Good day, and welcome to Paymentus' Second Quarter 2022 Earnings Call. This call is being recorded. At this time, I would like to hand the call over to Paul Seamon, Vice President of Financial and Strategy for some introductory comments. Please go ahead.

Thank you. Good afternoon, and welcome to Paymentus' Second Quarter 2022 Earnings Call. Joining me on the call today are Dushyant Sharma, our Founder and CEO; and Matt Parson, our CFO. Following our prepared remarks, we'll take questions. Our press release was issued after the close of the 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 continued economic uncertainty and inflation, our market opportunities, business strategy, implementation timing, product enhancements, impacts from acquisitions and other matters. These forward-looking statements speak as of today and we undertake no obligation to update them. These statements are subject to risks, uncertainties and assumptions that may cause actual results to 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 31, 2021, which we filed with the SEC on March 3rd, 2022. Our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which we expect to file with the SEC in early August 2022 and elsewhere in our filings with the SEC. We encourage you to review these detailed 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, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures. These non-GAAP financial measures, which we believe are useful in measuring our 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 the most directly comparable GAAP measures in our earnings press release issued today and the supplemental slides for this webcast, each available on the Investor Relations page of our website and in our filings with the SEC. With that, I'd like to turn the call over to Dushyant Sharma, our Founder and CEO.

Thanks, Paul. We believe the business performed well in the second quarter, with momentum in both sales and revenues. The revenue increased $26.5 million or 28.3% to $120 million. Contribution profit in the quarter grew 30.2% to $48.7 million, driven by a 39.4% increase in transactions. Our sales engine continues to be strong with signings of more than 60 deals again this quarter, bringing the year-to-date total to over 125. This number of signings is more than 50% higher versus the same period last year. Notwithstanding the challenging economic environment, including inflationary pressures and the recession, these results illustrate why we believe our business is resilient. In spite of the current headwinds, we are seeing around client-based implementation delays and inflation, which we will talk more about later in these prepared remarks. We remain excited about our fundamental business operations and long-term prospects. We continue to drive implementations forward and had a number of client implementation success stories in the quarter. One example is the implementation of one of the largest utilities in the country. This client serves a very large footprint across the country and selected us to handle the complexity of the nationwide implementation. We also completed the migration of a large municipality with JPMorgan support. A third client we implemented in the quarter was a top 20 credit union with over $10 billion in assets. As we continue to move up market, this is our third financial services client with over $10 billion in assets launched on our banking IPN platform. As you know, the pricing model for banking bill payments is not affected by interchange. Also in the quarter, we received the Pacesetter Awards for 2022 from a large enterprise software company utilities user group, recognizing Paymentus for its leadership in billing and payment innovation. We are proud of this award and believe it exemplifies the strength of our billing and payments product and innovation. We also completed integration with one of the leading providers of electronic health care records in the quarter along with adding advanced payment functionality for the health care vertical to our product. Although we believe we had a solid financial performance this quarter, the difficult economic climate is not without impact on us. Implementation and onboarding is one of the primary areas we are seeing impacted by these difficult economic times. A few of our larger deployments, which were originally slated to go live in Q2 and the back half of 2022 have been pushed out due to lack of client IT resource availability. Due primarily to these client-based slowdowns, we are changing our full year 2022 guidance. However, I'd like to make it clear that in a better economic climate with normal implementation timelines that specifically relate to these clients, I believe we would be meeting or beating existing guidance for 2022. If you take a long-term view of the business as we do, these delays are not particularly significant, especially considering that the anticipated financial benefits from these clients are merely delayed to future quarters, not lost. Matt will cover the details as he discusses our financial results and revised guidance. Matt?

Thanks, Dushyant. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our press release and supplemental slides for a reconciliation of non-GAAP items to the most directly comparable GAAP financial measure. In the second quarter, we processed 89.5 million transactions, which is a 39.4% increase over the same period last year. Transaction volume was driven by Biller Direct with tailwinds from IPN, Payveris and B2B transactions. The transaction growth led to a revenue increase of 28.3% in the quarter, which resulted in revenue of $120 million. Contribution profit was $48.7 million, representing a 30.1% increase over Q2 last year. Consistent with the last several quarters, contribution profit grew a little faster than revenue, primarily due to an increased mix of transactions without interchange, specifically IPN transactions and B2B transactions. Contribution profit per transaction was $0.54, which was consistent with the past 2 quarters and our expectations. As we said multiple times in the past, fluctuations in areas outside our control like average payments or payment mix can impact contribution profit on a quarter-to-quarter basis. Historically, we have seen these things even out on a full-year basis. However, given the ongoing economic uncertainty, we will continue to monitor these things very closely in the back half of the year. Adjusted gross profit increased $8.6 million or 28.6% in the quarter to $38.7 million. Adjusted EBITDA was $5 million for the second quarter, which represents a 10.3% adjusted EBITDA margin, which was a little softer than we expected primarily due to wage inflation. Operating expenses rose $13.2 million to $38.1 million for Q2 of 2022 from the same period last year. Overall, the increase in operating expenses from last year was driven by investments in staffing as well as additional operating expenses associated with Payveris and Finovera, the amortization of identified intangible assets from the acquisitions and stock-based compensation. Specifically, R&D expense increased $2.3 million from the second quarter in 2021 to $10.2 million. Sales and marketing increased $8.3 million, driven by the Payveris acquisition, continued expansion of the sales team, adding partnerships to capture our sizable market opportunity and an increase in stock-based compensation. We experienced an increase in G&A expense of $2.6 million due to our acquisition, multifold increases in the cost of corporate insurance and ongoing investment in public company infrastructure. Our GAAP net loss was $2.5 million and EPS for Q2 was negative $0.02. Non-GAAP net loss was $400,000 and non-GAAP EPS was 0 for the quarter. As of June 30, 2022, we had $158.3 million of cash and cash equivalents on our balance sheet. Cash decreased primarily due to the timing of certain customer payments as well as increased operating expenses due to the acquisitions. At quarter end, we had approximately 122.6 million shares of common stock outstanding. Now turning to our 2022 full year outlook. Coming into Q2, we were comfortable with the guidance we gave. As Dushyant mentioned earlier, elongated implementation of onboarding times and this economic environment has created slower-than-expected net revenue recognition for the second half of 2022 of approximately $6 million to $8 million. But this revenue is not lost. It's just shifted into future quarters with the contract terms and TCV remaining the same. The inflationary environment has also compressed our contribution profit by a couple of million dollars. We were able to recapture some of the inflationary impact with price adjustments, some of which is already in process, but it takes a bit of time to recognize the impact. Based on these factors, we're changing our 2022 revenue outlook to the range of $485 million to $492 million. We're also changing our contribution profit guidance to be between $200 million and $204 million for the year, which is approximately 26% to 29% growth. We broadened the range due to the economic uncertainty, specifically the uncertain timing on implementation and potential for ongoing inflation. Just to provide some context on the stretched out implementation, in our Q3 call last year, we told you about a large new client win that would add 400 basis points to our then revenue run rate. It was our expectation that this client would go live in Q3 of this year. However, that client has now rescheduled to go live in 2023. We also have one other large implementation that has done the same. To be clear, we aren't expecting any loss of revenue associated with these clients. It's simply starting later than was originally anticipated, and we expect to start recognizing this revenue in 2023. We expect these delays to have a bigger impact on Q3, combined with the fact that Q3 is a lower contribution margin quarter seasonally. As a result, we anticipate little to no sequential contribution profit growth over Q2. Our adjusted EBITDA outlook is now in the range of $25 million to $29 million with an adjusted EBITDA margin of 13% to 14%. We are seeing ongoing wage pressure in our current workforce due to the levels of inflation, which is also putting some short-term pressure on our EBITDA margins. In addition, after seeing the current sales momentum, we expect to make additional investments in our sales and marketing efforts. Our current guidance reflects some assumptions around continued inflation and potential for increasing wage pressure, and further expected delays in implementations could also impact our ability to meet our guidance. To be clear about our guidance, we widened our range to provide a better view on the spectrum of scenarios given the increased economic uncertainty. We expect to finish the year in the ranges we've laid out. Finally, as we said last quarter, we would anticipate our full year effective tax rate to be around 30%. However, due to the amortization of intangibles associated with the acquisition, the closer we are to breakeven on pretax book income, the more variation we could see on our tax rate. In addition, the permanent tax benefit from stock-based compensation continues to impact the rate. I'll now turn the call back over to Dushyant for some closing comments.

Thanks, Matt. Before taking questions, I'd like to spend a little bit more time talking about the economy. In the quarter, we experienced solid growth in the same-store sales. For example, in utilities, we saw close to 10% growth compared to the second quarter of 2021. We believe the business can weather an unusual level of inflation, though contribution profit growth would have been a little bit better without it. We have and will continue to manage through this environment by closely working with our clients as our contracts provide some flexibility to make changes over the medium term when the average transaction increases at the rate we have recently seen. We plan to maintain our responsible growth philosophy by keeping a balance between investing for future growth while continuing to look for ways to increase profitability in the near term. The vast majority of our expenses outside of interchange are people-related. So we have the flexibility to add or pause hiring based on market conditions or the opportunities. And look, we have been in business for a long time, and the bottom line is, I don't like to lower guidance. But for client delays of this magnitude where the TCV, the total contract value, is over $100 million, any quarter they end up going live in is a good quarter, whether that is in 2022 or 2023. That's why it is not a big concern of ours, especially since these delays are related to the economic climate we are in. Therefore, we believe our fundamental business is strong, sales momentum continues, water, insurance and tax bills continue to get paid, and we remain excited about the remainder of the year and the future. With that, I'd like to thank our over 1,000 employees for their commitment to serve our clients. And I'll now turn the call over to the operator for questions.

The first question comes from the line of Andrew Bauch with SMBC.

Just trying to square the commentary you made about the large client that decided to push it into first quarter '23. I mean, part of it was the way I think about it is that in an environment where your customers are trying to maximize the amount of receipt of collections from consumers that may be facing financial difficulty. I could see a need for your solution at this time more than others. But any additional color would be helpful.

Andrew, first of all, good question. Actually, that's a great point. And frankly, as you can see from our signings in the bookings, if that trend continues to be strong. What's happening is when the operational aspect of implementation comes into play due to this post-pandemic inflationary environment, what we're observing is that clients are having difficulty finding IT resources. In fact, this remains a top topic. I was talking to our Head of Sales, and he mentioned to me that almost every client he speaks with is talking about how they are going to get it implemented and so on. So we are able to overcome a lot of those challenges because of the ease of implementation on our side. It takes because of the highly configurable nature of our platform. But then it comes down to still you require some testing, some support, and that's where the declines are unfortunately struggling. And this, again, the point about the size of the customer we talked about and the total contract value in aggregate we mentioned. When you have a group of clients of that size, you're always going to be open if they say, 'Hey, we're going to be delayed by a couple of quarters,' because our contracts allow us to recognize the entire value from the contract over the period the term, which starts on the day they go live. It's not when they start implementing. So from that perspective, that's what is really going on. Matt, do you want to add any?

Yes. I'd just say very good question. And the last part Dushyant was talking about the key point, which is it's really at least in what we've seen at this point limited to very large clients for the most part. Because your point is valid, and we're still seeing small and medium-sized clients and some large ones too. Dushyant pointed out in the prepared remarks that are going live; it's just certain large organizations, I think, struggle more than others.

And then just a comment on the 125 deals closed year-to-date. I mean, I think that would be indicative that the sales pipeline is still relatively sound. And could you give us additional insight on what kind of clients those consist of? Are they the traditional verticals that you guys have been strong in? Are you experiencing more in the B2B side? And maybe a sense of the sizing of those potential deals?

The new signings are significantly more diverse compared to our historical verticals. We have customers in real estate and commercial enterprises, with government entities also playing a considerable role. Additionally, we continue to have strong implementations in our traditional verticals. Overall, the landscape is more varied, and there is also some B2B activity included.

And then size wise, I think it was the second part of your question. It spans the spectrum honestly. I mean, we're still seeing a lot of success in the SMB space and then also still having great success at the very large. As we've said multiple times, we're continuing to focus on both of them. And we've got teams internally that are focused on both the SMB space as well as large enterprise space. And so the success we've seen so far this year on the signing side is really spanning the spectrum from small to large.

The next question is from the line of John Davis with Raymond James.

I want to start by discussing inflation and the potential lag it may create. Specifically, when you incur costs and interchange in basis points, do you need to provide 30, 60, or 90 days' notice to increase prices on a per transaction basis? I'm trying to understand the timing delay regarding your ability to raise prices to counterbalance inflation. In our IPO discussions, we anticipated that inflation would remain relatively stable, aside from some timing differences impacting your profits and losses. I'm curious about how this timing affects your price adjustment strategy in response to inflation.

We are very focused in our approach to clients, as these relationships are long-term. We consider our clients to be partners, and many have been with us for a significant time. From this viewpoint, we always consider the contractual aspects, and as you mentioned, the 60 to 90 days is about the maximum time it takes to implement changes contractually. We are deliberate in our communication with clients about this, and we find that they are quite sympathetic and understanding because they are facing similar challenges across the economy. As a result, we typically have better engagement than what might be expected. Your understanding is accurate; we can make changes, and it does indeed take 60 to 90 days.

And then I just want to touch on profitability. Obviously, some near-term headwinds from the push out and then kind of wage inflation. I wanted just on, maybe for a minute, talk a little bit about longer-term profitability. If you go back pre-IPO, this is a mid-20s EBITDA margin business. And maybe just talk about the ramp back to that, how you think about profitability over the kind of the medium to long term.

I think that remains our goal, and I'll let Matt jump in as well. What we are seeing is tremendous momentum in the market. We're looking at how we can be more aggressive from a sales and marketing perspective to continue accelerating growth. We'll keep exploring that. Our long-term perspective is to achieve that EBITDA margin profile in the coming years.

Yes, I wouldn't say there's been any change in our approach regarding growth and profitability and ultimately what we aim to achieve in that area. We are currently below where we would like to be for this year, considering the factors we discussed earlier. However, our overall philosophy and our medium- to long-term perspective remain the same. There continues to be leverage in the business. As Dushyant mentioned, the management team is continually reassessing the balance between growth and profitability, ensuring that we do not limit future growth just for the sake of an extra point or two of profitability. In summary, our medium- to long-term outlook has not changed, and the business remains strong, as shown by our recent signings, and we are continuing to execute accordingly.

The next question is from the line of Jeff Cantwell with Wells Fargo.

I wanted to circle back on the pushback and the timing that you're talking about in 2023 because I can already hear the follow-up question that we'll be answering for the next few months until we speak again, which is, was this an isolated incident? And I guess I'd have to kind of phrase it that way because the question would then be, why would there not be others? And so we have to try to work our way through that. So I was curious if you can give us a little more detail and just get a little comfort around what you're discussing as far as pushing back revenue in 2023.

Thank you, Jeff. First of all, that's a very good and understandable question. Let me discuss it from two perspectives. One is the current economic climate. Overall, clients are taking longer than usual to go live on our platform. Historically, we have been very effective at implementations, and our capabilities for getting customers active are better now than ever due to our long-term investments. The challenge is that clients need a bit of support, which is minimal compared to the other efforts needed to launch them. This support involves their technology teams engaging with us, as some IT resources are needed for quality assurance and testing the platform. Given the current environment, this is taking a bit longer. However, linking this back to our guidance, if it weren't for a few declines we have discussed, clients would have maintained their timelines, and we would still be aligned with our guidance as mentioned earlier. It's a unique situation where only a couple of clients have impacted what we were relying on for this year, but we had already anticipated some of these delays.

Yes, I think Dushyant is correct. I'll just add that in our planning modeling, we do not assume the best-case scenario for client go-live. We look at historical data and include some buffer time for when they typically go live, depending on the client's size and other factors. The challenge with the two clients we mentioned during the call was that they were both very large and encountered delays at the same time. As we look into the rest of the year, our guidance includes what we believe to be appropriate levels of buffer and delay. These two clients were among the largest ones scheduled for the latter half of the year. As I mentioned on the call, we fully expect to stay within the revised range. Additionally, I want to emphasize that demand for our product remains robust, as our market conditions are favorable for a platform like ours. However, after business executives decide to launch, they need support from their IT partners, and various other priorities can complicate matters, especially given the current climate.

And if I can ask one follow-up. On the financial outlook for this year, I'd like to ask this question, but I guess it depends on how to level set expectations for going forward. What would be the factors in your own minds right now that would drive revenue, for example, to the lower end of the range? And what would be the factors that would drive it to the upper end of the range? I just want to make sure we're all clear on that. Same with contribution profit. I'm just trying to get a feel for what you think are the swing factors in your guidance as it stands right now.

I think there are two or three factors we have talked about. I mean client go-lives. If they all go live as we are planning to, and if our assumptions hold true in terms of being able to make adjustments that we have been making, then I think we'll be at the top end. If they don't, then we'll be closer to the bottom line.

Yes, I agree with that. I think that's the two main factors as we kind of think about the ranges, timing of go-lives, implementation go-lives and our continued ability to improve the pricing profile in certain situations based on what we're seeing with inflation.

The next question is from the line of Dave Koning with Baird.

I have a question about the numbers. You mentioned that you expect the clients who have delayed to be around 4% for this year, and they are expected to come through in Q3. Does this imply that they represent about 8% of total revenue? Additionally, if your wound rates remain unchanged, does this indicate that next year could be a significantly strong growth year since you will benefit from this, along with the typical new wins?

Yes, thank you, Dave. To address the first question, it was a 400 basis point impact on our revenue growth rate for Q3 of last year. Just to clarify, the other client wasn't as significant in size, but it's in a similar range. Additionally, that 400 basis point figure relates to our revenue growth rate from that time last year. This also highlights an important point: due to the overall momentum we've experienced in the business, when you compare our previous guidance with the current one, considering the numbers I presented earlier, we have seen positive developments that have mitigated some of the negatives throughout the year. It hasn't been a straightforward decline; there have been several positives that have balanced out the negatives. Regarding next year, we will provide our guidance at the appropriate time. As we mentioned, these clients are advancing into 2023, and we anticipate that the revenue is not lost. So we expect them to start generating revenue in '23. From a dollar perspective, it would have already been included in the figures even if they had gone live later this year. While it won't contribute new revenue to 2023, it will affect the percentage calculations. As I said, we will share our 2023 guidance when the time is right, but your thinking is aligned with the direction we’re heading.

And then the second one, I think this was very, very clear, but I think inflation, basically, you're saying has two impacts. One is just wages to the expenses. But two is inflation has a network fee impact that hurts the contribution profit, right, because you pay a higher volume to pay network fees. Those are the two main things, right?

That's correct. That's correct. And as we shared earlier, one of which our contracts already allow us to talk to our clients and discuss and partner with our clients to solve for that, which, as Matt mentioned, we are already in the process in some cases.

There are no additional questions at this time. I will pass it back to the management team for closing remarks.

Thank you so much. Really appreciate your time. We look forward to speaking with you next quarter, and have a great summer.

That concludes today's conference call. Thank you. You may now disconnect your lines.