Repay Holdings Corporation

Good afternoon. I'd like to welcome everyone to REPAY's fourth quarter 2023 earnings conference call. This call is being recorded today, February 29th, 2024. I'd like to turn the session over to Stuart Grisanti, head of investor relations at REPAY. Stuart, you may proceed.

Good afternoon and welcome to our fourth quarter 2023 earnings conference call. 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. Those forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and in 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 reference 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. With that, I would now like to turn the call over to John. Thanks, Stuart.

Good afternoon, everyone. Thank you for joining us. I wanted to cover three main topics today. First, a review of the fourth quarter. Second, a recap of our accomplishments in 2023. And lastly, go over our strategic initiatives that will drive growth in 2024 and beyond. First, on Q4, on a normalized organic basis, we reported revenue growth of 14% and gross profit growth of 13%, with both metrics performing ahead of our expectations. We closed out the year seeing the continued demand from existing clients adopting more payment capabilities. and new clients demonstrating the need for our powerful technology. 3PA has become a leading expert within the consumer payments and business payment verticals we serve. We have become a one-stop platform to optimize payment streams and are constantly working to capture new payment flows while enhancing client relationships with many value-added services. In Q4, our consumer payments organic gross profit growth was 13%. This was primarily driven by the ongoing secular tailwinds within the consumer payments verticals we serve and the continued ramp of recent large client implementations. We added many new partners and clients to our network in Q4, including four new software partners, bringing us to a total of 165 partners in the consumer payments segment. One example was our launch with Akubo, a leading provider of cloud-based software that elevates how financial institutions collect and manage their portfolios. Through the integration with Akubo's collection management software, we enable financial institutions to accept digital payments while utilizing a secure real-time data exchange for streamlined operations, robust reporting, and simpler RUT conciliation. We also recently announced an integration with Lexop, a self-service software for credit unions, financial institutions, and other financing companies that optimizes the repayment journey for past due consumers. The repayment integration with livestock collections management software enables their clients to collect late payments more efficiently, receive real-time payment updates, and increase engagement and minimize loan servicing costs. We added 10 new credit unions to Repay, bringing our total credit union clients to 276. Repay's vertical expertise and software integrations are a differentiated solution leading to a healthy sales pipeline. As an example, a new credit union client was evaluating multiple processors to solve all their payment processing needs before selecting repay. We believe we are the only market participant that has a combination of integrations with our client's core platform, home banking platform, and collection platform to fit their unique needs. In addition to credit unions, we're also addressing a similar client base in community banks and winning new clients through our existing software integrations. These new wins continue to give us the confidence that our investments towards creating software partnerships and further embedding our payment technology within existing integrations are leading to a strong sales pipeline with positive returns across Repay. Additionally, in value-added services, our instant funding product continues to see significant growth with transactions up approximately 45% year-over-year. What a very productive quarter for our business payment segment. which grew gross profit by 25% when excluding the impact of political media during 2022. Our normalized gross profit growth was driven by sales penetration within software partners and a strong implementation pipeline for enterprise and mid-market companies within our healthcare, property management, auto, and municipality verticals. Within AR, we remain focused on deepening our client bases within existing ERP systems and optimizing payment acceptance. And on the AP side, we increased our supplier network to over 261,000 suppliers during the quarter. Our real-time vendor enablement continues to drive the number of suppliers within our network, which drives the monetization of digital payment flows and deeper virtual card penetration. We find many new clients across our verticals during the quarter, and we also continue to grow with our existing clients. A great example of this is Baywood Hotels. whose management portfolio spans many well-known brands as one of the fastest-growing hotel management and development companies in the United States. We signed and began implementing for Baywood Hotels earlier this year, and they have continued to expand on our AP platform by adding many new hotel properties each month. We are now integrated with 97 software partners in the business payment segment. A few new and expanded partnerships to highlight include Blackbaud, PDI Technologies, and Sage. Repay's enhanced integration with Sage Intac will supplement our existing integrations across Sage's product suite. Software providers are selecting Repay to directly embed our payment technology into their software as they strive to enhance their users' experience by providing value-added services to their customers. And now on to the next topic, a review of full year 2023. From a financial perspective, we demonstrated normalized organic revenue growth of 12% and gross profit growth of 13% while improving our free cash flow generation throughout the year. From a commercial perspective, we made great progress as well, including the continued focus on our sales and distribution resources. We now have over 262 software partners, up from 240 at the end of 2022. In addition, We aligned our internal sales, implementation, and support teams to focus on specific articles and software partners, as well as strengthen the customer experience. And throughout the year, we added talented team members in select areas of our organization while reducing overall net headcount and maintaining our margin profile. We increased our supplier network 60% year-over-year to 261,000 vendors. On the product side, we rolled out additional payment modalities such as PayPal, Venmo, while also enhancing our e-cash solution. We also made progress on our mortgage debit exceptions initiatives with Black Knight. In addition, we made key hires to ensure our product team can support the rollout of future products and services to support our customer needs. From a capital allocation standpoint, we started the year streamlining the organization with the divestiture of BlueCal software, which helps us to remain focused on investments towards organic growth. And during Q4, we utilized our share repurchase program to buy back shares in a disciplined way. The work we've put in this past year positions us well to execute towards RFA's mission of helping businesses make and receive payments so they can focus on what matters most to them. This effort involves meshing together a vast ecosystem of payment flows with many moving pieces over the past decade plus. It involves the connectivity of all various networks that allow us to move money, including our card payment rails, RTP, or instant funding via Visa Direct and MasterCardSend. It means that we need to provide omni-modality and omni-channel. It includes a software network of embedding payments directly within enterprise software workflows. These integrations open up large verticals with critical mass and allows us to create a network within our end markets. On the business payment side, we have developed a vertically rich supplier network to create a flywheel for the future and eventually expand capabilities to enhance our vendor enablement process. This means we are a full-service processor providing value-added services like instant funding and communication solutions, while also working on various strategic initiatives and opportunities to expand over time. The value created is the digitalization of payment flows, while also optimizing transaction routing to deliver the best payment experiences to our clients and their customers. While we are relatively early in this continuous mission, we are starting to see improved growth, which we believe will drive higher returns over time. As we turn to 2024, we will align our strategic initiatives with this mission while driving growth this year and beyond it. As we continue to take advantage of the secular trends towards frictionless digital payments, we will be squarely focused on, first, go-to-market efficiency. We will continue to expand our services into our now 262 integrated software partners while finding ways to further penetrate these relationships. We look to add new software partners to help fill our expanding sales pipelines. And we will selectively add enterprise sales team members to specific verticals within consumer payments and business payments. Second, client implementations. We remain focused on making sure we guide our clients through a seamless onboarding process while providing ongoing and first-class support throughout the entire client experience. And third, product. Our tech platform is constantly evolving as we have developed a best-in-class clearing and settlement engine while expanding our payment modalities. As we look into the future, our platform continues to scale as we automate manual processes. Lastly, our capital allocation priorities remain focused on creating values to our shareholders by investing in organic growth opportunities while continuing to be open to a creative strategic M&A, as well as buying back shares in a disciplined way. We exit 2023 with a solid execution that has continued into January with consistent trends and strong growth. With that, I'll turn it over to Tim to go over our financials and our outlook for 2024. Tim? Thank you, John.

Now let's go over our Q4 financial results before I review our financial guidance for 2024. As a reminder, Q4 normalized organic growth is calculated by excluding contributions attributable to the divested Blue Cross software business and the contribution attributable to political media in the fourth quarter of 2022. In the fourth quarter, Repay delivered solid results across all of our key metrics. Card payment volume was $6.4 billion. Revenue was $76 million, an increase of 14% on a normalized organic basis over the prior year fourth quarter. Our business continues to benefit from strong performance in both card-based payment revenue as well as other value-added services such as communication solutions and funding, along with higher yields and business payments. Revenue attributable to Blue Cow and Political Media in Q4 2022 was approximately $3.3 million and $2.8 million, respectively. In Q4, normalized organic gross profit grew by 13% year-over-year. This normalized organic gross profit growth removes approximately $3.2 million and $2.5 million of gross profit attributable to Blue Cow and political media in Q4 2022, respectively. Our consumer payments segment reported organic gross profit growth of 13% in Q4. Our business payments segment gross profit grew 25% when excluding the impact of political media during Q4 2022. Fourth quarter adjusted EBITDA was $33.5 million, representing 44% margins. Importantly, Q4 adjusted EBITDA margins improved sequentially as we have maintained relatively stable SG&A costs on a quarter-over-quarter basis, while simultaneously working to align our sales, implementation, and support teams throughout the year. Lastly, fourth quarter adjusted net income was $26.3 million, or $0.27 per share. Our pro forma net leverage is now approximately 2.6 times. We expect net leverage to naturally decline throughout this year from our strong profitability and cash flow generation, including any potential M&A. As of December 31st, we had approximately $118 million of cash in the balance sheet with access to $185 million of undrawn revolver capacity for a total liquidity amount of $303 million. We pay a total outstanding debt of $440 million comprised of a 0% coupon convertible note that does not mature until February 2026. During the fourth quarter, we used $13.5 million of cash for a software partner residual buyout and $2.5 million of cash for share repurchases. As of December 31st, we have $37.5 million remaining available under our current share repurchase authorization. Moving on to our thoughts for 2024. Our full year 2024 outlook demonstrates our consistent growth algorithm of growth with existing clients, the full year contribution from clients that began ramping during the prior year, and growth from signed new clients. We expect revenue to be between $314 million and $320 million. We will no longer be providing guidance for CPV. Our company has evolved over the years to now have over 20% of revenue attributable to value-added services that are non-card volume-tied revenue streams. We expect gross profit to be between $245 and $250 million, and adjusted EBITDA to be between $139 million and $142 million. We expect roughly 44% adjusted EBITDA margins. As we expect adjusted EBITDA to grow faster than revenue and gross profit during the year, leading to an acceleration of cash conversion, we're introducing a free cash flow conversion target of approximately 60% for full year 2024. Free cash flow conversion is calculated by dividing free cash flow by adjusted EBITDA. We plan to reduce overall CapEx spending, giving us the confidence to accelerate our free cash flow conversion throughout 2024, leading to free cash flow growth of approximately 60% year-over-year and sustained mid- to high-teens growth thereafter. We continue to execute on our strategic priorities, and while we have more work to do, we are seeing the sales pipeline develop, giving us confidence in our multi-year growth opportunity. Planning assumptions around our 2024 outlook involve a measured ramp of the previously announced auto captive win while lapping strong growth from enterprise clients during 2023. Due to the uncertainty around volume timing, our 2024 outlook does not incorporate significant second half contributions from the mortgage debit acceptance opportunity and the recently announced business payments enterprise software integration such as Blackwood. Our quarterly cadence for 2024 is comprised of Q1 being positively impacted from the seasonality of tax refunds, while Q3 and Q4 will benefit from the incremental contributions of our political media business in the business payments segment. While tax refund season began later this year, early data suggests the total refunds will be consistent with last year, and the average refund size may be up slightly compared to prior year. Q1 free cash flow conversion is expected to be closer to the full year 2023 profile due to quarterly timing around network and capital, and is expected to accelerate throughout the year. As you can see from our results and outlook, we expect free cash flow conversion to improve throughout 2024 as we reduce CapEx, but also realize the benefits from investments we've made in sales, product, and technology over the past several years. We have always focused on profitable growth, refining processes across the business where we can scale through automation, while also maintaining investments towards innovation. I'll now turn the call back over to the operator to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Ramsey El-Assoul from Barclays. Please proceed with your question.

Hi, this is Ryan Campbell on for Ramsey. Thanks for taking my question today. And what are the biggest levers when it comes to improving free cash flow conversion this year? And given the 60% rate you provided, is that how we should think about the longer-term normalized conversion rate for repay? Thank you.

Absolutely. So, you know, we're very excited about that and feel confident in rolling out that new metric. The biggest drivers would be, you know, adjusted EBITDA growing faster than gross profit. So increased profitability, reduced capex, you know, down to the levels we've said previously, which are around call 13 to 14 percent of revenue. Those factors combined lead to the cash flow conversion outlook of 60 percent. And like we said on the call, we think that can grow sustainably mid to high teens going forward. So that should lead to an even higher pre-cash flow conversion percentage in future years.

Great. Thank you.

Our next question comes from the line of Peter Heckman with DA Davidson.

Please proceed with your question.

Good afternoon, everyone. Thanks for taking the question. Can you comment a little bit about your expectations For the growth in revenue related to political media spend over 2022, and then a little bit about how you're thinking about the underlying growth of the business segment as we go into 2025 or growth in 2024 excluding political media spend.

Yeah, so we feel good about how we're set up for this year's presidential cycle. As we've said previously, the 2022 cycle, we had about $6 million of gross profit, and we think that'll grow about 20% this year. So we're expecting strong growth, and that's generally related to just the digital payment, shift to digital payment trend, and then just a lot of the industry research we've done. So that's how we're thinking about the contribution for this year, and we think underlying business payments growth, excluding political media, can still be mid to high teen. So we think it's a mid to high teen growth business in the near term.

That's great to hear. And then can you talk a little bit about the expected margin benefit from the software partner residual buyout? Is that where we will see it show up in the gross margins?

Yes. Yeah, you'll see it show up there. I'd say our outlook assumes that impact, and so you can see a little bit of expansion in the outlook. And that's not solely related to that, but a decent chunk of it is. And so that's something we've done in the past, and we have opportunities still to do that in the future. We think that's a good use of capital given the multiples we pay for those portfolios, and you do see that show up in really both gross profit margin expansion and adjusted EBITDA margin expansion.

Great. Thank you.

Our next question comes from the line of Andrew Schmidt with Citi. Please proceed with your questions.

Hey, John. Hey, Tim. Good evening. Thanks for taking my questions. I just want to dig into slide 12, the existing client growth bucket. Maybe you could just drill down on that a little bit. I know historically this has been driven by increased penetration of your existing clients. Wondering if That's still the case here. Are there other factors? And maybe just a definitional question, whether this includes clients signed in 2003 that are ramping in 2024. Maybe just a little bit around that existing client growth bucket would be helpful and your visibility there. Thanks a lot.

We do have a lot of visibility there. I mean, our business is highly recurring. It's typically tied to longer-term payment streams. And so we see, you know, a lot of growth from existing clients just adopting more of our payment modalities and our payment channels, which drives, typically drives higher debit acceptance and debit penetration, which leads to a lot of the existing client growth. And, you know, like you said, I mean, there's also some embedded growth from clients that have been signed in prior periods that haven't fully ramped. And usually the ramp is around additional adoption as well. So it's a combination of those things. And then just the underlying clients themselves growing helps support existing customer growth.

Yeah, Andrew, good evening. I would also point you to our investor supplement, which you'll see a bridge on new client growth as well as existing client growth in there. And I'll also give you a couple additional points. If you look at the 45% year-over-year growth in our value-added services, which includes our instant funding, Those are kind of leading indicators of existing client growth. And then the network effect we get off of some of our supplier network, the growth in our 60% growth in our supplier network, that in itself drives additional growth as well.

Yeah, and it's a good point. I mean, in the business payment side, you know, we have a total pay solution. So we outsource the entire payables function. And so oftentimes where we're taking payments from, you know, say checker ACH to virtual card and driving enhanced virtual card penetration, you know, in the way we do supplier enablement and vendor enablement. And some of that could lead to existing client growth as well on the business payment side.

Got it. That's very helpful. And yeah, good point about the value add services. I know that's been a increasing part of the story over the last couple of years. So that's, that's a well added. If I could just, For my follow-up, I gave a lot of questions on the convert. Obviously, it's out there in 2026. What's the philosophy around handling that? Are there opportunities to chip away at that in the interim or opportunistically, or is it sort of wait until we get close to maturity and then determine a course there? Anything around just the strategy there would be helpful. Thanks a lot.

Yeah, I mean, we're obviously very aware of the maturity on that. It's still not for another two years, but, you know, we're thinking through different ways to manage that liability. There are a lot of options. It's very flexible capital, and, you know, we're growing cash, and one of our capital allocation priorities could be to address the convert, and it likely would be in the form of chipping away at it, like you said, but We haven't made any final decisions on that. We have a lot of options.

I would add that the convert market appears to have opened back up, which will give us those additional options if we choose as well.

Makes sense. Thank you, John. Thank you, Tim.

Thank you.

Our next question comes from the line of Sanjay Stakrani with KBW. Please proceed with your question.

Hi, this is actually Steven Fox filling in for Sanjay. Thanks for taking my question. The first one I had was just around if you could talk about the macro outlook that's assumed within the guide and anything around how we should think about the gross profits at EBITDA from a quarterly cadence perspective. Thanks.

Yeah, I mean, our guidance philosophy is generally based on just looking at current run rate trends in our business and utilizing you know, what we know about the business, what we have either from existing client growth, like I said, we have a lot of visibility into that, and then new signed clients. So a lot of it is just based on those recent run rate trends in our own business, and then what's going on, the most recent trends from a macro perspective. So those are kind of our planning assumptions based on what's currently happening in macro. And then, as I mentioned on the call, I mean, the quarterly cadence is that Q1 will benefit from tax refunds. And I mentioned it's still early days, this tax refund season, but so far it looks like overall returns will be generally consistent with last year, but the average refund size seems to be a bit higher. That would be good for us. And then we see, because this year is a presidential cycle, we see an uptick in Q3 and Q4 related to political media volumes and political media spend. So that's generally how we think about the cadence of our overall business. And from a free cash flow perspective, as I mentioned, Q1 will likely look like the full year 2023 profile, and it will build throughout the year. So free cash flow conversion will accelerate throughout the year, leading to a full year number of approximately 60%.

Got it. That's very helpful. And just like following up around the prior comment on the convertibles, it just How should we think about the cash that you have? And if you could talk also about the potential M&A market, because we've been hearing this maybe signs that valuations have been coming down. Just want to see what you're seeing out there, and if the right deal comes along, does these convertibles on the horizon prohibit you from doing anything? Thanks.

Okay, yeah, I mean, on the convert, we, like I said, it's really flexible. We have a lot of options. We're growing cash nicely. Our free cash flow conversion profile should put us over $200 million at the end of 2024. We are looking to maintain flexibility for various capital allocation priorities, first and foremost being organic growth. And then we have, you know, the share repurchase authorization, which we acted on toward the end of last year. And then the convert is, again, something we're monitoring. It's 0% interest. And so we're just trying to be thoughtful around maintaining flexibility to also continue to reduce net leverage. And then from an M&A perspective, we do see the pipeline building. We do see more activity picking up coming into this year. I think sellers probably have become more rational on valuation, so the spread between private and public markets is probably compressing. But we haven't done an acquisition in over two years, so we've been very disciplined, and we'll continue to be disciplined on valuation.

Got it. Thanks for taking my question, and congrats on the good quarter. Thank you.

Our next question comes from the line of Joseph Effie with Canaccord.

Please proceed with your question.

Hey, guys. Good afternoon. Nice results. Could you just go through the reduced CapEx outlook for 2024? Remind us, you know, what were some of those investments that were, you know, being invested in at higher run rates? And, you know, are those projects just completed? Or, you know, how should we think about the CapEx reduction relative to, you know, forward investment and the opportunities coming from? And I'll have a follow-up.

Yeah, we have invested heavily in the business. We've invested in growth. A lot of that was focused on our back end, RCS, where we're just trying, you know, that is, we as Repay are the largest user of that platform, and so we want that to be as robust and as modern as it can be. So that was a big investment that we don't think is recurring. From a growth investment standpoint, you know, there's, A lot of work done on large client implementations and also large software partner implementations and then upgrades. We've been doing a lot to put ourselves in a position to further penetrate existing software relationships in addition to implementing new relationships. And we've also done a lot of work. We haven't done an acquisition in over two years. So in addition to doing work on RCS, we've done a lot of work to integrate prior acquisitions and move on to effectively a single platform, and there's integration costs associated with that, and that can sometimes show up in the form of CapEx. So there's some of that work behind us, and so like I said, we, you know, there was, CapEx was a bit elevated in 23, and we expect to bring that down to call it to 13 to 14% of revenue level in 24, and even further down beyond 24. You know, that in addition to just EBITDA growing, just EBITDA growing faster than gross profit, you know, combined leads to the free cash flow acceleration.

Yeah, Joe, let me add just a little color there. Obviously, that continues our investments in technology or, you know, go with our embedded payment solutions inside of our software partners and our ability to do it via networks, all networks that move funds. So, an omni-modality as we drive our product features throughout our solutions. We've added many of those this year. So, very complimentary to what we're looking at. We think we're set up well, and we've made some of those investments, our ability to drive those processing features, and we would expect to, as Tim indicated, we would expect to scale some of that back as those projects begin to end.

Sure. Fair enough. Thanks for those comments, guys. You know, if we look at this, you know, some of the stuff like instant funding and your, you know, other value services growing really fast, just trying to get a feel for kind of how penetrated in the market you might be with some of these services. I mean, clearly it's a small base, but just kind of wondering how you're thinking about the CAMs and some of these fast growth areas. Thanks a lot.

The value-added services are certainly a nice grower for us. There's a couple of different revenue streams there. We called out instant funding and communication solutions. Instant funding today, the primary use case is in personal loans. It's funding loans directly onto the consumer's debit card, which we actually think leads to higher debit acceptance because oftentimes when you fund the loan onto a debit card, it becomes a default repayment mechanism for automatic recurring payments. So that's a benefit just to existing client growth in terms of additional debit acceptance. But we're probably only utilizing that instant funding product with maybe a few hundred lenders, and we have several thousand personal lenders. So the penetration is fairly low. The primary use case we've seen so far for communication solutions is in mortgage servicing. There's a lot of communication and notifications required around when your payment is due, how your payment can be made, and the various options for making the payments. And we oftentimes will charge for that, and we're also trying to make more of those communications digital and then tie a digital payment to the communication itself. So that's a nicely growing business for us, and that drives some of the growth in mortgage servicing. So those are two areas we see where there's just not a lot of penetration today, but a big opportunity to to continue to grow those services.

Let me add as well, the real flywheel effect on the business payment side, as you know, we're seeing tremendous amount of opportunities there, specifically on the payable side, and for every payable, if someone else is receivable, our ability to really turn that crank is there, and our ability to just continue to accelerate that Let me add as well, embedded payments into very large enterprise software platforms such as our example we've been given is Blackbaud. There's several of those opportunities out there and really help in the monetization of payments, the to and the from, which exist in every platform. It's a significant opportunity with many years of growth as well as We mentioned a few things as well, like our mortgage initiative is really not in our 24 concept, but we think it's a multi-year contributor to organic growth as well.

Great. Thanks for that extra color, John. Nice quarter again, John and Tim.

Thank you. Thank you.

Our next question comes from the line of James Fawcett with Morgan Stanley. Please proceed with your question.

Thank you very much. Just a quick question. Obviously, you answered the question around acquisitions and valuations, and you guys haven't done anything in a couple of years. You've been disciplined, but maybe that's starting to open up a little bit. How should we think about what kind of appetite you would have? Like, what are you looking for, either from a capability or size perspective? And then, you know, In reference to your CapEx questions, I think your comments about like maybe why that was elevated and now coming down makes sense. But if and as you were to do some incremental acquisitions, should we expect CapEx to come back up or is that really hard to say ahead of time?

Yeah, in terms of M&A priorities, I mean, we look at, you know, deals, across both consumer payments and business payments. We have a number of attributes we look for and it usually centers around integrated payments because integrated payments to us lead to better retention statistics, typically higher margins, and that's why we focus on those types of businesses. And those exist across consumer payments and business payments. You know, we'd like to scale business payments. We'd like that to be a bigger part of the overall mix. We see in the business payments segment specifically, we see targets in both AR and AP. I would say there's probably more targets in AP. And we would be not only scaling B2B, but we potentially would be buying other capabilities like cross-border payments. We're really not in cross-border payments today. We could be more in the SMB market through acquisition. Right now we're focused on medium to enterprise. There's some opportunities to potentially participate in the SMB space. or just expand the number of verticals we're in in AP. Some of our targets are in different end markets, and they have their own supplier networks in those end markets. So we'd be getting access to new vertical niches, new software integrations, and an enhanced supplier network, because we'd like to grow our supplier networks. That would be one of the attributes we'd look for on the AP side. So that's how we think about M&A. It's across the board. but we do want to grow the B2B business and scale it. And, you know, we've done a lot of work to bring these platforms together, and I think we have the right platform and infrastructure in place to absorb additional acquisitions without significantly elevated CapEx to integrate them. I mean, there may be some work required initially, but I think we've kind of demonstrated our ability to bring these platforms together, particularly over the last few years when we haven't been doing M&A and been focused more on organic, And I think segmenting the business also sets up to absorb acquisitions more effectively and efficiently going forward, which should limit the need for incremental CapEx.

James, the thing I would add to that, Tim's dead on on those comments. The other thing I would add to that is we have proven our ability to embed payments into these various different software platforms. We would want to add to our scale across the board. for our key core competencies of what we do. And we think we can add great shareholder value when they're with the right opportunities there.

Yep. Got it. Got it.

Thanks a lot. Absolutely. Our next question comes from the line of Timothy Chiodo with UBS.

Please proceed with your question. Great. Thank you for taking the question. Of the 262 software partners, if we were just to look at the consumer payment side, I just want to get a rough lay of the land update in terms of how would you describe the need for you to sell into those? In other words, I know that for many of them, the sales folks at Repay would be able to contact the underlying merchant working with the software platform. Maybe some of them, if you could just help us, some of them you're kind of the only payment provider and anyone working with them is automatic business to you. Maybe just break down the mix there, and then I'll have a brief follow-up unrelated on RCS.

Sure. I'll start. Good evening, Tim. We are a direct sales force, and most all of our software providers are referral partners, as you are aware, in which they're referring new clients to us, and we're actually going directly into capturing clients. the clients we don't already have. There are several of those inside of every one of those, of those 262. So we're constantly going through our associations, our conferences in which we are meeting these various new clients. So it's a direct approach where we own the customer relationship. Some of that is obviously reflected in our margins. But we do partner with them. It's probably, from a referral basis, it's probably a 50-50. relationship of us being referred to us, but ultimately, because of the payment expertise knowledge needed, because of the omnimodality, omnichannel part of this, there's great value in the financial technology embedded into that, and it needs our expertise to onboard our clients through that process.

Yeah, and I'll add, you know, on the consumer side, you know, we have 165 of the 262. You know, like I think you were saying, you know, we're often the preferred provider These software partners don't need more than, say, two or three at most payment providers in their platform, and usually our integration is more deeply embedded into the platform, and therefore we get more of the referrals. And then we start calling on the clients directly, which leads to existing penetration opportunities. So we're often the preferred provider, and we've had a lot of these relationships for a number of years. And we've gone through an exercise of refreshing the integration, which is some of the CapEx dollars, but that gives us a better opportunity for penetration.

John and Tim, thank you. Both of those answers were very helpful. That's exactly what I was trying to get at in the 50-50 on the 162 and that extra context. That's great. The follow-up, RCS. So oftentimes we talk about RCS as an acquisition that helped with your growth margins anytime you bring on an acquired property you can switch the processing over to rcs it's in-house it helps your existing business it helps future acquisitions but what we often or don't as often talk about is just rcs is a standalone business and and gaining processing share and signing up new partners on its own outside of repay is there any just context you could provide around that how much of a focus is that how is that going

Yeah, we can. I mean, you're right. I mean, there is an effort to bring on new processing clients. We would call them onto RCS. We have a dedicated sales team doing that, someone with a lot of experience in the industry and has a lot of relationships with the various processing client prospects. And so we do bring on several of those a year, and oftentimes they're coming to us from one of the larger shops looking for a more customized solution, enhanced customer service, and basically a more modernized platform in terms of onboarding and all the different things we do for them. So that's how we win there. From a sales and distribution perspective, it's clearly not the number one focus because it's not the largest part of the business, but we do have an effort there to bring on new clients each year.

Excellent. Thank you for both of those.

As a reminder, ladies and gentlemen, it is Star 1. To ask a question, our next question comes from the line of Mike Grundle with Northland Securities. Please proceed with your question.

Hey, guys. Thank you. Hey, first question is just how are you feeling about the auto and the personal loan end market? And then secondly, just the pipeline, sales pipeline there. How are you feeling about that or how is that stacking up kind of relative to other years?

In terms of personal and auto, you know, very similar trends, as we said previously in prior quarters. You know, we try to stay close to our clients there, but the trends we're seeing are pretty similar. And in terms of the sales pipeline, I mean, one of the things we like about adding the four or five new software partners each quarter is it just gives us a much larger distribution opportunity and helps us grow the pipeline. And so we feel like we have a really robust pipeline, you know, coming to us via referrals from the 262 software partners and also just with our direct sales force. We've added, you know, we reduced overall headcount in 23, but when we did add, we added in areas around go-to-market, like direct sales reps and sales support. So we have a very healthy, growing pipeline, you know, largely a result of just the growing number of software relationships.

Got it. Okay. Thank you. There are no further questions in the queue at this time.

I'd like to hand it back to John Morris for closing remarks.

Thank you again for joining us today. We capped off 2023 with strong results that we have continued to see in the first part of this year. We feel confident in executing on our 2024 plan. as we outlined today, of profitable growth and accelerating free cash flow conversion. Thanks for joining us.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.