Earnings Call Transcript - PAY Q2 2021

Operator, Operator

Good day, and welcome to Paymentus' Second Quarter Earnings Call. This call is being recorded. All participants are currently in a listen-only mode. The floor will be open for your questions, following management's prepared remarks. At this time, I would like to hand the call over to Paul Seamon, VP of Finance and Strategy for some introductory comments. Please go ahead.

Paul Seamon, VP of Finance and Strategy

Thank you. Good afternoon. And welcome to Paymentus' second quarter 2021 earnings call, our first as a public company. Joining me in the call today are Dushyant Sharma, our Founder and CEO; and Matt Parson, our CFO. Following our prepared remarks, we will take questions. Our press release was issued after the close of the market today, and it was posted on our website where this call is being simultaneously webcast. The webcast replay of this call will be available on our company website under the Investor Relations link. Statements made on this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as will, believe, expect, anticipate, and similar phrases that denote future expectation or intent regarding our financial results, business strategies, impact from acquisitions, and other matters. These statements are subject to risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements, including the risks and uncertainties set forth under the caption Risk Factors in our filings with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, and adjusted EBITDA. We believe these non-GAAP financial measures are useful in assessing Paymentus’ performance and liquidity, and should be considered in addition to, not as a substitute for or in isolation from GAAP results. We encourage you to review additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release. With that, I'd like to turn the call over to Dushyant Sharma, our Founder and CEO.

Dushyant Sharma, Founder and CEO

Thank you, Paul, and thank you everyone for joining the call today. I'm very excited, and it's my pleasure to talk to you for our first earnings call as a public company. I'd like to thank you for your support and trusting us with your capital. I'm also grateful for our clients and partners who put their faith in us every single day. I'd also like to thank each of my colleagues at Paymentus who work very hard to operate our 24/7 business and drive the execution of our strategy. We are very proud of you. Thank you. I'm very pleased with our second quarter results. The progress we have made on IPN, including the signing of definitive agreements to acquire Payveris and Finovera, puts us at the heart of the bill payment ecosystem for financial institutions of all sizes. Before covering our second quarter highlights and talking more about each of these exciting items, I would like to provide a summary of our business for those who aren't familiar with Paymentus. I founded Paymentus to power the next-generation ecosystem for electronic payments by simplifying them for both consumers and dealers and with an eye to do the same for financial institutions and consumer platforms. We took a very deliberate approach to our strategy over the years in three different horizons. During the first horizon, we built an agent platform and targeted the middle market billers with it. In the second horizon, we moved up market and expanded the functionality of our product. With the recent introduction of our Instant Payments Network, we entered our third horizon, which allows us to put all the pieces in place to create a modern payment ecosystem. The IPN leverages our network and extends it outside of those billers to financial institutions, retailers, and technology companies who can access payments for their customers. In essence, IPN represents a paradigm shift in the bill payment industry, creating a multi-sided network effect for our business. Our objective is to be the central modern age bill payment ecosystem for the entire payments industry, including banks, credit unions, and other financial institutions. To that effect, we have taken a major step towards strengthening our IPN presence in the financial institutions market. This week, we are pleased to announce that we have signed a definitive agreement to acquire Payveris. Payveris is a modern money movement platform for banks and credit unions. This means that any customer of a bank on Payveris' platform can pay any bill from the bank, including the largest billers to the smallest businesses like their lawyers, accountants, or send money to anyone in the U.S. using their person-to-person transfer capabilities and move money between their own accounts across multiple financial institutions using their account-to-account transfer capabilities. Payveris serves over 265 national institutions. What this means to Payveris is that this transaction provides a unique offering for financial institutions when combined with Paymentus’ unique Instant Payment Network and therefore accelerates Payveris’ customer acquisition strategy. What this means to Paymentus is that this allows us to accelerate our IPN strategy for banks by having nearly 300 financial institutions join our network. Additionally, there is another equally exciting opportunity where each of these nearly 300 FIs can be direct billers on our platform, which will add to our existing base of direct billers. In addition to agreeing to acquire Payveris, we have also signed an agreement to acquire Finovera, a technology provider that aggregates consumers’ bills, including statements in one place. This platform is already being utilized by Payveris and many of the financial institutions. We believe the combination of Finovera and Payveris will enhance our offering for financial institutions as we provide robust coverage of billers, whether they are currently utilizing Paymentus' platform or not. This will continue to allow our sales team to prioritize biller outreach for direct onboarding onto our platform based on the bill volumes. We anticipate that both of these acquisitions will close by the end of Q3 and have been considered in the outlook that Matt will share shortly. On our core Horizon 1 and Horizon 2 strategies, we continue to execute very successfully. Our second quarter performance was strong. Revenue grew 30% over the same period in 2020 to $93.5 million. Q2 contribution profit grew 25% to $37.4 million. Adjusted gross profit in the quarter was $30.1 million, which was a 24% increase over Q2 of last year, and the transactions processed grew over 39% year-over-year. Matt will provide more color on the financials shortly. We continue to execute on all three strategic horizons I described earlier. From the first horizon, small to medium billers continued to be a focus of ours, and we completed a multitude of implementations in the quarter. As an example, we implemented a midsized public utility in Arizona, resulting in improved customer experience and access to new payment methods. The utility was very pleased with our product and the implementation process and has offered to implement other departments in the city. In the second quarter, we also continued to build on our more than 315 divisions by adding new partners, including completing an integration with a leading provider of software to midsize telecommunication companies. Going forward, Paymentus will be the preferred provider of payments to their clients. In the second horizon, which targets larger, more diverse billers, we implemented several new billers, including a large auto finance company. We also continue to make progress in our partnership with UPS, adding them to our platform in the U.S. this quarter. The U.S. is in addition to other countries around the world already live for UPS on our platform. We are excited about this partnership and how we believe UPS and Paymentus can co-create a leading experience for business clients. Beyond the implementations, we also have the opportunity to expand at existing clients. This growth occurs as clients migrate additional divisions to acquire companies and convert them to us, all by adding new payment types and features such as AutoPay. Two examples of expansion are a large utility with over 2 million customers, which added advanced payment methods like PayPal to provide their customers with more choices, and a software utility that moved AutoPay payments to Paymentus to improve its customer's experience by combining one-time and recurring payments under Paymentus' platform. In addition to new sales and same-store sales expansion, we completed several key renewals, including extending our relationship with a leading provider of insurance to the jewelry industry. With the addition of IPN, we completed our third horizon with a focus on building out our partner network. IPN expands our reach beyond billers to financial institutions, technology partners, and our dealers who originate transactions that we process. PayPal, one of our founding IPN partners, continues to focus on introducing enhanced bill payment functionality across its platform. We are also really excited about IPN across other partners, especially our extended reach to nearly 300 financial institutions with the Payveris transaction. In summary, I'm very pleased with the financial results of this quarter and the progress we have made through the acquisition of Payveris and Finovera to move closer to our original long-term vision: to be that ecosystem for consumers, dealers, financial institutions, and partners. With that, I will turn the call over to Matt to talk more about our financial results.

Matt Parson, CFO

Thanks, Dushyant. Let me start by also adding my thanks to our shareholders, clients, partners, and employees. You all are the reason for the strong Q2 financial results that I have the privilege of sharing today. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables and our press release for reconciliation from non-GAAP items to the most directly comparable GAAP financial measure. Before I talk about the second quarter’s financial results and our outlook for 2021, let me remind you about our business model. We get paid when our clients get paid, so the key indicator to measure the performance of the business is the number of transactions processed. For the vast majority of our clients, transaction fees are the same regardless of the payment amounts. For example, we would receive $1.50 for a utility payment of $50 and the same $1.50 for a payment of $275. Interchange fees may vary by bill or industry and type of payment among other things, but in most cases, we have caps on interchange and payment amounts to help us manage the costs. These transaction fees can be paid by the biller, the consumer, or a combination of both, and we generally do not charge for implementation or customization fees for our platform, so professional services revenue is minimal. Now turning to the quarter. We processed 64.2 million transactions, representing a year-over-year increase of approximately 39%. This transaction growth drove a 30.3% increase in revenue over the same period in 2020, resulting in revenue of $93.5 million. As we've explained before, as we sign larger billers, we anticipate the mix shift of fees will continue. Contribution profit for Q2 was $37.4 million, a 24% increase over the same period last year. Adjusted gross profit for the second quarter was $30.1 million, an increase of 24% from Q2 of 2020. Contribution profit growth and adjusted profit growth can vary more than revenue growth due to changes in interchange costs. External factors that impact interchange include the average payment amount in a particular month or quarter. For example, hot summers or cold winters may increase utility bills, which increases our interchange costs. Adjusted EBITDA was $8.3 million, representing a 22.2% margin on contribution profit. The 5% decline in adjusted EBITDA from Q2 of 2020 is due to cost increases related to being a public company, as well as increased investments in R&D and sales and marketing. The adjusted EBITDA margin for Q2 was higher than anticipated due to higher contribution profit than expected for Q2 and the fact that travel did not start back as soon as we thought, as well as the ongoing tightness in the U.S. labor market making hiring more challenging than expected. Operating expenses rose $7.8 million to $24.8 million for Q2 of 2021. R&D expense increased $1.9 million or 32.4% as we continue to invest in new features and functions in our payments platform and to build out IP with additional partners. Over half of the increase in operating expenses of $4 million was in G&A and was driven by public company costs and continuing to build out public company infrastructure. Sales and marketing increased $1.9 million or 24.5% as we ramped up selling activity relative to the same time last year amidst the COVID uncertainty. Our GAAP net income and EPS for Q2 were slightly lower than we anticipated due to one-time discrete tax items that arose as a result of going public. These two one-time tax items totaled approximately $2 million, or about $1 million each. As a result of these discreet one-time items that hit GAAP tax expense in our Q2, our effective tax rate for the quarter was approximately 86%. Excluding these two discreet one-time tax items, our net income for the quarter would have been $2.6 million. As of June 30, 2021, we had $266.4 million in cash and cash equivalents on our balance sheet. Now from our Q2 results, let's turn to our 2021 full year outlook. Inclusive of our Payveris and Finovera acquisitions, our revenue outlook for 2021 is in the range of $378 million to $382 million, representing growth between 25% and 27% year-over-year. For contribution profit, our full-year outlook is between $152 million and $154 million, or approximately 26% to 28% growth. For both revenue and contribution profit, we expect Q4 to see almost all the benefit due to a full quarter of Payveris. As you may recall, we typically see the highest average payment amounts of the year in Q3 due to the summer heat combined with some semi-annual tax payments. In fact, in Q3 of 2020, we actually saw a slight sequential reduction in contribution profit. While we do not anticipate a sequential reduction this year, we do expect similar factors that will influence our Q3 results. For the full year 2021, we expect adjusted EBITDA in the range of $25 million to $28 million with an adjusted EBITDA margin of 16.5% to 18.5% on contribution profit. This margin is a bit higher than we previously anticipated for factors mentioned, including travel and accounts not ramping back as quickly as originally expected, as well as ongoing tightness in the U.S. labor market making hiring more challenging. With respect to taxes, we do not anticipate any further impacts from one-time discrete items this year. However, as a result of the items mentioned for Q2, we expect that our full year effective tax rate for 2021 will be approximately 47%. On a normalized basis going forward, we would anticipate that our effective tax rate would be approximately 30%, assuming no changes to current U.S. Federal tax laws or rates. This is due to the fact that a large majority of our revenue is in the U.S., representing the U.S. Federal Statutory rate combined with various state income taxes. I will now turn the call back over to Dushyant for a closing comment.

Dushyant Sharma, Founder and CEO

Thank you, Matt. Overall, we are very pleased with the financial and strategic progress we have made this quarter, especially in the expansion of our IP and ecosystem, deeper into the financial institutions market. We continue to execute across our three horizon strategy and drive organic growth. With Payveris and Finovera, we’ll continue to accelerate the breadth of our IPN offering. We’ll now open the call to questions.

Operator, Operator

The first question is from Ashwin Shirvaikar from Citi.

Ashwin Shirvaikar, Analyst

Hey, thanks. It's Ashwin Shirvaikar from Citi. Great results, congratulations on the results as well as on your first public call here. I was wondering if you could address the quantitative standpoint of Q3 versus Q4 cadence? Matt, you’ve qualitatively addressed some elements of Q3, but if you could talk about what to expect from both a top-line perspective, as well as contribution perspective.

Matt Parson, CFO

Yes, sure; happy to. Thanks for the question, Ashwin. As I said, because of the semi-annual tax payments that we have, as well as sometimes seeing cold winters and hot summers, Q1 and Q3 are typically higher average payment amounts compared to Q2 and Q4. As a result of what I said in the prepared remarks, we anticipate that this will continue this year; we'll see higher average payment amounts in Q3. From a contribution profit perspective, it may be more challenged than Q3 or Q4, but we expect it still to be solid. On a top-line revenue basis, we continue to drive additional transactions. We're over a 250 million transaction run rate annualized for Q2. We certainly expect this to continue through some of the same-store sales items that Dushyant talked about, as well as additional implementations of new billers. One thing I'll point out is that we did see overperformance on both the top-line and contribution profit; part of this was driven by existing customers who saw faster expansion than we anticipated, coupled with some implementations that went live earlier than we planned and modeled for. This is great, but it doesn't necessarily translate into future quarters since we moved some of that revenue forward. Hopefully, that gives you some flavor, and I'm certainly happy to go into more detail if needed.

Ashwin Shirvaikar, Analyst

No, understood, got that. The second question, if I could, regarding the two acquisitions, could you talk a little about the financial contribution to the outlook, especially regarding Finovera? Maybe dive into the 15,000 billers; do they give you a step up into a particular end market?

Matt Parson, CFO

Great, thanks. I'll take the first part, and then I'll pass it over to Dushyant for the second part. So we are not breaking out any financial specifics of the acquisitions; neither of them are material to our overall position. We said we expect to close them by the end of Q3, so we would be really only talking about Q4 impact for this year, and it’s not material to our full-year results. It's really about—don't get me wrong, they've got some nice business and nice customers—but we're really excited about the strategic aspect and what this drives for our business going forward. With that, I'll turn it over to Dushyant.

Dushyant Sharma, Founder and CEO

Sure. Ashwin, from our perspective, we aim to build a modern ecosystem for bill payments. The main thing these acquisitions do for us, starting with Payveris, is that we have hundreds of financial institutions on our platform. We can reach all the banks we didn't have before. Not only does this help us originate payments to our IPN, but each of these banks and credit unions could potentially become direct billers on our platform. In the case of Finovera, it is a technology platform that aggregates bill data for most major billers in the country, including credit cards, banks, large telecom companies, and utilities. This gives us the ability to capture the bill data for customers we don't have while we prioritize our sales process to reach out to those billers and onboard them. So there's a network effect where we're trying to monetize transactions for billers we don't currently have while encouraging them to move to our direct platform. Does that make sense?

Ashwin Shirvaikar, Analyst

Yes, that makes sense. Thank you. Good. Thanks, Matt. Appreciate it.

Matt Parson, CFO

Okay, thanks Ashwin.

Operator, Operator

Thank you, Mr. Shirvaikar. The next question comes from the line of David Koning with Baird.

David Koning, Analyst

Yes. Hey guys, great job.

Matt Parson, CFO

Thank you.

Dushyant Sharma, Founder and CEO

Thank you, David.

David Koning, Analyst

Sure. My first question is about the growth. It's obviously tremendous in terms of the number of transactions. Can you remind us how much of that is just from new signings versus existing client growth when we look at the 39% transaction growth? How do we see that trending over the next couple of years?

Matt Parson, CFO

Yes. Great question. None of that is really from new signings in the sense that—if you recall, our business model provides excellent short and medium-term visibility. For us, we've got the timing of sales with the customer and then the implementation timeframe can take anywhere from a few months to a year, depending on the size and complexity of the customer. Much of the transaction growth in Q2 was driven by same-store sales expansion and implementations that went live with customers who we already contracted several months beforehand and were in the pipeline. I'll turn it over to Dushyant to talk about sales performance in the quarter, but that really contributes to our outlook for next year.

Dushyant Sharma, Founder and CEO

Yes. By the way, we had a great quarter in terms of sales performance. I’m very pleased we are on target for the year. As Matt said, the results of that sales performance will materialize in coming quarters rather than immediately next quarter, as we bring that volume up on our platform and get those customers live, but very good performance from a sales perspective.

Matt Parson, CFO

I should've said this the first time I spoke, but I would like to add that the growth in transactions seen this quarter was partly due to same-store sales and implementations happening faster than we had expected. This is largely due to our implementation team doing a great job; our customers are excited to work with us. We had a fantastic result this quarter, and while every operation is different, the growth we've achieved is commendable.

David Koning, Analyst

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

Matt Parson, CFO

Yes, absolutely. So that's one. It's a variety of things. First, in Q1 we did not have public company costs, but began to incur some legal and accounting fees. The bulk of costs hit in Q2, along with D&O insurance fees. Then, as we anticipate, we think there will be some pickup in travel and conferences happening as we get later in the year. We're also focusing on hiring more people, as we're excited about the opportunities ahead. Lastly, particularly in Q4, the results of the two acquisitions will certainly impact what we expect to see regarding EBITDA this year.

David Koning, Analyst

Got you. Thanks. Great job.

Matt Parson, CFO

Thank you.

Dushyant Sharma, Founder and CEO

Thanks, Dave.

Operator, Operator

The next question is from the line of Tien-Tsin Huang with JP Morgan.

Tien-Tsin Huang, Analyst

Thanks so much. Good afternoon, congrats on the IPO and the great results. Many of my questions have already been asked, but I wanted to ask Dushyant about Payveris. Can you frame how many users or deposit accounts they currently power or have access to? Regarding the game plan, how do you plan to speed these banks onto IPN now that you own it? Also, any insights on the direct biller opportunity for these banks—how many bills these banks might represent overall?

Dushyant Sharma, Founder and CEO

Yes. First of all, thank you for the kind words, Tien-Tsin. We're not discussing numbers at this point, but I think we can talk to the strategic side of it. Combining hundreds of financial institutions includes credit unions and banks of different sizes. You have a decent scale and the capability to service all money movement feeds from bill payments to P2P to A2A. We believe the IPN, combined with some of the technologies we’ve acquired, allows us to enter that market rapidly. Each of these financial institutions is sizeable in terms of the number of payments they handle, so we feel very good about the opportunity.

Tien-Tsin Huang, Analyst

Yes, it sounds like a great way to scale into the banks. Thanks for your thoughts.

Dushyant Sharma, Founder and CEO

Thank you.

Operator, Operator

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

Dushyant Sharma, Founder and CEO

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

Operator, Operator

Thank you all for joining today's Paymentus second quarter earnings call. I hope you all enjoy the rest of your day.