Quick Take
Paymentus Holdings (PAY) has filed to raise $200 million in an IPO of its Class A common stock plus $50 million in a concurrent private placement, according to an S-1/A registration statement.
The firm provides bill payment software to companies and their customers worldwide.
PAY is growing impressively while producing earnings and free cash flow, so the IPO is worth a close look.
Company & Technology
Redmond, Washington-based Paymentus was founded to develop a cloud-delivered payment technology stack for financial institutions and other businesses to provide omni-channel payment services with customers.
Management is headed by founder, Chairman and CEO Dushyant Sharma, who was previously co-founder of Derivion, a SaaS electronic billing company.
The company’s primary offering features include:
IPN - Instant Payment Network
Engagement
Presentment
Empowerment
Payment
Intelligence
Paymentus has received at least $30 million in equity investment from investors including Accel-KKR and Ashigrace LLC.
Customer/User Acquisition
The firm seeks relationships with billers via a direct sales and marketing model and with no development or implementation fees required.
In 2020, the firm's platform generated more than 195 million transactions from a network of over 1,300 billers representing 16 million customers.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:
| Sales and Marketing | Expenses vs. Revenue |
| Period | Percentage |
| Three Mos. Ended March 31, 2021 | 8.9% |
| 2020 | 10.6% |
| 2019 | 11.9% |
(Source)
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, has increased to 2.8x in the most recent reporting period, as shown in the table below:
| Sales and Marketing | Efficiency Rate |
| Period | Multiple |
| Three Mos. Ended March 31, 2021 | 2.8 |
| 2020 | 2.1 |
(Source)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
PAY’s most recent calculation was 38% as of March 31, 2021, so the firm is close to meeting this metric, per the table below:
| Rule of 40 | Calculation |
| Recent Rev. Growth % | 33% |
| EBITDA % | 5% |
| Total | 38% |
(Source)
Management reported that its net dollar revenue retention rate for both 2019 and 2020 was greater than 117%.
A figure of over 100% indicates the company is generating additional revenue from the same cohort of customers, showing strong product/market fit and an efficient sales & marketing process, so Paymentus has performed well in this regard.
Market & Competition
According to a 2021 market research report by Grand View Research, the global market for digital payments (as a proxy) was an estimated $58.3 billion in 2020 and is expected to reach $241 billion in 2028.
This represents a forecast very strong CAGR of 19.4% from 2021 to 2028.
The main drivers for this expected growth are continued high adoption of smartphones, growth in e-commerce and rising internet penetration and adoption of online payment technologies.
Also, the chart below shows the historical and projected U.S. digital payments market by solution type, from 2016 to 2028:
Major competitive or other industry participants by type include:
Legacy solution providers
Internal financial institution systems
Phone-based payments
Financial Performance
Paymentus’ recent financial results can be summarized as follows:
Growing topline revenue, at an accelerating rate of growth
Increasing gross profit but reduced gross margin
Growing operating profit and net income
Uneven but upwardly trending cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
| Total Revenue | | |
| Period | Total Revenue | % Variance vs. Prior |
| Three Mos. Ended March 31, 2021 | $ 92,222,000 | 32.5% |
| 2020 | $ 301,767,000 | 28.0% |
| 2019 | $ 235,778,000 | |
| | | |
| Gross Profit (Loss) | | |
| Period | Gross Profit (Loss) | % Variance vs. Prior |
| Three Mos. Ended March 31, 2021 | $ 27,547,000 | 32.6% |
| 2020 | $ 92,627,000 | 24.4% |
| 2019 | $ 74,434,000 | |
| | | |
| Gross Margin | | |
| Period | Gross Margin | |
| Three Mos. Ended March 31, 2021 | 29.87% | |
| 2020 | 30.69% | |
| 2019 | 31.57% | |
| | | |
| Operating Profit (Loss) | | |
| Period | Operating Profit (Loss) | Operating Margin |
| Three Mos. Ended March 31, 2021 | $ 4,853,000 | 5.3% |
| 2020 | $ 18,428,000 | 6.1% |
| 2019 | $ 18,371,000 | 7.8% |
| | | |
| Net Income (Loss) | | |
| Period | Net Income (Loss) | |
| Three Mos. Ended March 31, 2021 | $ 2,278,000 | |
| 2020 | $ 8,525,000 | |
| 2019 | $ 9,000,000 | |
| | | |
| Cash Flow From Operations | | |
| Period | Cash Flow From Operations | |
| Three Mos. Ended March 31, 2021 | $ 7,177,000 | |
| 2020 | $ 35,620,000 | |
| 2019 | $ 17,511,000 | |
| | | |
| (Glossary Of Terms) | | |
(Source)
As of March 31, 2021, Paymentus had $49.6 million in cash and $45.4 million in total liabilities.
Free cash flow during the twelve months ended March 31, 2021, was $22.3 million.
IPO Details
Paymentus intends to raise $200 million in gross proceeds from an IPO of its Class A common stock, offering 10 million shares at a proposed midpoint price of $20.00 per share.
Investors have indicated a non-binding interest to purchase up to $60 million of Class A shares in the IPO.
Existing investor Accel-KKR has agreed to purchase $50 million of Class A shares in a concurrent private placement and at the same price as the IPO.
Class A common stockholders will be entitled to one vote per share and Class B shareholders will receive ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $2.3 billion, excluding the effects of underwriter over-allotment options.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 8.62%.
Management says it will use the net proceeds from the IPO as follows:
We intend to use approximately $57.4 million of the net proceeds from this offering to redeem all of our issued and outstanding shares of Series A preferred stock (including accrued dividends), substantially all of which are held by AKKR and our founder and chief executive officer. We intend to use the remainder of the net proceeds from this offering and the concurrent private placement for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies. (Source)
Management’s presentation of the company roadshow is available here.
Listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, BofA Securities, Citigroup, Baird, Nomura, Raymond James, Wells Fargo Securities, Fifth Third Securities, PNC Capital Markets, AmeriVet Securities and C.L. King & Associates.
Valuation Metrics
Below is a table of relevant capitalization and valuation figures for the company:
| Measure [TTM] | Amount |
| Market Capitalization at IPO | $2,319,584,740 |
| Enterprise Value | $2,269,945,740 |
| Price / Sales | 7.15 |
| EV / Revenue | 7.00 |
| EV / EBITDA | 115.98 |
| Earnings Per Share | $0.08 |
| Float To Outstanding Shares Ratio | 8.62% |
| Proposed IPO Midpoint Price per Share | $20.00 |
| Net Free Cash Flow | $22,255,000 |
| Free Cash Flow Yield Per Share | 0.96% |
| Revenue Growth Rate | 32.52% |
| (Glossary Of Terms) | |
(Source)
As a reference, a potential partial public comparable to PAY would be Fiserv (FISV); below is a comparison of their primary valuation metrics:
| Metric | Fiserv (FISV) | Paymentus (PAY) | Variance |
| Price / Sales | 5.16 | 7.15 | 38.6% |
| EV / Revenue | 6.58 | 7.00 | 6.3% |
| EV / EBITDA | 19.46 | 115.98 | 496.0% |
| Earnings Per Share | $1.28 | $0.08 | -93.8% |
| Revenue Growth Rate | 19.1% | 32.52% | 69.89% |
| (Glossary Of Terms) | | | |
Commentary
Paymentus is seeking public investment to redeem its Series A preferred stock and for its corporate expansion plans
The firm’s financials indicate increasing topline revenue and at an accelerating rate and growing operating and net profits.
Free cash flow for the twelve months ended March 31, 2021 was a reasonable $22.3 million.
Sales and Marketing expenses as a percentage of total revenue dropped as revenue has increased; its Sales and Marketing efficiency rate rose to 2.8x.
Additionally, the company’s Rule of 40 metric performance nearly cleared this hurdle and its dollar-based net retention rate was an impressive 117%, for both 2019 and 2020.
The market opportunity for providing legacy financial billers with modern software solutions is significant and the firm should enjoy very positive industry dynamics in its favor, especially after the COVID-19 pandemic and its effects on increasing consumer adoption of digital technologies.
Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 25.8% since their IPO. This is a mid-tier performance for all major underwriters during the period.
One risk to the company’s outlook is that it relies on U.S. Bank and JPMorgan Chase along with a payroll solutions provider (among others) to refer new billers to its platform, so if any of these referral relationships were to end, it may negatively impact the firm’s growth trajectory.
As for valuation, compared to much larger and diversified Fiserv, the IPO appears reasonably valued, as FISV is growing revenue more slowly although producing higher EPS.
Paymentus appears to be growing impressively due to its focus on modernizing the biller space while producing earnings and free cash flow, so the IPO is worth consideration.
Expected IPO Pricing Date: May 25, 2021