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

Let's get started on this session. I'm Ashwin Shirvaikar. I'm Citi's Global Head of Fintech Research. And it's my pleasure to welcome next Payoneer. From Payoneer, we have Scott Galit, who is the Co-CEO; and John Caplan, also Co-CEO. And thank you both for being here. Thank you for doing this.

Thanks, Ash.

I'd like to start with a setup question in terms of just kind of level set for everybody in the room. Who is Payoneer? What's the value proposition you're brining to the table? So maybe just start with that.

Terrific. So hi, everybody. I'm John Caplan. It's really great to be here. Thank you for having us. I think the first way for folks to think about Payoneer is that we built a payment and financial operations provider for emerging market SMBs and the companies that they do business with. And there really isn't a single firm that is directly comparable to Payoneer today, the platform we've built, the brand we've built, the assembled relationships and our go-to-market strength. We really differentiated the business through a number of, I think, very strategic sensible, pragmatic steps. The first is the global set of partnerships we put in place. I'd say, the second is our strong compliance and regulatory framework with regulators across the globe. Our go-to-market teams that are in emerging markets, serving our SMB customers. Our customers are the SMBs themselves. That's an important distinction and one that folks should understand, we have a high-tech and a high-touch model serving those companies. And our strategy has been to grow by acquiring more SMBs and selling them or providing more of our services to our installed base. And the TAM, the addressable market, is so substantial that it feels like despite being a 15-plus-year-old platform, we are at the beginning of our opportunity. It feels very much like the infrastructure of the Payoneer platform is so well established that we're now able to accelerate our growth into the future. And I think you can see that in the results of something we refer to as our high-value services. The high-value services are the utility that our SMBs use to make managing their money easier, right? So if you think about how Payoneer your functions, Payoneer -- at the essence of Payoneer is the Payoneer account, where money comes in, and SMB has money on the account, and money goes out. In all 3 sections of the Payoneer's account, customers account, we're providing exceptional value. Our B2B AP/AR product, makes it easy for an SMB around the globe, who's doing business cross-border to invoice or get paid by one of their customers. So if you're a Vietnamese table manufacturer and you're selling tables to Argentina, you can get paid easily by those customers. The money on, we have an exceptional working capital product by one example for your funds that are kept on the Payoneer account. There's over $5 billion of customer funds on the Payoneer platform. And then the money outside of our business, the accounts payable side of our business, includes things like make -- to be able to make a payment with Payoneer, our commercial MasterCard product that makes it easy for an SMB who's getting paid in dollars, for example, by advertising on Facebook or on Amazon or another platform, without repatriating their funds in advance of doing so. So really, if you think about what we've established, it's a unique solution for cross-border SMBs and the companies that they're doing business with. I think in the short term, we have an extraordinary opportunity because our emerging markets are growing faster than developed markets. And that's where our strength is. Scott and I were in India a couple of weeks ago, and we have 1% market share in India. Our business is growing 35% year-over-year in India. And the GDP of India is growing 7%, right? And we have a great team, a small team, but a great team that's really focused on penetrated that market. And across the globe, you can see very similar setups for Payoneer, So we are short term, I think excited about how we're positioned. And long term, given the infrastructure we've built, the brand we've built, the platform we have, I think we're just at the beginning of this pretty remarkable journey.

Awesome. Great. Before I get into some of the details on the elements that you laid out, I do want to ask you Co-CEO structure is unusual for any company. So specific skill sets, what does each of you bring to the table? Can you comment on that?

Yes. Why don't I start with a little bit of context for why we would pursue such a structure? So first, I had some background John and I started to get to know each other. I was at Payoneer, John was at Alibaba. And it actually kind of accelerated kind of our professional friendships, so to speak. During COVID, when we weren't traveling so much anymore and we would meet for socially distance walks in Central Park, walking around and talking about some things that actually were -- we found we are pretty uniquely paired to talk about, there aren't a lot of people in the world candidly, who have worked on scale platforms with global brands focused on small- and medium-sized businesses and cross-border commerce. So what we found was, we were able to have conversations with depth and complexity that you really couldn't find in many other places. So as I started to think, I've been at Payoneer over 10 years, I tend to think in very long term, as I started to think about what was next for Payoneer as I thought about how I would transition the company to its next step and its next stage of leadership. And as John was thinking about his next step after Alibaba, it was really this rare opportunity for us to collaborate together, bring kind of this incredible energy that we would get by talking and exploring ideas together and actually now do it within the context of Payoneer. So that's really the foundation of it. It was 2 of us professionally and then transition. And so the idea, and we've communicated this publicly, is that John will be the sole CEO, no later than the end of 2023. And the idea, again, is thinking from a very long-term perspective and continuity. I mean, I am so passionate about Payoneer and what we've built and what we do. And we thought that it was a great opportunity for us to work together to collaborate and to ensure a very smooth transition. And kind of from a decision-making framework, we have divided roles and responsibilities, but also we've got kind of a mechanism. Whenever John is ready to kind of take the next step, take leadership of something incremental that I'm taking a step back and John is taking a further step forward. And so a good example to illustrate this is Assaf Ronen. Really excited to bring in Assaf as our new Chief Platform Officer. It's the first time we've had such a role. Assaf is reporting in to John. So we're -- before technology and product, we're part of my direct reports, we've now started to transition that to John with Assaf, so they get to build kind of the next generation of leadership together and kind of build the future vision for where Payoneer is going to go.

I joined the company 6 months ago and really 3 key sort of takeaways. The opportunity is actually far greater than I realized. So it's even more exciting as an executive to join a company that feels like we are very small and there's a massive TAM, and we're in the lead. So like that's an extraordinary feeling. We can do better, right? We are -- we hold ourselves to the highest professional standard, the highest execution standard, and we want to serve our customers fully, completely unlike anybody else in the planet. And I think we have the opportunity, and Scott and I together have been talking a lot about this, about how -- what the future of being across border SMB looks like and how we can center everything we do on serving that customer effectively. And I think that's, I think, probably the second area. And our customers are increasingly telling us, they need us. And that's really important. I think there's a misperception that Payoneer is a tax on the money highway between Amazon and an SMB. And that's actually just inaccurate, right? We have less than half of our business is e-commerce today and most of our customers are increasingly using more of our services. We have the opportunity for all of them to use all of our services, like that's in front of us. But we are just at the beginning of our journey. And in terms of the Co-CEO partnership, we are different, different executives, different approach, but we have such a shared goal and a common desire to build a 100-year business, right, to create opportunity for the world's SMBs that we've really been good sort of LEGO pieces, I don't know with, peanut butter and jelly. I don't know what the right Monday morning analogy is here, but the -- we really do fit and the -- when you have a common goal with fresh perspectives and unique skills, you can do extraordinary things. And we like to say to the team when well-meaning people get together to do meaningful things, the outcomes are pretty great. And our -- we reported earnings last week, we continue 30% revenue growth, over 100% EBITDA growth for the quarter. We are delivering.

Yes. Great. Super. One of the attractive things about Payoneer, you do have multiple growth factors. Like think what digital marketplace is? Think of the B2B APR stuff. Let's maybe take them one at a time. Think of digital marketplaces. Just kind of at a very basic level, what are some of the things you do, who is your customer? And how do you monetize, basic setup of why that's?

So I'll take that one. The marketplace -- the best marketplaces in the world are we have relationships with. And -- but they are a source of funds into the Payoneer account of our customer. Our customers are the SMBs. So they get paid and paying your helps them get paid, but our customer is the SMB. And many of those customers started Payoneer before they ever join a marketplace. And what's interesting is, if you're the e-commerce seller reference in Vietnam, you may -- you'll join Payoneer, and Payoneer will help you as you join Walmart or eBay or Amazon or any of the other platforms where you -- MercadoLibre or other platforms around the globe, where you may sell your goods, but all of those funds are going into your Payoneer account. In select cases, we have marketplaces paying us for onboarding services or KYC services, but that is a tiny fraction of our business, frankly. And really, our relationships are most principally with the SMB and their ability to sell around the globe. And it's marketplaces like Amazon or Fiverr, Upwork or others. It's not limited to just goods in any case.

Yes. But what is it that the marketplace cannot do themselves in this case, or you just coexist?

Yes. So marketplaces are remarkable and capable of lots of things. Payments is hard, right? And payment is exceptionally complex and difficult. And customers, SMBs want to have some space between their financial activity and their transactional or volume activity. And so we are -- I think we're uniquely positioned to provide that value for them. We are replacing checks and wires and ACH, the things that are -- feel like outdated parts of the financial supply chain. And marketplaces may dip their toe there, we think we're -- our network is uniquely strong and in a position to support our SMBs.

One additional note that John touched on a minute ago is that notion of the Payoneer account is the heart of the relationship with the SMB. And think about it, you're managing a business, you're selling in as many places as you can support and manage, you want to have your money come to one place. You want to manage your financial operations in one place. Payoneer provides that for our customers. And the majority of the volume in our business is coming from to customers that are using us to get paid from more than one place. So as a result, they're kind of concentrating their activity with Payoneer, and we then are able to provide them with kind of more of a complete solution across all of their financial needs regardless of where they may be selling. And that's something that a marketplace just can't provide.

Yes. No, it makes sense. It makes sense. No, because the marketplace is one of the many places, like you mentioned.

This is important. If you're a seller, you're looking for as much distribution as you can get.

Yes, yes. Yes, absolutely. On the second thing, B2B APR, could you kind of talk about what that initiative is about? It's grown tremendously in a very short period of time. I think you just announced 12% of your temp already. So as a company, you're growing rapidly, but this is growing much, much faster. So what is it? Why is it growing so fast? What's the opportunity here?

Yes. So for starters, let's go back and start with the customer for a second because I think it will just help explain the primary use case. We just talked about a marketplace seller, you're a business, you're an exporter. Most of our customers who work with our exporters and you're selling on a marketplace, and we help you get paid into the Payoneer account. And John touched on this before. There's other ways of doing business. In fact, global cross-border B2B trade just between trading partners is many multiples of the size of marketplace commerce. So there are many more small and medium-sized businesses around the world that are exporting goods and services directly to buyers around the world. So what we provide is based on that same Payoneer account, we provide a suite of services that enable exporters to bill their buyers and to get paid around the world as if they had local bank accounts in the countries where their buyers are. So think about your trading globally. You have expenses globally. With coming to Payoneer, one relationship, we kind of give you something like global bank accounts without having to go around the world to establish and maintain them, to better experience for the buyers to be able to transact locally in their home country and their home currency. It's better for the exporter who can now actually manage their currencies all through one platform, have local payments capabilities, and then we get access to all of those same services that John talked about before that we provide for our customers. So it's really just a better way of doing business. And so what's so exciting, this is a multitrillion-dollar addressable market. We're just like so early stages in penetrating this incredible opportunity. And ultimately, what we're competing against is like legacy ways of doing business. It's going around the world and opening bank accounts. So it's trying to deal with having international expenses, but your buyer sent you a wire into your local bank account in your home market. I mean there just aren't great alternatives that are kind of built for the way small and medium-sized businesses actually do business today.

Okay. Okay. In that business, though, you did also announce that you're terminating some clients, which at least at first glance seemed odd to me. So could you sort of walk through that? Is this -- why are you?

Yes, sure. So first, we are a regulated company. We have regulated entities around the world. And so actually maintaining the integrity of our compliance and risk management programs is the foundation of what we do. And so it is routine for us, we actually terminate lots of customers actually regularly. It's kind of ordinary course and payments and financial services that you will find over time that there are customers that are engaging in activity that is outside of your risk appetite. And so B2B, as you said, has grown quite quickly. We actually undertook an effort to do a little bit more of a thorough review of actually our risk policies and procedures. And we identified that there were certain patterns of behavior and certain risks where things like higher rates of complaints and things like that from buyers for certain types of customer activity. So we actually updated our risk policies. It resulted in us terminating a relatively small number of customers, like well less than 1% of the customers using our B2B AP/AR services. But a few of them happen to be some customers that were on the bigger size within that, still SMBs. And so as a result, it had a bit more of a noticeable impact. And so what we reported in the quarter was that our volume growth in B2B AP/AR was about 40%, and that it would have been a little north of 60%, if not for those terminated customers. The revenue impact is smaller because bigger customers generate lower fees and as a result of lower take rate. So the revenue performance was actually better than the volume performance by comparison. And as a result, for the next few quarters until we kind of lap it, they will have a bit of a headwind on the reported growth. But overall, the underlying trends of customer acquisition and customer retention are very strong. And there is nothing kind of out of the routine here. Just the outcome was, again, a little bit more noticeable than what it would be in certain other parts of the business. But we've terminated marketplaces before. We've terminated merchants before. I mean it's kind of part of the routine hygiene of managing a business. There's no kind of classically defined high-risk segments or something like that, that we're supporting. These are exporters of goods and services, kind of normal ordinary course kind of stuff.

Okay. So if you looked across those clients, they wouldn't be that they're all in this industry or this particular geography, you wouldn't see the normal KYC that every financial services company does, every -- takes its time?

Yes. So think of it as kind of periodic reviews with more knowledge, more insight and more information to kind of actually make better decisions than we could when they came in it.

Okay. Okay. In terms of the beneficial impact of interest rates, because you did have that on your interest income this quarter, how should investors think about that in the current environment?

Sure. I'll take a start, and then Scott, if you want to add. The -- our business, as I described, it's money in, money on, money out. As the money comes in, our customers leave balances on our platform, about $5 billion of balances. Over half of those balances are in interest earning accounts, and we are in those interests. Over the last 70 years or 80 years, interest rates have been 0 for 9 of those 80 years, right? So the low interest rate environment is actually abnormal for a company -- for the world, but certainly for a company like ours. What we -- as interest rates have grown, what we've decided to do is to take a portion of that growth and reinvest it in the business. So this quarter, for example, we're spending about -- we'll have about mid-20s of interest revenue. We're going to spend around $16 million of -- in Q4 on go-to-market activities, marketing activities, engagement of our organization. We have strategic planning going on, and we've brought in third-party consultants who are actually aiding that strategic planning work of geographic product and platform opportunities. Long term in 2024, we have not communicated guidance for '24, but we did say and we feel comfortable saying the quantum of EBITDA in 2024 will grow pretty significantly, I believe, and EBITDA margins will grow moderately. And the reason why we caveated them that they'll grow moderately is we have not yet prepared or presented our 2022 -- 2024, excuse me, forecast or beyond, and we wanted to give investors some insight into how we're thinking about it. And so what we think we're delivering for investors is short-term, very strong operating results and EBITDA. And long term, the prudent and responsible thing of taking the investment while interest rates are, frankly, abnormally high, taking a portion of that and investing that in our future growth. And both delivering for the short term and delivering for the long term, given the size and scope of our opportunity is the responsible pragmatic thing for us to do because we're playing for the long-term opportunity. So the short-term view is powerful, and the long-term view is powerful.

Just one caveat, that is '23.

'23.

Oh, did I say '24. I'm having 4 cups of coffee at this time. Sorry, everyone.

Okay. Cool. But if you want to give '24 outlook...

I do not. Sorry, I apologize for the miscommunication.

In terms of just kind of a major topic of conversation economic downturn, how might it affect you? How are you thinking of sort of the planning of the business around it? So if you could talk about, first of all, whether you are actually seeing any signs of it? Secondly, whether you are or not, how would you adapt to it in other parts of your business that are more or less affected?

Yes. So John touched on this earlier. One of the things that I think we maybe could do a better job of talking about is just how diversified our business is, e-commerce is an important part of our business, and it does have exposure to the consumer. And certainly, the inflationary environment and interest rate environment is creating some challenges there that I think folks are well aware of. But we have a lot of other parts of our business that are really driven by different types of factors, whether it be travel, whether it be our B2B AP/AR business, which is about the export of services and goods. We have remote work and freelancing and we have services, exporters like EPO companies. There's a very, very social commerce platform. There's a very broad spectrum of business types that we support, and that creates kind of a resiliency in the business model. And we've been through kind of different market cycles before. And what we have seen is that we actually -- some things may suffer or other things actually can kind of compensate for it and provides quite a bit of stability and a lot of different ways for us to both grow and navigate through periods of challenge. When it comes to managing the business, I mean, we're in this great position of financial strength, where we have a profitable business. We've had adjusted EBITDA positive results for -- since 2012. We think we're kind of very prudent stewards of capital. And so as John touched on, we're making discretionary investments. We're not ramping up our headcount like crazy or things like that. We're making what we think are prudent decisions based on financial strength, massive opportunity, strong position, strong balance sheet to give us the ability to deliver improving results in the short term and create value in the short term and ensure that we're on track to deliver our long-term target business model that we've talked about of 20% plus revenue growth and 20% plus EBITDA margins on a sustained basis in the future. So we think we've actually got a pretty good diversified mix of business opportunities and capabilities and that we're able to go from strength to the strength.

Okay. Okay. One of the things that I feel you've not necessarily talked about as much as you could in your brand, right? And you kind of mentioned India and 1% penetration, and I'm reasonably sure if you looked across, it would probably not be that much higher than, say, mid-single digit in a lot of countries, right? So how do you grow your brand? How important is that process? Are you going to do something different with the brand than you were just in terms of the focus because you're building out a product in a platform?

So this is a great question. So Scott and I actually were -- as I said, we were just in India. And we were in India 3 weeks ago, and I wish we had been there last week actually because last week, we had in 7 cities, 7 events, 1,000 people at each event talking about cross-border commerce, the opportunity to do business cross-border. So we are -- pre-pandemic, the company was very focused on events and knowledge share and community building. During the pandemic, that obviously had to slow down for all the obvious reasons. We're ramping that up again, which is exciting and thrilling frankly, to see entrepreneurs come together, talk about the power of the Payoneer platform and engage with the ecosystem of partners. We get over 300,000 applicants at the top of our funnel every month, without a great deal of marketing spend at all. We are beginning to test in 4 markets in the fourth quarter: in the Philippines, in UAE, in India and in Brazil. Some over-the-top marketing to support our go-to-market efforts, the early indications of that have been really positive. But the time will tell on the efficacy of it. But we think our brand is an ally to SMBs who are doing business cross-border and we are not going to be shy about that. We're proud of what we've achieved and believe we can help more people -- I've said this before, but brilliance is evenly distributed around the globe, what opportunity isn't. And if we're here in New York, it's hard to realize how good we have it, frankly. But if you're an entrepreneur in some of the emerging markets around the globe, having access to modern financial technology like Payoneer's is the difference between struggle and success. And we are excited to go out and talk to folks about that and beginning to do so.

One very practical element of that, that translates from a business model perspective is it really comes with low customer acquisition costs, which has a platform that's serving small- and medium-sized businesses right? You obviously can't afford to spend a lot to acquire each of those SMBs. And so that brand and the value that John just talked about of creating kind of a sense of community and paying your being an on-ramp for small businesses to actually get access to the tools they need to succeed, really is something that translates into a very important positive contributor to our business model.

Understood. Right. There are certain parts of the business that kind of tend to generate more questions than others. So one of them is your geographical exposure and then in particular, China. And if you could talk about that, and then there are a couple of other items. But if you could talk about that, how are you thinking of it, how your investor conversations gone when you try to explain China?

Yes. I mean one thing, our business is global and diversified, right? We do business in 190 countries. Our business in Latin America, for example, is growing super quickly. Our business in North Africa is growing really quickly. We -- our business in Serbia and other parts of Eastern Europe, growing very quickly. In China, we have a very strong business. We have an exceptional team, and we have held our own there with some intense competition in that we're getting the wave sign of work to slow speed, to speed up, I think.

No, no, no. We've got 5 minutes to discuss 17 questions.

Okay Yes. So we have a great team in China. And one of the things that I think is really powerful for us is our team in China has actually led the way inside of our organization, bundling our high-value services into the platform. And that for our customers. And that is an exceptional case study for us to then use in other parts of the world where we are at earlier stage of development, for example, in India. One of the things we were doing, we were there a couple of weeks ago was taking best practices from China ensuring them with the team in India. With that kind of approach to innovation, I think, is really powerful for us. In Ukraine, where we've had a very strong business, obviously disrupted by the war, we did research recently that 70% of SMBs are continuing to operate as they had been before the war. We've been sort of overwhelmed and impressed by the resilience of the entrepreneurship there and guided that our business will be at about 75% of what we had originally forecast.

Got it. Got it. Okay. And then as you sort of think of -- you were one of the first companies that I think, pointed out supply chain has an issue. And I think you probably did it like in July or June or whenever it was last year. What are you seeing now with that? If you put on your forward-looking hat, have things improved? Things still a problem? How are you adapting?

Yes. So I'd say the good news generally is that supply chain issues have moderated. And so I wouldn't describe supply chain issues as the major kind of challenge facing the market. It was a little bit of an early indicator of different types of constraints and certainly was a contributor to inflation, which I think now inflation and interest rates are more of what's impacting the market these days as opposed to supply chain. Again, we're seeing China, where obviously many goods are come out of China. We're seeing things improve from a COVID perspective there. But obviously, we're very happy to see that things have been improved.

Okay. Okay. And then FX, and obviously, FX, just given how global and diverse you are managing that is an integral part of what you do. A strong dollar does help. But in general, as we sort of think ahead, how do you manage that, maybe take us behind the curve and then kind of talk about that?

Yes. So first, just in case there's any misconception, like we move a lot of money, and we actually do move money in a lot of different currencies, but we actually, as a business has very little FX exposure. So most of what we're doing is we're helping our customers manage their exposure. So again, going back to some of the use cases we talked about before, you're an exporter that's selling internationally. Most of the exports internationally get paid in dollars, and we allow our customers to hold dollars and we're matched in dollars. And so if they want to convert currency or they need it back in their home market or things like that, we will actually facilitate that for them, but it's really an act of facilitating. We're not taking positions or things like that in any significant way. So we've reported that about 85% of our revenues are dollar-based. So that, again, not all that much exposure internationally, and that actually, about 40% of our expenses are dollar-based. So actually, the strength of the dollar has helped a bit with our expenses this year. But overall, part of what, and John talked about this a little bit earlier, we certainly have seen customers finding the real value of having the ability to hold money in different currencies, major currencies. Matching their expenses in those major currencies has actually been more important than ever for some of our customers. And so it's been great for us to be able to really amplify the value that we provide in the Payoneer account to our customers.

My last question, really, a lot of buildings, a lot of it organic -- all of it organic. Most of it is organic, actually. But is your M&A philosophy going to be different?

We're on offense as it relates to M&A. So we are -- if you think about it, we have this incredible distribution network with our go-to-market teams. We've got 300,000 customers coming in the front door, applying to have accounts and active accounts and a very clear approach money in, money on money out. So we are active talking to products and services that we can create more value on our team would create more value for our customers. We have $500 million of cash in the bank. The private company valuations have come down a bit and which makes things more attractive to us, but we will -- we are -- we will -- I don't know if -- I can't think of an analogy. We're looking at a lot of things before we choose something, right? So we are very, very disciplined acquirers.

Okay. Great. On that note, thank you very much for your insights.

Thank you. Thank you.

Thank you, Ashwin Shirvaikar. Thank you very much.