Introducing Paymentus (PAY)

[wpr101]

Paymentus IPO’d in 2021 and is a cloud based bill payment system. It offers the biller the option to give a number of different payment methods to their clients. They have an impressive trend of accelerating revenue growth and a massive beat on this last quarter’s numbers.

Revenue, and yoy growth
152M → 165 → 185 → 197 → 232
19% → 25% → 25% → 33% → 52%

EBITDA
7.6M → 11.4 → 10.6 → 12.4 → 14.3

Net income
6.4M → 9.4 → 7.2 → 9.4 → 14.4

This last quarter had results on November 12 and they reported,

Guides vs Actuals
Revenue 188-193M → actual 232M (+52%)
Contribution profit 71-74M → actual 80M
Adj EBITDA 18-20M → actual 24.6M

Their upcoming guide looks maybe a bit on the weaker side considering it would be sequential decline, however reading the transcript I believe they could be conservative on their forecasting. Q4 is guided to,

Revenue 215-220M
Contribution Profit 79-81M
Adj EBITDA 22-24M

Some more info on the company,

• Founded 2004
• 1273 employees
• HQ location North Carolina
• Cash 188M, debt 9M

Biggest concerns are,

• Sequentially lower guide
• Investor Accel-KKR owns a huge portion of shares, balanced maybe by the CEO being a large shareholder and there since the start
• Cash flows and Margins are on the weaker side for SaaS based solutions

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Reviewing the last earnings,

• very strong operating leverage
• adj EPS grew 58% to 24.6M
• view today’s interchange expense as possible TAM from a margin expansion standpoint
• capturing market share at a faster pace than ever before as a public company
• IPN - instant payment network
• diverse clients: insurance, government services, municipalities, utilities, education, telecomm, banks, credit unions, and property management
• onboarding a cohort of large clients in the third quarter that we originally slated to go live in 2025 (concern this could weaken Q4, and probably why they guided lower)
• continue to experience strong customer activity and demand which drove robust bookings
• significant backlog
• transactions processed +34.6% yoy
• average price per transaction increased to $1.49 from $1.32 last year
• contribution margin was 34.5% in the third quarter compared to 40.3% last year because of large high volume enterprise billers (not sure why this is down, or if big billers get better deals)
• adj operating expenses were flat sequentially, +16.9% yoy
• adj net income 19.6M compared to 10.9M last year
• receiving greater inbound interest from larger enterprise customers
• raised FY revenue guide 7.3% from the midpoint of last guide
• serve a large and growing non-discretionary market
• strong and differentiated competitive moat
• Q4 has some seasonality (maybe explains weaker guide)
• new TAM on the network fees, “busy thinking about how we can convert the network fees into revenue”
• analyst says history shows Q4 doesn’t have the seasonality, CFO says “we’ve taken a very prudent approach in how this may play out when we come to Q4 guidance”, wants to wait and see if trends continue (here is where I think they may be conservative)
• implementing deals with large enterprise clients faster than anticipated
• whole year have seen continuous trends of improvement, including bookings
• “we got a very good visibility”
• “business is humming in all the directions”, “momentum is very high”
• profitable growth is the mode of operation, “very clear from the numbers”
• expect economies of scale to help
• pricing is working really well, in the mode of capturing the market
• defining the higher end of the market, used to think that higher end could be a few million dollars in the deals, now seeing opportunities to do better than that
• level of complexity for payment outflows has exceeded companies internal engineers capability
• “Now we think of this as a reengineering of the entire customer journey and frankly, the payment journey for customers”
• platform is universally scalable to any vertical, no customer too large, no workflow too complex, no customer too small
• instant payment network (IPN) will continue to be a competitive advantage
• recurring revenue from newer customers is now secured, de-risks 2025
• CEO says, “increasingly more excited about the TAM. The TAM itself is growing beyond, like you said, run of the mill billers”

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Notes from the S1 IPO prospectus back in 2021,

• 16M customers
• feedback loop
• SaaS infrastructure
• 350+ payment integrations with ERPs
• US Bank and JPMorgan refer billers to platform and can jointly sell
• PayPal uses to enable customers to pay bills from PayPal
• enabling Walmart consumers to pay their bills in store
• in 2020 over 37.9B of transaction volume, sector breakdown of 57% in utilities, 23% finance, 16% insurance (has diversified significantly since 2020)
• no single biller was more than 10% of tx’s processed
• secure “omni-channel payments”
• consumers have control, multi-lingual, high quality customer service
• at nexus of billers, partners and consumers
• offers APIs, iFrames, or fully hosted solutions
• helps with PCI-DSS compliance on payments
• reconciles payments to backend financial and operating systems
• commercial bank may while label solution
• consumers initiate bill payments through IPN partners which are routed to billers
• Paymentus gets fee per tx, in some cases Paymentus gives a referral fee to partners
• bank can be biller, strategic partner, and IPN partner
• partners gain access to network of billers and can provide turnkey electronic bill payment functionality
• revenue model is highly visible because: mission critical, embedded, recurring
• usage based monetization strategy
• single point of access for Electronic Bill Payment Value Chain, solution fixes pain points along the chain
• benefits from scale and powerful and accelerating network effects
• 98% of revenue in 2020 was from US, room to expand internationally
• majority of revenue comes from a paid per fee tx by the biller, consumer or both

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Overall I am impressed with the revenue and profitability accelerations this business is showing. I wouldn’t expect a SaaS based billing solution to be ramping up revenue like this, and it indicates to me the solution is taking the market by storm.

I’d be interested to learn more about how the solution compares to BILL. Paymentus is about half the market cap of BILL right now. It is not clear to me yet if they are direct competitors or play in different segments.

[RickMaki]

Hi Wpr101,

Thanks for bringing a new company to the board. It’s certainly something I’d like to dig into over the next few days. In regards to your question on how the solution compares to BILL, while they are both fintech companies, I don’t think they compete for the same space.

Bill.com focuses on automation of Accounts Payable/Receivable. Things like digitizing invoices, automating approval processes and facilitating online payments. Their goal is to improve efficiency in B2B payments.

A quick look at Paymentus and I would say it looks like their solutions are for organizations to present bills to consumers and collect payments. Off the top of my head, I would imagine they would be direct competitors to a company like Tyler Technologies (TYL) who specializes in this same thing but is tailored to public sector agencies.

[wpr101]

Some notes from the Goldman Sachs Communacopia Technology Conference on September where Paymentus presented,

• trying to simplify bill payments
• could based service provider for non-discretionary recurring billing companies like utilities, government services, insurance, telecom, health care, and education
• “the implementation of Paymentus actually, believe it or not, it touches all aspects of your organization”
• all aspects from the customer experience, executives, customer service, finance, billing, and collections
• still a fraction of the market, processing billions of interactions
• “Increasingly, I would like to say that almost all of that market is available to us at this stage”
• getting more interest from the largest billing companies, the household names… they used to outsource the solutions
• previously investment into billing went into the customers who are easiest to collect from, and challenging customers cost a lot in customer support, Paymentus very important tool for collecting from everyone
• billing companies used to have to scramble to find where the payment is when getting stuck, “nightmarish experience”
• banks started to lose the market share to Paymentus platform, which was being adopted by the billers
• can reach almost 100% of a businesses customers with one integration of Paymentus platform
• can offer automated phone systems, mobile payments, tax payments, can call the call center or make a payment using the platform, set autopay
• great partnerships, PayPlay and JPMorgan Chase examples
• setting invoices, how many invoices and with different policies can be set by Paymentus
• the large end of the market is also showing up in our pipelines because we are getting tremendous inbound interest
• our pipelines are stronger than ever before
• platform is agnostic, can support utilities, telecommunications, health care, financials, among others
• when we enter into a new customer or we enter into a new booking, we have an expectation of how much price to expect, how much profitability to expect
• “we are at the pace of delivering growth, are we are seeing consistent improvement”
• making processes more efficient, implementations faster, partnerships with the billing companies
• “we are already seeing tremendous progress at the larger end of the market in all those verticals”
• Paymentus is “kind of under-appreciated” as one of the larger providers in the space
• the market is moving in our direction just because the strategy we adopted of combining our platform with the Instant Payment Network
• remain a very sales centric organization
• already had contracts fully capable of raising the price of product based on inflation, which meant if the billing company raises their billing prices, Paymentus costs more in turn
• whatever changes we make on pricing are permanent so we do not have to go backwards on pricing
• analyst mentions, “you talked about 20% revenue growth, 20-30% adj EBITDA growth and you are running well ahead of those targets”
• it is sustainable, great visibility, our same stores sales are doing really well
• go to market strategy and technology platform are key aspects
• we don’t need a lot of OpEx to generate the business
• analyst notes, have been one of the consistently profitable companies from the 2021 IPO cohort, no pivot to profitability needed
• “product portfolio is pretty complete”

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There was a lot of commentary in this presentation about the bigger enterprises looking to onboard with Paymentus. This last quarter had a big pull through of large customers and it does not sound like that trend is stopping.