Good day and welcome to Paymentus' 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. 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 Dushyant 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 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 express future expectations 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 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 31st, 2022, our quarterly report on Form 10-Q for the quarter ended March 31, 2023, and our quarterly report on Form 10-Q for the quarter ended June 30, 2023, which we expect to file with the SEC shortly and elsewhere in our other filings with the SEC. We encourage you to review these detailed forward-looking 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, should 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 issued 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 Dushyant Sharma, our Founder and CEO. Dushyant?

Thank you, David. We are in 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, which approximately trended 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 investments in our innovation framework to drive future long-term success. While we are excited about our performance for the second quarter, there is still some uncertainty about the impact of the 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. 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, 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, our 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 on RTP, FedNow, and real-time processing in general. Our instant payment network is centered around real-time payments between banks and billers, and we are excited that financial institutions 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, Dushyant, 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'll be referring to include non-GAAP financial measures. As David mentioned earlier, our Q2 press release and earnings presentation include 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 our control, such as increases 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 the 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. 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 2023. 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 days sales outstanding at the end of Q2 was 41 days, an improvement from DSO of 46 days at the end of Q1 2023. Working capital at the end of Q2 was approximately $190 million, an increase of approximately $9 million from the end of Q1 2023. We had 124 million diluted shares outstanding at the end of June 30th, 2023 compared to 123.8 million diluted shares outstanding at the end of Q1 2023. 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 million to $154 million, representing 19% year-over-year growth at the midpoint. Contribution profit to range from $58 million to $60 million, which is 15% year-over-year growth at the midpoint. Adjusted EBITDA of $9 million 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 a 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 Q4 2023, we expect revenues to be in the range of $152 million to $158 million; contribution profit to range from $60 million to $65 million; and adjusted EBITDA of $9 million to $13 million. Given the considerable progress we have already made in the first half of 2023 and our expectations for the remainder of the year, for the full year 2023, on slide eight, we now expect revenue in the range of $599 million 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 the midpoint versus our prior guidance; and adjusted EBITDA to range from $41 million 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 2023, we have continued to build on our solid momentum from Q1 2023 with strong revenue, contribution profit, 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.

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 this ESG report with you. Also, I want to take this opportunity to thank my colleagues at Paymentus who work tirelessly to serve our clients. Thank you. That concludes our prepared remarks, and I'll open the line for questions.

Our first question comes from Dave Koning with Baird. Please proceed.

Yeah. Hey, guys. Great result. And I guess my first question…

Thank you, Dave.

My first question is about network fees, which decreased significantly sequentially, going from $0.87 or $0.82 per transaction, aligning more closely with the normal range. Now that utility inflation has lowered, does this indicate that we are returning to a more typical network fee per transaction?

Well, there is a variability quarter-over-quarter in terms of the fee and what the rate average you will get, but overall we are pleased with the significant improvement we saw this year and the trends we are seeing, Dave, and definitely the CPI index does help overall. But the trends could be in a very close range, I would say over the quarters.

Yeah. Okay. Okay. Thank you. And then I guess my follow-up …

And David, if I may, there's also a seasonal impact to consider, as Sanjay mentioned earlier, this summer has been quite hot. We are monitoring that as well.

Thank you for that information. For my follow-up, your incremental margins have been impressive in recent quarters and particularly outstanding this quarter, with an 85% year-over-year incremental margin. I'm curious about which costs you foresee increasing. You mentioned that costs have been tightly managed this quarter, but when they do start to rise again, will it primarily be in sales and marketing? Or do you expect SG&A, D&A, and R&D to remain more stable and not increase as much as sales and marketing?

That's right, Dave. Relatively sales and marketing will ramp up more than G&A and R&D. But this quarter we saw some benefit in Q2. We were actually slower in our pace of hiring than we originally anticipated. So, there is some element of that in Q2, but in Q3 we are coming back to that level. But you are correct in your assessment of, which part of OpEx is going to be higher than others.

Gotcha. Great job guys. Thank you.

Thank you, Dave.

Our next question comes from Ashwin Shirvaikar with Citi. Please proceed.

Hey, guys. So, congratulations from me as well. I wanted to pick up on a point that I think Sanjay mentioned, faster implementations. Could you delve a little bit more into that? What are some of the changes that you made and how sustainable are they? I mean, were these like idiosyncratic focused on specific clients to get it done? Or was there more of a process improvement that might be more sustainable, if you could comment on that?

I believe there are three key factors to consider. First, it's essential to grasp the complex and sophisticated workflows we implement for our clients and integrate them into our core platform. This involves making adjustments and introducing tools. Second, we need to examine our onboarding process and how we interact with clients. Lastly, as I mentioned earlier, face-to-face interactions—particularly with larger and more complex clients—have significantly impacted our operations in the post-pandemic environment. When we identify opportunities for whiteboarding, we can rapidly reach conclusions, allowing us to maintain momentum during the implementation process. Being directly engaged with our clients and collaboratively developing solutions has been highly beneficial for us.

Understood. Thank you for that. Congratulations again on completing the American Express and PayPal partnership. Could you comment on the impact of the partner-based approach becoming increasingly important compared to a direct approach from a financial model perspective? Is that starting to make a difference? This also affects which lines are impacted. If you could walk us through that and remind us, it would be great. Thank you.

Yeah. No, that's a great question, Ashwin. Actually, this is one of the key areas which we have been focused on as we have shared in the past that we are building an ecosystem through our IPN partnership, but also our bank and other FinTech partners as well as software partners. If we look at our partner ecosystem, it has never been broader and better than right now. There's tremendous momentum there just because of all the capabilities we offer and the breadth of the network that exists. So that is all translating into momentum in bookings as well as the pipeline in addition to the direct sales. Some of the sales and marketing expenses we are making are also towards developing the partner ecosystem, or growing with our existing partners as well. So, this is actually working extremely well for us.

Our next question comes from John Davis with Raymond James. Please proceed.

Hi. Good afternoon, guys. Sanjay called out several factors for the 2Q upside relative to your guide, but none of those seem to be kind of one-time in nature. So, Dushyant or Sanjay, maybe you can help me just kind of square that with the fact that the guide implies about a 700 basis point deceleration in contribution profit growth and about 600 to 650 basis points, a lower margin in Q3 and Q4 versus Q2, maybe just as conservatism, anything timing related? Love, any comments there?

Yeah. Sure. John, that's a great question. I can start by talking about the four key factors in Q2, which we noted because of the Q2 performance. I can cover all four. I think the first one is mainly we saw a level of disinflation of the CPI Energy Services index. This is the first quarter when we have seen it coming. Once it establishes a trend, it will get into our numbers, but as of now we have not factored that in for Q3. It's very, it's not easy as you would understand to forecast what the CPI index would do. So, we have taken it into consideration that it happened in Q2, but not counted it in Q3. Second, we began to realize the benefits of our repricing conversations with customers, and that was actually originally planned to happen in Q3, so we pulled that into Q2. Our teams did a phenomenal job in making those negotiations and closing those deals sooner than expected. So that's an upside for Q2, but that was already planned for Q3. What that does is it basically guarantees us more confidence that in Q3 this is going to happen because it's already done in Q2. So that's not an upside in Q3 versus Q2, but Q3 is already set. And cost improvement initiatives as well. We had plans for some cost initiative improvements, working with the card networks on their plans based on certain information. The teams did a great job there. That was accomplished in Q2 as well and was also planned for Q3. So, consider that happening sooner as well. Now, the implementation phase has picked up, and this is great. Some implementations that were planned for Q3 started happening in Q2, so that’s a pickup in Q2, and in Q3 they're already on plan. The last piece is that the hiring expectations in Q2 came slower because we didn't hire as many people, but we are getting back on our original plan to fill those positions in Q3. So that's kind of the comparison of each of those key items. You'll see that some of them are continuing, some could be upside, and some will not, because they already happened, they were already planned in Q3.

Okay. Great. No, that's super helpful. And Dushyant, maybe a follow-up. You have about $160 million of cash on the balance sheet, a cash flow positive business, margins flexing the right way. How should we think about capital allocation? What are your priorities? Are you guys looking for tuck-ins, anything more transformative? Just any update on a capital allocation perspective. Thanks.

Sure. First of all, we take pride in showcasing the operating leverage in our business, especially alongside our growth. We appreciate you highlighting that. Our business is cash flow positive, and we do not see any significant gaps in our product portfolio that we need to address. We believe we are in a strong position for growth and are enhancing our product offerings and capabilities. We remain open to opportunities in the market, and although we are watching for various possibilities, nothing is specifically planned at this moment.

Our next question comes from Tien-Tsin Huang with JP Morgan. Please proceed.

Hi. Thank you. Nice results. Just following up on John's question, just with the repricing piece, what percent of your target book of business that you're looking to reprice have you completed at this point? Did all of it achieve this in the second quarter?

Great question, Tien-Tsin. I would say that most of the improvement occurred in Q2. There is still more to go, but I would say a significant piece happened in Q2. It's now becoming part of our regular process as new billers are getting signed and as our contracts already entail the provision that the pricing would be changed based on CPI. Overall, going forward, the process will be better, but if the question was more in terms of catching up with the existing previous billers, I would say a big piece happened in Q2. That’s going to reoccur every quarter, and that's baked into our guidance already.

Right. So, that's what I meant, right? So, there will be a reoccurring piece, but it sounds like there will also be maybe some incremental benefits as well. I know there's some other offsets, but I just wanted to isolate the pricing part. And then just given the disinflation comments is my follow-up question, just the spread between contribution profit and revenue. I know it's implied in your guidance here. But can we expect that generally to track tighter or narrower here? If this disinflation theme continues, just trying to understand it a little bit better. Thank you.

Yes, if this trend continues, what you mentioned could be expected, but we have observed that there is seasonality and variability among the quarters. Therefore, if you take that into account, your assessment is correct, Tien-Tsin.

Our next question comes from Zachary Gunn with FT Partners. Please proceed.

Thank you for taking my question. I want to ask about sales and marketing, as you mentioned some investment in this area. We've discussed how a less competitive marketing environment is leading to cost efficiencies. I was curious about your observations on this. Additionally, EBITDA margins were strong this quarter at 24%, despite ongoing inflation challenges. Can you help us understand if the long-term margin structure of the business looks any different now compared to when you went public? Thank you.

Yeah. I think the market conditions have changed a lot. The macro environment is very different than it was when we went public. So, we are obviously not guiding in any way, shape, or form, but long-term, our target and objective would be to grow the top line in the 20% range and EBITDA in the 20% and 30% growth over the dollar quantum. And going back to your first question on sales and marketing, I think the efficiencies we are seeing, we have a very strong pipeline in front of us, and we are actually trying to be opportunistic and see if we can improve our hiring in sales and marketing sooner in Q3. Our goal is to convert a big piece of the pipeline into bookings going forward, as the majority of the growth would come from there.

Thank you for your questions. Our next question comes from Jason Kupferberg with Bank of America. Please proceed.

Hi, guys. I know you mentioned some timing benefits on the expense side in the second quarter. I was just curious in terms of booking, because I know you talked about the bookings being robust again in Q2. Was there any pull forward there? Maybe just talk about your outlook for bookings in Q3 and Q4, just how those might trend at least on a relative basis versus what you saw in the first half of the year. Thanks.

Thank you. Our product demand continues to be very strong. At the start of the year, and particularly considering the macro conditions we faced, we emphasized making the first half of the year robust. This focus aimed to maximize our opportunities to implement clients and reap benefits in the coming quarters, especially in 2024. This is one of the reasons for our strategic focus. Nevertheless, our outlook for the remainder of the year also remains positive.

Okay. And then just on transaction growth in 2022, 23% through the first half. Same kind of question, just sustainability in the second half. I know you don't guide explicitly on this metric, but just wondering what's directionally assumed in your guidance for underlying transaction growth?

Well, the seasonality in Q3 is a piece which, if you look at the trends, Q3 is seasonally a little less than Q2 and Q4 as well. From a seasonality perspective, the interchange does get impacted, and hence our contribution profit does. But in terms of transactions, if you leave the seasonality out, because there are some billers which pay us only once a year or twice a year, versus many others where we get paid every quarter, I think that piece year-over-year should improve, given the seasonality would be similar. So, in terms of expecting transaction growth for Q3 and Q4, I think looking at the trends of the past year would be a reasonable trend to look at.

Okay. That's helpful. Thank you.

Thank you for your questions. There are no longer questions in queue, so I will pass the conference back to the management team for any closing remarks.

Well, thank you everyone for joining. We really appreciate everyone's time. Have a great day. Thank you all.

That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.