest income and normalizing for $7.5 million of non-volume fees earned in Q1 of 2023, our revenue was up 21%. We delivered record adjusted EBITDA margin of 29%, fueled by strong revenues and sustained expense discipline.

S&Bs in 190-plus countries and territories. Payoneer is building the business-grade financial stack for all their cross-border AR and AP needs. Over the past year, we have focused on accelerating growth and increasing profitability. Our efforts are paying off. We are successfully capturing opportunity in the $6 trillion global cross-border B2B market. We achieved 33% volume growth in Q1, more than doubling the 13% growth of the previous quarter. Our momentum comes from a number of strategic initiatives well implemented over the past year. We have focused our B2B acquisition efforts on service-oriented markets, where we have strong product market fit and higher take rates. As a result, we have grown B2B volume from service-oriented markets in APEC, LATAM, and SEMEA at over 30% in Q1.

We opened new verticals we now support, including agriculture in Ukraine, beauty products in Asia, and marketing services firms globally. New verticals launched over the past year have already contributed tens of millions of dollars of incremental B2B volume in Q1. We are deeply committed to building the best products for our customers. We have reduced friction in our onboarding process and delivered new features and functionality. One example, we made it easier for customers to load funds into their Payoneer accounts, an important feature for B2B customers who use our platform to pay their global suppliers and contractors. We have added features to increase convenience, such as the ability to automate large batches of payments or schedule recurring payments.

We also recently increased the methods B2B customers can receive payments, including by adding direct from bank payments in Europe. These enhancements will help drive long-term retention of our B2B customers. We are expanding the take rate in our S&B customer business. We increased our SMB customer take rate by 4 basis points, driven by pricing initiatives we’ve launched over the past year and faster growth in our higher take rate businesses and regions. We continue to drive ARPU expansion. ARPU increased 31% in Q1 and 13% excluding interest income. This 13% growth is an acceleration compared to the 9% year-over-year growth in Q4. We are increasing ARPU for our pricing initiatives and are focused on acquiring larger ICPs. We are pleased with our Q1 results.

The accelerating underlying revenue growth we’re driving gives us confidence that our strategy is working. We remain incredibly focused on delivering our plan and capturing the significant opportunity ahead of us. Cross-border trade is undergoing a transformative evolution shaped by technological advancements, which are disrupting traditional ways of working and shopping, demographic shifts, changing geopolitical landscapes and increasing consumer purchasing power, driven by the rise of the middle class around the globe. In this dynamic environment, the role of fast-growing emerging market as both consumers and entrepreneurs cannot be overstated. Entrepreneurs, particularly in emerging markets where Payoneer is strongest are driving innovation, creating new business models and capitalizing on digital platforms to expand their reach beyond traditional borders.

And it is these customers that are choosing Payoneer to make it easier for them to do business globally. In closing, we are delivering robust revenue growth across the entire platform and significant profitability as we embark on Q2. We’re enthusiastic about our momentum and remain laser-focused on our mission to connect global SMBs to the digital economy while delivering significant value for our shareholders. We’re proud of our team. We’re confident in our opportunity, our efforts are paying off. I’ll now turn it to Bea to discuss our financial results and our increased guidance in more detail.

Bea Ordonez: Thank you, John, and thank you to everyone for joining us. We delivered strong performance across the platform in Q1. We grew volume by 21% representing a fifth straight quarter of accelerating growth. We grew revenue by 19%, growing revenues ex interest income by 15% or 21% when normalized for non-volume fees earned last year. We achieved a record 29% adjusted EBITDA margin. We continue to return cash to shareholders repurchasing $51 million worth of shares during the quarter. Turning to our first quarter results. Revenue of $228 million was up 19%. Growth was driven by interest income on customer funds, momentum in our B2B business, strong performance from SMBs, selling on e-comm marketplaces, the benefit of pricing initiatives implemented in 2023, and consistent ICP growth.

We grew revenues from our SMB customers by 21% and continue to see positive take-rate dynamics within our SMB business. Volume growth of 21% reflected broad-based strength. Our B2B business delivered 33% volume growth in Q1, a significant acceleration compared to 13% growth in Q4 of 2023. We generated over 200% volume growth in our merchant services business and continue to grow the number of 10K plus ICPs using our checkout product. 13% volume growth from SMBs that sell on marketplaces reflected both the residual benefits of the strong holiday season as well as ongoing robust performance in the e-comm sector and in our acquisition and retention of large marketplace sellers. Enterprise payout growth of 34% was driven by continued strong travel volume, including the ramp-up of new routes we won a year ago.

Our Q1 take rate of 124 basis points decreased 1 basis point. While on a normalized basis, our take rate increased by 3 basis points. We continue to expand our SMB customer take rates, which increased 4 basis points, driven by our pricing initiatives and faster growth in higher take-rate businesses and regions. Our customers value the utility that their payment account provides, including the ability to hold balances in multiple currencies and to manage their cross-border AR and AP needs from a single account. Customer funds held by PP&E increased 8% to $5.9 billion and we earned $65 million in interest income from these balances in Q1. Total operating expenses of $190 million were up 7%, driven primarily by higher transaction costs as well as continued investment in our product roadmap and in marketing spend related to certain cross-sell activities and incentives.

Transaction costs of $34 million increased 25%, broadly in line with volume growth and were impacted by continued mix shift into our fast-growing B2B and Merchant Services businesses. Transaction costs represented 14.9% of revenues an 80 basis points increase from the prior year period. Sales and marketing expense of $50 million, increased $2 million or 4%, driven by higher marketing spend related to card incentive programs and partner commissions. We continue to drive greater efficiency within our sales organization and have kept labor costs relatively flat year over year while we increased our acquisition efforts around larger ICPs and in key markets and we’re able to increase the number of 10,000 plus ICPs added per sales. G&A expense decreased $2 million or 9%, primarily from reductions in headcount.

Other operating expense was relatively flat year-over-year even as transactional volumes increased with decreased labor costs largely offset by higher IT costs. R&D expense increased $3 million or 9%, driven by higher labor related costs. We continued to invest in our platform and capabilities. Average R&D headcount was up nearly 20% year-over-year even as our total average headcount is down mid-single-digits. R&D resources are broadly allocated as follows; approximately a third of resources are dedicated to initiatives tied to growth. This includes enhancing our product offerings and B2B capabilities and improving our overall UX to drive greater engagement cross-sell and retention. A third is tied to enablement and efficiency investments including in our compliance infrastructure and money movement capabilities and in our data capabilities.

Today approximately a third is tied to maintenance and ongoing platform modernization efforts, which are in part designed to reduce the spend in this category over time. Adjusted EBITDA was $65 million compared to $39 million in the prior year period. This represents a record 29% adjusted EBITDA margin in the quarter. Net income was $29 million compared to $8 million in the first quarter of last year. Q1 basic and diluted earnings per share was $0.08. We have been actively returning capital to shareholders. We accelerated the pace of our share purchases in 2024 buying back $51 million of shares in Q1. We ended the quarter with cash and cash equivalents of $587 million. Our business continues to generate positive free cash flows and our free cash flow conversion is well above 100% year-to-date.

Moving to our 2024 guidance, we are raising our guidance for revenue by $20 million and guidance for adjusted EBITDA by $15 million to reflect our strong results and momentum heading into the second quarter. For the full year, we expect revenues to be between $895 million and $905 million. This includes $655 million to $665 million of revenue excluding interest income and $240 million of interest income for the year. We are raising our expectations for revenue excluding interest income by $15 million. This implies 10% growth at the midpoint of our guidance, representing 13% year-over-year growth on a normalized basis. Our updated guidance reflects our strong performance in the first quarter and assumes revenue ex interest income for the second quarter will be higher by approximately $5 million versus our prior expectations.

We have not modeled changes to third and fourth quarter revenue at this time relative to our expectations in February, which we believe remain appropriately prudent. We are increasing our interest income revenue expectations by $5 million to $240 million for the year. As of March 31, we invested approximately $100 million of customer funds into US treasuries. We intend to more actively extend duration on the portfolio over the next few quarters with the intention of reducing our interest rate sensitivity and to drive greater interest income consistency in 2025 and 2026 as rates decline. We will continue to prioritize safety and liquidity as we do so. Our expectation for transaction costs as a percentage of revenue remains unchanged at approximately 17.5%.

We expect this percentage will ramp up over the course of 2024, reflecting the impact of shifting business mix towards higher take rate, but also higher transaction cost business lines and products like B2B, Merchant Services and cards. We are increasing our adjusted EBITDA guidance to be between $200 million and $210 million, representing an adjusted EBITDA margin of approximately 23% at the midpoint. Our guidance for cash OpEx less anticipated transaction cost remains unchanged at approximately $540 million. Cash OpEx represents our guidance for revenue less adjusted EBITDA. Our first quarter results demonstrate that our strategy and focus on growing and retaining ICDs, driving increased adoption of our financial stack, optimizing ARPU and delivering improving operational leverage is working.

We believe our unique assets, the scale and breadth of our ecosystem and relationship position us to further expand our market share and create lasting value for our shareholders. We are now happy to answer any questions you may have. Operator, please open the line.

See also Morgan Stanley’s Top 15 Stock Picks for 2024 and 14 Best Financial Sector Dividend Stocks To Invest In.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Will Nance with Goldman Sachs. Your line is now open.

Will Nance: Hey, guys. Appreciate taking the question. Nice quarter, really nice to see things falling into place here. I wanted to ask around just sort of the cadence of revenue growth in your expectations. I know you had spoken kind of intra-quarter about sort of a U-shaped revenue growth for the year, and it sounds like with the higher expectations now for 2Q, that might be a slightly more lopsided view, but just any color you have on just cadence? And maybe remind us again what’s sort of driving modestly lower growth I guess, in the middle quarters and the acceleration that it sounds like you continue to expect in the fourth quarter? Thanks.

Bea Ordonez: Look, as your question calls out and as we talked about in March, it’s broadly speaking, a U-shape core revenue trajectory over the course of 2024. We delivered record Q1 results, really happy to deliver that 21% normalized growth. We expect a strong Q2, roughly high single digits core mid-teens normalized. So a robust performance coming into Q2, benefiting from that really strong momentum in our B2B business. But as your question notes, moderating from Q1, which as we called out, benefited from a really strong e-com quarter and strong performance in that sector in general, moderating again into Q3 where we expect, roughly speaking, high single-digit core growth. By then, as you know, we will have fully lapped those non-volume fees we’ve talked about.

And look, recall that in February when we gave full year guidance, it was based on our estimation that marketplace volumes would grow high single digit. What we’ve seen in Q1 is that we’re hitting mid-teens. We’re seeing a very robust marketplace environment, 13% volume growth from our marketplaces. We’re not going to run rate out through the back half of the year. So we’ve raised based on our strong B2B momentum and a strong April. Our Q2 expectations were not run rating out into the back half of the year, keeping our guidance where it’s at. We think that’s frankly prudent. Given the macro context and some of the signs of consumer distress that I think everyone is seeing, we do think there’s room to outperform, obviously, if the macro remains stable.

And ultimately, we see really strong fundamentals in our business coming into that second quarter. And John —

John Caplan : I’ll just add. Yes, I think, Bea said it really well. What’s so exciting inside the company we see is that we’re executing on the strategy we laid out a year ago and our new leaders we brought in, accelerating our growth, seeing B2B growth in Q3 of last year at 1% and now at 33% for Q1 and really solid performance for that team. We’re excited about the pace of product deployments and advancements and we’re confident in our ability to continue executing and delivering on the parts of the business that we directly control, and we benefit from the performance of our partners on their strong execution. So we are making steady progress, big opportunity in front of us, and we feel confident about what we’re going to deliver for the full year and how we’ll exit the Q4 in a very strong position going into 2025.

Will Nance: Got it. That’s super helpful. Appreciate it. Just to level set those numbers, I think you said the mid-single, high singles for the next two quarters as a relative to the 21% underlying growth in the slides?

Bea Ordonez: Yes, high single-digit Q2, mid-teens normalized. Again, we still have one more quarter of those non-volume fees, and in Q3, high single-digit. And obviously, there’s no normalized impact as we will have fully lapped, and exiting, as we’ve said consistently since the back half of last year, exiting mid-teens core revenue growth as we round-out the year. So overall, roughly 13% is the midpoint in terms of core growth on a normalized basis year-over-year.

Operator: Thank you, Will. Our next question comes from the line of Mark Palmer with Benchmark. Your line is now open.

Mark Palmer: Yes. Thanks very much for taking my question. And congratulations on the strong quarter. Looking at the various regions, the regional markets in which Payoneer operates during the quarter, it looks like Greater China had some significant strength. What are you seeing right now in China as it pertains to macro and the extent to which that is impacting your operations there?

John Caplan : That’s a great question. So I think the first thing is we generated double-digit growth in each of our major regions, normalizing for the impact of non-volume enterprise fees earned last year and over 20% revenue growth in the higher take rate regions in Q1 of 2024. Specifically, the China, the team there and our brand position there are so strong and the power of our relationships with the world’s largest marketplaces, Amazon, Walmart, eBay, Etsy, et cetera, those relationships are strong, and we’re picking up customers and cross-selling the full financial stack. We saw great growth in our commercial card product in Q1. And as consumers have kept buying in the West is benefiting our merchants in China and we’ve begun to step back into the B2B business in China.

We’re seeing some early positive signs there as well. So we are executing well across the board in that region and proud of the progress we’re making, and I feel good about our guidance as it relates to the full year, particularly seeing our local teams on the ground, their relationships with our big customers, the share of wallet we’re gathering and the cross-sell of products we’re delivering, the Payoneer financial stack is increasingly valuable to our customers in China and around the globe.

Mark Palmer: Thank you. Just one follow-up question. Where do you stand right now with regard to capital deployment priorities? You bought back a healthy amount of shares during the quarter. How are you thinking about balancing buybacks versus tack-on M&A and other alternatives at this point? Thank you.