Payfare Inc

TSX:PAY

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to Payfare's 2021 Year-End Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Mr. Cihan Tuncay, Head of Investor Relations and Corporate Development. Please go ahead.

[Cihan Tuncay, executive]

Thank you, operator, and good morning, everyone. Joining me on the call this morning is Marco Margiotta, Payfare's CEO and Founding Partner; and Charles Park, Payfare CFO.

Payfare would like to note that the company's remarks and answers to your questions today may contain forward-looking statements that are based upon management's current expectations. All such statements are made pursuant to the safe harbor provisions of, and are intended to be, forward-looking statements under applicable Canadian securities legislation. And when relying on forward-looking statements to make decisions with respect to the company, you should carefully consider the risks set forth in the risk factors section of the annual MD&A for the year ended December 31, 2021, which is available on www.sedar.com. Except as may be required by Canadian securities laws, the company does not undertake any obligation to update any forward-looking statements as a result of new information.

We would also like to remind listeners that Payfare uses certain non-GAAP and supplementary financial measures to arrive at adjusted results to assess its business and to measure overall performance. Payfare believes that these financial measures provide readers with a better understanding of how management views the company's overall performance.

Throughout the call, we will also refer to a slide deck, which was posted on our website, corp.payfare.com/investors last night.

I will now turn the call over to Marco Margiotta.

[Marco Margiotta, executive]

Good morning, everyone. Thanks, Cihan. Let's start on Page 3 of the slide deck. 2021 was a transformational year for Payfare. We successfully executed our IPO and just passed our 1-year anniversary as a public company. We launched store DasherDirect with DoorDash, which has been extremely successful. We announced integrations with Plaid, Marqeta and many other large payment companies and fintechs. I would like to take this opportunity to thank the tremendous employees at Payfare who make all of this happen on a daily basis.

In the fourth quarter, we achieved several milestones, including revenue of $17.3 million. We ended the year with over 0.5 million active users, and we surpassed $1 billion in quarterly GDV for the first time.

Turning to Page 4. You'll see our user growth. Ending active users were up 834% year-over-year in 2021, which is something we are very proud of. We continue to see solid momentum in user growth post quarter end. We recently partnered with Lyft and DoorDash to offer our cardholders cashback on fuel purchases. Early indications are that daily card applications have broken records since our gig platform partners notified their workforce of these opportunities. I would also like to point out that Payfare is not funding the cashback rewards for either program. These rewards are in addition to the meaningful and engaging cashback rewards that we already -- that were already available for our cardholders, along with free instant access in earnings deposits and their mobile banking account.

Now to Page 5. On Page 5, you will see our strategic objectives for 2022. We are introducing revenue guidance of $90 million to $100 million for 2022 and $21 million to $23 million for the first quarter. I want to emphasize that these guidance numbers are based on our existing partnerships with DoorDash, Uber and Lyft, with no assumptions for new products or new gig platform partnerships.

Today, we are laser-focused on launching Paid App by Payfare, which we expect to go live in the second quarter. We have already landed the largest gig platforms out there, and that Paid App will allow us to target a much larger TAM by providing a free instant payout option and mobile banking app for small to midsized gig platforms in the U.S. With over 51 million independent workers out there, the opportunity in front of us with the Paid App is substantial. Stay tuned for our Investor Day on April 6, where we will share additional details on the Paid App.

There is a robust pipeline of new partnerships ahead of us, from late-stage discussions, RFPs and LOIs to implementing final agreements. The aggregate GDV in our pipeline is in the several billion dollar range.

As we build scale, we are exploring the development of new products to financially empower our users. Microcredit is a product we are looking at very closely. We have a unique position and direct visibility to user earnings and spending habits that go beyond conventional FICO scores. When we started Payfare, our goal was to eliminate predatory payday loans. We started with instant or near-instant earnings payouts. We think the next step is offering our users microloans for additional capital to fund their work, be it plans to fill up on gas, to drive more, prepare their vehicles or anything that they need to keep working.

We also have an eye for international expansion. As our gig platform partners grow internationally, we want to be ready to grow with them. Our initial focus internationally outside of the U.S. will be on Canada, Australia, the U.K. and Europe.

With that, I'll turn it over to Charles to review our Q4 financials.

[Charles Park, executive]

Thank you, Marco, and good morning, everyone. Turning to Page 6, you will see our summary income statement. In the fourth quarter, we generated revenue of $17.3 million, up 36% from the prior quarter and up 399% year-over-year. For 2021, total revenue was $43.8 million, up 225% over 2020. This increase was primarily driven by the national launch and ramp-up of the DoorDash program, which led to higher onboarding of new active users, network interchange from card purchase transactions and support services associated with the scaling of our active user count.

Gross profit in 2021 was $1.3 million, which represents a 391% increase year-over-year. I would also like to point out that post year-end, we are realizing margin expansion as we continue to scale. We have visibility to double-digit gross margins in Q1 with a line of sight of up to 20% to 25% by Q4 of this year.

We continue to hire more personnel and invest in our underlying technology. If we were to hold back on growth, we would be generating positive adjusted EBITDA. We are making these investments to position the business to be significantly larger in the coming years. We are long-term stewards of capital, and at the moment, we are prioritizing growth.

On Page 7, we summarize our current financial condition. We ended the year with almost $41 million in cash. Our financial condition is strong. We have no incremental capital needs to fund our 2022 strategic objectives. Our balance sheet is well capitalized, and we remain debt-free.

I will now turn it over to Cihan for a capital markets update.

[Cihan Tuncay, executive]

Thanks, Charles. So let's flip to Page 8. On the recently announced normal-course issuer bid, we want to emphasize that Payfare is a growth-first company. We will have the option to repurchase up to 5% of our issued net payment shares on an opportunistic basis during elevated levels of market volatility.

We continue to focus our efforts on building a strong ESG program, which is still early stage, that Payfare adjusts to eliminate payday loans and predatory credit products. We think that by simply paying workers faster or instantly after every tap, we can enhance financial inclusion and empowerment for our cardholders. We also prioritize diversity at Payfare. 6 of 8 of our executives are visible minorities.

And flipping to Page 9, this compares our share price performance to the ETFMG Prime Mobile Payments ETF since our IPO. We're happy to see that we have outperformed the benchmark by 28% over this period despite elevated market volatility in recent months.

On Page 10, this shows where our stock is trading relative to other high-growth payments companies. I want to point out that all figures on this table are in U.S. dollars and all forward-looking information reflects the analysts' consensus estimates. We'll leave it to the capital markets community to assess our stock relative to our peers, bearing in mind our recently announced guidance for 2022, taking into consideration our size and the liquidity of our stock.

And with that, operator, we are ready to go into Q&A.

[Operator]

[Operator Instructions] Our first question comes from Josh Siegler from Cantor Fitzgerald.

[Joshua Siegler, analyst]

For my first question, I was wondering what impact the rising rate environment will have on Payfare.

[Marco Margiotta, executive]

Josh, it's Marco. There's a few different aspects that it touches upon. First off, I mean, as we've seen, we launched these recent -- the recent announcements you've seen with DoorDash and Lyft about the fuel discounts, so obviously, the hardest hit area for them will be fuel. Well, understanding our user base, you know that gas spend and fast food spend is the 2 highest spend categories and fuel being the biggest. Us going out there and opting a discount on that has a substantial impact on applications, as we mentioned earlier.

And so with those inflated gas prices, it actually is a positive for us. We actually get more interchange going through as more money spent off of our cards. So it's actually a very positive thing.

On the flip side, in the macro environment, you would expect to see maybe discretionary spend come down. So for DoorDash, to highlight them as an example, we're not necessarily seeing any depression on that discretionary spend from consumers not spending as much on DoorDash. And so I can't speak to them specifically. But just in what we're seeing right now, we don't see the macro impact of that being -- putting any pressure on our business just yet. In fact, we're seeing steady volumes come through, more earnings from all the drivers.

And I think it also helps the fact that with that specific client, they're also getting into a number of different verticals that don't just rely on discretionary spend. There's many aspects of their business that are now getting into real-time delivery of everyday household items and really serving a commercial side of business that is being fulfilled now with delivery of almost anything. And so that's kind of more highlighting on the DoorDash front.

On the rideshare side, specifically, we do see travel coming back. 50% of rideshare activity stems from travel. So in a post-pandemic environment, even with high inflation, we're still seeing that pent-up demand kind of flow through. And so I think that more than negates any inflationary pressure on the discretionary spend. I think there's just so much pent-up demand for travel out there. We don't see any slowdown there either.

[Joshua Siegler, analyst]

Okay. And then you've mentioned such a robust pipeline of demand. I'm curious how the company is thinking about positioning itself to best capture all this incoming demand.

[Marco Margiotta, executive]

Yes. I think what you'll find out more is on our Investor Day on April 6. You'll see exactly why our playbook has always been to get the biggest names in the space. We are the pioneer in the space. We're the first ones to market and launching with Uber, Lyft and DoorDash. We certainly punched well above our weight and landed those contracts. And now quite frankly, we've created table stakes. If you're a worker out there and you're working for one of the other platforms that's not offering Instant Pay, that becomes a competitive advantage for the ones that are.

And so we see a huge amount of demand from a lot of the smaller to midsized gig platforms out there because, everything else being equal, that worker will flock to wherever they can get paid sooner, which a lot of the reasons inherently for gig workers to kind of get out there, considered a side hustle, if you will, to kind of earn extra income and kind of bridge the gap between some of the financial hardships they might have.

And so with that all being said, the Paid App kind of puts us in an opportunistic approach where we can actually target all those smaller to midsized platforms and scale, whereby we would have our brand, being the Paid App, front and center for all those consumers to make it a very scalable solution. So from the gig platform side, it will be a one integration into our platform, and we'll be able to pay 100% of their workforce, whether it's through the card that we've created or in a new revenue stream, which is transactional for us, or they can push instant payouts to the bank account that they already have that already exists. That actually opens up new revenue streams for us as well. But that's kind of the path, and we'll think about that in depth on our Investor Day on April 6.

[Operator]

Our next question comes from Adhir Kadve from Eight Capital.

[Adhir Kadve, analyst]

I just want to talk about the instant payout option for the DasherDirect program. Kind of ignoring the effect of gas prices for a moment here, how is that program trending? I think we -- you guys have launched it in early November -- sorry, late November. And just maybe, how was the uptake on that program prior to kind of gas prices increasing and stuff like that?

[Marco Margiotta, executive]

Thanks, Adhir. Actually, I'll turn it over to Charles. Charles, do you want to kind of provide some color or provide some content and I'll kind of jump in with some color?

[Charles Park, executive]

Yes, sure. Thanks, Adhir, for the question. So Adhir, I would say that the majority of our Q4 growth was largely driven by that announcement. I mean it's hard to tell in terms of what was pre and post, but we definitely saw an uptick in our sign-ups and active user counts from the DoorDash program when that announcement was made in mid-November, and that led to steady kind of growth that ultimately led to a 42% quarter-over-quarter active user increase relative to Q3.

So we think that there was a lot of positive momentum there. And obviously, with the recent announcement with the cash rebate on gas, we continue to see kind of that growth flow into Q1 and beyond as well.

[Adhir Kadve, analyst]

Very good. And then just maybe, Charles, just on the back of that, we did see a slight increase in ARPU in Q4. Can you maybe point to where that strength came from? Was that kind of -- like Marco kind of talked about, was that small offshoots or green shoots that we're seeing from the return of rideshare? Was that kind of the thought process there?

[Charles Park, executive]

Yes. So Adhir, I think it's kind of twofold. There definitely was a little bit of an uptick on the rideshare component. A larger portion of that growth, I think we'll see in 2022. But Marco kind of highlighted this on other calls as well, where DoorDash, our primary customer, is really growing their network in terms of -- they're just not a food delivery company anymore. They're delivering more SKUs. And kind of if you look at the DoorDash results quarter-over-quarter, they report that their nonfleet delivery side of the business continues to grow.

So a lot of that growth really is just premiering the growth that DoorDash is seeing in their user base, and we see that translated in Q4. And hopefully, you'll see some more positive news coming forward for Q1 results that are just around the corner as well.

[Adhir Kadve, analyst]

And then maybe just one last one for me, and then I'll pass the line. You kind of mentioned a key priority for this year would be establishing infrastructure to facilitate global expansion. I think you guys mentioned Canada, U.K. and Europe as being a -- as priorities. Can you maybe talk about what sort of investments will need to go into establishing that infrastructure and what kind of stuff you guys will have to do surrounding that? And when could we see kind of some of that kind of coming through into the P&L?

[Charles Park, executive]

Yes, sure. I'll maybe turn it over to Marco maybe to start off and happy to maybe add to any points that Marco didn't cover if that's okay.

[Marco Margiotta, executive]

Yes. That's perfect. So with global expansion, really the one kind of key piece that we would be missing as we enter each market is a local BIN sponsorship to a bank partner to kind of be in a position to issue either a Mastercard or Visa debit or prepaid card in each market. And so with global processes behind us and with our platform being built to scale and expansion capabilities to go global already baked in, the one piece we do need would be that BIN sponsorship. And so development on that would take, on top of my head, 30 to 45 days, along with a long application and core chip process and finding those partners. Most of them would be likely introduced through the networks like Visa and Mastercard as well as all the networking that we have in the payment space.

So there's not much in terms of heavy lifting development dollar-wise. Obviously, with getting into other markets with foreign tongue and all that, you'd have that spend as well, but that's negligible compared to the opportunities that we would be in front of. And so long story short, there's not much capital outlay in terms of launching in those new markets, nor would there be a considerable amount of time involved with each one.

In terms of opportunities, it's kind of a push and a pull, right? So we can either push to get into those markets and set up infrastructure, which is what we'll be doing ahead of those contracts. But with the partnerships we already have at the table -- I'll look at DoorDash as an example. DoorDash and the acquisition of Wolt, that brings them into 27 new markets. And so it'd be a prime opportunity to get in front of a potential client or even an existing client and just utilize their expansion opportunities and kind of showcase that with one integration to our platform, we can now help them scale not only in their local market that they initially reached out for but also globally, which makes it a complete no-brainer decision on behalf of that gig platform.

[Operator]

Our next question comes from Stephen Boland from Raymond James.

[Stephen Boland, analyst]

Maybe just talk about the guidance in terms of the -- on Slide 3, you gave the split of where the majority of your revenue comes from, from the exchange fees. I'm wondering if the guidance has a similar split for that $90 million to $100 million in 2022.

[Marco Margiotta, executive]

Steve, I'll throw that over to [indiscernible].

[Charles Park, executive]

Yes. Thanks, Marco, and thanks, Steve, for your question. In terms of the guidance, Steve, what we -- as Cihan kind of mentioned in his opening remarks, really, we're just talking about 3 existing logos that we have, our major ones, so DoorDash, Lyft and Uber. It doesn't include any kind of net new business or products that we are planning to launch in 2022. So that guidance is just based on the core kind of logos that we've had in all of 2021, just basically organically growing in 2022.

[Stephen Boland, analyst]

So when I think about it in a little bit more detail, is it guidance coming from -- I'm trying to get a little bit more color. Like is it -- do you have an ending active user for the end of 2022 in mind or an improving ARPA -- or ARPU, sorry? Like is it just -- or is it just, in general, like you said, we think DoorDash is growing at X percent, we think we're going to grow X percent? Maybe, you can just try and give us a little bit more color.

[Charles Park, executive]

And maybe I'll touch on 2 points, so 1 quantitative point and 1 qualitative point. The quantitative point is we're obviously kind of 2 months into our quarter. So we have a bit of visibility in terms of where we think we'll end off Q1. So based on kind of prorating that out throughout the rest of 2022, we have a general sense of where we think the baseline of our business will be from a perspective.

Over and above that, we're working very closely with our partners with -- be it DoorDash or Lyft or Uber to really ingrain this product into their infrastructure and DNA so that we can get organic growth and deeper penetration of their driver base as well.

So I'll use DoorDash as an example. This is kind of a key and primary kind of objective of this senior management team at DoorDash to get this program launched, a deeper and deeper penetration throughout their organization and driver base. So with the support of our partners and our continued investment and just rolling out innovative new products and offerings like the cash rebate that we recently announced with them, we're confident that the guidance that we have as a baseline can be met.

In terms of beating those expectations, we're being somewhat conservative early days so that we can see where things land and see what the stabilized rate is. But the good news is in Q1, we continue to see growth. I don't see any slowdown in Q2, but we're -- I think we'll take baby steps in terms of our guidance and kind of update on a quarterly basis, but we're fairly confident that the numbers that were provided in the deck can be reached and, hopefully, exceeded with future updates in upcoming quarters.

[Stephen Boland, analyst]

Okay. And maybe just a second question, Marco, on the microcredit and microloan program. Is there any development you can give us in terms of partners, loan sizes, the third-party balance sheet? Anything on that program that you can talk about?

[Marco Margiotta, executive]

Yes. Thanks, Steve. I mean it's early stages. I mean our goal has always been to come up with another kind of opportunity to scale all the TAM, which is the introduction of the Paid App and Paid Platform. So that's first and foremost. And that's obviously after making sure that the existing clients we have are up to scale and where they want to be. And so we're now in that sweet spot where we're now transitioning and staying within the realm of the gig economy and kind of expanding that TAM through that Paid App launch and Paid portal launch, which is coming up.

So as it relates to loans, I mean that whole infrastructure needs to be in place. I mean you obviously want the biggest user count we can going into that to make it -- economies of scale makes sense. And so with that all being said, we are having early indications -- or sorry, early discussions with different partnerships that might play a role in that lending opportunity or product launch. And so we've been debating back and forth, whether it's something we want to do and get our hands wrapped up in and launch that on our own or launching a partnership with different lenders that might be out there already with existing products or we can kind of sit in the middle and clip a 2 in 10 or 2 in 20 like a fund model.

And so we certainly, by any stretch, don't want to take on the bulk of the balance sheet risk. In fact, we want -- as minimal as possible, we want to stay focused on what we are, which is a fintech providing mobile banking solutions with instant access to earnings. But yes, it's certainly a product that's going to be very well received for our user base. And for now, I could tell you, we're launching with different partners that already have loan infrastructure and all the software that comes with it, including underwriting, adjudication, account management and then even collections, if possible, if that's needed as well.

[Operator]

Our next question comes from Joseph Vafi from Canaccord.

[Joseph Vafi, analyst]

A couple questions from me. I just wanted to start and circle back around to the guidance, and these gas rebate programs are really newly announced. And I was wondering if any early uptake or demand considerations were included in the guidance from those rebate programs because it seems like -- I don't know why someone would not sign up for that rebate program given where gas prices are. And then I have a quick follow-up.

[Marco Margiotta, executive]

Joe, thanks for the question. So you're right. Actually, before I say that, Charles, chime in when you want. But my quick response to that is we really kind of had the visibility of what was going on in the first 2 months of the year to kind of give us our baseline for guidance in terms of the rest of 2022. That being said, we did announce the cashback rewards after that. It hasn't been, in some cases, even marketed yet. It was just through a press release, and we've already seen daily record volumes of applications come through. And so you can be more accurate in saying it feels like a no-brainer. Anybody who understands the gig platforms and the gig workers themselves would understand when you're spending the vast majority of what you're earning through gas. Discount as much as 10% is certainly rewarding.

Now layer that on with the free bank account where you can get a segregated account for $10.99 in independent contractor purposes that makes it easy for tax reporting purposes. In addition to getting your instant earnings or earnings instantly, on top of a ton of cashback rewards and other discounts like the fuel discount, it is very compelling.

And so the short answer is there is none of that activity baked in. Like Charles was suggesting, we've taken a very, very conservative approach. Even the guidance doesn't include any new products, new partnerships, new revenue streams. The list goes on. And so it's our first time to market with even a formal set of guidance numbers. And so we just wanted to have that conservative hat on.

But I'll throw it over to Charles. Maybe he'll have some other things to add.

[Charles Park, executive]

Yes. Thanks, Marco. I think the only thing I would maybe add to that is that, from a sign-up perspective and actual revenues, the main [ timing ] difference in that, by the end of Q1, which is just around the corner, we should see a significant uptick in our active user base. But the full impact of the revenue from those record-breaking sign-ups will likely be seen more in Q2 and beyond.

So we hope to report great numbers there. But as we said, because of the timing difference, probably the active user number will be a lot more attractive kind of as a Q1 reportable item with the [ revenue ] showing up in Q2 and beyond. So we hope to kind of shed some light and color on that in the coming weeks when we report our Q1 results, but that's probably the only thing I can add to what Marco has already covered.

[Joseph Vafi, analyst]

Great. That's good color. And then Charles, I know you mentioned some good gross margin progression during the year, and it just seems like it's still -- it's off your base of customers that you have now and more or less the same product set. It'd be interesting to get a little more color on where that gross margin expansion's coming from in a little more detail.

[Charles Park, executive]

Sure. I would say probably the 3 main pillars of our COGS kind of makeup are processing charges, card purchases and customer service costs. So for card purchases and customer service costs, we kind of have the impact of when there's a huge sign-up, those costs tend to just drive out. And when normal, they're not really kind of steady-state kind of costs. So generally, there's a little bit of pressure on our gross margin lines when we have big sign-ups like we're seeing in March as well. Steady state after a month or so, and the customers have been onboarded.

We see the -- we expect those costs to normalize. And that's where we're kind of reporting that. We're definitely going to see double-digit margins for Q1, and that's what we're forecasting. But we see, as the population kind of normalizes and matures, those cost levels, as a percentage of revenue, should decrease.

From a processor perspective, as we gain more volumes, we actually hit the higher tiers and better pricing for us as well. So that's the most significant component of our COGS. And with the added volumes that we're seeing in Q1 already and expect to see for the rest of the year, that's where kind of the guidance from a margin perspective are coming from. So those 3 pillars that I would say, Joe.

[Joseph Vafi, analyst]

Great. And then just one real quick one. Just for perspective, could you remind us how penetrated you are with Uber, Lyft and DoorDash now just to get a feel for how that may grow over time?

[Charles Park, executive]

So Marco, I can maybe speak to that. It's a bit of a moving target guide. I think the target is to, at a minimum, get a 30% penetration level with all of our programs. DoorDash, we're pretty close to getting there, but the good problem is that DoorDash continues to pace. So as I mentioned in kind of other calls, there's a little bit of a time line for us to kind of onboard those new drivers that they continue to grow quarter-over-quarter.

But the baseline for 2022 would be to get at a minimum 30%. And for the other rideshare programs, we're a little bit lagging in terms of the overall penetration largely due to COVID. But with some of the recent announcements, our hope is to get there by the end of the year as well.

[Operator]

We have no further questions in queue. I'd like to turn the call back over to Marco Margiotta for any closing remarks.

[Marco Margiotta, executive]

Yes. Just really quickly. Thank you, everyone, for joining. Really appreciate the time, and looking forward to the Investor Day on April 6. We'll see you then. Thank you very much. Have a great day.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.