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

Terrific. Thank you. So Paymentus is next up. With the session, we'll do a fireside chat with the Paymentus team to talk about bill pay, something that I always love to talk about. Of course, we've got Dushyant Sharma, who's back, the CEO; and Sanjay is here as well. My first time shaking his hands. So I thought maybe we'd kick it off Sanjay just maybe if you wouldn't mind just giving us a quick intro of yourself and why you joined the firm?

Yes. Thanks, Tien-Tsin, for having us here. I'm glad to start with Paymentus being close to 3 months getting there. And I'm very excited, very intrigued with the opportunity when the opportunity came to me, I was excited. And once I read the S1 and read what's happening in the company and what lies ahead for the future and after talking more to Dushyant, it was just very intriguing opportunity. And once I got in the company, it was more exciting than initial stage. I mean, there are a lot of opportunities and the kind of industry we are in, the kind of billers and the partners we have. It's very exciting. It's very encouraging to see the growth, and there's a lot to happen in the next few years and partnering with Dushyant and Dushyant's vision was one of the main reasons which got me on board. And definitely, it's great to work with Dushyant, and the team is amazing at Paymentus. So I'm very excited.

Great. Well, welcome. Welcome to the conference, and I look forward to working with you, of course. So let's get right into it. So the bill pay sector, I think, Dushyant, we talked about this post earnings, but it did feel like it's performing quite well despite all these macro questions that everyone might want us to focus on. So I'm curious, from your standpoint, given where we are in the cycle, the strategic priority for billers to modernize bill pay, where do you see it?

I think, frankly, in a difficult macro, it becomes even more important for organizations to look at their OpEx more efficient with closer look and frankly, also take a deeper dive into how they can modernize and make it more efficient. Their operations and also improve customer service, which also leads to efficiencies in OpEx side. So since our messaging and our value proposition is very, very simple that there is no real CapEx required from the billing companies standpoint, and the biggest benefit we are -- the value proposition we are offering is, we will improve your customer experience by modernizing with our platform. And number two, we will reduce your cost to serve the customers by bringing all of these channels and all these capabilities together in 1 holistic platform with 1 integration and frankly, delivering value even from a call center efficiency standpoint, the reconciliation standpoint and so on. So it becomes even more interesting in these difficult macro environment. And frankly, ever since I've been in the business, I've seen that, that message has resonated well in good terms and not so good terms as well.

Yes. Well, the bookings have been doing quite well, right? So it started out the year pretty strong, exiting the year pretty strong. So who are you -- are you primarily replacing in-house solutions? And who are you typically competing against for these deals?

I think it's -- when we first started out, it used to be that we were simply either pursuing greenfield or have legacy replacement of legacy players. But now what has happened is even the in-house solutions, some of the largest organizations, when they look at their product portfolio when it comes to payment experience for the users, as well as how much they spend to serve the customers. It becomes actually pretty exciting for us when we put the financial model together and the ROI. So the greenfields are -- everyone has payments now. So it's mostly replacing either the legacy platforms or modern companies working in the legacy model even though from an age perspective, they're modern, they're younger, but the platforms are still same legacy disjointed offering and so on. And in-house that becomes even more paramount because they have bought multiple systems at different times, multiple software, multiple maintenance fees and so on, all of that becomes pretty attractive. So for all of those areas across different verticals, is where we are getting a lot of traction.

Okay. Good. So with good bookings, there's always the backlog conversion question. And we cover some IT and BPO services companies. We're hearing different things around delays or implementation surprises to some degree. So how much visibility do you have on the conversion of the backlog?

Actually, it has gotten better, frankly, as we were talking about -- some of the questions we got during the earnings call itself is that what -- their -- the pandemic had different impact on different businesses. Since we work in the nondiscretionary bill pay environment, our business wasn't a factor as much from a usage standpoint. People still have to pay their bills. They were paying their bills and so on. What did get affected was the things which could only be done in person. Number one would be some of the largest deals. You're not going to close some of the largest deals on Zoom and some of the largest implementations it becomes harder to bring everyone together in one room and whiteboard everything on remote calls. It wasn't as easy. So since most of that is already behind us now, we are seeing in our traction in the bookings you're seeing benefit, but also in our conversion of those bookings to implementation dollars of the revenue dollars is also improving, primarily because of the macro improvement as well.

Okay. Good. I'm glad to hear it. So let's dig into some of the results recently. So the first quarter revenue was up 27%. Transaction growth, I have here, 23%, contribution profit up 13%. So the spread between revenue and gross contribution profit, can you discuss that trend for us and the per transaction dynamics behind it?

Yes. I think the -- first of all, very proud of the revenue growth that we were able to deliver. And as a reminder, last year as well, I'm just proud of that I'm just sharing that. But last year, we beat the initial guide we gave to the state and the revised guidance after Q1. We also beat that number in the top line. So I feel like the top line is a very big indicator of how well the business itself is performing. In terms of how much of that is dropping to the contribution profit line item has a lot to do with the macro we are dealing with inflation. And we talked about that inflation has been a factor. And not only year-over-year, but also sequentially quarter-over-quarter, we talked about that we had 400 to 500 basis points of inflation. Now the way we look at inflation is, it's not like it's a permanent loss of value. It's a temporary impact in the sense if our cost is going up because the average ticket item for utilities, primarily utilities going up, but our revenue was flat, the fee was flat. Some of it is from a regulation standpoint. Some of it is that we actually like it that way for various reasons, including if the things go back to normal, we get to keep some of those margins if we have raised the price and so on. So it's a temporary thing. Our contracts already allow us to change the fee if the average payment amount goes up, and we have done that. We are doing some of that. So all you're seeing is revenues growing. Contribution profit is lagging behind a little bit, but the gap is narrowing as we continue to improve the conversion of the current contracts pricing to better pricing adjusting for the inflation.

Yes. So what's the learning from this, right? I know you're going through this pricing adjustment with some of your clients. What's the learning from here as you're building future contracts out? Is there a way to buffer against some of these inflation dynamics?

Actually, the biggest learning -- so contracts already allow us to do that. So contracts already provide our -- so there was -- if you look at our language, it actually calls out multiple factors under which we can change the pricing. And this remains a very important part of our contracts for going back a decade. The biggest learning, however, was that I was somewhat hesitant initially to make the change because I wanted -- I didn't want to be the first call to our customers that, hey, I'm impacted by inflation, give me more money. Because we look at our relationship with clients for a decade-long relationships plus many, many of these clients are doing more business with us every year than the year before for same-store sales and so on. So I felt that I could actually wait a little bit. And there was a little bit of an intensive perspective on the team that should we get a little bit more data a quarter or 2 to show that, hey, this is really impactful to us. So we didn't want to get into the discussion whether it's seasonal. We want it. So the learning lesson for me is probably we could have been a little bit faster to act because of the feedback we are seeing from the customers, some of them even said, hey, we were expecting a call from you. So we are happy about that. So now it is part of our regular cadence when we talk to our clients, let's see how the profitability is playing out based on the macro environment we are operating in.

Okay. No, thanks for sharing that. So just staying with the pricing and it's an interesting model, right, because you have a fee that you can charge to the billers or convenience fee that you charge to the consumer. Same thing. So from a benchmarking or from a learning standpoint, should we expect any changes in the mix between those 2 or not necessarily?

Actually, our approach to the market right from the beginning has been that get the customer excited about modernizing and let the fee be decided by the customer, whether they want to absorb it, they want to pass it on 100% to the customer or a hybrid scenario. They absorb some and pass the remaining to the customers. What we have seen, however, is because of the ROI, we are able to demonstrate over a period of time, the customers are able to -- they're able to see the benefit of the platform itself and the usage. And as a result, we are able to then convince the customers, the pillars, do you really have to pass on the entire -- the fee to -- the entirety to -- in its entirety to the customers? Or can you just absorb it or absorb it all? And there are some incentives in place from the card networks, if you absorb the fees, so you can lower the fee as well. Our cost goes down and the adoption goes up. And we have been able to successfully do it. Now having said that, when the platform is adopted, sometimes our platforms are so well, many times it does so well that adoption goes through the roof and then the cost starts to go up even a little lower numbers. So customers may see that, hey, I want to pass on part of the cost to the customer as well. But I would say the trend remains that we move from convenience fee to absorb direction.

Okay. Okay. No, that makes sense. That makes sense. So let's talk about IPN. I know that's always been an exciting part for me because thinking about the history of bill payment and how it evolves, it seems like a very logical strategy. So still under 10% of revenue, right, but growing very, very fast. We know it's dilutive to margin, right? So catch us up and maybe for those that are less familiar with it, the thesis and sort of the receptivity of it.

Sure. So let me actually describe what IPN -- why IPN to begin with, so those who are new to the concept. So when we were starting the company, the main benefit we wanted to explain to the billing companies was who were used to receiving the only source of receiving payments as to the banks. We said that you could receive all of these payments on your own properties using Paymentus platform. . And billing companies would be so skeptical, they will say, well, I don't know how many people will come to a utilities website to pay the bills and so on. And I used to say that and it was many times proven that all of the banks combined will give you less payments than Paymentus will give you in the first 90 days of launching. And what happened as a result that biller direct, which is the Paymentus platform started to take off. And banks are starting to see a decline in volume. And billers started to see more and more of this. This became a norm to offer a bill payment platform like Paymentus to the customers. IPN was our answer to saying the reason bank payments were declining is customer experience is totally actually outdated compared to what the experience you get from the biller site. You can make the payment at the last minute, any time in real time. You have more options to pay including credit cards and the banks just didn't offer those options. So we said, can we take what we have done for billers and extend through a network to banks and other fintechs. And we have done this successfully, and we call that IPN. The other part, which we actually predicted and has paid out exactly the way we thought is that we will get access to billers who are not directly in our network right now. So through IPN, if a bank user is making a payment to 10 of their billing companies, let's say, 4 of them are on Paymentus platform or 3 of them are on Paymentus platform, the remaining 7 becomes sales leads for us. So that's going directly to say, hey, we're already sending new payments, and that's more inefficient, why don't you join our network? So that's one part. And the second part, we have now actually started to observe and got excited about is that we are sending payments to payees who are outside of the electronic network and most of them happen to be SMBs, and the numbers are in 6-figure, like hundreds of thousands of these pads are potential SMBs, and that's why we have launched an SMB offering adjacent to IPN to capture those payments. First of all, reduce our COGS rather than having these paper payments go out, make it electronic, and the second is to -- we have taken a smarter approach rather than just doing 1 transaction conversion from paper to electronic. We are saying we're going to give you a platform, which will be monetizable for us. And since it's all interchange revenue there or most of it is interchange revenue, it gives us the ability to have no impact of interchange on that as well. So very excited. That's the IPN in a nutshell. In terms of adoption, I think we see tremendous acceptance of it on the banks, credit unions, fintechs, all of them remain. I think this is a -- in some ways, the modern way of integrating with a consolidated view in the billing system for the customers using our platform.

Right. No, it's smart to lead with the biller direct and then to go into this. And like you said, built this flywheel or this network effect, which you mentioned?

Absolutely. Even from a billing companies standpoint, if you were given a pitch that, hey, I can give you a platform for web and IVR and mobile what another company told you that to a billing company that, look, we can give you an entire platform, which is industry-leading in many ways. But also, we will give you access to the ecosystem where someone walking into a Walmart can make a cash payment, can go to a Green Dot associated store whether CVS and Walgreens can make a payment to you through cash. The payment will be made in real time. You can go up to PayPal app and make a payment or to any of the banks who are participating in our network. In essence, what this really means is that we are allowing the billing companies who historically have been completely isolated from the bill payer ecosystem to now have taking their entire bill payment framework and associated customer experience powered by Paymentus to customers wherever they might be, any of the apps of their choice and so on. So it becomes a -- that actually becomes an accelerant for us in terms of sales acquisition as well, the customer acquisition.

Yes. So as you were describing at the beginning, right, you -- in the network, you're touching a lot of different endpoints, including SMB, and this whole concept with ever netting interchange or 0 interchange net effect. Tell us about the receptivity of the payables opportunity for you with SMBs. It sounds interesting and compelling. But how do you think about executing that versus everything else you've discussed so far?

Yes. Actually, this is -- look, first of all, the SMB itself is a -- it's a nascent opportunity. It's early and it's not in our numbers and so on, but except in the expense line item, that Sanjay will remind me, for sure. So it's there. But what we are -- our approach is rather simple. Prove the business concept that it works, acquire the customer, show the true value, demonstrate the revenue generation, and we are generating revenue is very small still. And then go to some of the partners we already do business with, whether they are some of the largest banks of the fintechs or other B2B companies we work with and then offer this as a way to expand our network. And then also through the IP, and I talked about the paper payments and so on, a leverage that as a way to get more customers. So our strategy is prove out the [ drag ] little bit and then use the channels to accelerate the growth.

Good. So let me stop here. I have several more questions, but happy to take questions from the audience or from the portal, if there are any. Yes, Adam?

So I'm sure all your customers benefit from the efficiency and the lack of CapEx of outsourcing. But I'm guessing it's pretty uneven between how many customers really sort of use this for customer experience and brand building and cross-selling. And so maybe you could spend a little time talking about sort of the best-in-class customers that you have and how they're proactively using bill payment for more revenue-generating opportunities?