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

All right. Let's get started. My name is Tien-Tsin Huang. I follow payments and IT services at JPMorgan. And this is the Paymentus fireside chat. We're happy to take questions at the end and also through the through the portal. But thank you to the Paymentus team for being here, Dushyant Sharma, CEO; Sanjay Kalra, CFO. Again, thank you both for being here. I always say like Dushyant you founded Paymentus what, 2004. So you've seen a lot from a bill pay perspective. But let's not forget, you founded Derivion and sold that as well to Metavante. And we've seen some consolidation recently. So I do want to talk about the chessboard and how you're seeing it changing. But you just reported not too too long ago. Maybe for those newer to the story, just a quick commercial on Paymentus and the trends that you're seeing and what you're doubling down on strategically?

Sure. First of all, thank you so much for having us. it's a real pleasure. So we are actually, in some ways, we find ourselves in a very fortunate situation where we are serving the nondiscretionary side of the U.S. economy. We are a cloud-based technology platform for bill payments. We are disrupting the bill payment space by digitizing and modernizing bill payment experiences for clients, ours in various industries like utilities, insurance, government services, property management and all the other recurring billing space. We are pretty sizable actually, if you think about, we process over 170 million transactions a quarter. Last year, we did over -- or close to 600 million transactions. So quite a lot of households and businesses we are already intertwining with. So we feel great about where we are and where we are headed.

So you have had a series of big beats and raises. You seem to be fairly insulated from from the macro and some of the uncertainty out there. So just remind -- you mentioned nondiscretionary. We do rank you very highly in terms of the nondiscretionary mix relative to our broader coverage. What does that mean for you and visibility and whatnot before we dig into the details.

Sure. So if you take a step back, and that's one of the things we wanted to accomplish on the earnings call to make sure our investors have a pretty good understanding of who we are serving and how insulated -- relatively insulated we are as a business. So if you think about -- just to be able to coke your food, you need in a typical household, you need electricity, gas and water. And that covers almost 50% of our business. And if you go further than that, you have telephones, you have mortgage, you have rent, you have insurance premiums to pay if you want to maintain coverage. So we feel like that we are serving a pretty pretty essential side of the economy. And even during past macroeconomic events, we continue to grow our business. We saw people continue to pay their bills. And the trends we are seeing right now, we were -- Q1 was all about making sure that we are observing all the trends all across our verticals. We haven't seen any slowdown of any kind. And so -- in fact, we are seeing encouraging trends. And from the bookings -- from pipeline to bookings to the conversion of bookings to revenue, to continue to see the same-store sales and encouraging trends there as well. So we feel like all aspects of our business, we are feeling good about and visibility remains.

When you think on the monetization front, Dushyant or Sanjay, just thinking of the convenience fee versus the absorbed fee? And given what you just described and how nondiscretionary is yet the benefits of automation and epay and whatnot. Any interesting observations there in terms of how you monetize?

Well, we monetize using both approaches, as you said, convenience as well as absorbed, and it depends on kind of the relationship kind of the position the biller prefers to and we give flexibility as we do the deal. But they are not distinguished in a way that they kind of back to our profitability, both are different methods to pay. And whatever makes sense more to the biller, we do and both are working well.

Yes. So throughout the earnings season and also early in the tech conference here, we always ask around implementations, timing and is the backlog converting in a timely way or not? I'm curious for both the backlog and the pipeline, how strategic of a priority is it for players to modernize their bill pay and consolidate on to payments. How does that rank? What are you seeing on timeline?

Sure. First of all, we continue to be encouraged with all the trends we are seeing. But I would go to actual point here, something I feel like that we don't put 2 and 2 together. Bill payments is about actually revenue as much as it is -- if you look at it from a consumer standpoint, it is about receiving the services, which are essential. But from a supplier standpoint or the billing company standpoint, the billers' standpoint, it is actually the lifeline. So if you're not collecting payments on time, you don't have the ability for the next month, your payroll or purchase more electricity or pay your suppliers. So it is very important to -- especially those which are serving millions of or a lot of -- relative to the size of the business and number of subscribers they are dealing with. It's very important that they are able to collect, collect in time, collect with efficiency and not spending a lot of money, collect in a way that they are not having to answer whole bunch of phone calls, and collect in a way that they can continue to provide better experiences for their customers. So if you think from those priorities perspective, we believe that CFOs and customer service executives, experienced executives, they all become extremely friendly towards Paymentus value proposition. And many times for us, we are just simply saying that, we want CFOs to be the biggest champions of this, not the ones who are challenging the value proposition. And as a result, regardless of the season we are in economic cycle we are in, we continue to see positive trends because it is all about revenue collection, which is very important to CFO and it's all about making sure the customers when they're interacting and engaging with the company, they continue to have better experience. So from that perspective, it's a very important aspect to the business. It's all about revenues, is bringing the money in the door.

Yes, because I think sometimes us included make that mistake, it thinking about it as an expense to cost of goods sold, but the revenue collection, of course, is critically important. Just another one I want to hit before we go into some more detail. Just -- there's a lot of new payment methods emerging. I know credit/debit of course, matter. But given new APMs and the macro shifts that are happening, is there any shift in preferences that you're seeing that has some impact on your take rate that we need to consider? I know we learned from that in the summer months with utilities and things like that. How about now, given where we are with uncertainty in macro.

I think we -- first of all, having more payment options for our customers have are welcome sign. And frankly, getting more and more alternative and advanced payment methods in our network is an opportunity to negotiate better deals. So for us, we are like looking at -- from our standpoint, interchange or our cost of goods sold, which is primarily centered around interchange is a vendor expense. And we, as a company, have always looked at it that way. We increasingly look at it that way. And now as we are looking at more and more payment options emerging we start to think about how do we negotiate better deals, how do we make sure our take rate continues to improve as we continue to scale the business.

Okay. So back to bookings and you went through very clearly what the strategic benefits are Who are you taking share from? Like what's the decision to move to Paymentus. Is there an incumbent that they're not happy with? Is it an old antiquated system that's been replaced? What's moving today?

I think it is the -- the #1 driver for change is the level of sophistication of the buyer is changing. So what used to happen before was if you go back even 10, 15 years ago, if you didn't have web payments or mobile payment, that could be the entre, well, we can provide you a mobile app or we can give you that kind of experience and so on. And a lot of legacy infrastructure got created as a result of that, sort of point solutions and so on. Right now, what's happening is the buyer is sophisticated. They have heard stories, they have seen all the things, and they have seen that electronic payment or digital payment could be expensive if it is not handled well, then even the paper payment. So a lot of times, it's very important for them to ensure that they are thinking through all the areas of improvement as they are bringing a new provider. In our case, what's working extremely well is that we have -- we are no longer targeting legacy providers per se. We are simply saying everything is legacy infrastructure and can that be modernized. And can that be modernized in a way that both CFO and the executive team are happy, but CFO being a very important part of the equation. So can we actually lower the cost to serve without lowering the transaction fee which we will be collecting. And what we are seeing is many -- if you're doing deals where customers are actually paying us a little bit more than what they were used to paying or spending on the transaction fee. But because of the completeness of the solution, we are able to garner more support internally because of the savings they will recognize elsewhere. So -- what is driving the change comes down to these 2 simple value proposition, the improved experience and cost -- lower cost to serve. But to your point about what we are replacing, it is really the legacy infrastructure in-house and legacy providers.

And then the cost to change and to make that switch -- is that conversation changing? I know for several quarters or not years now, you've talked about adding and improving the timeline to go live and switching. Is that less of a gating factor for switching?

Actually it's a strong gating factor even today. Like every customer wants to know what will the life would be, the moment I signed the agreement, how long it will take me to get live with Paymentus how much effort it will take and how much time and then on top of that, the cost and so on? And then what will be -- what it will be like the day after. What is helping us tremendously is that there is all the investments we have made in automation, but also we have made it a point to communicate very publicly that we are seeing tremendous success. We are able to -- even the large enterprise clients who are having big in-house systems, they have moved to Paymentus, and they've gone live sooner than we were thinking and they're outperforming. There -- our expectation is basically the combined expectations in many cases. So what that all translates to is a great sales collateral. So if you're the -- new clients are looking at payments, they're hearing very publicly that Paymentus is doing whatever their biggest concerns were, that's what Paymentus is already addressing and very publicly so. And then when they -- a little bit under the cover, they realize that payment is done a lot of work in automating and being able to implement these large multidimensional conversions with having to -- while keeping majority, if not all of the interfaces of our customers identical. So we do all the work on our side, and we do all that through automation. So that is what is driving some of that apprehension away.

Okay. So can we discuss the -- you mentioned it right, the day after you implement the outperformance. What can a biller typically see in terms of e-payment performance and maybe disputes. And I don't know if there's a way to measure customers at on bill pay. But what do you typically see? And how has that changed versus, say, a year ago when I asked you the same question.

Yes, I think what we are seeing is that we are increasingly becoming more focused on making sure that not only the the utilization improves of digital channels, meaning more and more customers should use digital channels for payments. In addition to that, even the customers who are used to using the system, are they able to get faster response times, the average handling time is lower. The number of costs to the call center are lower. So all of that is stuff when we put it together, I think customers are generally very pleased with -- like we have stacks where customer will go live and they will see a significant jump. And we are reporting that. Our model for some of these large enterprise clients was certain numbers. And we were thinking was seasonality, and we are still not certain until we have the whole year. But it looks like that based on the performance and the reach and the simplicity and all the investments we have been making to make the experience simpler, shorter and better for the end users and the staff for the companies we are serving, it is paying off in some ways.

Okay. And I think you mentioned, I think, Sanjay, you've also said right, when people ask about conservatism in the outlook and the go-forward quarter, that kind of thing. I think that's something that Dushyant said that you're not ready to call a trend until you see a full year it's worth of biller volume. Is that accurate? And you think about forecasting and and the outlook that you said?

Yes, that is. So for all the enterprise clients, especially the ones which we onboarded in Q3 of last year, they want to see at least 4 quarters of the runway. And based on that, we would rather like to forecast. And that's exactly what we did in our guidance when we gave in the previous call for Q2. We did not anticipate the same kind of growth we saw in Q1 and Q4. Q4 of last year and Q1 of this year because those were exceeding our expectations. And we are unable to figure out is that the seasonality which they had 2 quarters? Or is that the consistent trend we should see. So taking prudent approach is more reasonable, given all of what's going on, and we just want to keep our head straight and keep on executing rather than building an expectation and then without having a history of that, I think that will be more aggressive. So -- and being prudent never hurts, and that has been proven philosophy, I would think, on our approach because we want to march on that path.

Yes. And I would also simply say that we have a bias obviously, and we have a desired outcome we are seeking there -- we want this to be the victory for the platform. But it's very hard to call that without seeing all the trends. And clients are sometimes not very open to telling you exactly whether that seasonality or that's based on platform outlook, just because we are also very pleasantly surprised, they're not sure whether that would be the same trends will continue.

Okay. That's fair. So building up on NRR point of everything we just talked about, same-store new sales implementations, outperformance in the backlog growing through the consumer usage, et cetera. How does that typically build up in your mind?

Yes. So NRR when we look at NRR is mainly same-store sales, and because NRR does not capture any new implementations, but is I would say, primarily same-store sales. There is a modest portion of pricing component also, but that's not as big. But when we look at our total growth vectors, apart from same-store sales and the pricing change. The biggest growth vector for the company is, I was said, since last 8, 9 quarters, has been the new implementations because our bookings are very strong, and our implementation machinery is running at a good great pace. So as the time comes for implementation, the new implementations go live, they are the biggest contributors to our growth. And that's consistent, and that has been the most rewarding aspect, I think, of our business because bookings are strong because pipeline is strong and pipeline is getting converted to bookings at a great pace as well. . So all right from the TAM, I would say, which is enormous, which is like around 17 billion bills, and we have only 4% share of that in the U.S. We have a huge runway there. And together with the TAM going to the pipeline, bookings and implementation, everything is moving in the right direction at a great pace.

Okay. Any questions before I keep going. Customer Vertical. I was curious if there's a specific customer vertical you're excited about where you're seeing more growth within that TAM, you're most excited?

So we are actually -- it sounds like a little bit of a cliche, but we are excited about all of the verticals. We did the analysis earlier in the quarter in the Q1 and seeing how well we have done across all verticals versus year-over -- versus last year. We are very pleased if you think about it, our utility business has, which is our bread and butter business, I mean the core DNA of the company right from the beginning, but that has continued to scale extremely well, continues to grow. But the other verticals, nonutility verticals, which we talk very much about, they continue to grow, continue to accelerate. Very, very pleased with how well we have been successful in manifesting the sort of the destiny we always visualized by our technology platform that no vertical should be too far for Paymentus or no size of the customer should be too large or too small for us. So we have been able to prove all of that actually. Right now, we have verticals -- we have teams and we have partners who are focused on verticals, not in utility, and they're driving tremendous growth in there. So we remain very excited. And one of the philosophies we have had over the years is we never believed because of watching and Tien-Tsin you have been in the space and you know that once you've been watching the trends for years and years, you realize that, well, there are 120 million households in the U.S., and -- but there are 16 billion, 17 billion bills. So one household is getting more than a few number of bills, right? So meaning customers eventually they are not going to -- the end user payers are not going to make that much of a difference between my insurance bill versus my utility bill versus my car payment and so on. They want a similar unified experience. And based on -- if you follow that philosophy and go all the way down to the back end, then the buyers of our services are also consumers because they're also paying bills. They're also desirous of the same thing. So when Paymentus goes with the model that our platform is unique because it is purpose built for all verticals, and we have crowdsourced the functionality from all of the verticals and so on. And as a result, the platform itself is so much more mature and sophisticated that it meets the requirements for all customers. So when our clients, prospective clients hear that and then they hear, really, that company signed with you. So, okay, we want to call them. So our approach works, we get some beachheads, and then from there, grow the business with great storytellers.

I wanted to ask within the go-to-market, you talked about the importance of direct sales, but also the partner channel because partners have been an important part of Paymentus' growth story. So I just wanted to hear how you balance the 2, and maybe what's the optimal mix of sales coming from each channel?

Actually, this has been, in some ways, the -- what you -- the unlocking of the growth algorithm what you're seeing in the recent past is has a lot to do with us actually figuring out. We all work together, we try to figure out how can we make it somehow financially agnostic whether we get a deal directly versus we get a deal through our partners. And we are pretty much at that stage right now. So profitability of a given deal is very similar to Paymentus. due to operating leverage as well as how our sales model works. So we are -- so therefore, there's no extra incentive or disincentive to do a deal one way or the other. That's one. The second is our direct sales channel is so strong and tied with the entirety of the business that it becomes almost like a life cycle learning of the entire customer journey and then propagating that to our partner channel and our partners there getting benefit of that. leads to better sales productivity. A lot of times, as we all know, partnerships don't work out as well because they are sort of great paper, great advertisement but not as much productivity, we are seeing the opposite of that. We are seeing a lot of productive partnerships and partners getting excited. Don't think there is any competitive tension between Paymentus, the way we have built the culture and the way proveably, we are seeing that the numbers are very similar.

Is there a temptation -- I know you're way through the rule of 40 and all the stuff, the margins have been good. Is there a temptation to push harder on the on the direct selling front given the momentum you have and some of the success you've seen in the pipeline conversion? .

Always. We are always focused on that, but not at the expense of affecting our profitability. So we remain -- and Sanjay, you're welcome to comment on it. But we are so focused on profitable growth. There are 2 parts to it. One is the investors need to know that this management team knows how to think of profitability when we are not in front of investors. When we are delivering result about that we can deliver profitable growth. The second is, I think, as a management team, it's a challenge. It's very easy to go ahead and go to the Board and go to your investors and say, we are going to bring down our EBITDA by certain points, and now we're going to grow the business and so on, I think is a tougher challenge as a management team from a go-to-market strategy perspective and creativity therein, can we actually not do that and still grow the business? And can we still accelerate the business? Or what could we do to our product, what could we do to our implementation process and so on, which will allow us to do that. So we will continue to challenge us on that.

Yes. No, I'll give you credit. As a public company, you found a good rhythm on balancing the growth and the profitability. I think that's definitely worth commenting on.

Profitability growth of different segments? And is there anything special about the mix of the business coming from different segments?

No. We are seeing very -- as Sanjay has rightly pointed out on the earnings call that we have some large clients who actually have a different size of the ticket and so on, and which affects the the actual per unit, how much revenue we're generating, but margin profile is very similar.

Yes, when we look at whether it's a large customer or a small customer or any one vertical or verticals. We don't distinguish separately compared to our overall business. Our goal is that overall, Paymentus is moving in a direction with a corporate goal of growing topline 20% and showing EBITDA 20% to 30%. And and we very well know our operating leverage is very high. So when we price the deal, we don't look at that deal itself, but rather the whole company and how that's contributing to the company. So when we go into the per transaction matrix. That actually is an output of the whole product and the whole cycle rather than an input. So revenue per transaction may fluctuate, interchange or cost per transaction may fluctuate, percent profit per transaction is kind of similar despite of growing so significantly. So what we are doing is we are getting the benefit of scale without compromising the profitability. And that's helping us grow the profitability overall. Like Q1, for example, was a record adjusted EBITDA margin for us, 34.2%. And that new record is created. Together with that, we created one more record, our cash generation was huge this quarter. So we have a lot of focus on cash as well. I mean, together with profitability, we want to see that eventually convert into cash sitting on the balance sheet. So we are not focusing on any one particular metric for a customer, but looking at overall picture.

And if I may actually add, it's a very positive thing even for clients to see that Paymentus is a well-run profitable business, generating cash because that's how they run their businesses. We are dealing with companies which are very -- in many cases, even though a small market for us is still a large enterprise. They might be dealing with 50,000 subscribers. And if you multiply that by $200, this is a sizable business. So they run their businesses very profitably and profitability matters to them as well. Anyone else?

So Dushyant, I did want to make sure I'm glad we have some time. I want to ask about, we touched upon it briefly last year, just this opportunity to turn interchange from a cost into revenue. You've discussed it as a TAM expansion opportunity. We've seen different players in the ecosystem, especially marketplaces Fintech trying to tap into their merchant network, connect them and do bill payments or directory. It feels like you can do that with large enterprises, you're doing the cash money movement anyway. Where are you In that, -- how big of a priority is that? And does it make sense for you to go faster and do more on the accounts payable side since you have the merchant network already or the biller network already.

I think very interesting point, let me touch the first one first, the interchange and I'll go to the merchant directory and the payouts and some of those capabilities. But in terms of the interchange itself, if you think about from Paymentus' point of view, we always looked at interchange as a vendor expense. And we said, what can we do to improve, just like any other business, what can we do, and while we have great partnership with all the card networks and so on. But ultimately, interchange is a big expense for us. Right now, the key priority for us as a business is to make sure we continue to have as much growth as possible build as much, or capture as much market as possible. Even though, as you know, it's a multitrillion dollar market and we have captured only a fraction of that, 3% or 4% right now under 4% of the market. So goal is to capture as much market as we can. Longer term, what I mean by that is not this year or next year is longer than that is we are working through what are the different parameters, we will need to or the dials, we're going to return to convert the interchange from a cost center to revenue center. And -- which actually get very exciting as we start to take a look at that. And it becomes a multiplier actually profitability and the retention rates of all the -- which we already have pretty high, but it becomes pretty trusting. Not yet able to go into all the details of it. But at the high level, I could say, it is a combination of partnerships, a combination of different payment methods and so on. Combination of some products and services as well, which we are thinking about. And then it also is a combination of being able to do money out and some payout transactions. For everyone's benefit, if you think about Paymentus today, we talked about the number of transactions we process, like last year, close to 600 million transactions. If you just take a step back and ask, well, how many households does that represent? How many businesses does that represent of United States? The number is pretty big. So Payments in addition to building a great business in disrupting bill payment, Paymentus is also building a great distribution network for future products and services to be distributed to all these participants in our network. So we have that ability. And that's a big focus, but not necessarily -- the expense run rate is in our numbers, but not the revenue and anything generated yet from -- so that will come in the future.

Okay. Good. Let's do one last question.

Thinking about your conversation back to interchange fees and how you view that as a customer cost more than even your cost to you. as your customers come back to you and ask you for more of an emphasis on pay by bank to lower their fees on their end?

They do. Actually, it's a big piece to customers as well. And that's why when Tien-Tsin was asking earlier the question about convenience fees absorbed, how many billers absorb the fee in convenience. So we are -- in many ways, we are agnostic whatever the client decides, whatever they want to do. Interchange is a big expense for everyone. For Paymentus, the way we think about it is that our clients and payment as our partners in this together because both of us, whether it's Paymentus is paying it, customer is paying it. It is getting paid, and it's still a big expense. So longer term, when we solve the puzzle, it benefits both us and the client. More so Paymentus, of course, because we -- majority of our revenue we are collecting from our clients is going to the interchange. So we get tremendous benefit from that, but also our clients as well. There will be more options for them.

Good question. All right. We should probably close it out there. Thank you, Dushyant, thank you, Sanjay, for being here.

Thank you so much. Thank you.