Paymentus Holdings, Inc. (NYSE:PAY) Q3 2023 Earnings Call Transcript
Paymentus Holdings, Inc. (NYSE:PAY) Q3 2023 Earnings Call Transcript November 6, 2023
Operator: Good day and welcome to Paymentus’ Third Quarter 2023 Earnings Call. This call is being recorded. [Operator Instructions] At this time, I will now turn the call over to David Hanover, Investor Relations. Please go ahead.
David Hanover: Thank you. Good afternoon and welcome to Paymentus’ third quarter 2023 earnings call. Joining me on the call today is Dushyant Sharma, our Founder and CEO; and Sanjay Kalra, our CFO. Following our prepared remarks, we’ll take questions. Our press release was issued after the close of market today and is posted on our website where this call is being simultaneously webcast. The webcast replay of this call and the supplemental slides accompanying this presentation will be available on our company’s website under the Investor Relations link at ir.paymentus.com. Statements made on this webcast include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements use words such as will, believe, expect, anticipate, and similar phrases that denote future expectation or intent regarding our financial results and guidance, the impact of and our ability to address continued economic uncertainty and inflation, our market opportunities, business strategies, implementation timing, product enhancements, impact from acquisitions and other matters.
These forward-looking statements speak as of today, and we undertake no obligation to update them. These statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements, including the risks and uncertainties set forth under the caption, special note regarding forward-looking statements and risk factors in our annual report on Form 10-K for the year ended December 31, 2022, and our subsequent quarterly reports on Form 10-Q, including our Form 10-Q for the quarter ended September 30, 2023, which we expect to file with the SEC shortly and elsewhere in our other filings with the SEC. We encourage you to review these detailed forward-looking statements safe harbor and risk factor disclosures.
In addition, during today’s call, we will discuss certain non-GAAP financial measures, specifically contribution profit, adjusted gross profit, non-GAAP operating expenses, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income and earnings per share. These non-GAAP financial measures, which we believe are useful in measuring our performance and liquidity, should be considered in addition to and not as a substitute for or in isolation from GAAP results. We encourage you to review additional disclosures regarding these non-GAAP measures, including reconciliations of the most directly comparable measures in our earnings press release issued today and the supplemental slides for this webcast, each available on the Investor Relations page of our website.
With that, I’d like to turn the call over to Dushyant Sharma, our Founder and CEO. Dushyant?
Dushyant Sharma: Thank you, David. In the third quarter of 2023, Paymentus again delivered outstanding business results with a strong growth in revenue, contribution profit and adjusted EBITDA. Third quarter revenue increased 18.9% on a year-over-year basis to $152.4 million. Adjusted EBITDA, which is a significant financial metric for us finished well ahead of our expectations at $15.5 million, a 93.9% year-over-year increase. Contribution profit was $61.5 million, growing 20.3% year-over-year. In Q3, we added $10.4 million in contribution profit over the same period last year, while dropping over $7.5 million of that to adjusted EBITDA. So similar to Q2, the majority of incremental contribution profit dollars, we generated a drop to the bottom line.
We believe this is important and demonstrates our ability to expand our operating leverage without sacrificing growth or innovation. This has been our operating strategy throughout 2023. Our updated guidance for Q4 and full year 2023, which Sanjay will cover shortly, reflects the continued execution of this strategy and our expectation that a significant portion of our incremental contribution profit will drop to the bottom line in the fourth quarter on a year-over-year basis. Our goal is to deliver high-quality earnings with solid top line growth. We are proud of what we have accomplished already in this regard, and we expect to continue executing on this strategy, which we believe is extremely effective in today’s macro environment where many things are beyond our control, such as interest rates or geopolitical events.
Now I’ll review some of our key third quarter business highlights and accomplishments. We exited the third quarter with a strong bookings backlog and are very pleased with the year-over-year growth we have achieved so far in 2023. Given the strength of our backlog, we feel good about the remainder of 2023, and we believe we are well positioned for 2024 in our ability to deliver top line and adjusted EBITDA dollars growth. We believe the key reason for our continued momentum is the strength of our technology platform, competitive differentiation with diverse financial product, fintech products, and ever-expanding Instant Payment Network or IPN ecosystem, which enables our clients to participate in a broad and diverse ecosystem by merely integrating onto our platform.
We believe our Instant Payment Network ecosystem continues to be attractive to financial institutions as well because it allows them to modernize their legacy bill pay experience with minimal difficulty or expense. On the topic of our strong sales momentum, we signed several large clients during the quarter. For example, we signed two large insurance companies who will use our platform and the Instant Payment Network ecosystem to receive payments from various channels from the consumer and business policyholders. We also signed a large consumer finance business for managing their loan payments across all channels. And we also signed a large credit union to manage their online bill payments using our Instant Payment Network. We believe this opens a further upsell and incremental revenue opportunities for us with similar clients to handle their loan repayments in addition to bill payments.
Among various other clients across multiple verticals, we signed a large government agency for managing their payments on our platform. We also remain focused on onboarding our strong backlog in order to drive continued growth. We are making targeted investments in this area and believe these investments as well as the improving post-pandemic environment that allows for a more in-person collaborative process continues to help us in accomplishing this goal. In terms of our implementation progress, we launched several large clients during the quarter across various verticals, including a wholesale business-to-business entity, a health care company, a large utility, and multiple insurance companies, financial institutions, and government agencies.
Complementing this, we also added new partners to our growing partner ecosystem in various business verticals. These include an education technology company and a health care company to assist with expansion of our platform in these industry verticals, along with several partners in the municipal and the utility space. In summary, we reported excellent results for the third quarter, once again demonstrating our ability to expand our operating leverage without sacrificing our continued growth. We continue to have solid sales momentum and remain focused on onboarding our strong backlog. Now, let me turn it over to Sanjay to review our financial results in greater detail.
Sanjay Kalra: Thanks Dushyant 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’ll be referring to include non-GAAP financial measures. As David mentioned earlier, our Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures discussed on this call to the corresponding GAAP measures. Both of these are available on our website. Turning to Slide 5. For the third quarter of 2023, we delivered excellent financial results. We believe these results demonstrate the resiliency and strength of our business, which continues to perform well despite present macroeconomic concerns. Our third quarter results included revenue of $152.4 million, contribution profit of $61.5 million, and adjusted EBITDA of $15.5 million.
As Dushyant noted, contribution profit and adjusted EBITDA came in higher than expected, and I’ll discuss that in more detail in a bit. We also continue to experience solid business momentum in the third quarter, this enabled us to exit the quarter with a robust backlog while strengthening our cash position. Based on our strong performance this quarter, the positive business trends Dushyant mentioned earlier, and our expectations for the remainder of 2023, we are raising our full year 2023 revenue, contribution profit, and adjusted EBITDA guidance, which I’ll talk about shortly. Now let’s review our third quarter financials in more detail. The number of transactions payments processed grew to $115.4 million in the third quarter up 25.2% year-over-year.
As I mentioned earlier, Q3 revenue was $152.4 million, up 18.9% year-over-year. This growth was largely driven by increased transactions from existing billers, the launch of new billers and increased activity in our Instant Payment Network or IPN business. Third quarter 2023 contribution profit increased to $61.5 million, up 20.3% year-over-year and ahead of our expectations. This year-over-year increase reflects higher transactions from existing billers and the launch of new billers that I mentioned earlier. Contribution margin was 40.3% for the third quarter compared to 39.9% in the prior year period. As previously noted, contribution profit in the third quarter surpassed our expectations. This outperformance was primarily due to 2 factors.
First, we saw some improvement in the Energy Services Consumer Price Index, or CPI, during the quarter that we didn’t originally anticipate. Second, we experienced some favorable unexpected seasonality from several newly implemented billers. We expected to see the favorable seasonal biller activity in the fourth quarter, but it occurred a quarter earlier than expected. Contribution profit per transaction for the quarter was $0.53, which was modestly down by 3.6% from $0.55 in the prior year period, primarily due to biller mix and payment method mix from newly launched billers. As we stated in the past, variables outside our control, such as an increase in average payment amount, changes in the payment mix, biller mix, CPI, and card network fees, et cetera, can significantly influence contribution profit on a quarterly and per transaction basis.
Adjusted gross profit was $51.3 million for the third quarter, up 24.9% year-over-year. Year-over-year adjusted gross profit growth exceeded contribution profit growth, primarily due to economies of scale of processing costs. Non-GAAP operating expenses increased to $37.9 million, up 8.9% year-over-year. The increase was primarily due to higher sales and marketing expenses as we continue to focus resources on the execution of our go-to-market strategy. Adjusted EBITDA for the third quarter was $15.5 million or 25.3% of contribution profit, up 93.9% compared to $8 million or 15.7% of contribution profit in the prior year. This strong quarterly performance compared to the guidance we had provided in August was driven by four key factors. First, we benefited from some level of deflation of CPI Energy Services Index during the third quarter, something we could not anticipate.
Second, as noted earlier, we experienced increased contribution profit due to some unexpected seasonality from several recently implemented billers. Third, as I just mentioned, our processing costs improved due to economies of scale. And fourth, expected hirings progressed slower than we originally planned in the quarter resulting in lower operating expenses. Even taking into account these unexpected variables, which benefited us, I believe our strong adjusted EBITDA margin demonstrates the inherent operating leverage we have in the business and our ability to adapt to changing market conditions as we continue to grow. Other income was $1.9 million during the third quarter reflecting increased interest income from our bank deposits and effective cash management.
Non-GAAP net income was $10.9 million or $0.09 per share compared to non-GAAP net income of $3.8 million or $0.03 per share in the prior year period. Now I’ll discuss our balance sheet and liquidity position on Slide 6. We ended Q3 with cash and cash equivalents of $166.9 million compared to $162.5 million at the end of Q3. The $4.4 million increase is primarily comprised of $13.1 million of cash generated from operations, offset by $8.9 million used in investing activities, primarily internally used capitalized software used to drive growth and innovation. The company does not currently have any debt. Our free cash flow generated during the quarter was $4.3 million. Our days sales outstanding at the end of Q3 was 45 days compared to 41 days at Q2 ‘23, within our expected range.
Working capital at the end of Q3 was approximately $196 million, an increase of approximately $6 million from the end of Q2 ‘23. We had 125.6 million diluted shares outstanding as of September 30, ‘23 compared to 124 million diluted shares outstanding at the end of Q2 ‘23. The increase was largely due to improved average stock price during the quarter and to some extent, due to vesting of employee restrictive stock units and the exercise of stock options. Now I’ll turn to our guidance for full year 2023 and Q4 2023 on Slide 7. Given the considerable progress we have already made in 2023, and our expectations for the remainder of the year. For the full year 2023, as reflected on the left side of the slide, we now expect revenue in the range of $604.5 million to $608.5 million, up from the midpoint of our previous guidance.
Contribution profit in the range of $235 million to $237 million, up at the midpoint versus prior guidance and adjusted EBITDA in the range of $50 million to $52 million, representing a 17% increase at the midpoint versus our prior guidance. As reflected on the right side of the slide, for Q4 ‘23, we now expect revenues in the range of $155 million to $159 million, up from our prior guidance. Contribution profit in the range of $60.5 million to $62.5 million, with a narrower range than before due to better-than-expected seasonality benefits we realized in Q3 from newly implemented billers. We had originally expected those benefits to occur in Q4. Adjusted EBITDA in the range of $12 million to $14 million, representing an 18% increase at the midpoint versus our previous guidance.
In summary, we reported exceptional third quarter results. During 2023, we have continued to build on our solid momentum with strong revenue, contribution profit, adjusted EBITDA, and bookings growth, which enabled us to end the third quarter with a solid backlog. As a result, we have strong visibility and believe we have positioned ourselves well for the fourth quarter of 2023 as well as into the next year. Thank you, everyone, for your attention today. And now I’ll turn it back to Dushyant for final remarks before we open up the call for questions.
Dushyant Sharma: Thanks, Sanjay. In closing, we are very pleased with our third quarter results and are very excited about the long-term value we are creating in the business and for our stockholders. We are also very proud that over the last couple of years, we have consistently demonstrated that; a, we can grow revenue while still expanding margins; b, we can achieve this growth and sustain our sales momentum even in a challenging macro environment; and c, we have built a world-class team that knows how to come together and operate the business and still deliver these great results while navigating through difficult market conditions. To that end, I want to thank my team for all their efforts. That concludes our prepared remarks. I will now open the line up for questions.
See also 11 Best Uranium Stocks To Buy and 15 Biggest Corporate Frauds in US History.
To continue reading the Q&A session, please click here.
