Q3 2021 BTRS Holdings Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen.
Thank you for standing by welcome to build Trust third quarter 2021 earnings conference call. As a reminder, this conference call is being recorded I would now like to turn this call over to John T. Williams head of Investor Relations. Thank you Sir you may begin.
Thank you operator before we begin I'll remind you that today's call may contain forward looking statements. These forward looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC and available on the Investor Relations section of our website actual results may differ materially from any forward looking statements. We make today. These forward looking statements speak.
Only as of today and the company does not assume any obligation or intend to update them, except as required by law. In addition, todays call may include non-GAAP measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures reconciliation to the nearest GAAP measure can be found in today's earnings release, which is available on our website hosting.
Today's call or Flint Lane build trust founder and Chief Executive Officer, and Mark shifting build trust Chief Financial Officer, I'll now turn the call over to Flint to begin.
Thanks, John and thank you everybody for joining the call today, the third quarter was another great quarter for <unk>, both financially as well as strategically I'd like to share a few headlines first and then discuss some of the trends that we're seeing I'll then address some of the more frequent questions. We get and then hand, it off to mark for more detail on our performance and updated guidance for the year.
<unk>.
We once again saw great results in our core software and payments revenue line, which exceeded our expectations and grew 22% year over year. You may recall that we had some one time deferred revenue accelerated into the first quarter. If that revenue had been recognized throughout the year the software and payments segment revenue growth would have been 25%.
Adjusted gross margin percentage also exceeded our expectations and came in at 72, 7% compared to 75% in the third quarter of 2020.
We expect this to continue to trend up as we drive customers from print to digital and continued to grow our software and payments revenue.
Total payment volume or T. P V, which is the dollar value of customer payment transactions that we process on our platform increased 41% year over year to 21.0 billion versus.
Versus $14 $9 billion in the year ago quarter.
<unk> V through the business payments network or VPN TBB increased to 102% year over year in Q3, the credit card component of VPN TPB grew $1 9 billion in Q3 and is up 72% year over year and year to date through September exceeds <unk> 5 billion.
Additionally, on the VPN front, our partnership with visa continues to pay dividends as we signed another top five bank issuer to process payments through VPN, giving us four of the top five U S Bank issuers as BPM partners.
We also entered into a pilot agreement with a major bank to offer the VPN supplier experience, what we call the VPN digital lockbox to their treasury clients.
We've received many questions related to payment revenue and what many referred to as take rate or yield for the first time, we have decided to breakout the revenue we get from processing credit card payments, which we call direct card revenue or D C or.
<unk> is the fastest growing component of our software and payments revenue viewing this in concert with our card related TPB reveals favorable underlying trends as our payments mix shifts towards card and our legacy gateway business migrates to payback Q.
Q3, direct card revenue was $4 $2 million, representing 77% year over year growth and a quarterly yield of five seven basis points. The yield on <unk> has been growing year over year as we move more and more of our card volume onto our payback and expect that to grow into the teens over the long term. In addition, our average card.
<unk> size was approximately $2500, which drives great per unit transaction fees that have also been increasing over time. These.
These card payment metrics, including historical are available in our earnings supplement.
We were also very excited to announce last month, our most recent acquisition I controller based in Belgium. This is our first acquisition as a public company and ninth in company history I controller of several hundred customers throughout Europe using their collection solutions. This deal will help accelerate our global expansion and as part of the strategy we have shared in the past.
Round M&A.
I would now like to highlight three keys to our investment story. The first is the favorable secular trends the world is moving more and more to electronic billing and payments and suppliers and buyers need help with that transition companies are seeing an opportunity to generate significant cost savings and improved cash collections by digitizing accounts receivable workflows.
Bill just that has built and scaled a superior robust platform that allows them to do just that and more.
The rapid uptake of digital accounts payable software solutions has created even more complexity for suppliers or customers requiring manual activity for invoice presentment remittance capture and electronic payment processing governments have required <unk> sellers to interact with electronic tax validation systems in order to present invoices the global <unk>.
<unk> working from home and reduced U S. Post office service have further accelerated this transition to digital solutions and we see the direct impact impacts of that in our customer portfolio and accompanying invoice dollar volumes on our platform.
The second key to our investment story is the enormous underpenetrated addressable market, we've talked about the top down view of our addressable market before $280 billion global invoices for software of 120 trillion in global commercial payments <unk> E. Commerce drives approximately two thirds of global payments. These markets will continue to get bigger and we.
Back to grow faster than the overall industry and take a disproportionate share of the market drilling.
Drilling down a bit we estimate that the north American addressable market for digital accounts receivable transformation is $11 billion.
With the target universe of 50000 businesses with annual revenue greater than $50 million in potential annual revenue to us.
Approximately $250000 per customer.
Roughly 50% of BTB payments are still made using paper checks, which are expensive slow and risky built what is driving that digital transformation for our customers Our bank partners and the entire <unk> ecosystem with VPN and remember we have several ways, we grow adding new customers cross selling additional solutions into existing customers increasing does.
<unk> conversion and by more effectively monetizing payments put simply this is a huge tam and a great long term opportunity.
Lastly, we are a platform our SaaS solutions are mission critical and integrate across a broad array of ecosystem players, including financial institutions, Erp's and AP software platforms, we help our customers accelerate cash flow and generate sales more quickly and efficiently we have customers of varying sizes across a variety of industries, but the common thread.
Is that they're all high volume builders with highly diverse buyer sets, meaning their buyers require them to invoice and collect payment in many different ways our.
Our customers' needs are complex and our scalable offering streamline their entire process, whether via our core SaaS offerings are growing payment suite or through VPN, our two sided network.
I would now like to address some of the questions we get frequently from investors.
Question. One why are you focused on <unk> and how does it differ from AP.
Our accounts receivable is the lifeblood of corporations simply put if companies don't have cash they can't pay their bills and can't operate we hear a lot. These days about the accounts payable side or AP.
As more complex and we believe ripe for innovation the traditional processes laden with inefficiencies there are multiple steps that need to be taken before a company can get paid for credit decisioning to order placement and processing invoicing and cash application.
These steps are time consuming paper intensive people intensive and highly inefficient taken together they represent a real pain point for our customers and an opportunity for bill for us to drive efficiencies accelerate payments and help them manage the entire order to cash process on.
On the AP side automation has been a mixed blessing.
Departments have happily pushed spend onto virtual credit cards to capture generous high margin interchange rebates and many AAP providers have eagerly help with that transition payable spend is being monetized turning turned into many profit centers that have been great for AP software vendors banks and the companies themselves, but this is creating significant.
Patients in the accounts receivable department, which is now forced to deal with the inefficient delivery of credit cards and payments often through E mail plus lots of manual transactions and Verifications that are simply too much to handle some of our customers get thousands of these emailed payments per month, which is quite a mess to.
To solve this problem, we developed our business payments network or VPN to allow buyers to access a directory of suppliers looking to get paid move money, where it's supposed to go and properly and automatically apply that payment against open invoice.
Now Theres a nice connection here between the question about AAR versus AP and our second common Investor question is can you explain VPN and why it's special.
At a very basic level VPN is to business to business transactions with venmo is person to person transactions in both cases, there was a two sided network that includes a directory of parties that can be paid our money movement tool and remittance information.
<unk> is an open network that Leverages, our platform and connects the financial services ecosystem, including AP providers payment card issuers, erp's and banks, bringing together suppliers and buyers at its core we partnered with visa banks and software vendors, because we understand that the sheer size and importance of this problem requires a car.
Prehensile, an interoperable solution.
Question, three simply explain your business model and how you get paid over.
Over 75% of our revenue generated from software and payments and the remainder is from print and services. Most of our software revenue is generated from subscriptions for our AI solutions, but we continue to increase the amount of payments related subscription revenue from processing ACTH and cards. This revenue is highly predictable the majority of our non subscription card Weil.
Volume is driven through credit card gateways, however, the fastest growing and highest yielding direct card revenue is generated as basis points on the volume processed through our payback, providing print surface services, coupled with a digital solution. How we initiate some of our customer relationships and we have a team dedicated to helping our customers to continue.
On the path to invoicing and other E solutions, which all include a payments opportunity. We also provide services both for implementations and post implementation projects. We are maniacally focused on pleasing our customers, which continues to help us maximize their lifetime value.
Our success in landing expanding customer relationships.
And Dr and software and payments approaching 120% for the full year reflects the success, we're having with our platform.
Question for how do you monetize payments, we process customer payments that come in through VPN and through branded customer portals, which our websites where theyre small customers can go to review and pay bills, we generate subscription revenue from processing ECH and certain card payments and we generate interchange and gateway fees and connecting in connection with process.
In credit cards, and virtual card payments in general relatively larger dollar payments are transmitted through VPN and smaller dollar payments through customer portals, given that both VPN and our payback were introduced in the last five years most of the card volume. We process is still through customer portals, using our gateway the fastest growing portion of our card payments portfolio.
<unk> and the materially higher take rate on volumes comes through our payback, which we use to monetize substantially all of our card payments processed through VPN, we generally get 10 to 40 basis points on these card volumes with lower rates on outsized volume. Finally, we also received single digit basis points on volume from a P providers and banks provided for.
Providing them access to the suppliers on VPN.
We've been public now for about 10 months as part of going public we committed to investing for growth driving more payments expanding our partnership channel and focusing on M&A. We have kept our promises and our strong performance reflects that I'll now turn the call over to Mark to review, our third quarter results in more detail and provide our up.
Dated financial outlook.
Thanks Flint.
Very pleased with our third quarter results Q3 software and payments segment revenue grew 21, 5% year over year from $21 4 million.
To $26 million.
Or one and a half a million dollars more than what is implied by our internal forecast. This outperformance was driven by greater than expected growth in car T PV and direct card revenue.
As well as revenue from increased customer utilization of our software moving more of those customers to a higher subscription tiers in the quarter that we had expected.
Services revenue declined 12% year over year to $2 4 million and print revenue also declined as expected to $4 $4 million in the aggregate Q3 net revenue was $32 7 million an increase of 13, 6% year over year.
Adjusted gross profit was $23 8 million or.
We're 72, 7% of net revenue compared to $20 3 million or 75% of net revenue in the third quarter of 2020.
Year over year margin improvement was driven primarily by the higher mix of software and payments revenue relative to our expectations as well as lower than expected direct cost.
Turning now to operating expenses they were generally in line with expectations, excluding stock based comp in each case research and development expenses were $12 2 million compared to $8 9 million in the year ago period.
We continue to increase our year over year spend in sales and marketing as we said, we would which expenses were $9 3 million.
Compared to $5 6 million in the year ago period, and G&A expenses were $6 6 million compared to $4 6 million in the year ago period.
Adjusted EBITDA came in at a lower loss than expected or a loss of $4 million compared to positive $1 2 million in the prior year period we.
We acquired I controller shortly after the close of Q3 acquisition costs in Q3 were $300000 and are excluded from our calculation of adjusted EBITDA.
We ended the quarter with 288, and a half million dollars in cash and equivalents and short term marketable securities on our balance sheet and zero debt.
As we have disclosed we used approximately $57 million of our cash after the end of the quarter for the acquisition of <unk> controller.
Now I will turn to our updated full year outlook, we are raising our net revenue guidance given the strong Q3 results and positive momentum into October for the fiscal year ending December 31, 2021, our total revenue guidance remains $163 million to $167 million.
Given the reduction in our estimate of Reimbursable costs from $37 million.
To a range of $34 million to $36 million, but we are increasing and narrowing our net revenue guidance, which excludes reimbursable items.
Range of $126 million to $130 million to a range of $129 million to $131 million, which at the midpoint of $130 million represents 20% year over year net revenue growth.
<unk> and this guide is less than $1 million attributable to our recent acquisition of a controller.
This increase in projected net revenue was driven by greater than expected growth in our software and payments segment, which we now expect to grow 26% organically year over year, rather than at 23% as previously projected.
Given the continued mix shift to higher margin software and payments segment revenue, we are raising our adjusted gross margin range from 70% to 71% to a range of 71, 5% to 72, 5% or 72% at the midpoint year over year increase of 170.
Basis points.
Adjusted gross profit guidance also moves higher from $88 million to $92 million.
To a range of $93 million to $95 million or <unk> $94 million at the midpoint year over year increase of 23%.
Our prior guidance of full year 2021, adjusted EBITDA pointed towards the higher end of our negative $14 million to negative $16 million range, we intend to again reinvest our quarterly over performance into the business and expect our full year adjusted EBITDA to be at the higher end, if not slightly above the high end of that.
Prior range.
I'd like to turn now to our medium to longer term outlook, our focus on software and payments continues to pay off as shown by our mix shift drove 64% of net revenue in 2017 to approximately 78% year to date 2021 as customers continue to shift from print to digital.
<unk> and we continue to monetize payments and VPN.
As we look out over the next few years, we are increasingly confident in the sustainability of year over year software and payments growth in the mid Twenty's adjusted of course for any one time items, which growth in turn should support net revenue growth over the same period in excess of 20% year over year with that in mind, we re.
Reiterate our long term outlook for other key non-GAAP metrics adjusted gross margins of 80% plus with sales and marketing at 25% R&D, 20% and G&A, 10% of net revenue all of which exclude stock based compensation expense with a long term adjusted EBITDA margin target.
Of 25% plus.
Note, we have been showing electronic invoices presented or <unk> as a proxy for the growth of our software business.
It is the only loosely correlated to software and payments growth. So we've decided to eliminate that metrics. We therefore will no longer show Ian invoices presented in our quarterly earnings supplement, but we will continue to disclose this metric and our quarterly reports on Form 10-Q and annual report on Form 10-K filed.
With the SEC in respect of fiscal year 2021.
We believe the company is well positioned for the continuation of sustainable high growth and geographic expansion, we are driving acceleration in our payment volumes continued momentum in our subscription software business sales and marketing success via new logo acquisitions, our land and expand strategy and our focus on long term revenue access.
The ratio through partnerships the economy remains on good footing and we expect to exit the year on a strong growth trajectory in our core software and payments segment, we remain.
Incredibly excited about the opportunity in front of us that build trust and are excited to have your longest partners on this journey. Thanks again for joining.
Turning the call and we're happy to answer your questions.
Operator, please open the lines.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star to move your question from the queue.
Has it been using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys, one moment, while we pull for questions.
Our first question comes from the line of Andrew Schmidt with Citi. You May proceed with your question.
Hey, guys. Thanks for taking my questions and great quarter here, a lot of good stuff and begin to.
I appreciate the incremental disclosure I think it would be helpful.
Just a quick clarification on my end.
Correct card revenue.
You might have addressed this point sorry, if I missed this.
Card revenue.
VPN spreads that you earned for allowing E&P partners access to the network or is this just purely <unk> and gateway revenue.
It is more of a ladder. So no. We don't include the AP charges in the direct card revenue. We only include those things that we can correlate directly to the payment including gateway.
Pay for Mac and there are some foreign gateway fees and things like that.
Perfect.
<unk> ramping would be incremental to what we see here. Okay. That's good to know.
<unk> card volume, but that's good to understand I'm.
I'm, sorry, just to be clear just to be clear. The VPN card revenue is part of that as well as the rest of the card revenue.
So the so what providers are paying like.
Network spread essentially Thats included in the correct card revenue I.
I guess, there's two components.
There's two components of revenue on VPN, what we charge the AP participants and what we get in terms of acquiring.
It's just the acquiring revenue that's included here perfect. Okay, Yes that makes a lot of sense I appreciate that clarification.
Mark you mentioned <unk>.
<unk> growth rate over the intermediate term.
In the 20%.
The next one is kind of software and payments revenue growth through intermediate term, 20% to revenue growth, but if I look at that.
Senior debt it has.
Normalized software and payments growth it looks like it's already running at 25% you are there we havent seen kind of be the effect of all the initiatives that you've put in place. So maybe some context in terms of that intermediate guide in terms of what youre assuming for productivity from everything you are putting in motion today.
Yeah.
Yeah, Great question, Andrew and again.
We continue to see the opportunity to grow.
25 in the mid twenties on top of growth that was previously in the mid twenties, what we're looking at right now is.
Feeling very good about seeing the continued momentum of the organic growth in our existing business and then on top of that we're feeling that we're seeing.
The effects of our increased spend on sales and marketing. So we're looking for continued growth coming from new sales both to existing logos as well as new logos that then start the process of our land and expand motion.
We are very excited about our controller.
We see that as replacing in part some of the grow over revenue will have from the loss of a customer this year going into next year.
Then the opportunity for revenue synergies on top of that both in the U S and in Europe.
And we'll probably see some contribution from an increase in prices. So when you put that altogether.
We see that opportunity for that mid.
Mid twenty's growth for the <unk>.
Medium term.
Got it thank you for that.
Seek one more in what's the right way to think about just the ceiling for.
Card yield.
What should we expect to continue to move that moving up at the pace, it's been moving up better over the past couple of years or is there opportunity to accelerate that.
The growth in yield thanks, guys.
I think we would continue I think we can expect to continue to see that increase and what I shared in my commentary as we expect it to hit the teams and the long term.
Perfect. Thanks, Glen Thanks, Mark Congrats on the quarter I appreciate it.
Thank you Andrew.
Our next question comes from the line of Tien Tsin Huang with Jpmorgan. You May proceed with your question.
Hey, guys. This is Andrew on for Tianjin, Congrats on the quarter.
Thanks.
I just had just had two questions. The first one on gross margin.
It was really nice gross margin expansion, both year over year and sequentially and beating our forecast and I know you talked about a little bit but can you drill in on some of the drivers was there any benefit from organic investments you guys have been making over the past couple of years and I just wanted to make sure I caught it right. You said that you expect this level to continue so that suggests <unk>.
Lee recurring benefit, but just wanted to clarify.
Sure.
Look there were a couple of things that we you look at an adjusted gross margin.
On the one hand, our software and payments revenue is already generating.
Adjusted gross margins in the <unk> and so on a consolidated basis that will be diluted somewhat by the margins we have on print and the margins associated with services in.
In the quarter.
We saw more customers.
Going through existing tiers into higher tiers, and at a faster or greater pace than we had expected but at the same time some of our direct cost associated with generating revenue.
Less than we anticipated so we saw that that benefit in the quarter. As we look forward, we expect to see a continuation of our software and payments growth relative to other parts of the business and as we continue to see that mix shift that should continually should continue to pull our adjusted gross margins.
Upward.
Great. That's helpful and I said, one more quick one and VPN.
Been several months now since you guys announced VPN for pointed out I was just curious if there are any milestones or highlights that you are able to share with us today.
We added the direct card revenue and we've gotten requests for lots of other types of disclosures. So we don't have any specific disclosure around BPM invoicing, which is the distribution of invoices into third party accounts payable portals and we've been very happy with the market acceptance so far in <unk>.
<unk> seen lots of adoption, but we're not ready to share any specifics around that yet.
Okay No problem. Thank you guys.
Our next question comes from the line of.
George Mahalo with Cowen you May proceed with your question.
Hey, Good evening guys. Let me add my my congrats on a very solid quarter and as always appreciate it.
Additional.
Disclosure of very very helpful.
I guess, maybe for my first question is if we can kind of dovetail to back to the first question that was asked just around the monetization of <unk>.
The.
The credit card T T V.
It looks like basically if I look on an annual basis.
Been able to improve that yield by a little under call. It a basis point on an annualized basis is that a good way to be thinking about it going forward or should that accelerate a little bit as theres, a bigger contribution coming from from the VPN and payback monetization.
Mark you want to take that.
Sure.
I think that that isn't a bad way to think about it and yes. There is the upside of greater acceleration as we grow volume I mean, we're growing volumes at a very.
Healthy pace.
Through the payback.
As we do so George it then.
Due to the impact of the lower revenue generated from the historic Gateway piece that we were getting so.
I think it's that's not a bad way to think about that as a floor and to consider the possibility of upside to it.
Okay. That's super helpful. Mark and just one more if I can kind of sneak in nice to see the gross margin ticking up and you are taking up the guide.
Just curious I guess on the math that I've done it looks like for fourth quarter, you were talking about something.
Our margin that is maybe at the upper end kind of flattish to maybe down a little bit depending on where revenue.
False just just curious if there's anything embedded in there that we need to think about is it an impact from from acquisition or something else that.
That might be.
Impacting that.
Yes, I mean, theres nothing major going on and no no problems in the business.
Things that.
We want to make sure we're being cautious about is the potential.
Direct costs associated with <unk>.