Repay Holdings Corporation

Greetings and welcome to today's earnings conference call being hosted by Repay. With us today are John Morse, co-founder and chief executive officer, and Tim Murphy, chief financial officer. During this call, we will be making four linking statements about our beliefs and estimates regarding future events and results. These four linking statements are subject to risks and uncertainties, including those set forth in the SEC filing related to today's results and in our most recent Form 10-K filed with the SEC. Actual results might differ materially from any forelinking statements that we may make today. The forelinking statements speak only as of today, and we do not assume any obligation or intent to update them, except as required by law. In an effort to provide additional information to investors, today's discussion will also include references to certain non-GAAP financial measures An explanation of these non-GAAP financial measures as well as reconciliation of these non-GAAP measures to the nearest GAAP financial measures can be found in our earnings group available on the company's IR site. I would now like to turn the call over to Mr. Morris. Please go ahead.

Thank you, operator, and good afternoon, everyone. We hope everyone is doing well and staying healthy. On today's call, I wanted to first give an update on our business in the third quarter. followed by a review of how we're executing on our growth strategy with some exciting business announcements. I'll then turn it over to Tim to discuss our third quarter financials and guidance for the remainder of the year. As you can see from our results, the value proposition for our business has continued to prove more evidence since the COVID-19 pandemic began almost eight months ago. For the third quarter, we reported 44% and 44% growth in card payment volume and gross profit, respectively. Similar to Q2 and in Q3, we experienced increased demand for our offerings in several of our businesses across existing and new clients as our customers have accelerated the implementation of electronic payment capabilities. The pandemic has proven that loan repayments are resilient. Borrowers place a very high priority on staying current on their loan payments. The use of stimulus funds to pay down debt supports this belief. We've also continued to see significant shifts to electronic payments over the past few months. which has been and will continue to be a tailwind for our organic growth. Specifically, auto loan repayments have been very strong, which has been driven by an increase in auto lending and positive macro trends in the used car space. There's a lot of demand for used cars from people who are moving out of the cities or are more reluctant to use public transportation. Lower interest rates are contributing to the demand as well. Auto lenders are accepting more payments on cars and are seeing increased volumes, which benefits us. Our customers are wanting to use more of our channels and are looking for ways to engage consumers more efficiently. Digital engagement is one such ongoing trend, allowing customers to effectively reach consumers, which drives penetration for us in terms of electronic payments for auto loans. In the future, we also look to more actively address the prime lending market, including CAPTUS. Therefore, our TAM for auto is about $600 billion and is one of the fastest growing parts of our business. Our mortgage servicing business also performed very well in the quarter due to increased home buying and refinancing activity, along with low interest rates. This increased demand and low mortgage rates has sparked a boom in originations and mortgage service transfers, positioning us well to benefit. We've seen similar adoption trends in our B2B vertical. Businesses, especially enterprise clients we typically serve, have been forced to adopt electronic methods of payments, as well as automate their payments. That is a nice catalyst for accelerated growth in the future. Our instant funding product, which is our product that allows lenders to send funds directly to borrowers' bank accounts through eligible debit and prepaid cards, has also continued to see increased adoption as lenders and borrowers shift towards more electronic payments. So, overall, a strong quarter with positive trends. We made progress against all of our growth strategies during the quarter. We continued to execute on our existing business during the quarter by first expanding the usage and adoption of cars with our existing client base, as well as acquiring new merchants in existing verticals. To that end, we had some great client wins in the quarter driven by our direct sales force. These efforts were also aided by software integrations, of which we added 12 new partners during the quarter, mostly via acquisitions. This brought our total to 94 integrations at the end of September. When including the integrations from CPS payments, we now have a total of 119. We signed seven credit unions in Q3, bringing our total to 33, which represents approximately 340,000 collective members. I want to spend a few minutes discussing several of these integrations. In September, we announced a partnership with Advanced Business Computers of America to enhance our card payment acceptance and processing. ABCOA is a leading provider of software with real-time accounting for consumer finance companies. During the quarter, we also announced a partnership with CU Answers to integrate card processing for credit unions. CU Answers is a 100% credit union-owned data processing credit union service organization. They provide combined services to over 270 credit unions nationally, representing over 2 million members. On the mortgage servicing side, We're also very excited about our recently announced integration to Ellie Mae, the leading cloud-based loan origination platform provider to the mortgage industry. This partnership will enable mortgage originators with the ability to accept digital payments, enhance the customer experience, and drive efficiency for interim service loans. Ellie Mae has over 4,000 clients using their platform, so it could be a very large distribution opportunity for us with the potential to become one of our largest ISV partners. While we're on the topic of mortgage processing, we also recently announced a new service offering, STX, or Service Transfer Exchange, to automate loan transfer payments between mortgage servicers. STX automates the process of routing borrower payments from one lender to another when their mortgage servicing right is sold or transferred from one servicer to another. This product solves a real pain point for our target market by eliminating manual and paper-intensive processes standardizing the exchange of payment data and funds flow, reducing errors and costs for services, and creating a more seamless borrower experience. We are very excited about this new product as efficiency and accuracy are more important than ever in today's environment. Speaking of SDX, we also recently announced the formation of the SDX Advisory Board. initially comprised of six mortgage industry experts representing a variety of companies and leadership levels who all play the role in the mortgage service transfers between lenders. The goal of the S6 Advisory Board is to design and promote the implementation of operating standards to ensure consistency, recommend enhancements to products and services to improve workflows, and to promote participation and adoption of these standards throughout their networks. We also completed some important software integrations for our B2B business, with Stage 500 and Stage X3. This is adding on to our integrations with the Stage 100 and Stage 300 solutions. This technology integration between Repay and Stage 500 and Stage X3 will allow B2B merchants to easily and affordably accept payments with Level 3 processing for B2B transactions to save time and money. Moving on to our M&A, which continues to be a growth driver for our company. Our pipeline remains very active. There are many players out there that are great acquisition candidates for us. Ideal targets are high-growth businesses and large verticals that are underserved from a payment perspective, are integrated with software, have attractive margins, and have a need for our technology. On the topic of M&A, we recently closed the acquisition of CPS Payment Services, which affects all those boxes. CPS is a B2B and accounts payable automation technology provider, that facilitates the issuance, execution, and reconciliation of virtual card, enhanced ACH, ACH, and check payments through their integrated software platform, the CPS Payment Portal. CPS has developed a proprietary database of over 20,000 enrolled suppliers and serves an expanding base of over 160 enterprise clients across various sectors with deepest representation in healthcare, education, media, government, and hospitality. Additionally, CPS has integrations with over 25 ERP and accounting software platforms. CPS also has the opportunity to unlock significant growth potential by cross-selling its new total pay solution to capture greater wallet share across its existing client base. We are very excited about the acquisition as it immediately expands us into new verticals and greatly enhances our current B2B offering. Our ultimate goal for our B2B offering is to truly be a one-stop shop for our clients. We've set ourselves up to do that over the past 12 months, having capabilities on both the accounts receivable and accounts payable side. Taking that solution to the market in a comprehensive, one-stop way is something that not a lot of folks are doing. From a competitiveness standpoint, the B2B market is less competitive than some of our other markets. Over two-thirds of the opportunities that we win in this space are greenfield opportunities. And in that rare case where it's not a greenfield opportunity, we're winning because of the quality of our technology and the robustness of our platforms. Our B2B business now includes over 40 software integrations and a supplier network of over 50,000 plus. We expect to process card and enhance the ACH payment volume in excess of $4 billion annually, with accelerating growth ahead, including cross-sell opportunities with other parts of our B2B business. Our total addressable market in the B2B space is now $3.4 trillion, bringing our combined overall TAM to $4.7 trillion. We're putting a lot of resources behind our efforts in this vertical. With every acquisition we make in this vertical, we've been fortunate to get B2B payments to veterans who are helping us really bring together the strategy, unify the businesses and offerings, and will be instrumental in the long-term growth and the development of our larger strategy. To wrap up, I continue to be incredibly proud of our team for their hard work and dedication to growing this company and providing excellent service to our customers throughout this time. Our business has proven resilient, and our value has become even more apparent as we move into 2021. With that, I'll turn it over to Tim to discuss the financials in greater detail. Tim?

Thank you, John. Now let's move on to our Q3 financial results before I review our financial guidance for the remainder of 2020. In the third quarter, Repay delivered strong results across all of our key metrics. For the third quarter, card payment volume was $3.8 billion, an increase of 44% over the prior year's third quarter. Total revenue was $37.6 million, an increase of 43% over the prior year third quarter. TriSource, APS, Fantanix, and CPayPlus contributed approximately $10.2 million of incremental revenue during the third quarter. Moving on to expenses in the quarter. Other cost of services were $10.5 million compared to $6.8 million in the third quarter of 2019. The increase was primarily due to the additions of TriSource, APS, Fantanix, and CPay+. However, when excluding those additions, the amount was down in Q3. First profit was $27.1 million, an increase of 40% over the prior year's third quarter. On an organic basis, we saw gross profit growth in the high single digits compared to the third quarter of 2019. Please note that organic growth now includes TriSource. Organic growth was solid in July and September, but August was flat due to the lapping of a very strong August 2019 for personal loan repayments. Also, the increased mix shift to auto and the tri-source recovery resulted in slightly lower gross margins for the quarter. However, our September organic gross profit growth was in the low teens, and volume trends in October were strong, which provides us continued confidence in our mid to high teens organic growth outlook. SG&A was $28.6 million compared to $55.1 million in the third quarter of 2019. As a reminder, in the third quarter of 2019, we incurred transaction costs related to the business combination with ThunderBridge. Excluding the impact of those items, expenses were up year over year primarily due to commission restructurings completed during the quarter, increased hiring, share-based compensation, and added operating costs from our acquisitions. During the quarter, we modified sales commission plans for certain direct sales reps by making an upfront payment in exchange for the release of future commission rights associated with designated customer accounts. Given our balance sheet strength and the low multiples paid for these ongoing cash flow streams, we felt it was a very good use of capital. We may consider additional commission or partner residual restructurings in the future as we look to deploy capital in a productive and efficient manner. Third quarter pro forma net loss was 6.6 million compared to combined net loss of 41.4 million in the third quarter of 2019. The increase was mainly the result of general business growth and the impact of the aforementioned business combination expenses to net loss last year. Third quarter adjusted net income was $9.5 million or $0.12 per share, compared to adjusted net income of $10.4 million or $0.18 per share in the third quarter of 2019. The decrease was driven primarily by a pro forma tax adjustment in the current period, which we did not include in the prior year period, as well as a higher outstanding share count. Lastly, third quarter adjusted EBITDA was $15.6 million, an increase of 31% over the prior year third quarter. Third quarter adjusted EBITDA as a percent of the total revenue was 42% compared to 45% in the prior year third quarter. This increase in adjusted EBITDA as a result of organic growth and contributions from TriSource, APS, Fantanix, and CPay+. As a reminder, adjusted EBITDA margins from these acquired companies are slightly below our loan repayment business. However, they are typically growing faster and want to continue to invest in growth in the future. In mid-September, we closed an upsized public offering of common stock, where we sold approximately 14.4 million shares of repaid Class A common stock at a price to the public of $24 per share. All the net proceeds of this offering were used to acquire an equivalent number of LLC units from an entity controlled by Corsair Capital. Accordingly, the offering resulted in an aggregate increase to the company's public float of Class A common stock by approximately 14.4 million shares, but there was no increase to the total as-converted share count. As a result of this transaction, which included the full exercise of the over allotment option by the underwriter, Morgan Stanley, Coursera and its affiliated funds no longer hold an equity stake in the company. Coursera's private equity investment and repay occurred in September 2016. There's been a great four plus year relationship with the Coursera team. We want to thank them for all their contributions to helping us along the way. As John mentioned, on November 2nd, we announced the closing of the acquisition of CPS payments for up to $93 million, of which $78 million was paid at closing last week. The remaining $15 million may become payable depending upon the achievement of certain growth targets. The closing of the acquisition was financed with cash on hand. Our cash and liquidity positions remain very strong. As of October 31st, pro forma assuming $78 million was paid for CPS, we have $101 million of cash in the balance sheet, $30 million of undrawn rebar capacity, and $46 million of undrawn delayed draw terminal capacity for a total liquidity amount of $177 million. Our pro forma net leverage is now only 2.3 times, which is well below our current net leverage covenant level of five times. Please note that we recently amended our credit agreement with the only material change being to extend the availability period for the delayed draw term loan. As of September 30th, we had approximately 79.6 million shares outstanding on an as-converted basis. Our fully diluted share count, including uninvested shares, equaled approximately 82.2 million shares as of quarter end. Finally, moving on to our outlook for the remainder of the year. As I mentioned earlier, October volume trends have remained strong, providing us continued confidence in our mid- to high-teens organic growth outlook. However, we have continued to see increased mix shift to auto and recovery of our tri-source business, which is resulting in slightly lower margins. Our personal loan business, which typically has higher margins, has experienced some volatility over the past few months due to the introduction and then lack of stimulus benefits. We expect this volatility may continue while we're in this period of uncertainty around the economy and pandemic. Due to all these factors, we expect our gross profit margin in the fourth quarter to be more similar to the first quarter of this year. In addition, we expect adjusted EBITDA margins to be down slightly in the fourth quarter due to investments we are making in sales, product, and technology to set us up for continued growth in 2021. We have also added two months of contribution from CPS, However, please note there is seasonality in this business as it has some concentration in the media and education sectors, which means contribution in Q4 may not be equivalent to prior quarters. Finally, with only a quarter left to report, we thought it was best to narrow our guidance range to the following. Card payment volume to be between 14.75 billion and 15 billion. Total revenue to be between 148 million and 153 million. Gross profit to be between 110 and 113 million. and adjusted EBITDA to be between 63 and 65 million. As with prior quarters, this range assumes no further unforeseen COVID-related impacts, which could create substantial economic duress in the fourth quarter. Looking forward, with our several recent acquisitions, additional software integrations, new team members, and expanding addressable market, we continue to enhance our key growth levers to have significant momentum heading into 2021. I'll now turn the call back over to the operator to take the questions. Operator?