Payoneer Global Inc.

Good afternoon and thank you for standing by. Welcome to Payoneer's third quarter 2022 earnings conference call. At this time, all lines have been placed on mute to prevent any background noise. Following the speaker's remarks, we will open the lines for your questions. And as a reminder, this conference call is being recorded. I would now like to hand the call over to Michelle Wang, Payoneer's VP of Investor Relations.

Thank you, Operator. With me on today's call are Payoneer's Co-Chief Executive Officers Scott Gallat and John Kaplan, as well as Michael Levine, Payoneer's Chief Financial Officer. Before we begin, I'd like to remind you that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available in the investor relations section of our website. 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 contain non-GAAP measures. These measures should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today's earnings press release, which is available on the company's website. With that, I'd like to turn the call over to John to begin.

Good afternoon, and thank you all for joining us today to discuss our third quarter 2022 results. On today's call, I will discuss the opportunities I see for our business, our outlook for the rest of 2022, and our initial outlook for 2023 EBITDA. Scott will cover third quarter business results, and Michael will discuss third quarter financial results. and our updated guidance in more detail. Payoneer delivered a strong quarter of business and financial results. We generated 30 percent revenue growth and over 100 percent adjusted EBITDA growth year-over-year. Year-to-date, our revenue is up 33 percent, and adjusted EBITDA is up over 150 percent year-over-year. It can be challenging to understand the obstacles that emerging market entrepreneurs face and the limited options they have when growing their businesses. Payoneer helps these entrepreneurs operate globally, which underscores the value of the Payoneer account and Payoneer's role in powering the cross-border economy. Scott and I recently traveled to India to meet our customers face-to-face. They told us about their challenges as emerging market cross-border SMBs and the ways Payoneer is helping them simplify their ability to grow their business. We returned with a deeper appreciation for the scale of the opportunity we have and the capabilities of our local team. Our revenues for SMBs from India have grown 35% for the first nine months of 2022 versus a year ago. In a country whose GDP is growing approximately 7% this year, and where we have less than 1% market share. And India is just one example of our exciting market opportunity. We do business in 190 countries and territories, and we see similar growth opportunities and dynamics in many other emerging markets around the world. Our customers use their Payoneer account to get paid from their global customers, including large marketplaces, trading partners, corporate buyers, and small firms around the globe. They use Payoneer to manage their funds in the currency they want and need, and they ultimately move their money where it needs to go. They can send money to their local bank account, pay for expenses using our commercial MasterCard, make payments through our in-network ecosystem, and pay suppliers. They can also access working capital from Payoneer to invest for growth. Our customer base today represents a fraction of the global cross-border SMBs and freelancers that we can serve. A minority of our customers today utilize the full potential of the Payoneer account, and we aim to provide more services to our existing customers and accelerate our pace of acquiring new, active, and profitable customers that can and will benefit from our broad range of services. One key feature of the Payoneer account is our customers' ability to store their funds with Payoneer and pay other Payoneer customers. Our customers are increasingly utilizing these balances to make billions of dollars of in-network and cross-border payments to one another instantly. These payments highlight the network effects of Payoneer and are not currently included in our reported volume metrics as we are not monetizing them directly today. We believe our engaged and active community of global SMBs has the long-term potential to become a meaningful source of low-cost new customer acquisition. In Q3, we made investments to expand our ecosystem meet our customer needs, and maintain long-term 20% plus revenue growth. We plan to continue our investments in Q4 and 2023 focused in two major areas. Number one, we are expanding our go-to-market penetration even as we're decelerating the pace of total company headcount growth. Number two, we are scaling our platform and product suites. In September, we hired Asaf Ronan to be our first Chief Platform Officer. Asaf is leading our technology, product, and high-value service team to deliver two things. One, the Payoneer account suite of products, and two, increasing the efficiency of our operations as we broaden the gap between Payoneer and the physical checks, ledgers, and disconnected software platforms that our customers use. We expect meaningful investment in 2023 to support these efforts, and we will share more information in the coming months. Our interest income is expected to significantly increase in 2023 relative to 2022. We will invest a portion of this growth in our strategic growth and platform development initiatives. The recent zero interest rate environment has been a historical anomaly. And as we emerge from this, our business model will benefit from the value our customers attribute to holding a balance in the many currencies we offer. In our last quarterly update, we communicated our commitment to delivering sustained positive adjusted EBITDA. While it's premature currently to provide formal 2023 guidance, our plan is to moderately increase adjusted EBITDA margins in 2023. There are several factors we are planning for, including the uncertain global economic landscape, the war in Ukraine, and the impact of high inflation on consumer spending behavior. Specific to Payoneer, we expect lower non-volume and non-strategic revenue beginning in the second half of 2023, specifically for onboarding-related services we provide to certain enterprise partners. We will be thoughtful with our spend while further increasing our efficiency in 2023 and beyond. Our balance sheet is strong, our business is well-positioned, our opportunity is significant, and our team is focused. We are confident in our ability to successfully execute on our strategic growth plan and create long-term shareholder value. With that, I'll turn it over to Scott to discuss our third quarter business results in more detail. Thank you, John, and thank you everyone for joining us today. We had another quarter of strong results driven by new customer acquisition, adoption of our high value services, and rising interest rate tailwinds. Total revenues grew 30% year over year and 7% sequentially, and we delivered another quarter of positive adjusted EBITDA of $13 million. We are seeing momentum in our business, and the diversity of our customers and products gives us confidence that Payoneer will continue to execute and generate strong growth through the current macroeconomic challenges and global uncertainties. We serve a range of industries, including freelance, remote work, e-commerce, travel, and social content creators. This diversity drives resilience in our business model, and our emerging market focus provides our shareholders access to the higher growth rates these emerging economies deliver. In 2023, the IMF expects growth in emerging markets and developing economies to be more than three times faster than that of developed economies. And emerging markets are where the majority of Payoneer's customers are located. Volume in the third quarter increased 11 percent year-over-year and 3 percent sequentially, as B2B APAR and travel had solid growth and e-commerce volumes were stable. Given the uncertainty around economic conditions, we remain cautious about year-over-year volume growth in the near term, although sequentially, volume is expected to increase in the fourth quarter due to e-commerce holiday sales. This holiday season volume growth is typically driven by our largest customers who have a lower take rate. B2B APAR continues to grow faster than our overall business and at a higher take rate. This is a big opportunity for Payoneer. B2B APAR helps our customers that are doing business across borders to send a digital invoice and get paid across countries and currencies without needing to open bank accounts around the world or rely on outdated ways to move money such as checks and wires. B2B APAR generates a higher blended take rate because we earn fees on both the money in and from the uses of the Payoneer account compared to our other customer volumes where we primarily monetize when our customers use the funds in their Payoneer account. B2B APAR generated year-over-year volume growth of nearly 40% and represented 12% of our total volumes. We implemented an enhanced risk and compliance measures in the third quarter to position us to consistently generate future growth and scale and to ensure we maintain strong controls. As a result of these enhanced controls, we terminated relationships with certain customers, slowing growth compared to the first half of 2022. Normalizing for these terminated customers, B2B APAR volumes for remaining customers grew at over 60 percent year-over-year. We continue to have strong customer acquisition, and customer retention for B2B APAR remained consistent with prior periods. The small number of terminated customers on average generated higher volume and paid a lower take rate, so the revenue impact of their termination wasn't as significant, increasing the blended take rate for the B2B APAR business in the third quarter as a result. B2B APAR is a massive market opportunity measured in the trillions of dollars of addressable volume. We remain confident about the long-term growth potential for B2B APAR and in our ability to successfully execute to capture this opportunity. Looking ahead, we see early signs that our B2B customers' businesses are facing their own economic headwinds. For us, macro conditions and our enhanced risk and compliance measures may result in slower growth of B2B APAR volumes in the near term, particularly as we begin to lap very strong volume growth from a year ago. We expect revenue growth will be faster than volume growth, because of continued strong customer growth and momentum globally, along with a higher blended take rate. While our customers are not immune to macroeconomic uncertainty and recession fears, it's especially in these more challenging times that our customers find value in what Payoneer can offer them. Our customer acquisition remains strong, and the number of customers using multiple products continues to increase. Another service that we are excited about is our commercial MasterCard, which is one of our high-value services. Card adoption continues to grow, and the virtual card spend is up more than 100% from a year ago. Most of our customers receive payments in U.S. dollars, and with the dollar appreciating significantly year to date, they increasingly want to match their dollar liabilities. As a result, we are seeing more interest for our commercial MasterCard. which allows customers to pay for expenses directly from their Payoneer account balance. We continue to develop our ecosystem of partners and recently announced a partnership with WooCommerce, enabling us to offer WooCommerce SMBs Payoneer Checkout and the complete Payoneer suite of services. We are in the early stage of the Payoneer Checkout opportunity, which aims to help SMBs expand and grow through direct-to-consumer web store sales globally. The dedication of all of our employees globally and their successful execution translated into strong results for our third quarter. To all of our employees, thank you from the entire management team for your continued efforts. We are confident about the opportunities ahead of us, and our positive cash flow and ample cash on our balance sheet enable us to invest for long-term revenue growth and future profitability. I'll now hand it over to Michael to discuss financial results and forward guidance in more detail. Thank you, Scott, and thank you to everyone for joining us. Paynia delivered another strong quarter of results, once again exceeding our forecast. Q3 revenue increased 30% year-over-year to $159 million driven by continued customer acquisition, growth of high-value services, and accelerating interest income. We see faster growth in regions such as Southeast Asia, Latin America, South Asia, Middle East, and North Africa as SMBs around the world use Payoneer to make and receive payments, manage their finances, and grow their businesses. Payoneer customers are utilizing the multiple benefits of a Payoneer account. Customer funds on our platform remain above $5 billion as of September 30th. With the U.S. dollar appreciating 13% versus a basket of other major currencies through September 30th, our customers, many of whom are in emerging markets that have been impacted, value the ability to hold U.S. currency, and they trust Payoneer to do it. We earned $15 million of interest income from these customer balances in the third quarter, up from less than $1 million compared to the prior year period, Q3 volume increased 11% year-over-year and 3% sequentially to $15.1 billion. Year-over-year volume growth was driven by continued growth of B2B APAR, new customer acquisition, as well as an acceleration in travel volumes. We are also seeing stability in customers who receive funds from large e-commerce marketplaces as the industry begins to lay off tough year-over-year comps. The Q3 take rate was 105 basis points up, compared to 90 basis points in the third quarter of last year, and 101 basis points in Q2. Sequentially, the take rate expansion was driven by higher interest income, partially offset by mix shifted to travel, which is a lower take rate vertical, and lower non-volume related revenues. Q3 transaction costs were $28 million, representing 17.6% of revenue, an improvement from 20.1% in the third quarter of last year, and 17.7% versus Q2. Transaction costs grew at a lower rate than revenue due to improved commercial terms, internal platform optimizations, and cost structure benefits from increased transaction volumes. Bank and processor fees, the largest component of transaction costs, increased 10% year-over-year, well below Q3 revenue growth. The year-over-year improvement in transaction costs as a percent of revenue also benefited from higher interest income revenue and lower network fees from achieving certain volume-related milestones partially offset by higher working capital costs. Q3 revenue, less transaction costs, increased 34% year-over-year to $131 million, representing 82.4% of revenue. Q3 total operating expenses, including transaction costs, were up $164 million, up 27% year-over-year. Including transaction costs, operating expenses increased 30% year-over-year and 10% sequentially driven by higher labor costs, marketing investments, and a rebound in travel costs as employees returned to offices and connected with each other and customers in person. Two-thirds of the year-over-year increase in operating expenses excluding transaction costs relate to employee compensation. This reflected headcount growth primarily in our R&D and sales and marketing teams, as well as base salary increases for employees and higher equity compensation. Compensation expenses increased 9% sequentially, reflecting the full quarter impact of new hires in the first half of 2022. We started to moderate our hiring plans in the third quarter as we announced in our previous earnings call. Q3 adjusted EBITDA was $13 million compared to $6 million in the third quarter of last year and $15 million in the second quarter. Q3 net loss was $26 million compared to net income of less than $1 million in the third quarter of last year. Net loss for Q3 included $15 million loss from the change in fair value of warrants. Q3 basic and diluted loss per share was $0.08. We continue to generate positive cash flow, and we ended the quarter with cash and cash equivalents of $508 million, a sequential increase of over $15 million. Turning to our outlook for full year 2022, we are raising our 2022 guidance. Our updated guidance reflects strong year-to-date results and the evolving broader macroeconomic, geopolitical, and interest rate environments. We are raising our revenue guidance to be between $605 million and $615 million, reducing transaction costs as percent of revenue to 18%, and increasing our adjusted EBITDA guidance to be between $40 and $43 million. The midpoint of our latest guidance represents 29 percent increase to revenue and 47 percent increase to adjust EBITDA year over year. We believe our faster-growing geographies and high-value services, along with interest income and fourth-quarter e-commerce holiday sales seasonality, will drive revenue growth in the fourth quarter. Regarding the war in Ukraine, While the situation in the region remains fluid, our Ukrainian customers continue to be incredibly resilient. A recent survey we conducted found that 70% of Ukrainian businesses are continuing to operate despite the invasion of their country. Our outlook on our business in Ukraine remains stable at 75% of our original budget. Sequentially, we expect volume growth to accelerate going into the fourth quarter. Our take rate will be impacted in the fourth quarter by seasonal holiday volumes, which tend to be driven by larger customers who, on average, pay a lower take rate. This mixed shift impact is expected to be partially offset by higher interest income in the fourth quarter, as well as continued mixed shifts towards faster-growing geographies and products. As Scott discussed, we recently terminated a small number of B2B customers on our platform. We expect our proactive actions to continue to impact the fourth quarter and first half of next year from a volume perspective. We expect revenue growth will likely outpace volume growth. We remain confident in the long-term growth potential of B2B APAR. We expect interest income to be in the mid $20 million range in the fourth quarter based on our third quarter customer funds exit run rate and current anticipated Fed funds interest rate increases. We expect transaction costs over 2022 to be approximately 18% of revenues, an improvement from our previous guidance of 19.5%. This improvement is driven by lower transaction costs as a percentage of revenues year-to-date. We are revising our 2022 adjusted EBITDA guidance to be between $40 and $43 million. Our raised guidance is due to our strong year-to-date results. as well as our confidence in our ability to continue generating positive adjusted EBITDA going forward while investing in our business to drive additional future growth. We expect fourth quarter operating expenses to increase sequentially and include approximately $16 million of non-compensation discretionary investments related to accelerating our market penetration, strengthening our organization, and focusing our growth strategies. Nearly two-thirds of this spend is additional market penetration investments in four key markets to increase share in 2023 and beyond. We expect to increase travel-related expenses in the fourth quarter to drive more connectivity and collaboration across the organization. We are investing in our growth platform and efficiency initiatives with the help of third-party consultants to increase our momentum as we head into 2023. For 2023, we expect to deliver a moderate increase to adjusted EBITDA margins. We plan to invest a portion of the interest income revenues we generate next year back into the business. We will share formal 2023 guidance when we report earnings in February. In conclusion, Q3 success once again demonstrated our team's ability to deliver strong financial results. We have built a resilient and profitable business, and we see positive and exciting trends for our business going forward. We have confidence in our ability to meet our 2022 financial targets while investing to position Payoneer for many years of future profitable growth. On behalf of John, Scott, and myself, and the rest of the Payoneer management team, we thank you for your continued interest and support. We are now happy to answer any questions you may have, Operator, please open the line.