PAYA - Paya Holdings: A Leading Independent Integrated Payments Platform

Summary

• Paya Holdings Inc. is disrupting the middle-market payments industry.
• Paya Holdings has a differentiated operating model.
• The Paya Holdings Inc. distribution strategy is partner-centric.

Description

I recommend buying Paya Holdings Inc. ( PAYA ). The payment processing industry is shifting towards software-led solutions, and PAYA's partner-centric distribution model allows it to flexibly and with scale address multiple attractive markets at once. In addition, Paya serves customers who are generally larger than those targeted by other companies and generates a large portion of its payment volume from card-not-present transactions. They prioritize these transactions to ensure that integrated payments are as valuable and long-lasting as possible.

PAYA has a low attrition rate, which helps them maintain visibility into their revenue and payment volume retention. Overall, I believe PAYA's unique position in the integrated payments industry make them well-positioned for success.

Note that this post assumes Paya Holdings Inc. does not get acquired.

Company overview

With Paya, companies in all major industries can seamlessly incorporate payment processing into their existing ERP or accounting systems.

Paya's market will be sizeable and growing

With a focus on the middle market in the United States, Paya Holdings Inc. offers payment processing services. Banking institutions and local reseller networks offering both installation and maintenance services have traditionally been the backbone of the payment infrastructure serving the middle market. Local bank partnerships, however, have dwindled as the prevalence of computers and the Internet has increased. Instead, a new breed of sophisticated, all-in-one payment processors has arisen to serve the commercial sector. Providers of modern payment services often offer customers a range of unique, value-added options by integrating the software they already use to process payments with that of other companies. Regular bank processors haven't had much luck here because they lack the necessary technology and industry expertise.

There is a growing need, in my opinion, to bridge this technological gap so that businesses can have access to digital payment solutions that are also compatible with reporting tools. As a result, software merchants are now crucial to the process of issuing payments. To each other's benefit, software companies and payment processors have formed partnerships through which the former can gain access to potentially lucrative new customer leads and the latter can earn money from those leads.

For this reason, I believe PAYA's total addressable market ("TAM") will be sizable and expanding at a faster rate than the overall payments market.

PAYA serves larger customers

With its focus on middle-market customers in underserved areas, I believe PAYA has found a truly unique niche in the integrated payments industry. One distinguishing feature is that they serve customers who are generally larger than those targeted by other companies, and a large portion of their payment volume comes from card-not-present transactions. They prioritize these transactions in their primary areas of focus to ensure that integrated payments are as valuable and long-lasting as possible. Furthermore, PAYA has a good handle on their revenue and payment volume retention because of their low attrition rate, which is only 8%, which is lower than the industry average of around 15%.

The payments industry is undergoing a continual shift, demonstrating the efficacy of a business model based on integrated payments. Therefore, I anticipate that software-led payments will expand at a rate significantly higher than that of conventional acquirers in the years to come.

PAYA's strategy is forming new partnerships

PAYA's strategy as a whole is to work with other businesses to create a unified software and payment experience for their respective customers. This strategy, as opposed to employing a large direct sales force, enables them to simultaneously target multiple promising markets with minimal effort. It also frees up capital that could have been used to hire more door-to-door salespeople and put it toward developing the company's technological infrastructure.

Due to their collaboration with numerous independent software vendor [ISV] offering both front- and back-end solutions, PAYA has structured their distribution strategy as such. Most of the time, these partners provide services to a savvy, middle-market company that, in turn, resells the PAYA products to other customers via the underlying software. PAYA's primary purpose is to facilitate the acceptance of payments from customers in a way that improves the quality of customer service and simplifies invoice reconciliation.

An integral part of PAYA's strategy is forming new partnerships. One of the main tenets of its go-to-market strategy is a focus on helping software partners find ways to generate more revenue/profits. In my opinion, if these partners are able to successfully incorporate payment processing into their software, not only will customer retention increase, but they will also gain access to a new revenue stream beyond the standard monthly subscription.

For existing partners, PAYA also offers Paya Connect to further expand their product reach. In my opinion, Paya Connect rounds out PAYA by connecting PAYA's payment options with vendors who focus on front-and-back-end systems. Paya Connect runs on a robust technology stack designed specifically for the business sectors it supports. As a result of the platform's payment features, software vendors are able to focus on making sales rather than worrying about accepting payments.

Valuation

I believe PAYA is worth USD$8.78 in FY23, a 16% increase from the current stock price based on my model. This is based the following assumptions:

Revenue will grow as guided in FY22 and maintain a similar growth rate in the near term. There should be no issues with PAYA sustaining this growth rate since the total addressable market ("TAM") is large and the verticals that PAYA are presence in are generally underpenetrated.

Net margins to remain the same as FY22 as PAYA continues to invest in S&M to further penetrate the core verticals and enhance its distribution model.

Key risks

Competition in the payments industry

Paya Holdings Inc. is a payment provider that targets middle-market businesses in industries that don't have a lot of options. However, they have competition from companies of all different sizes in this space. If there isn't much demand for the extra value PAYA offers, they might have to lower their prices to compete, which could hurt their margins and overall financial performance.

Reliance on distribution partners

Referral partners and integrated software vendors are crucial to PAYA's success in promoting its services to retailers and increasing the company's revenue. Even though the company has many distribution partners, most of them do not work exclusively with them, and the company may not always be at the top of a partner's list of priorities. Further, PAYA's operating performance could be hampered by the loss of distribution partners.

Summary

The shift towards software-led payments and the increasing demand for electronic payment solutions that are compatible with digital reporting instruments make Paya Holdings Inc. well-positioned for future growth in the industry.

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