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

Good morning. Welcome to Citi's 14th Annual Fintech Conference. My name is Pete Christiansen. I'm on Citi's research team covering digital assets, some LendTech and some import services as well and really pleased to be hosting Paymentus with us today. We have Paymentus CEO and Founder, Dushyant. And also Paymentus CFO, Sanjay. Thank you, gentlemen. Welcome to have you.

Thank you for having us.

Of course. Of course, now I remember Paymentus not too long ago coming to the public markets, certainly with our previous teams doing a lot of work on the name. And since your IPO in '21, now you're a $1 billion company, you're generating cash. Maybe for those who are less familiar, can you just provide us with a brief overview of your company, why you set up Paymentus? And why is bill payment exciting?

Okay. That's a great question. In a time, bill payment doesn't get the excitement nerves going for folks. It's a very exciting business, primarily because if you think about majority of the U.S. household spend is towards nondiscretionary bills, and that's due towards nondiscretionary bills. So just to be able to put water, electricity, gas. And then they're in a home, which most of us are in a partner at home, we either have a mortgage or rent and then you have insurance policies related to all of that. So once you start building those blocks up of a typical household, you realize that a nondiscretionary part spend and serving that economy is very, very important in all times, whether economy is doing great or economy is not doing great. We have gone through multiple cycles and continue to grow our business. So from that, I think we saw an opportunity where the providers to the banks -- bill payment service providers to the bank, were actually letting the bank down and has proven out now in reality where banks continue to lose their market share. They used to have 70%, 80%, 90% of share of bill payments is now down to 20%. And all of that is, in some ways, from a bank's perspective loss or from a billing company perspective gain through a platform like Paymentus, where we said, why don't we give billing companies the entirety of the control of their own destiny. They are the ones who are issuing the bills to their customers. They are the ones responsible for the money -- collection of the money. And they are the ones who are actually then paying the price if the customers don't pay in time or dealing with the rest of the customers if they have already paid to the bank and then several days later, the bank tells the billing company that they have not received the money. So why not give them a platform which is holistic, comprehensive, takes care of all aspects of customer engagement and payments related to billing and all customer inquiries and engagement across all channels. And that thesis actually proved out to be very successful, that we would go to a billing company initially and say, we will deliver more payments to you in 90 days through Paymentus platform than all banks combined in the United States. And we were -- time and time again, we were able to prove that out. And we also realized that if we can build a successful business, profitable with great unit economics in utilities, starting with utilities, which is the most complex and most efficient part of the sector, we would have an ability to expand into different verticals. So whether it is government services, whether it is insurance, whether it is property management, telecom and others. So if you look at it from where we were to where we are, even since our IPO, we now have -- utilities remains a very big vertical for us, electricity, gas, water and waste and so on. But we also have a -- significant piece of our business is now other verticals, that is government services, insurance and others and very sizable, still growing rapidly. And more recently, what we've also observed the last several years is we are able to get into companies which were typically out of reach for -- not only for us, to anyone because they are used to in-sourcing, building everything in-house. Paymentus built a platform now with the scale and the size and the ecosystem. It's sort of irreplaceable. It's not easy to create for any organization regardless of how many flows of programs you have. So we are seeing tremendous traction there as well. As a result, we are able to provide our CAGR model of 20% top line growth, turning to 30% adjusted EBITDA growth in dollars and with great operating leverage, delivering great operating incremental margins. So investors are liking it. Investors are liking the stability of nondiscretionary part of the business, but also high growth algorithm and high profitability.

And super sticky, I imagine. But what sounds, I think, initially interesting to me is the ability to scale as you counter kind of like one vertical. You're able to port some of that success into other verticals, so on and so forth. Maybe if you could discuss that. And also, how should we think about you finance this on a partnership front, not only perspective but also maybe on the FI side?

Absolutely. I think in the part which is -- was very important for us and that's why we were -- there's a joke in programming and engineering terms, but they say the sooner you start coding, the later you finish. So if you don't start -- you don't think first, and you start coding, you will probably finish later and the person will spend more time thinking about what they're coding and what they're solving the problem for. We realize that even though Paymentus may actually not be in early 2005, '06, '07, '08 and all those years, which were very formative founding years, we were trying to build a platform for the future. We were saying there will be a time where a lot of these billing companies will have exact same problems. It's not going to be restricted to a specific vertical. So the main point for us was, can we actually deliver a top quality product in a small to midsize utilities, which was totally underserved market, but one where they were already way down the path of taking all the efficiencies out of the paper process. And we felt that we can actually solve that problem and profitably serve them, then attacking the larger utilities will be easier. And then from there, you can branch out to other verticals. So that played very well. But then we realized that banks who have been largely underserved by legacy providers by literally -- if you can think of it from a bank's point of view, regardless of how many times we play golf with them, with the legacy providers, they're still not going to be able to serve the customers unless the customers themselves are getting a better service. So what we felt that eventually, banks will become lot aware that their service providers have not served them well because there's no real-time connectivity to the billing company. And we felt that more and more billing companies we create, which becomes eventually on our instant payment network like cellphone towers. So more cell phone towers you have, the bigger opportunity for us to attract bank. So we have the created instant payment network of the billing companies we have on our platform as well as all the other payers in the U.S. and go to the bank and say, "Hey, you can now use Paymentus platform to start distributing your bills." So we are trying to bring a little bit of the control back to the bank and we have been successful at it.

I would imagine it's really crucial table stakes for the bank, right?

Correct. Because if you think about it from a bank's perspective, the most important customer base is the one who has primary checking account with them. They make 3 to 4x more from that customer base than the one who doesn't have a primary checking account. And bill payments is a very important piece to it from being able to -- many of us can -- who use banks for bill payments, you can realize if you -- once you have set up all your pays and so on, in fact, I've met various folks who have been decades out of the college and they're still using the same bank they had in the college because they have set up some mutual pays and so on. So --

It's been a long time for me.

So that part -- you are a very important customer to the bank. So banks -- it is very important to the bank to get now finally instant payment network connectivity, so they can provide better service to the customers.

Let's tie this down to some of the financial performance that Paymentus has seen since its IPO. Maybe we could talk things in the context of the go-to-market. In what ways does being payments and vertical agnostic serve the top line? And maybe more broadly, have the drivers of revenue growth changed since perhaps maybe the time of IPO?

I'll say the drivers of revenue growth are -- there are 2 points. One is the new implementation. We have very good bookings continuing since IPO. Every quarter, we got very good bookings. We are, in fact, moving into large-sized customers now. Since last year, we started highlighting more on the enterprise customers. So larger-sized customers are now becoming a bigger part of our overall customer base. So more the bookings and -- but they get implemented on time. In fact, they are getting implemented sooner compared to the implementation phase at the time of IPO. It has evolved over time our processes have become much more effective and efficient and the customers are going live at a better pace now. So those early implementations are also helping us accelerate our revenue growth. So both the 2 building blocks, I will say, new implementations. And the second block is the same store base, which is the growth of existing customers. We have these digitalization tailwinds which are helping us as well. So overall, the platform is agnostic. We got a lot of many verticals, around 10 or 12 verticals we operate in, utilities being the largest one. Approximately 50% of whole revenue come from utilities. And then there are insurance, health care, telecom, and there are many of the verticals which we are entering into. Some nascent verticals, but we are seeing progress in all. So we've seen a lot of traction. And the biggest reason for that is that our platform is now resonating more and more. It is our platform, but we are being agnostic. At the same time, it has a lot of features, which are not probably present in a lot of other competitors as well. So we are serving our customers well. We're providing them a good quality service at a very reasonable price. So our product is resonating with the customers, end customers who are actually on a platform on a daily basis, making the payments, bill payments and at the same time, with our billers, or our customers with whom we have contracts as they are able to provide a very good quality of service to your end customers. So we are serving this vast community of billers and end customers, and we are seeing significant growth.

I want to go back a little bit just a couple quick on -- I think you talked about the pipeline conversion is getting better. It's accelerating. Is that monetization unit economics that's driving that? Like talk about what maybe some of the elements there. And then I don't know, maybe qualitatively, what the pipeline looks like today versus [indiscernible]?

Well, our pipeline looks very good at this point in time and the pipeline over the past few years, if we compare that's getting better and so is our backlog, and so is our implementation pace, and so is our revenue. The entire machinery right from identifying an opportunity and recording in a pipeline, still it converts to revenue in our P&L. I think the entire machinery or the subprocess they're all working. So I think it's hard to say like which process is getting better just because everything is getting better. So we are very fortunate to see this kind of progress on our platform and the traction we are getting with all sorts of customers and verticals.

Systems coming together. Benefit onto itself.

Correct. But if I may also add one more thing on the vertical strategy. If you think about if a company is focused on just one specific vertical, then let's take an example. If we are in property management and property management only as a company, then you get one consumer at only one time for that particular brand. And that's it because you're not living in apartments at the same time, by and large. So we felt that at some point in time, it will become very important to the buyers of our service that what percentage of a typical household you already deal with. And as a result, where do we fit in a typical household spend. So take an example, if Paymentus handles 3 to 4 bills just in utilities alone in a given household. And then you add insurance, you have car insurance, you have home insurance, your renters insurance, a few of those, you have a couple of bills there. You have telecom, another bill, at least another bill there. And you keep adding property management or mortgage, the loans, the car loans, mortgages, you start to build up on it. It becomes very interesting from a long-term perspective. If you were to say 5 years out, 10 years out, what does Paymentus look like? You can start to see how big an opportunity we are talking about here. Sometimes all that gets lost because we, as a company, are very focused on making sure our investors don't get confused that there is a certain level of humility in how we execute on our business. But there is also a very important aspect of our investor communication strategy, which is we don't want our numbers to be ever confusing. We want -- and we want to tell the story behind the numbers so that the numbers themselves stand on their own. So investors can say, "Okay, I can listen to the rest of your story, but at least the numbers are holding where they are." And -- but in that pursuit, sometimes you don't look at the 5 years or 10 years. So what is Paymentus really building? So you can take a look at it. If you are serving a big percentage of a U.S. household and big swath of the customer, on the other hand, as a result, you also have a lot of billing companies. There is a tremendous network effect, which will be a lot more disruptive than what means BI right now.

That's interesting. Maybe this might be a good point to help investors understand the biller direct versus the bank-based payment side of the business? And how is Paymentus kind of enabling both ends at the end, serving the end user, the client, that sort of thing. But how do you think the -- obviously, you're helping bill collection improve and things like that. But what overall utility are you driving still in just bill payments generally by playing in both?

So I think -- if you think about it from a billing company standpoint, billing company doesn't care where the money is coming from and when they get the money. So we felt that our strategy has to be all encompassing. It's -- when we're going to a billing company, we have to be able to say that everyone of your customers who wants to engage digitally with you regardless of where they are, they should be able to engage with you and get a similar experience. For example, if I'm a retailer store, I want to make a cash payment versus taking time off away from my work next day to line up in a utilities counter or an insurance counter, and then make a payment. I want to be able to do it while I'm shopping in the evening. And I want the payment to be affected in real time and get posted to the ERP system of the billing company, even though the billing company is closed, but the retailer store is open. But -- and cash was never exchanged at the billing company, but the billing company wants to receive that money maybe next day. If we could achieve that, it was a repeatable value proposition for our billing company. And we were able to achieve that through our instant payment network from the billers' point of view. If you extend the same to the bank and say to the -- to your customer who wants to send money to anyone in the U.S., whether it is to a small business or to the largest company, we have them all on our network. Some of them are directly on our network and increasingly so as they're growing rapidly, we will continue to have those real-time rails built. But those who we don't have real-time rails, we will send them electronic payments, will take a day or 2, et cetera. So that becomes very attractive for the banks. But if you think about the central from an investor perspective, that strategy then is you are having both ends of the candle where you have, on one side, you're signing more billers. As a result you're getting more consumers involved with the business on the platform. On the other side, you're bringing more banks, we're also bringing more consumers also participating in the same ecosystem. So that's why in our public communications, you will always see us say you can look at our scripts. We'll always talk about that we have a platform and an ecosystem, which is what is driving. So if you think from that perspective, it's not easy. It has only taken us 20 years to get here. It's not easy to create these things again and again. So at the scale, we become a hopefully an essential and invaluable part of the essential side of the U.S. service commerce and service.

But I would imagine, at least competitively, just by the sheer size of your network that you have right now, you're a must-have, you're a must-have.

Exactly. I mean that's what -- that's where it is building towards and more and more. And if you also think about it from another perspective, from a billing company point of view, simple perspective. If you were a billing company in this room right now and you are saying, "Look, I am looking for the platform, which is going to act as a central nervous system for my revenue collection which will be my primary revenue collection channel. Not all of the revenue will come from it but primarily because of -- and the fastest-growing channel. What company do I want to partner with?" Do I -- do I even want to take a chance that company will not have the best platform because this is a revenue collection? This is not about vendor payments. This is about handling your customers and your money, both of those, the most valued assets any business has. So when you look at it from that point of view, we -- you can see from our expanding margins and even you saw in the last quarter, even expanding revenue per transaction and contribution profit per transaction. All of that is coming in, although they move around from quarter-to-quarter, but that notwithstanding, the point is that customers see Paymentus as an essential part, which is your point, essential part of the revenue collection chain. And increasingly so, it will become more and more important in terms of -- we have tens millions of households right now and users as well as businesses on our platform today. As that reach expands, including this year as we are onboarding more and more customers, we become a very important part of the U.S. service economy.

Mission-critical.

Mission critical. I think that's what the pursuit is. And we're very pleased during pandemic, for example, we were even deemed as a -- in most jurisdictions we were deemed as an essential service organization because we are providing service to the essential businesses.

That's a good time to pivot into helping us understand the competitive landscape. I think more importantly, I'm sure we're going to touch on what we just spoke about a little bit before, but what's on the checklist of your prospects when they're evaluating Paymentus and their solution set? Maybe where does pricing fit into that?

I think -- so that's what I've actually, to be honest with you, that's what I was trying to get to that particular point, which is the world has changed totally. There was a time when digital payments was a -- used to be called as alternative payment channel because almost all payments used to come from the physical means. Digital payments was a nice thing to have. It was a luxury. I also put a link on my website, and I can get the payment. Not the case anymore. All the efficiencies one organize can drive because of digitalization tailwinds have already been realized. All the customer service representatives have been moved to different functions. All the branch staff has been redeployed in other areas. If you digital platform is not accepting payment, you are essentially in a deadlock. You cannot function as an organization, especially when you have millions of these payments coming in, millions of users, hundreds of thousands of users, regardless of the size of the organization, even 50,000 user subscriber organization, you are in a deadlock immediately if you don't have it in your system. So after going through various situations of selecting different legacy providers and seeing all the challenges and platform scaling, the billing companies have gone away from trying to save pennies and have the potential to lose dollars are now saying, okay, we're going to choose the right partner who has the right ecosystem, biggest coverage, biggest cell phone coverage, but also the most reliable platform. And if it charges a bit more, so be it. But we want our revenue collection to take place efficiently, quickly, accurately and continuously.

Why don't we talk about the ecosystem of products that you do have profit by Paymentus, instant payment network, bill wallet, intelligent payments platform. Why or maybe you can talk about some of these features and how the system kind of comes together, why do you see this combination winning in the market place right now?

Yes. I think the main thing that billing companies are looking for is the platform, some of these decisions are multiyear decisions, right? Our typical contracts are multiyear contracts. And the reason for that is it's not always driven from us, even though we prefer long-term contracts, of course. But customers also want surety of service. If you think about it from a client point of view, they have just moved away from a legacy system to payment. Last thing they want to do is a year later, they have to do the same thing all over again. They're not interested in that. So they are looking for long-term partners as well. Then they are looking for a long-term partner, one of the key things they are looking for is how do I continue to get more benefit from the platform I've chosen? And how do I define that is -- can I evolve -- can my requirements continue to evolve as the -- can the platform evolve with my business requirements? And as my business rules change, can the platform change with it? As the technology evolves, can the platform change with it? As AI takes the newer technology revolution right now, can Paymentus continue to provide with that capability? Once they see all of those, they end up choosing Paymentus because instant payment network is proprietary to Paymentus and our platform, which we actually -- we were very fortunate to take the approach. And I don't want to come across that we were smarter than the next guy. We just had the benefit of doing for the second time. I built a company in the old style before, which was acquired by FIS and so on. And so from my point of view, I have the luxury of quickly starting again, and in some ways, learning from my mistakes. And one of the key mistakes was you cannot build bespoke solutions in the bespoke software and hope that 10 years later you'll be able to scale the business. You have to build a platform, which is one code base, cloud source the functionality from your clients in such a way that each of them can see themselves in your platform and teach you how to be that platform. But in some ways, they have bespoke experience, but not your platform to the functionality of the platform, but not the platform version. You have one version, one code base and that is serving all verticals, all industries, all sizes of customers, all types of customers, all business rules and magic happens as a result of that. Operating leverage start to take place.

No, these are the ingredients, I think that go behind any best-of-breed product strategy approach. It sounds like prospects and potential wins out there are shifting from these platform providers that do a multitude of functions that is now shifting or focusing more on best-of-breed table for that. Is that an accurate read?

Absolutely. Absolutely.

Yes. That sounds interesting. I do want to talk a little bit about partnerships. How should we think about your multifaceted partnership like with PayPal? And how does that differ from some of your own relationships including some of your banking partners, e-commerce partners and other ...

Sure. So for us, I think one of the other things we have learned over the years is that having a go-to-market strategy, which is centered around a perfect combination of the balance between direct go-to-market as well as the partnership ecosystem. And both of those entities learning from each other, those go-to-market dimensions, learning from each other becomes a central part of our strategy going forward. Partnerships are becoming increasingly more important to us. So our partnership with a partner like JPMorgan Chase, where you have -- we are partnering with them on the treasury services. They are large scale treasury clients when they are looking to -- Yes. Yes. We will welcome Citibank anytime. Whenever Citibank wants to choose the best platform, we are here. We are in this office. I can get my team to send the contract right now and we can sign. So we -- the large skilled strategy clients can actually get deeper engagement with the bank and make more money actually along the way and our platform becomes catalyst. PayPal similar relationship whereas PayPal is looking into more complex large enterprise deals in their pipeline or their customer base, and they want to monetize it better, Paymentus comes in handy. Likewise, our software vendor partners. We have partners with a large scale ERP system. So think of us as a company that has -- sorry, a company that has realized that you want your direct story tellers to have the deep understanding of how easy it is to onboard any type of customer with any size and any vertical onto our platform with any workflows, combine that with a great partnership to where there's a warmer relationship possible. And the partners realize that if Paymentus can actually help unlock the opportunity with their existing customer base, it sort of, in some ways the management may happen. So we feel very fortunate that we have a great partnership ecosystem, including the Citibank, hopefully.

Sanjay, Paymentus has 2,200 clients in North America, and it seems like we're starting to see the shift maybe towards upmarket kind of solution. Just wondering if you could speak to that. Is that intentional? Or is that just a function of having cases forming? And maybe you could discuss some of the products that resonating with some of your market?

I would say it's mainly the function that our platform is more and more with all sorts of verticals, all sorts of customers, large, small and midsized. And I think the diversity is giving us an opportunity to enter into more verticals. For example, we talked about B2B in our most recent earnings call. And it's providing us more opportunities which we did not think of earlier. So I think the platform, the ability of the platform, the feature of the platform and the convenience to the end customers at the same time as the customers, our billers -- they both are working in a right manner to give us the benefits of scale as well and eventually, it's all translating financially. Definitely, you can see the numbers. It's highly cash-generating business with a very high profitability. But incrementally, EBITDA margin this quarter was record 61.7%. So we feel good about the way the entire processes are working to get us to different kinds of customers. All that and the value process ...

Okay. We have 2, 3 minutes left. Dushyant, why don't we cap it off with some of your midterm, longer-term kind of priorities, where are you investing, where you're spending your time? And maybe to take a little bit of a picture for investors where do you think Paymentus is in 10 years.

Yes, absolutely. So I think we're going to be a sizable business in 5, 10 years out and just as an attractive band as we are now just because the mission for the company from investment point of view is to build a perpetual business. And we believe that we are in the process of achieving that with all the different components in play. In terms of from an investment thesis perspective, you want a management team who have done it before, knows how to scale the business, but also how to profitably scale the business, knows how the competitive waters are, have muscle memory and all of that. We are very fortunate to have assembled one of the best themes ever assembled in, I would say any -- our management team over any other payment companies, let alone the bill payment. Some of the best and the brightest have joined us. And then if you look at from that, you look at our customer base, we have customers in almost all verticals you can think of. So for a given household, if there are 12 to 15 bills we might be already touching almost all of them or a vast majority of them. And then you layer in, there are 130 million or so households in the U.S. and tens of millions of them are already using our platform right now that has 5 million or 6 million of SMBs. If you think about a small utility, even a small utility, which is serving a locality, both consumers and businesses pay their bills to the same utility. So we are very fortunate from that perspective of our strategy is working out to create a long-term moat for the business while delivering value today to our shareholders. So I thank our shareholders or investors to participate in our journey as well.

Well, thank you both, Sanjay, Dushyant. Very compelling story here.

Thank you.

And we must have you back to track your progress on a lot of these initiatives. But thank you both for coming, and great to have you. I appreciate it.

Thank you. Take care. Thank you. Appreciate it.