Q3 2021 Paya Holdings Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the payer Holdings, Inc. Third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
Require operator assistance. Please press star and then zero on your telephone.
A question and answer session will follow the formal presentation.
As a reminder, this conference call is being recorded.
I'd now like to turn the conference over to Mr. Matt Humphreys head of Investor Relations you may begin.
Okay.
Good morning, and welcome to the Pie of third quarter of 2021 earnings Conference call.
Before we begin let me remind everyone today that today's discussion will contain forward looking statements based on our current assumptions expectations and beliefs, including financial guidance and growth of <unk> business, our objectives and business strategies as well as other forward looking statements.
Please refer to the disclosure at the end of the company's earnings press release and form 8-K filed with the SEC today for information about forward looking statements that will be made or discussed on this call.
Statements made today reflect our current expectations only.
And we undertake no obligation to update any statements to reflect the events that will occur after this call.
You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion and the risk factors section of the company's Form 10-K filed with the SEC on March eight 2021.
And in subsequent periodic reports that the company files with the SEC.
Also during this call we will discuss certain non-GAAP measures of our performance GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release in the 8-K filed with the SEC.
This call is also available via webcast you can find all the information I've just described on the Investor Relations section of <unk> website, including a supplemental third quarter 2021 presentation.
Now joining us on the call today are <unk>.
Jack and CFO Glenn Renzulli following their prepared remarks, we will open the call to your questions.
With that let me turn the call over to Jeff.
Thank you, Matt and good morning, everyone.
Thank you for joining us today as we review <unk> third quarter 2021 financial results and discuss highlights from the quarter.
We delivered solid year over year growth across our Kpis payment volume grew 28% to a record $11 1 billion driven by card volume growth of 14% and ACTH volume growth of 54%.
Total revenue grew 22% to $63 million led by growth in card and ACTH as well as a full quarter's contribution from Paragon.
Gross profit grew 26% to $33 million and adjusted EBITDA grew 21% to $16 3 million.
And compared to the same period in 2019 total revenue growth was 25% and adjusted EBITDA growth 34%.
These results continue to demonstrate the inherent growth and leverage that we see in the business and in the markets and verticals that we serve Glenn will review the key drivers of performance in the quarter and our full year expectation.
I'm now going to review what underpins these financial results and gives us confidence over the medium term.
First is our ability to attract and find new partners and clients. We recently signed some great New software partners and Isps within our growing PDP vertical.
Through our recently announced partnership with paradigm, a leading software company focused on the construction and building industry. We are providing the commerce engine within their core software offering enabling payment acceptance, while enhancing the operational and administrative processes within front and back offices of their clients.
We also recently partnered with encompass technologies, a leading cloud based distribution ERP provider focused on the beverage industry key.
Key drivers of our win with encompass where not only pie is integrated payments experience and customer support but also the payment agnostic approach we take.
By offering a wide variety of payment types, including ACTH, our solutions are able to support and enable growth across a diverse set of Isps and merchants in industries, where payment flexibility is a requirement not an option.
We are currently standing up the partnership and look forward to launching in the coming months.
I thought it would be useful to reference another partnership while early in its progression that helps to highlight our focus on expanding our addressable market, while embedding pio within large scaled operating platforms on the front end of customer business processes.
We recently signed a new partnership with a leading provider of digital invoicing solutions within the <unk> vertical.
This partnership allows pilot to bring our full suite of integrated payment capabilities to our peers business management software. The combined offering comes pre integrated into Salesforce via our <unk> application and can enable Isps, who leverage salesforce as their front end platform to quickly enable payment functionality, both card and <unk>.
While expanding payment acceptance through such features as E invoicing and text to pay.
Oppens within the broader salesforce ecosystem, allowing for reconciliation reporting that centralized while giving a holistic and detailed view of all business and payment data for reporting and analytic uses.
Also worth highlighting are the great results of new customer wins, we are seeing within our government vertical.
Specifically through a large existing government software partner, we signed multiple new contracts in the quarter with municipalities located primarily in the southern United States, including Florida, Mississippi, Tennessee and Texas.
The momentum we're seeing in our government vertical remains strong and we will look to continue to invest resources into growing this channel further through both organic and inorganic means.
Wins, such as these set the stage for <unk> future growth, especially within our integrated solutions.
That software led integrated commerce is the natural progression in the markets and verticals that we serve.
And while all of these wins are great to see it is continuous innovation across our products and solutions that enhances our competitive positioning expands our addressable market and enables payer to win.
Our focus on developing building and delivering value added enhancements and offerings to our flagship Hyatt connect solution remains key to our future growth, notably we delivered robust E invoicing enhancements to meet the growing needs of our deeply integrated software partners, including our key integrations with axiomatic in Sage.
The data, we provide our partners and customers, which is a core part of integrated payments is vital to improving customers back office efficiency.
As such we strengthened the user experience with the release of new customer facing portals and reporting interfaces, providing modern efficient and useful functionality in order to support our partners and customers as they grow.
Our targeted middle market partners demand improved solutions, which enabled the migration of their existing customers onto highest platform quickly and seamlessly.
This customer import services enable large software partners to migrate to pious platform with little to no disruption of service, ensuring continuation of payment acceptance, including the secure and encrypted transfer of all card and ACTH data.
Unlike migrations are conversions, which can render payment functionality unavailable for a period of days or weeks, probably it provides and supports a seamless implementation experience.
This experience is highly valued in today's market and critical to be able to launch partners quickly or transition new partners from legacy providers without disrupting their day to day operations.
As you May recall, we recently announced some key additions to <unk> leadership team Michelle Shepherd joined US recently as our Chief commercial officer in this role Michelle is focused on the development and execution of forward thinking vertically tailored customer engagement strategies across sales marketing and customer success.
Shell has a track record of success at high growth vertical software companies in surety and vertical for as well as at Gartner and we're excited to have Red pie out. Additionally, we recently welcomed biology, Deborah SETI as our Chief Technology Officer.
Ology is focused on accelerating innovation at pie out through product and platform development, enabling us to extend our leadership with an integrated payments apologies deep expertise and track record includes technology leadership in both large scale integrated payments and fast growing digital commerce businesses Needless.
To say, we're excited to have both Michelle anthology here at tier leading our efforts to expand distribution of our innovative commerce solutions.
On capital allocation, our priorities have not changed we've remained focused on organic growth through the continued and ongoing investment into our people and solutions in order to extend our market leadership, while expanding our addressable market strategic M&A continues to be a top priority for us as well and complement to the <unk>.
Ganic growth profile of the business are.
Our pipeline of acquisition opportunities remains robust and our teams continue to proactively engage with opportunities across the markets and verticals we serve.
In summary, these recent updates demonstrate pie as continued momentum in high growth end markets, coupled with our continued investments in talent and technology to further accelerate aircrafts.
With that I'll turn it over to Glenn to walk you through the financials Glenn.
Thanks, Jeff and good morning, everyone.
We continue to see good momentum in key parts of the business specifically within the integrated solutions and a C H.
Total payment volume in the third quarter was $11 1 billion, an increase of 28% year over year.
Card volume grew 14% and ACTH volume grew 54% with each transactions growing 37%.
Much of the momentum we're seeing in the business currently is through our <unk> and government verticals across both card and a C. H.
Total revenue in the quarter was $63 1 billion, an increase of 22% versus last year.
Integrated solutions revenue was $39 7 million up 31% led by the continued strength in our B to B and government verticals combined with the incremental contribution from Paragon.
Payment services revenue was $23 4 million up 9% year over year with <unk> revenue growing 24%.
In the quarter, we saw two primary headwinds that detracted from our otherwise strong revenue growth.
First in our health care vertical, which as you know was primarily indexed to elective medical procedures, we saw slightly lower than expected payment volume, we attribute the slowdown to the rise of the Delta COVID-19 variant in the latter half of Q3 as consumers delayed or deferred elective procedures.
Second one of our key partners slightly delay the implementation and launch of certain solutions in the quarter. This is primarily a timing item and we expect to see the implementation move forward in the coming periods.
For the quarter gross profit was $32 6 million up 26% year over year with gross margin of 51, 7% expanding 170 basis points from the prior year integrated solutions gross profit of $20 1 million was up 24% while payment services gross profit of $12 4 million was.
Up 28%.
Specific to the quarter, we saw a certain faster growing integrated solutions partner scale much faster than forecast, which is a great leading indicator for the health of our partners and long term trajectory of our business. However, given the higher revenue share component for this high growth partner, particularly as they move into larger revenue share tiers based on volume it was.
Modestly dilutive to gross margin compared to prior quarter in.
In addition, a full quarter impact of Paragon had a slight impact to our consolidated gross margin.
Our <unk> business continued to see strong growth and solid financial performance, which was the primary driver of our large gross margin expansion within our payment services segment.
It continues to be a key differentiator and strength per buyer.
Adjusted operating expenses came in at $16 2 million as we saw a full quarter of operating expenses related to our Paragon acquisition layer in.
Adjusted EBITDA in the quarter was $16 3 million up 21% versus the prior year.
Adjusted EBITA margin declined 30 basis points year over year to 25, 8% driven by some accelerated tech investments as well as year over year increase in public company costs, which were not applicable while we were a private company in the third quarter of 2020.
Finally, GAAP net loss for the quarter was $3 million versus net income of $1 6 million in the prior year driven largely by a change in tax method for how our in your tax liabilities accrued.
Adjusted net income was $5 5 million in the quarter.
Regarding our balance sheet at the end of the quarter, we had $133 million in cash and $250 million of gross debt with a net leverage ratio of slightly below one nine times.
At the end of the third quarter, our total liquidity is approximately $180 million and positions us well as we focus on opportunities to accelerate our growth both through organic and inorganic means.
Net cash provided by operating activities in the quarter was approximately $8 million and finally, our share count at the end of the third quarter was 132 million diluted shares outstanding inclusive of approximately $5 7 million earn out shares that have not yet met issuance thresholds.
Additionally, this figure includes $4 6 million shares that were issued in the third quarter to retire our outstanding public and private warrants.
As a result of these actions, we no longer have any public or private warrants in our capital structure and our former public warrants had been delisted from trading.
Our supplemental earnings presentation provided this morning contains an updated illustrative walk through of our share count at the end of the quarter.
Turning to our updated guidance for the full year 2021, we are reaffirming our revenue guidance range of $244 million to $248 million.
We're also reaffirming our gross profit margin range of 52% to 53%.
As we move towards the end of the year, we are refining our full year 2021, adjusted EBITDA expectations to a range of $64 million to $66 million. Our updated guidance reflects our current expectations for the balance of the year.
As a final point, we continue to monitor COVID-19 developments and the potential impacts that may or may not have on the business for the remainder of the year.
That concludes my prepared remarks. This morning, I will turn the call back over to Jeff to close out the call Jeff.
Thank you Glenn our results for the quarter continued to reflect the growth we see in the key markets and verticals in which we operate through new wins continued penetration of existing customers strengthen our ACTH capabilities and strategic M&A opportunities. We see we are confident that the growth trajectory at payer remained strong.
In the near term actions, we are taking to accelerate innovation, while adding exceptional talent will enhance and extend our competitive positioning while expanding our addressable market.
With that operator, we're ready to take questions.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Bob Napoli with William Blair. Your line is open.
Alright. Thank you good morning, good morning, Jeff Glenn Matt.
So just.
As you look at your business, Jeff and.
Think about next 2022 and in longer term and what is how do you feel about the momentum in the business the ability to to achieve the targets that you the goals.
Set out.
Previously you so how's the momentum How's your confidence.
Are you seeing anything.
I mean, I'd called out Covid, obviously in the elective health care, but anything else concerning.
Yeah. Thanks for the question Bob Good morning.
What I would what I would say is our view hasnt changed.
Same strategy same expectations of ourselves in the business.
And doing everything we can to accelerate that momentum further, which really boils down to talent and technology. So.
Very focused on execution.
But the momentum in the business like what's the pipeline look like and is the competitive environment.
Changed so what's the pipeline the flow of new business, let's say versus a year ago.
So we.
We feel good about the pipeline.
And the competitive environment exists, but very importantly, and I think you appreciate this.
Our people operate in different segments of the market and as we said to all of you before we are very focused on core avenues like b to B municipal middle market business, which is not as competitively intensive everyone has competition of course, so we feel good about momentum and we feel good about our competitive hand.
Okay.
Thank you appreciate it.
Go back in queue.
Our next question comes from David <unk> with Evercore ISI. Your line is open.
Thank you very much and good morning could you talk about your outlook for margins both for the fourth quarter and 2022, you called out some additional public company expenses, a little bit of margin pressure given higher revenue pay out from a fast growing client.
But adjusted Opex grew 31% year over year nine P. P T faster than revenue. So how should we think about the outlook for gross and EBITDA margin for <unk> in 2022.
Hey, David This is Glen thanks for the question.
Yeah look I think we've.
You said it before but just another reminder rate X public company costs, we would have been up about high twenties, 27% to 8% and EBITDA for the quarter year over year. So that's part of the reason you're not seeing as much expansion this year, which obviously not impacting us as we get into the fourth quarter from a year over year perspective.
At least.
I'll take the margin question in two parts one gross margin, yes, we definitely had some impact this quarter from a large partner, which.
We've got a lot of success, where they continue to but they hit one of their growth incentive bonuses, which gave them an incentive payout for this quarter.
Which was a little higher than we expected.
That will even out a little bit.
As we get into the fourth quarter and as we look into next year and we also had some impact.
With the full quarter from Paragon this quarter as well so from a gross margin perspective for Q4, we do see it coming back up a little bit we're not going to call. The exact number obviously.
<unk> to forecast exactly but it will be above kind of where where we had it we believe in Q3 here.
We do have some also some pricing initiatives and items that hit in the fourth quarter that give us a little bit of added there and you can kind of center of our guidance as well for the full year from a gross margin perspective.
And then yes from an opex and kind of below gross margin.
Look we.
The public company costs kind of washout from a year over year perspective, as we get through this quarter and then yet obviously.
The environment from a cost perspective, when you think about hiring in some of the cost inflation that's out there.
Certainly seen impact probably not as much impact as some others that play in different spaces, but.
That comes into account, a little bit with us as well.
And then yeah, we're like Jeff said right. We're very focused on are our medium term objectives from a growth perspective, and there are a lot of that investment comes through technology and sales.
So.
We don't see any drastic increases rate above trend, but at the same time, we're going to put money to work in technology in the go to market side as much as we need to keep that topline growth going so we're working on our planning for 'twenty two at the moment. So we're not going to comment too much on that but.
From a fourth quarter perspective, we will see probably a slight tick up from an opex SG&A perspective book more or less than that.
Not too much different from where we've been trending last couple of quarters here.
Understood just to just to clarify.
So when you think about your medium term to long term revenue and EBITDA growth model you see changes in the growth model given the cost inflation.
You've called out in terms of hiring and technology costs or is the model.
When we think about 2022.
Yes, if we speak about.
Go ahead Joe.
Go ahead Glen.
I was just going to quickly say you know what I think we speak to the current year rate with our guidance.
And then from a medium term perspective, we can speak of it that way, but we're not going to cover 22, yet just because we're not done with our planning cycle.
And it doesn't really differ from the message I just gave as well.
Got it David.
I'll just I'll just add this.
At this point and.
Our medium term objectives are exactly the same as those that we set out for all of you. Originally last summer when we were coming out of some public company and then laid out again early in 'twenty one.
Very clear. Thank you just a quick final question can you quantify for us the impact on revenue from the delayed onboarding of the new client I mean, do you have visibility as to when that client will convert either in Q4 or early 2022.
Yeah. This is Glenn again, David happy to give a little color there, Jeff it's up to you do you want to.
Go ahead Glen.
I was going to say so we're having success with this partner already so this is not like a zero or buying.
Binary item right, where we're starting to get some traction with them. They have some different instances of.
Their install base from a software perspective different versions right. So we continue to work through the various versions of their installed base that they have out there right. So there is a.
One that we continue to work on with them.
Continue to have great.
Relationship and moving volume forward.
But.
Some of these projects take a little bit longer than you'd hope this.
This one specifically on the government side.
Which you know you have the partner component from an integration standpoint, but then you have also the merchant component as far as the municipality itself.
So yes to answer your question certainly have some impact this quarter.
But at the end of the day the relationships strong.
The path is still there we're going to not going to comment on specifics as far as the dollars, but but.
It could have some impact in the quarter and we do see it as a positive item as we look forward in the next few quarters.
As far as layering that in but Jeff I'm not sure. If you had other comments tied to that.
And David I would just add the following is signing large terrific new partners.
It takes a lot of work to get them to full strength and if it takes and I've said this before if it takes a few months longer to get full stride. That's okay. Because once you have them today and the underlying customers are with you for an incredibly long time.
Very clear thank you very much.
Thank you. Our next question comes from David <unk> with Raymond James Your line is open.
Hey, Good morning, guys. Just wondering if you would call out the revenue impacts from TPG and Paragon.
Third quarter.
Hey, Jamie this is Glenn.
What I'll say just broadly our revenue topline growth was about 12% organic.
So that will give you a sense of the impact of those two.
Okay, great that kind of leads into my next question. So obviously you called out some some impacts from delta, especially loves with health care costs.
Organic growth to decelerate, but I think the guide would assume that you do.
You see a pick up in organic growth and the <unk>.
Fourth quarter and I just wanted to confirm that.
So maybe any comments on seasonality of your business I think it's.
It's shaping up <unk> from the higher slightly on a dollar basis for revenue versus <unk> and just want to understand to make sure. That's correct and maybe seasonality. We should think about <unk> 14 in your business.
Yeah, No I'll take that one first and so from a Q4 perspective, we should see a slight tick up sequentially.
In the quarter. Some of that is just how we end the year, but also we do have some pricing initiatives that we do I think as you're as you're aware right twice a year of which one of those actions happens in the fourth quarter. So.
So we'll see a slight pickup in the fourth quarter.
But.
I think the message on the guidance as you know, we feel comfortable kind of the midpoint.
The revenue guidance for the year.
And saying from a gross margin perspective.
Okay.
Okay, and then just on the gross margins you've talked you've hit on the kind of decline in the integrated margins, but so on the <unk>.
At the same time, you saw a nice pick up.
And then the payment services margins or gross margin basis. So just is that sustainable going forward should we kind of expect.
Payment services to build at higher than it was before and integrated a little bit lower just didn't think that was the highest which is 3% is the highest its ever been.
In payment services, especially color there would be helpful.
Yes sure.
So yeah, no I mean, the payment services gross margin, we think it's sustaining you at around those levels.
So I don't know if it accelerates.
From here, but we feel good about the level that it is currently around.
<unk>.
And.
Yes from an integrated perspective, I think that will.
Again tough to call each quarter to quarter, but we feel good that we should see a tick up from kind of where it ended in Q3.
To Q4 from an integrated perspective.
Okay, and then just two quick last one bigger picture.
Jeff first are you <unk> any of your partners seeing any issues from a supply chain perspective, we've heard some.
Some of these things from some of your peers potentially going into next year. So just curious comment there and then maybe Jeff just talk.
A little bit about the acquisition pipeline from a.
Where are you focused on.
Valuations are starting to rationalize like what's the biggest.
I want to call it hang up but what's the biggest hurdle at this point to kind of being a little bit more active on the M&A front. Thanks Pat.
Great. Good morning, J D. Hi, this is Jeff.
So first on the supply chain I would say, we have observed anecdotes, but nothing that we would say.
Say defines a pattern.
So not much to add there in terms of the acquisition pipeline a couple of things one the pipeline is strong.
Deals in various stages from early cultivation to later conversations as always.
Our criteria and our objectives are exactly the same if they deepen us into existing verticals or sub verticals with differentiated distribution a proprietary technology, that's great adjacent verticals and anything that widens are brought into the value chain in terms of your comment.
About valuations.
Certainly there have been examples of that but I would not call that a broad based pattern either.
And if there's any impact on our thinking on the margin there are probably a few areas, where we might choose to build out certain proprietary technology features whereas maybe we would have acquired them before if the valuations in the cat in a particular category do not meet our criteria.
Alright appreciate all the color thanks, guys.
Thank you. Our next question comes from Timothy Chiodo with Credit Suisse. Your line is open.
Great. Thanks, a lot for taking the question mine is on retention. So when we just think about the growth algorithm and part of that is clearly kind of the same store sales or retention type of metric and you did say that in the slides that the volume retention is at about 95% actually I think is a little bit of a slight uptick from the last time, you disclosed that metric down.
Not a big one but it did go into right direction.
And was just curious what's the timeframe around that metric or if theres any just general context, you can talk around your volume retention and then a quick follow up on next year's seasonality, which we can touch on them.
Yeah, Good morning, Terry.
Uh huh.
So Tim as you kindly pointed out our retention numbers are terrific and while they might move a tiny bit up or down at any given time period.
We see that obviously is a key part of the growth algorithm. Once you have great partners and great end customers leveraging our integrated solutions, it's very sticky its very price sensitive.
And it is core to the business so.
In General we think these are great kpis and.
Intend to maintain them and perhaps find some ways on the margin to improve them further.
Okay excellent.
Okay. Oh go ahead please.
We're just going to comment on the 95%.
Yeah, the time periods typically it's about a year.
So we look at a 12 month.
12 month Rolling perspective.
Look I think the attrition for us is pretty stable right. It doesn't really move too much from a year over year perspective, which is part of the strength of our business right integrated.
We're running a little bit from a net volume perspective over the 95% at the moment.
But what we're trying to do is.
Normalized for same store right. So we're not trying to take any kind of a benefit from any kind of outsized same store sales growth and that's why the squiggly lines on the page.
Retention is running well from a net perspective, and obviously, that's the volume number with with pricing.
Initiatives, you get much above that number from a revenue retention perspective.
And then you had another question.
Yeah.
Fully respect that.
It is not the kind of giving 2022 guidance, but as we look at our models.
There were some moving parts this year last year and also with different ramping of clients would you be able to just give an overview again of what the expected seasonality would be from an absolute volume and revenue basis across Q1 to Q4 next year not the numbers, but just kind of directionally.
Yeah look.
What we've said in the past.
<unk> seen that number to Q1 is typically our lowest.
Quarter.
Constant dollars.
If you look in looking at it that way.
And then you know Q2 tends to bump up in Q3 tends to be.
About the same as Q2, sometimes slightly below just because of the summer period, and then we get a little bit of a slight ramp from Q3 to Q4 typically.
That's again constant dollars with.
Sequential growth assumed.
Okay excellent and then from there we kind of think about this.
The delayed implementation, a little bit and how that might impact Q1 et cetera.
That's really helpful. Thank you.
Okay.
Our next question comes from Peter Heckmann with D. A Davidson your line is open.
Good morning, Thanks for taking my call Glenn.
On.
Unusual tax item in the quarter.
You referenced that in the prepared remarks, if not.
What was that about and it doesn't appear that you.
We added it back in the pro forma net income.
Yeah no. Thanks for the question, yes, so from a tax perspective, there's two methodologies that you can calculate your tax provision on one is a kind of forecasted methodology.
Which we were using the first half of the year and then we moved to a year to date methodology in Q3, just because we thought it was a little more accurate than the forecasted method.
And that was the larger adjustment this quarter.
Get to that year to date method for 2021.
So when you think about it.
Right to look at that year to date amount versus the quarterly I think that's probably the more accurate way to look at the tax expense for the current year 2021, and then for Q4 tax.
Tax expense, we should be probably a little bit under a million dollars and tax expense and that will give you a sense for the.
The tax impact for the full year.
Okay. That's helpful and then just going back to Paragon.
Certainly it looked like the acquisitions contributed a little bit more.
On a revenue perspective.
When we when we think about paragon and their ramp and their integration do we still expect a bump up to maybe 25% or so adjusted EBITDA margins in <unk>.
Contribute more meaningfully to.
Overall EBITDA next year.
Yeah. So.
Good morning, it's Pete it's Jeff.
I'd say the answer is yes.
We are very pleased with the pace of the Paragon integration.
And in terms of existing customers growth of existing customers pipeline of new customers.
In terms of attribution, because paragon has become such such an integral part of our integrated solutions business.
It'll be harder to measure it in isolation, but we feel great about the acquisition, we feel great about it meeting our financial and strategic objectives.
Okay. Thank you.
Our next question comes from Andrew Crean tourists Securities. Your line is open.
Hi, Good morning, guys. Appreciate you taking the.
The question, you know kind of lots of moving parts here.
And your business.
Encouraging to hear about the momentum in B to B.
Jeff timing notwithstanding on a big customer, but I'm wondering if you could just speak to.
Specific vertical markets it sounds like maybe construction and manufacturing that are strong.
And I wonder what the implications are going forward for mix. So are we going to see this sort of continued elevated rate of ACTH growth recognizing that you signed a big customer at the end of last year and.
And I think we know what that means for yield but it suggests that maybe gross margin could trend sort of all else equal in the right direction I'm just trying to think about as b to b grows fast what that means overall for the kind of profitability profile of your business.
Good morning, Andrew It's Jeff Thanks for the question.
Couple of things first of all we manage to the attractive growth momentum of each of the category with you outlined so whether it's b to b and manufacturing distribution logistics supply chain and so on.
So.
We we don't spend a lot of time on mix understand you guys want to model it and understand sensitivity, but yes. It is how we maximize the growth of all of these key categories.
Typically the b to B categories that I, just mentioned are very attractive for what we do and the level of awareness and understanding of the power of integrated payments inside of business software.
We used to build.
Some of that obviously, thanks to Covid and distributed workforce ACTH more broadly we are very pleased with the momentum we see there and importantly, it is becoming far more common for it to operate along side.
Typically commercial card virtual card etcetera, as a companion to expand the penetration into larger ticket transactions. So both our key growth levers for this business.
And I think the big call out on a C. H is that a lot of it comes alongside card not instead of card.
To maximize the growth of the Tam.
Okay. So I guess over time, we might expect b to b to gravitate more toward card, but it sounds like today, it's still an <unk> centric remittance business is that is that is that a reasonable characterization.
No so Andrew I would say it differently.
Not about that and displacing one another there is great underlying growth in the category and it is very common for cards for the smaller transactions and hundreds of dollars ACTH for larger tickets think thousands of dollars. So they operate in tandem.
In penetrating and maximizing the growth of the category rather than toggling between them and importantly, a pilot we've made big investments both technically and commercially.
Single underwriting common boarding unified reporting so you should expect we believe.
For there to be a much higher prevalence of people who are accepting both payment methods alongside one another.
Alright.
Super helpful. Thank you and then as I think about <unk> connect in some of your investments.
Is that more of a do you think a new business driver in terms of how you differentiate.
For for your ISP partners in vertical markets.
It also ultimately be.
Yield enhancer.
Enhancer for you as you drive greater connect to some of that functionality I think you mentioned the invoicing in particular this quarter.
Yes, Andrew Great question. So first of all pilot connect absolutely a driver of winning new business.
It's modern flexible cloud based and then very importantly.
<unk> tailored so those very important words that I have said many times before so that you can tailor the experience to the specific use cases in different vertical segments. So it is core to the value prop in terms of being a yield enhancer, what I would say is.
I'm not talking about the firm wide yield as a whole but in terms of maximizing your growth maximizing your value prop enhanced reporting the capability to leverage data and analytics are all part of the value prop and obviously the stronger your value prop the more you're able to price for that.
So we think of that frankly as the foundation of the value prop.
Okay. Thank you.
Our next question comes from Joseph <unk> with Canaccord. Your line is open.
Hey, guys good morning.
A few more follow ups here most most of that was already been a lot of good questions here, but.
I know you mentioned a partner in the southeast and in.
And public services, where there's some good traction if you looked at other parts of the country is does that ISP working in those other sections of the country or would you probably would be looking for other partners.
In other parts of the country.
Relative to public service and then I'll have a couple of follow ups.
Good morning Joseph.
So the partner you are referring to does serve munis.
Municipalities nationwide. So obviously that is a great partner for <unk>.
We are obviously always talking to other partners.
Who may focus on different segments of the market broader different geographies et cetera, So, it's an and not an or.
Okay, and then Jeff I know you mentioned your ability to turn on payments.
Without.
For some of your partner jobs not.
To kind of bring in the outbound for any period of time or or eliminating payment functionality how competitive.
Competitive advantage do you think that is in the marketplace. It sounds like a pretty good capability.
Yes, it's a great question.
So first of all obviously, we're very proud of that and then importing call out is that is not just a technical capability, which in and of itself is is hard to accomplish.
But it's also the operational maturity of the business to support the client through that migration and we view that as a key differentiator at Pi and I think to be candid, sometimes often overlooked and so as has some of the existing integrated payments relationships X.
Floor more modern alternatives to legacy providers. This capability I believe will become even more important and more differentiated for companies like payout.
Alright, and then I know you called out one of your partners, whose rune and the sales force. If you look across your kind of.
Your partner network at this point.
How often do you see a partner thats integrated into another much much larger ISP.
No.
Pencil for you to get the kind of extra boost in distribution through the extra distribution layer. Thanks a lot.
Yeah no. Thanks, Great question.
Thank you described our strategy perfectly.
Getting more at bats, we're getting bigger at bats, as you know more integrations to offer your customers.
Is is better and there is also.
A flywheel effect here because as you add these integrations.
You have widened your scope of capabilities, you get more at bats, which leverage the investments you've already made and our tools to help you grow even faster.
Thanks, Jeff.
Thanks Joseph.
Our next question comes from Grondahl with Northland Securities. Your line is open.
Yeah, Hey, guys.
Just a quick question. It sounds like you have a new leader in sales any other adjustments or expansion of the sales force to call out.
Yeah, Great question. This is Jeff.
So we one of the things I am most proud of is our ability to attract some incredible talent and leaders to this company to help us accelerate our growth even further.
So broadly speaking I discussed Michel and biology on the call.
Can imagine your go to market and your technical innovation are the foundation of this business.
Beyond that we are always looking for great people in pockets to support our growth, but I wouldn't point to any one area and say that is the next big item we are.
Always looking for great talent to support the growth in all areas of the business.
Okay. Thank you.
Our next question comes from Jeff Stiegler with Cantor Fitzgerald. Your line is open.
Hi, good morning, Thanks for taking my question.
Firstly, how did average ticket size trend in <unk> and what are your expectations as we move into <unk>.
Yes, so average ticket sizes overall has trended up the last few years few quarters. So we've seen a positive trend there and we'll continue I think two parts there one is.
Or a few parts ACTH is one so the ACS group typically is at a higher ticket.
And then we've seen good just macro growth and same store growth as well.
Some of that is just the general economic environment, and then from an inflationary perspective.
And others.
Have their revenue model based off spread.
Benefit from that.
So yes, we've seen a good trend there.
Really last few years.
I don't think that's going to change as we look out.
Great. Thanks for the color there and then what are some of the driving factors that would make you feel more comfortable to hit kind of the high end of guidance right now.
That's a good quite good question.
You know what.
It's a it's one of those things where the vertical matters right, we talked about the healthcare item in Q3 right.
So, we'll see where that settles out in the quarter or too early to tell at the moment, but that obviously always could could provide some upside.
When we spoke about some of those delayed implementations.
Turning goes on really make a difference so.
When those go live it really helps so there could be some upside there.
And then yes, we will see what kind of what the macro environment does.
For the quarter right October no surprises to date, which is good.
But we'll see where we settle in for the rest of the lift in the next two months.
As we exit the year.
Great. Thank you very much.
Our next question comes from James Faucette with Morgan Stanley. Your line is open.
Thank you very much I wanted to go back to a question I think.
Like we you you've kind of addressed it but I missed your answer to be honest or what you said was you know how youre looking at the acquisition landscape you guys have always been really good at finding deals, but you know there's been a lot of obviously volatility both in terms of evaluation and lots of capital coming into.
The market generally so.
What are you what are you thinking about in terms of pipeline and an ability to convert et cetera.
Yeah, Good morning, James.
Very important question.
So our view of the landscape in bi landscape I mean, the kinds of companies that we are interested in bringing into Pi has not changed at all.
And we feel good about our pipeline, we continue to get better at kind of broadening that pipeline and remember some relationships and deals come very quickly others are ones you nurture over a period of time. So broadly speaking we feel very good and we are very focused on that as.
We should be.
To the comment on valuations I'll reiterate something I said earlier, which is very important is a.
A few examples of head scratchers, but nothing that I would declare a pattern. It's obviously undeniable that theres been a lot of capital drawn into the category.
I think we would all appreciate that's because these are great growth categories. So it's not a surprise that capital is being drawn there.
But broadly speaking we feel good about our ability to get deals done at valuations that are accretive to pie of financially and of course strategically and then finally on the margin there are probably a few categories, where if the valuations are unreasonable we will choose some incremental building.
Hum technology features.
Fill those needs, whereas we might have otherwise purchased those capabilities in one of the beauty of the strong financial position that pie is in is that we can do both.
Got it got it and then more broadly around capital allocation.
Our acquisitions.
What you think should be your primary use of capital right now or are you looking at.
Other uses potentially kind of how you're thinking about that more generally.
Yes, James I'm glad you asked I wanted to reiterate that our capital allocation framework has not changed.
Our two primary capital allocation priorities are investments in the organic growth of this business that particularly it boils down to people and our technology that is unchanged and we will drive or what we believe to be high ROI investments in the organic business and we will do that enthusiastically.
<unk>.
The companion to that as you pointed out is M&A and we view that also as a core part of the growth strategy of Pi.
We're very proud of the success of the deals we have done to date.
I would characterize us as disciplined but enthusiastic buyers.
Got it got it that's great. Thanks for your time this morning.
Thank you James question comes from Bob Napoli with William Blair. Your line is okay.
Thanks for the follow up.
You guys called out paradigm during the quarter as a partner I was hoping maybe to get some color on.
Maybe what the average.
Customer can bring in revenue like what the mix is do you have some customers that bring.
I don't know $500000 a year in revenue and whats the average like when we see you doing partnerships and adding customers how should we think about.
That is affecting the.
The growth of the company.
Yes, Bob that's a great question. So let me try to boil it down simply is new partnerships come in.
All shapes and sizes.
So you can have an up and comer software partner, who is on their own growth trajectory and the early revenue contribution of that partner may not be as large.
But you like what they offer and what their growth trajectory as the other end of the spectrum are larger established players in that case, we may or may not be their first integration partner. If we are not their first integration partner that businesses is more predictable and knowable and can come on faster and then there are.
A lot of partners in the middle.
So we don't manage.
Two average partner size.
We continue to get better and better at understanding the power and potential of partnerships of different sizes.
And we pursue them with relatively equal enthusiasm.
Thanks is there any feel you could give for like some companies will give like we have eight customers with over $1 billion in revenue per year.
There's something like that that would get you just give us some feel for it.
Yeah, So Bob.
Does it give some thought to some incremental disclosure on that point, but nothing we specify at this point okay.
Okay like number of customers. So we could come up with that I would be I think would be really appreciated it would be helpful.
Yeah listen I'll give you.
The broader point as you know is we talk about over 100000 and businesses, sometimes known as merchants, who are leveraging our integrated payments capabilities across a strong roster of partners. So that that is a number that we communicate and probably should update from time to time.
Okay.
Your last question.
12% organic growth in the quarter and I know the focus is on.
Obviously accelerating growth and you're bringing in more sales.
Talent, but what is what does it take to accelerate the growth rate from the organic growth rate from current levels.
So how confident are you you could do that.
So what does it take it takes a little bit of everything so obviously, having the right salespeople supported by a great marketing engine and terrific what I'll call technical solutions talent.
All foundational and are all categories.
Ripe for continuous improvement.
And our intention as you just pointed out.
Is to pull all of those levers to continue to notch up the top line growth profile of the business.
Okay. Thank you appreciate it.
Alright got it.
Thank you and I'm showing no further questions at this time I'd like to turn the call back over to Jeff for closing remarks.
Great. Thank you operator thanks.
Thanks, everybody for joining us this quarter I think you can hear from the dialogue and the color. We are very pleased with the progress <unk> is making and we look forward to continuing the dialogue with all of you. So thanks and have a great day.
This concludes today's conference call. Thank you for that.
You may now disconnect.
Okay.
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