Paymentus Holdings Inc (PAY) 2021 Q4 法說會逐字稿

Good day, and welcome to Paymentus Fourth Quarter and Full Year 2021 Earnings Call. This call is being recorded. (Operator Instructions)

At this time, I would like to hand the call over to Paul Seamon, VP, Finance and Strategy for some introductory comments. Please go ahead.

Thank you. Good afternoon, and welcome to Paymentus' Fourth Quarter and Full Year 2021 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 will take questions.

Our press release was issued after the close of market today and is posted on our website for this call is being simultaneously webcast. The webcast replay of this call and supplemental slides accompanying this presentation will be available on our company's website under the Investor Relations link ir.paymentus.com.

Statements made on this call 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, our market opportunity, business strategies, impact from acquisitions and other matters. These forward-looking statements speak as of today, and we undertake no obligation to update them. These statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements, including the risks and uncertainties set forth under the caption Special Note Regarding Forward-looking Statements and Risk Factors and our quarterly report on Form 10-Q for the quarter ended September 30, 2021, which we filed with the SEC on November 10, 2021; and our annual report on Form 10-K for the year ended December 31, 2021, which we expect to file with the SEC in early March 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 Paymentus' performance and liquidity, should be considered in addition to, not a substitute for or in isolation from, GAAP results. We encourage you to review additional disclosures regarding these non-GAAP measures, including reconciliations of comparable GAAP measures in our earnings press release issued today and supplemental slides, 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.

Thank you, Paul. Look, 2021 was a great year. We accomplished many things that we believe position us well for a strong 2022 and beyond. But before I talk about 2022, let me discuss our Q4 performance first.

We closed out our first year as a public company on a high note. Our contribution profit grew 36% in Q4 to $45.3 million. Our transaction volume grew 54% to over 83 million transactions in the quarter. And in 2021, we also increased our number of clients to over 1,700, including billers and financial institutions. And from a user standpoint, we saw 21 million consumers and businesses use our platform in the month of December 2021.

Our payment volume for the full year jumped 68% to over $63 billion. To provide an additional context, it took us 15 years to get to $30 billion in payment volume, annual payment volume, and we have added more than that in just the last 2 years. It is pretty remarkable. And as you can see from these numbers, our core strategy of building a network and gaining market share is paying off handsomely.

As reflected in our 2022 guidance, we expect continued demand for our platform and the ecosystem, which we believe provides significant momentum for 2022 and beyond.

Let me now discuss our expectations for 2022. Based on our current visibility, we believe 2022 will be another year of strong growth and profitability. We are expecting full year contribution profit growth to be between 29% and 30% and adjusted EBITDA margin to be between 14% and 16%. And we feel great about our prospects for 2022 primarily because of the work we have done, already done, during 2021, which we believe has set a great foundation for our 2022 performance.

Let me walk you through a few of these items. First, we established a significant partnership with JPMorgan Chase to jointly sell our solution to the biller market. Both teams continue to be excited about the partnership and the momentum we are seeing.

Second, we closed 2 acquisitions, which has strengthened our presence in the financial services market that allows us to begin monetizing payments through the bank channel. And I'm sure you're wondering about the integration. It's going very well.

Third, we launched our Instant Payment Network, or IPN, with several of the largest companies in the world. And when combined with nearly 300 financial institutions on our platform, we believe it is a tough combination to beat. And as you know, IPN is unique to Paymentus.

Fourth, we signed and implemented a number of key clients that we expect to serve for years to come. We also finished migrations of a large insurance company, a large real estate e-commerce website and a top 15 U.S. mortgage servicing company. All went live in 2021, each displacing legacy systems. These are among the over 50 clients, billers and financial institutions that we onboarded in the quarter.

Fifth, we have signed additional partnerships, including a new telecom partnership in the fourth quarter that we expect to help grow our biller base and corresponding revenues.

In October 2021, we launched an IPN-powered app called Bill Center that modernizes bill payments for banks and credit unions. It has been very well received in the market with several clients signed in the fourth quarter. Bill Center provides consumers with a 360-degree view across all bills. It offers more payment choices with debit, credit and digital wallet options, and it delivers immediate notification of payment from the biller to the banks and financial institutions. With IPN and Bill Center, consumers have more choice and flexibility about how they pay and when they pay.

Finally, our addressable market opportunity is big. And despite our scale, we believe we are just getting started. As a testament to our momentum and leadership position, in a recent comprehensive review of many biller direct vendors by Aite-Novarica Group, a leading financial services advisory and research firm, Paymentus was named as the industry's best-in-class vendor. Aite-Novarica reached its conclusion after numerous capability deep dives, feature functionality comparisons, client reference calls, product demos and due to our innovative biller direct platform and our excellence in biller service and support.

As a reminder, our platform and the IP ecosystem exist to create a flywheel effect where our objective remains to, a, sign as many billers as possible; b, constantly grow the digital payment volume; c, expand IP reach to as many partners and financial institutions as possible; and d, generate a warm lead list of all billers that are outside of our biller direct platform but processed through our IPN network and, therefore, add them to our sales pipeline.

We have done a tremendous amount of work in 2021, including all of the exciting accomplishments I listed. And as a result, we believe we are more drivers of future revenue than we have ever had before. We believe these revenue drivers, combined with our highly visible model, provide attractive upside potential for 2020 and beyond. Our 2022 guidance doesn't change but hopefully, this gives you an understanding as to why we feel good about 2022 and beyond.

Many of you are new to Paymentus' story. So let me take a moment to describe how we think about our business. Our strategy is centered around capital-efficient long-term growth. We view ourselves as a custodian of your capital, and we take this role very seriously. As a public company, it is never lost on us, in fact, I personally think about it every day, that our long-term performance also impacts children's education plans, family retirement accounts and vacation funds. Therefore, we will continue to be a responsible executor of our business strategy as we aggressively pursue profitable growth irrespective of the market conditions.

Let me now touch quickly on the nature of bill payment market and the industries we serve. If Christopher Bullock's famous line was spoken today, it would likely say something like, "It is impossible to be sure of anything except death, taxes and bills." We all have bills and they have to be paid whether there is a financial crisis or a pandemic. The majority of our clients are recurring services businesses such as utilities, government, financial services and insurance companies. Due to the nondiscretionary nature of these businesses, they aren't affected like other businesses by supply chain issues and geopolitical events. We believe this gives us tremendous stability as we execute on our long-term strategy for accelerating growth and capturing meaningful portions of the total addressable market through innovative offerings. This is one of the many reasons why we feel confident about our ability to execute and deliver long-term sustainable growth.

And before I pass the call over to Matt, let me also touch on inflation for a moment. Our pricing and contracts are structured such that either our pricing increases automatically or we can adjust our pricing if our clients increase their fees to their customers. Therefore, we have protection to maintain margins. This notion is not new at all and has been in our agreements for over a decade now. And I also want to remind you that one reason we grew through the financial crisis way back when and through the pandemic was because people still had to pay their bills.

With that, let me pass the call to Matt. Matt?

Thanks, Dushyant. As a quick 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.

I echo Dushyant's commentary on the strength of our performance in 2021. If you recall Dushyant's 4 ecosystem objectives from last quarter, we've made progress in each of them: signing and implementing a significant number of billers, rapidly growing our payment volume, expanding the reach of IPN and expanding our sales pipeline through warm leads.

In the fourth quarter, we processed 83.3 million transactions, which represents a year-over-year increase of 53.7% and an annualized run rate of more than 330 million transactions. This accelerated transaction volume was driven by a mix shift as we ramped business to business, IPN, inclusive of and in particular the Payveris acquisition, and other non-biller direct products. These transactions are typically priced based on contribution profit because there is no interchange associated with them. We believe we have the opportunity to drive additional revenues with this volume over time as we extend our reach and scale. The transaction growth drove a 31.2% increase in revenue over the same period in 2020, which resulted in revenue of $108.1 million in the quarter and $395.5 million for the year.

Contribution profit for Q4 was $45.3 million, a 36.3% increase over the same period last year. For the full year, contribution profit was $158.5 million, which represents growth of 31.5%.

Adjusted gross profit for the fourth quarter was $36.1 million, which is a 35.1% increase from Q4 of 2020, and it was $127.4 million for the year.

Adjusted EBITDA was $6.3 million for the fourth quarter, which represents a 13.8% adjusted EBITDA margin. For the full year, adjusted EBITDA finished at $29.5 million or 18.6% adjusted EBITDA margin. We are very proud of our performance across all these metrics.

Operating expenses rose $12.6 million to $33.4 million for Q4 of 2021 from the same period last year. Overall, this increase in operating expenses from last year was driven by increases in head count from ongoing investments in our business and its growth as well as our acquisitions and also the amortization of intangible assets associated with the acquisitions. Specifically, R&D expense increased $3.1 million or 47.6% from the fourth quarter in 2020 as we continue innovating with and for our customers and partners.

Sales and marketing increased $6.3 million or 73.1% as we continue to add head count to drive new sales and expand partnerships given the significant market opportunity we see and market position we have established. Travel and marketing events also continued to ramp up relative to Q4 of 2020. We experienced increases in G&A expense due to our acquisitions and multifold increases in the cost of corporate insurance and ongoing investment in public company infrastructure.

GAAP net income was $4.7 million and EPS for Q4 was $0.04, and non-GAAP net income was $2.1 million and non-GAAP EPS was $0.02 for the quarter.

Our full year effective tax rate ended up at 10.4%. You may recall that I indicated in our Q3 call to expect a full year effective tax rate of around 55%. But during Q4, we received a discrete tax benefit associated with the deductibility of stock option exercises. And like most companies, we don't forecast discrete tax items. And without the discrete item, our effective tax rate would have been 52% for 2021.

As of December 31, 2021, we had $168.4 million of cash and cash equivalents on our balance sheet. And this cash decreased primarily due to our acquisitions and the timing of customer payments. At year-end, our common stock share count was 120.64 million shares.

Now for our Q4 and full results, let's turn to our 2022 full year outlook. We are introducing our 2022 full year guidance based on our historical performance and current expectations for this year. Our revenue outlook for 2022 is in the range of $490 million to $495 million, which represents growth between 24% and 26% year-over-year. We expect contribution profit to be between $204 million and $206 million for the year, which is approximately 29% to 30% growth.

We anticipate 2022 adjusted EBITDA in the range of $28 million to $33 million with an adjusted EBITDA margin of 14% to 16%. With regard to the adjusted EBITDA, I want to remind you that while we were at 18.6% for 2021, it was a tale of 2 halves, meaning, before we went public, our adjusted EBITDA margin for the first half of 2021 was 24.4%. But for the second half of 2021, it was 13.8% due to the cost of being a public company as well as the impact of the acquisitions. So our guidance for 2022 adjusted EBITDA margin, we are actually including incremental improvement from our current run rate.

We believe the combination of our expected growth and EBITDA margin outlook will continue to keep us a Rule of 40 company with a clean balance sheet that has no debt.

Finally, we would typically expect our effective tax rate to be between 25% and 30%. However, due to the amortization of intangibles associated with acquisitions, we expect pretax book income to be essentially breakeven in 2022. This will cause our effective tax rate to vary from expectations. And accordingly, we are not providing a forecast for the effective tax rate for 2022.

This guidance incorporates certain assumptions and does not incorporate the impact of any future acquisitions that we may undertake. Directionally, we expect our contribution profit per transaction to be substantially similar to the level we saw in Q4 throughout 2022. Some of the other assumptions include: a consistent rate of growth in same-store sales to what we've seen historically; new customer implementations going live in line with expectations, even though that obviously has a dependency on our clients and that those newly implemented clients have the transaction volumes and average payment amounts that we expect. It also assumes minimal client attrition as has been the case historically.

As you know, we don't provide quarterly guidance. And one of the reasons we don't is because there can be quarter-to-quarter variations in the growth rate due to changes in average payment amounts, mix of payment types and other items. But I did want to give you a bit of color on how we anticipate the year may progress as we do not expect to experience straight-line growth from quarter-to-quarter during 2022.

We expect higher year-over-year contribution profit growth in the first half of the year than in the second half as we lap our acquisitions in Q3. As a result, we expect the second quarter to have the highest growth rate in the year because of the relative comp to last year. The vast majority of sales that will impact 2022 revenue has been closed, and the variance between quarters is driven by variable implementation timing that can generally move a month or 2 earlier or later depending on client specifications and needs. Specifically, with Q1, please keep in mind that we typically see much lower or actually really even 0 sequential contribution profit growth in the first quarter due to higher average bill amounts associated with utility clients.

With all that said, though, even though we may see fluctuations in growth quarter-to-quarter as evidenced by the upper end of our guidance range, we believe we're a 30% growth business on an annual basis.

And with that, I'll turn the call back over to Dushyant for some closing comments.

Thank you, Matt. As Matt and I have shared, we feel good about 2022, primarily because of the hard work and the foundation building we did in 2021. Likewise, our focus in 2022 is to continue to deliver the expected performance and to also set a great foundation to deliver similar results for 2023 and beyond. That is the nature of our business but also, for over a decade now, our execution focus is always on a 2-year horizon where we execute in the current year with an eye to the subsequent year.

Our 2021 results and 2022 plans won't be possible without the hard work and the dedication of our 1,100 team members who build, sell and take care of our clients every day. I would like to thank each and every member of our team for their hard work.

And with that, we'll now open the line to questions.

(Operator Instructions) The first question comes from Darrin Peller with Wolfe Research.

Congrats on finishing your first year as a public company. I want to start off with, when we look at the customer adds you had over the past 6 to 9 months, you started off at 1,300, if I remember correctly. You went up to about 1,400 plus, and now we're showing 1,700. It's just a pretty dramatic move in a pretty short period of time. So if we could just touch on what's driving that, what kind of categories you're adding in and maybe a little more color on sustainability or what you'd expect to see in the next, call it, 12 to 24 months, that would be great.

Well, the 1,700 clients include the Payveris clients as well that come through the acquisition. That is primarily the financial institutions. And relative to remaining clients, I think, first of all, we remain very bullish. And as you heard us talk about, our goal and strategy is focused on continuing to build network and gain market share through acquisition of billers and build IP and continue to build the IP ecosystem and bring as much volume as possible. So we see the similar trend. Minus the acquisition, we see a similar trend in 2022 and beyond in terms of acquisitions of customers. Now in terms of where they will come from, utilities, insurance -- our key verticals, the core verticals, utilities, insurance, government, consumer finance, telecom as well as health care.

The only thing I would add is that also financial institutions, I think with the addition of Payveris, there'll obviously be a focus on financial institutions and continuing to add more and more financial institutions to the stable of clients.

Absolutely.

Okay. Just one quick follow-up or maybe 2 parts to it. But when thinking about the guide and the outlook for '22 and beyond now, number one, I mean we're getting a couple of questions on the strength of the customer adds and transactions but more in line results on contribution profit as well as really more in line trend looking forward. And so maybe just touch on the yield dynamics for a minute and what you're seeing or expecting to see on the yield and where you're able to charge fee per transaction if it's changing at all. And then also, is there an inclusion of anything for the JPMorgan partnership yet? Or is it just too early on for that?

Yes. So on the first part, on the contribution profit line, I think I might have said it in the prepared remarks, but we expect in '22 the contribution profit per transaction to be consistent with what we saw roughly the level in Q4. As we've said before, we continue to add larger and larger clients. We've been very fortunate and we've worked hard and earned them in winning larger clients than we've ever won. And of course, with greater volume for our client generally comes better pricing. And so certainly, as we continue to add larger clients, there will be some continued kind of pressure on the price per transaction line. But we think, on the whole, we can keep it fairly consistent for 2022 with what we saw in Q4. And some of that also comes from, as I think, Dushyant mentioned on the call, from other -- as we continue to expand our B2B presence and the financial institution business, in particular, those are priced on a contribution profit basis, there is no interchange, but that will be more -- it will be akin to where we are currently on contribution profit per transaction.

And then with respect to the second part, on JPMorgan, lots of positive momentum there. But as you said, when we're -- there's 2 pieces of the business, if you remember, Darrin. One is migration of their existing account, of some their existing clients they had on the previous platform. The second is the go to market together with them. On the go to market together with them and the winning new clients, as you would imagine, a lot of those clients are on the larger end of the client spectrum. And so we've had very good results early on, but those are going to take a little bit longer to get up and running simply because of their size. And so there's not a lot of impact in '22 from revenue associated with those clients. That doesn't mean we haven't already won some and we're well underway on winning others, but the revenue impact doesn't really show up in a meaningful way in '22.

On the migration there's time that is required to get prepped and talk to the clients, get them comfortable with it. So there, again, also, there's not a whole lot of impact in '22. There is some in the back half of the year, but it's not very large.

The next question comes from Andrew Bauch with SMBC.

I want to touch upon the IPN real quick. I know one of the key advantages of the IPN is it gives you a lot more visibility into really the bill payment ecosystem across the country. Could you help us and investors better understand how the IPN dramatically expand your immediately addressable market? And the point on the automated biller discovery, I think a little bit more color on that would be helpful.

Yes. So well, first of all, thank you for the question. Look, as you rightly pointed out, IPN for us is a way to continue to garner insights into how consumers are paying their bills, who they are paying and whether those billers are on our network directly or not. And then if they're on, great, so we are now able to serve the existing customers better. But those who are not, they go directly to our sales pipeline, and we are starting to target those customers. So this phenomenon actually opens up doors for us beyond the core verticals we talked about. There are several verticals where we are now seeing payments too where they're starting to look very attractive to us because we are already processing payments, and it becomes a very warm lead for us.

So the way to think about this is, by having financial institutions leverage our IPN and Bill Center, on one hand, they're modernizing their capabilities; on the other hand, using those capabilities and the payment volumes, we are able to garner insights as to what other verticals and what other key features and capabilities we could add to our platform that allows us to further expand our TAM. So that is actually happening as we speak.

Another thing which is interesting in that whole dynamic is, as you know, one of our key areas of focus is how do we reduce the gap between our gross revenue to the contribution profit, the net revenue. And this opens doors for us there as well. So we see that as the biggest strategy for us. And Andrew, if you could repeat the second part of your question.

No, I think you answered it. It was with regard to the automated biller discovery. I guess my follow-up question would be, just looking at the adjusted EBITDA guide, 15% margin at the midpoint seems relatively in line with what we were expecting. I mean any changes to your investment strategy there with regards to tightening supply or labor markets, in that vein?

Not really. I think as we've said before, we're letting, to some extent, the strength of our business dictate how we think about spending in the sense of if we feel like there's opportunity to increase the top line, then we believe it's worth the investment, obviously, to spend the money to do that. We've been continuing to add people. Certainly, as we talked about on our previous call, as everybody is seeing, the hiring cycle is maybe a tad bit longer than it was, say, 9 or 12 months ago just because of the little bit of tightening in the labor market, but we've still been able to attract phenomenal people. I mean some days, I'm telling our recruiting team to slow down a little bit because they're finding such great candidates. But yes, we're going to continue to -- as Dushyant said on the prepared remarks, our hallmark has been responsible growth. And we think that profitability is important, and we're going to continue to really weigh out every investment decision on do we think it can drive additional growth. And if not, we're not going to do it. We're going to make sure that we're spending the money responsibly into driving growth on the top line.

The only other thing I was going to say is just keep in mind that because of our implementation time line, the results in revenue are lagging the investment, in the sense that it takes us 6 to 9 months to get a customer live, we're not going to see the revenue impact of the investments necessarily straight away, it takes a little bit of time to see those.

The next question comes from John Davis with Raymond James.

First, I just want to start on net rev retention, maybe just comment a little bit, if not an actual number, directionally, how it trended in '21 versus '20 and what kind of is embedded in the '22 guide.

Yes. So consistent with what we've seen historically, we have not yet disclosed the number or talked about a number for '21. But I would say it's very consistent with what we've seen historically. So let's call it, mid- to upper 1 teens, kind of 115 to 120 range. And so as we've, I think, laid out previously, when we think about -- if we think about ourselves around about a 30% grower, about roughly in the ballpark of half of that comes from expansion with existing accounts and roughly about half of that comes from new clients, and 2022 is no different.

Okay. Great. And then the inorganic contribution for revenue -- or sorry, contribution profit in 4Q and then how should we think about what's baked in the guide from an inorganic perspective in 2022.

Yes. We haven't broken it out because it's not material to the overall numbers. But it's in there, and it's baked into the guidance for next year, what we expect to do. And there's certainly -- when you think about the acquisition, they obviously brought some clients with them, but the real value -- or a real value is the combination of the companies and what we're able to do as far as providing the bill payment capabilities to the financial institutions, et cetera. So it's included in our guidance, but we haven't broken it out because it's not material.

Okay. And I'll just squeeze one last one in, if I can. Just Dushyant, you talked a lot about IPN in the prepared remarks. Maybe just help us, maybe in '21, ballpark contribution to revenue. And are you expecting IPN to contribute meaningfully more than '22? Just kind of curious, an update from a revenue contribution profit perspective for IPN.

Actually, one of the things we are doing internally now is we have seen -- as you have seen the trends, the IPN and the core business, they are so intertwined. Because of the network effect, which we were pursuing, we are seeing that already in action. And therefore, we are internally actually not even breaking out exactly how the IPN versus the core business. But as you are seeing from our numbers and the volume and the transaction growth, it is contributing to our growth as well as to, frankly, the network effect we were talking about. Do you want to add anything to that?

Yes. I'll just add on the revenue contribution profit. As we talked about, I think, previously, the revenue line will certainly step down on a per transaction basis over time as 2 things happen, one, we sign larger and larger accounts; but also as more of the mix of our business transitions to becoming contribution profit only or business without where we don't carry the cost of the interchange such as B2B, as you mentioned, the IPN transactions, which includes the financial institutions as part of -- that Payveris is working with, et cetera. So we will continue to see a progressive increase in contribution profit as a percentage of revenue. We can talk more about it, obviously, but I would not model a massive step-up for that this year. I think it will be a very kind of slow step-up throughout the year as we go through the year.

The next question comes from Tien-Tsin Huang with JPMorgan.

Great results here. Just I wanted to ask on the pipeline for billers and partners now versus this time last year. Any big change here? Your sales targets that you set for the sales team quota-wise, is it higher for '22 versus '21? How does it compare? Just curious.

Great question, Tien-Tsin. Actually, the reason I'm smiling is because some of the discussions are already happening between me, Matt and Jerry and the rest of the team. So we are having those discussions. But yes, the pipeline is stronger than it was before. And it's the combination of all of the things we have been working towards leading up to this day, if you will, from years past. It's the combination of the partnership framework we have put together both from the biller set of partnerships, the companies who are helping us build our biller network as well as on the IPN ecosystem and then as well as financial institution partnerships, including JPMorgan Chase. So as a result of all that, combined with, frankly, the better messaging, the network effect, the clear understanding in the market that there is a need for our platform and ecosystem like Paymentus, as a result, our targets for this year are bigger than they were last year. And our team is very focused on that. And as I talked about in my prepared remarks as well that we have many sources of revenue, and that's part of that platform we have built here.

Yes. No, it feels that way. It seems like the net is definitely wider, which is why I thought I'd ask. So just my quick follow-up then, just thinking about the revenue drivers this year versus last year, do you expect it to be meaningfully different? I mean given what you just said there with a lot more partners in place, I know you've signed a lot of larger billers as well, I'm just curious if you think the wheel is going to spin a little bit differently to get to where you're targeting.

Yes. I mean, look, our pursuit is to gain as much of the market share as we can and continue to expand our network. And that will continue on. And we remain very excited. Actually, we are seeing tremendous trends in our favor from all aspects. If you think about it, billing companies are looking for a more unified platform. The banks are looking for a more nice user experience, and we sit right in the middle of it all. And consumers want choice. They want a way to be able to pay whatever they want, whenever they want, however they want, and we are able to do that. So as a result of that, I think -- the net, as you said, is getting wider. And as a result, I think we are able to target clients in different industries than we were not thinking about.

We are able to -- also watching our trends, the type of billers we are not processing payments for directly on our direct platform, but we are seeing them through the IPN network. We are able to also restructure some capabilities and see, hey, what more could we add. So what you will start to see is a combination of large clients coming in, whether it's coming through larger partners as well as directly. But also, you will see a little bit more diversity of verticals we can go after as well, initially opportunistically, just based on what we are seeing, and then eventually pretty -- in a formal manner.

The next question comes from Jason Kupferberg with Bank of America.

I'm just curious how to think about cash flow conversion in 2022 based on the adjusted EBITDA that you're forecasting, whether you want to talk about it in terms of operating cash flow, free cash flow.

Yes. Thanks, Jason. Yes, consistent with what we've seen historically in 2021 and prior, no real changes to the drivers in cash flow conversions. I think cap software is a big impact. If you think about it in terms of operating cash flow and free cash flow, we do have a lot of capital on software, but there's no changes to any of the levers or drivers that would change the cash flow conversion from adjusted EBITDA, consistent with what we did in '21.

Okay. Good. And then just with respect to the balance sheet, obviously, in great shape and no debt, and you've had a track record of some successful M&A. What does the pipeline look like there? And do you feel like that will be a meaningful part of the story for Paymentus in 2022?

Yes, I'll start, and Dushyant, you can add on. We're constantly looking at M&A opportunities. As you can imagine, once we went public, our e-mail inboxes got flooded with things. And so as we said before, we've been very opportunistic and disciplined in the past with M&A and will continue to be so going forward. I think the good news is, as you heard, Dushyant lay out kind of where we are and the things we accomplished in 2021, when we look at the goals we want to achieve in 2022 and really beyond, there are no big holes in our strategy or our objectives that say we've got to go out and buy something to fill this gap or to plug this hole. So it gives us the ability to be very opportunistic and either expand our TAM or deepen our capabilities in a certain area, but it's all kind of additive to what we're already doing as opposed to, say, plugging a big gap or a hole that we have, which is a good position to be in and allows us to be quite opportunistic. But Dushyant, do you want add anything there?

No, I completely agree. I think we'll continue to be selective and very disciplined. But doing acquisitions, I won't put it out of the realm of possibility. We'll continue to look at opportunities. And if there's something comes along, which we like and we think it would be additive, we will do it.

The next question comes from Ashwin Shirvaikar with Citi.

I guess let me start with -- you have the 14% to 16% margin range, and if you could kind of talk about what drives the 14% versus the 16%, how much of that is explicit investments versus mix, things like that, if you could talk about that, I guess.

Yes, absolutely. So some of it, obviously, is dependent upon we land on the top line and to the extent it flows through, ultimately, the EBITDA for sure, and there's a range on the top line, so there's a flow-through on that. But it also is -- one of the things we want to make sure, that we give ourselves enough of a range, to be honest, and transparency with you and the investors on having additional capability to invest to the extent that we see opportunities to do that. Again, we're a growth business, and we think that being able to grow in the 30% range is quite attractive. And to the extent that we have opportunities that can potentially add to that growth level, we want to have the ability to make those investments. So I'd say that's really the difference between kind of the 14% and 16% is, throughout the years, we see opportunities to invest, being in a position to do that.

And as you would expect, a good majority of our expense is in the people bucket. And so I think we're always looking for good people, and it's also somewhat depending upon the timing of hiring and attrition and some of those things you can't control. So kind of with all those factors in, we felt like that was an appropriate range and just gave, again, ourselves a little bit of flexibility as we kind of work through the year to have additional investment dollars to the extent that we think that there's things that we can invest in that will drive additional top line.

Got it. And then as you added new partners, is there any change observable, I guess, in either payment type or bill amount size, you might be gaining affluent versus subprime, various different factors that you might look at to figure out sort of the partner strategy and hone it? Can you talk a little bit more about that forward-looking perspective as well?

Yes. I think from -- what we are seeing is that larger billers are obviously a lot more open to doing partnership with us as a result of the ecosystem we have built on the platform but also the partnership framework, but we haven't seen a major shift in terms of the payment mix or other changes. In fact, that's what makes this thing pretty attractive and also this entire business proposition we're talking about, is that we have built what we needed to build to get to the point we are at, which is now it's more about having more storytellers, more ways to tell the story and more listeners and, therefore, more customers coming onboard because we have the platform, we have the ecosystem, we have the network, all of the components we needed to make it happen.

I would really totally agree. The only thing I would add is we have definitely seen a widening in the payment amounts kind of levels for different clients, meaning, if I go back 2 years ago before we started adding more and more large billers 3 years ago, I could have told you our average payment amount across all of our billers is $180, let's say. And it was fairly consistent. There wasn't a wide high and low on that $180. But as we've expanded into more verticals and doing more things, like we've got a client that we went live with in Q4, the average payment amount is well over $1,000. And we've got another one that the average payment amount is $500 or $600 in the auto space. And so I would say on an average payment amount, it picked up slightly across all billers, but there's a bigger delta between high and low.

But there's nothing to necessarily draw from that other than a good thing that we're getting more and more different types of billers and more and more different types of verticals. But as we price them appropriately, the economic and financial statement output of that is consistent regardless of, ultimately, the payment type. But there's definitely more divergence than what that looks like just because we've moved into more industries and different verticals.

The next question comes from Will Nance with Goldman Sachs.

I had a question just on the revenue trajectory over the year. And it sounds like there are a handful of things that may start to kick in, in the back half of the year. I think you mentioned some of the JPMorgan partnership will start to contribute towards the end of the year, but really it sounded like more 2023 weighted. I think last quarter, you talked about a large client that was supposed to come onboard, a larger-than-normal client coming onboard towards the second half of this year. So I just kind of want to understand, like I'm hearing you loud and clear, you guys consider the business a 30% grower. Is it possible that with the addition of these handful of things you guys have talked about, we could be exiting the year with a little bit of tailwind?

I'm going to not let Dushyant answer that question. I'm kidding. Look, our guidance is our guidance. I think, yes, we certainly said that there's some things coming out of the JPMorgan partnership that we're hitting late in the year; the client that you referenced, we talked about going live late in the year. All of those things set us up well for, as we said, 2023 and beyond. I would just reiterate that our guidance is what it is. But we've got a lot of reason to be optimistic for how things shape up towards the end of the year. And yes, we'll see. We've got a lot of work to do.

As we talked about, our implementation time line is such that when we look at 2022, I think I said in my prepared remarks, most, if not all, of that revenue is kind of locked in as far as the clients signed up that will go live this year. Now there's variability in the timing of when they go live and the volumes of when they go live. But the work that we're doing between now and the end of 2022 is what becomes obviously 2023 revenue. And so we've got a lot of work to do. I think the Board is set up well for us with some of the things that are happening late in the year, but there's still a lot of work to do this year to get 2023 where we want it to be.

Got it. That's helpful. And then just if I can ask a follow-up, I just want to try the organic growth question a different way. I realize that you guys are not breaking that out because you don't really consider it too material. I just want to make sure I understand the comments on the quarterly cadence of growth throughout the year because it sounded like you said that it was material enough that we would notice, just from a comp perspective in the first half of the year, the growth being elevated and then falling off in the back half of the year. So I was wondering if you could just help us understand the magnitude of that inorganic impact from comps in the prior year as we go from the first half into the second half? And I would kind of echo the earlier questions around, ballpark, what the acquisitions in the third quarter are contributing to the current run rate.

Yes. That's a fair point. And I think really what we were intending was -- obviously, Q3 and Q4 are tougher comps than Q1 and Q2 is really what we were trying to say. And part of the reason for that is, even though not material, there's still some amount of acquisition in there. I would say a couple of points. Really, what we're trying to essentially say is, as we go through the year, it's going to appear -- well, it is going to be that Q1 and Q2 growth rates are going to be higher than Q3 and Q4. And so essentially, what I was trying to say is don't read into that, that growth is slowing down because there's a lot of factors that play into the quarter-on-quarter results that we see. And overall, part of the reason we don't give quarterly guidance, overall, on an annualized basis, we think we're a 30% grower. And so even if Q3 and Q4 aren't at that level, that doesn't mean in our minds that we're slowing down the growth because we're still believing ourselves to be a 30% grower for 2022 and into the future.

Well, I'd just make a quick point here. I may be a single voice here on the table, but I'm actually not very happy with 30% growth. I continue to think about all innovative ways we could get to, what can we do to accelerate the growth even further. But the 30% number actually is important from a different perspective also, that we want to remain a Rule of 40 company. We want to be a responsible grower of the business. We want to be a profitable company. We feel like that you and the rest of the investment community has trusted us with your capital, and it's not lost on us that families through mutual funds are investing in the public funds and they're investing in our business. And so we want to make sure that we are a responsible custodian of that capital. And as a result, we feel like that 30%, with the EBITDA margin we have, we are a Rule of 40 company. So that's the key reason why 30% is the number.

The next question comes from Dave Koning with Baird.

Nice revenue momentum. And maybe my first question, just transaction growth was so strong sequentially, can you kind of review just how much of that maybe was from acquisitions, how much is kind of just normal existing client growth and how much was kind of newer clients? Like just so we can kind of see why it was -- it just seemed to diverge quite a bit from normal.

Yes. I would say -- and again, we haven't broken it out specifically, but I would say it's safe to say that even without the acquisitions, transaction growth was still well north of 40% and approaching the 50% level. And as we said before, growing share is our #1 priority and trying to get more and more transactions on our platform. As we think about the mix is changing through, as we talked about B2B and some of the IPN stuff with financial institutions, et cetera, the pricing then becomes really on a contribution profit basis -- or the revenue on a contribution profit basis, because there's no interchange associated with it, and so that changes the dynamic a little bit on revenue versus contribution profit versus the transaction. But it was still very strong. And we think, as we go down the road, that will continue to pay dividends as we think about, I think Dushyant referenced, ways to minimize the gap between contribution profit and revenue and drive even more contribution profit out of those clients.

Great. And maybe just as a quick follow-up, gross profit per transaction was a little bit down too. Is it all the same factors with contribution profit per transaction? And maybe is that even a worthwhile of metric to kind of track?

For sure. I would look at -- personally, I don't know if you're talking about GAAP gross profit or adjusted gross profit per transaction. I would use adjusted gross profit just because now, with the acquisitions, we've got the amortization of intangibles that are flowing into cost of revenue that kind of just start to distort GAAP gross profit a little bit when you think about just the normal business. But I do think it's a good metric. And the main difference between contribution profit and adjusted gross profit is processing cost and other hosting and data center costs that we use to deliver on our platform, which are -- I think is an important way to look at the business as well, but the same drivers at play.

There are no additional questions registered at this time. So I'll pass the conference back to the management team for closing remarks.

Well, thank you so much for joining the call. Really appreciate it. We'll talk to you soon. Bye-bye.

Bye.

That concludes the Paymentus fourth quarter and full year 2021 earnings call. Thank you for your participation. You may now disconnect your lines.