Repay Holdings Corporation

Good afternoon. I'd like to welcome everybody to Repay's second quarter 2023 earnings conference call. This call is being recorded today, August 9th, 2023. I would like to turn the session over to Stuart Crescente, Head of Investor Relations at Repay. Stuart, you may begin.

Thank you. Good afternoon and welcome to our second quarter 2023 earnings conference call. With us today are John Morris, Co-Founder and Chief Executive Officers. 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 risks and uncertainties, including those set forth in the SEC filings related to today's results and our most recent Form 10-K. 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. Reconciliation and other explanations of those non-GAAP financial measures can be found in today's press release and in the earnings supplement, each of which are available on the company's IR site. Those materials include reconciliations and other explanations with respect to REPAY's organic growth. As described in other materials, Q2 2023 organic growth is calculated by excluding contributions attributable to the Blue Cow software business in the second quarter of 2022 since REPAY divested Blue Cow during Q1 2023. With that, I would now like to turn the call over to John.

Thank you, Stuart, and good afternoon, everyone. Thank you for joining us today to review our second quarter results. On an organic basis in Q2, we reported revenue growth of 9% and gross profit growth of 12%. Our strong results through the first half of the year give us the confidence to raise the midpoint of our revenue and gross profit guidance for 2023, which Tim will discuss in greater detail. Our focus as a company is to help businesses accept and send payments by providing integrated payment solutions to verticals that have specific transaction processing needs. Our proprietary embedded payment technology reduces the complexity of electronic payments for clients, while enhancing the overall experience for consumers and businesses. As we continue to take advantage of the secular trends towards frictionless digital payments, We have been focusing on thoughtfully investing in our go-to-market efforts as well as technology to ensure we remain best in class in both the consumer and business payment segments. On the go-to-market side, our investments are paying off. We continue to further penetrate and expand our services into the 252 integrated software partners. We're also diving deeper into existing integrations, including with Microsoft Dynamics 365 Business Central. Our current integration enables clients to automate their accounts payable payments, and we are now in the process of developing for accounts receivable payment streams. In addition, our direct sales team has made great traction, especially when further penetrating large enterprise accounts. Our investments into technology also continue to generate positive returns. We're regularly evaluating and leveraging new payment modalities to reduce friction and boost revenue for our clients. Last quarter, we announced additional digital wallet capabilities like PayPal and Venmo, and we continue to offer the industry-leading best-in-class e-cash solution. We are forging ahead on offering real-time payments for clients while continuing the development work on FedNow. Our consumer payment segment grew organic gross profit by 16% in Q2. This was primarily driven by the ongoing secular tailwinds within the consumer payments verticals we serve and the ramp of recent large client implementations. We are pleased with our strong sales activity in the personal loans and credit union verticals, adding many new clients in each market. We are now integrated with 158 software partners in the consumer payment segment. During the quarter, we announced an integration with Q2's digital banking platform via the Q2 Partner Accelerator Program. This program enables financial institutions to purchase repaid products and then offer our payment technology directly through Q2's digital banking platform. further expanding Repay's reach into the personal loan and credit union industries. In addition, we established new partnerships to offer Repay's embedded payments across a variety of software platforms, including loan servicing management and accounts receivable management systems. Credit unions and community banks continues to be a key focus for our sales teams. Repay's platform helps financial institutions and financial providers automate payment streams across all payment types. We signed seven credit union clients this quarter, bringing our total credit union clients to 257. We are well positioned to continue winning clients in this underserved market of approximately 4,750 credit unions across the U.S. We have also been enhancing our existing software partnerships by adding new product features and payment modalities, as well as our go-to-market efforts that present new subvertical opportunities. Credit card servicers are a great example of a new opportunity for repay. And we have been building a strong pipeline in this exciting new sub-vertical. The mortgage servicing space continues to be a significant growth opportunity in our consumer payment segment. And we look to increase debit card penetration in this vertical. As a reminder, a recent Visa study found that more than 50% of consumers, if given the option, would use their debit card for mortgage payments. In addition, over 50% of mortgages in the U.S. are not currently set up for automatic recurring payments. We're able to provide those consumers with the opportunity to use their debit card for the next monthly payment. This process is made easier through our partnership with Black Knight. The early results of testing are promising, and we began marketing the debit capabilities to both existing and potential clients. Black Knight's software platform supports the majority of the mortgage services in the U.S., so we believe this could be a great growth lever in 2024 and beyond. Instant funding, which we process real-time through Visa Direct and MasterCard SIN, Continues to resonate with new and existing clients. In the second quarter, transaction volumes were up approximately 60% year over year. And lastly, our RCS platform performed nicely in the quarter, as the modern platform is resonating well within the marketplace. Moving over to the business payments, during the second quarter, our business payment gross profit grew single digits year over year on a reported basis. But more importantly, grew 15% when excluding the impact of political media during 2022. Our normalized growth was driven by the continued momentum in our sales and implementation pipeline for enterprise and mid-market companies within our healthcare, property management, auto, and municipality verticals. We're integrated with 94 software partners in the business payment segment, including Quadient, a leading cloud-based communications solutions provider. Through our partnership, businesses that use Quadient's AP automation software can process payments seamlessly with Repay's real-time vendor enablement and embedded payment technology. We're also working with Quadient to expand Repay's reach in Canada by offering accounts payable capabilities to their clients. Within the hospitality vertical, we're excited to announce our recent integration with Inflow. With Repay's embedded accounts payable solutions, hotelers and hotel management groups using Inflow can continue operating in one comprehensive hotel management platform. On the AR automation side of business payments, we recently expanded our integration with AccountMate. launching Click-to-Pay as a new feature provided by Repay that enables account-mate users to get paid faster and provide a simplified, convenient payment experience. Repay continues to see the prioritization of AR and AP automation issues by businesses across our verticals, and our growing list of software partners represents the opportunity to provide our embedded payment solution to them. As a result of the investments we have been making with software partners and our go-to-market efforts, we signed and implemented many new clients across our business payment verticals during the quarter. A great example is Castle Management Group, a premier property management company with approximately 500 HOA properties. Castle Management required a unified payment system to make their vendor payments across all their managed properties and selected Repay's total pay solution for their accounts payable needs. And in the healthcare vertical, a large healthcare system in the state of Arkansas selected Repay for their supplier payment needs. We continue to build our vendor enablement functionality accelerating to over 195,000 suppliers in our AP supplier network, which includes additions across all key sub-verticals within AP while simultaneously enhancing our go-to-market proposition. We will continue to invest towards our real-time vendor enablement as the business payment segment scales by vertical. In addition, we're always looking for ways to find processing cost efficiencies in the business. So there's a lot of excitement and progress happening across the company as we guide businesses through the ever-changing world of embedded payments. We're excited about the future of repay, being strategically positioned in the middle of the new digital payment flows in North America. We are poised for success with a strong balance sheet and profitable organic growth to accelerate cash generation. As we're starting to see various opportunities come back to the market, we always maintain the potential for strategic M&A. To wrap up and before turning the call over to Tim, I am proud of our solid results for the first half of the year. Our sales pipelines are strong and growing. We have a great opportunity ahead of us as we continue to innovate and drive the transformation of integrated digital payments by expanding and enhancing our network to all networks that send and receive funds on behalf of our clients. With that, I'll turn it over to Tim to go to our financials and our outlook for the remainder of the year. Tim?

Thank you, John. Now let's go over our Q2 financial results before I review our financial guidance for 2023. In the second quarter, Repay delivered solid results across our key metrics. Card payment volume was $6.3 billion, which was partially impacted by lower overall tax refunds in 2023. Revenue was $71.8 million, an increase of 9% on an organic basis over the prior year's second quarter. This represents a take rate of approximately 115 basis points. Take rates were higher primarily due to strong performance in our non-card volume-based businesses within consumer payments, specifically in communications solutions and instant funding. Revenue attributable to Blue Cow in Q2 2022 was approximately $1.7 million. Gross profit was $54.9 million, an increase of 12% on an organic basis. This organic gross profit growth removes approximately $1.7 million of gross profit attributable to Blue Cow in Q2 2022. Our consumer payments segment reported organic gross profit growth of 16% in Q2. Our business payments gross profit increased 4% year-over-year on a reported basis and grew 15% when excluding the impact of political media during Q2 2022. Business payments gross profit growth, when excluding media, demonstrates the ramp of our strong sales pipeline while also realizing the benefits from our processing cost optimization and automation initiatives. Second quarter adjusted net income was $18.8 million, or $0.19 per share. Lastly, second quarter adjusted EBITDA was $30.3 million. Second quarter adjusted EBITDA as a percentage of revenue was 42%. Adjusted EBITDA margins were slightly lower than initially expected due to the timing of investments towards sales, product, and technology into key verticals, and the impact of inflationary pressures, which may continue to increase costs. We thoughtfully invest for growth while also reviewing our business to see where we can efficiently scale our operations through process automation. Repay has surpassed the rule of 40 on an organic basis for the 16th consecutive quarter as a public company. We continue to believe that the combination of double-digit organic gross profit growth along with strong adjusted EBITDA margins makes us unique compared to our peers. Our net leverage is now approximately 2.7 times. We expect net leverage to naturally decline during the year from our strong profitability and cash flow generation, including any potential M&A. As of June 30th, we had approximately $104 million of cash on the balance sheet with access to $185 million of undrawn revolver capacity for a total liquidity amount of $289 million. REPAY's total outstanding debt of $440 million is comprised of a 0% coupon convertible note that does not mature until February 2026. Moving on to our outlook for 2023. As the year-to-date results showed strong performance and resilience in our business model, we are raising the midpoint of our 2023 revenue and gross profit outlook. We expect volume to remain between $26 billion and $27.2 billion, revenue to now be between $280 million and $288 million, gross profit to now be between $218 million and $228 million, reflecting organic gross profit growth of 6% to 11%, and normalized organic gross profit growth of 9% to 14%. And we are reaffirming our adjusted EBITDA outlook of between $122 million and $130 million. As a reminder, during the second half of the year, we'll be lapping strong results in our business payments segment due to the political media cycle in 2022. We expect Q4 2023 contributions to be greater than Q3, given the continued ramp of recent wins and implementations. Our full year 2023 outlook range continues to plan for a slowdown in the overall macroeconomic environment during the remainder of the year. For additional details on 2023 organic growth's profit growth, please refer to the 2023 outlook bridge on page 12 of our earnings supplement posted to the company's IR site. As you can see from our results, we have a great deal of momentum in the first half of 2023 heading into the second half of the year. We expect adjusted free cash flow conversion to remain strong in 2023 accelerating throughout the year into 2024 as we realize the benefits from investments we've made in sales, product, and technology over the past several years. I'm now trying to call back over to the operator to take your questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If you wish to remove your question from the queue, please press star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ramzi Elisal with Barclays.

Hi, thanks for taking my question this afternoon. I wanted to ask about the take rate in business. It was super healthy. It popped really nicely quarter over quarter. Just wondering what the driver there was and also what we should expect from business yields in the back half of the year?

Yeah, so we feel really good about that. We've signed some customers recently that are a bit higher margin, higher take rate. We've been doing a lot of work to optimize our pricing, particularly within business payments, and that's showing up in the yield. So we feel strong about that. And in terms of overall revenue take rate for the remainder of the year, we're projecting that it will be slightly down from where it was in the first half of the year. mainly just because we're not projecting the non-card volume-based products like communications and solutions and instant funding to contribute quite as much. Those generally would lead to higher take rates. So I think that the yields will still be very strong. We're just not projecting them to be quite what they were in Q2.

Okay. And you also mentioned that guidance contemplates some slowdown, some macro pressure later in the year. I guess Two questions related to that. One is, are you seeing any signs, you know, most recently of a slowdown? And if one doesn't materialize, secondly, what is the magnitude of what we might expect to kind of flow back into guidance?

I mean, we exited the quarter in a healthy pace. Early Q3 into July has trends have remained stable. So we're not necessarily seeing anything different from a trend perspective within the different verticals. We just wanted to, you know, continue to be conservative just given the uncertainty with the macro and the overall potential slowdown. So I think if we're coming into Q3 and we don't see that, then, you know, there's potential to revisit our guidance and just like we did this quarter, you know, revisit the ranges. But everything's been stable so far through the end of the quarter and into early Q3.

Fair enough. Thanks so much. Appreciate it. Our next question is from Peter Heckman with DA Davidson.

Good afternoon. Thanks for taking my question. Could you give us just a quick update? I think last, was it last quarter you announced the signing of a second captive lender of a car manufacturer. Can you remind us when you expect that to ramp?

Yeah, good afternoon, Peter. This is John. So we have indicated that we are in an implementation process with them. That's a very long, detailed schedule process that is ongoing and on plan and on schedule. And just like we had indicated earlier as well, that's a 2024 contribution. Okay.

And then in terms of real-time payments, I guess, how are you thinking about that? I would assume primarily on the business side, do you see that as primarily switching from ACH and same-day ACH or – Are you thinking that there's going to be maybe some applications that actually take – real-time payments take volume from cards?

No. So, yes, we do see that. As early on, on the business payment side, as I've indicated, we want to be a network to all networks that move funds to and from. And we see some value there on that side of it. On the business payment side, we'll add it in as an additional modality. And – I would see people, it would be probably something similar to an enhanced ACH option where people would want to accelerate funds. I do not necessarily see it cannibalizing a specific card on the payable side of the world. But in reality, we would continue to be able to charge for that. So it could be good margins as well. But overall, we're looking to enhance the overall experience to the end B2B payable side vendor, and we look to that to just augment existing in our total pay solution.

Okay.

I appreciate it. Thank you. Our next question comes from Andrew Schmidt with Citi.

Hey, John. Hey, Tim. Good evening. Thanks for taking my questions. I want to start off with just a question on free cash flow conversion. Tim, I know you had some comments in the release about that. Maybe just talk about what you're expecting for free cash flow conversion this year. And then it sounds like you're expecting some improvement in 2024. Maybe you could talk a little bit about that and the key drivers there. That would be helpful. Thanks a lot, guys.

Yeah, sure. So, as you've probably seen, the CapEx number came down from Q2 to Q1, so it drove a little bit higher conversion in the second quarter. We expect that CapEx number to remain somewhat stable for the rest of the year and likely decline as a percentage of overall revenue. So, as revenue grows and CapEx dollars remain stable, we'll see pre-cash flow conversion increase. And so, you saw that in Q2, and we expect that to continue throughout the rest of the year. We haven't given a specific number. We haven't provided guidance on adjusted free cash flow conversion, but we would expect the same trend that happened from Q1 to Q2 to continue throughout the year and exit at a higher rate going into next year.

Got it. Thank you for that, Tim. And then maybe digging into the mortgage opportunity, and I know you have the mortgage partnership with Black Knight, and Johnny talked a little bit about that in your prepared remarks, but If you could talk a little bit about how that's progressing, any early learnings, whether it's consistent with the study that you outlined, anything there that's – I know it's early days, but anything there that's incremental would be interesting. Thank you very much.

Sure. I can give you a little color. As we indicated before, we definitely are confirming that demand is there. We're confirming that – that opportunities are there as we're engaging with our clients, existing clients, as well as prospective clients that would be basically servicers. And that's going well. And we're, you know, in the process of doing some testing there, as well as, you know, as we advance that initiative long throughout the third quarter into the fourth quarter. We, as we indicated earlier, we did not indicate that there's any contribution for that in 2023. So we do think that'll be a 2024 contribution. And as we move throughout the third quarter and the fourth quarter, we should be able to give you some updates on what we think that'll look like for 2024.

Perfect. Thank you very much, John. Our next question is from Andrew Jeffrey with Truist Securities.

Hey, good evening. Thanks for taking the question. Appreciate it. Tim, I wonder if we could get a little bit of color on the second quarter vertical mix within the consumer business, auto versus personal loans. And I guess if there were, you know, a decel in the economy to Ramsey's question, where do you think that manifests?

Yeah, so the breakdown is very similar to last quarter. You know, personal loans at 20%. This is within consumer. Auto at around 20%. And then RCS is about 10%. And the balance of the categories would make up, you know, get you to the 80% total for consumer. And those would be like verticals like arm, credit unions, healthcare, and mortgage. And so I think where we would see some pressure and have been seeing pressures in the auto space, I think the used car prices are coming down, which is a good sign, but there still remains some affordability concerns. that we expect could ease, but we haven't seen it materially change. So that's an area that we're focused on. And then, you know, we talked earlier in the year about ARM volumes coming back, and ARM is about 10% of our business. We do think that's still happening. We just don't necessarily think it could happen as soon as we had planned, which was Q4. We think that's probably more into 2024. Now, that could be, you know, that could happen sooner, but what we've done in our recent forecasting is move that out to 2024. I think auto and arm were playing closest attention there.

Okay. Now, I mean, I guess, you know, I know you're not talking about 24, but I think about a big auto captive, some of the, you know, mortgage opportunities, arm, presidential election cycle. It seems like you've got a lot of drivers that likely manifest maybe 4Q into the beginning of next year. Is that sort of directionally the right way to, to think about the business and any considerations from a mixed perspective if that does indeed come to pass?

Correct. You're actually, you're accurate there. And those are investments that we talk about in sales and technology and product. And those are, you know, those are byproducts of those investments that are starting to pay off for us. And 24 is when we will start seeing those contributions. I'll let Tim maybe talk about mixes.

I agree. I think that's where you may see, you know, business payments become a slightly bigger part of the overall mix given the political. There's, you know, we think that the cycle in 24 will be a lot higher than 22 in terms of overall spend, which should help. And then, like I said, I think ARM could be a bigger contributor next year. And you can see that in some of the public arm folks in that, the public folks in the arm vertical talking about supply coming back and that'll eventually lead to our repayment volumes.

Okay, thanks.

As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star one. Our next question is from Tim Chiodo with Credit Suisse.

Great. Thank you for taking the question. I want to hit on a topic that comes up often with investors, which is the commissions paid to ISVs. Tim, I know we've talked about this in the past, and the math that we wrote back into it suggests that they're really low. And I don't believe that we've touched on this in a little bit of time here. I just thought it would be worth a brief update. I gather that they're low because of the specific capabilities you bring, the role that you take on that is larger maybe than other integrated payments players. and also a relative lack of competition in some of the verticals, which all adds up to low commissions paid to the ISVs. So I think everything kind of checks out quite well. But just wanted to see if there's been any changes or trends or anything, or if you could maybe even just quantify what portion of your cost of goods sold or other cost of services is those commissions that get paid to ISV partners.

Yeah, I think you're spot on. I mean, everything you just described is the reason why they're lower than the overall industry average. I mean, just as a reminder, we engage in these relationships as referral partners, not resellers. And so the ISV is not reselling our product. And so we're doing a lot of the heavy lifting in terms of contracting, onboarding, risk and compliance, product development. So all of that is on us, which leads us to have a higher share of the economics. So just like you described, and we haven't seen that dynamic change materially at all in the past several years. And, you know, it is a big, there's a pretty big portion of our overall COGS. And within COGS, that's probably the biggest number. But then we also have things like sponsor bank fees and, you know, other processing costs, maybe for processing that's not on RCS, like on the, you know, in other parts of the business. It's a big part of our cost structure, but we've managed it closely. It's still much lower than industry average for all those reasons.

Right. I'm with you. So other things in there, right? The sponsor bank fees and then the acquiring bank sponsors and then also portions of the business that have not yet been migrated to RCS that are still using some contracted third-party processor, correct?

Correct. And then on the B2B side, particularly in AP, we wouldn't have them on RCS. Yes.

Thank you, ladies and gentlemen.

We have reached the end of the question and answer session. I would like to turn the call back to John Morris for closing remarks.

Thank you, everyone, for joining us today. We are very proud of our second quarter first half results. Our sales pipelines continue to be strong and growing. We have a great opportunity ahead of us, as I mentioned earlier, as we continue to drive and innovate with our integrated digital payments and expanding into the various different networks that move funds to and from. And we're very excited about that. We appreciate your call today and look forward to additional discussions. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time.