Paymentus Holdings, Inc.

Good day and welcome to Paymentus' second quarter earnings call. This call is being recorded. All participants are currently in a listen-only mode. The floor will be open for your questions following management's prepared remarks. If you would like to register a question, please press star followed by one on your telephone keypads. At this time, I would like to hand the call over to Paul Seaman, VP of Finance and Strategy, for some introductory comments. Please go ahead.

Thank you. Good afternoon and welcome to Paymentus' second quarter 2021 earnings call, our first as a public company. Joining me on the call today are Dushant Sharma, our founder and CEO, and Matt Farson, our CFO. Following our prepared remarks, we will take questions. Our press release was issued after close of market today and is posted on our website where this call is being simultaneously webcast. The webcast replay of this call will be available on our company website under the investor relations link at ir.paymentsys.com. Statements made on this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as will, believe, expect, anticipate, and similar phrases that denote future expectations or intents regarding our financial results, business strategies, impact from acquisitions, and other matters. These statements are subject to risks, uncertainties, and assumptions that may cause actual results that differ materially from those set forth in such statements, including the risks and uncertainties set forth under the caption risk factors, in our final perspective filed with the SEC on May 26, 2021, and our quarterly report on Form 10-Q for the quarter ended June 30, 2021, which we expect to file with the SEC on August 11, 2021, and elsewhere in our filings with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, and adjusted EBITDA, our non-GAAP financial measures. These non-GAAP financial measures, which we believe are useful performance and liquidity, should be considered in addition to, not as a substitute for, or in isolation from GAAP results. We encourage you to review additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results. And our earnings press release issued today and available on the investor relations page of our website. With that, I'd like to turn the call over to Dushant Sharma, our founder and CEO.

Thank you, Paul, and thank you everyone for joining our call today. I'm very excited, and it's my pleasure to talk to you for our first earnings call as a public company. I'd like to thank you for your support and trusting us with your capital. I'm also grateful for our clients and partners who put their faith in us every single day. I'd also like to thank each of my colleagues at Paymentus who work very hard to operate our 24-7 business and drive the execution of our strategy. We are very proud of you. Thank you. I'm very pleased with our second quarter results, the progress we have made on IPN, including the signing of definitive agreements to acquire Payveris and Finnovera. That puts us at the heart of the bill payment ecosystem for financial institutions of all sizes. Before covering our second quarter highlights and talking more about each of these exciting items, I would like to provide a summary of our business for those who aren't familiar with Paymentus. I founded Paymentus to power the next generation ecosystem for electrical payments by simplifying them for both consumers and billers and with the eye to do the same for financial institutions and consumer platforms. We took a very deliberate approach to our strategy over the years in three different horizons. During the first horizon, we built a NetGen platform and targeted middle market billers with it. In the second horizon, we moved the market and expanded the functionality of our product. With the recent introduction of our instant payment network, we entered our third horizon, which allows us to put all pieces in place to create a modern payment ecosystem. The IPN leverages our biller network and extends it outside of those billers to financial institutions, retailers, and technology companies that can access payments for their customers. In essence, IPN creates a paradigm shift in the bill payment industry and creates a multi-sided network effect for our business. Our objective is to be the central modern age bill payment ecosystem for the entire payments industry, including banks, credit unions, and other financial institutions. To that effect, we have taken a major step towards strengthening our IPN presence in the financial institutions market this week as we are pleased to announce that we have signed a definitive agreement to acquire Payvaris. Payvaris is a modern money movement platform for banks and credit unions. What that means is that any customer of a bank on Payvaris platform can pay any bills from the bank, including the largest billers to smallest businesses like their lawyers, accountants, send money to anyone in the U.S. using their person-to-person transfer capabilities, and move money between their own accounts, bank accounts, across multiple financial institutions using their account-to-account transfer capabilities. Payveris serves over 265 financial institutions. What this means to Payveris is, this transaction means to Payveris is that it provides a unique offering for financial institutions when combined with Paymentus' unique instant payment network and therefore accelerates Payveris' customer acquisition strategy. And what this means to Paymentus is that this allows us to accelerate our IP and strategy for banks by having nearly 300 financial institutions join our network. In addition to that opportunity, there is another equally exciting opportunity where each of these nearly 300 FIs can be direct billers on our platform, which will add to our existing base of direct billers. In addition to agreeing to acquire Payveris, we have also signed an agreement to acquire Finovera, a technology provider that aggregates consumers' bills, including pasta statements, in one place. This is a platform that is already being utilized by Payveris and many other financial institutions. We believe the combination of Finnovera and Payveris with our IPN will solidify our offering for financial institutions as we provide a robust coverage of billers, whether they are currently utilizing Paymentus platform or not. This will continue to allow our sales team to prioritize biller outreach for direct onboarding on our platform based on the bill volumes. We anticipate that both of these acquisitions will close by end of Q3 and have been considered in the outlook that Mac will share shortly. On our core Horizon 1 and Horizon 2 strategies, we continue to execute very successfully. Our second quarter performance was strong. Revenue grew 30% over the same period in 2020 to $93.5 million. Q2 contribution profit grew 25% to $37.4 million. Adjusted gross profit in the quarter, $30.1 million, which was a 24% increase over Q2 of last year. And the transaction process grew over 39% year over year. Matt will provide more color on the financials shortly. We continue to execute on all three strategic horizons I described earlier. From the first horizon, the small to medium billers continue to be a focus of ours, and we completed a multitude of implementations in the quarter. As an example, we implemented a mid-size public utility in Arizona, resulting in an improved customer experience and access to new payment methods. The utility was very pleased with our product and implementation process and have asked us to implement other departments in the city. In the second quarter, we also continued to build on our more than 350 integrations by adding new partners, including completing an integration with a leading provider of software to mid-sized telecommunication companies. Going forward, Paymentus will be the preferred provider of payments to their clients. In the second horizon, which targets larger, more diverse billers, We implemented several new billers, including a large auto finance company. And we also continue to make progress in our partnership with UPS, adding them to our platform in the U.S. this quarter. The U.S. is in addition to other countries around the world already live for UPS on our platform. We are excited about this partnership and how we, both UPS and Paymentus, can co-create a leading experience for our business clients. Beyond new implementations, we also have the opportunity to expand at existing clients. This growth occurs as clients migrate additional divisions to acquire companies and convert them to us or by adding new payment types and features such as AutoPay. Beyond new implementations, we also have the opportunity to expand at existing clients. Two examples of expansion are a large utility with over 2 million customers which added advanced payment methods like PayPal to provide their customers with more choices. and a top five utility which moved its AutoPay payments to Paymentus to improve its customers' experience by combining one-time and recurring payments on the Paymentus platform. In addition to new sales and the same store sales expansion, we completed several Q renewals, including extending our relationship with the leading provider of insurance to the jewelry industry. Through the addition of IPN, we added our third horizon with the focus of building out our partner network. IPN expands our reach beyond billers to FIs, technology partners, and retailers who originate transactions that we process. PayPal, one of our founding IPN partners, continues to focus on introducing enhanced bill payment functionality across its platform. We're also very excited about IPN across other IPN partners, and especially our extended reach to nearly 300 financial institutions with the PayPal risk transaction. In summary, I'm very pleased with the financial results of this quarter and the progress we have made through the acquisition of Paveris and Finobera to move closer to our original long-term vision to be the ecosystem for consumers, billers, financial institutions, and partners. With that, I will turn the call over to Matt to talk more about our financial results. Matt?

Thanks, Deshaun. Let me start by also adding my thanks to our shareholders, clients, partners, and employees. You all are the reason for the strong Q2 financial results that I have the privilege of sharing today. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our press release for a reconciliation from non-GAAP items to the most directly comparable GAAP financial measure. Before I talk about the second quarter's financial results and our outlook for 2021, let me remind you about our business model. As Deshaun said, we get paid when our clients get paid. So the key indicator to measure the performance of the business is the number of transactions processed. For the vast majority of our clients, transaction fees are the same regardless of the payment amount. For example, we would receive $1.50 for a utility payment of $50 and the same $1.50 for a payment of $275. Interchange fees may vary by bill or industry and type of payment, among other things, but in most cases we have caps on interchange and payment amounts to help us manage the costs. These transaction fees can be paid by the biller, the consumer, or a combination of both, and we generally do not charge for implementation or customization fees for our platform, so professional services revenue is minimal. Now turning to the quarter, we processed 64.2 million transactions, representing a year-over-year increase of approximately 39%. This transaction growth drove a 30.3% increase in revenue over the same period in 2020, which resulted in revenue of $93.5 million. As we've explained before, as we sign larger and larger billers, we anticipate the next shift of fees will continue. Contribution profit for Q2 was $37.4 million, a 24% increase over the same period last year. Adjusted growth profit for the second quarter was $30.1 million, and this was an increase of 24% from Q2 of 2020. Contribution profit growth and adjusted profit growth can vary more than revenue growth due to the change in interchange cost. As a reminder, there are certain external factors that impact interchange, such as the average payment amount in a particular month or quarter, For example, hot summers or cold winters may increase utility bills, which increases our interchange costs. And we also have property tax payments that see large amounts twice per year. Adjusted EBITDA was $8.3 million, which represents a 22.2% margin on contribution profit. The 5% decline in adjusted EBITDA in the second quarter of 2020 is due to cost increases related to being a public company, as well as increased investments in R&D and sales and marketing. The adjusted EBITDA margin for Q2 was higher than anticipated as a result of the higher contribution profit than anticipated for Q2. And the fact that travel and conferences did not start back as soon as we thought, as well as the ongoing tightness in the US labor market, making hiring more challenging than expected. Operating expenses rose $7.8 million to $24.8 million for Q2 of 2021. R&D expense increased $1.9 million, or 32.4%, as we continue to invest in new features and functions in our payments platform, and we build out IPN with additional partners. Over half of the operating expense increase, or $4 million, was in G&A and was driven by public company costs, as well as continuing to build out the public company infrastructure. Sales and marketing increased $1.99 or 24.5% as we ramped up selling activity relative to the same time last year in the middle of the COVID uncertainty. Our gap net income in EPS for Q2 was slightly lower than we anticipated due to one-time discrete tax items that arose as a result of going public. These two one-time tax items totaled approximately $2 million or about $1 million each. As a result of these two discrete one-time items that hit GAAP tax expense in our Q2, our effective tax rate for the quarter was approximately 86%. Excluding these two discrete one-time tax items, our net income for the quarter would have been $2.6 million. As of June 30th, 2021, we had $266.4 million of cash and cash equivalents on our balance sheet. Now from our Q2 results, let's turn to our 2021 full-year outlook. Inclusive of our Payveris and Finnevera acquisitions, our revenue outlook for 2021 is in the range of $378 million to $382 million, which represents growth between 25% and 27% year-over-year. For contribution profit, our full-year outlook is between $152 million and $155 million, are approximately 26 to 28% growth. For both revenue and contribution profit, we expect Q4 to see almost all the benefit due to a full quarter of pay varus. As you may recall, we typically see the highest average payment amounts of the year in Q3 as a result of the summer heat combined with some semi-annual per year tax payments. In fact, in Q3 of 2020, we actually saw a slight sequential reduction in contribution profit. While we do not anticipate a sequential reduction this year, we do anticipate similar factors that will influence our Q3 results. For full year 2021, we also see adjusted EBITDA in the range of $25 million to $28 million with an adjusted EBITDA margin of 16.5% to 18.5% on contribution profit. This margin is a bit higher than we previously anticipated for factors mentioned, including travel and conferences not ramping back as quickly as originally anticipated, as well as ongoing tightness in the U.S. labor market making hiring more challenging than in the past several quarters. With respect to taxes, we do not anticipate any further impacts on the one-time discreet items or any other one-time discreet items this year. However, as a result of the items mentioned for Q2, we expect that our full-year effective tax rate for 2021 will be approximately 47%. On a normalized basis going forward, we would anticipate that our effective tax rate would be approximately 30%, assuming no changes to current U.S. federal tax laws or rates. And this is due to the fact that a large majority of our revenue is in the U.S., so it represents the U.S. federal statutory rate combined with various state income taxes. I'll now turn the call back over to Dushan for a closing comment.

Thank you, Matt. Look, overall, we are very pleased with the financial and strategic progress we have made this quarter, especially in the expansion of our IP and ecosystem deeper into the financial institutions market. We need to execute across our free horizon strategy and drive organic growth. The pay varies and turnover will continue to accelerate the breadth of our IP and offering. We'll now open the call to questions.

Secondly, if you would like to ask a question, please press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. When preparing to ask your question, please ensure that you are unmuted locally. We will pause here briefly to allow questions to generate in queue. The first question is from the line of . with penances. You may proceed. Hey, thanks. It's Ashwin from Citi.

Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin. Hi, Ashwin address from a quantitative standpoint sort of TQ versus 4Q cadence, you know, Matt, you've qualitatively addressed some elements of TQ, but if you could talk about what to expect both from a top-line perspective as well as contribution perspective.

Yeah, sure, happy to. Thanks for the question, Ashwin. So as I said, and just to give a little more color on that, because of the semiannual tax payments that we have as well as the sometimes seeing, you know, cold winters, hot summers, Q1 and Q3 are typically higher average payment amounts versus Q2 and Q4. And so as a result of what I said in the prepared remarks, we would anticipate that that will continue this year, that we'll see higher average payment amounts in Q3. And so from a contribution profit perspective, it would be more challenged than, say, Q2 or Q4 would be. Not bad, but definitely more pressure on the contribution profit line item simply because of the higher average payment amount in Q3. Um, on a top line, uh, revenue basis, you know, we continue to drive additional transactions. Uh, we're at, if you look at the number of transactions that we had in Q2, we're over a 250 million transaction run rate, uh, annualized for Q2. Uh, we certainly expect that growth to continue through some of the same store sales items that Deshaun talked about, as well as, uh, additional implementations of new billers. One thing, one other thing I'll point out there, um, is, uh, We did see, if you look at the overperformance on both the top line as well as contribution profit, we had a couple of, on same-store sales, we saw some expansion faster than we had anticipated as well as, some implementations that went live a little bit earlier than we had planned and modeled for, and so that's what drove our, part of what drove our origin Q2, that doesn't necessarily translate to Q3 and Q4, because we just kind of pulled the timing forward on some of those things, and so it doesn't necessarily translate into origin Q3 and Q4, because we'll still have that revenue in those periods. But hopefully that gives you some flavor, and certainly happy to go into any more detail you need there.

No, understood. Got that. And then the second question, if I could, the two acquisitions, if you can talk a little bit about the financial contribution into the outlook. And specific to Finnair, if you could kind of talk about maybe, you know, a better drill down into the 15,000 billers. Do these give you I mean, I see utilities, credit cards, wireless all listed, but is there a particular end market that you didn't have before that it really gives you a good step up into?

Great, thanks. I'll take the first part, and then I'll pass it over to Dushan on the second part. So we are not breaking out any of the financial specifics of the acquisitions. Neither of them are super material to our overall position. As we said, we expect to close them by the end of Q3, so we'd really only be talking about Q4 impact for this year. It's not material to our full-year results, what we expect to see. It's really about, and, you know, don't get me wrong, they've got some nice business and nice customers, but we're really excited about the strategic aspect and what this drives for our business going forward. And so with that, I'll turn it over to Deshaun to talk a little bit more about that piece.

Sure. Ashwin, from our perspective, we're trying to build a modern age ecosystem for bill payments. And And the main thing these acquisitions add for us, number one, starting with Payveris, we get hundreds of financial institutions on our platform. We are able to reach all the banks we didn't have before, not only from the perspective of originating the payments to our IPN, but also each of these banks and credit unions could potentially be a direct biller on our platform. In case of Finovera, Finovera is actually a company that has built a technology platform that aggregates bill data for all major billers or most major billers in the country. That includes credit cards. That includes banks, large telecommunication companies, and so on, utilities, et cetera. And what this gives us is basically an ability to capture the bill data for the customers, the billers we don't have, while we are in the process of prioritizing a sales process to reach out to those billers and onboard them on our platform. So in some ways, it's a network effect where you're trying to monetize the transactions for the billers you don't have while you're in the process of trying to increase those billers to move to our direct platform.

Does that make sense? Yeah, that makes sense. Thank you. Thank you. Appreciate it. Thanks, Arjun.

Thank you, Mr. Schavaka. The next question comes from the line of Dave Conning with Baird. You may proceed.

Yeah. Hey, guys, and great job. Thank you, Dave. Thank you. Thank you, Dave. Yeah. Yeah, sure. And so I guess my first question, just think about, you know, the growth is obviously tremendous in terms of number of transactions. Can you just kind of remind us how to think about like how much is just from new signings and then how much is kind of existing client growth? Can we just look at the 39% transaction growth and maybe how do we see that over the next couple of years?

Yeah, great question. And so none of that is really from new signings in the sense that, if you recall, our business model provides very good short and medium-term visibility insofar as we've got the timing of sale with a customer and then we have the implementation timeframe, and that can take anywhere from a few months depending on the size and the complexity of the customer. And so we've got a lot of visibility of what comes out in the short and medium term. And so when we see the results of the transaction growth in Q2, it's almost extensively driven by same-store sales expansion and implementation go-lives with customers that were already contracted several months earlier and in the implementation pipeline. I'll turn it over to Dushant to talk a little bit about our sales performance in the quarter, but that really is contributing to where we go next year. If you think about the remainder of this year, pretty much any growth that we see is going to be coming out of the implementation pipeline and same-store sales growth. But, Dushant, you want to talk about our sales performance a little bit?

Yeah, and we, by the way, we had a great quarter from a sales performance standpoint. Very pleased with it. We are on target for the year, and as Matt said, The results of that sales performance you will see in coming quarters as opposed to immediately next quarter as we bring that volume up on our platform and get those customers live. But a very good performance from a sales perspective.

Sorry, I should have said this the first time I spoke, but the thing I would add just slightly to that too is what I said, it was in part a response to Ashwin's question, a contributor to the – almost 40% transaction growth that we saw in the quarter, was really some of the items as far as same-store sales as well as implementations happening sooner than we had kind of modeled and anticipated, which is great. Our implementation team is doing a great job. Our customers are, you know, excited about working with us, and so we've been able to move up in the current quarter. That doesn't necessarily mean it will continue. You know, every implementation is different, but we had a great result this quarter in being able to get customers live.

Great. Thanks. And maybe just a quick follow-up. It looks like, so in the first half of the year, adjusted EBITDA was $17, $18 million or so. And it looks like full year, you're guiding the $25 to $28, which would mean maybe $10 in the back half. Why is the back half lower? Is that just IPO costs and just sales efforts and all that stuff? Just maybe walk through that.

Yeah, absolutely. So that's one variety of things. One is, you know, in Q1 we did not have public company calls. We had, you know, some legal fees and accounting fees starting to flow through, but the bulk of those hit in Q2 along with D&O insurance, et cetera. Then, so that's one, you know, continuing to operate as a public company. We also, we think that, you know, obviously depends on what happens with, with, Delta variant, et cetera, but we do think that there will be some pickup and travel and conferences happening as we get later in the year back to normal, if you will, on that. And we continue to look to hire folks and continue to drive hiring as we're very excited about the opportunity. And then I think the last thing is, in particular in Q4, the results of the two acquisitions certainly have an impact in what we think is going to happen on EBITDA for this year. Gotcha. Thanks. Great job. Thank you. Thanks, Dave.

Thank you, Mr. Carney. The next question is from the line of Tim Wong with J.P. Morgan. You may proceed.

Thanks so much. Good afternoon. Gareth on the IPO and the first call. Really great results. A lot of good questions asked already. I wanted to ask Dushan on pay versus just Is there any way to maybe frame how many users or deposit accounts they currently power or have access to amongst their universe and just the game plan to speed some of these banks onto IPN now that you own this asset? Is there an expedited way to move them on? And the last question, just the direct bill or opportunity for these banks, any idea on how many bills – these banks might represent overall? Sorry to ask several, but mostly around just the opportunity around pay-versus.

Yeah, no. First of all, thank you so much for the kind words, Tingen. We're not disclosing the numbers at this point, but I think we can talk to the strategic side of it. As you can imagine, when you combine hundreds of financial institutions that includes credit unions and banks of different sizes, you have a decent scale. And the capability they have built in terms of a full-service platform for banks for all money movement needs from bill payments to P2P to A2A, we feel like that actually helps us get to other cohort of banks rather quickly. Now, we continue to hear the feedback from the banks of all sizes, including some of the largest banks, that the legacy mainframe-based systems they've had and suppliers they've had, they haven't delivered the innovative aspects they're looking for. We believe the IPN combined with some of the technologies we have acquired here allows us to get after that market rapidly. And in terms of the direct biller opportunity, each of these financial institutions is actually sizable in terms of the number of payments they receive and the amount. So it's not insignificant. So we feel very good about it.

Yeah. Sounds like a great way to get a one-to-many model onto the banks. Thanks for your talks. Thank you.

Thank you, Mr. Wong. There are no additional questions waiting at this time. I would like to pass it back to the management team for any closing remarks.

Well, thank you so much for taking the time. And it was a pleasure to walk you through our results and performance for the second quarter. We would like to wish you all the very best to you and your families, and please stay safe. Thank you.

Thank you all for joining today's Paymentless Second Quarter Earnings Call. I hope you all enjoy the rest of your day.