Good day and welcome to Paymentus' First Quarter 2023 Earnings Call. This call is being recorded and all participants are currently in a listen-only mode. There will be an opportunity to ask questions following managements' prepared remarks. [Operator Instructions] At this time, I will now turn the call over to David Hanover, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Paymentus' first quarter 2023 earnings call. Joining me on the call today is Dushyant Sharma, our Founder and CEO; and Sanjay Kalra, our Chief Financial Officer. 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 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 the 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 captions, special note regarding forward-looking statements and risk factors in our annual report on Form 10-K for the year ended December 31st, 2022, which we filed with the SEC on March 3rd, 2023, and our quarterly report on Form 10-Q for the quarter ended March 31, 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, adjusted EBITDA and adjusted EBITDA margin. 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 GAAP 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?

Thank you, David. As you can see from slide three, we once again had a very success quarter with top line growth and adjusted EBITDA ahead of our expectations. Revenue increased 27.1% on a year-over-year basis to reach $148.3 million. Our first quarter adjusted EBITDA was $8.4 million, which was 56.4% higher than Q1 of last year. Contribution profit for the quarter was also higher than we had originally expected at $53.5 million despite the ongoing macro. These numbers are especially exciting to me from a profitability standpoint and demonstrate our continued progress. On a year-over-year basis, our adjusted EBITDA grew by $3 million or 56.4%, which means 50% of incremental contribution profit dollars dropped to the adjusted EBITDA line. We believe this is even more compelling if we factor in the macro environment. Between Q4 and Q1, we had about 400 basis points to 500 basis points of macro and seasonality-related inflationary impact. Meaning on an inflation-neutral basis, we would have expected to drop the vast majority for our contribution profit to adjusted EBITDA as OpEx did not increase on a relative basis. As we continue to make pricing adjustments to address inflation, over time, we believe these adjustments will become a tailwind for us when energy prices move closer to the pre-inflationary levels. We are also encouraged that our core biller business has been growing well and is scaling profitably, again, as more of our incremental revenue dollars dropped to adjusted EBITDA. Parallel to this, we continue to make investments in complementary offerings in our instant payment network or IPN and to small and medium-sized businesses or SMBs. IPN remains an exciting part of our strategy and is growing well. On SMB, we are receiving positive feedback from our partners and seeing encouraging early signs from the SMBs.…

Thank you, Dushyant. I am very excited to be a part of Paymentus 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 Q1 press release and earnings presentation includes reconciliations of non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. Turning to slide five. For the first quarter of 2023, we delivered solid financial results that were above the top end of our guidance ranges. We believe these results demonstrate the strength of our business, which continues to perform well despite macroeconomic challenges still at play. Our first quarter results included revenue of $148.3 million, contribution profit of $53.5 million and adjusted EBITDA of $8.4 million. We continue to experience solid business momentum in the first quarter, which drove robust bookings, enabling us to exit the quarter with a solid backlog. Based on our strong quarterly performance and the positive market trends Dushyant mentioned earlier and our expectations for the remainder of 2023, we are modestly raising our full year 2023 revenue, contribution profit and adjusted EBITDA guidance, which I'll talk about shortly. Now let's review our first quarter financials in more detail. As I mentioned, Q1 revenue was $148.3 million, up 27.1% year-over-year. This growth was largely driven by increased transactions from existing billers and launch of new billers and increased activity in our Instant Payment Network or IPN business. Transactions grew to $108.5 million in the first quarter, up 23.4% year-over-year. First quarter '23 contribution profit increased to $53.5 million, up 13% year-over-year. Contribution margin was 36.1% for the first quarter compared to 40.6% in the prior year period.…

Thanks, Sanjay. In closing, based on our first quarter results and the strength of our backlog, we believe we are extremely well positioned for the balance of 2023 and into 2024. We also are laser-focused on bringing more and more of these new customers live on our platform to continue to expand profitability and adjusted EBITDA margins. Our strategy remains simple and in this order. First, sign as many clients as possible to grow the network. This includes larger clients. Second, onboard those clients as quickly as possible and simultaneously deliver best-in-class service. And third, improve operating efficiencies and manage costs in order to drive margin expansion and bring more to the bottom line. I want to take this opportunity to thank each of my colleagues at Paymentus, who worked tirelessly to serve our clients. Thank you. That concludes our prepared remarks. I'll now open the line up for questions.

Absolutely. [Operator Instructions] Our first question comes from John Davis with Raymond James. Please proceed.

Hi. Good afternoon, guys. Dushyant, you talked a lot about kind of the pricing changes that you're going to make headed into this year given inflation. Just curious how those conversations have gone in the unexpected attrition. Obviously, numbers were good, good to see the increase in guide for the full year. But just curious how these conversations have gone with your customers as you implemented pricing changes that you talked about late last year.

Hey, John, thank you for the question. The conversations are going extremely well, actually. Clients are very understanding and they -- we are not the only ones who are talking to them about the challenges in their vendor network, if you will. So we are seeing positive feedback. Some of the conversations have resulted into actual meaningful pricing increases, which we will continue to deploy throughout the year. But one thing I do want to highlight to you and the rest of the analyst community on the investor base is that as we are seeing the trend, what we are doing now is, as an account management team or account management function, we are just including the pricing discussions as an ongoing framework. So we think that until the inflation is completely behind us, we will continue to have these discussions as we are seeing positive trends here.

Okay. That's helpful. And then just quickly on -- I think when you set out the initial 2023 outlook, you assume kind of no incremental new wins in the contribution profit outlook and EBITDA outlook for the full year. You mentioned numerous wins here in the first quarter. So just -- have you had to put those into the guide? Or are you still excluding new wins from the guide? Just help us think about where the guide is today versus 90 days ago?

John, this is Sanjay. Thanks for the question. When we guided earlier versus when we are guiding now, the major increase we are seeing is based on the activity we have seen from the growth with the existing billers and also increased transactions. We did launch some big billers in Q4 last year, and we have seen a decent grow over from them as well. So all that's coming from that, all the growth, I mean, the increased growth in the outlook is coming from these things we have seen. We have not baked in any significant revenue from the new wins. That remains the same what we said last time.

Okay. Appreciate the color. Thanks, guys.

Thank you for your question. Our next question comes from Dave Koning with Baird. Please proceed.

Yes. Hey, guys. Thanks and nice quarter. And maybe a couple of questions. My first one, just implementations, I remember that was part of a little bit of the weakness kind of midyear last year and through the end of last year. You talked about implementations being a little slower. Have those picked up? Are they according to plan? Are they actually may be ahead of plan now? Or how are you seeing those?

Actually, David, that's a great question. And I was trying to allude to in my prepared remarks. The post-pandemic conditions is now actually helping us a little bit, especially in the large deals. That's where we saw some of the -- more of the stretching of the implementation time lines. We are now able to see customers, first of all, both in the sales cycle, but also in the implementation phase as well. So those high-touch engagements are giving us a lot of confidence that we will be able to keep within the time lines we anticipate. So the implementation as a whole is actually on a better footing than where we were last year.

Okay. No, that sounds great. And I guess my second question is a numbers question around the gap between gross and net revenue, really. It was reasonably small in Q4, I think a few percent gap. This quarter, it's about a 14% gap, right? It gross grew 27%, net grew 13%. And next quarter, you're guiding for that gap to be cut in half, basically what are the dynamics? I understand the inflation impacts, but what are the dynamics of that gap kind of moving around?

Yes, a great question. The growth of revenue at 27% and the growth of contribution profit at 13% definitely brings a question. So let me give a around what we are seeing and what we expect to happen. First of all, both these are going to converge as time passes. We are seeing this as a temporary phase. And one of the reasons, as we said, is inflation we are seeing and then, in fact, seasonality is a part of it as well. But we have also started adding to some extent, larger billers in the mix. And what larger billers means is billers with heavy volume of transactions, where the contribution margin on these are slightly lower than the corporate contribution margins. So it's giving a temporary impact where the contribution margins seem low. But as time passes and as we scale more, we expect this gap to converge. And overall, we should realize economies of scale, which should ultimately improve our contribution margin together with contribution profit dollars. In fact, if you look at what we delivered in Q1 and compared with the guidance of Q2 and the guidance for the full year, both in all the three scenarios, you will see that this gap is already converging. And in the outer years, we expect this to converge even more. So we think it's a temporary phase. And eventually, this will be behind us. And right now, it's a great opportunity for us to see how we can scale the business and eventually get a better contribution profit and margin in the long run.

Thanks guys. Great job.

Thank you. Just a quick point I would add to that is that even Q1 bookings give us a lot of encouragement in that regard as well.

Awesome. Thanks.

Thank you so much.

Thank you for your question. Our next question comes from Jason Kupferberg with Bank of America. Please proceed.

Good afternoon, Dushyant and Sanjay. This is Tyler DuPont on for Jason. Thanks for taking the questions. First, I just want to start by looking at the EBITDA margins. I mean, they came in pretty healthy this quarter. Can you maybe just speak to what, in particular, drove that upside to price and sort of how we should be thinking about margins going through 2023 as well? Is it still the right idea to think about quarterly expansion on a year-on-year basis? And I guess going off that point as well, where are you anticipating the most margin efficiencies to come from throughout the year? Is it mostly G&A or any color there would be helpful?

Yes, Jason, I'll say that when we guided, we were expecting close to 40% growth year-over-year, and we came at 56.7%. So we definitely are all are very encouraged about the results. And the thing that Dushyant pointed out, I will just remind that the company's objective is to drop as much as possible the contribution profit dollars we generate to the bottom line. There is a significant inherent operating leverage in the business. We don't really need to spend the money if the contribution profit is increasing. So, I would say that the increase is mainly coming from operating expenses, not increasing in the same line or in the same ratio as the contribution profit is increasing. So overall, I think the operating leverage exists. And in future where that will come will also be from the same. Right now, we are putting some investments in Q2 in our sales marketing and also in Q3. But over time, we expect that the operating leverage would be more than what we see this year. In fact, for the whole year, you have seen EBITDA up by 27% year-over-year at the midpoint. In Q2, we are seeing good growth there as well. So, we are encouraged by what we delivered, and we believe that this growth is going to come. And on the top line, just to mention as well on the contribution profit line, the growth is coming from -- it's mainly organic growth and increase in transactions from the existing billers. And we are also seeing traction on IPN as well, which we will talk more as it grows significantly, but we are seeing good increases there as well. So, I think everything is contribution -- is contributing in the right direction, helping us grow the EBITDA dollars.

Okay. That's helpful. Thank you for that. And then just curious, as a follow-up on bookings growth, it looks like you had a pretty robust increase in that as well as the number of transactions. But maybe if you could just spend a minute or two parsing out how much of that growth was from new versus existing clients, and if there is any vertical concentration that's worth mentioning? And then I guess also jumping through that as well, just sort of how we should think Paymentus is anticipating revenue conversion. Just curious if we should be thinking like how we should be thinking about average conversion rates given the current macro backdrop?

I think we have not shared in the past the new versus existing. But you could actually -- it is safe to assume that we worked very hard towards the tail end of the year to bring as many customers live as possible to actually beat our 2022 top line guidance, which we did. And also set us ourselves up for 2023, as we exited the year with a healthy backlog, so we have done that. We are also seeing some same-store sales, which Sanjay alluded to earlier. So, I think all of those are pointing in the right direction. In terms of the conversion itself, I think we will continue to take a look at whether we can start to share some of the information, the backlog and the -- and how that converts over time. But I can tell you, as I have said earlier, we are seeing positive trends in the implementation area in the overall business just because we are able to interact with our clients, especially the large ones, in the high-touch engagement that is needed to bring them live.

Okay. Great. Very helpful. Thanks and congrats on the quarter.

Thank you.

Our next question comes from Andrew Estes with Wolfe Research. Please proceed.

Hey guys. It's Andrew on for Darren. Just a few on the strategy side, can you maybe talk about the Oracle CIS client base and the opportunity that exists within, especially with the updated implementation? And then with regards to the IPN, just remind us where you are with respect to executing on the third horizon of that strategy? Thanks.

Sure. Thank you, Andrew. In terms of Oracle, Oracle is a great partner, has been a great partner. We have been doing a lot of things together with them in the sense our Oracle customer base continues to grow. This cloud integration actually helps us where an Oracle cloud -- Oracle CIS cloud that client would find it very easy to integrate with Paymentus through the certification of the integration we have achieved. So, we are very excited about that. In terms of the IPN itself, look, IPN to us is a multidimensional strategy. First, on its own, you are trying to bring in or we are trying to bring in the participants who have been left behind, if you will, through the platform we built for the billers. So, what I mean by that is the banks and other fintechs who are left behind, they wanted to play in the Paymentus space, but just couldn't get in just because of the strength of the services we provide directly to the billers through our platform. So, with IPN now, we are able to bring those in, and we have tremendous progress there, a lot of interest in the market. But the second thing about IPN, which I think will become a lot more clear as we continue to execute on our strategy is very efficient distribution model for us or channel for us. We have banks as partners, we have fintechs as our partners, and we also have distribution to a lot of businesses through our payment network, and many of which could utilize our increasing functional footprint of receivable payment payables, expense management and accounting and so on, especially in the SMB space. So, we are very excited about that. And so far, we have seen great progress.

Great. Thanks Dushyant. Great quarter.

Thank you.

Our next question comes from Tien-Tsin Huang with JPMorgan. Please proceed.

Hey. Thanks. Good afternoon. A lot of the good stuff. I wanted to ask already. I wanted to get a little bit more, maybe, Dushyant, on the SMB push with the payables discussion you had last time as well. Just any surprises there in terms of momentum and start to connect closer to the SMBs?

Yes. Thank you, Tien-Tsin. Good question. I was smiling about the word surprises. We are seeing a lot of positive excitement about the product. And it's early stages and a lot of discussions early on and getting a lot of positive feedback as well as from the SMB themselves. Folks are using the product, giving us feedback, and we are seeing a lot of encouraging signs there. We believe that the whole SMB strategy and our strategy to build SMB in a way that all of that functionality is available for enterprise clients as well, especially those who use our receivable capabilities can now leverage payables and expense management and all of that that comes with it. I think it gives us a lot of confidence that we are setting ourselves up for a great future ahead. So, that's the one I am able to share right now, but we will share more as we see more progress.

Okay. Great. And just my quick follow-up, just to expand or dig deeper into the -- what's going on in the bank partner side, given all the stresses in the banking system and all the turmoil, etcetera, has that -- have you noticed any change in terms of existing relationships or even prospective partners on the banking side.

Actually, some of our large bank partners, they are getting even stronger. So, we are very excited about that. But in terms of the overall our bank network, we are not seeing any negative change that we remain just as bullish as we were before about the entire ecosystem of our platform, whether it's on the bank side or the credit union side or the biller side.

Great. Thanks for the update.

Thank you.

Our next question comes from Will Nance with Goldman Sachs. Please proceed.

Hi guys. Appreciate you taking the question. I wanted to maybe follow-up on some of the backlog commentary, you had Sanjay, it sounded like that was sort of what was catching your eye early on from kind of digging into some of the numbers. I am wondering if there is any kind of quantification or perspective you can give us on kind of how the current level of that compares to maybe a year ago and how that might actually translate towards an acceleration of top line as we go into 2024?

So, appreciate the question. I am a little reluctant at this point to share the numbers. I will be honest. I am very excited about looking at the backlog and various other KPIs which I am still trying to understand that. Once we develop a good process around them then I will be happy to share them on a going forward basis. So, that's why the number is not out yet. But I am excited and hence at least qualitatively I am sharing that the backlog is very robust and our bookings were very solid as well. That gives us a lot of confidence not only this year but outer years trajectories pretty visible to me based on how the implementation goes, but we have a very strong backlog. That said I can provide some comfort that how much it has grown year-over-year. It's again, quantification is not something I would like to go here, but it's -- I would say it's a significant increase year-over-year.

Got it. Makes sense.

And if I may -- well if I maybe add to that is that where we sit today, and we are looking at how -- where we want to be next year based on how well we have executed against the implementation backlog to bring customers live especially in the Q4 and then what we are -- how hard we worked during Q1 to bring some of the customers live in Q2. Combined that with the backlog and the early success in Q1, we feel good about where we are relative to 2023 and 2024. And one of the things, which I think I just want to highlight is that when we measure the backlog, we take out all of the same-store sales from it. So, said differently, let's see if I book a client for $1 million in second half of 2022 and that client goes live in some time in 2023, there is some tailwinds, the digitization tailwinds that take place. And then by the time, over a period of time, that customer continues to rise with us as well as the same-store sales. So, when you factor that in is even becomes more impressive, especially with the size of the backlog. But we will take a look at it, as Sanjay mentioned, that what we could share as the time goes by.

Got it. Makes a lot of sense. I appreciate that. And then I guess as a follow-up question. When you guys think about EBITDA conversion over the next couple of years, obviously, you have had a lot of investment priorities, whether it's the IPN, small business platform, some of the acquisitions. But when we look at kind of CapEx and capitalized software, it is running around close to 100% of EBITDA. So just wondering how you are thinking about the level of investment in the business, what the outlook is for that and whether we could see the very strong top line growth contribute towards more cash flow conversion as we get into 2024.

I think that -- I would say this is actually one of the key points you wanted to get across. And that was that -- we have always been a relatively profitability-centric organization obviously, being public, has some costs associated with it that challenged some of the profitability dimensions we had or the metrics we used to have and then obviously, the macro and so on. But one of the things we wanted to get across was that we have the ability to drop a lot of the top line and the contribution profit dollars to the EBITDA line. And we are already doing a lot with our core biller business so even except the IPN and the SMB, some of those new initiative investments we are making. But we feel good about generating -- dropping more to the cash line, if you will, in 2024, just because even as we are making the investments, we feel good about where we sit today with our current OpEx itself. Sanjay, do you want to add something?

I would just add that, I appreciate the question. You see $8.4 million EBITDA and then in the cash flow, you see $8.1 million software CapEx and hence the question. But if you look at our cash flow statement, even though the cash might have dropped by around $3.8 million in the quarter. But overall, our working capital has significantly increased. So, a lot of cash is sitting in accounts receivable, which we plan to turn around in the next quarter. Next quarter, the cash should go up. That's the expectation. And while we don't guide for cash, but going forward, our planning for cash is either to stay neutral or maybe slightly negative, depending if the software development increases. But overall all that investment is happening for future growth for the projects for which we don't see revenue yet. And that is basically going to drive more growth, and that's where all this investment is going. So, that outer years' revenue growth, which is invested today and I think we are on track in terms of managing cash as well for the whole year.

Got it. Appreciate all the color. Thanks for taking the questions.

Thank you, Will.

Thank you for your questions. There are no further questions waiting at this time. So, I will pass the conference back over to the management team for any closing remarks.

Well, thank you, everyone. Thank you for being here with us today, and have a great day, and stay safe.

Thank you all.

That concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.