Paymentus Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 4, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the 4th Quarter and Full Year 20 23 Pimentis Earnings Conference Call. This call is being recorded. All participants are currently in a listen only mode. There will be an opportunity to ask questions following management's prepared remarks. At this time, I will now turn the call over to David Hanover, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to PayManta's 4th quarter and full year 2023 earnings call. Joining me today on the call is Dushan Sharma, our Founder and CEO and Sanjay Kalra, 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.

Speaker 1

The webcast replay of this call and the supplemental slides accompanying this presentation will be available on our company's website under the Investor Relations link at ir.pynantus.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 and our ability to address continued economic uncertainty, our market opportunities, business strategies, implementation timing, product enhancements, impact from acquisitions and other matters. These forward looking statements speak as of today, and we undertake no obligation to update them. These statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements, including the risks and uncertainties set forth under the captions Special note regarding forward looking statements and risk factors in our annual report on Form 10 ks for the year ended December 31, 2022, and our subsequent quarterly reports on Form 10 Q and our Form 10 ks for the year ended December 31, 2023, which we expect to file with the SEC shortly and elsewhere in our other filings with the SEC.

Speaker 1

We encourage you to review these detailed forward looking statements, Safe Harbor and risk factor disclosures. In addition, during today's call, we will discuss certain non GAAP financial measures, specifically contribution profit, adjusted gross profit, non GAAP operating expenses, adjusted EBITDA, adjusted EBITDA margin and non GAAP net income and earnings per share. These non GAAP financial measures, which we believe are useful in measuring our performance and liquidity, should be considered in addition to and not as a substitute for or in isolation from GAAP results. We encourage you to review additional disclosures regarding these non GAAP measures, including reconciliations of the most directly comparable GAAP measures in our earnings press release issued today and the supplemental slides for this webcast, each available on the Investor Relations page of our website. With that, I'd like to turn the call over to Dushyant Sharma, our Founder and CEO.

Speaker 1

Dushyant?

Speaker 2

Thank you, David. We had a great quarter and a great year and we are looking forward to carrying our momentum into 2024. Even more exciting to me is my view that our 2023 financial performance reflects only a subset of the opportunities arising out of the innovation framework we have built over the years. Therefore, we are excited about our long term future and believe we are just getting started. Now I'll cover our Q4 and the full year 2023 highlights.

Speaker 2

In the Q4 of 2023, Paymentus again delivered results that were well ahead of our initial expectations. 4th quarter revenue was $164,800,000 up 24.7% year over year. Adjusted EBITDA, which as many of you know is a significant financial metric for us, was $19,900,000 for the quarter, up 95.4 percent year over year. 4th quarter contribution profit was $66,300,000 up 22.7 percent year over year. In addition to these results, we also exited 2023 with a strong bookings and a strong backlog that we believe puts us in a position to achieve the top end of our guidance without signing any new clients, but of course, timely completing our expected 2024 implementations.

Speaker 2

As you may recall, we shared the same sentiment last year around this time. For the full year 2023, revenue increased 23.6 percent over the last year to $614,500,000 beating our long term target of 20 percent top line growth. Adjusted EBITDA increased 103.1% to $58,100,000 far ahead of our long term target of 20% to 30%. And contribution profit was $240,900,000 growing 19.7%. In Q4, we added $12,200,000 in contribution profit over the same period last year, while dropping $9,700,000 of that to adjusted EBITDA.

Speaker 2

So for the past few quarters, we have continued to demonstrate an ability to drop the majority of the incremental contribution profit dollars to the bottom line. We believe this highlights one of the key strengths of our operating strategy, our proven ability to expand our operating leverage without sacrificing growth or innovation. As we have shared before, at Paymentus, our goal remains to continue delivering high quality earnings alongside solid top line growth. We are proud of what we have achieved to date and we expect to continue delivering long term growth in both of these areas in the years to come. Now I'll review some of our key 4th quarter business highlights and accomplishments.

Speaker 2

As I mentioned earlier, we finished 2023 with a strong backlog and are very pleased with our year over year growth. Of course, all of this continues to be driven by the strength of our technology platform and our IP and ecosystem, which enables our clients to participate in a broad and diverse network by merely integrating onto our platform. Turning specifically to new client activity. During the Q4, we signed several notable and large clients. We signed multiple large insurance companies, large utilities and large government agencies.

Speaker 2

We also signed a large property management company in the real estate sector and a large business in the retail sector. In addition, we signed several clients across various other verticals. We believe this broad mix of customer signings demonstrates the diversity of the businesses and verticals our platform can support. And as always, one of our key focus areas continues to be on boarding our strong backlog in order to drive further growth. We are making incremental targeted investments in this area and believe these investments as well as the continually improving post pandemic conditions that allows for a more in person collaborative process continues to be a tailwind for us in this regard.

Speaker 2

As part of this effort, we have continued to ramp up hirings. We have made significant progress on boarding new clients since the start of 2023, including the launch of several large clients during the Q4 across various verticals, including multiple utilities, insurance companies, commercial entities, property management companies, government agencies and financial institutions. Of course, we expect to make further progress throughout 2024 consistent with our growth plans and internal targets. As we reflect on our platform and the ecosystem, we believe we are increasingly becoming a central hub to the entire bill payment ecosystem. When I step back and reflect on our product capabilities and who we currently serve with product offerings, it drives a strong personal belief that we are setting a foundation to become a large global fintech provider.

Speaker 2

First, we serve businesses of various sizes and industry verticals, engaging with their consumer and business customers and getting their bills paid through our platform. 2nd, we have banks and credit unions of various sizes sending payments from their customers to the billers using our platform and our ever expanding IP and ecosystem. 3rd, we have millions of consumers and small businesses interacting on our platform and the ecosystem. And finally, we have clients who are disbursing and paying on 1,000,000 of dollars using our payout and disbursement platforms. These billers, businesses, banks, credit unions and SMBs all engage our direct product offerings that uniquely address their specific business and payment workflows.

Speaker 2

So if you're an investor like me in this business, I hope you're as excited as I am about where the business is headed with ever expanding TAM along with our growth and profitability. In other words, I believe this is a long term sustainable growth business with innovative platform and the company DNA. In closing, we are proud to report another period of results that were ahead of our original expectations, both for the Q4 and the full year 2023. At the same time, we continue to prove our ability to increase operating leverage without sacrificing revenue growth. We ended the year with a strong backlog and solid sales momentum going into 2024.

Speaker 2

And of course, we intend to remain focused and disciplined in onboarding our strong backlog, which we expect to fuel our future growth. Now let me turn it over to Sanjay to review our financial results in greater detail. Sanjay?

Speaker 3

Thanks, Ashant, and thank you all for joining us today. Before I discuss our quarterly and full year results and our 2024 outlook, I'd like to remind everyone that the financial results I'd be referring to include non GAAP financial measures. As David mentioned earlier, our Q4 press release and earnings presentation includes reconciliations of the non GAAP financial measures discussed on this call to their corresponding GAAP measures. Both of these are available on our website. Turning to slide 5.

Speaker 3

For the Q4 of 2023, we delivered another quarter of very strong financial results. We believe these results continue to demonstrate the resiliency, stability and strength of our business. Our 4th quarter results included revenue of $164,800,000 contribution profit of $66,300,000 and adjusted EBITDA of $19,900,000 Our results came in higher than we originally expected, and I'll discuss the drivers of our outperformance in more detail shortly. We also continued to experience solid business momentum in the Q4. This enabled us to once again exit the quarter with a strong backlog while further increasing our cash position.

Speaker 3

Now let's review our 4th quarter financials in more detail. 4th quarter 2023 revenue was 100 $64,800,000 up 24.7 percent year over year. This growth was largely driven by increased transactions from existing billers, the launch of new billers and increased activity in our instant payment network or IPN business. The number of transactions we processed grew to $124,800,000 in the 4th quarter, up 28.4% year over year. Our transaction growth exceeded revenue growth during the quarter, primarily due to biller mix.

Speaker 3

4th quarter 2023 contribution profit increased to $66,300,000 up 22.7% year over year. This year over year increase in contribution profit reflects higher transactions from existing billers and the launch of new billers. Contribution margin was 40.3% for the 4th quarter, essentially flat compared to 40.9% in the prior year period, despite adding a number of large sized billers to the mix throughout the past year. Contribution profit in the Q4 surpassed our expectations and was actually our best quarter in 2023 in terms of year over year growth. This outperformance was primarily driven by 3 key factors.

Speaker 3

1st, we saw higher transaction growth than we had expected initially during the quarter. The growth was driven by increased transactions from newer billers that were launched earlier in the year with the incremental transactions driven by seasonality and adoption success. 2nd, we saw growth from billers who are seasonally strong in the Q4. And third, we realized the benefit of improved pricing from some billers upon renewal of their contracts. Contribution profit per transaction for the quarter was $0.53 which was modestly down from $0.56 in the prior year period, primarily due to biller mix.

Speaker 3

As we stated in the past, variables outside of our control, such as an increase in the average payment amount, changes in the payment mix, biller mix, CPI and card network fees, etcetera, can significantly influence and diminish the utility of contribution profit on a quarterly and per transaction basis. 4th quarter 2023 adjusted gross profit was $54,200,000 up 21.5 percent year over year. Year over year adjusted gross profit growth marginally trailed contribution profit growth, primarily due to increased employee costs we recorded during the quarter related to customer support that are non recurring. Q4 2023 non GAAP operating expenses increased to 36,700,000 dollars marginally up 1.1% year over year. The increase was primarily due to increased sales and marketing expenses and research and development expenses net of savings we realized in general and administrative costs.

Speaker 3

We expect to increase sales and marketing expenses as we continue to focus resources on the execution of our go to market strategy and increase in investments related to converting our strong pipeline to bookings and onboarding our strong backlog. Additionally, we started to see increased hiring in the Q4, including some hirings that we had originally planned for the Q3 of 2023. Q4 2023 non GAAP net income was $13,900,000 or $0.11 per share compared to non GAAP net income of $5,100,000 or $0.04 per share in the prior year period. Q4 2023 adjusted EBITDA was $19,900,000 a record 30% of contribution profit, up 95.4 percent compared to $10,200,000 or 18.9 percent of contribution profit in the prior year. This very strong quarterly performance compared to the guidance we previously provided was primarily driven by 2 key factors.

Speaker 3

First, we benefited from increased contribution profit due to transactions growth and the reasons highlighted earlier. And second, hirings were less than we had expected in the quarter, resulting in lower operating expenses. Even taking into account these unexpected variables which benefited us, we believe our strong adjusted EBITDA margin demonstrates the inherent operating leverage we have in the business and our ability to adapt to changing market conditions as we continue to grow. Related to this, we also exceeded the rule of 40 for the Q4 coming in at approximately 53. This is a measure we take very seriously and our team here monitors it very closely.

Speaker 3

This is our 3rd consecutive quarter exceeding the rule of 40. Turning to Slide 6. I will summarize our full year 2023 financial results, which also came in higher than we originally expected. Revenue for the full year increased 23.6 percent to $614,500,000 driven by 24.9 percent increase in transactions from new billers as well as transactions growth from existing billers. Contribution profit increased 19.7 percent to $240,900,000 primarily due to increased transactions and repricing initiatives.

Speaker 3

Lastly, adjusted gross profit increased 23.1 percent to 199,200,000 Non GAAP operating expenses increased to $150,000,000 up 6.8% year over year, primarily due to higher sales and marketing expenses as we continue to focus resources on the execution of our go to market strategy. Non GAAP net income was $40,100,000 or $0.32 per share compared to non GAAP net income of $14,800,000 or $0.12 per share in the prior year period. Adjusted EBITDA increased 103.1 percent to $58,100,000 primarily due to increased adjusted gross profit net of increased non GAAP operating expenses. We exceeded the rule of 40 for the full year ending at approximately 44. We are proud to report that $29,500,000 of $39,700,000 contribution profit increase, representing 74% incremental contribution profit in the fiscal year 'twenty three flowed through to adjusted EBITDA.

Speaker 3

Now I'll discuss our balance sheet and liquidity position on slide 7. We ended 4th quarter with cash and cash equivalents of $183,200,000 compared to $166,900,000 at the end of Q3 'twenty three. The $16,300,000 increase was primarily comprised of $24,400,000 of cash generated from operations, offset by $8,400,000 used in investing activities, primarily internally used capitalized software used to drive growth and innovation. The company does not currently have any debt. Our free cash flow generated during the quarter was $16,000,000 Our days sales outstanding at the end of 4th quarter was 43 days compared to 45 days at Q3 'twenty three, within our expected range.

Speaker 3

Working capital at the end of the 4th quarter was approximately $208,000,000 an increase of approximately 6% from the end of Q3 'twenty three. We had 126,500,000 diluted shares outstanding as of December 31, 2023 compared to 125,600,000 diluted shares outstanding at the end of Q3 2023. The increase was largely due to improved average stock price during the quarter and to some extent due to the vesting of employee restricted stock units and exercise of stock options. Now I'll turn to our Q1 'twenty four and full year 2024 guidance for revenue, non GAAP contribution profit and adjusted EBITDA on Slide 8. Taking into account our progress to date for Q1 'twenty four, our guidance is revenue in the range of $170,000,000 to 176,000,000 dollars contribution profit in the range of $64,000,000 to $66,000,000 and adjusted EBITDA in the range of $15,000,000 to 17,000,000 dollars Before discussing full year guidance, I want to mention that we are continuing to follow the same prudent approach to guidance that we followed during 2023 as uncertainty around the macroeconomic environment still exists.

Speaker 3

For the full year 2024, we currently expect revenue in the range of $720,000,000 to 744,000,000 dollars reflecting growth of 19.1 percent at midpoint and 21.1 percent at high end. Contribution profit in the range of $274,000,000 to $288,000,000 up 16.6% at midpoint and 19.5 percent at the high end. Our growth range for contribution profit is wider than revenue, primarily because, as we have said before, contribution profit is subject to a number of external factors that are beyond our control. Accordingly, we are taking a cautious approach on this metric. And finally, adjusted EBITDA in the range of $65,000,000 to $75,000,000 for the year, representing 20.5% increase at the midpoint and 29.1% at the high end.

Speaker 3

Please note this adjusted EBITDA guidance reflects the annual merit awards for our employees and our expectation that the increased hiring pace we saw in the Q4 will continue to pick up in 2024. It also takes into consideration the slower operating expense growth we saw in 2023, which was largely a reflection of the accelerated operating expense growth we had seen in the prior 2 fiscal years, primarily as a part of going public. Now that this period has passed, we expect to deliver a more normalized operating expense growth rate in 2024. During our last earnings call, we provided long term growth targets for both revenue and adjusted EBITDA for our 2 primary financial metrics. We stated our goal to grow revenue at approximately 20% annually and to grow adjusted EBITDA dollars between 20% to 30% annually.

Speaker 3

The guidance that we have provided today for the full year 2024 reflects these long term targets. Regarding contribution profit and operating expenses, which we consider secondary financial metrics, We plan to actively manage our operating expenses, dialing them up or down as necessary, depending on how contribution profit is trending throughout the year to enable us to remain a rule of 40 company on an annual basis. We manage this quite well in 2023, and we believe we can do so again in 20 4, given our strong operating leverage. In summary, we reported exceptional Q4 and full year 2023 results. Throughout 2023, we consistently demonstrated our ability to generate strong revenue, contribution profit, adjusted EBITDA, cash and bookings growth.

Speaker 3

This enabled us to end the year with a substantial backlog. Based on the solid footing and strong visibility, we continue to believe we are well positioned for 2024. Thank you everyone for your attention today. And now I'll turn it back to Dushyant for final remarks before we open up the call for questions.

Speaker 2

Thanks, Sanjay. I'm proud that our team came together and significantly beat our original expectations for 2023, which we had set out around the same time last year. I believe this performance illustrates the resilience of our business despite the difficult macro environment we dealt with. Sanjay just covered our guidance for the full year and the Q1 2024. As I shared earlier, we feel good about the guidance based on the strength of our backlog.

Speaker 2

On that note, also want to thank all of my team members for their continued efforts and dedication. That concludes our prepared remarks. I'll now open the line up for questions.

Operator

The first question is from the line of John Davis with Raymond James. Your line is now open.

Speaker 4

Good afternoon, guys. This is Madison on for JD. I appreciate you taking the question. I wanted to start on the revenue guide. Obviously, it calls for roughly 19% growth here.

Speaker 4

It doesn't include any new client wins and understand the conservatism. But can you help us understand just how much new clients have contributed to growth in the past? I'm just trying to get a sense for the potential upside if new client growth goes as kind of planned given the strong backlog and sales trends you're seeing?

Speaker 3

Madison, appreciate the question. The growth of the new clients and the growth of the existing clients, these are the 2 contributors for our growth generally year over year. And I would say we generally do not disclose the breakup of the 2. I would say that the growth this year we are seeing the 19.1% at midpoint. That's comprised of both these factors, as I mentioned.

Speaker 3

And I would say they are in a very similar ratio, what you saw last year. They are in a pretty close range of those numbers last year as well. The trends are continuing as we expected. And I think as we are guiding the high end at 21.1 percent and as Dushyant just mentioned, if all our client implementations happen on time as planned, I think that should get us to high end. But I would say no new customers are planned in this year, which we will have to win this year and implement this year.

Speaker 3

All of our revenue expectation is based on the client billings we had till the end of 2023.

Speaker 4

Got you. Yes, that's helpful. It's probably worth noting that obviously you outperformed that initial revenue guide from last year by mid single digit percentage wise. And then just as my follow-up here on capital allocation, obviously, you talked about the pristine balance sheet, strong cash position, no debt generating nice free cash flow now. Can you just talk about your capital allocation philosophy?

Speaker 4

And then just any color you could possibly give on how you guys are thinking about cash flow in 2024 would be helpful. Thank you.

Speaker 3

Sure. Madison, we are very glad to be in a great position in the current economy to have a very good balance sheet. Dollars183,000,000 on the balance sheet gives us a lot of comfort and opens a lot of avenues for us to think about. But our priorities for capital allocation or cash spending remain unchanged since what we have discussed in the past. We want to grow organically.

Speaker 3

And the biggest opportunity for us to spend cash to prove the best results for us is to invest in hiring the sales and marketing team so we can build a better pipeline for growth for outer years. In fact, would rather highlight the current year expectations for growth of revenue do not need any additional sales team or additional sales bookings. But we plan to invest in our sales team, which we think is the right measure for us to spend money. Other than this, we currently do not have any other plans to spend cash. And I think we are headed in the right direction.

Speaker 3

Starting from Q4 itself, we saw that trend happening. And we are excited to make that happen more in this year and build a great pipeline.

Speaker 4

Got it. Thank you. I appreciate all the color.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Dave Koning with Baird. Your line is now open.

Speaker 5

Yes. Hey, guys. Thanks so much. And nice job. And I guess my first question, in you gave at the end of 'twenty two, you gave I think a little over 1900 clients.

Speaker 5

So last year, we could kind of back into like 10% client growth and mid teens revenue per client growth. Did you give that number at the end of 2023? Now I don't think I saw it in the presentation, but maybe if

Speaker 2

you could just give us a

Speaker 5

little bit of how much clients grew and then how much revenue per client grew?

Speaker 3

Yes, David, the new number that's an annual number we disclosed and our 10 gig will be filed shortly and the number will be in there and it's 2,200. So it's a 3 100 increase from the last number you saw and the increase prior to that was 200. So definitely we are marching at an accelerated pace than we were marching earlier. And I think revenue per client is, I would say, is getting better. Interesting, the revenue per client, I would also highlight, David, is not really kind of the most optimum metric to look at.

Speaker 3

Given the kind or given the size of the clients we are getting into, we are getting large enterprise customers as well as small and medium sized billers from various verticals, our mix is kind of becoming different than it was a few years ago. I think looking at revenue per client may not be the right metric, but I get it that that's an easy metric to look at and see the trends. I would say just the growth of billers itself it is more relevant than revenue per biller.

Speaker 5

Yes. Got you. No, that's helpful. And I guess just a follow-up question. You've become quite profitable so quickly in the last few years.

Speaker 5

And now we can look at like we can look at earnings as a valuation metric. And I'm just wondering, do you have like a normalized tax rate or something that we should use when we start thinking about how to think about earnings?

Speaker 3

Yes, David, that's a great comment. Thank you for that. We are profitable and we definitely want to be and we think we'll be profitable going forward as well given the strong operating leverage this business has. In terms of tax rate, we are profitable and we kind of exhausted all NOLs this year. A very small portion is left, which will be used next year.

Speaker 3

So going forward for the long term planning for earnings, I would suggest you use the rate which is closer to the statutory tax rate in the U. S. Counting states, I think you should use approximately 25% tax rate.

Speaker 5

Yes. That makes sense. Well, no, thank you and great job.

Speaker 3

Thank you. Thank you, David.

Operator

The next question is from the line of Will Nance with Goldman Sachs. Your line is now open.

Speaker 6

Hey, guys. I appreciate you taking the question. Dushyant, you called out a number of client wins in the quarter seeing particularly increased traction or where you're getting increasingly optimistic that maybe could unlock some additional growth, maybe verticals you haven't played in historically as much?

Speaker 2

Yes, Akshat, great point, Will. From our perspective, during the IPO roadshow, we actually had a comment that wherever there is a bill, is a payment and wherever there is a payment, there is Paymentus. And I think that's coming to pass at this point where from all of our channels, whether it's direct acquisition of clients or through channel partners of various kinds, what we are observing is that the needs of the customers is the same that they want to automate their complex payment and business workflows and our platform fits the bill perfectly for that. So as a result, we are growing in all different verticals. Utilities remains a strong vertical for us, but many other verticals, as I named, we are seeing traction in.

Speaker 2

So we are very excited about the future actually. And one of the other things which is interesting is, as we are entering into some other verticals, we are noting that it's not just the payments in, even payment out. So disbursements and payouts becomes an important transaction flow that we could acquire or automate through our platform. So we're excited about that as well.

Speaker 6

Yes. Appreciate all that. And then just maybe on some of the ITN comments, you kind of mentioned the progress and seeing more integration with Bank Bill Pay. Maybe you could just talk about the opportunities there long term. I think a lot of people would consider payments to some companies like that kind of be in opposition to traditional bill pay centers at the bank.

Speaker 6

So how do you see that kind of playing out over time? Are there opportunities to maybe work more closely with some of the incumbents in the space? And how do you kind of see the IP and strategy playing in specifically to kind of the bank bill pay market? Thanks.

Speaker 2

Thank you, Will. I think this is an interesting scenario. I think what we felt right from the beginning of the business that each billing company, if I can liken it to the analogy of cell phone network, each billing company is like a cell phone tower. And if you have enough of the billing companies like we do and we continue to and we have built the platform and the ecosystem where we are signing increasingly at a faster pace, the billing companies of all sizes and various verticals onto the network, the cell phone network, if you will, or the biller network becomes increasingly valuable on its own in addition to the revenue we generate from the billers themselves. So what that means is that any bank who has any desire to attract customers or not or stop losing the customers or the payment volume they have historically lost to Paymentus.

Speaker 2

If they want to participate and continue to maintain their customer base, they have to use a real time network like IPN. And since we are the leader in the space or at least we believe we are the leader in the space, we believe that this is as we bring in more and more billers, this becomes even more valuable for banks and other third party providers who want to provide aggregated consumer bill payment. So in some ways, that chasm that existed between the consolidated business bill payments to the pillar direct bill payments is being sort of evaporated or being reduced or eliminated through instant payment network. So we are very excited about the future here. And frankly, as the time progresses, it will start to become more and more evident how and why we are winning the type of customers we are winning.

Speaker 3

Thank you, Bill.

Operator

Thank you. The next question is from the line of Darrin Peller with Wolfe Research. You may proceed.

Speaker 7

Guys, nice job on this. Maybe just touch a little bit more on the landscape for a minute because I think you mentioned pricing a couple of times in your prepared remarks. Maybe if you can give us a little more understanding on how receptive clients have been to this and where payment is generally felt leverage to do so, maybe add on to it just overall competition. It looks like you guys obviously have differentiated yourselves as time goes on more and more. So maybe just any more color on where if you've seen any incumbents do anything differently or perhaps new start ups?

Speaker 7

Thanks.

Speaker 2

Sure. Great question, Darren. I think from our perspective, the approach we took during the inflationary period or high inflationary period was, we wanted to work with our clients. We want to demonstrate that we are long term partner and we understand the pinpoint that just because inflation has come up rather quickly, it may dissipate quickly as well. So you want to give a little bit of a time for customers to understand that they're working with a great partner, in addition to having a great platform like we support or we offer.

Speaker 2

And that approach actually worked extremely well. So we were able to walk the customers through the pain point we were suffering publicly, as you all know that we were being called out multiple times about the inflation impact we were facing. We were able to show that combined with the data, obviously, the detailed data customers were privy to. We were able to review the renew the pricing, update the pricing, customers were rather understanding. So we feel good about where our contractual arrangements are with the client, where our pricing capabilities exist with the strength of the platform and the technology capabilities we support.

Speaker 2

So should a situation like this were to arise in the future, it gives us confidence that our approach and methodology of taking a long term view to customer service and then adjusting the pricing could work again well for us.

Speaker 7

That's really really cool. Maybe just one more on the operating leverage side. If you can give us a little bit more color on your operating expense plans and the cadence expected for 2024. I mean, I think perhaps just a little more color on where you think you need to invest.

Speaker 3

I would say that you saw that the growth this year was 6.8% full year. And next year, while we don't guide for OpEx as such, but you can, I think, model it out looking at the guidance we are giving for the other three metrics? You will see that the OpEx is currently expected to grow in mid teens. That's what you'll come, I would think, looking at what we provided. We are actually taking a prudent conservative approach in terms of what we need to do.

Speaker 3

And as I mentioned earlier, we don't really need to spend OpEx. Majority of the OpEx is not needed to be spent for this year's growth. This year's growth is coming from bookings we did last year. We are planning to spend more in terms of what we need to book for outer years growth. So in terms of your main question, where will the spend be?

Speaker 3

Majority of the spend will be in sales and marketing. I think R and D and G and A will marginally go up, but not significantly. The growth will mean OpEx growth mainly be in sales and marketing. That said, I also want to highlight one thing. Majority of the spend is discretionary in nature.

Speaker 3

And we manage our business very carefully. In fact, there is a regular review of how the OpEx is trending and we can dial up and down based on how the CP is trending. So operating leverage is strong. As you saw last year, like we dropped 70 percent plus to the bottom line of incremental CP dollars. It can happen again, but we are not planning to do that by choice.

Speaker 3

So I think we can manage it the way business is progressing, but we are glad to be in a position of operating leverage the way we are.

Speaker 7

Understood. Great.

Operator

Thanks, guys. Thank you. The next question is from Andrew Bakke with Wells Fargo. Your line is now

Speaker 8

open. Hey, thanks for taking the question. Just wanted to put a finer point on hiring plans, particularly in sales and marketing that you highlighted. Sanjay, I know you mentioned in your prepared remarks that it was a function of converting the backlog, but then you also said just now that extending the growth in the out years is a priority. So I guess qualitatively, like how do you kind of anticipate these sales and marketing investments as they come on to augment your growth your go to market strategy?

Speaker 8

And then if we could just put a finer point quantitatively, like what should we ultimately be kind of expecting based on your current plans for sales and marketing expense growth in 2024?

Speaker 3

Yes. Andrew, we as I said, from the modeling perspective, you would come at around 15%, I think, at the midpoint of growth of OpEx. And to put a final point quantitatively, I would say, can give a percentage specifically here, but I would say bigger piece is material pieces for sales and marketing and the remaining piece for R and D and G and A. And a piece also depends on G and A in terms of how the few things come up. D and O insurance renewal, for example, couple of renewals, we got a good benefit last year.

Speaker 3

And we don't know if the market trends of those costs, which are significant costs, where do they go this year? Are they going to stay flat or go up? But I would think they will marginally go up, not significantly. So take it that biggest piece of the increase in sales and marketing and remaining on these 2. Now within sales and marketing, if I have to think about how much we'll go for growth of pipeline for outer years versus the backlog implementation, I would say in these two things as well, the material portion would go for generating additional pipeline for outer years and the smaller piece or a modest piece for backlog implementation.

Speaker 8

And then the qualitative piece, like is there anything changing in the go

Speaker 4

to market strategy?

Speaker 3

Well, our basic go to market strategy is not significantly changing. One thing which we are continually looking at, are there more verticals where we need to get into or can get into. We have made a significant progress, I would say, in the last 2 years in diversifying more into newer verticals. And we are seeing good progress there and good traction there. So our pace to accelerate diverging into new verticals would continue.

Speaker 3

But other than that, there is no strategy overall.

Speaker 8

Got it. Makes sense. And then my follow-up was, Sandeep, you mentioned that the contribution guide was slightly wider than the revenue guide that you gave. You called out the uncertainty around macro and a lot of the mix dynamics, I mean, are you seeing anything thus far into 2024, be it around amount type, biller or the network fees that would lead you to inform us all on that wider range for contribution profit?

Speaker 3

So Andrew, that's a very interesting question. Interestingly, we are not aware of any specific change here. What we have learned among, I would say, in the last two quarters when we look at all the contribution profits for all the quarters and try to analyze all the trends. What we've noted is that the degree of visibility at any given point in time for the current quarter is much better than the full year. And that's where we are.

Speaker 3

If you look at our Q1 guidance versus full year, we are taking a broader approach just because the quarterly variability exists. For example, you'll see Q1 'twenty four growth exceeds the revenue growth. I mean, Q1 'twenty four CP growth exceeds revenue growth. And Q4 'twenty three was similar revenue growth, but it changes in other quarters. So quarterly variability exists, and it's one of the most difficult metric to forecast.

Speaker 3

But that said, the variability on CP does not impact our bottom line EBITDA, and we can calibrate the OpEx to manage our profitability depending upon how the CP is trending. So as a result, I would say that the utility of CP or contribution profit is a key as a key metric is diminishing over time. Hence, we also call it a secondary metric where the utility is limited and we mainly use it to calculate rule of 40. Hence, we thought it's prudent to take that approach, rather than taking a narrow range as there are so many factors. And ultimately, we can manage through our bottom line target by dialing up the OpEx up or down.

Speaker 3

Maybe this was a mouthful. Maybe this was more than you asked for, but hope it provides some perspective and insight into how we think about this metric.

Speaker 7

No, it's helpful.

Speaker 2

And also, if I may add what Sanjay mentioned earlier was that to deliver 2024 growth, OpEx actually, even though everyone knows that we work in the non discretionary, we service the non discretionary industry, but our own internal OpEx in the context of 2024 is actually rather discretionary. So we are able to turn the dial up and down because of the operating leverage we have. So we feel good about the top and the bottom end of the guidance and despite the variability in the CP. And that's essentially the message you want to communicate. We know the trends in the business and we are feeling good about how we are capturing the market share and how we are able to profitably grow the business.

Speaker 2

All of that is moving in the right direction.

Speaker 8

No, loud and clear. Thanks, Ashok.

Speaker 3

Thank you.

Operator

Thank you. The next question is from the line of Tien tsin Huang with JPMorgan. You may proceed.

Speaker 9

Hey, good afternoon. Good results here. Just a couple of clarifications. Just did you share the NRR for the year and how that came together and how fiscal 2024 might be different? And also did you disclose the bookings or backlog growth in 2023 versus the prior year?

Speaker 9

Just curious on the magnitude of benefit there.

Speaker 3

Hi, Tien Tsin. No, we have not disclosed the numbers for the things you asked for.

Speaker 9

Okay. Anything qualitative to share then just on the bookings or backlog front? Qualitatively, I can share.

Speaker 3

Yes. Yes, sorry. Yes, qualitatively, I would say our NRR as well as bookings and pipeline, they are growing at a very decent pace, I would say. And that's giving us all the confidence to not only exceed our Q4 expectations, we delivered a strong quarter, we

Speaker 2

are very proud of that. And at

Speaker 3

the same time, Q1 also we are marching in a very good way. And I think we are headed for the I would say in the right direction for the whole year given that we exited with a very strong backlog. So I think all these metrics qualitatively are providing us a lot of encouragement and confidence.

Speaker 2

And Finjan, if I may add to that was that one of the key reasons I wanted to point out the point that we exited 2023 with enough in the bag that we could actually deliver the top end of the guide for any all of the 3 matrices, the 2 primary and one secondary being CP. That's primarily based on the strength of the backlog and that is growing year over year and we are feeling good about 2024 as well.

Speaker 9

Yes. No, it sounds that way. That's why I thought I'd ask the question. Just my quick follow-up then on the drop through or incremental margin around EBITDA was quite strong in 2023. It's running around what 50% in fiscal 2024 looking at my simple math.

Speaker 9

So just to make sure it sounds like there is some hiring that will come through that you called out. I know you'll adjust OpEx depending on what contribution profit lands. But is that the primary difference in thinking about drop through or incremental margin in 2024 versus 2023?

Speaker 3

That's right.

Speaker 7

Thank you.

Operator

Thank you. The next question is from the line of Rebecca Lu with Citi. You may

Speaker 10

Can you give us an update on the JPMorgan partnership? This thing a year or 2 ago, we expected that partnership to have a pretty meaningful contribution in 2024. What do we think now?

Speaker 2

Thank you, Rebecca for the question. We are very proud with our part very proud for our partnership with JPMorgan Chase. They're great partner, great organization and it's going extremely well in all areas and we're looking forward to a great 2024 with JPMorgan Chase. We also have a very strong partnership ecosystem, and we are looking forward to and frankly, as you can think about our go to market strategy, as Sanjay was also mentioning earlier, that increasingly partnerships become a big factor for us. So JPMorgan Chase is a strong partner for us, but also we have other partners, software vendors, fintech providers and so on.

Speaker 10

Okay. And I want to ask about the contribution profit in a slightly different way. The profit margin has been a decline last year because we had some negative impact from inflation. And if we're looking at the 2024 outlook even at the top end of the range, we're also assuming a decline as well. Is it just conservatism or are there anything else that we might not be thinking about?

Speaker 3

So, Rebecca, there are 2 pieces there are 2 answers to this, I'll share individually. Number 1, as we are onboarding larger customers, enterprise customers, Enterprise customers pricing definitely is different than smaller or midsize customers due to the volume discounts they get because they've got bigger transactions sorry, much larger transaction base. So I think, as a result of that, our contribution profit margin is getting softer a little bit. But that's totally fine given our strong operating leverage. And hence, we call contribution profit or contribution margin as our secondary matrices because they don't really matter as much to our long term growth model, which are purely dependent on the revenue growth and EBITDA dollars growth.

Speaker 3

So it's a good question to analyze that how the CP margin is going. But at the end of the day, that can easily be managed by adjusting dialing up or down over OpEx. So it doesn't really matter to our bottom line. I think there could be situations you will see that if CV percent is getting softer, our EBITDA could still get better because we can manage our expense better. And in our current long term model, which we have talked about, I.

Speaker 3

E, 20% top line growth and 20% to 30% bottom line adjusted EBITDA dollar's growth annually. I would think if CP margin gets better, which is also a probability depending upon what kind of customers we get, I would think there's an upside to EBITDA. Although we are not planning get there right now, I think we are applying a prudent approach. But what I'm just trying to say is contribution profit and contribution margin are really secondary. And over analysis of that might not produce an optimum result to understand the company.

Speaker 2

And if I may also say one more thing, as Sanjay has alluded to, as your biller mix changes and the larger biller comes to play, imagine a scenario where we saw a large deal where we are going to have a contribution profit of, say, dollars 1,000,000 that changes. We are less concerned at that point exactly what each transaction is contribution profit for each transaction is. We are more concerned about how quickly and how efficiently can we serve the customer and what will be the net operating margin from that biller is once they live on our platform, which ends up being very good based on the operating leverage we've been talking about.

Speaker 10

Great. Thank

Operator

you. Thank you. There are no further questions in queue. I'd like to turn the call back over to Dushant Pharma for concluding remarks.

Speaker 2

Well, thank you everyone for joining the call today. Really appreciate the time. Have a great day. Thank you.

Operator

That concludes today's conference call.

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Earnings Conference Call
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