Q2 2022 Paymentus Holdings Inc Earnings Call
Emotionally pressures in this session.
These results illustrate why we believe our business is resilient.
In spite of the current headwinds we are seeing around client based implementation delays.
And inflation, which we will talk more about later in these prepared remarks.
We remain excited about our fundamental business operations and long term prospects.
We continue to drive implementations forward and had a number of client implementation success stories in the quarter.
One example is the implementation of one of the largest utilities in the country.
This client service, a very large footprint across the country and selected us to handle the complexity of the nationwide implementation.
We also completed the migration of a large municipality the J P Morgan support.
A third client implemented in the quarter was a top quality credit union with over $10 billion in assets.
As we continue to move up market with our current financial services client with over $10 billion in assets launched on our banking IP platform.
As you know the pricing model for banking Bill payments is not affected by interchange.
Also in the quarter, we received the Pacesetter award for 2022 from a large enterprise software company utilities user growth.
Recognizing payment this forex leadership in billing and payments innovation.
We are proud of this award and believe it exemplifies the strength of our billing and payments product and innovation.
We also completed integration with one of the leading providers of electronic healthcare Records.
In the.
Quarter, along with adding advanced payment functionality for the health care vertical door product.
Although we believe we had a solid financial performance this quarter the difficult economic climate is not without impact on us.
Implementation Onboarding is one of the primary areas, we are seeing impacted by these difficult economic times.
A few of our larger deployments, which were originally slated to go live in Q2 and the back half of 2022 have been stretched out due to lack of client back to the source availability.
Due primarily to these client based slowdowns, we are changing our full year <unk>.
Two guidance.
However, I'd like to make it clear that in better economic climate with normal implementation timelines.
Specifically relate to these clients I believe we will be meeting or beating existing guidance for 'twenty.
If you take a long term view of the business as we do these days are not particularly significant especially considering that the.
The anticipated financial benefits from these clients are merely delayed to future quarters not lost.
Matt will cover the details as he discusses our financial results and revised guidance.
Thanks to John as a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our press release and supplemental slides for a reconciliation of non-GAAP items to the most directly comparable GAAP financial measure.
In the second quarter, we processed $89 5 million transactions, which is a 39, 4% increase over the same period last year.
Transaction volume was driven by biller direct with tail winds from IPL, <unk> and <unk> transactions.
The transaction growth led to a revenue increase of 28, 3% in the quarter, which resulted in revenue of $120 million.
Contribution profit was $48 7 million, representing a 31% increase over Q2 last year.
Consistent with the last several quarters contribution profit grew a little faster than revenue, primarily due to an increased mix of transactions without interchange, specifically IPM transactions and <unk> transactions.
Contribution profit per transaction was 54, which was consistent with the past two quarters and our expectations.
As we've said multiple times in the past fluctuations in areas outside of our control like average payments or payment mix can impact contribution profit on a quarter to quarter basis.
Historically, we have seen these things even out on a full year basis. However, given the ongoing economic uncertainty we will continue to monitor these things very closely in the back half of the year.
Adjusted gross profit increased $8 6 million or 28, 6% in the quarter to $38 $7 million.
Adjusted EBITDA was $5 million for the second quarter, which represents a 10, 3% and adjusted EBITDA margin, which was a little softer than we expected primarily due to wage inflation.
Operating expenses rose $13 $2 million to $38 1 million for Q2 of 2022 from the same period last year.
Overall, the increase in operating expenses from last year was driven by investments in staffing as well as additional operating expenses associated with Paypal since <unk> <unk>.
Amortization of identified intangible assets from the acquisitions and stock based compensation.
Specifically R&D expense increased $2 3 million from the second quarter in 2021% to $10 2 million.
Sales and marketing increased $8 $3 million driven by the <unk> acquisition continued expansion of the sales team, adding partnerships to capture our sizable market opportunity and an increase an increase in stock based compensation.
We experienced an increase in G&A expense of $2 6 million <unk>.
Acquisition.
Multi fold increases in the cost of corporate insurance and ongoing investment in public company infrastructure.
Our GAAP net loss was $2 $5 million in EPS for Q2 was negative two.
non-GAAP net loss was $400000 and non-GAAP EPS was zero for the quarter.
As of June 32022, we had $158 $3 million of cash and cash equivalents on our balance sheet.
Cash decreased primarily due to the timing of certain customer payments as well as increased operating expenses due to the acquisition.
At quarter end, we had approximately $122 6 million shares of common stock outstanding.
Now turning to our 2022 full year outlook.
Coming into Q2, we were comfortable with the guidance. We gave as Duchamp mentioned earlier elongated implementation of Onboarding times in this economic environment has created slower than expected net revenue recognition for the second half of 2022 of approximately $6 million to $8 million.
But this revenue is not lost it's just shifted into future quarters with the contract terms and TCE remaining the same.
The inflationary environment is also compressed our contribution profit by a couple of million dollars.
We're able to recapture some of the inflationary impact with price adjustments some of which is already in process, but it takes a bit of time right now is the impact.
Based on these factors, we're changing our 2022 revenue outlook to the range of $485 million to $492 million.
We're also changing our contribution profit guidance to be between $200 million $204 million for the year, which is approximately 26% to 29% growth.
We broadened our range due to the economic uncertainties, specifically the uncertain timing on implementation and potential for ongoing inflation.
Just to provide some context on the stressed out implementations in our Q3 call last year. We told you about a large new client win that would add 400 basis points to our then revenue run rate.
It was our expectation that this client will go live in Q3 of this year. However that client is now rescheduled to go out to 2023.
We also have one other large implementation that has done the same.
To be clear, we aren't expecting any loss of revenue associated with these clients simply starting later than was originally anticipated and we expect to start recognizing this revenue in 2023.
We expect these delays to have a bigger impact on Q3 combined with the fact that Q3 is a lower contribution margin quarter seasonally.
As a result, we anticipate little to no sequential contribution profit growth over Q2.
Our adjusted EBITDA outlook is now in the range of $25 million to $29 million with an adjusted EBITDA margin of 13% to 14%.
We are seeing ongoing wage pressure in our current workforce due to the levels of inflation, which is also putting some short term pressure on our EBITDA margins in.
In addition, after seeing the current sales momentum, we expect to make additional investments in our sales and marketing efforts.
Our current guidance reflects some assumptions around continued inflation and potential for increasing wage pressure.
Further expected delays in implementations could also impact our ability to meet our guidance.
To be clear about our guidance, we widened our range to provide a better view of the spectrum of scenarios given the increased economic uncertainty we.
We expect to finish the year in the ranges we've laid out.
Finally, as we said last quarter, we would anticipate our full year effective tax rate to be around 30%. However, due to the amortization of intangibles associated with acquisitions. The closer we are to breakeven on pre tax book income the more variation, we can see on our tax rate.
In addition, the permanent tax benefit from stock based compensation continues to impact the rate.
I'll now turn the call back over to you shop for some closing comments.
Thanks, Matt.
Before taking questions I'd like to spend a little bit more time talking about the economy.
In the quarter, we experienced solid growth in the same store sales.
For example, utilities, we saw close to 10% growth compared with second quarter 2021.
We believe the business can whether unusual level of inflation.
Contribution profit growth would have been a little bit better without it.
But we have and will continue to manage through this environment by closely working with our clients.
There are contracts provide some flexibility to make changes over the medium term when the average transaction increases at Acs with recently seen.
We plan to maintain a responsible growth philosophy by keeping a balance between investing for future growth while continue to look for ways to increase profitability in the near term.
The vast majority of our expenses are set of interchange are people related.
So we have the flexibility to add robust hiring based on market conditions all the opportunities.
And look.
We have been in business for a long time and the Bottomline liners.
I don't like the lower guidance.
But for client delays of this magnitude where the PCB. The total contract value is over $100 million.
Any quarter, they end up going live in is a good quarter.
Whether that is in 2022 or from different country.
That's why there's not a big concern of ours, especially since these delays related to the economic climate we are in.
Therefore, we believe over fundamental business and the strong sales momentum continues.
Water insurance in textbooks continue to get paid and we remain excited about the remainder of the year in the future.
With that I'd like to thank our over 1000 employees for their commitment to several of our clients.
And unlike now.
I'll now turn the call over to the operator for questions.
Absolutely.
We will now begin the Q&A session.
If you would like to ask a question. Please press star followed by one touch tone keypad.
If for any reason you would like to remove that question. Please press star followed by Kim again to ask a question press Star one.
As a reminder, <unk> using a speaker phone. Please remember to pick up your handset before asking your question.
Pause here briefly to allow questions to generate in Q.
Okay.
First question comes from the line of Andrew barge with SM BC.
Proceed.
Hey, guys. Thanks for taking my question I'm, just trying to square the commentary you made about the large client that decided to push it into the first quarter 'twenty three.
Part of what is the way I think about it is that.
And then the environment, where your customers are trying to maximize the amount of receipts of collections from consumers that may be facing financial difficulties.
Our need for your solution and this time more than others, but any additional color would be helpful.
Andrew first of all good question I should say, that's a great point and frankly as you can see from our signings in the bookings.
<unk> brand continues to be strong what's happening is it is when the APA.
Operational aspect of implementation comes into play.
Due to this post pandemic inflationary environment, what we're observing is that clients are having difficulty finding sources. In fact this remains a number one topic I was talking to.
<unk>.
Head of sales.
And he mentioned to me that.
Almost every client <unk>.
Bob.
They are they are talking about and thinking about how are they going to get it implemented and so on so we are able to overcome all of those.
Those challenges because of the ease of implementation on our side. It takes because of the highly configurable nature Configurable nature of our platform.
But then it comes down to is still you'd require some testing some support and thats, where the declines are unfortunately struggling.
And.
Again, the point about the size of the customers, we talked about the total contract value.
In aggregate we mentioned.
Bob.
When you have a client.
Client group of clients there.
<unk> size.
You are always going to be opening to say, hey, we're going to be delayed by a couple of quarters.
Because.
Our contracts allow us to recognize the entire value from the contract over the period of term.
We can start on the data go live is not when they start implementing so from that perspective, that's what it's really global macro underpinnings.
Yes, I would just say.
Very good question and the last part, which I'll talk about the key point, which is it's really.
At least what we've seen at this point limited to very large clients for the most part.
Because your point is valid and we're still seeing small and medium sized clients.
And some large ones to the shop went out in the prepared remarks that are going live.
Certain large organizations I think struggle more than others.
Got it and then just to comment on the 125 deals closed year to date.
I think that would be indicative that the sales pipeline is still relatively sound and could.
Could you give us additional insight onto what kind of clients that would kind of make up the traditional verticals that you guys have been strong and are you expanding into more on the <unk> side, and maybe a sense of the sizing of those those.
Potential deals.
Actually the new signings tend to be lot more diverse than historically.
Our historical verticals. So we have customers in real estate, we have customers and commercial enterprises.
Government entities tend to be a big factor as well.
And then obviously, our bread and butter.
Implement implementations are the other verticals.
It is it is more diverse than and obviously, some <unk> as well there.
And then size wise I think it was the second part of your question.
It spans the spectrum honestly I mean were still being.
Seeing a lot of success in the SMB space.
And then also.
Still having great success at the very large and you know as we've said.
Multiple times, we're continuing to focus on both of them.
We've got teams internally that are focused on both the SMB space as well as large enterprise space and so.
The success, we've seen so far this year on the siding side really span the spectrum of.
Small to large.
Got it thanks guys.
Thank you.
Thank you.
The next question is from the line of John Davis with Raymond James You May proceed.
Hey, good afternoon, guys just wanted to start talking a little bit about inflation and what kind of lag obviously when your some of your cost of interchanges and basis points do you have to give 30 60 90 days notice to raise price on a per transaction basis I'm just trying to understand I think when we're talking to IPO.
The thought was that inflation would be relatively flat minus some timing differences.
Far as the impact on your P&L. So just just curious kind of what that timing delay it looks like your ability to raise price to offset inflation.
We are actually very surgical in how we are approaching our clients. It could be the long term relationships long term partnerships with review of our clients are our partners and many many of these clients have been with us for a long period of time.
No.
From that perspective.
All of US looking at contractually we have.
At the time, you talked about the 60 90 days is pretty much.
The top end of the time it takes us to make the changes from a contractual standpoint, but we have been.
<unk>.
We're very surgical as to how we talk to our clients about it and what we are seeing is clients are very empathetic and very understanding.
They are dealing with this not just with us.
The whole economy is right now.
Dealing with this so.
Really have it better.
Better traction.
Than typical.
It would be the case, so but your assumption is correct that we do have ability to.
To make changes and it does take 60 to 90 days.
Okay, and then just wanted to touch on profitability, obviously, some near term headwinds from the push out and then kind of wage inflation, but wanted to just maybe for a minute talk a little bit about longer term profitability.
If you go back pre IPO this was a mid twenties.
EBITDA margin business. So maybe just talk about the ramp back to that how do you think about profitability over the medium to long term.
I think that's that remains our goal and I'll, let Matt jump in as well, but that remains our goal and.
What we are seeing is the right now the tremendous momentum in the market.
So we're trying to take a look at can be can be can be leaning even more from a sales and marketing perspective to go even more aggressive.
To continue to accelerate the growth here. So we'll continue to look at that but our long term perspective is in coming years is to be in that.
EBITDA margin.
Profile.
Yes.
I wouldn't say, there's been any change in kind of our.
Mantra around how we think about growth and profitability and ultimately.
On that front, we obviously are.
A little bit under where we'd like to be for this year given the things we talked about in the prepared remarks, but our overall kind of philosophy in medium and long term view and mantra is still the same as it was in there.
<unk> continues to be leveraged in the business I think it's.
So to Sean's point.
Continual reevaluation of the management team of.
The trade off between growth and profitability.
Making sure that we're not <unk>.
Straining future growth.
Simply because of <unk>.
An extra.
Cost of an extra point, a couple of points of profitability.
So, but I think just to sum it up nothing has changed in kind of our medium to long term view of our mantra of we're fundamentally in the business.
Business is still strong as evidenced by the signing.
And so we're still executing accordingly.
Okay. Thanks appreciate the color guys.
Thank you.
Thank you.
The next question is from the line.
Well.
<unk> Fargo.
Proceeds.
Hey, Thank you I wanted to circle back on the.
The pushback.
Youre talking about the 2023 alright.
Because I can already hear D.
Follow up question that we will be answering for the next few months until we speak again, which is what's the scenario isolated incident and I guess I'd have to kind of freezing that way because the question would be why would there not be others and so we have to try to work our way through that so I was curious if you can give us a little more detail.
Just get a little comfort around what you're discussing as far as pushback and trying to make sure.
Thanks.
Thank you Jeff.
Yes.
Look first of all.
I think first of all we're very very good question, but a reasonable question.
Very understandable and let me just talk about from the.
From two perspectives one is the economic climate itself, we are dealing with.
The overall the sentiment is.
The clients are just taking a little bit longer than they usually do to get live on our platform I mean historically speaking.
We.
We are in implementation machine actually I mean, we do a great job, we get customers live and that is.
And our platform our capabilities are better today and getting customers live than they have ever been and the reason for that is the investments we've been making over the years.
Challenges that the readiness of the client to just.
Whatever little support which is a fractional support relative to the.
Although our first which are required to get them launched.
That traction support as required by clients getting their technology team engaged there or some idea sources to just QA that desktop platform and so on.
And because of the environment we are in.
It is stretching a little bit.
But I wanted to tie it back to the guidance.
And this year.
If all of that aside its couple of declines we're talking about it they would have actually maintained their timeline we.
We would be perfectly fine with.
With our our guide as I shared earlier.
<unk>.
Interesting scenario, meaning that.
Couple of clients made an impact, which we were counting on for this year.
But other delays some of them were actually we were already factoring in.
Yes, I think the shots right and I'll just add.
Of course that are.
Planning modeling as we go through it.
Don't assume best case scenario for.
Client go lives.
Look at history, and assume some amount of buffer on wind.
When they would go live typically.
Depending on the size of the client and various things as you would expect.
I think the challenge with these two in particular what were they were very large.
That we referenced on the call the tubular who's on the call were very large.
And.
Kind of hit at the same time and so.
I think as we look into the rest of the year.
Yes.
In our guidance, we've assumed appropriate again, we think is appropriate levels of.
Buffer and delay.
And these are two of the biggest ones that were kind of slated for the back half of the year. So.
Yes, I think we as I said on the call we fully expect that we will land within the revised range.
Actually to Andrew's point earlier on a question earlier I, just don't want to suggest to you and others.
The demand for the product remains very strong because it is the markets. We're in are actually.
The.
The right conditions for a platform like ours. However, once the business executives to make the decision to to get it get it launched they are still at a support from the.
Partners.
Other priorities, which might be going on and some of them off.
Right now stretch just because of the climate feeling.
Okay I appreciate all color and if I can ask one follow up.
On the financial outlook for this year.
I'd like to ask this question because it kind of guess in terms of how to level set expectations score going forward what would be the factors in your own minds right now that would drive revenue for example to the lower end of the range.
And what would be the factors that would drive it to the upper end of the range I just want to make sure. We're all clear on that same contribution profit I'm just trying to get a feel of what you think are the swing factors in your guidance as it stands right now.
Thank you.
I think they are two or three and all of them, we have talked about I mean.
<unk> go lives.
If they all go live as we are planning to and if they.
And.
And some of the inflationary environment that we're operating in our assumptions.
<unk> in terms of being able to make adjustments in which we have been making.
Then I think we'll be at the top end and if they don't then we'll be closer to the bottom line.
Yes, I agree I think that's the two main factors as we kind of think about the.
The range is.
Timing of go lives implementation go lives.
Our continued ability to.
Improve the pricing profile in certain situations based on what we're seeing with inflation.
Got it okay, great. Thanks very much.
Thank you.
The next question is from the line.
Kieran.
Sir you May proceed.
Yeah, Hey, guys. Thank you and maybe I can ask a numbers question. Just if I think you said that you expected. These clients are delayed.
To be about 4% of this year and they were going to come on in Q3 does that mean that they collectively are about 8% of total revenue and I guess the corollary to that is if your win rates are still the same does that mean next year will be an outsized good growth year, just you'll get the full impact of the best plus just the normal wins coming on.
Yes. Thanks.
<unk>.
Sure.
So on the first question it was.
100 basis points on our then revenue growth rate in Q3 of last year. So.
To make sure.
The multiplier is the right number but your concept is correct. The other client was not quite as large.
But it was in that same ballpark and it was 400 basis points on the revenue growth rate at that point last year.
So I think that also raises another good point, which is.
Because of the other momentum we've seen in the business if you sort of do the math on.
What our previous guide was versus what <unk> got is when you take the numbers that I've mentioned in the prepared remarks.
We've also there's also been some good things that have happened that have helped offset some of these negatives during the year as well, it's not just a one way kind of mood theres definitely been some other positives that have helped to offset the negatives.
On next year I think.
We'll see we'll give our extra guidance when the time is appropriate I think.
We as we said they are pushed into 2023 and the revenue is not also to your point we.
Do expect them to come live and start getting that revenue in 'twenty three.
It would have from a raw dollar perspective, it would have already been in the number anyway had a go live later this year. So it's not necessarily new revenue into 2023, but to your point on a percentage basis.
It has an impact there so.
We will utilize that will give our 'twenty 'twenty three guidance at the time is appropriate, but I think the way youre thinking about it is.
As in the right direction.
Yes, gotcha. Thank you for that and then the second one I think this is very very clear, but I think inflation basically youre, saying its two impacts one is just wages to be expenses, but two is.
Inflation has a network fee impact that hurts the contribution profit rate because you pay on higher volumes pay network fees and those are the two main things right.
That's correct.
Correct.
And.
As Bill said earlier, one of which.
The.
Our contracts already allow us to to talk to our clients and discussing.
And.
And partner with our clients to solve for that.
Which as Matt mentioned they are already in the process.
In some cases already.
Yeah got it thanks guys.
Thanks, Dave.
Thank you again to ask a question. Please press star one.
Okay.
There are no additional questions at this time I will pass it back to the management team for closing remarks.
Well. Thank you so much really appreciate your time, we look forward to speaking with you next quarter end.
Have a great question.
That concludes today's conference call. Thank you you may now disconnect.
Okay.
Sure.