All right, we're gonna go ahead and get started here. My name is John Davis. I'm the Payments and Fintech Analyst here at Raymond James. Excited to have Paymentus CEO, Dushyant Sharma, and CFO, Sanjay Kalra, with us this afternoon. It's gonna be a fireside format, but feel free to raise your hand if you have questions. We'd love to be as interactive as possible. So Sanjay and Dushyant, great to have you.
Thank you.
Thank you for having us.
Maybe a good place to start is just a general overview of Paymentus. Just a couple of minutes. There may be some people in the room that are new to the story. Just kind of what problem do you solve? How do you monetize it? Just maybe a quick two minutes on Paymentus.
Sure. So, at a very high level, we exist to simplify bill payments. And what that means is, for a billing company, we are and billing companies, utilities, insurance, government, telecom, healthcare, consumer finance, auto, mortgage, property management, all different verticals. As you can imagine, bill payment is about 60% of a typical household's spend, which is more non-discretionary nature. So you're not gonna be able to spend anything unless you paid your bills, so to speak. So in good times and bad times, you're paying bills. But at a high level, we are about simplifying bill payments, making it easier for billing companies to engage with their customer for billing and payments, and receiving payments. Our value proposition remains very simple: improve the customer experience while lowering the cost to serve.
So, just 10 more seconds on this. If you are a customer of one of our clients, if you receive a text message which said, "Your bill is due," that text message likely came from us. If you received an email, that came from us. If you clicked on any of those and made a payment, that site you're looking at is us. If you call a utility or insurance company who's our client, and you are making a payment, they're likely entering that information in our system. So we have become really a digital experience platform for the entire enterprise.
Okay, great. And, you know, I'm gonna ask the obligatory, you know, quarter-to-date question. You have a very resilient, predictable business model, obviously, mostly non-discretionary bill pay. But just curious, you know, in the past, there's been times where we've had some implementation delays, just anything, been about a month since your call, anything, you know, kind of in November, positive or negative, that kind of stood out at all or kinda tracking as expected?
We remain very excited about the business. We have actually had a phenomenal year, this year, including the last quarter, and we feel good about where we are sitting for rest of the year. No surprises.
Okay, great. I, I think you guys laid out kind of a growth algorithm or a way to think about the business on the last call, you know, 20% top line growth with 20%-30% EBITDA growth. But maybe if we just talk about the building blocks to that 20% top line growth, you know, how much of that is kind of net rev retention versus new logos, and how do you guys think about it and kind of your confidence in giving that kind of midterm target at, you know, a pretty healthy growth rate?
Yeah, let me start, and Sanjay, you can jump in, please, feel free. In terms of the growth algorithm, we actually find ourselves in a pretty strong position. For years of hard work, building a great platform, which is very differentiated, as hopefully you can see from the numbers, very differentiated, as well as sets the foundation for a very durable business opportunity based on the type of distribution strategy we have created, both from direct as well as through channel partnerships. And we have channel partners, partnerships from software vendors to fintech players, but also banks. So very, very proud of that. So combination of that, combined with our same-store sales, gives us pretty strong confidence.
If you add to that, the bookings backlog we have, we feel good about where we are sitting for the rest of the year and obviously feel good about the 20% long-term perspective we have on our business. In terms of the breakout, we haven't really done within the net what percentage of that is same-store sales, but is decent percentage. We enjoy a pretty decent percentage of same-store sales.
Yeah, maybe we just take a step back, you know, talk a little bit about your vertical exposure, you know, mostly utilities today. Are there any verticals that you're particularly excited about, maybe smaller today, and maybe just a high-level kind of rough estimate of, you know, kind of what your vertical exposure looks like today and, and maybe what it could look like over the next five years?
Actually, the way I would like to answer the question would be that, frankly, we designed our platform right from the beginning to be a vertical agnostic. And what I mean by that is, a lot of us in Paymentus, we got together after paying our dues in our first-generation platforms. So we realize how difficult it is to change vertical orientation of a technology platform if you haven't really thought through that early on. So we designed our platform right from the beginning for it to be vertical agnostic, being able to handle any complex, sophisticated workflows related to any specific vertical, without you know, boiling the ocean, if you will. So we have done that. As a result.
We wanted to prove out that can we actually handle utilities, which are the slowest moving, one would argue, on the bill payment side because there are regulatory challenges, and they have to make sure that they're doing it right. The whichever partner they select is a good partner, a good platform, and continues to be so for a long period of time. So from that perspective, we proved our utility, we can deliver great results there, and we remain very excited about that vertical. But we also have expanded into insurance, consumer finance, government, more recently, even into property management, telecom, healthcare. One of the largest healthcare systems is running on our platform, much like some of the largest insurance companies, some of the largest, utilities utilize our platform. So we're very excited about that.
One of the largest B2B companies utilize our platform for in tens of countries. So we feel that we are able to expand into any vertical. In terms of five years out, I think we remain equally excited about all of the verticals just the way we have laid out our growth strategy. And the way we have designed our distribution strategy with partners, we are able to get into verticals with ease relative to how we used to do before having to enter directly recruiting forces and so, workforce and so on. Right now, with some partners we have, we are able to get into different verticals with much easier times, based on the strength of the technology platform and the ecosystem we have designed.
Okay, great. Sanjay, I'm not gonna let you off the hook, so, we'll talk about margins here for a minute. You know, obviously, you know, kind of targeting EBITDA growth faster than revenue growth. You're you have some pretty impressive operating leverage in the business, but how do you balance kind of the growth and then the versus the investments? If you go back pre-IPO, this was kind of a mid-20s EBITDA margin business, so clearly the scale and profitability is there. But how do you balance that, and how should we think about, you know, in any given year, the level of margin expansion that we could expect?
Yeah, John, I would say that, you know, this business, by its inherent nature, has a very strong operating leverage. After that, you know, we are very prudent in spending as well. Based on what happened last year with the macro, how it hurt us, we have a very prudent mindset whenever we spend anything. There are multiple approvals we take through before we spend anything which is not planned. So with that strict control in spending, which I think is needed in today's environment, and then we think outside in a couple of years down the road, you know, we think that we definitely have not only to use operating leverage we have, but also spend prudently, and spend at the place where there are more opportunity for us. For example, today we see a huge pipeline in front of us.
We have a huge TAM, the business which we operate in, and we have still a lot of untapped customers or billers, which we are gonna go after, given the strong pipeline we have. We want to convert that pipeline to bookings so that in future it adds additional revenue-generating opportunity for us. That's what we're doing even now. Like, at the end of Q3 call, we were confident enough to talk about long-term model of revenue and bottom line. All that confidence comes from not only the growth we have seen in the bookings last year, but also to your question on profitability, I think it comes to the operating leverage and the prudence we have in spending.
Okay, great. And, you know, Dushyant, kind of dovetailing on that, one of the areas you are spending a decent amount in investing is IPN. You had PayPal and Amex, you know, this year. So how do we think about IPN? You know, where are you today? You know, when do you think that that will become, you know, less of a drag, if you will, on margins? And just maybe just a general update on IPN.
Yeah, for those who are not familiar with IPN, Paymentus' proprietary network, real-time bill payment network called Instant Payment Network. The way we conceived it was that a billing company, if a lot of the digital, digitally savvy customers start using digital payment options to pay their bills, you still end up being minority of the users, your customers. Majority of the customers are still making out-of-band payments, whether it's checks, whether it's cash, walking into different, stores and making a payment. We felt that if we could actually create a, extend the ecosystem we have created for the billers and extend it outwards to customer cohorts who are not coming to the biller's website to make a payment, if you will, it actually gives us, an ability to monetize transactions we typically don't.
Secondly, it also gives us, gives us an ability to go to the financial institutions who have been left out, if you will, from this bill pay revolution, where they see continuous decline in transaction volumes based on the legacy platforms they've been on. So as a result, IPN is a very important piece of the puzzle, if you will, for our business. Long term, we see IPN will become sort of the glue, which brings anyone who's thinking about participating in the bill pay ecosystem, whether you're a financial institution, credit union, bank, fintech, and you want to participate in the most modern ecosystem related to bill payments, you will think about IPN.
Since that is taking place, if you look at it from a biller's perspective, billers will want to continue to choose a platform that gives them access to all of that with one integration, not just modern ecosystem for their own platform, but broadly as well. This remains an area where we continue to make investments in. We see bringing a more innovative offering as a result of. I think we find ourselves in a very unique situation where we're sort of in the middle of the entire bill payment ecosystem, where banks and billers are both participating.
That leaves a lot of opportunity for us to innovate, where we can take, we can bring new products to market, new form of payments to market potentially, as well, which will be very accretive to our margins, based on just bringing back the banks into the bill pay ecosystem. We plan to continue to make investments in this, and then, as you've seen from our execution this year, we will continue to expand margins despite that investment into IPN. Although IPN is also becoming more contributive to our business, or less dilutive than it has been in the past.
Okay. I mean, given you have a highly predictive business, and as we kind of look into 2024, not looking for guidance by any means, but you laid out a midterm target. Are there any puts or takes, anything we can keep in mind that, you know, any reason why 2024 would be any different than some of the midterm targets that you've laid out?
Well, shouldn't be. I mean, we think that's a long-term target, and midterm target will be similar. We don't expect it to be, but at the same time, I want to just say this is not the guidance. You know, when we do the guidance, when the time for guidance comes, we look at exactly what we have, what is the status of business, what's the bookings, what's the backlog, what is gonna convert to revenue and all that. We will do all those exact math, and we think we should fall in a very similar ballpark, but it's not very specific. But we wanted to set a kind of a long-term target, and that's why we set 20% top line and 20%-30% EBITDA dollars growth. But that's kind of the driving force for us.
But that said, when the time for guidance comes, we'll give, but at this point, I don't think it would be far off from where it is.
Okay. Oh, great. And Sanjay, or, sorry, Dushyant, when we sat here last year, you talked about some pricing changes that you're, you're gonna make, but that was gonna be kind of a, a multi-quarter process as you kind of didn't just blanketly go in and raise price across the board, but obviously with inflation, you know, talk a little bit about your pricing strategy in the sense that, is it still majority per transaction fee versus kind of basis points? And where are we in the pricing renegotiations? I know it was layered in throughout this year. Just trying to be mindful of when we potentially start lapping some of those price increases.
That's a great question. Actually, sort of describes the strength of our business in some ways. If you look at it last time we were here, and I was very, very comfortable with the fact that we wanted to do the right thing by the customers. We wanted to be a great partner for the work, for our customers. Our relationships are long term, and we want to make sure. And frankly, as I mentioned earlier, same store sales, every customer who stays on our platform is actually growing their business on our platform. So we want to make sure that we are preserving that. We didn't want to rush to go to the customer immediately, as we were not sure whether the inflation is transitory or is gonna be a little bit more persistent.
If, and as that became clearer to us, we were able to go to our clients and walk them through all the math and what the impact to us was. Almost all of our clients were appreciative and allowed us to, whoever we wanted to make the change to, allowed us to make the change. But those changes are here with us. The part of the benefit of doing it the way we did it was that when the disinflation or, hopefully, deflation starts to kick in, we're not going to have to go back and give those benefits back. So we, they're gonna stay with us. They're in our pricing model.
As Sanjay mentioned, in terms of the long-term growth algorithm, I think that remains intact with all of these changes we have made.
So you've pretty much implemented all the pricing changes at this point.
Correct.
So maybe, you know, start lapping those, you know, kinda halfway through next year. 'Cause I know it was a phased-in approach.
Yes.
It wasn't just like a, you know, January 1, price is going to X. It was kind of client by client. So I just want to be mindful of, you know, some tailwinds and appreciate you've now raised price, and, you know, when inflation cools, that's, you're, you know, you're clearly gonna get a benefit from that. But, you know, just from a timing perspective, just want to be mindful of, you know, when do those kind of more or less fully implemented?
I think they are implemented right now. In terms of, we don't look at the same way that they lap, you know?
Right.
Lapping has the feeling that this is somewhat transitory or the benefit is. We look at it that the pricing changes we have made are from henceforth going to stay in place.
Right.
And which was actually it speaks to the strength of our platform, the strength of the relationship and the service mindset we have with our customers, and frankly, the respect for the relationship both parties have for each other, us and our customers. So we feel good about the pricing. In terms of the year anniversary, I think probably sometime mid of next year.
Okay.
Yes.
But John, I would add that, you know, as the regular business progresses, there are challenges which come. For example, macro, which came last year.
Right.
Which we tried to manage. There could be other things which could come, but when every business goes through it. So I think our goal is to grow at the metric which we are driving the business towards. Anything comes along the way, whether it's positive or negative, will be dealt in a manner that it doesn't hurt our EBITDA margin targets. That's the goal. So yes, if our, you know, for example, if we are making more money in, say, margins because our business is growing significantly, we'd like to spend more to get to and, and convert more of the pipeline to bookings. If we are not able to get there, we'll reduce the spend. As far as our EBITDA margin dollar is growing at the levels which we are setting. So that's our driving force, but maybe it's a subset of the question.
Anything else which comes, you know, but I think we can. We have enough flexibility to manage it.
Okay. Yeah, and if I look over, over the last year, you know, you guys set initial guidance this year, have handily kind of beat that as things have improved. You put through the pricing, we've had some great flow-through to EBITDA dollars and margins. But one of the things that I think you've definitely harped on and hope to get a little bit more color on is just the strength in the backlog and kind of your confidence. Your tone seemed to improve throughout the year as far as the confidence and sustainability of the growth, and you keep citing backlog. And I appreciate you guys don't give specific metrics, but maybe just a little bit more color on what drove the backlog improvement this year. You know, are you having specific success in a particular vertical? Is it broad-based?
You know, it just feels like there's been a tone change in the backlog kind of throughout the year, getting more positive.
I think we felt that the investor base needed to know because it takes a little while to see the momentum of our sales in the numbers, and we wanted to make sure that investors were able to assess the opportunity with a more complete picture in terms of how well the business was doing. Our sales momentum remains very strong, and primarily because of the strength of our competitively differentiated offering. And it has sustained the test of time, right? We're not a one-year-old company. We've been here for a while. You know, we have continued to innovate, continued to make the difference in the market.
What's driving the backlog is primarily the way we have architected our distribution strategy. Our sales teams have progressively become more productive, more efficient. Our distribution channel partners have become more actually stronger in terms of not just the breadth, but also the depth of each of the partners as they understand how much impact Paymentus makes in a given enterprise ROI, or the efficiencies and improved customer experience. So from that perspective, we see that's a trend we can rely on. It'll continue on. So we feel good about where we are for the rest of this year and later.
Okay, great. Thank you.
John, I would add, it's not just the number of billers we have added more in our bookings and backlog, but actually the size of the billers is also very relevant, which is giving us a lot more confidence that, you know, any, say, any customer more than $1 million ACV, we are getting many more of those versus getting just $500,000. So that trend has changed, and that also is helping us to have that confidence that the backlog is strong and is going to convert to revenues in the expected timelines.
Great. Yeah, you know, from my seat, and I think maybe the. Oh, we have a question in the audience.
Can you talk about the cost structure a little bit? I would have expected incremental margins to look a lot higher for a business like this. Something about the cost structure that I don't understand?
So the question is if you.
What are your fixed costs, and what, like. Is there a point in time and scale where your incremental margin, contribution margin, look a lot higher than what they are today?
Yeah, I mean, from our perspective, the- we're still in a growth phase of the business. We are still driving for growth. And as a result of that, you're seeing a lot of investment in sales and marketing. We also talked about our Instant Payment Network is another area where we continue to make investments in. But lately, I mean, if you saw in Q3 what was our margin, EBITDA margin as a percentage of contribution profit was.
25%.
25%. So we, we feel like that we are we'll continue to, you know, expand our EBITDA margins. And outer years will do even better. I mean, we, we feel like that, we might be able to expand maybe 100 basis points each year.
Yeah, and I think also probably IPN is weighing on the incremental.
Yeah.
Margins and the investments you're making there.
Uh, exactly.
No, great. So, you know, I think one of the tough things for analysts and investors alike, when you see a 20% growth business is, you know, how do we think about the durability and the duration of that growth? So, Dushyant, maybe just talk a little bit about the market opportunity here in the US. You know, what I call bill pay 2.0, right? Not the legacy bank bill pay. Seems to still be very early innings, but maybe help put us, you know, put that in context of where you see the market opportunity, where we are today. Still feels very early innings, but just love to get your perspective on kind of the durability of the growth.
Great question, John. Thank you. In terms of the market, I think we have a huge TAM, and it has expanded actually since the IPO. If you look at just the bill payment itself, it's a multi-trillion-dollar opportunity just in U.S. alone, and we haven't even captured 500 basis points of that. So we're just getting it started, and we could grow multifold as a business in our existing customer base. If 100% of our customers had 100% adoption, we might be, you know, approaching S&P 500. So I mean, it's a pretty sizable business opportunity on its own. So we are in the early innings.
We believe that if we can continue to stay focused, remain centered on customer-centric innovation, and continue to make investments, appropriate investments, but also recognize the operating leverage we have and start flowing more and more through to the bottom line, we can continue to drive pretty strong growth long term, as well as very high EBITDA margins.
Yeah, I understand there's a huge opportunity in the U.S. I mean, what are your thoughts? I mean, there's discretionary bill pay around the world on any potential, you know, international expansion. I understand that's probably not on the horizon by any means a near or even medium term, but how do you think about your solution and how that potentially play in some markets around the world?
Yeah, actually, we have been so focused domestically, even though our platform is processing payments in over 30 countries right now, actually. So we have multilingual capabilities, multicurrency, all of those capabilities already exist in the platform. And, while the U.S. market is $5 trillion of household spend, the bill payment market worldwide is multifold larger than that. So it's a big opportunity for us. And we have looked at some areas in Europe and others that the market, the Paymentus' approach of taking the payer-centric position and then going to the financial institutions and the consumer side of things will be well-received everywhere.
There's an opportunity beyond U.S., even though we are focused here right now, primarily.
Okay. And Sanjay, maybe I just wanted to touch a little bit. You're in an envious position. You have net cash on the balance sheet, free cash flow positive. So maybe just talk a little bit about capital allocation. You have a little bit of challenge buying back stock, if you will, just given liquidity. You know, maybe talk a little bit about M&A. You guys have done a couple of small deals since you've been public, but just how do you think about capital allocation priorities and what you're going to do with that cash you've generated?
Yeah, great question, John. I would say the capital allocation priorities remain unchanged. We are focused on growth of the business, whether organically or inorganically. I think as of now, if you look at our roadmap, we don't have any deficit which we need to fill. We are not looking to fill up anything. The biggest area for us to organically grow is to improve our bookings more than what we are seeing. And I think we are ready to spend the money there. So sales and marketing is gonna be our biggest area to spend in the year or maybe years to come. And even starting Q4, we talked about our growth scheme should be there. So that's the area we'll put more effort on spending, but currently, we do not have any plans for, say, buyback or anything else.
M&A is something which we are not centrally focused on, but, you know, the fintech market is pretty interesting and we do get teasers from a bunch of companies, and we take a look at it. If something makes sense, we will be all up for it. We are looking for something which is gonna give us more growth, which is gonna be a cash-generating business, which is gonna be accretive to us. So as far as all those criteria are satisfied, we would be interested. We would not let any great opportunity for our shareholders go out of our hands. But at the same time, we are not looking to spend somewhere else, which is not gonna be beneficial for the company. It has to be the growth of the company, whether organic or inorganic.
Okay, great. And, you know, one of your competitors and peers was recently, you know, acquired by PE. So I'd just love to get your comment or your thoughts on being a public company, the advantages. You know, obviously, you have a little bit of a liquidity overhang, given the PE ownership and what you own yourself. You know, how do you guys think about that? What are the advantages? Like, where do you see Paymentus longer term? I'm sure there's no shortage of suitors knocking on the door.
Look, we are. The market opportunity is big. It is, and we are having fun. We are having fun building a great business here. Even though to the outside world, it may appear at times that, you know, it was not as much fun when the markets were, you know, fintech markets were collapsing around us and so on. I felt that it is a great opportunity for us to demonstrate for the long-term shareholders that it's not what happens to you, how you react to, and a great management team and great leadership is all about being able to deliver strong results in a very difficult market, and we were able to do that.
I feel like we have a great road ahead and we are having fun. We'll continue to enjoy being a public company.
All right. Any, any questions? We have a minute or so left. All right. So, so as we wrap, you know, Dushyant, we talked a lot about the business, the opportunity, but, you know, what do you want investors here and those listening or, you know, will read the transcript, what do you want them to take away, the one or two things about the, the business or, you know, our conversation this morning that you want people to walk out of the room with?
Look, we have built a great franchise. It's a great business. We have a great technology platform, it's differentiated. We have a great management team. We have done it before. We have also, over the tenure of the business, we have dealt with different great times as well as not-so-great times, and we have been able to continue to grow the business and expand margins. So if you're looking to, for a, for a business that is focused on non-discretionary household spend, where people still have to pay their bills, and you're looking for a solid, growing business which has an ability to expand EBITDA margins, even in a difficult year like this, we have had, we are the place, and we'd love to have you.
All right. Well, we're out of time, so thanks, Sanjay. Thanks, Dushyant.