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

Hi, everyone. I'm Jason Kupferberg, the payments and IT services analyst here at Bank of America. We are continuing here with day 1 of the Electronic Payment Symposium. And very pleased to have us -- have with us here the management team from Payoneer. We have Scott Galit, CEO; we have Michael Levine, CFO. And we're going to run a 30-minute fireside chat format here. You can feel free to submit questions to me electronically through the Veracast platform, if you'd like, and we can then ask those questions on your behalf. So to start, Scott and Mike, thanks for joining us today. We appreciate it.

Thanks for having us. Great to see you again.

Yes. Yes, yes, absolutely. So I thought it would be helpful maybe start with some broad strokes for those who might be a little bit less familiar with the story since your IPO wasn't too long ago. Broad strokes on the business model, how that's evolved, where does Payoneer sit in the ecosystem? And just for the benefits of those who might be less familiar, we can start there and then talk into some other questions.

Great. So good morning, everybody. So Payoneer aims to be the world's go-to partner for digital commerce everywhere. And there are a few really important parts of that. So first, we really see the potential in a digital world for any business of any size from anywhere in the world to build and grow a digital business and capitalize on the growth opportunities globally that are presented by digital commerce. And so Payoneer has built an infrastructure that enables these businesses to have a global account and provides them a range of services that they need in order to sell and get paid around the world and then to manage their financial activities through that Payoneer Global account that we provide for them. The foundation for our business and where we started was by helping small businesses around the world sell-through and get paid by marketplaces. Marketplaces have been one of the greatest developments and kind of democratizers of opportunity in our digital world, enabling businesses from all over the world to sell into markets that they otherwise would not have access to. And over time, we've expanded -- and this has been an exciting part of our IPO story and our post-IPO efforts is to really broaden the scope of what we offer to businesses around the world. So starting with marketplace payments, moving into B2B, billing and payments for businesses that sell to other business buyers around the world; and then more recently introducing a product called Payoneer Checkout, which helps businesses that are selling online to consumers around the world to get paid. And then we provide a range of account services, things like working capital, accounts payable tools and other services that help our business customers to actually manage their financial lives regardless of where they're buying from, selling to or managing their business. And so it's a really exciting part of the world, growing very, very quickly as digitalization continues to transform how all business all over the world gets done.

So you're touching more and more areas as part of the business model expansion. I mean, I guess, how do you guys think about your TAM, if you will? And then how do you think about your primary competition set? Because my guess, it may vary a little bit or it's broadening out as your offerings are becoming more expansive.

Yes. So I'll start and, Michael, obviously, feel free to chime in. In terms of the TAMs, I mean, part of what's exciting for us, we built this great kind of global brand and go-to-market machine. And while we're not a household name in the market segments that we operate, our brand is really quite meaningful. I mean we get over 300,000 applications in a typical month coming from over 190 countries around the world. And most of those come to us organically at payoneer.com because people understand and business owners and entrepreneurs around the world understand that Payoneer is an on-ramp sort of digital economy for them. And so the TAMs are massive. I mean, if you think about marketplace e-commerce, I mean, marketplaces are roughly half of global digital commerce. It's been growing. The cross-border piece of that has been growing. Global B2B trade is even bigger than consumer commerce. And so we've now opened up another multitrillion-dollar addressable universe of opportunity by pursuing our B2B services for cross-border exporters. And then our Payoneer Checkout and our Merchant Services effort is, again, another multitrillion-dollar universe of opportunity, helping businesses get paid for their online sales. And so all of these things together are really tremendously large universes of opportunity that we're actually playing in. And we're kind of building on this strength where we started with this global brand, this global infrastructure, from serving marketplaces. For the most part, when we think about competition, we really still wake up every day and focus on how we can help businesses do a better job than the kind of legacy and incumbent infrastructure that they would have used, things like checks, wires, opening bank accounts around the world, to try to manage their global operations and activities, all of which are very cumbersome, not very conducive to the speed, the connectivity and really kind of global interoperability that we have in the modern digital economy.

Right. So basically disrupting a lot of the legacy technologies, payment processes that can kind of bog down SMBs.

Absolutely. And look, I mean -- and not to be -- I mean there's a massive number of participants in global payments and in global commerce, and so it's a very broad and diffused ecosystem. So whether it be wires and checks that banks are providing as part of integrated solutions, whether it be FX boutiques that are providing a range of services to help companies move money across borders. In the marketplace ecosystem realm, you have terrific companies, Stripe, Adyen, Braintree and others that are providing a range of tools to help marketplaces make payments, get paid, things like that. So again, there's lots and lots and lots of different participants in some way, shape or form are touching on pieces of what we do, but there's really nobody that approaches the world the way we do. And we've got a lot of pretty unique things that we're doing within that.

Yes. Yes. Well, there's a lot of fragmentation that you can probably take advantage of time, I would imagine. So can we talk just a bit about pay-in versus payout volumes? Maybe just talk about some of the key use cases on both sides. And what does the volume mix look like there? And to the extent that it has evolved over time, what has driven some of the evolution of the pay-in versus payout mix?

Yes. So the majority of our business is accounts receivable services for small- and medium-sized businesses. And so that notion of helping small businesses get paid for their sales around the world is the key driver of what we do. And we do that for small- and medium-sized businesses across a range of sales channels, so marketplaces, which is where you have the payout for the marketplace, which is a pay-in for a small business. But the vast majority of the marketplace payouts we support are actually pay-ins for Payoneer small business customers. And then across other channels, again, it's really driven by pay-ins for receivables essentially for small- and medium-sized businesses. We do that for small businesses across a range of vertical markets. And so really exciting and interesting categories like remote work, freelancing and digital services, social commerce, cross-border trade of goods are examples there. And then across a range of geographies as well, we've really seen some kind of pioneering markets like China, which really early on became a tremendous adopter of kind of digital channels. But we've seen that whole business model really broaden globally. And so whether it be Eastern Europe, Latin America, Southeast Asia, kind of the Indian subcontinent, I mean there's -- it's really become a very, very global phenomenon as we've seen more and more businesses and more and more governments actually looking to encourage the growth of exports through digital channels.

Interesting. Interesting. Another one of the key strategic initiatives you guys have been talking more about is partnerships with banks, with digital wallets. Would love to hear about how you think about the mutual benefits there for yourselves as well as these prospective partners. And any success stories that you'd like to highlight?

Yes. And so building on that, the last part we just talked about, the -- when you go, in particular, most of our small business customers are coming from developing markets around the world. I mean, again, we have customers in 190 countries, but really developing markets is actually a really important part of customer base is coming from. And in those markets, the -- whether it's banks or government agencies and the businesses in those markets, the drivers of growth are small- and medium-sized businesses exporting into other markets around the world through digital channels, whether it be services or goods. And so Payoneer really represents this amazing partnership opportunity for banks and other companies in those markets that are looking to support both government policy and initiatives to encourage the growth of exports and the growth of small businesses in there -- those markets. So we have a lot of excitement among banks and payment companies to integrate Payoneer. It's not a white-label offering. They integrate Payoneer as a branded global multicurrency account with all of our global payment capabilities by API into their online banking and their mobile platforms that they offer to their small- and medium-sized business customers. It gives those small businesses access to the entire world. The ability to get paid around the world, whether it be marketplaces from business buyers and all of those tools that we provide. All of those currency balances are available through that same bank's interface. And we allow 24/7 real-time withdrawals of money from those currencies into their local bank any -- basically, any minute, any day, anywhere in the world. And so all of that creates a tremendous amount of value for the banks who can now offer a really, really tailored solution that provides a unique global payment capability for their customers. And it provides those customers that are customers of both the bank and Payoneer with amazing interoperability in real time in their local market. A couple of great examples. Faysal Bank in Pakistan is one of the leading banks there. The growth of services exports in that market is a really, really important initiative. A tremendous amount of government focus on that. And so they have a real focus on driving the growth of exports for small- and medium-sized businesses. And so it's a great relationship there. And then GCash in the Philippines. It's the largest mobile wallet, and they have hundreds of thousand -- they have tens of millions of customers, but hundreds of thousands of small- and medium-sized business customers that are using the GCash account as part of the way they manage their business. And so we've actually collaborated acquiring lots and lots of new customers through that relationship as lots of these small- and medium-sized businesses are focused on selling not just domestically, but increasingly around the world and looking for better tools to do that, but in an integrated way that is fully interoperable with the way they're managing their money locally as well.

Excellent. Excellent. And so I wanted to pick up on some of the comments you made around the international presence that you have, which is -- I mean Payoneer is probably about as global or more global any other payments company out there. And so I would like to hear a little bit more about just the geographic evolution of the business. Which regions really hold the most potential here over the next few years? Feels like you've been talking about Latin America a little bit more, so it sounds like that could be some fertile grounds. So maybe a little bit of kind of where we've been, where we're going from a geographic mix perspective.

Yes. Great. So first, as you touched on, I mean, you can't really get more global than us. I mean we cover every country that we're not blocked from sanctions. So I mean we really cover over 190 countries and territories where we have customers coming from each and every month to work with Payoneer. Over 7,000 trade corridors of commercial activity every year that we support. And so we really are very global. And we started really as kind of just a pure digital platform, meaning we didn't have -- at the beginning, it was all self-serve, then we had customers coming to us from all over the world. And the biggest money flows have been from the major developed markets, so think U.S., Canada, U.K., Western Europe, Australia, Japan, Hong Kong, Singapore, kind of markets like that with money going to kind of the lower labor cost markets, right, whether it's services or goods. So we had a lot of activity coming out of Asia. And as we touched on earlier a little bit, China was kind of an early market in terms of driving the growth of goods exports. And so since then, what we've been doing is we've actually been making meaningful investments in our go-to-market teams and building out regional leads and then country teams in important markets around the world. And these are big markets like the U.S. and Western Europe, but there are also exciting regions like Latin America, Southeast Asia, South Asia, Middle East, North Africa, Eastern Europe. And so there's a lot of really exciting opportunity. Again, what's so great about the kind of digital forces that are at work is if you're a smart person anywhere in the world with a computer, you can basically now build a global business. And so you're no longer really bounded by where you are. You're bounded by how smart you are, how technically savvy you may be. And so what we're seeing is just incredible energy from entrepreneurs around the world to build and grow their businesses. Michael, do you want to talk for a minute about the growth we've been seeing in some of the kind of more interesting regions in the world?

Sure. When you look at the geographic split of our business, more than half of our business is growing over 43% last year. When you look at the exit velocity in Q4, that was over 53%. So this is for rest of world, excluding China and U.S. U.S. grew faster last year. We've been seeing more diversification. So many of the non-China locations are actually growing faster. So China as a percent has been coming down [ over the year ]. We're continuing to see that those areas that are growing faster also have higher take rates, good economics, improving the overall economic profile of the business.

So if we look at China, I think China was about 34% of revenue here, if I'm not mistaken. It sounds like if the business continues to evolve on the trajectory that it's on, that concentration will probably naturally decrease. Is that your expectation?

That's the way it's been trending. Q4 was about 32%. So you can see that relative to the full year. And again, we're seeing outside of China growing, most areas growing even at a faster rate.

Yes. Yes. Okay.

So China is growing, just everything else is growing that much faster.

For sure. For sure. Okay. Understood. And I know Payoneer is going to make more of a push into value-added services, cross-sell into the existing base. Which of those have you seen the most traction with so far to date? And any thoughts on how big of a piece of the overall business some of these value-added services could become over time? And what are the implications for take rate?

Yes. I think -- sorry, Scott, did you want to go?

No. Go ahead.

Yes. So the nice thing is there are actually a lot of higher-value services that we've been adding, working very hard. The B2B AP/AR is one that has already significant amount of traction. Share, that's represented about 11% of our volume in Q4. And usually, the take rate for B2B AP/AR is about 1.5x what the average take rate is because there's revenue stream of, to your question before, of volume coming in. We can charge as well as volume going out. And so that higher take rate as a percent of revenues, it's more like the mid-teens. So we're seeing a very quick traction. Again, helps with the take rate, good economics. But we also have new products like our Commercial Card that we started. That's been growing very quickly, and that's a tremendous value-added both for our economics, but also for our customers as they have a great opportunity to hold money off the system without paying for it, but -- and in some cases, getting rewarded for it. And so along with that, we're launching Merchant Services that we're very excited about with our Checkout solution as well as working capital and other solutions that we.

Okay. So more to look for there on that front in 2022. So I did want to talk a little bit more about B2B also. Like you said, 11% in Q4. So what has really fueled that growth? And what are kind of the most common types of use cases or which types of customers have been the initial adopters of the B2B solution?

Yes. So first, just for some context, right, I mean there probably is about $1 trillion of market cap represented by consumer payments companies that are helping businesses that are selling to consumers manage their payments. And in B2B, there's a small fraction of that market cap that's out there even though B2B payments is a bigger market overall than consumer payments. And so a lot of what's been happening is that there's been an effort that we've made, and you'll see others as well. I mean we're talking about gigantic market, lots and lots of room for lots of different -- the same kind of diversity and breadth you see in consumer payments you will see in B2B. What B2B payments has lacked really is kind of the unifying infrastructure of like a Visa, Mastercard that other businesses have built around. So we've been investing to build that kind of customer-centric, kind of more receivables-driven capability for businesses to help them better manage the way they get paid. And it's a gigantic opportunity. Again, trillions of dollars of addressable spend that eventually, we think we have an opportunity to penetrate. And we're in the single-digit billions at this point. So again, we've got a long way to go. What's exciting is we cover a range of use cases. And so 2 use cases just to kind of highlight some of this. One is, think about very small businesses that are selling services around the world. You see this increasingly. It's kind of -- it ties into the remote work trend, where you have these more flexible, mobile, global workforces with people that are working with people in other places. And those -- the people in these other places need to bill, get paid, manage all of that money, and they need it to be done in a very convenient way. And again, think about it, you've got 3 employees in another country around the world to go to your bank every month to ask your bank to initiate an international wire to each of those people. I mean it is just a mess for everybody to manage that. So we create a really, really simple way. Bill your buyers, bill them in their local market. The buyers can pay through an online interface through multiple local payment methods. Again, similar to some of the concepts that you see in consumer payments with the kind of localization of transactions where the buyer is, we've been doing in B2B. But B2B doesn't tolerate all of the same kinds of ad valorem fees. Transaction sizes are higher, risk tolerance is lower. So that's one example. And then another example is think about businesses that are a little bit larger that are selling into a number of different countries around the world. And they otherwise in the past might have gone and opened bank accounts in those different markets to deal with local revenues, local expenses and how to manage all of that. And again, it's very hard. It's very time-consuming, very costly to get accounts opened, to maintain those accounts, to manage all of that. One relationship with Payoneer, we give you access to countries, currencies, local payment infrastructure around the world that is tuned to the needs of a business. And once you've gotten paid, you can actually make payments out of that same currency before you actually repatriate your funds back into your home market. So you get all the interoperability that you would want through one relationship, online and mobile, API integrated into your ERP system that we actually give the ability to bill locally, get paid, make payments and deal with all the complexity of managing a global business. So those are a couple of examples of how businesses are actually just -- they have a better and easier time building and managing their business by using Payoneer.

I know you guys discussed your Russia, Ukraine, Belarus exposure in detail on the recent earnings call. So maybe just spend a minute on that for those who might have missed it and whether there are any potential mitigation strategies you might be able to employ.

Yes. So I'll start with the mitigation strategy opportunity, which -- so first, we zeroed out for the last 10 months of the year revenues from Russia, Belarus and Ukraine. And Russia and Belarus combined were a bit under 3% of our revenues. And adding in Ukraine, it was a little under 10%. So we took the step to zero that out for the rest of the year given the multiple dimensions of uncertainty, everything from sanctions all the way through the disruption in the markets as well as curtailing activities in places like Russia and Belarus. And so for us, I mean, first, I mean we have teams on the ground in these markets. We have lots of employees in Ukraine. We've got lots of customers in Ukraine. And so we've certainly been doing everything we can, first and foremost, to support the people that are there. And part of what's amazing, and as obviously people are seeing an extraordinary amount of resilience coming from people that are there, we actually see the opportunity for some similar types of resilience from a business model perspective in the future. And so digital businesses are kind of inherently more adaptable. And while our customers in Ukraine cut across multiple types of vertical markets, we have good traders. We have service providers. We have digital marketers, remote workers, a variety of different things. What's common across almost all of it is that it's all kind of asset-light. It's all people with their skills assembling other people and using technology, computers and other resources to actually deliver the value that they're delivering. And so we think that the people of Ukraine -- and hopefully, they will be able to be back in their homes. But wherever they end up will actually be capable of actually capitalizing on their intelligence, their knowledge, their resourcefulness and resilience to actually build and grow businesses. So we're quite hopeful for the people of Ukraine. Hopefully, they'll be, again, safe in their homes. But also wherever people end up, we're quite confident that they are showing the world what we've known for a long time, which is there's an extraordinary amount of resilience and resourcefulness there. And we're quite hopeful that they will be able to be successful in the future.

For sure. And so at this point, has Payoneer made any kind of formal decision to exit Russia or not or...

Yes. We've taken steps to already curtail a significant amount of activity in Russia and Belarus. And we've made financial contributions to humanitarian causes as well. And we're working with partners that we have that are relying on us in Russia to help them come up with their own plans and strategies to reduce activity or wind it down. And so that's something that we've been actively engaged in. But we've already significantly curtailed activity there, and we did that as of a couple of weeks ago.

Okay. Okay. That's helpful to understand. Inflation, would love to just hear how you guys are thinking about it both on the revenue side and on the cost side just given the kind of labor market that we're facing. And obviously, a lot of tech talent inside Payoneer. And I'm sure like everyone, you guys are probably looking to hire. So would love to just kind of hear the kind of pros and cons of inflation on your model as you see it right now.

Michael, do you want to take it?

Yes. I think from the revenue side, we're mostly an ad valorem business. So as volumes are again inflated, we get a percent of that. The real question over time will come from the -- where people put their spend. So if they're spending more on gas and food, then what's the percentage they will spend on online orders? So that will -- we'll see that -- what that balances over time. One of the other impacts might be investors have had questions about we're using higher interest rates and what that would mean for us. So we actually -- that's a positive for us in the sense that we do our trust income on customer funds that are on our balance sheet. We have over $4 billion of funds, more than half of which are interest-earning bank accounts. That said, we -- in today's environment where interest rates are low, not really meaningful in terms of revenue contribution. But as interest rates go higher, that actually would be beneficial from a revenue standpoint. And from a cost standpoint, we're a global firm. We have a, I would say, diversified customer -- or employee base throughout the world. So it really depends on local inflation and what that's going to look like. But like everyone else, we're watching carefully labor markets and seeing what the impacts will be.

For sure. All right. Well, I know we're out of time. We really appreciate you guys joining us today for this session at our payment symposium. And for the audience, our next session will begin at 10:00 Eastern, and that will be with the management team of EngageSmart. So special thanks here to Payoneer. Scott, Michael, thank you for your time.

Thanks a lot, Jason.

Thank you, Jason.

Have a great day. Take care.

Thank you.

Bye.

Bye.