Repay Holdings Corporation

Welcome to today's earnings conference call being hosted by Repay. With us today are John Morris, co-founder and chief executive officer, and Tim Murphy, chief financial officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risk and uncertainties, including those set forth in the SEC filings related to today's results. as well as in our most recent form 10-K filed with the SEC. Actual results may differ materially from any forward-looking statements that we make today. Forward-looking 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. Reconciliations and other explanations of those non-GAAP financial measures can be found in today's press release and in earnings supplement, each of which are available on the company's IR site. I would now like to turn the call over to Mr. Morris. Please go ahead, sir. You may begin your presentation at this time.

Thank you, operator, and good afternoon, everyone. As you can see from our results, we delivered strong performance in the third quarter across all our key metrics. This demonstrates the resilience of our diversified business model. We saw our card payment volume growth of 15%, revenue growth of 17%, and gross profit growth of 20%. Organic gross profit growth in the quarter was 15%. While much of the organic growth contribution was from our B2B business this quarter, we are excited about opportunities in both our B2B and consumer payment verticals. As a reminder, consumer represents approximately 70% of our total business. B2B is approximately 20%, and the remainder is primarily RCS. Consumer and B2B together represent over $5 trillion of annual payment volume, of which we currently process less than 1% on card, which provides support for our tremendous long-term growth opportunities. Both verticals have specific transaction processing needs and have lagged behind other industry verticals in moving to digital payments. This leads to lower penetration rates for electronic payments, specifically card payments, and a general lack of competition, which revives us with the opportunity to embed our payment technology directly into the client and to the client's software platform, thereby increasing stickiness and expanding margins. We believe that our vast distribution network of 236 ISV partners and deep presence in these vertical end markets creates durable growth, strong new economics, and significant defensibility. Within these ISV relationships, we have launched our Integrated Partners Program to add product features and functionalities to the existing integrations in order to further penetrate these relationships. This represents a significant growth driver for 2023 and beyond. I'll start with a view of our B2B payments business during the quarter. As you all are aware, B2B payments have traditionally been made by a check or ACH, including AP and AR. So there is a very large and unpenetrated market to attack in this vertical. We often get asked, what is your competitive advantage versus other B2B players? There are many players focused in the B2B market, which is mostly driven by the massive opportunity. First, I would highlight our complete offering, which includes our total pay solution, where we can execute supplier payments on behalf of our clients by all payment methods, including check, ACH, enhanced ACH, and virtual cards. AP automation, where we allow our clients to outsource their entire AP functions. including our proprietary approach to supplier enablement. And lastly, merchant acquiring, where we allow our clients to accept electronic payments from other businesses in a highly integrated manner through their ERP accounting solutions, such as Sage or Acumatica. Please recall that we believe we are one of the only B2B payment providers to offer two-sided integrations via Sage and Acumatica, which allows for both AR and AP payment automation and execution directly within the ERP environment. Second, I would highlight our vertical expertise. In AR, our largest areas of focus include manufacturing, wholesale, and distribution. In AP, our largest areas of focus include auto dealers, healthcare, hospitals, media, hospitality, property management, fuel services, and government. In addition, we are primarily focused on medium to enterprise-sized customers, which tend to be more resilient in any market condition versus SMBs. Third, I would highlight our go-to-market strategy and supplier network. As of the end of September, we had 85 B2B integrations and have expanded with many providers, such as Sage, which we announced during the quarter. We have also a dedicated in-house sales team working to sell our solutions. As of the end of September, our supplier network has grown to 147,000 vendors, a 40% increase year-over-year. Having a large supplier network is especially important when we talk to new customers in subverticals. Having that supplier network that we can already address with them is very helpful. Additionally, in terms of our talent, we have a great B2B team today, but we will continue to build out the sales and partnership functions. We plan to make key focus investments specifically on the AP side due to the massive TAM and low penetration of electronic payments. Turning now to a few Q3 updates within our B2B vertical. As mentioned on our Q2 call, we expected political media volume to ramp into the second half. Thus far, political ad spend is generally in line with what we expected. As for recent wins, we announced an AR agreement with Jones Healthcare Group, a market leader in advanced packaging and medication dispensing solutions. We were able to create a one-stop-shop payment ecosystem, enabling Jones' pharmacy customers to self-service and pay invoices online. We also recently announced an exclusive referral partnership with SpendMen, a leading provider of solutions to optimize the cost cycle for the healthcare industry. Repay will be the exclusive accounts payable solutions for SpendMen's clients across the healthcare sector. On the consumer payment side of our business, we saw strength across our various sub-verticals. As a reminder, the TAM for just this part of our business is approximately $2 trillion. of annual payment volume, and credit cards are not typically accepted for loan repayments, which has resulted in overall low card penetration. Our debit card acceptance offering provides many benefits to the lender, including accelerated payment cycle, which is the ability to lend more and faster through card processing. 24-7 payment acceptance through always open omni-channel offering. Omni-channel payment methods, web, mobile, IVR, and text. fewer ancillary charges, such as NSF or borrowers, through automatic recurring online debit card payments, direct software integrations to embed payments into loan, dealer, and other workflow management systems, which reduces operational complexity for our clients. As of 9.30, we had approximately 150 ISV relationships for just the consumer payment side of our business. Also, our solutions offer improved regulatory compliance through fewer ACH returns. Our instant funding products which we processed through Visa Direct and MassCardSend, continues to show strength. In the third quarter, volume was approximately 50% ahead of our Q3 2021. We believe this is another way to influence our more digital card-based repayment transactions, as the repayment method on file is a debit card. Recall that we are a payments leader in the personal loans, auto loans, credit unions, mortgage servicing payment verticals. We now have approximately 5,500 clients across the ZIN markets, including close to 230 credit unions. In these markets, lenders are looking for ways to engage with the borrower. They do this via the deployment of our omni-channel payment solutions, which are fully embedded into the lender's financial software. In fact, we recently extended our existing relationship with Fairstone Bank, one of Canada's largest lenders. This new agreement with FIG will focus on supporting various forms of lending through buy now, pay later, and embedded financing solutions, and further expands the refaith services offered within the Canadian lending market. Regarding the macro conditions in the personal loans vertical, many of the same trends exist that we discussed previously, including continued strong demand for credit. For the auto lending vertical, we believe our offering is more important now than ever before as lenders look to make auto loan collections as easy as possible for their customers. We also continue to be encouraged by our efforts in the mortgage servicing sector. Mortgage servicers are looking for more flexible and convenient ways to pay, but they still have to follow strict processing, notification, and servicing requirements. Our payment platform makes it easy to keep hours happy and servicers in compliance. In every area of our business, we are focused on finding the right talent and place to further accelerate penetration, and we found that in our recent hire for the mortgage vertical, Eric Skinner. Eric joins us from Black Knight, where he was responsible for MSP and back office customer experience modernization. He has vast experience in working in the mortgage servicing industry throughout different times in the market and brings a unique product perspective to Repay. Mortgage has become one of our fastest-growing areas within repay, going north of 30% in Q3 2022 versus the same period last year. Please recall we are less sensitive to the macro in mortgage since most of our growth is derived from existing clients. We're also now actively selling our AP solutions into clients across the consumer verticals, such as lenders and healthcare providers, and have experienced some recent wins. Lastly, on the consumer side, we expect to see a pickup in our accounts receivable management, or ARM, and revenue cycle management businesses as consumers take on more financial obligations, such as credit card balances, medical bills, and cell phone bills. According to the Federal Reserve Bank of New York, credit card balances in Q2 saw their largest year-over-year percentage increase in more than 20 years. Replacements will be picking up here in the short term, and based on the challenges with inflation, consumers are going to have to select payment plans as a way to pay off these outstanding past due financial obligations, which benefits repay as we gain volume from a consumer making more payments. Repay Payment and Settlement, or RCS, continues to form a nicely but significant pipeline for future growth. We continue to win business from the larger incumbent acquirers and truly believe that our more modern acquiring platform will allow us to keep taking share in future periods. Before I turn the call over to Tim, I wanted to provide a few thoughts about next year and beyond. As I hope you take away from my comments, we continue to be energized by our unique offering, technology platform, and our exceptional team. In addition, we remain very encouraged by the secular tailwinds in our business, including the ongoing trends away from cash and check towards digital payments. We are laser-focused on growing organically, with growth from both existing customers and new customers of all sizes. Our specialization in key verticals will continue to aid our growth for years to come. Our sales teams have deep experience in these verticals and a strong understanding of client needs. We have hundreds of ISV relationships that expand our reach and provide ease of implementation, aided by our superior software and payment solutions that are specifically designed with these verticals and clients in mind. While we are targeting investments in these high-conviction growth areas to seize more market share, we have always and will continue to remain focused on sustainable, durable growth with strong new economics. One of our main priorities is to have the right cost structure in place so that we can support growth while maintaining healthy margins. Now for 2023 specifically. Sitting here today, we continue to feel confident in solid organic growth, even in an economic downturn, for the following reasons. Number one, our core consumer payments business, specifically the lending verticals, are resilient and should grow even during a downturn. As a reminder, Consumer also includes our arm business, which is expected to see a pickup as consumers experience past due financial obligations such as credit card balances, medical bills, and cell phone bills. Number two, PayX will be included in the consumer payments organic growth beginning in Q1 of next year, and its growth rate is expected to be well above the overall corporate average. Number three, we have a strong sales pipeline in consumer and B2B payments as a result of our increased investments in go-to-market and product innovation. This has driven many new wins in 2022, which we should be fully rolled out in 2023. Number four, as I mentioned previously, our B2B services are focused on medium to enterprise businesses. We believe that this customer base will be resilient in any environment. This is a much faster growing part of our business, which we expect to have solid growth next year despite having the media volume impact of 2022. Finally, while we continue to be open to M&A, Our capital allocation priorities are currently focused on creating value for our shareholders by investing in initiatives that support our growth strategies as well as buying back shares. We believe our current valuation of our shares does not align with the value of our company. The program we have placed in place is a responsible way to deploy capital consistent with our disciplined approach. With that, I'll now turn the call over to Tim to review our third quarter results in more detail. Tim?

Thank you, John. Now let's move on to our Q3 financial results before our review of financial guidance for 2022. As John mentioned, in the third quarter, Repay delivered solid results across all of our key metrics. Card payment volume was $6.4 billion, an increase of 15% over the prior year third quarter. Revenue was $71.6 million, an increase of 17% over the prior year third quarter. This represents a take rate of approximately 112 basis points. Banks contributed approximately $3.1 million of incremental revenue during the quarter. Moving on to expenses. Cost of services were $16.6 million compared to $15.3 million in the third quarter of 2021. Incremental cost of services from PayEx were $0.9 million for Q3. Gross profit was $54.9 million, an increase of 20% over the prior year third quarter. As John mentioned, on an organic basis, we saw gross profit growth of 15% compared to the third quarter of 2021. SG&A was $36 million compared to $33.7 million in the third quarter of 2021. Third quarter adjusted net income was $22.8 million, or $0.24 per share. Lastly, third quarter adjusted EBITDA was $31.7 million, an increase of 30% over the prior year third quarter. Third quarter adjusted EBITDA as a percentage of revenue was 44%. We are continuing to prudently manage hiring and other non-personal expenses due to the current macro environment. Combined pro forma net leverage is approximately 3.4 times, down slightly from 3.5 times at the end of Q2. We continue to expect this to be closer to three times by the end of 2022. As a reminder, of the $460 million of total gross debt, $440 million of this is convertible with a 0% coupon and 40% conversion premium. This convertible debt does not mature until February of 2026. As of September 30th, had approximately 64 million of cash in the balance sheet and access to 165 million of undrawn revolver capacity for a total liquidity amount of 229 million we feel very good about our balance sheet heading into a potential downturn as of september 30th we had approximately 100 million shares outstanding on a fully diluted basis moving on to our thoughts for the remainder of the year based on the results from the first nine months of the year as well as current trends we're reiterating our guidance for 2022 which includes volume to be between 25 billion and 26.3 billion, revenue to be between 268 million and 286 million, gross profit to be between 204 million and 216 million, and adjusted EBITDA to be between 118 million and 126 million. In terms of cost management, as we have done in the past, we continue to work with our vendors to find opportunities to reduce processing costs as we add volume. In the event of an economic downturn, we will remain nimble the ability to further pull back on hiring and reduce other operating expenses such as travel. We feel very good about our third quarter results. This sets us up well for strong performance throughout the remainder of 2022 and into 2023 with the expectation for continued growth in any macro scenario. I'll now turn the call back over to the operator to take your questions. Operator? Thank you.