Payoneer Global Inc. (PAYO) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. I'm Ashwin Shirvaikar, Citi's Global Head of FinTech Research. Still going strong on day 2 of Citi's 11th Annual Fintech Conference, and I'm glad that you're with us. One quick logistical note before we start this next session. [Operator Instructions] And with that, let's get started. So next up, we have Payoneer. And from Payoneer, very delighted to have Scott Galit, CEO; and Michael Levine, CFO. Scott, Michael, welcome. Thank you for doing this.

Yes. Thanks for having us. Good to see you.

Absolutely. I think you're still a new company. So you're probably going to have to go through this a few times. And I'm going to ask, can you spend a few minutes just giving us a high-level overview of who you are, what problem you solve, what's the opportunity set? And we can dig in sort of just high level.

Yes, sure. So Payoneer is really a pure play on the digitalization of commerce all over the world. Payoneer provides technology, payment, financial services and commerce enabling services to businesses of all sizes all over the world that help them participate in the digital economy, grow their businesses, get paid from their buyers around the world, pay their suppliers around the world and get access to other much needed financial services that businesses need in order to grow and succeed. Payoneer does this with some really unique attributes. For one, we're a global platform that connects the entire world together. Last year, we supported over 7,000 trade corridors on our platform. We are a branded company, so we get over 300,000 applications a month coming from over 190 countries around the world, mostly from small businesses that look at Payoneer as an on-ramp to the digital economy and a service provider that can help them grow their global business and connect them to opportunities and also the financial services and tools they need in order to actually succeed in a digital world. We also have a very unique network effect in our business. We have marketplaces and platforms from all over the world that rely on Payoneer to pay suppliers around the world. And this is across a variety of vertical markets, e-commerce goods, digital services, digital marketing, travel, remote work, distance learning. There's a whole range of different vertical markets that we support. And we connect together those platforms and the suppliers that are selling on those platforms around the world. Some of the more exciting things that we've been doing more recently is we've opened up a new set of capabilities like our B2B AP/AR offering, which helps our small business customers sell outside of marketplaces to B2B wholesale buyers. We have new services like working capital to give our customers the much-needed investment resources they need to grow their business. And we offer really exciting new products like a commercial card to help our customers manage their expenses and drive really unique value for them as well as value for Payoneer. So that's a quick run-through of who we are and what we're doing. But it's really exciting. Every day, we get to work with amazing entrepreneurs around the world. that are really transforming how the whole world does business, and Payoneer is a really key and integral part of that.

Great. Great. And I mean, you have 2 very large TAMs that can really help your secular growth over time. And I was thinking maybe we should spend time on each of those. The digital marketplace growth TAM is better known, so we can get to that in just a bit. I wanted to start with the second large TAM, which, for some reason, doesn't get as much play. But you are supporting very large commerce platforms as they support SMB growth, their own clients, right? So think of Shopify, Wix, BigCommerce, companies like that. How do you size that opportunity? And how does the relationship with one of those type of vendors work?

Yes. So we have multiple large addressable markets of opportunity that we're pursuing. And that's, again, part of what's so exciting is we built this integrated global platform, and we have a brand that's powerful, that's pulling all of this activity and all of these networks of activity into our ecosystem. And it's allowing us to expand into these large addressable market spaces. So as you said, foundational for us has been marketplaces and platforms. Those are actually an increasingly large part of the global digital economy. And cross-border is an increasingly large part of the way marketplaces and marketplace sellers are doing business. Our B2B AP/AR offering, this is a multitrillion dollar addressable universe of opportunity where businesses are selling directly to their buyers around the world across borders. And this is growing quite a bit faster than our business overall. We see lots and lots of avenues for partnership and continued growth there. Third is our Merchant Services offering, where we actually are helping our small business customers actually with their web store sales. So now this is an extension where we started helping small businesses get paid on marketplaces, then we help them get paid from their wholesale B2B buyers, and now we're helping them get paid on web stores. That's still very early days for us, but we see so much demand, as you talked about, you can see it with the growth of the likes of Shopify and Wix and others that are reporting publicly, just how many entrepreneurs around the world are entering the digital economy and building their online storefronts. And so Payoneer is investing. We made an acquisition last year to position us in what is another $1 trillion plus area of opportunity in the market. And across all of these areas, we see great opportunities for Payoneer to continue to nurture our own brand, and we have global acquisition teams around the world, but also to partner with companies. And we actually are increasingly growing our partner base globally, where our technology and our collaboration with our partners helps them grow their customer base, helps us grow our customer base and helps both of us provide more value to our customers. So in all of those areas, there's common elements of these big companies that we're able to work with, help them address geographic coverage, help them onboard new customers and provide some unique high-value services.

Yes. Yes. So on that on that TAM which is kind of supporting the large commerce platforms, when you think of sort of -- I mean, are you marketing directly and bringing on SMBs? Or do you have a direct contractual relationship with someone like a Wix or a BigCommerce? How much of an integration do you have? Could you kind of walk through some of those? How do you make the vision a reality, kind of questions?

Yes, absolutely. So today, we are primarily acquiring customers in that part of the business ourselves. And actually, across our whole business, the #1 source of new customers at Payoneer is customers coming to Payoneer and signing up directly at Payoneer. And that continues to be our greatest strength. We also have sales teams in markets around the world that are going to market. What we've tended to do at a minimum would be to integrate with shopping carts to provide the integrated capabilities that our customers need in order to actually build and manage their business. This is a relatively earlier part in terms of it's a newer part of our business, and it's still in the earlier stages of development. But this is an area that we're very excited about, and we think there's tremendous potential for us to continue to grow organically, but also to do more partnerships looking forward from here.

Okay. Okay. Got it. Got it. In terms of this how these platforms might move traffic to you versus do you see competition from, say, somebody like a Rapid or a company like that. How do you compete? And who do you compete with?

Yes. So first, one thing that is really important to explain is that the vast majority of the revenues that Payoneer generates are from relationships that we have with our small business customers around the world. And those are the vast majority of the hundreds of thousands of applications we get every month. And so it's through those relationships that we actually will continue to grow and expand the scope of services that we're providing for those small business customers. We do get the majority of those directly at Payoneer, but the partnerships that we have where we have bank partners, mobile wallet partners, but also marketplace partners are another important source of customer acquisition and low-cost customer acquisition for us, which is a really important part of our business model overall is this low-cost customer acquisition. So across all of that, I don't really -- Rapid is not a company that we tend to compete against very much in these spaces. They're not really serving small businesses. They're not really building a branded offering. And so -- but there's nobody who's just like us, and that's been one of the challenges in trying to explain to investors who we are, is that we're a bit different. The vast majority of what we compete against is just wires and checks. The first marketplace that we were working with was actually a services marketplace, and they had wires, checks and PayPal. And so PayPal didn't cover the world, wasn't really useful for larger transaction sizes because it's really more consumer payments in terms of the way their businesses model was built. And so we really have filled a pretty unique spot in this B2B realm supporting the entire world's larger transaction sizes, and really the ability for anybody, anywhere to pay or get paid to and from anywhere and else.

Okay. Okay. Got it. You mentioned a couple of times, not just on this call but also on your earnings and such, that you are pulling in a very large number of SMB merchants per month who come to you. How are you, I guess, getting them? How are you building that brand locally? Could you talk a little bit about sort of the sustainability of that?

Yes. It's actually one of the great strengths of Payoneer and of our business. As I touched on earlier, I mean, for a business that isn't a consumer business to be one of the top 1,000 most trafficked websites in the world according to Alexa is pretty extraordinary. And again, the so much demand out there among entrepreneurs around the world, especially in emerging markets. who see an opportunity in a digital world to participate in the global economy in ways that they couldn't before. And they see marketplaces as an important on-ramp and they see Payoneer as their financial partner in this digital world. So the #1 source of new customers is payoneer.com, with folks coming to Payoneer because they know that they want to actually participate in the digital economy, and they know that Payoneer is the place to get started and open a financial account. But we have a number of different other ways that we acquire customers. So one of the important trends in our business over the last few years is that we've been investing in go-to-market teams in many markets around the world. And these are in markets ranging from the biggest, most developed markets in the world like the U.S., U.K. and Australia. But more significantly in markets like Eastern Europe, in places like Ukraine and Serbia. In South Asia in Bangladesh, Pakistan and India. In Latin America with Argentina and Colombia and Brazil. And you can kind of move around the world and see all of these exciting markets where we're acquiring kind of larger SMB customers that are driving more volume, but also at lower take rates. And then finally, partnerships is a really, really important part of our strategy where we're actually acquiring a lot of new customers through our bank partnerships, where they're integrating the Payoneer accounts into their online and mobile banking platforms. And other partnerships like marketplaces around the world.

Great. Great. So one follow-up question from that is, once you acquire a customer or once a customer like this comes to you, I guess, the -- I guess, step 1 is probably going to be risk management. Is it a good customer. What are your systems for that? How long does onboarding take? And if you can talk also about the trend line of a customer that might have come to you, say, a year ago versus a customer that comes today, is the attach rate of sort of the breadth of products higher than it used to be before? Or do they still ramp up slowly? I know I threw a lot at you there.

Yes. No, it's great. So starting with, as you mentioned, the initiation of our relationship with customers is a compliance process, right? We have to go through a know-your-customer process and onboard those customers. And out of all of the applications we get, we probably eventually are able to approve directionally 80% of those customers. So -- and a chunk of that is automated, but some of it isn't automated. And so it's a meaningful -- as you might imagine, to cover 190 countries around the world with an ability to actually do KYC and onboard these customers and underwrite them is really not trivial. And so this is, again, another really important part of the overall competitive differentiation of Payoneer is we've grown up doing this, covering harder parts of the world to cover harder parts of the world to actually do know-your-customer work. And it's really a core part of overall the unique value proposition that Payoneer is able to bring. And so once we've onboarded those customers, as you mentioned, I mean, there's -- and that can be anywhere from instant with fully automated and instant approvals, all the way through processes where we may have to collect a lot of additional documentation, which could take a couple or a few days depending on the nature of the services that customers will want to use. So in terms of comparing customers today versus the past, what I would say is that we are -- with our sales teams, we are more commonly acquiring customers that earlier on are using us for more than 1 service. And so that is absolutely something and we talked about a couple of the customer profiles in our third quarter. We talked about AutoZone in Australia, and we talked about TwinBarbarians in Thailand as illustrations of some of the types of customers we're onboarding. Global brands, selling across multiple marketplaces and channels, using us for accounts payable, using us, in some cases, for working capital. The smaller self-serve customers, which come to us in larger numbers still are typically starting with 1 service. They are often now we have multiple entry points that we didn't used to have before. So now they might increasingly sign up to use our B2B services instead of marketplace payments, for example. But they still are more often still signing up and using Payoneer for 1 service, and then we grow with them over time through that self-serve platform.

Got it. Got it. And maybe this is more of a financial question. But across 190 countries, you have, let's call it, these hundreds of thousands and you're approving 80%. In many of these countries, I would imagine what I would call thin-file locations, there aren't maybe credit bureaus. What's the -- I mean, I don't belabor the point, but it seems to me like this should be a pretty core advantage is what have you spent on the system to kind of build that infrastructure to do just that?

Yes. I mean this has been a core system for us for over 15 years. And in addition to the system, we have teams of people that manage the overall compliance approval processes as well. And look, there are a number of different -- not every onboarded customer has the same set of services available to them. So we actually rightsize the onboarding to what the customer is going to do. So in some cases, we're doing more identity verification work. And in other cases, we really are doing a full kind of business verification because we really need to understand every aspect of what that customer is doing in their business. And so depending on those, we use a variety of tools. But we also have built a variety of processes and OCR capabilities and things like that, that we use to authenticate the validity of different documents and essentially help us manage and automate that scale of onboarding capabilities. So I mean it's -- at this point, I mean, it's tens of millions of dollars, if not more. It's not something that we've quantified. But this is such a core system that we've been building around for so long. And again, part of what's unique is not just the capabilities, but we've onboarded so many customers from emerging markets. I'm not sure anybody else has ever seen outside of those markets, that scale of customers from those markets. So every process we have has really been tested by a scale number of applications from all of these emerging market countries.

I would just add, it's not just technology. It's the know-how that's accumulated over all these years. And working with regulators and bank partners around the world, you build up an understanding of what's required. And so it's a very challenging environment, to your point, Ashwin. It's about having a very deep and wide boat, and I think that goes to add to the value of Payoneer.

Right, right. And I do have an incoming question from an investor on this topic. Because when we think of 300,000 monthly applications, how does that compare to the past, say, a year ago? And if the conversion is 80%, you got 225,000 to 230,000 monthly applications against a base of 5 million. And they're taking more of your service. Should we be looking perhaps at a much higher eventual growth rate? And also, if it's higher than before, why is it higher than before? Is it the rebrand? Is it the IPO process? Is it the new marketplace additions? Have you done any sort of analysis figure out why you're getting so many more applications?

Yes. So great question. And so a few things. First, we are getting a higher number of applications today than we were a year ago. And a year ago, we were getting more than we were the year before that. But we've been at a pretty elevated level of applications for quite some time. The number of applications continues to grow for actually a variety of reasons. One is just the growing awareness around the world of the opportunities in the digital world. And so we are more a reflection of the growth of digitalization and the global trends that come along with it. Second is the go-to-market investments that we've made in our sales teams around the world and our partnerships around the world. Like our bank partners where we're actually -- they're integrating Payoneer into their online banking and mobile platforms, which drives new sign-ups for us. And also new marketplaces that we work with as well. And then finally, the additional services that we offer create additional entry points for new customers that before might not have seen value in Payoneer, but now there's value that we can provide. But there's also an important clarification that I want to walk through because there is a waterfall that we go through. The -- from an application, there was an approval. But like a lot of small business-related platforms, not every small business that's demonstrating an intent to do business actually really succeeds. And so as I mentioned, we're an on-ramp. Often, there's no cost to sign up. So often a small business or an entrepreneur will sign up for a Payoneer account and get approved, but never succeed at actually selling anything internationally. And so what we see is there's actually a fairly steep drop off from the approval to the actual ongoing customers that we actually end up with on the platform. So -- and again, within that, there's a fairly wide range. We have customers that are literally getting hundreds of dollars a month from selling services, and we have customers that are getting millions of dollars a month from exporting goods that own factories. And so there's a very wide range in terms of what each customer represents as well.

Got it. Okay. Okay. I also have a take rate and ARPU question that sort of come in. As you add new services, I think tech services, compliance, other things you may be considering adding. So part one of it is could you talk about the product road map a little bit with regards to what's coming? And secondly, how should one think of how this increases ARPU, take rate and so on?

Yes. And Michael, I'll start and obviously, feel free to chime in. So we have a number of areas that we're excited to be investing in. And it really is covering a wide spectrum of very large universes of opportunity that ultimately all wrapped together to provide businesses with a more comprehensive set of tools to sell and get paid around the world. And to then manage their businesses and deal with all of the financial complexities of managing a global business. And so areas like our B2B AP/AR, we're making meaningful investments to continue to broaden and expand that product capabilities, make it easier for businesses to pay and get paid locally in more places around the world with more payment methods, with more integrations, with more software tools and ERP systems and accounting platforms. And a more robust set of tools on both sides, the payer's and the supplier's. And so that's a big area of investment for us, and that's a higher average take rate than the business overall. So as we invest in that product, we've actually talked about how in the third quarter of 2021, that B2B AP/AR was 10% of our volume. Where in 2020, the same quarter, it was 7% of our volume. And so it's a higher take rate part of the business. It's growing faster than the business overall. And we're making meaningful investments in go-to-market end product. Our working capital offering is another area that we're making meaningful investments. It's a gigantic category. The World Bank has estimated there's over $3 trillion of unmet working capital need for small businesses in emerging markets alone. And so what we see is an opportunity. We've onboarded customers. We then see their cash flows. We're in a unique position as a trusted partner to actually give them access to much needed capital. And so this is an area where, again, it's lots of opportunity. We're still very early days in a huge addressable universe, and it's a highly take-rate-accretive part of our business because there isn't any incremental volume. We're basically underwriting the volumes that we have and providing and generating incremental value on top of it. The commercial card offering with our virtual commercial card. We talk about volume, something that is worth clarifying. When we describe volume, it's when volume comes to a Payoneer customer. So we count that volume once. Most of the revenue we generate is when our customers use that volume and do something with it typically when it goes off of the Payoneer platform. And so part of what's exciting about the virtual commercial card, and we also have a long road map ahead of product investments here, is that it generates a significant premium to our average take rate. And we're trading out for our customers them paying us a fee to withdraw money from the platform, where they now don't have to pay us anything. And we generate a higher take rate from the card usage. So it saves our customers' money and we generate a premium. So it's a great win-win opportunity there. And so not surprisingly, it's something our customers are enthusiastic about. It's still early days but growing quickly and also really an accretive part of the take rate story. And then, last but not least, is Merchant Services. We made an acquisition in 2020 of a company in Germany named Optile, and we're building a global merchant services offering, as I touched on before. And again, this is something where as we rolled this out for small businesses, there's revenues from getting the money in as well as the money out. And so we have multiple revenue drivers there. So these are all areas we're making meaningful product investments. We're ramping up our R&D capabilities. And they're all take rate accretive parts of the business. And so these are all things that we're very, very focused on.

Yes. I would just add that as we continue to add record numbers of new customers, it's truly coming from really diverse geographies around the world. And a lot of these tend to be smaller customers with higher take rates, too. So as we've onboarded these new customers as they scale over time, that will also be helpful to take rate as well.

Great. Great. Does -- where an SMB's product or service is sold, does that have a bearing on your take rate? And that's not necessarily a cross border question. I meant more like someone selling on a platform x versus platform y. Does it matter by platform? Or do the -- does it really depend on the SMBs on volume?

Typically, it's going to vary more based on the vertical market, the size of the transaction flows, the size of the customer and the geography of the customer, more so than it does a specific marketplace or a channel like that. But there are a number of variables that really do contribute meaningfully to what the ultimate pricing would be for a given customer.

Got it. Got it. Okay. One question I do get is, with regards to volumes, what portion of your volumes have not yet recovered to pre-pandemic levels? And I know it's a tough question because you continue to sign new merchants. And someone signed during -- in the midst of a pandemic, you might not have full appreciation of what their real volumes could be. But is there a way for you to size how much -- just for having the customers you have, how much growth can you get?

Yes. So a couple of pieces to the question. And again, I'll start, Michael, and obviously, feel free to chime in. So first, in terms of vertical markets, I would say the vertical market that has not come back to pre-pandemic levels for us is the cross-border travel market, which was one of our important verticals. And while travel has started to come back a bit, most of it has been closer to home and larger markets. And more of our travel volume is skewed more towards more, again, places like a Southeast Asia or a Latin America or markets like that. And as a result, those have not really seen the same kind of rebound as either domestic travel or travel that's kind of closer to home like a U.K. to Europe or things like that. So also, we've talked a bit about how there's been a bit of e-commerce softness as we've gone through 2021. And so that's more comparing within the pandemic than before the pandemic. Our 2-year growth rates are actually quite healthy within the e-commerce vertical, but there's been a bit of a tough compare. And again, supply chain and logistics issues have been challenging in the last 12 months. But overall, what we see in our business is that our cohorts performed very, very well over time. And we see growth comes from a number of different directions. One is that marketplaces tend to grow. Digital commerce is growing. The small businesses that succeed tend to grow. They tend to look to sell in additional channels and additional places. We actually have some offerings that help them with that. Our green channel offering is designed to help introduce merchants into new channels and new places to sell and to streamline their onboarding process into those new sales channels. And so we actually have really strong cohort performance over long periods of time. And you can see this actually in our investor presentation on our website. You can see these layering of cohorts over time with really strong growth and each cohort being bigger than the one before.

Got it.

And maybe just throwing in a little extra gravy on top of it is that we do have $3.7 billion of customer funds on our balance sheet. So today, we don't really earn much in terms of an interest rate on that. We do -- we are able to earn interest as rates go up over time. That will just be -- yes, extra revenues on top of everything else, but that's not -- we haven't built that into our forecast. But if it happens, it will be extra...

Great. Great. Just a quick follow-up on those comments. To what extent have you sort of built in, say, for example, Asia opening up, which would -- I think would help with regards to travel, particularly the marketplace clients you have, those sorts of things? I mean, have you built in a 2022 regional recovery first half, second half? I mean, I don't want to get way too granular, but any color you can provide on that?

Michael, do you want to?

Yes, sure. We haven't put out our '22 forecast yet. And I think in terms of -- for Q4, we've kind of made it clear that we don't expect any meaningful increase in cross-border travel. We have seen travel increase. It's just that the type of travel has been mostly same currency or low take rate destinations. We do expect that will improve over time, but we're monitoring that. And in March when we put out our '22 numbers, we'll be able to put a little bit more color to that.

Right. Okay. Okay. So just as we wrap up on time here, last question, bring it down to the numbers. Could you talk about your path to 20%-plus adjusted EBITDA margins and the gap that you have between -- currently between transaction profit north of 70%, how much leverage do you have there? How do you drive that back?

Yes, it's a great question, and it's something that I actually try to steer investors to when they're looking at growth because transaction profit is even growing faster than revenues. And that variable profit is a really good indicator in terms of the heartbeat of the business and how the business is performing. So that's been very strong all throughout. And to your point, if you look sequentially, all the quarters, when you normalize the quarters this year, we've been sort of in the upper 70s in terms of a transaction profit margin. And so really, that is the opportunity for us to decide how much we want to pull out in terms of profitability and how much we want to invest back in the business. For sure, based on everything Scott just went through in terms of the unique opportunities to scale our business and build that platform, we're continuing to invest back in the platform. So where we had initially, in the beginning of the year, stated that we were going to go from what was historically for the last, going back many years, positive EBITDA business that we're expecting to invest heavily to bring it into negative EBITDA. We actually now have updated our guidance, and we're going to be positive EBITDA for the year and sequentially continue to increase that adjusted EBITDA. And it's really just a matter of that we're investing as fast as we can, but we're also growing so quickly as well that is generating some bottom line EBITDA profit. But our goal right now is to continue to grab share in the market, and we're investing heavily. And as Scott mentioned, Merchant Services, which we're launching, as we mentioned, our Payoneer checkout capabilities this quarter is something that we continue to invest heavily in amongst our other cash growing businesses, B2B and so forth. So we're going to keep pressing on the gas at this point. And I think people looking at that variable profit will continue to see the heartbeat of the business continuing to stay very stable in terms of profitability at a very high level as we continue to grow very quickly.

That's great. That's a really good note to end on. So thank you both. I really appreciate your insights. Thank you for doing this for us.

Thank you.

Thanks so much, Ashwin. Always a pleasure.