Payoneer Global Inc. (NASDAQ:PAYO) Q3 2023 Earnings Call Transcript

Payoneer Global Inc. (NASDAQ:PAYO) Q3 2023 Earnings Call Transcript November 8, 2023

Payoneer Global Inc. misses on earnings expectations. Reported EPS is $0.03 EPS, expectations were $0.04.

Operator: Good morning. Thank you for standing by. Welcome to Payoneer’s Third 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 lines for your questions. As a reminder, this conference call is being recorded. I would now like to turn this 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 risks and uncertainties, including those set forth in our filings with the SEC, 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. With that, I’d like to turn the call over to John to begin.

John Caplan: Good morning, everybody and thank you for joining us today. Before we begin, I just want to say how deeply saddened we all are about the terrorist attacks in Israel last month and the ongoing war. The violence and loss of innocent lives has been shocking and heartbreaking. Our thoughts go out to all who are suffering. We continue to monitor the situation and our focus on supporting our colleagues in the Payoneer community in the region. We’ve donated $1 million via the Payoneer Foundation to support humanitarian relief efforts. Bea will provide a more detailed update on our business operations during her remarks and I would be remiss, if I didn’t express how deeply and immensely proud I’m of the determination and resilience our team has displayed in light of the current circumstances.

Now turning to our third quarter earnings. Payoneer delivered 31% revenue growth year-over-year and a 28% adjusted EBITDA margin. We are making progress executing our strategy and are confident about the pace of our efforts. We are diversifying towards higher take rate geography, acquiring more high value ideal customer profile, or ICPs and enhancing our financial stack. As we shared at our inaugural Investor Day in September, Payoneer makes it easy for small and medium size businesses to access the global economy by providing them with the financial tools to compete and win in the markets they want to do business in. We are positioned to capture this $6 trillion opportunity and are laying the foundation for durable, profitable growth. We are focusing on our ICPs, building more products to cross-sell into our base of 2 million customers and leveraging our scale, technology and data to operate even more efficiently.

Our comprehensive financial stack is a core driver of the opportunity ahead for Payoneer. We are penetrating the B2B in checkout markets, and cross-selling our card. As we highlighted at Investor Day, we remain confident about the long-term potential of our B2B business and continue to gain traction in our prioritized service oriented markets. Third quarter total B2B volume growth accelerated versus the second quarter, and increased 1% year-over-year, or 6% excluding the impact of the customer terminations we made a year ago. We delivered improving B2B volume growth trends throughout the third quarter, and most recently generated 17% year-over-year volume growth in October. By region, in our priority, service oriented market, we continue to see strong traction.

APAC, SAMEA, Latin America B2B volume grew 23% year-over-year, and have an overall blended take rate of over 2%. In SAMEA, we’ve delivered year-over-year B2B volume growth of approximately 40% or greater each quarter of this year. We are penetrating the large programming tech support and consulting industry in the region. For example, we recently hosted a series of events in India with over 1,000 attendees to discuss the next decade of export growth and how our customers can build a brand as an entrepreneur looking to capture this full opportunity. In checkout, we grew volume by 50% quarter-over-quarter. Checkout is emerging as a part of our value proposition to increase ARPU, grow ICP and enable our customers to scale. As of the end of September, checkout was generating over $1 million in daily volume.

We expect further momentum as we continue to enhance checkouts features and capabilities. For example, we launched our Shopify native capabilities for checkout, which should improve customer’s payment conversion rates by providing a more seamless consumer shopping experience. We are also cross-selling our product stack to our existing customer base. Our customers are using Payoneer cards to manage their accounts payable. Card usage was nearly $1 billion in the third quarter, up 31% year-over-year. This represented 6% of total usage, and we believe there is significant room to grow that further. Let’s turn now to our ICPs. Payoneer grew total active ICPs by 5% year-over-year in the third quarter. By region, we saw double-digit growth in our higher take rate regions.

13% ICP growth in APAC, 11% in SAMEA, and 10% in Latin America. We grew our largest ICPs, or those who do more than $10,000 a month on average in volume by 17% year-over-year. This segment represents approximately 10% of our overall ICPs. It contributes to over 50% of total Payoneer revenues. We continue to add new marketplace relationships to grow our ICP. I’m excited to announce that we recently partnered with Etsy to service sellers in emerging market. Our marketplace relationships are a key differentiator for Payoneer and contribute to the significant scale we’ve built in our banking infrastructure. The customers we acquire from marketplaces frequently expand to use our full financial stack, underscoring the significant value behind our focus on ICP.

We continue to invest in our platform and product capabilities to drive greater ease, trust and convenience for all of our customers. I’d like to highlight just a few of the new features we launched recently, which we believe will drive greater retention, volume and AP usage. We expanded the ecosystem of integrations of our financial stack, and launched bank feed integrations with QuickBooks. This will reduce manual processes and improve AR collection efforts for our customers. We now enable customers to receive funds locally in New Zealand. We offer 10 local collection accounts for our customers, which helps remove the borders and complexities of doing business globally. We are integrating generative AI into our operations to improve our customers experience and increase efficiency.

To accelerate our B2B growth, we are enhancing our AP tools to better meet the needs of large service customers. Our customers can now add funds from their bank to their Payoneer account. This significant enhancement positions us to drive growth in our accounts payable tool independent of a customer’s AR flow. We believe this is an important value proposition for customers who have global business expenses and payroll. We also enhanced functionality around scheduling recurring payments, and sending large groups of batch payments. These are features, our largest most sophisticated customers ask for, and we’re pleased that they can now make their workflows even more efficient, leveraging the Payoneer stack. I’m also happy to announce that we have begun the rollout of a Payoneer Life Account for customers who have simple AP and AR needs.

For example, those who use Payoneer only for receiving funds from a marketplace and withdrawing those funds to their local bank account. By limiting their eligibility for our full stack, we can reduce our costs to serve and work towards our long-term ambition of profitably serving every entrepreneur and business seeking to tap into the global economy. This is a part of our phased approach to implementing our customer segments specific service and pricing strategy that we’ve spoken frequently about. In closing, we are executing against the strategic priorities that we articulated at the beginning of the year and in our recent Investor Day. We are enhancing our customers value proposition, delivering strong growth and significant profitability, while investing in strategic long-term initiatives.

Our strong results are a testament to our global team and their tireless efforts and dedication to our customers and our mission. They inspire me every day. And I’m proud of what Payoneer has achieved so far this year, and excited about what’s ahead. I’ll now hand it over to Bea to discuss financial results and forward guidance in more detail.

Bea Ordonez: Thank you, John, and thank you to everyone for joining us. First, I want to echo John’s opening remarks. We are all deeply saddened by the ongoing conflict in Israel and Gaza and by the tremendous loss of life. Our thoughts are with our colleagues in Israel and with everyone affected during this extraordinarily challenging time. I’d like now to turn the discussion to our third quarter results. All comparisons are on a year-over-year basis unless otherwise noted. We continue to execute on our strategy. We grew ICPs by 5%, generated 31% revenue growth and delivered a 28% adjusted EBITDA margin. Third quarter revenue of $208 million was up 31%, driven by interest income and on customer funds, accelerating growth in our B2B and checkout businesses, higher card usage and improved monetization from ongoing pricing and other initiatives.

Q3 revenue growth also included the impact of a $7.5 million decline in revenues earned from the provision of onboarding services to enterprise clients, something we announced when we provided 2023 guidance. In line with a more customer-centric approach to monetization that we talked about at our Investor Day, we continue to implement changes to our product bundling and pricing strategies. We are expanding the rollout of initiatives we began testing earlier this year. For example, we recently introduced additional fees with small transaction sizes. We are also expanding our testing of account registration fees, as well as of potential strategies to monetize our significant cross border in network payment bonds. So far, we have not seen any unexpected or unintended changes to customer behavior or retention.

We believe there is significant opportunity to drive improved acquisition and retention as well as share of wallet gains from a more nuanced approach to our pricing, bundling and service model, one that is better aligned to our diversified customer base. Volume increased 11% to $16.8 billion, reflecting strong year-over-year volume trends with our large eCommerce marketplaces, continued strength in travel spend and growth in B2B volumes. B2B volume growth of 1% accelerated throughout the third quarter with volumes in September 2023 up 5% versus the prior year period. Growth was driven by the services oriented economy that John spoke about earlier. Our volume per customer has also remained stable year-over-year. We are seeing positive momentum with new industry verticals launched earlier this year.

Our Q3 take rate of 124 basis points increased 19 basis points. The expansion was driven by higher levels of interest income and the benefits of our various pricing initiatives. Customer funds held by Payoneer increased 7% to $5.4 billion, and we earned $60 million in interest income from these balances in the third quarter. Our financial stack delivers real utility to our customers. The ability to hold balances in multiple currencies, and to manage the cross border AR and AP needs from a single account. The balances our customers hold with us demonstrate the utility we deliver and the trust our customers have in. Over the past several years, we have seen robust growth in customer funds. We believe that is volumes into our platform grow and as we add more utility and features to the platform, we should see customer balances grow.

We continue to expect long-term balance growth to be broadly in line with volumes, while seasonality and macro factors can influence short-term balance performance. For 2023, we expect approximately 25% of interest income earned will be used to fund investments in our platform and infrastructure, including in our compliance infrastructure. We also expect to utilize approximately 25% of revenues generated from interest income to return capital to shareholders via our stock repurchase plan, which is designed to substantially offset dilution from a stock based equity compensation program. Total operating expenses of $179 million were up 9% or $15 million. Higher sales and marketing expenses represented approximately half of the increase with higher G&A, transaction costs and other operating expenses driving the balance of the [indiscernible].Transaction costs was $30 million and increased 9%.

Transaction costs represented 14.6% of revenue, a 300 basis point improvement from the prior year period. The decrease is driven by higher interest income cost savings impacting our bank and processor fees and mix shift towards lower cost markets. This was partially offset by increasing card usage and growth in our B2B and checkout businesses, all of which drive relatively high transaction costs as B2B, checkout and card volumes grow faster than our aggregate business, we would expect some upward pressure on transaction costs going forward. Sales and marketing expense increased $8 million reflecting higher commissions paid to certain enterprise partners. Excluding those partner commission, sales and marketing expense was broadly flat year-over-year, and declined modestly sequentially, a result of our previously announced workforce reductions and in line with continued efforts to streamline our go-to-market organization.

G&A expenses increased $3 million primarily driven by M&A and legal expenses. Other operating expenses were up $3 million, primarily driven by an increase in third-party consulting expenses related to our ongoing spend to enhance our regulatory and compliance capabilities. These increases were actually offset by the impact earlier this year of various initiatives designed to streamline, regionalize and outsource aspects of our operations function. These assets have allowed us to reduce our labor-related operations expense by 5% year-over-year, and to meaningfully drive down our cost to serve. For example, we have reduced the average cost of a customer service ticket by 25% since the end of 2022. By optimizing workflow so we can resolve more tickets in a single interaction, by automating processes and by implementing certain generative AI based tools.

R&D expense declined $3 million as a result of an increase in capitalization due to shifting of resources towards the investments in our platform, partially offset by additional hiring in our platform organization. We continue to take a disciplined approach to operating our business in order to drive greater efficiency, while ensuring we invest drive long-term and sustainable revenue growth. Adjusted EBITDA was $58 million compared to roughly $13 million in the third quarter of last year, and $56 million in the second quarter of this year. This represents a 28% adjusted EBITDA margin. Net income was $13 million compared to a net loss of $26 million in the third quarter of last year. Q3 basic earnings per share was $0.04 and diluted earnings per share was $0.03.

We ended the quarter with cash and cash equivalents of $591 million, up $83 million or 16% year-over-year. Our business continues to generate positive free cash flows, and our free cash flow conversion rate is well above 100% year-to-date. We have been actively returning capital to shareholders since the inception of our share buyback program in May. We have repurchased approximately 35 million of Payoneer shares, including 15 million in the third quarter. We expect to repurchase approximately 55 million of shares for the full year. Turning to our outlook. We are reiterating our 2023 revenue guidance and raising our 2023 adjusted EBITDA guidance. For the full year, we expect revenues to be between $820 million and $830 million, transaction costs as a percentage of revenue to be approximately 14.5% and adjusted EBITDA to be between $195 million and $205 million.

Before I dive into the drivers of our updated guidance, I’d like to note that our critical business operations have not been impacted by the ongoing war in Israel. And based on the current situation, we don’t anticipate any material impact or disruption to our operations or business. This is a testament to the resilience of both our infrastructure and platform and to our incredible teams on the ground. We continue to prioritize the safety, health and wellbeing of our employees, while ensuring that we continue to serve our customers. Our latest guidance includes approximately $3 million in one-time expenses in the fourth quarter related to our response to the ongoing conflict in Israel, including relocation costs, financial assistance and programs to support mental and physical wellbeing.

Approximately 50% of our employees are based in Israel. While a majority, approximately 81% of our research and development teams are based there. To date, less than 10% of our Israeli employees have been called into military reserve duty, and we have contingencies in place to cover impacted roles and responsibilities. A broad geographic footprint and outsourced operations model enable us to continue operating our business and serving our customers. As we have noted, we are reiterating our revenue guidance at this time. We continue to have conviction [ph] in our long-term strategy and key growth opportunities. They are generating strong growth in our checkout business, and driving increased adoption and usage of our commercial card product.

We see improving trends in our B2B business, where volume growth was 17% in October, and we expect to see the ongoing benefit of our customer focus monetization strategy. We are increasing our guidance for interest income by $10 million, reflecting current consensus rate forecasts and balanced performance. We now expect interest income to be $220 million for the full year. We expect this increase in interest income to be offset by near-term headwinds from increasing macroeconomic and geopolitical uncertainty impacting our business as we begin the fourth quarter. As a result, we are reducing our revenue ex interest income guide by $10 million. [Indiscernible] software revenues from our customers in Israel, where we anticipate economic activity will be impacted in the near-term.

Revenues from our customers in Israel represent approximately 3% of our total revenue. Additionally, in the immediate aftermath of the conflict, we proactively delayed the implementation of certain monetization initiatives that were scheduled for early October, but launched in early November instead. And lastly, in the broader environment, we see increasing macro uncertainty around consumer and business spending from elevated inflation and higher for longer interest in long-term borrowing rates. We expect 2020 free cash OpEx less transaction costs to be approximately $505 million. Cash OpEx represents our guidance for revenue, less adjusted EBITDA. We continue to focus on operating efficiency in order to maximize resources available for high growth areas of our business and for opportunities to deepen our competitive mode [ph].

We are on track to deliver on our commitment of ending the year with lower headcount than where we started. We expect fourth quarter operating expense to be higher than in the third quarter, primarily reflecting higher R&D spend, seasonal expenses, including seasonally higher marketing spend, as well as the impact of the previously mentioned spend related to our response to the conflict in Israel. We are raising our guidance for 2023 adjusted EBITDA to be between $195 million and $205 million. This guidance reflects a four-fold increase in adjusted EBITDA versus 2022 and a 24% adjusted EBITDA margin for 2024. In September, we hosted our first Investor Day where we have the opportunity to reintroduce Payoneer to the investor community. Since going public in 2021, we’ve delivered exceptional financial performance, and we plan to continue expanding our product offerings, growing in high growth and high take rate regions, and increasing the number of ICPs on our platform.

Our third quarter results underscore our consistent execution against these strategic priorities and our unique value proposition for customers. We are pleased to see that our focus on operating efficiency is driving lower costs and higher adjusted EBITDA margin. We are well-positioned to capture additional market share and to generate long-term value for our shareholders. We are now happy to answer any questions you may have. Operator, please open the line.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Sanjay Sakhrani of KBW. Sanjay, please go ahead.

Sanjay Sakhrani: Thank you. Good morning and good quarter. I’m just trying to think about the acceleration that happened across the different segments that you’ve highlighted. Can you just walk us through what the trends were there across those different segments?

Bea Ordonez: Hi, Sanjay. Thanks for the question. Yes, looks like you noted, we’ve seen acceleration both sequentially versus Q2 as well as within Q3. And as we — as we’ve seen, the fundamentals of the business remain in line to the strategy that we’ve been executing. We are seeing that we’re driving ICP acquisition, we’re seeing adoption of our card, and we’re seeing really strong acceleration within our B2B business. John highlighted some of those stats. But as you know, we saw in Q2 that we saw some deceleration in volumes, we’ve reversed that trend in Q3 where we saw 1% growth. And in October, which we highlighted month-to-date, we’ve actually seen 17% in volume. So we’re seeing nice trends and pickup in that B2B growth.

And excluding China, we’ve been disaggregating some of those trends. We’re continuing to see really strong growth in those B2B volumes. So, look, overall, the fundamentals as I say are performing pretty much in line. Ecom volumes are in line to maybe even slightly better than we thought, high single-digit to low double-digit. Travel continues to outperform. We’ve talked about that being lower yields business, but we’re seeing really nice volume performance. B2B, we’ve talked about accelerating and we reached that really important milestone with our checkout business where we hit a $1 million a day in transaction volume. So we’re seeing really strong trends from a volume perspective, as I said throughout the quarter, and into the fourth quarter.

Sanjay Sakhrani: Okay, great. And then to follow-up on like take rates ex float, those declined both on a year-over-year basis and a quarter-over-quarter. What were the drivers of that take rate and how should we think about that on a go-forward basis?

Bea Ordonez: Yes, absolutely. Look, top line inclusive of float we obviously grew take rate by about 19 basis points. That’s interest income driven, but also acceleration as we’ve noted in B2B and card and checkout, partially offset by mix shift and some of that volume to those larger eCommerce buckets that come with lower yield. As we disaggregate that interest out of that, look, we talked at Investor Day about roughly 80% of our revenues being attributable to customers that are active on our platform and that generally speaking have an account on that platform. And on an apples-to-apples basis, if I look at 80%, the take rate on that business year-over-year expanded fractionally, but expanded its interest — it’s interest income, sorry, by about a basis point.

The balance of that 20% revenue that we talked about at Investor Day, it includes some account fees for inactive customers. But mostly it relates to services that we provide the enterprises who use our payment rails to facilitate transfers to pay if you do not have an account on our platform. So we are not cross selling into those payees, and the yield on that business is understandably much, much lower, right. So a lot of that travel volume that we’ve highlighted, that has outperformed and grown very meaningfully, it’s that kind of volume where those enterprises are using our payment rails. And so the disproportionate growth in that travel volume has really had sort of a negative impact in the aggregate take rate overall. But I think the main message we’re driving out here is that core customer led business, our take rate is expanding that other business that is important to us, yes, but a smaller part of our overall revenue, there we’re seeing sort of a disproportionate growth which is impacting the aggregate.

Sanjay Sakhrani: Okay, very helpful. Thank you.

Operator: Our next question comes from Mayank Tandon of Needham & Co. Mayank, please go ahead.

Unidentified Analyst: Thanks. Hey, guys. This is Sam on Mayank today. Thanks for taking the questions here and nice results this quarter. I wanted to start off on revenue in North America, which came in pretty soft this quarter. Can you guys just talk a bit more about what you’re seeing here? And what’s different than the rest of the markets that you’re seeing?

Bea Ordonez: Yes, look, the main impact there is what we highlighted coming into 2023 in our full year guide that beginning in the third quarter, we had that headwind from non-volume fees. So these are fees that we earned historically from an enterprise clients with certain onboarding services. And those fees about $7.5 million in a quarter, those came out in Q3, effective Q3. So it’s really disproportionately skewing that North America performance where they were booked.

Unidentified Analyst: Got it. Got it. Okay. Yes, that’s helpful. Sorry about that. I missed that. And then just for a quick follow-up, I wanted to see if there was any update on the recent acquisition of Spott in any kind of new developments since you guys announced that?

Bea Ordonez: We closed it, as we said, on the last call, we’re really sort of happy to be integrating that great team. As we said, when we announced the deal, they bring real sort of data expertise, that’s going to help us really enhance our underwriting, enhance our risk framework, and that’s going to allow us to originate more because we’ll have a better handle sort of on that overall underwriting and to just better manage that book of business. But I think it’s part of the broader strategy to really sort of integrate real-time data capabilities and real-time data insights into how we manage and grow the business.

Unidentified Analyst: Okay. Thanks.

Operator: Our next question comes from Trevor Williams of Jefferies. Trevor, the line is yours.

Trevor Williams: Great. Thanks a lot. Good morning. I wanted to go back to B2B for a second. If you could walk us through some of the moving pieces within the volume mix there, the chart, I think it’s on Slide 18. That’s helpful. And you guys have hit on some of this in both your prepared remarks. But if you can unpack some of those diverging growth rates you’re seeing across the two buckets of geographies that you’ve laid out, and how that ultimately feeds into the medium term volume growth expectations and kind of take rate trajectory potential for B2B. Thanks.

Bea Ordonez: Well, thank you, Trevor. Yes, look, as we’ve highlighted, I think, look, we’re very pleased with the overall acceleration in this business, which is something we’ve been talking about heading into the back half of the year. We’re seeing that acceleration from really strong acquisition metric from as John noted, stable spend per customer in those service oriented economies and from the impact of the lacking of determination [ph] that we talked about in Q3 of 2022. Overall to sort of level set in the aggregate and Q2 we saw a contraction in volume. In this quarter, we saw 1% volume growth, 6% ex termination and accelerated that volume growth throughout the quarter. And so really strong performance in October again, up 17%.

To your point, Trevor, we’re seeing sort of — if we look at the disaggregation by market, we see very different trajectories. And we’ve talked about that volume is sort of ex China. And China now makes up in the third quarter less than 20% of the total volume. It’s about 17%. But what’s been really strong, we’ve been deemphasizing there, and we’ve talked about that throughout the call. We do view it as a long-term opportunity from a B2B perspective. But from an acquisition perspective in the current year, we’ve been deemphasizing our efforts and really focusing our efforts on that — those service oriented economies that John talked about. And now we’re seeing really strong growth. They make up now close to half of our total B2B volume. And we grew that volume in the quarter by about 23%.