Paya Holdings Inc.

Good day, ladies and gentlemen, and welcome to the PIA Holdings Inc. Third Quarter 2020 Earnings Conference Call. At this time, all participants are on a listen-only mode. If anyone should require operator assistance, please press star then zero on your telephone. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Matt Humphreys, Head of Investor Relations at PIA. You may begin.

Thanks, and good morning, and welcome to the PIA Third Quarter 2020 Earnings Conference Call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations, and beliefs, including our 2020 financial guidance, the growth of Pius Business, our objectives and business strategies, as well as other forward-looking statements. Please refer to the disclosure at the end of the company's earnings press release and Form 8-K filed with the SEC today for information about forward-looking statements that will be made or discussed on this call. All statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that will occur after this call. You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion in the risk factors section of the company's final prospectus and definitive proxy statement filed with the SEC on September 23rd, 2020, and in subsequent periodic reports that the company files with the SEC. Also during this call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliation and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. This call is also available via webcast. You can find all the information I have just described in the investor relations section of PIA's website. Please note, we also have posted a supplemental third quarter 2020 presentation and historical quarterly financial statement supplement to the IR section of our website. Joining us on the call today are CEO Jeff Hack and CFO Glenn Renzulli. Following their prepared remarks, we will open the call to questions. With that, let me turn the call over to Jeff.

Thank you, Matt, and good morning, everyone. And thank you for joining us to discuss our third quarter results. To begin, I'd like to properly welcome and introduce Matt Humphries to the PIA team. Matt brings with him a wealth of experience from his career in investor relations, equity research, and, of course, as a Marine Corps aviator. I'm excited to have him here, and the timing of his arrival one week prior to our first earnings call as a public company has been better. I'm confident he'll cultivate meaningful relationships with our investors and continue to elevate our broader investor relations efforts. Turning to a discussion of our financial performance, we're pleased to report solid third-quarter financial results which reflect the strength of our business model and the continued execution of our growth strategy. I'll begin with a few highlights from the third quarter. Third quarter adjusted EBITDA was $13.5 million, up 10.7 percent from the same period last year. Payment volume of $8.7 billion was up 7.6 percent year over year. We have rebounded nicely from our COVID-driven April low. Despite the impacts of the pandemic, Our revenue increased 2.4% year-over-year, and our adjusted EBITDA margin grew by 200 basis points. Prudent expense discipline, appropriate during these unusual times, led to lower operating expenses versus the prior year, contributing to our strong results. Despite this, we continue to prioritize investments into sales, marketing, and solutions in support of our growth objectives. Glenn will review our results later in the call. But since this is our first quarterly earnings call, I think it would be helpful to briefly review our business and growth strategies. Pi is a leading independent integrated payments platform serving software partners in attractive middle market verticals such as B2B goods and services, healthcare, nonprofit, government and utilities, and education. These verticals are all high growth and under-penetrated for integrated payments. Our quarterly volume trends during COVID clearly demonstrate the powerful combination of software and payments in very attractive verticals. Our position is further demonstrated by some exceptional capabilities, including an average transaction size over $200, 85% of our volume is card not present, and we are the sixth largest in U.S. card not present volume based on Nielsen rankings. We provide an end-to-end commerce experience to our software partners, from order management to invoicing to receipt of goods to payment and then post that to business management and accounting systems. These solutions enrich the value of the entire software suite, generating very material incremental economics for our software partners and improve cash flow and expense savings for end customers. The TAM here, over $1 trillion of volume, comes from a combination of replacing physical invoice and physical check, as well as electronic payments, that are not yet integrated into primary business management software. Among the things that differentiate PIA are PIA Connect, a modern technology suite that tailors the experience to the unique needs of each vertical. We have a long and difficult to replicate history of providing technologically and operationally integrated commerce solutions for modern business software. We provide enterprise-grade solutions, technology and support to our middle market partners, We have a powerful model for helping software partners maximize penetration of integrated payments within their installed base. And finally, we've combined all payment methods, card, ACH, and check, into a unified platform, which is particularly attractive in our key verticals. Our growth plan focuses on five key areas. First, over the past few years, we have invested in every aspect of our business, from technology to sales to marketing to support, and produce positive operating leverage every step of the way. We have assembled an outstanding and experienced leadership team that will continue to execute against our growth objectives. Our investments and the attractive verticals we serve have enabled us to weather the COVID-19 storm better than other industry players, rebound quickly from a relatively modest Q2 decline, and enable us to accelerate our growth going forward. Second, penetrating the installed base of existing partners is a powerful tailwind in our business. We had record new onboardings with large ISVs in the B2B and nonprofit verticals in Q3. Third, we are signing more new software partnerships, including some of the largest in our history. New wins in Q3 include Sycamore Education and healthcare software provider CoverMe, among others. Fourth, as previously mentioned, we provide the complete end-to-end experience to ACH and combination card ACH acceptors in markets that previously focused solely on card payments. We generated record attachment rates of ACH to new software partnerships in Q3, which significantly widens our addressable market. And last, strategic M&A is a compelling complement to our organic growth plans. We manage this just as we do other sales channels by cultivating a pipeline of attractive opportunities. Once acquired, we have designed repeatable processes to integrate and accelerate the organic growth of the acquired businesses. We have executed well against our key growth initiatives, including favorable progress implementing significant new CARD and ACH partnerships, key new partnerships in the education and healthcare verticals, and our acquisition of the payment group, which expands our market position and capabilities in serving local municipalities, which closed October 1st. We are very excited about the payment group as it shares very similar characteristics to prior acquisitions that we have completed and where we were able to accelerate top line growth as well as strengthening our capabilities and footprint in the very attractive municipal segment. The opportunities in front of us are vast, and with our modern solutions and competitive positioning, we're excited about the future and the ability to generate meaningful shareholder value over the long term. Finally, I want to talk about our recent combination with FinTech Acquisition Corp. On October 16th, we completed the combination and our common stock began trading on the NASDAQ under the ticker symbol PIA on October 19th. In connection with the business combination, we expanded our board of directors to include several new independent directors with decades of experience and who have already proven to be very valuable to us. We believe that operating as a public company will enhance Paya's visibility and public profile, which ultimately enables us to further grow and scale our business. Also, I want to reiterate how grateful we are to our team members and their dedication and focus throughout this process. And to our new shareholders, I want to welcome you and thank you for your support. Now, I'm going to call over to Glenn to take you through the financials in more detail.

Thanks, Jeff. I'd like to echo Jeff's comments that we are pleased with our third quarter results, given the macro environment, and are excited about our growth opportunities ahead. Pai has an excellent financial profile with strong volume growth driven by our integrated solution segment, as well as our growing ACH business, which is part of our payment services segment. Led by our revenue growth and over a mostly fixed operating cost base, we have a great opportunity for continued margin expansion. which leads to our expectation for strong EBITDA and EPS growth over the long term. Finally, our strong free cash flow generation gives us the financial flexibility to continue to strategically invest in our growth initiatives, including accretive M&A, and to drive shareholder value. Turning now to our third quarter results. Total payment volume was $8.7 billion, an increase of 7.6% from the third quarter of 2019. Our volume growth for the quarter was driven by ACH as well as growth in our government and B2B verticals. We saw a solid progression of both card and ACH volume throughout Q3 and continuing into the month of October. Total revenue was $51.8 million for the quarter, an increase of 2.4% from the third quarter of 2019. Looking at our segments, integrated solution revenue was $30.4 million, an increase of 3% year over year, and payment services revenue was $21.4 million, up 2% year over year. We made tremendous progress in the quarter, completing our integrations for a large client, leveraging our ACH and CHEF technology solutions, which will provide a lift to revenue in Q4. We also continued certain pricing initiatives in the latter part of Q3, which we expect to have a positive impact in Q4. Gross profit was $25.9 million for the third quarter, resulting in a gross margin of 50%, compared with $25.8 million and 51% for the third quarter of 2019. It's important to note that Q3 2019 had some favorable timing items, which is causing a year-over-year distortion in the Q3 overall gross margin comparison. September 30, 2020 year-to-date overall gross profit margin is 50.5 percent versus the year-to-date 2019 rate of 50 percent. Integrated solutions gross profit was 16.2 million, representing 53.3 percent segment gross margin, compared with 16 million and 54.1 percent in the third quarter of 2019. On a year-to-date basis, integrated solutions gross profit margin was 53.4% versus 52.3% in the year-to-date 2019 period. Payment services gross profit was 9.7 million in the quarter, representing a 45.3% segment gross margin, compared with 9.8 million and 46.7 margin in the third quarter of 2019. Year-to-date gross profit margin for payment services was 46.2% versus 46.7% in the prior year-to-date period. Related to operating expenses, adjusted operating expenses were $12.4 million, representing a decline of 8.8% from $13.6 million in the third quarter of 2019. The decrease was primarily due to lower employee related expenses in the quarter. Our third quarter adjusted EBITDA was $13.5 million, an increase of 10.7% from $12.2 million in the third quarter of 2019. Third quarter adjusted EBITDA margin was 26.1%, up 200 basis points from 24.1% in the third quarter of 2019. This reflects our top line growth and year-over-year decline in adjusted operating expenses. Finally, we generated GAAP net income of $1.6 million in the third quarter compared with a net loss of $0.6 million in the third quarter of 2019. Our adjusted net income was up 17% to $8.2 million compared with $7 million in the third quarter of 2019. Moving to the balance sheet and cash flow. At September 30th, 2020, we had $32.3 million of cash and $229.3 million of gross debt. Our net cash provided by operating activities was $16.4 million for the nine months ended September 30th, 2020, compared with $16.8 million for the same period in 2019. As Jeff discussed, on October 1st, we complete our acquisition of TPG for an aggregate purchase price of approximately $21 million in cash, which is funded with $9 million from the cash on hand and $13 million from the existing Paya shareholders at that time. We expect the deal to be accretive to our earnings in 2021. Now moving to our full year 2020 guidance. We are on track and expect to hit our 2020 targets based off the numbers we've previously communicated. As a reminder, our previously communicated 2020 expectations are total revenue of $205 million, gross profit of $104 million, and adjusted EBITDA of $53 million. I'd also like to give you an update on our share count. We have a total of 111 million shares outstanding as of the closing date of the business combination with FinTech Acquisition Corp 3. In closing, the underlying performance of the business was solid in the quarter with continued improvement against KPIs and steady progress against our growth objectives. The progress we're making and overall improvements we're seeing in the key verticals we serve continues to position us well as we close out the year and move into 2021. That concludes today's prepared remarks. Operator, please open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star then one on your touch-tone telephone. To withdraw your question from the queue, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from David Toga with Evercore ISI. Your line is now open.

Thank you. Good morning. Jeff and Glenn. Looking at the quarter, can you walk us through just the drivers of the spread between the 7.6% payment volume growth and the 2.4% revenue growth? You did call out some pricing initiatives that kicked in at the end of Q3, but I'm wondering also if there might have been some kind of price mix with a lot of strength in ACH.

Yeah, no, exactly right. ACH was up about 19% in volume on a year-over-year basis in the quarter. So that's certainly providing, you know, a nice lift on volume. But as I think the group knows, you know, the take rate math on that is going to be a little bit lower versus the card take rate. So, yeah, you know, we're very positive about ACH as we've gone through in the past. Seeing good momentum there. And really, you know, one item to call out is we didn't actually have really any impact from our larger ACH win. which is just getting converted as we speak in November here. So there's still some good upside in the fourth quarter for that upcoming revenue stream. But, yeah, look, I think what we did see on the card side is spread was stable. So our pricing that we did go back to in the latter part of Q3 really didn't have much of a Q3 impact. It was later in the quarter. And even with that, we saw price stability in our card side of the house. So I think that was a positive from a card take rate perspective.

Got it. Appreciate that. And then can you give us some sense of the exit rates in terms of volume growth at the end of Q3 and then for the month of October?

Yeah, you know, we're not going to go into details. specifics on our monthly volume. What I can tell you guys, though, is that we did see really solid progression throughout the third quarter, and that carried on through October. You know, we're not really looking at November yet, you know, as far as getting any color on that. Obviously, last week was a unique week as well. But, yeah, we've seen solid progression really throughout the third quarter and into October. So we're encouraged by that. And, yeah, you know, I think the fourth quarter has some nice lift tied to, again, that ACH win, a little bit of pricing, and then, you know, we have our TPG acquisition layering in as well.

Understood. Thanks very much.

Yep, no problem.

Thank you. Our next question comes from Mike Grondahl with Northland Securities. Your line is now open.

Yeah, hey, guys, and thank you. The press release talks about some strong progress, implementing some significant new partnerships. Could you talk about those a little bit, just kind of give us some insight there?

Sure. Hey, it's Jeff. Thanks, Mike. So two in particular that are the largest of a bunch of wins that I think you've seen announced in the past couple of months. The first is a large new ACH partner, in fact, one of the largest in the history of the company. This is a full conversion, which is underway as we speak. So we will get partial quarter lift in Q4 and the remainder, obviously, in full in Q1. And the second is a large municipal software partner. This is a much more staged migration because they have a variety of software platforms. So we have completed the integration of the first of five platforms, and the remainder of them will layer in throughout the course of the next few quarters.

Got it. That's great. And then the acquisition pipeline after TPG, how would you characterize that?

So the acquisition pipeline is good. You know, we've talked about this before in terms of our criteria. So we cultivate opportunities in all stages of the pipeline because, as you know, you can't always time when the opportunity presents itself. But we feel very good about the acquisition pipeline and working, you know, very early at any given, certainly now as well, on a handful of what could be nearer-term opportunities. But as you know, with acquisitions, you know, you're not there until you're there. So we will continue to work hard at them. And I'll just remind folks what I've said before is we will do as many as meet our strategic and accretive objectives.

Got it. Got it. Hey, thanks a lot. Thanks, Mike.

Thank you. Our next question comes from Craig Morer with Autonomous Research. Your line is now open.

Yeah, good morning. Thanks. Could you let us know if you have any plans for the outstanding warrants and how we should think about that over time?

Yeah, no, I think, you know, we haven't really decided on the action around those yet. You know, we're still very early in the process just coming out. So I think that's something the business will look at over the next X quarters as we look out, but it's not something that we have a plan of action on at the moment.

Okay. And also, could you comment on the go-forward expectation for pricing through the ISO channel regarding card payments within payment services to be able to stabilize revenue for what should be a shrinking market? part of that segment? Thanks.

Yeah, no, that's exactly right. I mean, I think the volume we see in that card component of payment services, you know, we refer to it as traditional card resellers. You know, we will, you know, see price stability there or some pricing offset is a better way to say it against the, you know, slow volume declines in that sub-segment. So, yeah, we're still seeing that. You know, again, we just were able to go back to kind of implementing some modest price actions in the back end of Q3. So that's really will help play into, you know, that strategy around, you know, modest increases of pricing for that segment to offset some of that decline. So, you know, same story there, and we feel confident we'll be able to kind of keep that revenue at least stable, if not slightly up. Okay. Thank you. No problem, Greg.

Thank you. Our next question comes from Joseph Voppe with Canaccord Genuity. Your line is now open.

Hey, guys. Good morning, and welcome to the quarterly conference call circuit. Just a couple questions here. First, Jeff, just following up on one of your prepared remarks on a couple perhaps larger deals this quarter, and then I know you were also in Q&A talking about the municipal win and rolling out ACH there. Is there a call out there relative to moving into a larger segment of ISVs versus historically? And then just secondly... you know, if the pandemic numbers kind of continue to rise, do you see there being a headwind reemerging relative to payment volume, or do you think that a lot of your verticals and partners have kind of created their pandemic workarounds already and it's not as much of an issue as it was in Q2? Thanks.

Great. No, thanks. Great questions. So, first of all, the first part of your question is, Certainly one of the things we're most proud of this year is the ability to compete and win for larger ISV deals. So that is a correct observation and I think speaks to the durability and strength and maturity of the business we've been building for the past few years. So as you would expect, that is something we will continue to drive forward on. To your second question, I would, around the pandemic, I would point you to the monthly disclosure that we provided throughout the process of becoming a public company. And I think what you see there is how incredibly durable and strong the combination of integrated payments plus the verticals we focus on is in terms of, you know, April was our worst month and it was down 50%, which is a number we're quite proud of. So to your point, obviously we can't control the pace or trajectory of recovery, but we feel like we're well positioned in any event to continue to serve our customers and be even stronger coming out the other side.

Great. Thanks, Jeff.

Thank you. And our next question comes from Bob Napoli with William Blair. Your line is now open.

Good morning. Good morning, Jeff and Glenn and Matt. Welcome. Jeff, just long-term, there was some pretty dramatic news this morning, I guess, on the vaccine front, but assuming the world gets back to normal, which is highly likely over the next year, I think your growth targets are double digits, low to mid-teen, revenue growth, and 20% EBITDA growth. I mean, is that a good thing? Is that, you know, are those, how do you get to those numbers? What are going to be the main drivers? Are those the right long-term targets for Paya? And, you know, what can drive that, you know, that attractive growth? Which pieces of the business are going to be the biggest drivers?

Yeah. Good morning, Bob. Great question. You know, so first of all, I would, I'll remind folks, those are really our medium-term growth targets. I'm not really sure what long-term is, you know. Sure. But importantly, Bob, those are organic growth targets, so accretive M&A layers in on top of that, as you would expect. You know, in terms of the main drivers, and I think we've tried hard to be very transparent about this throughout the process, first and foremost is the continued penetration of the installed base of our software partners. That is the principal tailwind that exists in this business. Secondly, as we talked about earlier on the call, we continue to sign both bigger and better partners, which is obviously a source of strength. Third, I would go to ACH, which, as you all know, is integrated into our suite, so folks can accept part ACH and check in a unified experience. And most importantly, that widens the addressable market. to penetrate, particularly as you move market. And finally, you know, as we talked about, strategic and accretive M&A layers in on top of that. So those are the four main levers that carry those objectives and beyond.

Great. Thank you. And on attach rates for ACH, you said you had record attach rates this quarter. What's you know, what has been the trend in the attach rates of ACH and what is, you know, the potential and what does it do to revenue per, you know, with the higher attach rates?

Yeah, great question, Bob. I'm glad you asked. So, first of all, the point of attach rates, you know, I would encourage folks, it's something we're very proud of. The way we have accomplished these higher attach rates is to create a seamless and unified experience so that when we are signing a new partner or the end customers behind the software partners, that it is one simple process, one underwriting, a lot of the friction out of the process, what would have historically been separate events. So that's the first point. The attach rates for folks for whom it's relevant. I would certainly take the higher attach rates as something that we are proud of and we think is important. But it's not necessarily that everybody needs the combination. So our view on this is we are payment method agnostic. Our value is through integrated payments across the lifecycle. And the goal is to maximize the penetration and adoption of electronic payments in whatever payment method makes sense. So that is certainly a bright spot in terms of progress and as much for making the experience more seamless. But it's a means to an end. It's not an end unto itself.

Great. Thank you. Appreciate it.

Thank you. And I'm showing no further questions. I'll turn the call over to Mr. Hack.

Great. Thank you. Once again, thanks, everybody, for joining us today. We're excited about our future as a public company and the long-term opportunities in front of us. The support all of you have provided to us over the past few months is really appreciated, and we look forward to speaking with you again early in the new year. Have a great day.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.