Paymentus Holdings, Inc.

Good day and welcome to the third quarter 2024 Paymentus Earnings Conference call. This call is being recorded. All participants are currently in a listen-only mode. There will be an opportunity to ask questions following the management's prepared remarks. If you would like to queue for a question, please 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, Operator. Good afternoon. Welcome and thank you for joining the webcast to review our third quarter 2024 results. Our earnings release documents are available on the investor relations section of the Paymentus.com website. They include the earnings presentation that we'll make reference to during this webcast. This webcast is being recorded. I hope everyone's had a chance to review those documents. Our founder and CEO, Dushant Sharma, will make some opening comments before Sanjay Khara, our CFO, discusses the details of the quarter and our guidance. Following our prepared remarks, we'll take questions. Let me just remind you that we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we refer to non-GAAP financial measures during the webcast. Forward-looking statements are based on management's current expectations and assumptions that are subject to risk and uncertainties. Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and our SEC filings that are available on the website. Information about non-GAAP financial measures, including reconciliations to US GAAP, can also be found in our earnings materials that are available on the website. With that, I'd like to turn the webcast over to Dushant Sharma. Dushant?

Thanks, David. We had a phenomenal third quarter. And overall, full year 2024 is shaping up to be a great year. As a result of our substantial progress, we are raising over a full year 2024 guidance. And before I go into the details for the quarter and talk about our exciting future, I want to remind you that our long-term CAGR targets for our primary metrics are 20% top line revenue growth and 20 to 30% adjusted EBITDA growth. These targets remain unchanged, even accounting for our outperformance during the third quarter. Going forward, we will refer to these targets as our CAGR model. Our CAGR model is related to our primary matrix only and should not be confused with our secondary matrix, which are contribution profit and OPEX. As we have done quite effectively in the past, we will continue to calibrate CP and OPEX as necessary to achieve our CAGR model due to the very strong operating leverage that is inherent to our business model. Let me now provide a third quarter financial summary. In the third quarter, revenue grew 51.9% year over year. At the same time, contribution profit increased by 30.1% to $80 million. Due to our solid execution in calibrating our secondary matrix of CP and OPEX, our adjusted EBITDA grew 58.2% to $24.6 million. And as a result, on a Rule of Forty scale, we saw a sequential increase in the quarter to 61. Given our third quarter results and expectations for the full year 2024, As you can see, our performance is well ahead of our CAGR model. Our excellent growth rate during the quarter and how 2024 is shaping up is one of the many exciting dimensions of our business. Another important dimension is the durability of our CAGR model, which we also feel great about. Let me now double click on our business strategy a bit. As you're looking at our numbers, please note that there is a specific business strategy that is in play here. We want to increase and capture more market share, and over time, we want the interchange economy and associated life cycle to flow through our P&L, even though interchange today only serves as a cost center for us. This strategy adds to our scale And with this level of scale, it creates tremendous opportunities for modernization and cost reduction. Therefore, longer term, we will work to expand our margins by pursuing products and solutions that offer the ability to convert part of the interchange from a cost center to a revenue center. In other words, we view today's interchange expense as possible TAM from a margin expansion standpoint. To clarify, I'm talking about our longer-term strategy here, as currently we are mainly focused on market capture. But market capture in a responsible manner where new deals are accretive in both the immediate term and the long term. And indeed, we are capturing market share at a faster pace than ever before as a public company. It's even more impressive when you look at our scale and see 50% plus top line growth. Onto our booking activities now. Bookings for this quarter and this year are strong. Our momentum continues to validate our platform and the IP and ecosystem moat combined with an excellent and efficient go-to-market strategy of delivering long-term profitable growth. To provide further detail on bookings, we signed several clients across various industries, contributing to our continued momentum. These included diverse clients in verticals such as insurance, government services, municipalities, utilities, education, telecommunications, banks, credit unions, and property management, among others. These bookings positioned us quite well for 2025 and beyond due to the multi-year nature of these agreements. Onto our onboarding of activities now. We are onboarding revenue at a faster pace than ever before, as is evident from the top line growth rate. Our success here resulted in onboarding a cohort of large clients in the third quarter that were originally slated to go live in 2025. This means we can expect to enjoy the full year benefit from this cohort of go lives throughout all of 2025 versus only a portion of this contribution, which is what we had originally modeled. Bringing on this cohort of large clients earlier also brings other strategic benefits to us. giving us more ammunition for our marketing activities, strengthening our IP and ecosystem, enabling further economies of scale, and longer term, increasing our margin expansion opportunity. We believe this onboarding performance has reduced our risk towards 2025 execution. And therefore, as we initiate budget planning for 2025, we are very pleased to take a bit of a head start towards achieving our CAGR model. As we have demonstrated throughout the last seven quarters, we will continue to methodically calibrate our secondary metrics using our operating leverage to achieve our desired CAGR model despite the variability that is inherent to contribution profit from quarter to quarter or even year to year. With that, let me turn it over to Sanjay to review our financial results in greater detail. Sanjay. Thanks, Rishabh, 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 Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures discussed on this call to their corresponding gap measures. Both of these are available on our website. Turning to slide five, our third quarter 2024 results demonstrate another quarter where we exceeded the top end of our guidance range. These results demonstrate the overall strength of our business model and our team's proven ability to execute. Our third quarter results included revenue of $231.6 million, up 51.9% year-over-year, contribution profit of $80 million, an increase of 30.1%, and adjusted EBITDA of $24.6 million, up 58.2%. We also continued to experience strong customer activity and demand, which drove robust bookings and allowed us to exit the quarter with a significant backlog. Based on our excellent quarterly performance, the positive business trends Dushant mentioned earlier, our expectations for the remainder of 2024 and forward visibility, we are raising our full year 2024 revenue, contribution profit, and adjusted EBITDA guidance, which I will discuss in more detail shortly. Now let's review our third quarter financials in more detail. As mentioned, Q3 revenue was $231.6 million, up 51.9% year-over-year. This growth, which was ahead of our original expectations, was driven by three key factors. First, increased same-store sales from existing builders. Second, the successful launch of new builders as anticipated. And third, early launch of some large enterprise customers, which we originally expected to launch in early 2025. These early launches were a result of continued improvement and implementation pace due mainly to our team's hard work and strong client engagement. Additionally, the number of transactions payment has processed grew to 155.3 million in the quarter, up 34.6% year over year. Our average price per transaction increased during the third quarter to $1.49, up from $1.32 last year. This was mainly due to the biller mix, or more specifically, by the early launch of large enterprise billers I mentioned earlier that had a higher average payment amount. Third quarter 2024 contribution profit increased to $80 million, up 30.1% year over year. The contribution profit increase was also higher than expected and reflects increased transactions from existing billers the launch of new billers, and the mix of billers launched. Contribution margin was 34.5% for the third quarter, compared to 40.3% in the prior year period. As we continue to add large, high-volume enterprise billers to our customer base, this 5.8% margin reduction was almost entirely offset by 5.7% operating expense margin reduction year over year. and then combined with economies of scale resulted in an improved adjusted EBITDA margin. This is consistent with our overall growth strategy focusing on profitability, which I will elaborate on shortly. Contribution profit per transaction for the quarter was 52 cents, similar to 53 cents in the prior year period, demonstrating our ability to capture market share with comparable contribution profit per transaction. During the third quarter, we saw transaction growth in closer proximity to contribution profit growth. In prior quarters, we've seen transaction growth at times closer to revenue growth and at other times closer to contribution profit growth. This is because we are capturing more market share and winning larger clients. Because we are adding more of these larger clients to our customer base, we expect pricing and contribution profit to vary quarter to quarter. as we continue to grow and diversify our client base. Please note that as a result of the quality of our services and solutions and client-centric approach, these larger clients are paying a similar or even increased average selling prices than they are accustomed to with other providers. Given the growth areas Dushan highlighted earlier, we believe long-term the growth rates for both revenue and contribution profit will converge in a closer range, also taking into account the inherent operating leverage as we have in our business model. As we noted in the past, variables that are outside of our control, such as an increase in the average payment amount or changes in the payment mix, can substantially affect the contribution profit on a quarter-to-quarter basis, and therefore we treat this as a secondary metric, while our gross revenue and adjusted EBITDA remain primary metrics. and focus areas on how we drive our business strategies. Third quarter adjusted gross profit was 66.2 million, up 29.1% year-over-year. Third quarter non-GAAP operating expenses were flat sequentially and increased 16.9% year-over-year to 44.3 million. The increase was primarily due to higher sales and marketing expenses as well as research and development expenses. The increases in both of these areas was mainly driven by increased hiring, which we've talked about previously, as we enhance our existing technical strengths. This year-over-year expense increase was consistent with our expectations. Third quarter non-GAAP net income was $19.6 million, or $0.15 per share, compared to non-GAAP net income of $10.9 million, or $0.09 per share, in the prior year period. Third quarter adjusted EBITDA was $24.6 million, up 58.2% compared to $15.5 million in the prior year period. Adjusted EBITDA also represented 30.7% of contribution profit for the quarter compared to 25.3% last year. This strong adjusted EBITDA performance was due to the same combination of positive factors I talked about earlier, all of which came together in the quarter. We believe the stronger adjusted EBITDA margin demonstrates the inherent operating leverage we have in the business and our proven ability to adapt to changing market conditions as we continue to grow. Interest income from our bank deposits was 2.3 million during the third quarter compared to 1.9 million in the prior year period. This year over year improvement was a result of an increased average cash balance and effective cash management. Related to our performance, We once again exceeded the rule of 40 for the quarter coming in at 61 compared to 58 last quarter and 46 in the prior year period. This marks our sixth consecutive quarter exceeding the rule of 40. Now I'll discuss our balance sheet and liquidity position on slide six. We ended the third quarter 2024 with total cash of $190.8 million. compared to 192.9 million at the end of last quarter. The 2.1 million decrease is primarily comprised of 6.7 million of cash generated from operations offset by 8.8 million used in investing activities primarily for capitalized software. The net cash generated from operations of 6.7 million consists of 26.5 million cash generated from operations net of investments in working capital of $19.8 million. Our daily sales outstanding at the end of the third quarter was 44 days compared to 42 days last quarter. Working capital in the end of the third quarter was approximately $245.8 million, an increase of approximately $16.2 million from the end of the second quarter. We had 127.6 million diluted shares outstanding during the third quarter, essentially flat from 127.3 million diluted shares outstanding during the second quarter. Now I'll turn to our non-GAAP guidance for the fourth quarter and full year on slide seven. Before discussing guidance, I want to mention that we are continuing to follow the same prudent approach to guidance that we have followed since last year. For the fourth quarter of 2024, we expect revenues to be in the range of 215 million to 220 million, representing 31.8% year-over-year growth at the midpoint and 33.3% at the high end. This growth rate is an improvement from prior year's fourth quarter growth rate of 24.7%. Contribution profit to range from $79 to $81 million. which represents 20.7% year-over-year growth at the midpoint and 22.2% at the high end, in line with the prior year's fourth quarter growth rate of 22.7%. An adjusted EBITDA of $22 to $24 million, representing growth of 15.6% year-over-year at the midpoint and 20.6% at the high end. This represents a 28.8% margin at the midpoint and 29.6% margin at the high end, comparable to prior year's fourth quarter adjusted EBITDA margin of 30%. Along with our guidance, I also want to provide further insight related to our outlook for contribution profit growth rates and adjusted EBITDA margin. As our business grows, we are receiving greater inbound interest from larger enterprise customers. Not unexpectedly, these customers often request volume discounts, which we are open to where the deal economics support it. In addition, our tremendous operating leverage allows us to attract and book these larger customers. Said differently, volume discounts for larger customers are typically more than offset by strong incremental adjusted EBITDA, as we just saw in Q3. This increases our efficiency as our onboarding time per biller is declining, while average customer size is simultaneously increasing. Furthermore, we have the ability to recalibrate OPEX spending relative to contribution profit in order to reach a desired adjusted EBITDA. For reference, our incremental adjusted EBITDA margin for the third quarter 2024 was 49.2% relative to adjusted EBITDA margin of 30.7%. Based on our results and progress we have already made in three quarters of 24 and our expectations for the remainder of the year, for the full year 2024, we now expect revenue in the range of $829 to $834 million, up 7.3% from midpoint of our previous guidance. The updated guidance now represents 35.3% growth at the midpoint. and improvement from the prior year growth rate of 23.6%. Contribution profit in the range of 305 to 307 million, up 3.6% at the midpoint versus previous guidance. This updated guidance now represents 27% growth at the midpoint and improvement from the prior year growth rate of 19.7%. Adjusted EBITDA to range from 89 to 91 million. representing an 8.4% increase at the midpoint versus our previous guidance. The updated guidance represents a 54.9% increase at the midpoint. This represents a 29.4% margin on contribution profit at midpoint and improvement from 24.1% in the prior year. This annual guidance implies a rule on a rule of 40 scale, 56 to 57 at midpoint and high end respectively. and improvement from the scale of 44 we achieved in 2023. In closing, we reported another quarter of excellent results. In the third quarter of 2024, we continued to build on solid momentum from the second quarter, resulting in strong revenue, adjusted EBITDA, and bookings growth. Additionally, we ended the quarter with earlier implementations of larger clients and a sizable backlog. Due to all of this, we have considerable visibility and believe we are well positioned for the rest of 24 as well as for 2025. Thank you everyone for your attention today and now I'll turn it back to Dushant for final remarks before we open up the call for questions. Thanks, Sanjay. It's indeed humbling to see that our raised full year 2024 guidance when compared to our results from the full year 2021, the year of our IPO, we have more than doubled our business in three years. And it's quite exciting, actually. In summary, we reported another quarter of strong financial results that exceeded our expectations. We feel good about the long-term durability of our CAGR model. We serve a large, growing, and non-discretionary market The combination of our platform and the IPN ecosystem allows us the benefits of a strong and differentiated competitive moat. In addition, we are looking to continue to build on our success to increase our TAM using our innovative DNA. In short, we as investors own a very special business here. I want to take this opportunity to thank my team who worked tirelessly to deliver these great results and create long-term shareholder value. With that, I'll open up the line for questions.