Paymentus Holdings, Inc. (PAY) Earnings Call Transcript & Summary

Thank you, everyone, for joining. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan. We have Paymentus here. Really excited to have a conversation with Paymentus. We're doing a fireside chat. We'll take questions from the audience. And I always remind to say we're taking questions from the portal. For those of you who are on the webcast, we'll be watching for that. So with us from Paymentus, we have Dushyant Sharma, the Chairman, Founder and CEO of the company. He is a legend or guru on the bill pay side. So I learned a lot studying -- bill pay was one of the first sectors I covered when I tricked people to hire me to do research on the right research side. So I was really looking forward to spending some time here with Dushyant. So Dushyant, welcome. Thank you for joining us.

Well, thank you, Tien-Tsin. You're very kind. Very kind. Thank you.

So I thought, given that -- and I meant it, right? So thinking of you having founded Derivion before, sold that business, came back and started Paymentus, how did that experience inform what you've built here with Paymentus? Can we start with that?

Yes, absolutely. So if you think about from the legacy system -- first of all, Derivion. When we were starting Derivion, we were trying to fix -- the Internet at that time was a new technology. We were trying to bring new things to the market where, hey, you could do transactions on the Internet. So we were trying to solve a technological problem, if you will, which was more about bringing Internet for bill presentment. What we didn't realize was that by doing that, we were actually creating a problem in the long term, which is creating another point solution, which was only addressing bill presentment piece of the equation. But starting Paymentus, it was all about looking at the market again and thinking, boy, the customers have -- the billing companies, the customers and the banks have a different challenge. And each of them are trying to seek a different type of an outcome from what would otherwise be a great ecosystem if it could be built. So I found that from a billing -- a biller's perspective, billers needed a solution, which from a customer-to-cash perspective, addresses all aspects of the life cycle. So I, as a billing company, the -- a business can enable myself on Paymentus platform. And from there, I can deliver my bills, receive payments, handle all engagement across all channels. It doesn't matter which channel the customer wants to engage with me from. And the customer wanted an ability to engage with the billing company, how they want, when they want, where they want. And banks wanted more real time as opposed to living off a completely disjointed ecosystem, which is based on the paper paradigm. They wanted a system which is real time. So I felt that if you could actually combine this into a omnichannel platform, build a next-generation processing model in an ecosystem, this could be pretty attractive. So that's what this was all about. And very pleased actually sitting here today that the 3-horizon strategy we set out, we have actually executed on all 3 of those. We've built a great platform. We built the ecosystem. We went after the mid-market -- small to mid-market segment initially, then national accounts, enterprise accounts. Those have continued to do extremely well. Both of those horizons continue to be extremely valuable today. And then we have the horizon 3, where we are now in the network business, where we have hundreds of financial institutions now working on our platform in addition to some of the consumer platforms.

Good. I mean you've been very methodical about bringing this up as you just closed with. And to get to this point of being a modern bill pay provider, what about the more traditional -- we can call them legacy, if you want. How hard is it and different would it be for them to make a similar transformation and also do the same thing? It's the modern versus legacy question.

Yes. No, it definitely is. I think the way to think about it would be that if you haven't thought through some of -- let me actually take a step back here. If you look at it from a bank's perspective, the banks -- the problem banks were trying to solve with the legacy platform as it exists today or the model that exists today is that how do I get my customers deliver all their bills from one place. And in the back, I will figure out how to send the bills to -- the payments to the billing company, so send -- whether it's through paper check, whether it's through electronically. And if you look at it from that perspective, the billing company has no idea that the payment has been made. And the -- after the billing company gets it, the customer doesn't know. So that model, it's very hard to now go back and change it without actually having connectivity to a billing company. So that's the bank side. On the biller side, I think the best example I could give you is Tesla. It looks the same. It's 4 wheels, cars. It has 4 doors and takes you from point A to point B but built with a very different mindset, built with a very different technology perspective. We like in Paymentus platform to be the same way, that we have thought through all the challenges and created a platform and an ecosystem, which is -- sort of think of us as a start-up company starting today with all the work we have done. And now we are setting the stage for a long-term growth company based on all the mindset and all the technology infrastructure we have built. So it's very hard to now compete against this rebuild, all of what we have done without going through another 15 years.

Sure. So the demand for Paymentus services, all those consumer service platform providers, you pick a bank, it doesn't matter, right? They all want better engagement with the user. So how would you describe the demand environment? And I'll ask it together with the macro question, which is you had the pandemic. We've had the recovery. Now there's worries around recession and inflation and high interest rates. How does that impact demand?

So let me add one more to it, which is the 2008-2010, the financial crisis, right? So if you look at it from Paymentus' standpoint, the 2 things we are really being trusted by our customers with is their -- the businesses who do business with Paymentus who are our clients, their customers and their money. So when I say customers, it's engaging with the customers to collect money. Those things don't go away. In fact, they become more important during difficult times. So during the financial crisis, we continue to grow as a business because demand for our platform, which is centered around 2 key value proposition: how do we improve your customer experience; and second, while lowering your cost to serve? Both of those things become actually very important because in a -- and frankly, combine that with our pricing model, which is we don't charge anything to the billing company or the businesses until they have been paid. So from that perspective, the macro challenges, whether it was pandemic, whether now the concerns of inflation or tightening of the capital markets, it actually increases the focus for a given business that how do we improve, how do we increase our efficiencies and take some of the unwieldy processes out. And Paymentus, with a modern paradigm and system, that's exactly why we exist. Let's improve the customer experience. Let's bring down your cost to serve. And therefore, the demand doesn't -- is not affected.

So let's go through the pricing model because I think that is very important, right? There's no upfront costs and things like that. It's really pay as you go as you see the transaction activity. So talk about your pricing philosophy. There's a customer pay side but also a biller pay side as well. So how do you see that evolving?

It is actually a very interesting question. I keep thinking about going back to the -- when we were starting out the business. One of the key things for me was how can I sell it to the CFO? How can I make sure CFO is my friend as opposed to the one asking all the difficult questions in the end of the sales cycle and slowing down the deals? And I felt the best I could do is give the customer the option saying, look -- first of all, provide a platform they don't have. Give them the road map to improving their customer experience but also lowering the cost to serve and do it in a way that we will only charge the entire cost of the service could be provided through just one transaction fee. And we felt that, that model will be very attractive to the businesses in good times and bad. And that model -- in that, we also gave options saying to the business, whether it's a utility or insurance and what have you, that you could actually make a decision how much of the cost you want to pass on to the customer of the transaction, 100%, or 0%, you want to absorb it all. And that actually led to a pretty interesting dynamic for us where we knew and we have proven it now over a period of time that many of the newer industries will actually start by passing on the cost to the customer. And eventually, they will enjoy the benefit of our platform and the service and seeing the lowering of cost. And they will say, "Well, I want more and more of my customers." What are the first thing they're going to think about? "I want to lower my cost to the customer." In some cases, they will start with hybrid, pass part of it. And then eventually, 100% of it is absorbed by the businesses. So that's how we price the platform.

So the sales momentum in general has been really, really good, right?

Thank you.

Since the IPO. Is there a change in what the client priority is -- the biller priority is in terms of ROI, cost, engagement? Is it similar? What is really resonating to drive the sales momentum in your mind, Dushyant?

I think it will be, frankly, the combination of the platform and the ecosystem. And our pitch to the billing companies have remained very consistent. But it's now more easy to realize in practice than it was in earlier years. Earlier years, it was mostly just about the platform. We didn't have the ecosystem where we could have financial institutions and other IPN partners on the platform. Now the billing company can -- even the in-house solutions of billing companies, the businesses, are fair game for us. We're able to go there and say, look, to move all of this over to our platform with just one integration with us and onetime conversion, you will have access to an ever-growing network in addition to the platform you wish you had. And you will be able to eliminate all of your cost internally of maintaining all these systems and multiple vendor relationships. All that goes away. So it becomes a pretty attractive offering. So that's what is resonating with the businesses. In addition to that, with our partnership footprint now, which is ever growing, has led to the acceleration on the sales side.

How about the verticals? We do get this question quite a bit in terms of expanding into verticals. I know utilities is quite strong. I think on the call, you talked about real estate and apartment complex, which makes a lot of sense. Where are you in diversifying the verticals that you're exposed to?

We actually -- when we started the business on the platform, one of the key fundamental design principle for us was that we wanted to make sure that we can serve every single business from every single industry. And regardless of their size, they should be able to onboard on our platform. With that mindset actually for us, even though we focused initially on utilities and then we expanded to our 6 core verticals right now, but through the partnership footprint now, we are actually enjoying the benefit of that work we did early on, where now we're able to get businesses like one of the largest real estate enterprises is on our platform. And not -- so the Tesla example I was giving, it was -- the beauty is not that we signed the client. The beauty is that we signed the client and we onboarded the client through the same implementation process as we had for utilities, for insurance, for other clients. It wasn't very different for us other than just the workflows are slightly different. And we are able to accommodate all of those. So that's what gives us the confidence that this is -- in fact, coming in, I was thinking about on the ride, which was pretty long, coast to coast, I was thinking that as the CEO of this company which I started, I keep thinking about every -- wherever I look at, there are opportunities for Paymentus to grow. There isn't -- we said during the road show and it -- but we think about it every day, which is wherever there are businesses, there are payments. And wherever there are payments, there is Paymentus. When I say payment, that includes the applications and the workflows, pay in, pay out. And we have talked about payout capabilities as well, the B2B capability. So pretty excited about that. Actually, that's the -- in some ways, the fruit of labor, our ability to expand our network without having to acquire companies. We didn't go and acquire a company in health care to start building a health care business. We're not buying a property management company to get into the property management area.

Now you've had some of the -- some earlier implementations, which is great. Is -- and I know it can be very lumpy sales and implementations. But given the pattern that it's been doing a little bit better, as Matt has talked to us about, is that a function of more automation, sort of better onboarding? Is that an area potentially for improvement?

It is, actually. The -- next to our go-to-market strategy, the place where we spend as a management team and, frankly, overall team, the most amount of time is thinking about how do we onboard faster. In fact, we did an analysis recently that 80% to 90% of our businesses who are onboarding on our -- with new customers, which are in our implementation process, don't require a single change anywhere in our code.

A [ nice ] position then.

So that's the configurability. It speaks to the configurability. Those 15%, 20% which are very complex, sophisticated enterprise-wide deployment, even there, we are spending a lot of time thinking about how do we modernize and continue to improve the workflow so that they are also easy to implement. So we are very focused on that. And that's the function of what you're seeing and then partnerships as well.

Okay. Good. No, that's important. So let me make sure I ask a payment take rate type of question, if you don't mind. With gas prices going up, energy prices going up, and we've seen a mix shift more towards credit again, Visa and Mastercard were talking about that the other day. Any implications for your business given that you do have some utilities and energy billing accounts?

Actually, let me talk about that a little bit. So we are not seeing the same thing what the global -- from a retail perspective, what the market is seeing. Our business -- our credit card utilization is fairly steady year-over-year. In fact, our ACH rate has even gone up. And that speaks to the value of what we offer, which is the user experience combined with a payment processing platform. So we are actually able to influence the user behavior there. In terms of the inflation itself, overall, despite seeing -- just like everyone else, in our utility sector, there was a 7% increase in terms of the average payment amount. But we still delivered our numbers -- actually, delivered better than what we forecasted. So we are doing -- we feel like that the business is resilient and some of the controls are already in place to be able to deliver -- continue to deliver the value despite the market conditions.

So your net dollar retention, I have here, high 110s, so quite high. So can you build that -- knock on wood. So can you build that up for us? I know same-store can be influenced by what we just talked about, retention churn, pricing, things like that. What's sort of the buildup and the visibility into that?

So there are a few factors actually which go into -- from a retention -- the same-store sales perspective. Number one is our customers themselves are growing. So sometimes, they acquire businesses. Second, we are trying to grow into those -- into the customer base. So for example, we would sign one part of the business and expand into other parts of the business. The third is actually the unification in the platform, the modernization of the capabilities we offer to the businesses. That itself leads to a higher adoption. So we see some of that immediate benefit there as well. On top of that, I think the digitization tailwinds, which continue to help us as well. So combination of all of those contribute to the same-store sales. And we feel very good about it actually. Year-over-year, we see that that's a consistent trend. And given how much more room we have for growth in our customer base today, we feel very good about the continued momentum on the sales store -- same-store sales side.

Okay. Good. So I know the partner side is very, very important. You alluded to it a couple of times. The JPMC one is a big one. So maybe if you could just generally give us a progress report on what's happening on that or the broader partner channel?

Well, first of all, we can...

We're sitting in JPMorgan [ here ].

So JPM is a great institution, not because we are being hosted here by JPM but just because I'm a big fan of your organization and so is millions others. But the partnership itself is phenomenal. The mindset JPM has, which is customer-focused strategy, customer-centric strategy is very much aligned with what we have. Our DNA is customer-centric. So the reason the partnership actually has worked extremely well is that both organizations looked at the customer first and said, what business process -- business processes could be automated? And what benefits could be provided to the end business and business customer? And that's what we have done. So we have combined the assets of both parties, JPM and Paymentus, and offered a very complete solution, which is being extremely well received in the market. So that partnership has gone extremely well and continues to do well in terms of the momentum in the market, improvement in our sales cycle and any implementations and so on. So very happy about that. But there are actually a side benefit of that partnership for us. We learned a lot as to how to really do great partnerships. And what we have done now is we actually even the -- Paymentus, since the IPO and leading up to the IPO, we have continued to see the momentum in our partnership portfolio primarily because of the ecosystem we have created as well, the IPN ecosystem. So we -- as a result, folks want to be partners with us. And what -- the difference this time is our execution strategy. What we're saying is we are going to join hand-in-hand with the partner and sell together. And -- at least in the early going, to make sure that the -- all the rails are in place, the go-to-market strategies are in place, messages are in place. That's working extremely well for us.

Good. Now so like I said, I'm sure you're always chasing the next partner. But it's good to have obviously a good reference account like that one. So you mentioned IPN. We've been thinking about IPN quite a bit, especially as I mentioned before, right, more consumer platforms want to drive engagement. Bill pay is a logical thing. And so plug-in with IPN makes a lot of sense. So can you maybe quickly share for everyone else that maybe not familiar, what is IPN? Where do you see it going?

So IPN -- think of IPN as -- at the highest level, why we -- it's an ecosystem which actually removes the chasm that always existed between the consumers and the billing companies. Consumers want an ability to transact and engage with the billing companies, the businesses, wherever they want. And the businesses had this -- in some ways, it's a dichotomy where the businesses have their own world, where -- the biller direct, where your own properties, customers are coming and making a payment and that's it. Everything else is happening outside of the world, which they don't know much about. We felt that this is actually, in some ways, ludicrous in this day and age, where why not expand and in some ways, reinvent the biller direct market itself and turn that into an ecosystem. So a combination of platform and the ecosystem, which extends to the banks, to the partners like PayPal and Walmart and others, where in one -- with one interface, with one platform, all of the participants can -- all the users can become in close proximity to the billing companies back to how it was supposed to be. So that's what IPN is all about. It is an ever-expanding network. We have right now hundreds of financial institutions who are participating in our IPN. So we see this continuing to grow and lead to continued growth momentum for us even in our biller acquisition because billers want to be -- the businesses want to be part of a platform which gives them with one interface access to all their customers, not just the ones who come to their properties, all customers without losing the quality of service. So they don't receive the phone calls and stuff. I made a payment 3 days ago from a bank A, did you get it? That call cost the billing company $16, which, by the way, could erode the margin for the entire year for the customer. So there is a reason for billing companies to bring a cohesive ecosystem.

Yes. 100%. So let me ask one more. And then we'll take questions. The biller direct versus aggregator model, like I call it a tug of war, right? You go to the biller side. You pay through an aggregator wallet. So it keeps evolving. Where do you think we are now when -- could it -- what could drive more change, I guess, is the bigger question?

I think look, first of all, the question you asked earlier about the legacy versus modern, I think that if -- the contrast couldn't be clearer with this question right here. So let me explain. The world used to be if you want to pay multiple bills at one place, then you go to aggregators. And aggregators have their own world. And if you want to go to the billing company one bill at a time, you go to the billing company directly. What Paymentus has done is actually removed the tug of war, if you will. We have said that this religious perspective on 2 different models has to disappear because ultimately, the 2 parties who are transacting are the -- have most to gain or most to lose, which is the customer and the business -- or the provider who is interacting with each other. So we felt that if we could actually create an ecosystem, what you call our Paymentus platform and the IPN ecosystem, it actually eliminates that need for having aggregators to be separate versus biller direct. So if you think about it, biller direct, as we know it outside of Paymentus, is done -- is no longer as relevant. Pay anyone, as we know it, no longer relevant because what really needs to happen is IPN ecosystem, which is what we are driving the change towards, is the billing company enables themselves on our platform -- through our platform to the IPN ecosystem. And therefore, they can reach the consumer wherever the consumer is. If I want to make a payment using PayPal app today, but tomorrow, I want to go to the billing company's website and make a payment, my experience doesn't change. I can do that without any problem. So that's the change. So in our mind, pay anyone, come to Paymentus. Biller direct, come to Paymentus because both of those exist on one IPN ecosystem.

And same experience?

Same experience.

Questions from the group, happy to take them. Sure. Tony? Thank you. Just use the mic actually because we're being webcast, if you don't mind. Thank you.

I guess I'd be interested in your views about the future number of bills that you think will be in the U.S. because I see an explosion of recurring payments. But most of those are being done in a -- charged to the card automatically. So think about the Netflixes of the world and all these other recurring payments. Is that an area where your company does play or might play in the future? Because I also look at other traditional bills like a cellphone bill. And again, those billers are pushing me to sign up with my card to get a discount on my bill. So there is no -- it's a straight to recurring card payment. So just how do you see the industry evolving, I guess?

Yes. You'll be surprised, actually. We have had the capability of recurring billing/subscription billing forever, actually. And so we process millions of transactions today where we charge on card or do a bank draft. But we do it in a lot more cohesive manner as far as the consumer is concerned. The consumer is notified when the payment is made. And if something was wrong with the transaction, you're notified of that as well, bring the consumer back into the ecosystem so that they can make the payment or engage with the billing company. So we see that as a key part of our offering. And expanding even further toward subscription billing, probably we'll add that as a vertical but our platform already supports it.

Thank you, Tony. Anyone else? I remember when I was a much younger analyst, we used to always track who's doing bill presentment, who's going to the bank, who's going direct to biller, like Tony's asked, who's offering discounts to go pay directly on the website. I mean the simplicity through IPN makes a lot of sense. Are there any must-have partners in your mind that can really drive a breakthrough with IPN?

I think we -- obviously, some of the banks would be. Some of the largest banks and JPM will be great to add to the IPN and could actually modernize the -- could champion the change in some ways from the largest banks' perspective. But the banks will be one of the key ones to look at. But from our perspective, we welcome any partner regardless of if you think of yourself as a provider of capability or facilitating bill payments for your customer for increasing your retention or if you're e-commerce player who have relationship with the consumer from the e-commerce side, where you wanted to participate in the nondiscretionary side of the household economy, which is the 60% or the majority of the household -- typical household expenditure, we'll welcome you. It's pretty straightforward to add. But there is no real must-haves for us anymore. With the Payveris acquisition, we got what we needed, which is the access to the bank channel. And at this point, we are -- we feel we are in a pretty good spot.

Okay. Good. So we have 5 minutes left, let me just rapid fire a few more. I know a lot of questions -- like you mentioned, Payveris acquisition, M&A with all the capital you raised. How important is inorganic at this phase of growth for Paymentus?

I think from thinking through, there isn't really a gap in our offering, which needs to be filled in with an acquisition. But our Payveris acquisition has been actually phenomenal success. The market has received it extremely well. It opened up our opportunity in the bank channel. In addition to that, which we don't talk as much about, but it would become a little bit clearer as we execute. There is a very important aspect to our DNA as a company, which is the innovation side. We -- everything you see today about Paymentus business was conceived way back when -- in the sense that if we did this, and if you were able to succeed here, then we will be able to do that. So we have a pretty methodical approach we have taken. What this acquisition also does for us is it gives us a pretty remarkable drawing board that -- so we've got financial institutions and we got merchants. On the merchant side, the business side, that isn't a type of merchant we can't support. We can support any business of any size on our platform and any workflow, inbound, outbound, any application, B2B, B2C. So if you look at it from that perspective -- and then on the bank side, we are actually -- we are the money movement platform for the banks and the credit unions who are participating in our ecosystem. That -- it gives us a pretty robust capability that, hey, are there things we could be launching, which are not yet in our financial projections and so on, could actually give us an incremental value. So more to come there. But that's -- so as a result of that, going back to the M&A point, we are going to be -- we are looking at opportunities. With the current market conditions, actually, it might be more attractive to buy businesses as we go forward. But we're going to be selective, just like we have been in the past. We got a pretty good business on the organic side going. And we are very cognizant of the distraction and so on, so we'll be very selective.

Yes. So if I'm to decode that, there's a lot of closed-loop potential there. I mean you are connecting a lot of end points to your -- to what you said. So it does make a lot of sense. So we've been asking this, Dushyant, to all the different companies, right? There's a lot more focus on profitability. You are profitable. I know you've invested a lot in go-to-market product. This trade-off of margin versus growth, has your thinking changed on that given the current climate?

Actually, let me say it this way. First, when we were on the road show, I've talked to Matt about this multiple times. But I also went to my wife one day and say, maybe I'm just not the -- I'm just the wrong type of CEO. Why did I have to build a profitable business? Because I would go on to this call and everyone will ask me questions, saying, why are you profitable? Why are you not -- take your margins even lower? And I just felt that the DNA of the company right from the beginning was and remains so today and will remain so going forward is that we want to be a responsible growth company. We want to be able to -- at any given time, we should be able to turn the dial towards expenses but if only towards increasing our profitability but not to promise to the investors that, hey, we have never been profitable, but let's see what we can do now. So we want to always be a profitable company. In terms of our EBITDA profile, actually, let me talk a little bit more on that. Prior to going public in Q1 of 2021, our EBITDA -- adjusted EBITDA margin was 27%. And then we have IPO costs. Our $40,000 D&O insurance became $4 million and a bunch of other IPO expenses. So our margins went down a little bit. And then we have acquired a couple of businesses, Payveris and Finovera, which were not profitable. So they're dilutive to our EBITDA. So a combination of that is what you're seeing today. But if I look at our base business, we are closer to 20% margin today. So we feel like that as we go forward even as early as next year, we might get close to that number. But the key point here is that we believe that we will continue to deliver growth as a business while also improving the margin -- or expanding our margin.

Good. So we have 12 seconds left. You've been meeting with a lot of investors, Dushyant. What do you think is the most misunderstood piece of the business or underappreciated?

I think people sometimes think that Paymentus is just a utility business. We're not. And we're not specifically tied to one specific partner. We have built a great business. Other questions we have received is about recession and some of that as well as inflation, how will that impact. We have done extremely well. We have gone through a bunch of cycles here. So what I would ask investors to do is to just give the benefit of doubt to the management team who has been here for a while and has built a business before in this market. It's not -- this is a next-generation business we have built and assembled probably one of the finest team ever assembled in our industry. With humility, I would say we know what we're doing. And we'll deliver a great business here in the long term. So we are very focused on that.

No doubt. Dushyant, it was a pleasure.

Thank you so much, Tien-Tsin. Really appreciate it.

Appreciate it.