Good day, and welcome to Paymentus' Second Quarter 2022 Earnings Call. This call is being recorded [Operator Instructions]. At this time, I would like to hand the call over to Paul Seamon, Vice President, Financial and Strategy for some introductory comments. Please go ahead.

Thank you. Good afternoon, and welcome to Paymentus' Second Quarter 2022 Earnings Call. Joining me on the call today are Dushyant Sharma, our Founder and CEO; and Matt Parson, 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 Web site 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 continued economic uncertainty and inflation, our market opportunities, business strategy, implementation timing, product enhancements, impacts 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 31, 2021, which we filed with the SEC on March 3rd, 2022. Our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which we expect to file with the SEC in early August 2022 and elsewhere in our filings with the SEC. We encourage you to review these detailed 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 are non-GAAP financial measures. These non-GAAP financial measures, which we believe are useful in measuring our performance and liquidity, should be considered in addition to, 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 with 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 and in our filings with the SEC. With that, I'd like to turn the call over to Dushyant Sharma, our Founder and CEO.

Thanks, Paul. We believe the business performed well in the second quarter, with momentum in both sales and revenues. The revenue increased $26.5 million or 28.3% to $120 million. Contribution profit in the quarter grew 30.2% to $48.7 million, driven by a 39.4% increase in transactions. Our sales engine continue to be strong with signings of more than 60 deals again this quarter, bringing the year-to-date total to over 125. This number of signings is more than 50% higher versus the same period last year. Notwithstanding the challenging economic environment, including inflationary pressures and the session, these results illustrate why we believe our business is resilient. In spite of the current headwinds, we are seeing around client-based implementation delays and inflation, which we will talk more about later in these prepared remarks. We remain excited about our fundamental business operations and long-term prospects. We continue to drive implementations forward and had a number of client implementation success stories in the quarter. One example is the implementation of one of the largest utilities in the country. This client serves a very large footprint across the country and selected us to handle the complexity of the nationwide implementation. We also completed the migration of a large municipality with JPMorgan support. A third client we implemented in the quarter was a top 20 credit union with over $10 billion in assets. As we continue to move up market, this is our third financial services client with over $10 billion in assets launched on our banking IPN platform. As you know, the pricing model for banking bill payments is not affected by interchange. Also in the quarter, we received the Pacesetter Awards for 2022 from a large enterprise software company utilities user group, recognizing Paymentus for its leadership in billing and payment innovation. We are proud of this award and believe it exemplifies the strength of our billing and payments product and innovation. We also completed integration with one of the leading providers of electronic health care records in the quarter along with adding advanced payment functionality for the health care vertical to our product. Although we believe we had a solid financial performance this quarter, the difficult economic climate is not without impact on us. Implementation and onboarding is one of the primary areas we are seeing impacted by these difficult economic times. A few of our larger deployments, which were originally slated to go live in Q2 and the back half of 2022 have been stressed out due to lack of client IT resource availability. Due primarily to these client-based slowdowns, we are changing our full year 2022 guidance. However, I'd like to make it clear that in better economic climate with normal implementation time lines, it specifically relate to these clients, I believe we would be meeting or beating existing guidance for 2022. If you take a long-term view of the business as we do, these delays are not particularly significant, especially considering that the anticipated financial benefits from these clients are merely delayed to future quarters, not lost. Matt will cover the details as he discusses our financial results and revised guidance. Matt?

Thanks, Dushyant. As a reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our press release and supplemental slides for a reconciliation of non-GAAP items to the most directly comparable GAAP financial measure. In the second quarter, we processed 89.5 million transactions, which is a 39.4% increase over the same period last year. Transaction volume was driven by Biller Direct with tailwinds from IPN, Payveris and B2B transactions. The transaction growth led to a revenue increase of 28.3% in the quarter, which resulted in revenue of a $120 million. Contribution profit was $48.7 million, representing a 30.1% increase over Q2 last year. Consistent with the last several quarters, contribution profit grew a little faster than revenue, primarily due to an increased mix of transactions without interchange, specifically IPN transactions and B2B transactions. Contribution profit per transaction was $0.54, which was consistent with the past two quarters and our expectations. As we said multiple times in the past, fluctuations in areas outside our control like average payments or payment mix can impact contribution profit on a quarter-to-quarter basis. Historically, we have seen these things even out on a full year basis. However, given the ongoing economic uncertainty, we will continue to monitor these things very closely in the back half of the year. Adjusted gross profit increased $8.6 million or 28.6% in the quarter to $38.7 million. Adjusted EBITDA was $5 million for the second quarter, which represents a 10.3% adjusted EBITDA margin, which was a little softer than we expected primarily due to wage inflation. Operating expenses rose $13.2 million to $38.1 million for Q2 of 2022 from the same period last year. Overall, the increase in operating expenses from last year was driven by investments in staffing as well as additional operating expenses associated with Payveris and Finovera, the amortization of identified intangible assets from the acquisitions and stock-based compensation. Specifically R&D expense increased $2.3 million from the second quarter in 2021 to $10.2 million. Sales and marketing increased $8.3 million, driven by the Payveris acquisition, continued expansion of the sales team, adding partnerships to capture our sizable market opportunity and an increase in stock-based compensation. We experienced an increase in G&A expense of $2.6 million via our acquisition, multifold increases in the cost of corporate insurance and ongoing investment in public company infrastructure. Our GAAP net loss was $2.5 million and EPS for Q2 was negative $0.02. Non-GAAP net loss was $400,000 and non-GAAP EPS was 0 for the quarter. As of June 30, 2022, we had a $158.3 million of cash and cash equivalents for our balance sheet. Cash decreased primarily due to the timing of certain customer payments as well as increased operating expenses due to the acquisitions. At quarter end, we had approximately 122.6 million shares of common stock outstanding. Now turning to our 2022 full year outlook. Coming into Q2, we were comfortable with the guidance we gave. As Dushyant mentioned earlier, elongated implementation of onboarding times and this economic environment has created slower-than-expected net revenue recognition for the second half of 2022 of approximately $6 million to $8 million. But this revenue is not lost. It's just shifted into future quarters with the contract terms and TCV remaining the same. The inflationary environment has also compressed our contribution profit by a couple of million dollars. We were able to recapture some of the inflationary impact with price adjustments, some of which is already in process, but it takes a bit of time to recognize the impact. Based on these factors, we're changing our 2022 revenue outlook to the range of $485 million to $492 million. We're also changing our contribution profit guidance to be between $200 million and $204 million for the year, which is approximately 26% to 29% growth. We broadened the range due to the economic uncertainty, specifically the uncertain timing on implementation and potential for ongoing inflation. Just to provide some context on the stretched out implementation, in our Q3 call last year, we told you about a large new client win that would add 400 basis points to our then revenue run rate. It was our expectation that this client would go live in Q3 of this year. However, that client has now rescheduled to go live to 2023. We also have one other large implementation that has done the same. To be clear, we aren't expecting any loss of revenue associated with these clients. It's simply starting later than was originally anticipated, and we expect to start recognizing this revenue in 2023. We expect these delays to have a bigger impact on Q3, combined with the fact that Q3 is a lower contribution margin quarter seasonally. As a result, we anticipate little to no sequential contribution profit growth over Q2. Our adjusted EBITDA outlook is now in the range of $25 million to $29 million with an adjusted EBITDA margin of 13% to 14%. We are seeing ongoing wage pressure in our current workforce due to the levels of inflation, which is also putting some short-term pressure on our EBITDA margins. In addition, after seeing the current sales momentum, we expect to make additional investments in our sales and marketing efforts. Our current guidance reflects some assumptions around continued inflation and potential for increasing wage pressure, further expected delays in implementations could also impact our ability to meet our guidance. To be clear about our guidance, we widened our range to provide a better view on the spectrum of scenarios given the increased economic uncertainty. We expect to finish the year in the ranges we've laid out. Finally, as we said last quarter, we would anticipate our full year effective tax rate to be around 30%. However, due to the amortization of intangibles associated with the acquisition, the closer we are to breakeven on pretax book income, the more variation we could see on our tax rate. In addition, the permanent tax benefit from stock-based compensation continues to impact the rate. I'll now turn the call back over to Dushyant for some closing comments.

Thanks, Matt. Before taking questions, I'd like to spend a little bit more time talking about the economy. In the quarter we experienced solid growth in the same-store sales. For example, in utilities, we saw close to 10% growth compared to second quarter of 2021. We believe the business can weather unusual level of inflation though, contribution profit growth would have been a little bit better without it. We have and will continue to manage through this environment by closely working with our clients as our contracts provide some flexibility to make changes over the medium term when the average transaction increases at the rate we have recently seen. We plan to maintain our responsible growth philosophy by keeping a balance between investing for future growth while continuing to look for ways to increase profitability in the near term. The vast majority of our expenses outside of interchange are people related. So we have the flexibility to add or pause hiring based on market conditions or the opportunities. And look, we have been in business for a long time, and the bottom line is, I don't like to lower guidance. But for client delays of this magnitude where the TCV, the total contract value, is over $100 million, any quarter they end up going live in is a good quarter, whether that is in 2022 or 2023. That's why it is not a big concern of ours, especially since these delays are related to the economic climate we are in. Therefore we believe our fundamental business is strong, sales momentum continues, water, insurance and tax bills continue to get paid, and we remain excited about the remainder of the year and the future. With that, I'd like to thank our over 1,000 employees for their commitment to serve our clients. And I'll now turn the call over to the operator for questions.

[Operator Instructions] The first question comes from the line of Andrew Bauch with SMBC.

Just trying to square the commentary you made about the large client that decided to push it into first quarter '23. I mean part of it was the way I think about it is that in an environment where your customers are trying to maximize the amount of receipt of collections from consumers that may be facing financial difficulty. I could see a need for your solution in this time, more than others. But any additional color would be helpful.

Andrew, first of all, good question. Actually, that's a great point. And frankly, as you can see from our signings in the bookings, if that trend continues to be strong. What's happening is it is when the operational aspect of implementation comes into play due to this post-pandemic inflationary environment, what we're observing is that clients are having difficulty finding IT resources. In fact, this remains a number one topic. I was talking to our Head of Sales and he mentioned to me that almost every client please and with, they're talking about and thinking about how are they going to get it implemented and so on. So we are able to overcome a lot of those challenges because of the ease of implementation on our side. It takes because of the highly configurability nature -- configurable nature of our platform. But then it comes down to still you require some testing, some support, and that's where the declines are unfortunately struggling. And this, again, the point about the size of the customer we talked about and the total contract value in aggregate we mentioned. When you have a client -- group of clients of that size, you're always going to be open if they say hey, we're going to be delayed by a couple of quarters because our contracts allow us to recognize the entire value from the contract over the period the term, which starts on the day they go live. It's not when they start implementing. So from that perspective, that's what is really going on. Matt, do you want to add any?

I'd just say very good question. And the last part Dushyant was talking about the key point, which is it's really at least in what we've seen at this point limited to very large clients for the most part. Because your point is valid and we're still seeing small and medium-sized clients and some large ones too. Dushyant pointed out in the prepared remarks that are going live, it's just certain large organizations, I think, struggle more than others.

And then just a comment on the 125 deals closed year-to-date, I mean, I think that would be indicative that the sales pipeline is still relatively sound. And could you give us additional insight on to what kind of clients those kind of make up? Is the traditional verticals that you guys have been strong in? Are you experiencing is more in the B2B side? And maybe a sense of the sizing of those potential deals?

Actually, the new signings tend to be a lot more diverse than historically our historical vertical. So we have customers in real estate, we have customers in commercial enterprises. Government entities tend to be a big factor as well now. And then obviously, our bread and butter implementations of the verticals. So it is more diverse than -- and obviously, some B2B as well there.

And then size wise, I think it was the second part of your question. It spans the spectrum honestly. I mean we're still being seeing a lot of success in the SMB space and then also still having great success at the very large and as we've said multiple times, we're continuing to focus on both of them. And we've got teams internally that are focused on both the SMB space as well as large enterprise space. And so the success we've seen so far this year on the signing side really spanning the spectrum of small to large.

The next question is from the line of John Davis with Raymond James.

I just want to start talking a little bit about inflation and what kind of lag, obviously, when you're -- some of your costs and interchange in basis points, do you have to give 30, 60, 90 days' notice to raise price on a per transaction basis? Just trying to understand, I think when we talked in the IPO, the thought was that inflation would be relatively flat minus some timing differences as far as the impact on your P&L. So just curious kind of what that timing delay looks like for your ability to raise price to offset inflation.

We are actually very surgical in how we are approaching our clients because these are long-term relationship, long-term partnerships, we view our clients and our partners and many of these clients have been with us for a long period of time. So from that perspective, we are always looking at -- contractually, we have -- at the time you talked about, the 60, 90 days is pretty much the top end of the time it takes us to make the changes from a contractual standpoint, but we are being very surgical as to how we talk to our clients about it. And what we are seeing is clients are very empathetic and very understanding because they're dealing with this, not just with us, but the whole economy is right now dealing with this. So we generally have a better traction than typical that would be the case. But your assumption is correct that we do have ability to make changes, and it does take 60, 90 days.

And then I just want to touch on profitability. Obviously, some near-term headwinds from the push out and then kind of wage inflation. I wanted just on, maybe for a minute, talk a little bit about longer-term profitability. If you go back pre-IPO, this is a mid-20s EBITDA margin business. And maybe just talk about the ramp back to that, how you think about profitability over the kind of the medium to long term.

I think that's our -- that remains our goal, and I'll let Matt jump in as well, but that remains our goal. And what we are seeing is, right now, the tremendous momentum in the market. So we're trying to take a look at, can we lean in even more from a sales and marketing perspective to go in more aggressive to continue to accelerate the growth here. So we'll continue to look at that. But our long-term perspective is in coming years is to be in that EBITDA margin profile. Matt, do you want to add anything.

I wouldn't say there's been any change in kind of our mantra around how we think about growth and profitability and ultimately, what we want to achieve on that front. We obviously are a little bit under where we'd like to be for this year, given the things we talked about in the prepared remarks. But our overall kind of philosophy and medium- and long-term view in mantra is still the same as it was. And there continues to be leverage in the business. I think it's -- to Dushyant's point, continual reevaluation of the management team of the trade-off between growth and profitability and making sure that we're not constraining future growth simply because of an extra -- the cost of an extra point, couple points of profitability. So -- but I think just to sum it up, nothing has changed in kind of our medium- to long-term view or mantra world fundamentally in the business. I mean the business is still strong as evidenced by the signings. And so we're still executing accordingly.

The next question is from the line of Jeff Cantwell with Wells Fargo.

I wanted to circle back on the pushback and the timing that you're talking about in the 2023 because I can already hear the follow-up question that we'll be answering for the next few months until we speak again, which is was this an isolated incident? And I guess I'd have to kind of phrase it that way because the question would then be, why would there not be others. And so we have to try to work our way through that. So I was curious if you can give us a little more detail on and just get a little comfort around what you're discussing as far as pushing back revenue in 2023.

First of all, very, very good question, very reasonable question and very understandable. And let me just talk about from two perspectives. One is the economic climate itself you're dealing with. The overall the sentiment is the clients are just taking a little bit longer than they usually do to get live on our platform. I mean historically speaking, we are implementation machine actually. I mean we do a great job. We get customers live. And that is in our platform, our capabilities are better today at getting customers live than they have ever been. And the reason for that is the investments we have been making over the years. The challenge is that the readiness of the client to just whatever little support, which is a fractional support relative to the other efforts, which are required to get them launched. That fractional support is required by clients getting their technology team engaged. There are some IT resources to just QA that test the platform and so on. And because of the environment we are in, it is stretching a little bit. But I want to tie it back to the guidance and this year, if all of that aside is a couple of declines we're talking about, they would have actually maintained their time line. We would be perfectly fine with our guide, as I shared earlier. So it's an interesting scenario meaning that couple of clients made an impact, which we were counting on for this year. But other delays, some of them were actually -- we were already factoring in.

I think Dushyant is an right and I'll just add, of course, that our planning modeling as we go through it, we don't assume best case scenario for client go live. We, of course, look at history and assume some amount of buffer on when they would go live typically, depending on the size of the client and various things as you would expect. I think the challenge with these two in particular were they were very large that we referenced on the call. The two we referred on the call was very large and kind of hit at the same time. And so I think as we look into the rest of the year, in our guidance, we've assumed appropriate, again or what we think is appropriate levels of buffer and delay. And these are two of the biggest ones that were kind of slated for the back half of the year. So yes, I think as I said on the call, we fully expect that we'll land within the revised range. But actually, to Andrew's point earlier on that question earlier, I just do want to say Jeff to you and others that the demand for the product remains very strong because it is -- the markets we are in are actually the right conditions for a platform like ours. However, once the business executives make the decision to get it launched, they still need a support from their IT partners and other priorities which might be going on. And some of them are right now stretched just because of the climate we are in.

And if I can ask one follow-up. On the financial outlook for this year, I'd like to ask this question, but I guess it depends on how to level set expectations for going forward. What would be the factors in your own minds right now that would drive revenue, for example, to the lower end of the range? And what would be the factors that would drive it to the upper end of the range? I just want to make sure we're all clear on that. Same with contribution profit. I'm just trying to get a feel of what you think are the swing factors in your guidance as it stands right now.

I think there are two or three, and all of them we have talked about, I mean client go-lives. If they all go live as we are planning to and if they -- and some of the inflationary environment that we are operating in and if our assumptions hold true in terms of being able to make adjustments and which we have been making. Then I think we'll be at the top end and if they don't then we'll be closer to the bottom line.

Yes, I agree that. I think that's the two main factors as we kind of think about the ranges, timing of go lives, implementation go lives and our continued ability to improve the pricing profile in certain situations based on what we're seeing with inflation.

The next question is from the line of Dave Koning with Baird.

And maybe I can ask a numbers question. Just I think you said that you expected these clients have delayed to be about 4% of this year, and they were going to come out in Q3. Does that mean that they collectively are about 8% of total revenue? And I guess the corollary to that is if your wound rates are still the same, does that mean next year will be an outsized good growth year, just you'll get the full impact of this plus just the normal wins coming on?

So on the first question, it was 400 basis points on our then revenue growth rate, i.e., Q3 of last year. So just to make sure the multiplier is the right number but your concept is correct. The other client was not quite as large, but it was in that same ballpark. And it was 400 basis points on then revenue growth rate at that point last year. So I think that also raises another good point, which is we -- because of the other momentum we've seen in the business, if you sort of do the math on what our previous guide was versus what this guide is when you take the numbers that I mentioned in the prepared remarks, we've also -- there's also been some good things that have happened that have helped offset some of these negatives during the year as well. It's not just a one-way kind of move. There's definitely been some other positives that have helped offset the negatives. On next year, I think we'll see. We'll give our next year guidance when the time is appropriate. I think as we said, they are pushing in 2023 and the revenue is not lost. So to your point, we do expect them to come live and start getting that revenue in '23. It would have -- from a raw dollar perspective, it would have already been in the number anyway, had it gone live later this year. So it's not necessarily new revenue into 2023. But to your point, on a percentage basis, it has an impact there. So like I said, we'll give our 2023 guidance at the times appropriate, but I think the way you're thinking about it is in the right direction.

And then the second one, I think this was very, very clear, but I think inflation, basically, you're saying has two impacts. One is just wages to the expenses. But two is inflation has a network fee impact that hurts the contribution profit, right, because you pay a higher volume to pay network fees. Those are the two main things, right?

That's correct. That's correct. And as we shared earlier, one of which the -- our contracts already allow us to talk to our clients and discuss and partner with our clients to solve for that, which, as Matt mentioned, we are already in the process in some cases already.

[Operator Instructions] There are no additional questions at this time. I will pass it back to the management team for closing remarks.

Thank you so much. Really appreciate your time. We look forward to speaking with you next quarter, and have a great summer.

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