Payoneer Global Inc. (NASDAQ:PAYO) Q4 2023 Earnings Call Transcript
Payoneer Global Inc. (NASDAQ:PAYO) Q4 2023 Earnings Call Transcript February 28, 2024
Payoneer Global Inc. reports earnings inline with expectations. Reported EPS is $0.05 EPS, expectations were $0.05. Payoneer Global Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. Thank you for standing by. Welcome to Payoneer’s Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers’ remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded. I would now like to turn this call over to Michelle Wang, Payoneer’s VP of Investor Relations.
Michelle Wang: Thank you, operator. With me on today’s call are Payoneer's Chief Executive Officer, John Caplan; and Payoneer's Chief Financial Officer, Bea Ordonez. Before we begin, I’d like to remind you that today’s call may contain forward-looking statements which are subject to risks and uncertainties. For more information, please refer to our filings with the SEC, which are available in the Investor Relations section of payoneer.com. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today and the company does not assume any obligation or intent to update them, except as required by law. In addition, today’s call may include non-GAAP measures.
These measures should be considered in addition to and not instead of GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today’s earnings press release, which is available on our website. Additionally, please note we have posted an earnings presentation supplement alongside our earnings press release on investor.payoneer.com. All comparisons made on today's call are on a year-over-year basis unless otherwise noted. With that, I’d like to turn the call over to John to begin.
John Caplan: Good morning. Thank you for joining us today. In 2023, we delivered 32% revenue growth and 25% adjusted EBITDA margins. Our strong performance is the direct result of our focus on our ideal customers, interests we earn on the funds, our customers hold in their Payoneer accounts, and our disciplined approach to unlocking increased efficiency. As we exit 2023, the key performance indicators of our business are all pointing in the right direction. We have approximately 2 million active customers and 516,000 who meet our ideal customer profile for ICPs. We grew our ICPs by 6% in 2023. We increased ARPU for our 2 million active customers by 36% and by 9% when you exclude interest income. We generated $66 billion of annual volume, up 11%.
We grew total take rate by 21 basis points in 2023. We are trusted by our customers evidence by over $6 billion of customer funds held in Payoneer accounts. Customer funds were up 9% year-over-year. 2023 adjusted EBITDA of $205 million more than quadrupled versus 2022. I'd like to put our results in context. We've discussed before that we primarily serve SMBs directly, although we also have direct relationships with certain enterprise clients. Our SMBs customer business represents 75% of our volume and approximately 90% of revenue. SMBs customer volume enters the Payoneer account from marketplaces, B2B transactions, direct-to-consumer sales from a customer's web store and when a customer loads funds from their local bank account. SMBs customers use our Payoneer account to hold multi-currency funds and manage their accounts receivable and accounts payable with overseas customers, suppliers, vendors and partners.
Our SMBs customers are valuable because we have a branded relationship with them and are able to cross-sell to them more of the Payoneer financial stack over time. We also operate an enterprise business in which large marketplaces use our payment rails to make payouts directly to a payee's local bank account. This is a scaled, lower risk offering and our enterprise clients benefit from our extensive breadth and geographic reach. And because we send payments directly to the recipient's bank account, we don't own the SMBs relationship and have therefore limited opportunity to drive greater adoption over time. To grow our business we are increasing the number of ICPs on our platform, which in turn can drive more volume into Payoneer accounts. We are also enhancing our AP tools and adding to our financial stack to increase our utility to customers.
I became the sole CEO of Payoneer almost exactly one year ago today, reflecting upon the progress we have made in 2023. Some highlights. We bolstered the experience and skills among our executive team and our board of directors. We have become an even more SMBs centered company and our focus on ICPs, ARPU, and cost-to-serve is resulting in greater organizational clarity and focus, which we believe will drive long-term profitable growth. We delivered 6% ICP growth in 2023, including faster growth of 13% in our higher take rate regions of APAC, SAMEA, and LatAm. We also delivered 15% growth in our larger, higher value ICPs that do more than $10,000 a month in volume. We aligned our market organization to our most valuable customers and biggest opportunity markets.
We recruited new leadership to drive the modernization of the Payoneer platform. We are increasing the velocity of which we release new tools and features and are focused on driving improved modernization, faster activation, and increased customer engagement. We announced two acquisitions in 2023, closing a small acquisition in the data space to support our working capital business and we continue to work towards closing our acquisition of a licensed PSP in China, which is subject to local regulatory approvals and customary closing condition. We drove our account self-funding to nearly $500 million in 2023 through the strength of our APS solution. This represents a new source of volume entering Payoneer accounts. We meaningfully reduced the operating losses on non-ICP customers.
In 2022, non-ICPs resulted in approximately $25 million of operating losses. We've cut that by a third in 2023 as we increased our modernization of this segment via our pricing initiatives. We lowered the average cost of a customer inquiry by over 40% as of the fourth quarter versus a year ago. We reduced our total employee headcount by 8% year-over-year. And we initiated Payoneer's first share repurchase program in May of 2023, and in December increased the authorization to up to $250 million. We are proud of the hard work by our team to deliver these strong results. To accelerate our progress, we are working to drive ICP acquisition, increase retention, and improve customer monetization. In our B2B and merchant services businesses, we believe we have a $6 trillion opportunity and are seeing product market fit and strong customer demand, specifically in B2B.
Our B2B business drove over $7 billion of volume into Payoneer accounts in 2023, and we expect volumes to grow by 25% in 2024. B2B growth accelerated in the second half of 2023 as we saw improved acquisition in the service-oriented markets we are focused upon. We delivered 28% volume growth in APAC, SAMEA, and LatAm in 2023, and these fast growing, higher take-rate regions now make up 42% of B2B volume, up from 35% in 2022. In 2024, we plan to continue focusing our B2B sales efforts on large ICPs in service-oriented markets, and further differentiate our service level based on customer size. We also plan to introduce more customer segment-specific pricing within the B2B business to drive greater stickiness and expand on product functionality to better cater to the needs of our larger ICPs. We're confident that successful execution of these initiatives will drive accelerating growth in our B2B business.
Our merchant services business ended its first full year with volume growth of over 400%. Fourth quarter volume of over $100 million was up 61% sequentially, and included record sales during the Black Friday and Cyber Monday weekend. Our customers that sell direct-to-consumers want to receive this portion of their international AR into their Payoneer account. We believe the $150 billion D2C payments market is a natural extension for Payoneer given our strong branded relationships with good sellers in these emerging markets. Today, we have over 600 customers in our merchant services business using our checkout product, approximately half of which are net new to Payoneer. As of December, merchant services customers on average receive over $60,000 of monthly volume, significantly larger than our ideal customer profile.
As we introduce this product to the market, we anticipate our momentum to continue. We have strong momentum coming into 2024. We are making progress at pace to capture our multi-year opportunity and to more reliably and securely connect the world's 80 million SMBs to the digital global economy. I'll now hand it over to Bea to discuss financial results and our 2024 guidance in more detail.
Bea Ordonez: Thank you, John, and thank you to everyone for joining us. 2023 was a transformative year for Payoneer. We shifted the company's focus to acquire and better serve ICPs, made meaningful progress in optimizing our ARPU and delivered improved operating efficiency. We were excited to hold our first investor day in September. We reintroduced the company to investors and laid out our strategy for capturing a $6 trillion market opportunity. We initiated Payoneer's first share repurchase program and were pleased to announce in December a refreshed authorization to purchase up to $250 million of common stock through the end of 2025. We focused the company on delivering sustainable, profitable growth and we delivered Payoneer generated 32% revenue growth in 2023 and $205 million of adjusted EBITDA, representing a 25% adjusted EBITDA margin.
These results are a testament to the unique value proposition we offer to our customers, SMBs looking to capture the opportunities of an increasingly digital and increasingly global economy. Before I turn to our fourth quarter results, I'd like to direct your attention briefly to our earning supplement presentation which is available on our website alongside our earnings release. We are committed to continuously enhancing our disclosures and appreciative of the feedback we continue to receive from investors. On page 23 of our supplement we have included some additional information that breaks out our volume and revenue. We believe this is helpful in showing how the execution of our strategy drives greater volume into the network and delivers improving take-rate dynamics.
We believe this additional disclosure will enable investors to better model our business going forward. Now turning to our fourth quarter results. Revenues of $224 million was up 22% driven by interest income on customer funds, continued steady ICP growth, record quarterly card usage and accelerating growth in our B2B and merchant services business. As a reminder our Q4 revenue growth rate is impacted by $7.5 million of revenue earned in the prior year period from the provision of onboarding services for an enterprise client. Excluding the impact of this revenue growth for the fourth quarter would have been 27%. Volume growth at 18% reflected strong year-over-year volume trends with our SMBs customers that sell on marketplaces, particularly larger customers that sell on e-commerce marketplaces, as well as accelerating growth in our B2B and merchant services businesses.
We also saw continued growth in our enterprise payouts volume which includes travel related volumes. Our B2B business delivered 13% volume growth in the fourth quarter versus 3% growth in the first quarter, a 2% decline in volumes in the second and 1% growth in the third quarter of 2023. We generated volume of over 100 million in our merchant services business, up more than 400% from a year ago and up 61% versus the third quarter. The fourth quarter take rate of 118 basis points increased six basis points. The expansion was driven by higher levels of interest income, record quarterly card usage and the benefits of our various pricing initiatives. Sequentially take rate declined nine basis points driven by a seasonal mix shift towards e-commerce and especially towards larger e-commerce sellers.
Our customers' value the utility that the Payoneer account provides including the ability to hold balances in multiple currencies and to manage their cross-border AR and AP needs from a single account. Customer funds held by Payoneer increased 9% to $6.4 billion and we earned $65 million in interest income from these balances in the fourth quarter. Total operating expenses of $199 million were up 3% driven by higher transaction costs from strong volumes, increased depreciation and amortization and higher R&D spend related to continued investment in our platform. This was partially offset by decreases in G&A and other operating expense. Before 2023 operating expenses included $3 million related to our efforts to support employers' in Israel as well as a $1.5 million contribution to the Payoneer foundation.
In line with our continued commitment to driving operating leverage, we ended 2023 with 8% less headcount than we began the year. We continue to operate the business with a focus on streamlining the organization, increasing efficiency and aligning our cost structure with our highest value customers and growth opportunities. Transaction costs of $36 million increased 20% driven by higher charge backs and operational losses, some of them one time, as well as higher network fees from record card usage. Transaction costs represented 16.2% of revenue, a 40 basis point improvement from the prior year period. The decreases driven primarily by higher interest income while improved pricing with bank and processing partners and lower capital advance costs also contributed.
Sales and marketing expense was roughly flat with higher partner commissions in the current quarter offset by lower marketing spend. As a reminder, the fourth quarter of 2022 included certain costs related to a one time brand campaign, while labor expense was flat year-over-year, reflecting lower headcount. Sequentially, sales and marketing expense was up 6%, primarily driven from incentive programs to drive card usage, as well as other largely seasonal in country marketing activities. G&A expense decreased $3 million or 10%, primarily due to higher one time consulting and organizational expense in the prior year period. Other operating expense was down $2 million or 4%, driven by lower headcount from initiatives undertaken earlier in 2023 to streamline and localize elements of our operations organization.
R&D expense increased $2 million, driven by higher compensation expense and IT cost, partially offset by higher capitalization of payroll and third party costs as internal use software. We continued to invest in our R&D organization and average headcount was up 13% year-over-year. Adjusted EBITDA was $52 million compared to $11 million in the prior year period. This represented 23% adjusted EBITDA margin in the quarter. Net income was $27 million compared to a net loss of $10 million in the fourth quarter of last year. Q4 basic earnings per share was $0.08 and diluted earnings per share was $0.07. We ended the quarter with cash and cash equivalents of $617 million, up $74 million or 14% year-over-year. Our business continues to generate positive free cash flows and our free cash flow conversion is well above 100% for the full year.
We have been actively returning capital to shareholders, in 2023 and since the inception of our share repurchase program in May we repurchase $57 million of Payoneer shares including $22 million in the fourth quarter. We have accelerated the pace of our repurchases following our $250 million authorization in mid-December and in the first quarter through last Friday, February 23rd we have repurchased over $30 million of Payoneer shares. Moving now to our 2024 guidance. For the full year 2024 we expect revenues to be between $875 million and $885 million. This includes $235 million of interest income for the year and $640 to $650 million of revenue excluding interest income. We expect revenue excluding interest income to grow 7% at the midpoint of our guidance representing 10% growth when excluding the impact of non-volume enterprise revenues of $15 million in the first half of 2023.
We expect revenue growth excluding interest income to accelerate throughout 2024 and to exit the year in the mid-teens in line with our medium term targets. We expect that acceleration will be driven by continued penetration of the large B2B and direct-to-consumer markets as well as high single-digit volume growth in marketplace related volumes. We expect B2B volumes to grow 25% this year and are seeing impressive performance year to-date with volume growth of over 30%. Our strategy to focus our product roadmap and acquisition efforts on higher take-rate service-oriented markets is working. We saw a 16 basis point take-rate improvement in our B2B business in 2023, given strong performance in our higher take rate regions. Take-rates are 2% to 3% in LatAm, SAMEA and APAC versus China B2B take rates which are approximately 50 basis points.
In 2024, we expect China B2B volume to rebound which will drive some decrease in B2B take rates overall, while we expect that these take-rates will remain significantly higher than take rates on our non-B2B business. We expect our merchant services volume to grow north of 100% this year as we continue to see strong adoption among existing sellers as well as strong demand from new customers in critical markets like China and Vietnam. We grew the number of merchants using our checkout product by more than three-fold in 2023. We also intend to continue implementing changes to our pricing to better align to the customer segments we serve, to deliver improved monetization and to drive improved share of wallet capture. We believe we have further opportunity in our pricing strategy to refine our corridor-based pricing and to better monetize effect.
We continue to test various pricing models related to our significant in-network payment volume and believe this represents a meaningful opportunity. We expect to generate $235 million of interest income for the year, which is modeled based on continued growth in customer balances, broadly in line with volumes, and probability-weighted market interest rate expectations. We are taking steps to further manage and optimize this revenue stream through different interest rate cycles by prudently extending the duration of our portfolio and investing in longer-dated assets. As previously discussed, we recently launched a program to begin investing a portion of our customer funds in short-duration U.S. treasuries. A very small portion of customer funds has been invested as of today, but we expect to grow this portfolio and potentially extend to other asset classes over the course of the year and as we further mature the program.
We expect transaction costs as a percentage of revenue to be approximately 17.5%, which reflects the impact of shifting our business mix towards higher take rate, but also higher transaction cost business lines and products like B2B, merchant services and card. 2024 cash OpEx, less anticipated transaction costs, is expected to be approximately $540 million, which represents 6% growth over 2023. Cash OpEx represents our guidance for revenue less adjusted EBITDA. We expect a adjusted EBITDA to be between $185 million to $195 million, representing an adjusted EBITDA margin of approximately 22% at the midpoint. Our 2023 results demonstrate that our strategy and focus on growing ICTs, optimizing ARPU, and delivering improving leverage is working.
We plan to continue enhancing our product offerings to deliver value for our customers, expanding our addressable market, optimizing monetization and driving improved retention. We believe our unique assets, the scale and breadth of our ecosystem and relationships position us to further expand our market share and create lasting value for our shareholders. We are now happy to answer any questions you may have. Operator, please open the line.
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