Paymentus Holdings, Inc.

Good day and welcome to PayMantis' second quarter 2023 earnings call. This call is being recorded and all participants are currently in a listen-only mode. There will be an opportunity to ask questions following management's prepared remarks, and if you would like to ask a question, press star 1 on your telephone keypad. At this time, I will now turn the call over to David Hanover, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to Paymentus' second quarter 2023 earnings call. Joining me on the call today is Dushant Sharma, our founder and CEO, and Sanjay Kalra, our CFO. Following our prepared remarks, we'll take questions. Our press release was issued after the close of market today and is posted on our website where this call is being simultaneously webcast. The webcast replay of this call and the supplemental slides accompanying this presentation will be available on our company's website under the investor relations link at ir.paymentus.com. Statements made on this webcast 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 expectation or intent regarding our financial results and guidance, the impact of and our ability to address continued economic uncertainty and inflation, our market opportunities, business strategies, implementation timing, product enhancements, impact from acquisitions, and other matters. These forward-looking statements speak as of today, and we take no obligation to update them. These statements are subject to risk, 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 captions. Special note regarding forward-looking statements and risk factors in our annual report on Form 10-K for the year ended December 31st, 2022, our quarterly report on Form 10-Q for the quarter ended March 31st, 2023, and our quarterly report on Form 10-Q for the quarter ended June 30th, 2023, which we expect to file with the SEC shortly, and elsewhere in other filings with the SEC. We encourage you to review these detailed forelooking statements, safe harbor, and risk factor disclosures. In addition, during today's call, we will discuss certain non-GAAP financial measures, specifically contribution profit, adjusted gross profit, non-GAAP operating expenses, adjusted EBITDA, and adjusted EBITDA margin. These non-GAAP financial measures which we believe are useful in measuring our performance and liquidity to be considered in addition to and 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 of the most directly comparable GAAP measures in our earnings press release issue today and the supplemental slides for this webcast, each 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, David. We had an excellent quarter with a strong growth in revenue, contribution profit, and adjusted EBITDA, all finishing ahead of our expectations. Revenue increased 24.1% on a year-over-year basis to $148.9 million. Contribution profit for the quarter was $59.6 million, representing growth of 22.3% year-over-year. approximately trending in line with our revenue growth. Our adjusted EBITDA for the quarter was $14.2 million, which was up 183.8% year over year. We are very pleased with the fact that we added $10.9 million in contribution profit over the comparable quarter of 2022 and dropped over $9 million of that to adjusted EBITDA. So essentially, The majority of the incremental dollars we generated dropped to the bottom line. We were able to achieve this while delivering revenue and contribution profit growth in the low to mid 20% range. We also accomplished this without sacrificing investment in our innovation framework to drive future long-term success. While we're excited about our performance for the second quarter, there is still some uncertainty about the impact of economic environment and seasonality that Sanjay will address in a few minutes. Now let me cover some key second quarter business highlights and accomplishments. From a bookings perspective, our performance in the quarter and the entire first half of 2023 was significantly better than the same periods in 2022. As a result of this and our continued sales momentum, we continue to enjoy the benefit of a strong backlog at the end of the quarter. Given this, we are confident about the rest of the year and believe we are strongly positioned for 2024. Our bookings results continue to support our belief that our platform is universally scalable to any vertical and any business of any size and complexity. For example, this quarter, two of our larger bookings were in the retail sector. We also signed a large insurance company and a large telecommunications client along with several large utilities and government agencies. And in addition, we signed a global technology service provider that serves over 100,000 domestic and international small businesses. During the quarter, we also remained focused on onboarding clients at a faster pace. We have continued to make investments in this area which we believe are yielding strong results. The number of billers implemented in the quarter increased significantly year over year, while the average time to implement a biller decreased during the same period. We implemented several large clients during the quarter, and we expect these clients to start contributing meaningfully in a couple of quarters as they fully ramp up their volumes. These clients are in a variety of industries, including financial services, utilities, government agencies, and others. We believe post-pandemic conditions are making it easier for us to have more meaningful face-to-face interactions with our largest clients during the implementation process. We are now able to collaborate with our clients more closely as we onboard sophisticated and complex workflows. So put things in perspective from a sales and operations standpoint. During the second quarter, we saw increased bookings, increased backlog, and improved implementation timelines, all working favorably year over year and contributing to our business growth. During the quarter, we also expanded our partnership distribution ecosystem with new relationships across a range of diverse verticals, such as property management, utilities, and government agencies. We also continue to see momentum in our IPN, or Instant Payment Network ecosystem, There's a lot of demand for our network. We also see IPN playing an increasingly larger role in bringing customers, banks, financial institutions, and billers closer together as banks focus more towards RTP, FedNow, and real-time processing in general. As you know, our instant payment network is centered around real-time payments between banks and billers, and we are excited that FIs are now focused on real-time processing. which has been our mission since our inception. We are also announcing a new addition to our IPN, which we are excited about. With full integration into IPN, millions of American Express card members can now pay their American Express bill using the PayPal app in real time. So in summary, we made substantial progress during the second quarter, which is reflected in our excellent results. We continue to invest in our future and are excited about the long-term growth potential of our business and look forward to keeping you updated on our continued progress. Now, let me turn it over to Sanjay to review our financial results in greater detail. Thanks, Ashant. And thank you all for joining us today. Before I discuss our quarterly results and outlook, I'd like to remind everyone that the financial results I'd be referring to include non-GAAP financial measures. As David mentioned earlier, our Q2 press release and earnings presentation includes reconciliations of the non-GAAP financial measures discussed on this call to their corresponding GAAP measures. Both of these are available on our website. Turning to slide five, for the second quarter of 2023, we delivered excellent financial results that were above the top end of our guidance. We believe these results demonstrate the strength of our business, which continues to perform well despite continued macroeconomic concerns. Our second quarter results included revenue of 148.9 million, contribution profit of 59.6 million, and adjusted EBITDA of 14.2 million. We continue to experience solid business momentum in the second quarter, quite similar to what we saw in the first quarter. This drove robust bookings enabling us to exit the quarter with a substantial backlog. Based on our strong quarterly performance and the positive business trends Dushyant mentioned earlier, and our expectations for the remainder of 2023, we are raising our full year 2023 revenue contribution profit and adjusted EBITDA guidance, which I'll talk about shortly. Now let's review our second quarter financials in more detail. The number of transactions Paymentus processed grew to $109.5 million in the second quarter, up 22.3% year-over-year. As I mentioned, Q2 revenue was $148.9 million, up 24.1% year-over-year. This growth was largely driven by increased transactions from existing billers, the launch of new billers, and increased activity in our Instant Payment Network, or IPN business. Second quarter 2023 contribution profit increased to $59.6 million, up 22.3% year over year. The contribution profit increase reflects the increase in transactions from existing billers and the launch of new billers that I mentioned earlier. Contribution margin was 40% for the second quarter, compared to 40.6% in the prior year period. Contribution profit per transaction for the quarter was $0.54, which was the same as the prior year period. In our last earnings call, we mentioned our contribution profit growth for Q1 significantly lagged revenue growth for Q1, largely due to inflation and the onboarding of large customers. We also said we expected that the gap would start converging in Q2, primarily due to the active repricing conversations with our billers. We are encouraged by the results of our repricing actions with the customers, as well as other cost reduction initiatives we have undertaken. We also believe we have benefited from some level of disinflation in the utility sector, and as a result, contribution profit annual growth of 22.3% was very close to the annual revenue growth in Q2 of 24.1%. As we've noted in the past, variables outside of a control, such as increase in the average payment amount or changes in the payment mix, can significantly influence the contribution profit on a quarterly basis. Adjusted gross profit was $50 million for the second quarter, up 29.1% year over year. Non-GAAP operating expenses, a new measure we are introducing this quarter, increased to $37.8 million up 6.4% year-over-year. The increase was primarily due to higher sales and marketing expenses as we continue to focus resources on our go-to-market strategy. Previously, we did not have a non-GAAP metric for operating expenses. Non-GAAP operating expenses exclude stock-based compensation and amortization of acquired intangibles from GAAP operating expenses. We believe that providing this metric will provide greater overall transparency into our business and performance. Adjusted EBITDA for the second quarter was $14.2 million or 23.8% of contribution profit, up 183.8% compared to 5 million or 10.3% of contribution profit in the prior year. This strong performance compared to our guidance provided last quarter was driven by four key factors. First, the second quarter benefited from some level of disinflation of CPI Energy Services Index. Second, we began to realize the benefits of our repricing conversations with customers and cost improvement initiatives earlier than anticipated. Third, our implementation pace quickened during the second quarter, which enabled us to successfully launch billers ahead of our original plan. And fourth, our hiring expectations progressed slower than planned in the quarter, resulting in lower operating expenses. I believe the strong adjusted EBITDA margin demonstrates the inherent operating leverage we have in the business and our ability to adapt to changing market conditions as we continue to grow. Other income was $1.7 million during the second quarter, reflecting increased interest income from our bank deposits and effective cash management. Non-GAAP net income was $10.2 million or $0.08 per share compared to non-GAAP net income of $0.9 million or $0.01 per share in the prior year period. Please note that beginning this quarter, we have modified the calculation of non-GAAP net income. Non-GAAP net income now adjusts GAAP net income for stock-based compensation. As a result of this modification, Non-GAAP net income adjusts GAAP net income for amortization of acquired intangibles and stock-based compensation. Now I'll discuss our balance sheet and liquidity position on slide six. We ended Q2 with unrestricted cash of $159.1 million compared to $143.6 million at the end of Q1-23. The $15.5 million increase is primarily comprised of $26.5 million of cash generated from operations, offset by $8.7 million used in investing activities. The company does not have any debt. The free cash flow generated during the quarter was $17.8 million. Our day sales outstanding at the end of Q2 was 41 days, an improvement from DSO of 46 days at the end of Q1 23. Working capital at the end of Q2 was approximately 190 million, an increase of approximately 9 million from the end of Q1 23. We had 124 million diluted shares outstanding as the end of June 30 at 23 compared to 123.8 million diluted shares outstanding at the end of Q1 23. The marginal increase was due to vesting of employee restricted stock units and exercise of stock options and improved average stock price during the quarter. Now I'll turn to our non-GAAP guidance for Q3 2023 and Q4 2023, beginning on slide seven. In Q3 2023, we expect revenues to be in the range of 150 to 154 million, representing 19% year-over-year growth at the midpoint. Contribution profit to range from 58 to 60 million which is 15% year-over-year growth at the midpoint. Adjusted EBITDA of $9 to $11 million, representing growth of 25% year-over-year at the midpoint. The reason adjusted EBITDA is projected to not be quite as strong as Q2 is partly because of increased hiring that began in July, reflecting our return to plan in that regard. The typical Q3 summer seasonality, and the extreme weather conditions we saw during July and that we believe are likely to continue in August. Lastly, this guidance does not anticipate the continued disinflationary trend in energy prices that we saw in the second quarter. In Q3 23, we expect revenues to be in the range of 152 to 158 million, contribution profit to range from 60 to 65 million, and adjusted EBITDA of $9 to $13 million. Given the considerable progress we have already made in the first half of 23 and our expectations for the remainder of the year, for the full year 2023 on slide 8, we now expect revenue in the range of $599 to $609 million, up 1% from the midpoint of our previous guidance. Contribution profit in the range of $231 million to $238 million, up 1.5% at midpoint versus our prior guidance. And adjusted EBITDA to range from $41 to $46 million, representing a 20% increase at the midpoint versus our previous guidance. In summary, we reported excellent second quarter results. In the first half of 23, we have continued to build on our solid momentum from Q123 with strong revenue, contribution profit, and adjusted EBITDA and bookings growth, which enabled us to end the second quarter with a solid backlog. As a result, we have strong visibility and believe we have positioned ourselves well for the balance of 2023 as well as into the next year. Thank you everyone for your attention today. And now I'll turn it back to Dushyant for final remarks before we open up the call for questions. Thanks, Sanjay. In closing, we're excited about the long-term prospects of the business. We believe we are well positioned to leverage our ecosystem, our payment operating system, and the various applications we support to grow our business. We are dedicated to our goal of delivering expanding EBITDA margins while growing our business over the long term. Our approach of sensible, profitable growth has served us well to this point, and we believe that approach will continue to serve us well in the future. Also as an organization, Paymentus is dedicated to incorporating environmental, social, and governance or ESG practices into our operations. As such, I'm pleased to announce that we have recently posted our 2023 ESG report on our IR website under the governance section. We are proud of what we have achieved in these areas and to share the CSG report with you. Also want to take this opportunity to thank my colleagues at Paymentus who worked tirelessly to serve our clients. Thank you. That concludes our prepared remarks and I'll now open the line for questions.