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

All right. So kicking off today, I am Will Nance. I cover payments and fintech at Goldman. Very excited to have John Caplan, CEO of Payoneer. Prior to Payoneer, John was President of North America and Europe at Alibaba and the cross-border business there.

So John, thanks for joining today. Really excited -- really excited to have you here, particularly at a really interesting time at Payoneer. I think you just reported one of the strongest quarters in the last couple of years. It seems like momentum has really kind of kicked off. The story has evolved since the company went public about 3 years ago. The company was historically more focused on e-commerce cross-border payouts, particularly from marketplaces to emerging market sellers. How do you think about the building blocks of growth in the business today and how that's changed over time?

It's -- first of all, thank you for having me. It's great to be here. It is a really exciting time at Payoneer. The foundation of Payoneer, as you say, SMBs that sell on marketplaces really built the franchise and it was -- we benefited from the secular growth of marketplaces globally, significantly over the last decade, and we continue to, where we have 20% share of the marketplace payouts business. And our strength there is our brand, our last mile network with -- and our relationships with local banks and the global regulatory framework. But as you say, we just delivered our best quarter in years, and that's because we've entered the second curve of Payoneer's growth. And the second curve of our growth is the insight we have around -- businesses around the globe, cross-border businesses need smart, simple-to-use, fair and trusted tools to manage their cross-border financial activity, and we're delivering that. The old analog banks are not in a position to provide the support to emerging market growing cross-border businesses. And we know that the sort of central nervous system of the global economy is global trade. And whether you're a good seller or an exporter or a services seller or exporter, Payoneer is actually providing a really unique set of solutions. When I think about the significant opportunity we're pursuing, we have 2 million active customers today, over 0.5 million of our ICP or ideal customers. As You know, what they want from us is one-stop shop. They want globalization in a box. They want to be able to use Payoneer to handle all their multicurrencies, all their AR activity, whether they're getting paid directly from a consumer, whether they're getting paid from -- by another business, whether they're selling their capability on a marketplace. And they also want to use Payoneer to manage all of their international AP, using our card products, our emerging workforce management products, our intra-network payments that are flowing through the network, and with $70 billion of AR entering the Payoneer ecosystem and 2 million active customers, we feel really good about where the business is today. And Bea and I were talking earlier the value creation is in front of Payoneer, and that's a really exciting time for us.

Yes. So you just reported a strong quarter, one of the strongest in recent years. Where did that strength come from? Are there any call-outs about how the business is performing so far this quarter?

I love all of our children equally. Like all of our business is performing well. Like, we've seen the source of our strength really is people in the organization, the brand, the mission to solve a problem for cross border business that no one else on the planet has solved, and the platform we've built and in place, and all of the cylinders in the business are firing. Our marketplace payouts firing, our B2b business firing, our cards business firing. And we -- as you said, we reported in Q2 accelerating customer growth and ICP growth at 10%. ARPU ex interest at 18% growth. B2B volume growth up 40%, volume to -- for SMBs that sell on marketplaces up 15%, in fact growing faster than the marketplace volumes themselves. Card usage up 40%, and the fourth consecutive quarter of great growth. So when I think about it, I was writing notes this morning, I was thinking everything is a bit better versus where we thought it would be. And nothing specific or individual. It's a series of good execution, focus and a great value prop for our customers that is delivering the growth that we're seeing in the business.

Yes. No, that's really exciting. You have been a bit more cautious, I think, on the macro environment year-to-date. And I think so far, we haven't seen that. This has been a theme in payments where we're always worried about the future but where we stand today is actually kind of okay. Could you kind of update us on how you're thinking about broader macro trends in e-commerce and otherwise, and how you see things holding up for the remainder of the year?

We said at Q2 earnings that July looked a lot like the second quarter and August look like July. And so the business is stable. It's nice to see consumer inflation coming down here in the U.S. I think that's a positive signal for all of us across lots of businesses. In the first half of the year, our marketplace business, Amazon, Walmart, Etsy, eBay, Fiverr, Upwork, Airbnb, those businesses, we had a 14% growth, and we had guided to high single digits. And I wouldn't say cautious, I would say prudent. There's so much uncertainty, we've tried to guide in a very prudent way, our foot on the gas to drive the growth. The areas where there's I think for us to continue to be prudent would be around the marketplace activity because we -- our growth, although it outpaces the marketplaces themselves, we rely on the Amazon success or Walmart success or eBay's or Mercado Libre or Coupang, et cetera. And we've guided to high single digits in the back half of the year. We hope to outperform there. And the enterprise payout side of the business where we -- which is particularly reliant on the travel vertical. And we'll -- it will be interesting to see as we've seen Americans and people around the globe travel intensely as that continues, we're a net beneficiary of that.

Sure. So maybe we can zero in on the core payouts business. You're a market leader here. You mentioned 20% share of marketplace payouts. What are you seeing from a competitive perspective? And how do you think about pricing and growth dynamics in that part of the business?

Yes. Next year will be Payoneer's 20-year anniversary, which is -- Payoneer is an incredible innovator. We -- the talent that came before the current management team really established, made possible the growth of marketplaces by enabling global supply to sell on those marketplaces. We are the market leader. The position we've build overtime, we've won and we're keep -- we're continuing to win in the marketplace arena. Our 15% growth has outpaced that of those marketplaces. I think because SMBs are business that sell and distribute their products or services on marketplaces. I want to consolidate all of that AR into a single account. It makes no sense to have dozens of accounts or 5 accounts where you're receiving payment. That just brain damage and a challenge for entrepreneur to deal with. So we're seeing -- from our leadership position SMBs and our business continue to pull AR into platform. And I think that's our trusted brand, public on NASDAQ, the breadth of our AP tools. In terms of pricing specifically, we have initiatives really across the board, corridor-specific pricing, product-specific pricing, fees if you have -- if you don't hit the minimum threshold of volume pricing. And we're testing and integrating new pricing strategies to capture more ARPU from our existing customers and cross-selling. One note that I wrote this morning was we've seen 100% growth in card usage for our cohort of customers in China because if you're buying advertising on Amazon or you're buying Amazon or Facebook or other platforms, there's no better way to do it than use paying our virtual card where you're receiving all of your international AR. In terms of growing AR volumes, specifically adding marketplaces, the world's best marketplaces want to work with Payoneer, and the best sellers want to work with Payoneer. So there's a lot of positive dynamics in the ecosystem for us. Adding more AP products makes it easier for people to drive more AR into the platform. And you and I have talked in the past where we were seeing hundreds of millions of dollars leave traditional banks and get added into the Payoneer account just for using our AP products. I think that's a very positive signal about the strength of the AP infrastructure we're putting in place. So that's around the self-funding and then the network dynamics. The more the network grows, the easier it becomes for 2 businesses on opposite side of the globe to both want to have Payoneer accounts to leverage the strength of our network and the trusted brand we have.

Yes. So both from Payoneer and also your own background, you have a lot of insight into the e-commerce landscape. And I think one of the trends that we've heard about recently has been the rise of some of these newer players in the e-commerce marketplace, particularly out of APAC. So how do you frame what that means for Payoneer?

Yes, I love the innovation in e-commerce, right? E-commerce innovation is great, I think, for consumers, ultimately, more choice, more selection, more creative ways to buy, and it's especially powerful for the entrepreneurs that sell their goods globally on marketplaces. Here in the United States, where -- which is the dominant procurer of services and goods from around the globe is the strongest player and will continue to be. But we are seeing innovation at Shein and Temu and other platforms around the globe, and what we're seeing from our seller's perspective is they want to sell on those marketplaces and consolidate the AR into their Payoneer accounts. So they have their Amazon U.S. sales there. They have their Shein sales there. They have their Mercado Libre from Latin America volume there.

No, that makes a lot of sense. So beyond just the core payouts engine, you've been talking a lot about the opportunity for more value-added services. You did an acquisition in the payroll space recently. Maybe you could talk about the opportunity more broadly how you think about the opportunity to expand ARPUs?

Our formula for growth, ICP times ARPU minus cost to serve really is the framework for how we're building the business. And we are -- when you think about driving ARPU, it's directly related to our ability to cross-sell our existing capability to more of our existing customers and then add new capability that those same customers want so that they can manage all their global financial operations. So we -- as you said, we bought a workforce management company. I'm thrilled about it. A great team, incredible entrepreneur, great penetration across APAC, companies called Skuad, based in Singapore, that provides employer of record and contractor management services. When we talk to our B2B customers, 25% of them say, I want to use Payoneer to manage how I pay my contractors in multiple geographies. Manage how I engage with my employees in multiple geographies and consolidating that into the Payoneer financial stack makes it easier for them to do business, and frankly, incentivizes them to bring more AR into the platform or self-load more funds into the platform. When you look forward, I think really, when we're looking at the ARPU equation, it's a combination of seamless payments, right, consolidate all the PSPs into one place. When you receive, hold and send funds right from the Payoneer account, we're working hard on that. Automating the workflows, entrepreneurs don't want to waste time scheduling payments they're making or scheduling invoices they're sending out. And this may seem remarkably basic. But if you're an affiliate agency in Europe or if you're a BPO in the Philippines or you're a software developer, a team of software developers in Argentina, having great workforce management tools that are integrated where you're -- how you're working, makes your workflow easier. We also are opening up the platform to more partnerships. Payoneer has tremendous amount of data about our customers, with customers all over the world. And one of the hardest things about scaling software for entrepreneurs around the globe or SMBs is customer acquisition. Well, we're a machine at customer's acquisition. So the best brands in the world that have great software. We don't have to build everything. We can integrate that into our platform to enable our customers to have more tools. And I think as we think long term, I know NVIDIA was downstairs earlier this morning. When we think about the analytics and AI, we can provide our customers, which we're not doing much of yet today in terms of in their Payoneer dashboard. We do see insights as a way to help the businesses that use Payoneer, be more efficient, be more successful and grow and sell more.

Right. So let's double click on that payroll acquisition. I thought it was really interesting. Could you give the audience a sense for the struggles of doing payroll in a cross-border situation?

Yes. I mean it's Excel spreadsheets and prayers basically. Like if you have a -- if you have -- and we did some research about this, which I found fascinating. Our $10,000 plus ICP, of which we have about 55,000 of them, frequently have multiple entities around the globe, which are even hard to set up. And they have contractors around the globe. You could be a BPO in the Philippines and have contractors in other parts of Southeast Asia or you're a business in Argentina outsourcing work to the Philippines. Managing paying those contractors requires thinking through when the payments get sent, what -- are they delivered at the right time? Do they get delivered directly to a card or they directly to someone's account following up on expense management? And then for employees, there's an entire regulatory infrastructure that you don't want to get on the wrong side of, right? You don't want to learn and understand the employment laws in Croatia and how they differ from those in Serbia, right? That just isn't your value prop if you're making eyeglasses for people. What your value prop is selling more of your products and unlocking more margin. So what our customers have said to us, adding workflow and workforce management into the Payoneer stack just takes a headache off the table. And so Excel isn't the answer, Skuad and Payoneer's payroll product will be the answer.

No, I heard a company just this week talking about the difficulties of doing it state by state just in the U.S., so I can imagine doing it country by country.

And the issue is, as you're successful, you run into tax issues, other problems that if a company scales, the last thing they want to deal with is those worries about where they have nexus. The #1 expense in most P&Ls for most emerging market businesses are their employees, right? And managing that employee expense through the Payoneer product, we think is a way to really get a step function in growth in our business.

So let's talk to the B2B part of the business. It's seen a major inflection over the last 3 quarters. Could you level set for people in the room, what does B2B mean in the context of Payoneer? And then what's been driving the 30% plus growth in the business?

Yes. The B2B business is our powerful growth engine. It's us controlling our destiny. It's our ability to go to the $80 million or more entrepreneurial businesses around the globe that are selling their products or services across borders and say, we're able to help you with your invoicing, with your payments, with your payroll. So today, some example of that, I mentioned a marketing in the UAE, IT outsourcing in Argentina or a BPO in the Philippines, these are smart, sophisticated businesses that are having to deal with analog old banks and long delays with ACH payments to get paid and make payments. It just isn't the modern age. They're not dealing with HSBC or Standard Charter. They're stuck in the old way. And what we're providing them is the new way and the new way we feel like is the account and tools integrated into their ERP systems, integrated into their workflow so that they can manage their payments and their AR. And when we think about those multi-entity businesses, they are really looking for a one-stop shop global solution, reduce complexity, save time and money and improve the certainty of payments. The hardest thing for an entrepreneur is uncertainty. But that's the thing that makes building a business really challenging. That's what you wake up in the middle of the night about is do I have -- did I receive the funds before I have to make my payments, all of that complexity, we're trying to eliminate that. As you said, we've had awesome growth through the first half of the year. We had guided at the beginning of the year to 25% growth. That was coming off at 13% growth in Q4 of last year. We've delivered well in excess of that, as you know, and raised our guidance to 30% growth for the year. I feel very comfortable with that guidance. We are doubling down on the acquisition of the right customers, the retention of those customers and cross-selling. I think this is the beginning of a really exciting part of that second curve of growth in our business, which is acquiring the right ICPs, selling them to the B2B suite of products. We've talked in the past about our Light account and our Pro account. The Pro account as we get there in the beginning of next year is really about bundling all of our B2B products in a simple-to-use way for those cross-border SMB to purchase from us.

Yes. That makes a lot of sense. I kind of want to dwell on it a bit just because I think B2B is a very nebulous term, that gets thrown around. Is it AP? Is it AR? What exactly is it? I mean, Payoneer at its heart has been an AR company traditionally for marketplaces. But for a company that's selling B2B, it's an invoicing product, right? It's how to send an invoice to your customer and get paid. And then you are making that easier for the buyer to actually make that payment at the end. What's their alternative? If there's no Payoneer, then how are they paying the customer?

They're sending a paper invoice and giving them ACH details for them to send the funds to their local bank, and they're hoping that they're getting paid in an efficient way and it's expensive and time consuming. The -- as you know, we've exceeded $10 billion of annual run rate volume in our B2B product. Now that seems small compared to our $11.5 billion a quarter in marketplace payout volume, I think you'll see over time that $10 billion annualized number continue to climb really nicely.

And then obviously, the financial benefits. I mean you've mentioned in the past the monetization on the B2B business because of the value add is just...

Yes, it's multiples greater. So we're seeing in high service economies where our take rates are more than double the take rate of goods exporter take rates, particularly in China. So what we're seeing many more customers to sell to, more products to sell them in places where we can charge them more where there are more of them. You've had in one of your notes, the concept of in cross-border payment -- the best part of payment cross-border, SMB businesses, emerging markets, high take rates. That profile is Payoneer.

Right. Yes, it's the intersection of everything. Okay. I wanted to maybe switch gears, talk about some of the go-to-market and customer acquisition at the business. Historically, Payoneer benefited a lot from word of mouth. You guys used to talk about the number of kind of inbound customers every month, the brand recognition that came from the dominant position in e-commerce payouts. What is the approach to customer acquisition today and how the go-to-market evolved over the last several years?

Yes. It's a really important question and for folks who really understand, acquiring -- because we're local around the globe and have a really great brand. We got 11 million applications from people who want to be Payoneer customers annually. I mean, that's a staggering number. We're spending a lot of time trying to cherry pick the high-value customers out of that. When we look at the high-value ICP acquisition, what we've done is the following: we've tiered markets. So we've identified the specific countries where we believe our right to win is significant enough where we're starting to see us with low single-digit market share in the B2B space. So if you think about Argentina, Ukraine, other parts of the globe, Turkey, we're capturing share from analog banks, and that share actually begets more share because in SMB land, it's all word of mouth. Once you get the influencer in a vertical, the others follow quickly behind. So the first is tiering markets. The second is we've tiered our customers. We know that our ARPU for a customer that does over $10,000 a month of volume on $120,000 a year of annual volume is so many multiples higher than the long tail of our business. We focused all of our go-to-market effort at the high-value customers. A year ago, it was 10,000 plus. Now it's at 50,000 plus. We're seeing exceptional growth on customers, 250,000 or greater. Just last week, I was meeting with salespeople from the Ukraine, UAE here in the United States, talk hearing them describe that our suite of products is unique to meet the sort of basic needs of cross-border businesses of that size, right? That's sort of big enough to be meaningful, but not so big that a bank cares about them, right? And when you have a really interesting business that's underserved by a global player, and we can provide that solution, there's a lot of runway for us in front of us. So the first is tiering countries. The second is tiering markets. We are focused on the outbound motion. I described the 11 million applications. We're now very directly identifying segments of the global economy where our product meets the needs of those customers, and we can target them, call them on the phone, go see them in person, explain the benefits of our product so that they joined the platform. We have over 100 CSMs around the globe whose sole function is supporting those customers and cross-selling the stack. So we talk about the success in China of the card product as an example, directly correlated to our go-to-market motion, the CSMs and the product team all working together to have a bespoke set of solutions for a unique set of customers that no one else on the planet is giving the attention to like Payoneer is. And then I'd say the final one is that we shut off the things that don't make sense, right? One of the great things about a business like Payoneer with so much reach globally with so many customers is that we can identify with a lot of discipline, the ROI of our activity. And you're seeing in our P&L, a lot of focus, focus on the high-value customers focus on the cross-sell, focus on the pricing to deliver consistent profitable growth. And as we -- you and I talked about in the past, consistent profitable growth is the name of the game at Payoneer, and we're delivering that and we'll continue to.

I think what's so interesting about the go-to-market, particularly when you look across the fintech space, having differentiated go-to-market, differentiated customer acquisition is so difficult. And there's perception that a lot of fintech is just beholden to the success of the Google App or a device.

That is definitely not us, right? I think we had -- we've had 20% or better IC -- $10,000-plus ICP volume and revenue growth. And we've had 5% fewer head count in our go-to-market team, right? So we've reduced the size of the team, and we're growing the business. We invest a lot of money at Payoneer, and I want us to be even more efficient with every dollar we spend, and we work on that as a constant effort. But reducing the size of the organization, while we grow the revenue at that 20% clip is, I think, an indication of the strength of the team and our focus.

Yes. No, 11 million applications a year. It's really just...

Yes, we have to make -- we have to find the good ones in that, right, because the garbage we don't want to waste time on because it comes up the expense and ops and KYC [indiscernible] business.

It makes a lot of sense. You mentioned the card program several times, particularly with some of the e-commerce sellers in the China corridor. You've shared some stats over time about the volume growth, and it's been very impressive. I'd like to hear just your thoughts on further improvements or enhancements to that product. There's obviously been a lot of innovation in the U.S., companies like Brex and Ramp and BILL and Divvy, what does the traction look like for those sort of software enabled card programs internationally? And where does that kind of fit on the Payoneer road map?

Yes. I actually think that comparison is appropriate, like thinking about the spend manage those -- the spend management innovation in cards from some of those companies, I think is pretty impressive. For us today, we have -- I think we've had 4 straight quarters of 30% growth in the card. We're continuing to help that marketing agency in the UAE that's helping customers around the globe by ads is a real vein for us to tap into using our virtual cards, not just for the Chinese goods exporter but now marketing firms using Payoneer so that all of their customers ad buys are -- or digital ad buys are going through the Payoneer card. So that's one. The next is, I think, the opportunities around more capabilities and role management limits to cards. As we add the workforce management payroll, what you'll see happening is businesses paying their employees and issuing them Payoneer cards with spending -- with spend limits they can use if you're going on a business trip to a conference, et cetera, that sort of using the Payoneer workforce management to be distribution for our spend management products, I think, makes sort of just good common sense, and we're -- it will take us some time to get that plane up off the ground but we're very focused on that opportunity.

Yes. No, it's very exciting. You've had several pricing initiatives over the last couple of years, I think across a range of different parts of the business, whether it's entrepreneur, volume, smaller customers segmenting the customer base. Could you just maybe give us the state of the union on where things today and what might be a lever in the future?

Yes. We're in the early innings on pricing. What we've decided as a group, the management team is that pricing is never done. We're going to keep iterating and learning and optimizing because as we're cross-selling and adding cohorts, we can learn different ways to both support those customers and, frankly, monetize them in a fair way. So you I think we pick some low-hanging fruit in 2023, which was $20 million of incremental uplift, then in '24, we've seen another $20 million benefit from those pricing initiatives, I think it was $25 million in '23 and $20 million this year, forgive me for getting the number wrong. We've launched our Light account, which limits the number of products that a customer can have and has some spend minimum dynamics in it, which I think has -- we will have a positive dynamic in the P&L, less OpEx for those customers, more monetizing from the, opens up -- unlocks more margin in our business. I talked about the Pro or premium account of bundling that. I saw a presentation on the early stages of that just last week. And it's the kind of experimentation and innovation that you can rely will come from Payoneer. We have a unique asset, a unique way to acquire customers. They need what we're selling, and we're innovating in terms of how we charge them and [indiscernible] them so we can monetize them fairly. So I think there's ICP times ARPU minus cost to serve, there's good opportunities for us to continue to drive ARPU through the pricing. We have talked in the past about intra network volumes that we can drive monetization of. And just so everybody gets it, right, you have a couple of million customers with billions of dollars of AR, they're paying one another within the platform. And we're testing different ways to monetize that. Cross-border payments between 2 Payoneer account holders, it seems common sense that, that not be free, right? Because that's not free any place else on the planet. And so we're experimenting with different corridors of how to monetize the cross borders side of it. And it's early, but I think an exciting vein and it speaks to why people are choosing to be part of Payoneer, to have a Payoneer account and then to bring their vendors or their suppliers into the network as well.

Yes. No, I mean it's the classic internalization of flows is really hard to do unless you have the scale. Okay, that kind of takes us to the next topic. I think you've talked a lot about the amount of value that you've been adding to the customers. I think one result of that as customers leave more and more of their funds on the platform over time. And that has exposed the business to the level of interest rates, and there's been a very nice income stream coming off the customer fund portfolio. How do you think about the underlying level of growth in that portfolio? And then what strategies do you have to mitigate some of the top line headwinds as rates come down?

Yes. I think the first is that customers hold balances with Payoneer for months, right? They don't think of the account as the toll booth on the money highway, right? The leave the money in the account because they have international expenses. And as I mentioned before, they're actually taking funds from their banks that may, in fact, be paying them yield and put it to their Payoneer account, which pays them no yield. We're -- and seeing that dynamic I think, speaks to the value of the account. And obviously, as you say, we've had this really lovely income stream over the -- as rates have gone up. What our team has put in place and is continuing to put in place is actually looking at how we use short-term treasuries and CDs to reduce the volatility as interest rates come down. I think everybody expects interest rates to come down a bit, but the balances will grow -- our funds will grow in line with volume, and we're reducing our exposure to the volatility with locking in interest rates and CDs. I think as an investor in Payoneer, you can feel comfortable that we have our hands on the steering wheel about this, right? We've committed to delivering a 25% adjusted EBITDA at Payoneer. We're going to do that. And that's our mindset is secure those balances, continue to drive ARPU with our customers, add new customers, I think we feel comfortable about where interest rates are and where they will go and how we'll manage it.

Yes. No, that's great. I mean, one thing I think is just interesting is people -- we see a lot of float-driven income, and it's usually thought about as money in motion, money on the way out of the door. And I think one of the things that's maybe less understood is just the value of the U.S. dollar bank account in the emerging markets.

Yes, if you're in Pakistan or Argentina or the Philippines, being able to hold your international AR and in an account and use our spend management products to pay your contractors around the globe, when there's volatility in your domestic currency, really seems like a sensible solution for people.

Yes. Makes sense. We've got just a couple of minutes left here. I wanted to touch on capital allocation. You've been buying back stock over the past year. You've also done some tuck-in M&A. So just how are you thinking about in the context of the 25% EBITDA margin that you mentioned, how do you think about capital allocation? And how do you think about balancing capital return versus tuck-in M&A and investments from the business?

Yes. I mean we -- there is so much opportunity in front of us that we are very disciplined about how we spend our money. We've done share buyback, as you know, we're thinking about tuck-in M&A to continue to expand our -- the stack of products we offer to our customers. We're trying to provide how do we penetrate the key geographies with even more capability where we see an opportunity to take share. We will use M&A to build the stack, deepen our local footprint and do 2x the share repurchase we did in 2023 and 2024. So we are responsible stewards. As you know, we -- there were -- as part of the SPAC, there were outstanding warrants. We've retired those warrants. I think that should be a healthy indication to the shareholders that we are optimistic and confident about the strategy we've laid out and are focused on driving it.

Yes, particularly given the strike on where those warrants were. We've got about a minute left, John. We covered a lot of ground today. Anything you'd like to leave the audience with about the state of the business and where your head is at?

Yes, we're foot on the gas in the business. We have great management team, a powerful brand, a license structure framework, unlike any other business and a big runway in front of us. And so we're focused and executing to return a lot of value to our shareholders.

Awesome. Well, John, thank you for today. Really appreciate the discussion. Thanks for joining us.

Thanks for having me.