Payoneer Global Inc. (PAYO) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Throughout this section, unless otherwise noted, “we”, “us”, “our”, “Payoneer”, and the “Company” refer to Payoneer Inc. for the period prior to the Closing Date (as defined below) and to Payoneer Global Inc. for the period thereafter.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other sections of this Annual Report, including “Item 1. Business,” and the accompanying Consolidated Financial Statements and related Notes included elsewhere in this Report. Some of the information contained in this discussion and analysis, including information with respect to our future performance, liquidity and capital resources, and general and administrative functions, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on a discussion of 2023 results as compared to 2022 results. For a discussion of the 2022 results as compared to 2021 results, refer to Part I, Item 7 of our Form 10-K filed with the SEC on February 28, 2023.
Overview
Payoneer is a financial technology company purpose-built to enable the world’s small and medium-sized businesses (“SMB(s)”) to grow and operate their businesses around the world by reliably and securely connecting them to the global digital economy. Payoneer’s financial stack makes it easier for millions of SMBs, particularly in emerging markets, to access global demand and supply, pay and get paid, and manage their cross border and other needs from a single platform. Our financial stack provides a full suite of cross-border accounts receivable (AR) and accounts payable (AP) capabilities, and includes services such as working capital and the provision of data-driven insights. Payoneer’s core value proposition is that we remove the complexity and barriers of doing business across borders for our customers. With a multi-currency Payoneer Account, businesses around the world can serve and transact with their overseas customers, suppliers, vendors, and partners as if they were local.
We primarily generate revenues when Payoneer customers use the funds in their Payoneer account to make a payment, make a purchase or to withdraw the funds locally. For our B2B and DTC customers, we also in certain circumstances generate revenue on their AR, such as when they invoice a customer or collect payments via their webstore. Additionally, as interest rates have risen throughout 2022 and 2023, interest earned on customer funds held on our platform has been a significant source of revenue. Our long-term strategy is centered on growing the number of customers on our platform who fit our ideal customer profile, who are customers that have on average over $500 a month in volume and were active over the trailing twelve-month period, and on increasing the revenue we earn from each customer. We believe that successful execution of this strategy will drive revenue growth as (i) adding new customers who meet our ideal customer profile, improving retention, and increasing our product offerings to capture more wallet share will drive greater ad valorem volume of transactions processed through the Payoneer platform; and (ii) introducing new products and services and increasing customer adoption of additional products and services will improve our monetization of customers over time. Volume is one of the primary drivers for our revenue growth. See “Key Metrics and Non-GAAP Financial Measures” for additional information.
Our customers have trusted the Payoneer platform to process $66.0 billion, $59.7 billion, and $55.4 billion in volume during the years ended December 31, 2023, 2022, and 2021, respectively.
Looking forward, we intend to continue to invest actively to enhance our global platform, deliver new products, extend our regulatory footprint, further automate our operations, increase new customer growth and make more acquisitions to accelerate our ability to deliver more value to customers around the world.
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Key Development and Trends
Repurchase Program
On May 7, 2023, our Board of Directors authorized a stock repurchase program for the repurchase of up to $80 million of our common stock, including any applicable excise tax. On December 7, 2023, the Board authorized an amendment to the program to increase the authorized amount of repurchases to an aggregate amount not to exceed $250 million, including the amount that remained available as of December 7, 2023 to repurchase common stock under, but not any prior repurchases effected pursuant to, the previous authorization. The amended authorization expires December 31, 2025.
During the year ended December 31, 2023, we repurchased 11,064,692 shares of our common stock under the program for approximately $56.9 million at a weighted average cost of $5.13 per share. As of December 31, 2023, a total of approximately $240.2 million remained available for future repurchases of our common stock under the program.
2023 Israel – Hamas War
In October 2023, in response to Hamas’ attack on Israel from the Gaza Strip, Israel declared war on Hamas. Concurrently, hostilities between Israel and Hezbollah ensued in the Israeli northern border. Despite the ongoing war, we have continued to operate our business and serve our customers around the world and, to date, our ability to support customers has not been materially impacted. We are monitoring the situation closely and benefit from our broad geographic footprint, partially outsourced operations model, and a robust business continuity plan. Additionally, our technology infrastructure has redundancy in place outside of Israel. Approximately 60% of our global employee base is located in Israel, including approximately 80% of our research and development resources. At this time, an insignificant portion of our Israeli workforce have been called to military reserve duty and we have contingencies in place to cover impacted roles and responsibilities.
The evolving conflict is likely to impact economic activity in the region and could impact revenues from customers located in Israel. Our revenue derived from customers based in Israel was insignificant for the year ended December 31, 2023 and is included within revenues from Europe in Note 17 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The situation in the region remains highly uncertain and there is the possibility that the conflict could worsen or expand which could, in turn, further impact economic conditions in Israel and in the broader region. At this time, it is difficult to assess the impact the war may have on our future results of operations. Any further escalation, expansion, or prolonged continuation of the ongoing conflict has the potential to impact our operations locally as well as to negatively impact the broader global economy and may have a material effect on our results of operations.
Workforce Reduction Plan
On July 10, 2023, we announced a plan to reduce our workforce by approximately 9% of our then-current total headcount (the “Plan”). The Plan was designed to enhance productivity and efficiency as well as streamline our organizational structure to better align operations with our growth objectives. We are reinvesting some savings from the Plan into future growth initiatives, and continuing to hire for roles essential to those initiatives in areas such as research and development.
During the year ended December 31, 2023, we incurred costs of $4.5 million related to severance and other employee termination benefits.
Impact of the War in Ukraine
During 2022, a geopolitical and armed conflict between Ukraine and Russia, which developed into an ongoing war, resulted in economic sanctions on Russia, Belarus, and certain territories in Ukraine. We provide services to customers in Ukraine and in jurisdictions that are or may be impacted by these economic sanctions. We have developed and implemented a robust transaction monitoring program designed to comply with imposed sanctions and to monitor the impact the conflict may have on our results of operations. During 2022, we ceased to provide services to customers in Russia and have limited our payment services to Belarus customers, while at the same time revenues in Ukraine have remained relatively stable. For the year ended December 31, 2023, Ukraine and Belarus, combined, accounted for less than 10% of our revenue, of which Belarus accounted for less than 1% of our revenue. For the year ended December 31, 2022, Ukraine, Russia and Belarus, combined accounted for slightly less than 10% of our
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revenue, of which Russia and Belarus, combined accounted for less than 3% of our revenue. Further escalation of the conflict may have a material effect on our results of operations.
Macroeconomic Conditions
Macroeconomic conditions, including geopolitical and other global events, that impact consumer and business spending and behavior, such as, but not limited to, the interest rate environment, inflation, local political instability, global health crises, supply chain dislocations, regional and other conflicts, including the ongoing war in Ukraine and the Israel-Hamas war, disruptions and instability in the banking sector, may impact our customers, providers, banking partners and ultimately the amount of volume processed on our platform which may affect our results of operations. While we have not been materially affected by the volatility and uncertainty in the banking sector experienced early in 2023, we have commercial arrangements with multiple banks globally and could be impacted by future disruptions in the banking sector. In 2023, we saw a significant increase in the interest income revenue we earn on our customer funds as the U.S. Federal Reserve raised the benchmark interest rate by 525 basis points since 2022. While there remains a great deal of uncertainty around the future timing and magnitude of interest rate cuts, we do expect to see a negative impact from declining interest rates over the medium-term.
Seasonality
Given the diverse nature of our customers and their businesses, Payoneer’s revenues experience seasonal fluctuations as a result of consumer and business spending patterns. Historically, we have seen revenues increase in the fourth quarter of every year, primarily as a result of higher e-commerce sales during the holiday season.
Key Factors Affecting Our Performance
Continued Growth of Digital Commerce. We have continued to see growth in digital commerce, as businesses of all sizes increasingly look to access the global digital economy and as the market for goods, labor, and services becomes more global and more distributed. In 2020 and 2021, we saw a significant acceleration in digital commerce adoption as consumers and businesses shifted activity to online channels due to the COVID-19 pandemic. In 2022 and 2023, we saw e-commerce growth rates normalizing to pre-pandemic levels as (i) consumers shifted from goods to services consumption following the loosening pandemic restrictions, (ii) rising inflation in many economies and the impact of higher interest rates set by many central banks impacted consumer and business spending behavior and (iii) ongoing supply chain disruptions impacted the pricing and availability of goods. While at the same time, we saw a significant rebound in global travel, as restrictions were eased globally. For the years ended December 31, 2023, 2022 and 2021, total volume increased by 11%, 8% and 27% on a year-over-year basis, respectively.
Multiple Acquisition Channels Allow Us to Add Customers, Including Those That Meet Our Ideal Customer Profile. We operate a two-sided network, providing services to buyers and suppliers, businesses and contractors, marketplaces and marketplace sellers, and connecting them via a single platform.
We benefit from a strong brand in the markets in which our customers operate, and especially in key e-commerce markets such as China. We continue to make investments both in our brand and in our go-to-market infrastructure, including in our local go-to-market teams. Our financial performance will depend in large part on our ability to continue to add customers, including customers who meet our ideal customer profile.
We leverage our unique relationships with various marketplace platforms to cost-effectively acquire and serve new customers and look to add new marketplace relationships, which drives increased volumes on our platform and broadens our global reach.
We enter from time to time into various agreements with marketplaces and e-commerce platforms. These agreements govern how we provide services to SMBs and individuals receiving payments from those marketplaces, or how we provide services to the marketplace directly, or a combination of both. Some agreements have exclusivity arrangements with a defined term length. Some agreements have fee structures that are defined only partly through the contract’s term while the remaining fee structure is subject to market competitive rates and good faith negotiation with the marketplace. In addition, in a few instances, we compensate the marketplace with structured incentives tied to the overall economics of the relationship. These incentive structures can apply throughout the contract term or through only a portion of the term. While the revenues we generate directly from our marketplace relationships are not significant, material changes to the terms that govern these relationships or the termination of those relationships could materially impact our revenues, expenses, and earnings.
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We benefit from a local presence and significant expertise in the markets in which our customers operate. We collaborate with many partners around the world, including local logistics firms, accounting firms, marketing companies and others, and these serve as a valuable acquisition channel for our business. We also integrate our services into software platforms, including accounting software providers, and with banks and other local payment providers. These partnerships enable us to offer better service to our customers and to cost-effectively acquire new customers. Our ability to innovate and grow is dependent, in part, on our ability to maintain and grow our partnership base.
Expanding our Addressable Market and Driving Increased Adoption of Higher Take Rate Products and Services. SMBs doing business in the global economy have many of the same complex needs as larger enterprises but lack internal resources and are underserved by the legacy financial system. Our financial stack is designed to meet the end-to-end AR and AP needs of SMBs with cross-border business.
We will continue to make significant investments in both existing and new products and services, including for those customers who operate B2B and direct-to-consumer models. We remain focused on increasing our penetration in these markets through new customer acquisition and from driving increased adoption of these and other services, such as our card product, with our existing customers.
As we meet more of the needs of our customers, we expect to grow the revenues we earn from customers and to drive improved retention. Our ability to continue to grow our revenues is dependent on our ability to continue to grow our customer base and to drive increased adoption of our B2B, Checkout, and other differentiated offerings.
Macroeconomic Trends. Our results are impacted by the relative strength of the overall global economy and its effect on business investment, unemployment, consumer spending behavior, and business and consumer demand. Our revenues are also impacted by the level of customer funds held on our platform and by the interest rate we are able to earn on those funds.
Our customers are also impacted by the macroeconomic and geopolitical environment, both the global environment and specific regional or local factors. For example, the war between Ukraine and Russia that began in 2022 and the related economic sanctions imposed on Russia, Belarus and certain territories in Ukraine, have and may continue to impact our services to customers in such countries. Subsequent to the outbreak of the conflict, in 2022, we ceased to provide services to customers in Russia and have limited our payment services to Belarus customers. It is not possible to predict the broader consequences of the conflict, but the continuation or escalation of the conflict, along with any expansion to the surrounding areas, may have a significant effect on our results of operations.
M&A. In 2023, we entered into an agreement to acquire a licensed China-based payment service provider to support Payoneer’s China business. We also acquired the assets of a real-time data platform to support underwriting decisions in our working capital business.
We believe there are additional opportunities to leverage our global platform, regulatory and compliance infrastructure, technology, brand and team to deliver additional value to more customers more quickly by supplementing our organic product development with targeted acquisitions that add new capabilities or deeper geographic penetration.
Components of Results of Operations
The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document.
Revenue
The majority of our revenues are generated from transaction fees, which vary based on the type of service the customer utilizes. Transaction fee revenue principally consists of revenue generated when customers use their funds, either to withdraw their funds from our platform to a local banking institution or to use the funds to make payments. Some services, such as virtual commercial cards, typically generate higher transaction fees from a dollar of volume than if that same dollar was withdrawn to a customer’s bank account. We also earn revenues in certain instances from volumes coming into the platform related to our services to B2B customers and through our Checkout offering.
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We generate significant revenues from interest earned on customer funds held on our platform. To a lesser extent, we generate revenue through the collection of fees, mainly fees charged when payments are made into a customer’s account, and bank transfer fees, which are fees charged when one of Payoneer’s enterprise customers uses Payoneer to send a payment directly into the bank account of a small business or individual that does not have an account on our platform. The majority of our revenue is recognized and collected upon the completion of the underlying transaction. In some cases, revenues are collected through intermediaries. For more information on our revenue recognition policies, see note 2r. of our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Transaction costs
Transaction costs mainly consist of fees paid to the banks, processors and networks that process payments to and from the Payoneer platform, costs to acquire currencies, card supply costs, losses related to certain of our services, and expenses related to the outstanding balance associated with the Warehouse Facility (as described in greater detail under “— Liquidity”). These costs are net of any rebate programs with banks and processors, such as volume rebates. Transaction costs are primarily driven by volume and number of transactions and generally increase as volume and number of transactions increase, while certain of our products and services, such as our commercial card or checkout product and certain markets drive higher transaction costs.
We are exposed to potential transaction losses such as credit cards collections losses, Electronic Funds Transfer returns, card negative balances and chargebacks and capital advance losses. These costs are included in transaction costs. We also record an allowance for estimated losses arising from doubtful capital advances.
Other operating expenses
Other operating expenses mainly include compensation for our employees and subcontractors, who support customer service calls, customer onboarding costs, banking infrastructure implementations, transaction monitoring and liquidity management as well as indirect costs incurred for fraud detection, compliance operations, regulatory services and maintenance costs related to our customer call center infrastructure.
Research and development expenses
Research and development expenses consist primarily of employee compensation and related costs, professional services and consulting expenses, and non-capitalized costs associated with the development of new technologies. Such non-capitalized costs are charged to the consolidated statements of comprehensive income (loss) as incurred.
Sales and marketing expenses
Sales and marketing expenses consist of costs for business development, customer success, product launch costs, marketing and advertising costs, retention costs and certain customer acquisition costs and includes employee compensation and related costs.
General and administrative expenses
General and administrative expenses consist primarily of compensation, benefits and overhead expenses associated with corporate management. This also includes, among other things, directors’ and officers’ liability insurance, director fees, internal and external accounting and legal and administrative resources, including audit and legal fees.
Depreciation and amortization
Depreciation and amortization consist primarily of amortization of intangible assets, internally developed software, and depreciation of our investments in property, equipment, and software. We depreciate and amortize our assets on a straight-line basis in accordance with our accounting policies. The useful lives are 3-5 years for computers, software and peripheral equipment, 6-16 years for furniture and office equipment, and the shorter of the asset useful life or remaining lease term for leasehold improvements. Internal use software and acquired developed technology assets are amortized over the period of estimated benefit, using the straight-line method and estimated useful lives of 3-6 years.
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Financial income, net
Financial income, net includes gains (losses) from foreign exchange fluctuations. We conduct transactions worldwide and settle accounts with our financial intermediaries in various currencies. Interest income (expense) from corporate cash and cash equivalents deposited in our accounts is also included under financial income, net, which vary based on cash and cash equivalents balances, and based on market rates. In addition, as a result of the reverse recapitalization transaction we completed with FTAC Olympus Acquisition Corp. (“FTOC”) in 2021 (the “Reorganization”, further description in Note 1 to our consolidated financial statements included elsewhere within this Annual Report on Form 10-K), we acquired warrants that are exercisable for shares of our common stock. These warrants are classified as a liability and remeasured at period end and the corresponding mark-to-market adjustment is included in financial income, net.
Income tax
We are in a taxable income position in the U.S. and in certain foreign jurisdictions, for which there are income taxes recorded. In addition, we record expenses associated with uncertain income tax positions.
Share in losses of associated company
Investment in entities where we have the ability to exercise significant influence, but not control, over the investee and investment in joint ventures, are accounted for using the equity method of accounting. As of December 31, 2022, we had a joint venture with assets and operations located in China. In January 2023, through our subsidiary Payoneer Research and Development Ltd., we acquired all remaining interests in the joint venture from other partners, and intend to dissolve the entity. For the periods prior to full ownership and consolidation, our share in the results of operations is included as share in losses of associated company on our consolidated statements of comprehensive income (loss).
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | | Increase (Decrease) | ||||||||||||
| (in thousands) | | 2023 | 2022 | 2021 | 2023 | | 2022 | | |||||||
| Revenues | | $ | 831,103 | | $ | 627,623 | | $ | 473,403 | 32 | % | 33 | % | ||
| Transaction costs (Exclusive of depreciation and amortization shown separately below)(1) | | 122,291 | | 110,165 | | 101,476 | 11 | % | 9 | % | |||||
| Other operating expenses | | 160,609 | | 149,199 | | 124,649 | 8 | % | 20 | % | |||||
| Research and development expenses | | 119,197 | | 115,041 | | 80,760 | 4 | % | 42 | % | |||||
| Sales and marketing expenses | | 196,654 | | 164,564 | | 114,331 | 20 | % | 44 | % | |||||
| General and administrative expenses | | 100,929 | | 90,010 | | 64,399 | 12 | % | 40 | % | |||||
| Depreciation and amortization | | 27,814 | | 20,858 | | 17,997 | 33 | % | 16 | % | |||||
| Total operating expenses | | 727,494 | | 649,837 | | 503,612 | 12 | % | 29 | % | |||||
| Operating income (loss) | | 103,609 | | (22,214) | | (30,209) | ** | % | (26) | % | |||||
| Financial income (expense): | | | | | | | | | | | |||||
| Gain from change in fair value of Warrants | | | 17,359 | | | 33,963 | | | 11,824 | | (49) | % | | 187 | % |
| Other financial income (expense), net | | | 11,568 | | | (10,131) | | | (6,854) | | ** | % | | 48 | % |
| Financial income, net | | | 28,927 | | | 23,832 | | | 4,970 | | 21 | % | | 380 | % |
| Income (loss) before taxes on income and share in losses of associated company | | 132,536 | | 1,618 | | (25,239) | ** | % | ** | % | |||||
| Taxes on income | | 39,203 | | 13,586 | | 8,711 | 189 | % | 56 | % | |||||
| Share in losses of associated company | | — | | 2 | | 37 | ** | % | (95) | % | |||||
| Net income (loss) | | $ | 93,333 | | $ | (11,970) | | $ | (33,987) | ** | % | (65) | % |
** Not meaningful
(1) In 2023, 2022, and 2021 interest expense and fees associated with related party transaction were $1.8, $1.5, and $0.2 million respectively.
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Year ended December 31, 2023 Compared to the year ended December 31, 2022
Revenues
Revenues were $831.1 million for the year ended December 31, 2023, an increase of $203.5 million, or 32%, compared to $627.6 million for the year ended December 31, 2022. Volume grew by $6.3 billion, or 11% compared to the year ended December 31, 2022. The increase in revenues was primarily driven by interest income earned on customer balances resulting from rising interest rates and an increase in customer balances held on our platform. The remaining increase was driven by a combination of growth in the number of customers on our platform, ongoing growth in high take rate regions, certain monetization initiatives and continued adoption of our high value services.
Transaction costs
Transaction costs were $122.3 million for the year ended December 31, 2023, an increase of $12.1 million, or 11%, compared to $110.2 million for the year ended December 31, 2022. Transaction costs for the year ended December 31, 2023 were impacted by an increase in chargebacks and other transaction losses of $3.4 million and an increase in Capital Advance losses.
Excluding the impact of these non-volume related costs, transaction costs increased by $6.5 million, or 6%, while volume increased by 11% compared to the prior year period. Transaction costs grew at a lower rate than volume due to improved commercial terms with banking and other providers, internal platform optimizations, and cost structure benefits from increased transaction volume.
Other operating expenses
Other operating expenses were $160.6 million for the year ended December 31, 2023, an increase of $11.4 million, or 8%, compared to $149.2 million for the year ended December 31, 2022. This increase was driven primarily by an increase of $10.7 million in third-party contractors and consulting expenses. In addition, there was an increase of $4.7 million in information technology expenses partially offset by various cost savings of $3.0 million.
Research and development expenses
Research and development expenses were $119.2 million for the year ended December 31, 2023, an increase of $4.2 million, or 4%, compared to $115.0 million for the year ended December 31, 2022. This increase was driven primarily by an increase of $19.4 million in employee compensation, benefits and other employee-related expenses as a result of an increase in average employee headcount, which was partially offset by the impact of our workforce reduction plan discussed above. Expenses were also impacted by a $5.9 million increase in information technology expenses, and the impact of a $2.5 million increase in third party contract and consultancy expenses. This was offset by an increase of $25.4 million in the amount of payroll and third-party related costs capitalized as internal use software. During the year ended December 31, 2023, we also incurred $1.6 million in severance related costs for research and development employees related to the workforce reduction plan discussed above.
Sales and marketing expenses
Sales and marketing expenses were $196.7 million for the year ended December 31, 2023, an increase of $32.1 million, or 20%, compared to $164.6 million for the year ended December 31, 2022. This increase was driven mainly by an increase of $19.2 million in marketplace partner commissions, an increase of $9.1 million in employee compensation, benefits and other employee-related expenses as a result of an increase in average employee headcount, which was partially offset by the impact of our workforce reduction plan discussed above, and an increase of $3.0 million in third party contract and consultancy expenses. During the year ended December 31, 2023, we also incurred $2.0 million in severance related costs for sales and marketing employees related to the workforce reduction plan discussed above.
General and administrative expenses
General and administrative expenses were $100.9 million for the year ended December 31, 2023, an increase of $10.9 million, or 12%, compared to $90.0 million for the year ended December 31, 2022. This increase was driven mainly by an increase of $8.3 million in compensation, benefits and other employee-related expenses as a result of an increase in employee headcount, an increase of $2.4 million in indirect taxes and fees and an increase of $2.3 million in expense related to the fair value adjustment of a liability related to our 2020 acquisition of optile that positively impacted the prior period and did not recur. This was offset by a decrease of $2.4 million in third-party contractors and consulting expenses.
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Depreciation and amortization expenses
Depreciation and amortization expenses were $27.8 million for the year ended December 31, 2023, an increase of $6.9 million, or 33%, compared to $20.9 million for the year ended December 31, 2022. The increase was driven primarily by an increase in amortization of internal use software costs.
Financial income, net
Financial income, net was $28.9 million for the year ended December 31, 2023, an increase of $5.1 million, or 21%, compared to $23.8 million for the year ended December 31, 2022. This increase was primarily driven by an increase of $11.9 million in interest income on corporate cash balances and $9.2 million from revaluation of foreign currency balances, partially offset by the gain from revaluation of warrant liabilities that was $16.6 million less in the current period compared to the prior period.
Income tax
Income tax expense was $39.2 million for the year ended December 31, 2023, an increase of $25.6 million, or 189%, compared to $13.6 million for the year ended December 31, 2022. The increase was driven by current tax expense increase of $37.5 million due to higher profitability in the U.S. primarily from interest income, as well as the impact of certain share-based compensation and research and development expenses which are nondeductible for U.S. tax purposes. Such increase was offset by a deferred tax benefit of $11.1 million, $10.5 million of which related to the release of the Company’s valuation allowance on deferred tax assets related to our U.S. operations.
Net income (loss)
For a discussion regarding our net income position in 2023 and net loss position in 2022, please refer to the Liquidity and Capital Resources section below.
Liquidity and Capital Resources
The following discussion of our liquidity and capital resources is based on the financial information derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe our existing cash and cash equivalents and cash flows from operating activities will be sufficient to meet our operating working capital, share repurchase and capital expenditure requirements for at least the next twelve months. Our future financing requirements will depend on many factors including our growth rate, the timing and extent of spending to support development of our platform and the ongoing expansion needs of sales and marketing activities. We have in the past and may in the future enter into agreements with third parties with respect to investments in, or acquisitions of, businesses or technologies, which could also require us to seek additional equity or debt financing.
Sources of Liquidity
As of December 31, 2023, we had $617.0 million of cash and cash equivalents.
As a result of the Reorganization, we raised gross proceeds of $874.5 million including the contribution of $574.5 million of cash held in FTOC’s trust account from its initial public offering, which is net of redemptions of FTOC’s Common Stock held by FTOC’s public stockholders prior to the Reorganization. These proceeds were mostly applied to transaction-related consideration to employees and investors as well as other transaction costs. We also raised $300.0 million of private investment in public equity (“PIPE”) at $10.00 per share of Payoneer Global Inc.’s Common Stock.
On October 28, 2021, Payoneer Early Payments Inc. (“PEPI”), our wholly-owned second tier subsidiary and its subsidiary (the “Borrower”) entered into a multi-party Receivables Loan and Security Agreement (the “Warehouse Facility”) with, inter alia, affiliates of Viola Ventures. The objective was to provide access to external financing for our capital advance activity. See Note 11 and Note 22 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
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Effective July 1, 2023, the Warehouse Facility interest rate was updated to the sum of the Daily Simple SOFR and 0.26161% plus 9% annually and has a revolving maturity of 36 months from the commencement date with a payback period of an additional 6 months after the revolving maturity date. The initial borrowing commitment is $25 million subject to increases at our request and the lender’s discretion up to $100 million. Additional commitments will carry interest rates ranging from 7% to 7.75% in addition to the benchmark rate. In addition, pursuant to the Warehouse Facility, PEPI entered into an amendment on June 8, 2022, whereby creating a condition that the total interest rate shall not exceed 10.5% per annum for all outstanding balances.
The Warehouse Facility is secured by eligible capital advance receivables at an initial rate of 80% of the total value of the underlying capital advance receivable outstanding. We are subject to financial covenants including minimum tangible equity, solvency and unrestricted cash requirements that are assessed based on our consolidated financial statements.
Current and Future Cash Requirements
On May 7, 2023, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $80 million of our common stock, including any applicable excise tax. On December 7, 2023, the Board authorized an amendment to the program to increase the authorized amount of repurchases to an aggregate amount not to exceed $250 million, including the amount that remained available as of December 7, 2023 to repurchase common stock under, but not any prior repurchases effected pursuant to, the previous authorization. The amended authorization expires December 31, 2025.
During the year ended December 31, 2023, we repurchased 11,064,692 shares of our common stock for approximately $56.9 million, of which $1.5 million was not yet settled at period end. As of December 31, 2023, a total of approximately $240 million remained available for future repurchases of our common stock under the program.
Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in thousands) | | 2023 | 2022 | 2021 | |||||
| Net cash provided by operating activities | | $ | 159,489 | | $ | 83,960 | | $ | 20,015 |
| Net cash provided by (used in) investing activities | | (44,254) | | 5,734 | | 10,156 | |||
| Net cash provided by financing activities | | 511,954 | | 1,461,312 | | 1,396,195 | |||
| Effect of exchange rate changes on cash and cash equivalents | | 4,458 | | (2,719) | | (1,222) | |||
| Change in cash, cash equivalents, restricted cash and customer funds | | $ | 631,647 | | $ | 1,548,287 | | $ | 1,425,144 |
Operating Activities
Net cash provided by operating activities was $159.5 million for the year ended December 31, 2023, an increase of $75.5 million compared to $84.0 million for the year ended December 31, 2022. This increase is primarily driven by a $105.3 million increase in net income in the current year compared to the prior year, as well as increased non-cash expenses and lower non-cash gain from change in the fair value of warrant liabilities. These increases were offset by lower trade payable balances, increased capital advance extensions net of collections, and non-cash income related to deferred taxes.
For the year ended December 31, 2023, we had $93.3 million of net income, which includes non-cash expenses of $65.8 million related to stock-based compensation and $27.8 million related to depreciation and amortization, as well as a $17.4 million non-cash gain from change in the fair value of warrant liabilities and non-cash income of $11.1 million related to deferred taxes. Net income was also adjusted for changes in current assets and liabilities, including net inflows of $13.6 million related to other payables and $10.2 million related to operating lease right-of-use assets. These inflows were offset by outflows of $8.3 million related to capital advances, $8.3 million related to trade payables and $6.1 million related to other miscellaneous items.
Our net loss for the year ended December 31, 2022 was $12.0 million after considering non-cash charges primarily consisting of stock-based compensation of $52.1 million and $20.9 million in depreciation and amortization, as well as other non-cash items, offset by a $34.0 million gain from the change in fair value of warrants.
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Investing Activities
Net cash used in investing activities was $44.3 million for the year ended December 31, 2023, a decrease of $50.0 million compared to cash provided by investing activities $5.7 million for the year ended December 31, 2022. This change was predominantly related to an increase of $33.0 million in the balance of customer funds in transit at the current period end compared to the prior year period and an increase of $21.0 million in capitalization of internal use software, partially offset by a cash inflow of $6.0 million related to our acquisition of the remaining interest in a joint venture, as described in Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Financing Activities
Net cash provided by financing activities was $512.0 million for the year ended December 31, 2023, a decrease of $949.4 million compared to $1.46 billion for the year ended December 31, 2022, primarily driven by a lower increase in customer balances during the current year compared to the prior year. Additionally, approximately $55.4 million was used in the year ended December 31, 2023 to finance our share repurchase program which began in 2023.
Lease Commitments
We have entered into various non-cancelable leases for certain offices and vehicles with contractual lease periods expiring between 2024 and 2035.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Payments due by period | ||||||||||||||
| | | | | | Less than | | | | | | | | More than | ||
| (in thousands) | | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||
| Operating leases | | $ | 31,491 | | $ | 7,050 | | $ | 8,223 | | $ | 3,846 | | $ | 12,372 |
Off-Balance Sheet Arrangements
As of the balance sheet dates of December 31, 2023 and December 31, 2022, we have not engaged in any off-balance sheet arrangements, as defined by Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, results of operations or cash flows.
Key Metrics and Non-GAAP Financial Measures
Our management uses a variety of financial and operating metrics to evaluate our business, analyze our performance, and make strategic decisions. We believe these metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as management. However, certain of these measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for financial measures that have been calculated in accordance with GAAP. We primarily review the following key performance indicators and non-GAAP measures when assessing our performance:
Volume
Volume refers to the total dollar value of transactions successfully completed or enabled by our platform, not including orchestration transactions. For a customer that both receives and later sends payments, we count the volume only once. Volume serves as a key metric for overall business activity, as growing volume is one of the primary drivers for our revenue growth.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in millions) | | 2023 | 2022 | 2021 | |||||
| Volume | | $ | 66,020 | | $ | 59,729 | | $ | 55,381 |
Note: we have updated our methodology to adjust for previously disclosed limited exceptions where both received and sent payments were counted in volumes, such that we count volume only once for a customer that both receives and later sends payments. The updated methodology has no impact on revenue and had, for all periods presented, less than a 3% impact on volume. The update has been applied to all periods reflected in the table above and we have updated the definition of volume accordingly.
Volume grew 11% for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by a combination of continued growth with our largest digital commerce marketplaces, strong travel demand, and customer acquisition.
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Revenue
We generate revenues mainly from transaction fees, which vary based on the type of service the customer utilizes. Transaction fee revenue principally consists of fees for withdrawals and usage. We also earn revenues in certain instances from volumes coming into the platform related to our B2B services and through our Checkout offering. We generate significant revenues from interest earned on customer funds held on our platform. In addition, we generate revenue from non-volume-based products and services which are based on a fixed fee. We believe that Revenue demonstrates our ability to monetize volume activity on our platform. Our revenues can be impacted by the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (i) | Mix in customer size, products, and services; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (ii) | Mix between domestic and cross-border transactions; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (iii) | Geographic region or country in which a transaction occurs; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (iv) | Pricing and other market conditions, including interest rates. |
Management closely monitors volume and revenue to ensure that we continue to grow funds and business activity that enters into the platform, expanding our overall scale and the reach of our business.
Adjusted EBITDA
In addition to our financial results determined in accordance with GAAP, we believe Adjusted EBITDA, as a non-GAAP measure, is useful in evaluating our operating performance. We use Adjusted EBITDA to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measures, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measure as a tool for comparison. A reconciliation is provided below for our non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year ended December 31, | ||||||||
| (in thousands) | | 2023 | 2022 | 2021 | |||||
| Net income (loss) | | $ | 93,333 | | $ | (11,970) | | $ | (33,987) |
| Depreciation and amortization | | 27,814 | | 20,858 | | 17,997 | |||
| Taxes on income | | 39,203 | | 13,586 | | 8,711 | |||
| Other financial (income) expense, net | | (11,568) | | 10,131 | | 6,854 | |||
| EBITDA | | 148,782 | | 32,605 | | (425) | |||
| Stock based compensation expenses(1) | | 65,767 | | 52,150 | | 37,012 | |||
| Reorganization related expenses(2) | | | — | | | — | | | 5,087 |
| Share in losses of associated company | | | — | | | 2 | | | 37 |
| M&A related expenses (income)(3) | | 3,468 | | (2,323) | | (1,721) | |||
| Gain from change in fair value of Warrants(4) | | | (17,359) | | | (33,963) | | | (11,824) |
| Restructuring charges(5) | | | 4,488 | | | — | | | — |
| Adjusted EBITDA | | $ | 205,146 | | $ | 48,471 | | $ | 28,166 |
| Column 1 | Column 2 |
|---|---|
| (1) | Represents non-cash charges associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy. |
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| Column 1 | Column 2 |
|---|---|
| (2) | Represents the non-recurring reorganizational costs that were not recorded as a reduction of additional paid in capital. The amounts relate to legal and professional services associated with the Reorganization. |
| Column 1 | Column 2 |
|---|---|
| (3) | Amounts for the year ended December 31, 2023 relate to M&A-related third-party fees, including related legal, consulting and other expenditures. Amounts for the years ended December 31, 2022 and 2021 relate to a non-recurring fair value adjustment of a liability related to our 2020 acquisition of optile. |
| Column 1 | Column 2 |
|---|---|
| (4) | Changes in the estimated fair value of the warrants are recognized as gain or loss on the statements of comprehensive income (loss). The impact is removed from EBITDA as it represents market conditions that are not in our control. |
| Column 1 | Column 2 |
|---|---|
| (5) | We initiated a plan to reduce our workforce during the year ended December 31, 2023 and had non-recurring costs related to severance and other employee termination benefits. Please refer to Note 13 to our consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information. |
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the report amounts of assets, liabilities, revenue, costs and expenses as well as related disclosures. On an ongoing basis, we evaluate these estimates and the assumptions used. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting estimates discussed in this section are critical based on the subjectivity and judgement involved in the underlying assumptions, and the materiality to our consolidated financial statements. Our significant accounting policies are described within Note 2 to the consolidated financial statements.
Allowance for Capital advance (CA) losses:
We have established an allowance for CA losses (ALCAL), which represents our estimate of current expected credit losses inherent in our portfolio. Since the adoption of ASC 326, Current Expected Credit Losses, as of January 1, 2022, we estimate ALCAL based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio, which is segmented by program. Loss rates are generated using historical loss data for each portfolio which are applied to segments of each portfolio. We then apply macroeconomic factors such as market unemployment rate, current and forecasted GDP, S&P yield, risk free rate and inflation rate, which are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. Expected credit loss rates, incorporating historical loss data and macroeconomic factors, are applied to the principal amount of our CA receivables.
Determining appropriate current expected credit loss allowances for CA receivables is an inherently uncertain process and ultimate losses may vary from current estimates. We regularly update our allowance estimates as new facts become known, and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected credit losses at the balance sheet date after incorporating the impact of externally sourced macroeconomic forecasts.
Goodwill:
The valuation of assets acquired in a business combination require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill. Our estimates are based upon assumptions that we believe to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur.
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Goodwill is tested annually for impairment at the reporting unit level in the third quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill utilizes a qualitative assessment to determine whether it is more likely than not that goodwill is impaired. The qualitative factors may include, but are not limited to, macroeconomic conditions, industry and market conditions, operating environment, financial performance and other relevant events, which are inherently subject to estimation. If it is determined that it is more likely than not that goodwill is impaired, then we are required to perform a quantitative goodwill impairment test, which requires us to estimate the fair value of our reporting units. The fair value of the reporting unit is estimated using a discounted cash flow method. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. Estimation is inherent in calculating the discount rate to apply and involves the use of third-party specialists.
Revenue recognition:
Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to customers, including marketplace platforms, and merchants, which require judgment to determine whether the payments should be recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
Income taxes:
Calculating our tax provision requires us to make estimates regarding the timing and amount of taxable and deductible items which will adjust pretax income earned in various tax jurisdictions. We are required to interpret complex tax legislation in the jurisdictions in which we operate, and although we believe that our estimates and judgments discussed herein are reasonable, actual results may be materially different than the estimated amounts.
The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Valuation allowances are established for deferred tax assets when the likelihood of the deferred tax assets not being realized exceeds the more likely than not criterion. Assessing the likelihood of realizing deferred tax assets involves significant judgement and assumption. Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
We follow the guidance on accounting for uncertainty in income taxes in accordance with U.S. GAAP, which requires us to estimate whether it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position; otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, we accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. Interest and penalties are classified as taxes on income in the consolidated financial statements.
In addition to aforementioned changes, the U.S. Tax Cuts and Jobs Act of 2017 also included a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued were subject to U.S. taxation. Notwithstanding the U.S. taxation of these amounts, we intend to continue to invest most or all of these earnings, as well as our capital in these subsidiaries, indefinitely outside of the U.S. and do not expect to incur any significant, additional taxes related to such amounts.
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Loss contingencies:
We are a party to certain legal and regulatory proceedings with respect to a variety of matters. We evaluate the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which we are a party and accrue a loss contingency when the loss is probable and reasonably estimable. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims, litigation, or other enforcements and may revise our estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may differ materially from the actual outcomes.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, result of operations or cash flows is disclosed in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.