Q2 2025 Paymentus Holdings Inc Earnings Call
Good day and welcome to the second quarter. 2025 payments is earnings conference call.
This call is being recorded. All participants are currently in a listen-only mode. There will be an opportunity to ask questions following management's prepared remarks. If you would like to ask a question, please press star 1 on your telephone keypad. At this time, I will now turn the call over to David Hanover with Investor Relations. Go ahead.
Thank you, operator. Good afternoon, welcome and thank you for joining the webcast to review our second quarter 2025 results.
Are initially documents are available on the investor relations section of the paymentus.com website.
They include the earnings presentation that will make reference to during this webcast, this webcast is being recorded.
I hope everyone's had a chance to review those documents our founder and CEO, Dan Sharma will make some opening comments before Sanjay. Cara our CFO, discusses the details of the second quarter and our guidance.
Following our prepared remarks, we will take questions.
Let me remind you that we may make forward-looking statements within the meaning of the Privacy Securities litigation and format of 1995, and we refer to non-gaap financial measures during the webcast.
So, we're looking statements are based on Management's, current expectations, and assumptions that are subject to risks and uncertainties.
Factors that may cause our actual results to materially differ from expectations are detailed in our earnings materials and our SEC filings, which are available on both the SEC's and our websites.
Information about non-gaap financial measures, including reconciliation to the US. Gaap
and also be found in our earnings materials that are available on the website.
With that. I'd like to turn the webcast over to duchan Sharma to shop.
Thanks David.
Paymentus delivered another strong quarter with results that exceeded our expectations in all areas of its business.
We ended the quarter with substantial bookings and a strong backlog.
Giving us a strong visibility and further confidence for the balance of 2025.
I also want to take a moment to provide an early insight into 2026.
Based on the strength of our bookings with increasing frequency of large Enterprise wins.
And the corresponding backlog that we are busy onboarding.
We have greater visibility that is already extending beyond 2025.
As a result, we are feeling very good about 2026.
With this level of unmatched visibility, which allows the management team to focus on creating long-term shareholder value.
By combining innovation together with steadfast execution.
I believe we are building something very special here.
As an example.
Since our Revenue run rate exceeds 1 billion dollar in 2025.
And we have early visibility into 2026.
On the next question that is likely on Investor's mind, how do we feel about achieving the next significant level of Topline Revenue growth from here on out?
Based on the bookings backlog pipeline and the customer trends we are seeing today, along with our expectation that these trends will continue.
And our proven ability to execute our business strategies.
We are feeling good about our potential to become a multi-billion dollar revenue company in the coming years.
And I'm talking primarily about organic growth here. And this is without any meaningful M&A activity.
And there are 3 key reasons why I believe that to be the case.
First.
With the Advent of agentic, AI.
The broader technology world and not just bill payments is moving in our Direction.
The field is now getting wide open for payments.
We already do a lot through our world-class platform and have tremendous capabilities. All of which will be fundamental as the world moves Beyond softer Solutions and becomes more agentic.
Let me elaborate.
We have the ability to securely handle client data at scale.
Manage complex, workflows.
And provide intelligent actionable insights to clients about their business with deep Integrations.
We securely handle all in interactions, and resulting transactions across all interaction channels.
And we do all this and more 24 by 7.
And only get paid when someone uses our platform.
Set differently. We are already used to a pay-per-use business model.
Which is likely the future with agentic AI.
As a result of our platform capabilities, our paper use business model.
And a highly profitable public profile. We are ready.
And have set a perfect foundation for payment us to be a force for disruption, for years to come.
With these strong tailwinds, I believe now is our time.
Second.
We believe we have everything we need to scale significantly from here on out.
We have tens of millions of users household and businesses.
Interacting with our platform.
We process hundreds of billions of dollars.
And handle hundreds of millions of payments.
And when you combine our current asset base with the market, moving in our Direction,
We are as excited as ever to take the company to the next level.
And third.
We are beginning to feel more and more confident about our ability to replace broad-based Legacy infrastructure.
Within an Enterprise and not just Legacy providers, as we move up Market.
Enabling expansion of our service offerings.
We believe that no company is too large, no workflow is too complex, and no project is too big for us to undertake.
Given our already innovative platform and capabilities.
So these are exciting times indeed. For our business. We are looking forward to achieving the next big milestone.
With that, let's review our second quarter results.
Revenue was $280.1 million, an increase of 41.9% year-over-year, largely driven by an increased number of billers and higher transactions.
Contribution profit was $93.5 million, up 22.3% year-over-year.
And adjusted EBITDA, which continues to be a primary financial metric for us, was $31.7 billion.
A 40.7% year-over-year, increase and representing a 33.9% adjusted, even a margin.
Once again, the majority of our year-over-year growth in contribution, profit fell to our bottom line.
And once again, we exceeded the rule of 40 for the quarter coming in at 56,
This reflects our team's solid execution.
And our focus on delivering high quality earnings together with solid Revenue growth.
Now, I'll review our second quarter business, highlights and accomplishments.
Regarding bookings. This was a very strong quarter and we are pleased with the pace of bookings. We have seen here today
In the second quarter, we saw particular strength in the large Enterprise segment of the market.
Spread across a broad vertical base.
We continued continued to show.
The diversity and wide appeal of our platform by signing clients in several industry verticals. Including
Utilities.
Government agencies.
Telecommunications.
Banking, and credit unions.
Insurance and educational institutions, among others.
Additionally.
Our partnership ecosystem continues to be a significant complement to our direct go-to-market strategy.
We have a very efficient and productive partnership portfolio.
This quarter, we added additional new channel Partners in the financial services and telecommunication Industries.
Simultaneously.
We remain focused on onboarding our sizable backlog.
Our onboarding enhancements.
Incremental Investments, as well, as improving face-to-face client engagement are driving these efforts.
During the second quarter, we onboarded clients throughout multiple verticals, including Telecommunications,
Utilities.
Government agencies.
Banking, and credit unions.
Property Management Healthcare.
Insurance and financial services.
With that, let me turn it over to Sanjay to your financial results in Greater detail.
Thanks rochon.
And thank you all for joining us today.
Before I discuss our quarterly results and Outlook, I'd like to remind everyone that the financial results I'd be referring to include non-gaap Financial measures
as David mentioned earlier, our Q2 press release and earnings presentation, includes, reconciliations of the non-gaap financial measures discussed on this call to the corresponding Gap measures.
Both of these are available on our website.
Turning the slide 6 for the second quarter of 2025, we delivered. Another quarter of financial results that exceeded the top end of our guidance.
We believe our continued ability to deliver such results.
Demonstrates the inherent strength and durability of our business model.
Highlights of our second quarter results, include revenue of 280.1 million.
41.9% year-over-year.
Which is up 22.3%.
And a gcdb of 31.7 million.
Up 40.7%.
We continue to experience strong customer activity and demand in the second quarter, which drove very strong bookings.
We had exceptional bookings this quarter, which enabled us to end the period with a very significant backlog and solid visibility both for the remainder of 2025 and into 2026.
We saw a particular strength in the large enterprise segment of the market.
Spread across a broad vertical base.
Based on our strong quarterly performance, the positive business Trends, dushyant, mentioned earlier and our expectations for the remainder of 2025.
We are raising our full year 2025 guidance for Revenue.
Contribution profit and adjusted beta, which I'll discuss shortly.
Now, let's review our second-quarter financials in more detail.
As mentioned, Q2 revenue was $280.1 million, reflecting a 41.9% year-over-year growth.
which was ahead of our original expectations.
Was driven by increased transactions across all aspects of our business.
Which includes the launch of new builders.
Same store sales from existing Builders and higher activity on our instant payment Network or IPM.
The number of transactions we processed grew to 175.8 million in the second quarter, up 25.2% year-over-year.
Over average price per transaction, increased from 1.41 cents.
To 1.59 cents during the same period.
This was mainly due to the biller mix or more. Specifically, the large Enterprise builders that we launched during the third quarter of 2024
With higher average payment amounts.
We are realizing the benefits of these large enterprise customers.
Although the second quarter guidance we provided earlier did reflect some of the potential upside from these larger customers. But as you can see performance, still exceeded our expectations,
In the second quarter of 2025, contribution profit increased to $93.5 million, up 22.3% year-over-year.
The increase was also higher than expected and reflects the launch of new builders, the mix of builders launched, and the increase in transactions from existing builders.
Contribution margin was 33.4% for the second quarter compared to 38.7% in the prior year period.
As we continue to add larger higher volume, Enterprise Builders to our customer base.
This change in contribution margin was offset substantially by a year-over-year reduction in operating expense margin.
which resulted in an adjusted DB margin of 33.9%.
This is consistent with our continued. Focus on profitability, which I will elaborate on shortly.
Contribution profit per transaction for the quarter was 53 cents, which was relatively flat compared to 54 cents in the prior year.
And demonstrating our ability to expand market share without sacrificing comparable contribution profit per transaction.
Also, as we have noted in the past variables that are outside of our control,
Such as an increase in the average payment amount or changes in payment, mix can substantially affect contribution profit on a quarterly basis.
And therefore we treat this as a secondary metric.
While our growth Revenue nhcd remained primary Matrix and focus areas on how we execute our business strategies.
Second quarter adjusted. Gross profit was 77.9 Million up 21.7% year-over-year.
As we anticipated, second quarter 2025 non-GAAP operating expenses increased year-over-year to $49 million.
This 11.3% increase.
Which we had budgeted for was primarily due to higher research and development.
As well as planned sales and marketing expenses.
Again, these increases were anticipated and mainly driven by increased hiring and agency fee, for business, from our resellers and partners.
In order to enhance our technical strengths and convert our strong pipeline into bookings.
We expect to make similar Investments throughout the remainder of the year.
As we continue to execute our go-to-market strategy,
These assumptions are already incorporated into our guidance, which I will review shortly.
Second quarter non-gaap. Net income was 19.3 million or 15 cents per share compared to 13.4 million or 10 cents per share in the prior year period and increase of 50%.
Second quarter as a CD beta was $31.7 million, up 40.7% compared to $22.5 million in the prior year.
Adjusted beta also represented 33.9% of contribution, profit for the quarter, compared to 29.5% in the prior year.
Our strong adjusted EBITDA performance was due to the same combination of positive factors I talked about earlier.
All of which came together in the quarter.
We believe the stronger adjusted, it be the margin demonstrates, the innate operating leverage, we have in the business.
And our sustained ability to adapt to ever-changing market conditions while we still continue to grow.
Interest income from our bank deposits was $2.3 million during the second quarter, compared to $2.2 million in the prior year period.
Related to our performance. We once again, exceeded the rule of 44, the quarter coming in at approximately 56, relatively in line with 58 in the prior year period.
Now, I'll discuss our balance sheet and liquidity position on Slide 7.
We ended the second quarter with total cash and cash equivalents of 270 million.
compared to 249.6 million at the end of first quarter of 2025,
The 20.4% increase.
Was primarily comprised of 31.5, million of cash, generated from operations.
Used in investing and financing activities, mainly capitalized software of 8.9 million.
We do not have any debt.
Free cash flow generated during the quarter was $22.5 million, primarily driven by a strong adjusted EBITDA in the quarter.
Driving organic growth continues to be our primary focus.
Having said that our strong cash position enables us to maintain Financial flexibility.
to allow for working capital Investments, as we scale,
in addition to this, our ample liquidity allows us to explore attractive amenity opportunities that may arise in order to expand our growth strategies.
Our daily sales outstanding at the end of second quarter was 31.
Compared to 33 at the end of Prior quarter.
Better than our expected range.
Working capital at the end of second quarter was approximately 297.4 million.
An increase of approximately 6% sequentially.
We had 129 million diluted shares outstanding during the second quarter.
relatively in line with 128.8 million diluted shares outstanding during the prior quarter,
Before I discuss guidance.
I would like to provide some additional color on our Recent. Bookings and backlog trends.
Over the past 2 years, we have seen increasing momentum from large enterprise customers.
In fact, as I mentioned earlier this past quarter, we saw particular strength in this customer segment a cross multiple verticals.
Adding to this.
Throughout the past, 4 quarters in a row. We have experienced very strong, bookings. Resulting in a robust, year-over-year, growth in exit, backlog for the quarter.
This significant backlog growth is not only in terms of total backlog dollars.
But also in the number of total customers and large Enterprise customers within our backlog.
This provides us much greater visibility for the rest of this year, as well as into 2026.
Now, I turn to our non-gaap guidance for the third quarter and full year 2025 on slide 8.
I want to emphasize.
That we are continuing to follow the same prudent approach to guidance that we have followed in the past.
For the third quarter, 2025, we expect revenues to be in the range of 278 million to 282, million representing 20.9%, year-over-year growth at the midpoint and 21.8% at the high end.
Contribution profit is projected to range from $92 million to $94 million, representing a 16.3% year-over-year growth at the midpoint and 17.5% at the high end.
Adjusting EBITDA of $30 million to $32 million represents a growth of 26% year-over-year at the midpoint.
And 30.1% at the high end.
This represents a 33.3% margin at midpoint.
And 34% at the high end.
Along with our guidance, I also want to reiterate some key points related to our outlook for contribution. Profit growth rates and adjusted to be the margin.
As our business grows, and as I mentioned on prior calls, we are receiving greater inbound interest from larger enterprise customers.
Not unexpectedly these large customers often request, volume discounts which we are open to where the deal economics supported.
In addition, our tremendous operating leverage allows us to attract and book these large customers.
Set differently, volume discounts for larger customers are typically more than offset by strong incremental adjusted.
This increases our efficiency, as our onboarding time per biller is declining, while the average customer size is simultaneously increasing.
Furthermore, we have the ability to recalibrate Opex spending relative to contribution profit.
In order to reach a desired outcome, adjust CDB.
To demonstrate this phenomenon for the second quarter of 2025 results. I want to share 2 key data points.
First, our incremental adjusted EBITDA margin was 53.8% relative to the adjusted EV margin of 33.9%.
Profit and fluctuate quarter to quarter and operating expense recalibration opportunities exist, in our business.
Our incremental adjusted be the margin has improved by 470 basis points year over year.
The margin has improved by 440 basis points year over year.
Despite any temporary softening of our contribution profit growth rates on a year-over-year basis.
Based on our results and progress, we have made in the first half of 2025 and our expectations for the remainder of the year.
For the full year 2025. We now expect Revenue in the range of 1.123 billion to 1.132 billion.
This is like a raise of approximately 45 million or approximately 4.2% from the midpoint of our previous guidance.
This updated guidance now represents
29.3% annual growth at the midpoint and 29.9% at the high end.
Contribution profit in the range of 369 million to 373 million.
This reflects a raise of approximately 5 million or 1.4% at midpoint.
Versus prior guidance.
This updated guidance now represents 18.9% annual growth at the midpoint and 19.6% at the high end.
at GCDB, data to range from 123 million to 127 million.
Representing a raise of approximately 5 million or approximately 4.2% increased at the midpoint versus our previous guidance.
The updated guidance. Now, represents a 32.7% annual growth at the midpoint and 34.8% annual growth at high end.
This represents a 33.7% margin on the contribution profit at midpoint and 34% at the high end.
We expect a non-gaap tax rate of 25%.
This annual guidance implies a rule of 40 scale, range of 52 to 54.
Thank you everyone for your attention today. And now, I will turn back to Dan for final remarks. Before we open up the call for questions.
Thanks.
In summary, our second quarter was another period where we achieved results that surpassed our expectations.
Including revenue and adjusted ibida. That were both up over 40%.
We exited the quarter with strong bookings and backlog to give solid visibility and confidence in our outlook for the rest of 2025 and into 2026.
We believe the stability and durability of the growth algorithm allow for a fertile ground for disruptive innovation and long-term value creation.
I'm also confident about our future success due to a number of factors, including...
Our business model, with this proven ability to generate sustainable growth, expanded profitability, and its innate operating leverage.
Our durability to withstand and even thrive in difficult economic environments.
the large non-discretionary and growing bill payment Market that we serve
our novel and differentiated technology and platform and ecosystem.
Our broad and growing customer base, along with our strong balance sheet, which includes $270 million in cash and cash equivalents and no debt.
As always, I want to thank our entire team for all their efforts and dedication to our business.
And that concludes our prepared remarks. I'll Now open up the line for questions.
We will now begin the question and answer session. If you would like to ask a question, please press star, followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please. Press star. Followed by 2 again to ask a question, press star 1. And as a reminder, if you are using a speaker-phone, please remember to pick up your handset before asking a question and we will pause here briefly as questions are registered.
The first question is from the line of Dave coning with Baird, you may proceed.
3 to pretty flattish sequential usually it's it's up a lot and maybe a review the the seasonality a little bit and B maybe is there any reason Q3 wouldn't wouldn't follow the normal trend for for faster growth than Q2.
Uh, Dave, thanks for the question. Uh, the seasonality, I would say, as we are capturing more and more market share and the pace of growth, we have seen, uh, in our revenues especially, uh, we are seeing that there is a shift happening a little bit, uh, on the seasonality, especially if you get the large government, uh, customers, we could see that shift. So overall, the business is growing. Overall, if you see, we also raised the guidance for the full year, uh, in terms of top line as well, bottom line as well. Uh, I think overall, it's marching in the right path and, uh, EBITDA as a percentage is getting better. Our incremental EBITDA margin is 53.8% as well. Seasonality quarter over quarter would exist and could move in between years and not necessarily the past trends could be followed as we are on a significant scale of capturing market share. But to be more precise on this year's numbers, especially.
For Q2, uh, there is one more. Uh, so sorry for Q3; you will see a flattish revenue, at least in terms of guidance.
Uh because there are 2 facts, 1 is seasonality which you mentioned. The second is we have not seen complete full 4, quarters of the large Enterprise Builders which were launched in Q3. They were not launched on first day of Q3 last year, right? And they were large. So they could have some impact, so that's the piece of it. Uh, and then there are some same store sales which offset it. So overall, you know, it's uh, that's the guidance we have come up with following our, uh, prudent guidance methodology. And as the business, uh, delivers and as a result come in, uh, we will be able to update you more. But overall, we feel very good about where we are in Q3, as well as Q4 and for the full year.
Yeah, okay, thank you for that. And then, secondly, um, you know, 1 thing, I'm just quality of earnings. That was kind of remarkable. Historically, you've had almost no bad debt. Expense the last couple quarters, it's been around 1 and a half million or so if you didn't have that it would be 200, basis points, higher adjusted, Evita margin. I is there something about the mix of business out? The Enterprise clients that you want to add a little bit more conservatism around just collections or maybe why why what's the bad debt expense a little higher?
Well, uh, on the bad debt expense. This is, uh, a pretty small amount. I think overall, compared to our business and revenues, I don't think it's anything significant. It's just some old, uh, old amounts which we write off prudently. Uh, it's totally insignificant in overview.
Yeah. Okay well great job. Thanks guys.
Thank you. Have a good day.
The next question is from the line of Darren Peller with Wolf Research. Please proceed.
A stronger than I just I want to start with. Again, you said, you know, your optimism and conviction and and really just um, excitement about bookings and back while I was very
It was pretty clear on the call, and so maybe just diving in a little deeper on that. I mean, in terms of the verticals, you're winning in.
You know, incrementally showing success above and beyond utilities, but really the expansion verticals. How's it going? Where are you? Seeing the most demand?
Um, and then maybe also add on to the Enterprise side and and really what is, what is it about the business that that's allowing you to have the right to win there, as much as you have. Um, it sounds like there's a lot of backlog and strong Trends ahead of us there, too.
Uh, thank you, Darren. Uh, this is the shop. So.
I think it's a culmination of what we have actually built over the years in our platform. So that, and combine that with our ecosystem,
One of the things we have noticed over the years is
Point, an inflection point will occur. Where, a lot of the large companies will start to realize that, uh, look, it's just not easy to replicate what payment this is built because of the capabilities, uh, uh, into the platform itself and the reach through the ecosystem,
So uh what that has transpired into now is almost like 1 of the other thesis we had was what can we do to allow or the overcome. The biggest challenge, these large Enterprises have, which is they don't, they want control, they want flexibility and and functionality, but they also want control. So we felt that. Can we create a platform that allows them to have relative control over the processes and also have a say into what goes into their platform and how the platform looks how it is perceived, how the consumers interact with it, and what the look and feel is like, and what the customer experience is like, and what the rules of engagement are for their customers. If all of those could be in, uh, Incorporated within Payment Plus platform, without having for payment us to go on a multi-year custom development, which used to be the traditional approach. Instead, we have taken a attack where we we did a lot of hard work there.
Yeah. Put a lot of hard work into the platform that uh, clients should be able to configure the platform that they will. They want it without having to, uh, spend a lot of time and money. And then if you combine that with our public statements over the years, which has been that in the last couple of years, we've been talking about how in the during the after the postcovid our implementation speed has gone gone up and including uh our uh success. We are seeing in the large Enterprises space and being able to onboard, uh, the the clients that is another Fear Factor for the clients. So, when you put all of this together, clients are becoming increasingly more comfortable with payment. This platform, the capabilities, the controls they get, but also the flexibility and the functionality. They get along with the reach.
And on top of that, the, uh, onboarding certainty, which comes with payment, this is public, uh, execution. Uh, is is very well received. Now, as a result, what's happening is we are actually, uh, utility remains a very strong vertical for us. We are doing great and we will continue to Great. Uh, we expect to continue to do great, uh in the utility work. Uh, vertical, we love the vertical. In fact, it's the hardest vertical to succeed at a scale. Uh, and we knew that if we could do well, there we would be able to do well in other Industries and that theory is proving out. Now, we have government agencies, which have Myriad of agencies all with different. Uh, uh, permutation combination of business rules. We are able to
To handle that. And then you have insurance companies, which have all different segments of their divisions, which are able to onboard successfully on our platform and then you go down the line. So we are seeing success in all of the verticals and each server, decided to strategy to continue to work on all of these verticals. Uh, and continue to grow our business and uh in all of those areas.
Does that help?
That that does help, it's exciting to hear. Um I guess just 1, quick follow up would be when I think about the ability to do all of this while growing your overall business. I mean your expense growth has been much more, you know, much more. There's been a lot of operating leverage in the in the business which which I just want to make sure we can still see given how much you're growing Top Line and adding new types of customers including Enterprises, do you, do you, you know, expect a sustainability to the operating leverage, you're going to be able to show so far going forward or do you have to build out more infrastructure? Thanks, guys.
So, the operating leverage on the business is, anyway, very good. And let me give you a couple of examples, which are pretty much evident from the results of our most recent quarter, Q2.
Uh, if you look at, uh, we are raising our guidance already for the full year for CP, and that is much more than what we already beat in Q2.
Things that has been over backbone and has been serving us really well, so we will not be shy of spending the money for the right reasons, as that's the right investment for us. Not only, we have a significant cash on the balance sheet, but that we believe is the right investment of organic growth, which is serving us. Despite of all that, we are still expecting a significant operating leverage it keeps on growing. I would highlight that the guidance today we have provided for Q3 and in fact, an implied guidance of Q4, which can also be derived from the numbers. We give both these quarters. The incremental EB, the margins.
Are better than what we delivered last year in Q3, and Q4 and for the full year as well. Based on the guidance, the incremental evida margin at midpoint is 51.6% compared to 50.8% last year. And as you already see, in this current quarter, our incremental EB. The margin is 470 points better than last year compared to Total EB the margin of 440 basis points. So
What I'm trying to get to is that the operating leverage in the business is high, you can look at from many perspectives and we are Marching on the right path. Our goal is to grow profitably and not just grow. So we we want to make sure we balance both the equations and, uh, but we have a great opportunity in in uh, in front of us. I I hope that helps to understand where we are.
Yeah, that's great to hear. Thanks, guys.
Thank you, d.
Next question is from the line of John Davis with Raymond James. May proceed.
Hey, good afternoon guys Deshawn. I wanted to Circle back to some of your opening remarks. You talked about, you know, becoming a multi-billion revenue business in the next few years and that would imply you call it, mid 20s Revenue growth, obviously a little bit slower than your growing now but you know ahead of the the 20% plus growth that you've kind of outlined for the medium term. So is it going too far to think that given the backlog you have incremental confidence?
And you know, kind of maybe mid-20s growth versus 20 before. Um, just kind of any thoughts that would be helpful.
Uh, thank you, John. I think from a Keger model perspective that we are still committed to the same case. In Marvel of $20, top-line growth and 20 to 30% adjusted, even a dollar growth.
Uh, what I was referring to is that, this is an exciting time for the company, and we are seeing the market is moving in our Direction. And, uh, frankly, uh, we as a company going to be more excited today. Uh, uh, uh, or or, uh, we are as excited as we have been at any point.
The with with the, uh, Advent of agentic AI and all of those uh uh the the things which are taking place in the world uh not just in bill payments. We are we believe that the that our preparedness over the years is actually going to prove to be very fruitful for our shareholders as we go forward. So what I was talking about is that we, we believe that we could be a multi-billion dollar company, uh, in in coming years, based on all of the strength of, uh, the kpis, we are seeing however, um, we want to remain very disciplined on our model and and, and, and that's where we are right now.
No, fair enough.
And then Sanjay, you know, I think obviously lots of positive things to talk about today, but maybe 1 thing that hasn't got a ton of play was free cash flow year to date, really strong, and again really good in the second quarter. I think, you know, conversions over 150% of adjusted income for the first half of the year. So any comments on full year free cash flow or how how I should think about it, either, in terms of adjusted percent, adjusted ibida or percentage of adjusted net income, um, for the back half or any kind of 1, thimesch things in 2 Q?
Uh, John, so cash flow is very important to us. And the interesting part about cash flow is that it is very difficult to forecast. One thing is for certain: looking at our trends, especially for this year, we generated $64 million in the 6 months. We had $22.5 million in this quarter and $48 million in the first quarter. So we feel very good about the cash generation.
Uh, to be helpful, I can provide a model of how to come up with a forecast for free cash flow.
At the outset, I would say our adjusted EBITDA margin can be adjusted for tax outflow, income taxes, which is approximately 25%. As we guided, there's a cap on software cash outflow, which is approximately at a rate of $9 million.
Jewish million, uh, based on the interest rates.
And then the unknown piece is working capital, and that's something which could fluctuate quarter over quarter. That's very difficult to forecast. I would say if the business is scaling significantly, we might need some cash.
Uh, to put in the working capital, but at the same time, uh, that's very difficult to forecast, as I said, and it could depend on DSO. The DSO range is somewhere between 30 to 40 days. We are glad that we are coming in at the best range at 31 days this quarter. So that's the piece which is unknown. Uh, you can use this model hopefully to come up with free cash flow forecasts, but I would say overall, the business is definitely cash-generating. We have seen over the past many quarters.
Or the right way to interpret this would be excluding working capital needs if they may arise.
Uh, this is a cash-generating, profitable business.
Very helpful.
Thanks.
Sure.
As a brief reminder, if you would like to ask a question, please press *1, and if you would like to remove your question, please press *2.
And the next question is from the line of Andrew Powitz with JP Morgan.
Good afternoon, guys. Um, congrats on Q1! To start off, my questions revolve around the comments you made on AI and agentic AI payments. I was curious if you could provide any color on what conversations are like with, you know, your existing customers or even prospects as far as what payments could provide for them and kind of an agentic payments future.
Yeah, I think we, uh, first of all, thank you for the question, Andrew. What?
The way we are synthesizing, uh, as we analyze the entire portion of the landscape.
if you think about,
1 of the key ingredients. Uh, ingredients that is needed for a very successful. Uh uh, AI implementation is
The all of the aspects I talked about, where
Can you handle, uh, very complex workflows? Can you handle data lakes at a scale? Can you separate one customer's data, uh, at a scale from one, thousands more you have? So, all of those types of things combined, with running a paper use model at a scale with 24/7 interaction channel management, across all, uh, across the spectrum. So when I factor, when I look at all of that, it appears to me that, uh, you know,
Uh, we couldn't be more ready than any other company in terms of being able to capitalize on it. So the type of opportunities we are seeing is, uh, is this early days?
Uh, uh, the first thing I would say is we we made a decision and we are thinking about it as we as we go forward from here on out and ears. I'm just giving you a longer term view, uh, here, uh, not necessarily uh, uh immediate uh, immediate. Uh, uh, future is that we believe that the AI not only going to be a productivity, uh, uh, uh, tool for, for payments, uh, for our internal purposes, but with our ability, uh, to already be uh, a central nervous system for our clients, uh, uh, a customer interactions and uh, Collections and and, uh, and revenues. We believe, we will be able to help our clients across all areas, whether it's improving their customer, uh, customer experience. Whether it is reducing their cost to serve by helping them taking a lot of the cost and unwieldy processes out, whether it is related to receiving payments or sending pay uh uh, sending payments out. So,
So we, we think of this as a multi-dimensional play and we are excited about, uh, uh, of setting foundation for being AI, could be a potential, uh, Revenue Center for us, or at least, uh, will be, uh, could be additive to what we are doing here right now.
Great, that's super helpful. Um, and then for my follow-up, you mentioned in the prepared remarks here, you know, headcount plans, kind of hiring to meet the demand. Um, I was curious if there's any way you could disaggregate for us, you know, hiring plans across sales force versus, you know, the implementation and onboarding side. Thank you.
To an opportunity to spend a little more, uh, than what we planned because the CP came in a little little more. But in terms of exactly, you know, how much is on sales, force versus say implementation or versus other engineering needs. Uh, we want to spend majority of our focus on converting the pipeline, uh, to bookings, which is, uh, our real return on investment. And while leaving no stone unturned, uh, to update our technical strengths in engineering and implementation as well. So, we are maintaining a fine balance between what the company needs.
To grow longer term.
Uh, keeping our strengths, uh, the priority as well, but not missing out any opportunity on conversion. So these decisions are kind of flexible, although we set a plan but we always make an attempt to be very much uh uh addressing. What are the real demands compared to the opportunities we have in front of us so it will be hard to lay out there it is more but on a high level. If you want to get a sense of where the more focus is I would say the focus is more on sales as we want to get more and more bookings uh to maintain and get delivered, a good growth uh and get our kegger model delivered.
Great. I appreciate the caller. Congrats again on the quarter.
Thank you, Andrew.
The next question is from the line of Zachary Gun with FT Partners. You may proceed.
Hey there. Thanks for taking my question. I just wanted to follow up and ask about the incremental margins. So, first, I appreciate that the implied 2H margin incremental margins are better on a year-over-year basis, but there is a step down in the second half of the year versus the first half of the year. So, I guess for my first question, is there anything specific driving that to call out?
Well, that I would say, the only thing I like to call out is that, uh, looking at any one particular metric, using a trend of actuals in the past.
And guidance in the future may give you a misleading view. I think it's important to see that and recognize the trends.
And, uh, I would say, first of all, uh, we follow a very prudent guidance methodology. We do not like to count our chickens, uh, before they hatch. So, we are cognizant of what the opportunities are. At the same time, we are aware of the risks in front of us, and we give them a fair share. Uh, we've been fortunate enough to address more of the upsides in our, uh, guidance methodologies rather than the risks. So, uh, we.
Do not expect that, uh, the incremental elite, the margins will go down. We are very, uh, focused on delivering good returns, uh, especially on EBITDA margins. We've been a Rule of 40 company for a long time. So, at this point, I would say that, uh, the incremental growth you are seeing based on that, the incremental margins are still positive, but overall, uh, I think the trends indicate, uh, we take a cautious view here.
Got it. No, I appreciate that. And just as a follow-up on that point. So, the incremental margins are in the low 50s for the full year. Is there any reason to think that that's not sustainable over the long term, and we should eventually expect the adjusted EBITDA margin to converge with that? Or do you think that this is an elevated level? Just anything higher level in terms of longer-term opportunity on the margin side?
Thank you.
How's that the longer term opportunity? I would say is this company has a very strong operating leverage and we have been able to demonstrate that, uh, many quarters in a row and based on the opportunities in front of us for growth and uh, given I'm talking about long term here and not in a very short term, especially not for the guidance periods. We expect longer term incremental, EBD down margins or even the EB, the margins of the company to get better. Uh, this is not the Peak at all. If that is the question. Uh, we are, we are seeing a good growth and this should be getting better.
Better over time, uh, in the outer periods.
Uh, thank you.
There are no further questions waiting at this time. I would now like to pass the converse back to management for any closing remarks.
Thank you, everyone. Have a great day.
Thank you. Bye bye.
That concludes today's call. Thank you for your participation, and enjoy the rest of your day.