Paymentus increases revenue but operating results turn negative (NYSE:PAY)

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A quick overview of Paymentus

Paymentus Holdings, Inc. (NYSE: PAY) went public in May 2021, raising approximately $210 million in gross proceeds in an IPO at a price of $21.00 per share.

The company provides payment solutions for a variety of vertical customers seeking omnichannel capabilities.

I am cautious on PAY in the near term due to the worrying trend in its GAAP operating profit and the possibility of a recession already underway.

Payus Overview

Paymentus, based in Redmond, Wash., was founded to develop a cloud-based payment technology stack for financial institutions and other businesses to deliver omnichannel payment services to customers.

Management is led by Founder, President and CEO Dushyant Sharma, who previously co-founded Derivion, a SaaS e-invoicing company.

Key features of the company’s offering include:

  • IPN – Instant Payment Network

  • Commitment

  • Presentation

  • Accountability

  • Payment

  • Intelligence

The company seeks relationships with billers through a direct sales and marketing model and with no development or implementation costs required.

Paymentus market and competition

According to a 2021 market research report by Grand View Research, the global digital payments market (as a proxy) was estimated at $58.3 billion in 2020 and is expected to reach $241 billion in 2028.

This represents a very strong CAGR forecast of 19.4% from 2021 to 2028.

The main drivers of this expected growth are continued high adoption of smartphones, growth in e-commerce, growing internet penetration, and adoption of online payment technologies.

Additionally, the chart below shows the historic and projected U.S. digital payments market by solution type, from 2016 to 2028:

US digital payments market

US Digital Payments Market (Grand View Research)

Major competitors or other industry participants by type include:

  • Legacy Solution Providers

  • Internal systems of financial institutions

  • Telephone payments

Recent financial performance of Paymentus

  • Total revenue per quarter has increased steadily over the last 5 quarters:

Total turnover over 5 quarters

Total revenue over 5 quarters (looking for Alpha)

  • Gross profit per quarter increased on a similar trajectory as total revenue:

Gross profit over 5 quarters

Gross profit over 5 quarters (looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter increased as revenue increased:

Sales over 5 quarters, G&A % of turnover

5 Quarter Sales, G&A % Revenue (Seeking Alpha)

  • Operating profit by quarter went into negative territory in the last quarter:

Operating result for the 5 quarters

5th Quarter Operating Result (Seeking Alpha)

  • Earnings per share (diluted) were flat or positive, although uneven:

5 quarters of earnings per share

5 Quarter Earnings Per Share (Seeking Alpha)

Over the past 12 months, PAY’s stock price has fallen 61.5% compared to the US S&P 500 index decline of around 12.8%, as shown in the chart below :

52 week stock prices

52 week stock price (seeking alpha)

Evaluation Metrics for Paymentus

Below is a table of relevant capitalization and valuation figures for the company:

Measure

Rising

Market capitalization

$1,620,000,000

Enterprise value

$1,470,000,000

Price / Sales [TTM]

3.73

Enterprise Value / Sales [TTM]

3.50

Operating cash flow [TTM]

$15,560,000

Revenue growth rate [TTM]

29.47%

CapEx ratio

11.10

Earnings per share

$0.05

(Source – Alpha Research)

Comment on Paymentus

In its latest earnings call (Source – Seeking Alpha), covering Q1 2022 results, management highlighted crossing an annual rate of $100 billion in payments volume among a wider diversity of customers.

The company recently won contracts with customers in municipal services, insurance and mortgage payments, while it saw a reduction in utility customers to less than 40%.

PAY has also sought to increase relationships in the telecommunications and multi-family real estate sectors.

Management seeks clients in non-discretionary and pre-existing areas.

Regarding its financial results, trading volume increased 40.9% year-over-year and revenue growth was 26.5%, while contribution profit increased 35%. %, growing faster than revenue due to improved deal mix.

Contribution earnings per trade were flat at $0.54, “ahead of expectations,” but management said “we don’t expect this tailwind to continue in subsequent quarters.”

However, Sales, G&A % of Revenue has steadily increased and GAAP Operating Income has turned negative in the last quarter and has trended negative for the last 5 quarters as shown in my graph above in this report.

Looking ahead, management raised its 2022 revenue guidance to approximately 25% year-over-year growth and contribution earnings growth to approximately 30.5%.

Notably, the company does not believe that the current inflationary environment “will negatively impact our bottom line.” But that belief doesn’t extend to its bottom line, as PAY grapples with wage inflation and other rising costs of doing business.

Regarding valuation, the market values ​​PAY at an EV/Sales multiple of around 3.5x, which is quite low for a SaaS company.

The SaaS Capital Index of publicly held SaaS software companies had an EV/Average Revenue multiple of approximately 8.3x as of May 31, 2022, as shown in the chart below:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

So in comparison, PAY is a relative bargain at a term EV/Income of around 3.0x.

But the main risk to the company’s outlook is slower growth due to a recession in the United States which is affecting payment volumes.

If a recession is shallow, the company could see an upside catalyst later in 2022 depending on forecasts and future earnings.

In any event, I am cautious for PAY in the near term due to the worrying trend in its GAAP operating income and the potential for a recession already underway.

I’m on hold for PAY until we see a reversal in its third-quarter operating profit and business performance metrics.

Sallie R. Loera