Repay Holdings Corporation (RPAY) Earnings Call Transcript

Hi, everyone. Thank you for joining us for Citi's Tenth Annual Fintech Conference, Fintech X. My name is Andrew Schmidt. I'm fintechs -- on Citi's payments processors and IT services team, focusing on fintech software. It's my pleasure today to host Repay. With us, we have John Morris, CEO; and Tim Murphy, CFO. Thank you both for joining us.

Nice to be here.

So it's always helpful to start with a level set question, if you will. For investors not familiar with the story, could you help us just understand how Repay's core business got started? And since that core business -- since you started that core business, clearly, you've expanded into a number of different areas, including B2B payments. So maybe help us just bridge the gap between that origin and then where you are today as well.

Sure. So I'll start here. As I said, nice to be here. Thank you for the question, and excited to talk to you all today. So yes, Repay was started in the personal loan space, which at the time in the mid-2000s, was very underpenetrated from an electronic payment perspective and still is. It's probably from a card processing perspective, still only in the maybe mid- to high teens to 20% penetration versus 60-plus penetration across the overall U.S. consumer payment market. And so we recognized an opportunity that was underserved, underpenetrated, not a lot of the larger merchant acquirers participating, and that's how we got started. And then we recognized that the auto lending space was also very attractive and actually much larger than the personal lending space. So we moved into auto lending via acquisition, then branched into accounts receivable management, which was also very adjacent to let -- the lending markets. And that's really where we got started. So our core business was in, what we call, loan repayments. And now, as you mentioned, we've branched into B2B payments. And so within B2B, we're in B2B merchant acquiring, but we're also in the AP side of the transaction, with our recent acquisitions of cPayPlus and CPS, where we're processing outbound payments in building a supplier network that we're enabling to accept electronic payments. And we also have a back-end processing business called TriSource where we can settle transactions. So collectively, that represents probably over a $4.5 trillion annual payment volume opportunity. So we started in the personal loan space, which was maybe $60 billion, which is large, but certainly expanded that addressable market significantly. And now we have a much more diversified business. In loan repayments, we also recently acquired a business that is in the mortgage space. So we're in mortgage payments within loan repayments as well, which we think is very underserved. And then we're also in credit unions within loan repayments and we're in Canada in loan repayments. So loan repayments has many subverticals, B2B, a few different parts to that as well, back-end processing business with a very large growth in the...

Right. That's a really good overview. And we'll dig into a lot of those areas in just a little bit. But one thing that you mentioned a number of times is the underpenetrated nature of these markets. And clearly, you've identified -- done a good job of identifying markets that are underpenetrated, and then you've gone after them. But I just -- I think it's helpful to understand why it is so underpenetrated, why isn't anyone else going after these markets? And what is your sort of competitive advantage in addressing these markets? I guess that's kind of a broad question, but maybe we'll start with the core sort of lending verticals, repayment verticals. I think starting there would be helpful.

I'll take a stab, and Tim will be able to give more color there. So thank you again this morning. Really appreciate it. It's good to see you. Listen, we -- I obviously been here -- having been here from beginning, I think -- hey, I'm all 4 of less people being in the verticals we're in, right? It's less to compete. But reality is we discovered it's not a traditional retail market, right? And it's really card-not-present when you're paying your card payments or various loan payments. We discovered that a long time ago, and we think there's lots of runway left. So we've been very intentional about what we're choosing and markets we're choosing that we're going after. And these 2 are very large underserved markets with huge TAMs, but also long, long runway, where we think the move to digital, the move to real time, the move to a card payment type is there. We were going into B2B before such a thing as a pandemic happened. That's confirmed probably our thesis there that we think there is lots of opportunity. We think the market is ready for that. That kind of accelerated a lot of those decisions. We think that is still the case. Our go-to-market strategy does revolve around, our technology does revolve around our integrations into ERP systems or loan management systems, which is the ERP systems in the loan world. We think that our ability to deliver great financial technology that's integrated at the end that makes ease of the customer experience much easier, but also accelerates and takes the friction out of that whole process. We can kind of beat the total financial plug in. And obviously, we'd bring the entire payment expertise to this. We look at also our ability to truly clear and settle these funds behind the scenes. We're not just a financial technology kind of we can actually move money and understand how to do that and all the things you get with that. We build our ecosystem around that. We think that's a really strong strategy for, I call it, stickiness. It creates -- assuming we do a great job of taking care of our customers, which that's a big to us, and we deliver them an excellent product and solution, we think there's additional room to continued growth for many, many years in the verticals we're in, and we'll continue to do that organically. So that's -- we do think a competitive advantage, obviously, is our technology. That's the moat around our business, the omnichannel approach we have. The integration is very critical. And when we put all those things together, our ability to properly process those transactions that's in the best way for our customer, which would be a business, we're excited about what we still have ahead of us.

Great. And then everyone's favorite topic, which is COVID and how companies have reacted. Could you just talk a little bit about just on the loan repayment side, how -- just how COVID has impacted that business in terms of consumers being able to repay their loans? Is there a difference across the verticals you serve, personal loan, auto, mortgage in terms of repayment trends? And then it does lead to a broader question in terms of cyclicality since it is loan repayment. There's presumably some cycle exposure. So could also talk about how the business responds in various economic cycles?

Sure. So -- yes, so if we start with Q2, when the stimulus funds went out to the system, we saw people using those dollars to repay their loans. So it confirmed for us what we've always believed, which is that these borrowers place a very high priority on staying current on their personal loans, auto loans, mortgages, and other types of consumer debt. And so that was a very -- that's very positive, generally, I think, fundamentally for our business. One trend we did see in personal loans is that as the system was pretty flushed with cash, and consumers were paying off, either paying off loans or making larger-than-normal payments on loans, the personal lenders really reduced originations and so those reduced originations led to a slight impact to our payment volume in Q3 in the personal loan space, meaning our payment volume was down because there weren't as many loans originated and those loans are also often shorter in duration. So although there's a lag effect, it takes a quarter or so to feel that. And so I don't think it's a fundamental kind of cycle question because clearly, what just happened is in a normal cycle. And the stimulus, the ups and downs and the stimulus has created some volatility in personal loans. But I think fundamentally, we've seen that consumers want to pay these loans. In auto, it's been very strong. The demand side of auto has been there, and so originations have continued. And then the existing loans are longer in durations, they could be as many -- as much as 6 or 7 years. And so we've seen that repayment volume stay very strong and growth rates actually probably a little faster than previously there. And then the refinancing activity has kept mortgage strong as well. So it kind of depends by the vertical within loan repayments. But I think what we fundamentally have seen, like I said, is that consumers want to pay their loans. There -- sometimes if there's excess cash in the system, could really translate into reduced originations, which could, for a short term, we think only short-term, reduce their loan repayment volume, which is higher margin for us. So you can see that flow through our P&L. But again, we think that's really a function of some of the volatility related to CARES Act stimulus.

Okay. And then I think it's important to kind of level set, just the secular growth you are seeing in loan repayments and why FIs are adopting this. What is the -- so typically, you think of the cost of acceptance, there is a cost to accept in card payments. What is the value prop for the FI in terms of just accepting repayments on a card? I guess there's benefits on both sides from the consumer and the FI. Could you talk about just in the loan repayments vertical, the value-add on both sides of the network, if you will?

Sure. Specifically on the loan repayment side, we see value on both sides, right? We've seen great value proposition on the B2B side as well. Especially in the middle of pandemic, we've seen demand. We saw demand for the need for a card-not-present transaction or a remote transaction, both to fund the loans, which we've seen some pickup in that activity where lenders want to be able to fund the loans directly to the consumer's bank account without actually having to come in to their branches; and then we also saw demand for the consumer, who wanted to be able to basically pay the -- make their payment over their mobile device, right? Or -- and just be able to pay anywhere, anyway, anytime. So having an omnichannel experience, we were able to start delivering that even more. Most of our existing customers would have had 1 or 2 of our channels, but they really want to be able to deliver high quality experience to different areas, so that pick up demand for wins on that side of it. The value proposition for us is really driven by their end borrower experience. And that particular consumer specifically wants to make a payment when they want to make a payment and how they want to make a payment. And what we've shown over time is when you allow them to do that, they're a happy customer and they pay more often, right, versus when they get to it. So the concept that kind of -- it puts you first in line, which becomes a competitive advantage from that perspective, you allow them to get a true virtual experience that's -- that they're experiencing in other parts of their lives because of -- this is 2020, everybody has really enhanced that overall experience, especially with the COVID piece of that. And so the other value proposition is that consumer wants to make a real-time payment, because they know when they use to save their debit card, they know that it's automatically immediately taken out of their account; with an ACH or a check, they don't know exactly when that's going to clear. So they've to kind of check that box. We know and the lenders know that consumers really want to do that. From the lending side, they realize that, "Hey, if I allow these additional products or payment methods, they will pay me more often." So if you think about a concept of, if you just get 1 more payment than you normally potentially would have, it totally pays for the freight of the offering. And if you look at all the other variables where it potentially is greater than that, but also you have a higher quality in consumer experience, those things really matter. The other thing that -- the other big characteristics on the consumer side in that the consumer also realizes that a declined debit card has no negative consumer impact. A declined check or declined ACH, there's a negative consumer impact and nobody kind of gets paid then. So the consumer actually knows that. And then -- our value proposition on the B2B side, around all that is our technology that kind of makes all that happen. That's our true value proposition. That reconciliation and the ability to truly reconcile all the way through and make it seamless and load it back into the ERP system, that in itself is kind of worth the freight in itself because of that. But then if you look at our B2B side, the same thing about the integration into the ERP systems, the ability to take a payment, and we're very underpenetrated on the B2B AR side, we're -- the low teens at best. And that consumer, that manufacturing distributor or whoever that B2B person is, they realize that hey -- and we saw this happening in the pandemic where people were paying sometimes larger invoices than normal because they needed to move things through. We even -- we saw different things out there. So -- and then on the AP automation side, we saw accounts payable departments could not go in the office and write checks, right? So the automation of that, we have seen an uptick in that piece of it, where the ability to basically outsource or really -- and give yourself internal controls, the ability to track your AP transactions, but be able to do it remotely. Obviously, we can do virtual cards. We can do ACH credits, and then we can actually print and send checks as well. So we can do it all for them. And then seamlessly integrate that into their ERP system, great value proposition. And in the AP automation world, it's basically a free transaction for them, because we give some rebates back on the virtual cards. So it makes a lot of sense for almost any business out there to be using some of these products in kind of the new digital world.

Okay. We do have some questions from the audience, but we'll get to those in a moment. First, I want to ask, in terms of just the pandemic's impact on new business wins, presumably, this is an attractive offering, particularly with the shift from the ratification of payments and things like that. But you've actually won a number of deals. You've had credit union success. You've had some announcements in mortgage servicing. So maybe kind of talk about, overall, how the pandemic has impacted new deals. And then just a little bit of detail on the credit union and mortgage servicing space, that would be helpful.

Yes. So we've had really strong new sales throughout the last 6 to 8 months, despite not being able to go to physical conferences and maybe meet customers in person. I think our team has done a great job of making everything virtual and figuring out ways to be more proactively engaging with either existing customers or potential new customers in a virtual way. And so that has led to some really nice wins in the credit union space, like you mentioned. We're building a nice business there. And we have key integrations with 3 of the software providers in that space, which have been really strong distribution and referral partners. And then similarly, in mortgage, as you mentioned, we have announced recently the partnership with Ellie Mae on the loan origination side, so the origination of mortgages, and we have now developed a pipeline and had some wins there as well coming out of that relationship. So I think the combination of our direct sales force engaging with merchants directly and then winning new referral partners, which we now have close to 120 on the software integration side, that provides an additional distribution path for us, which has become more significant. And it's probably helped us a lot with these new wins in the last 6 plus months just because we now have these larger referral sources. So those wins have been -- stayed strong. Our salespeople are doing a really good job hitting their monthly quota targets, which we base on gross profit. And we think that sets us up well going into next year with the implementation of a lot of those wins.

And that's actually a good segue into this question I got from the audience. Before I move on, just -- you have been very, very resilient in terms of growth through the pandemic. Is it in 20% plus organic gross profit growth in the first half, high single-digit organic growth in the third quarter? Is it fair to view the third quarter as a low watermark from your perspective? You mentioned a lot of these deals coming on board. But just what gives you confidence in terms of improvement in the fourth quarter into next year? And I think deals are probably part of that, but just a question on your resiliency, how to think about growth going forward?

Yes. I mean, I think we have proven resilience. Like I said, personal loans just was impacted by reduced originations, but auto has been really strong and other parts of our business remain strong. And even in that, what we would consider potentially, down quarter, we were still growing pretty nicely organically, maybe not at the same rates as the prior quarters, but still growing nonetheless, organically. And we have seen positive volume trends in October with some of our larger personal lenders, which gives us some confidence that they likely started originating loans as the CARES Act stimulus ran out, so probably in early August, which would flow through to payments for us starting now into Q4. So we're seeing that in October, although we don't have -- we don't know yet if that's a true trend. It's only been 1 month of data that shows positive results versus the prior months. So with our Q4 numbers, we were also just a little bit cautious in not understanding what that trend truly could be related to originations and still sort of showing kind of mid- to high single digits organic growth in Q4. But what we said was longer term, we still felt comfortable with mid- to high teens organic growth outlook going into kind of the middle of next year when we think that, hopefully, things will have stabilized, and we truly will see the trends resulting from the increased originations that happened starting in the end of Q2 into Q3. So that's how we think about kind of near-term organic growth outlook and then longer term.

That's super helpful. I think that addresses the question. I want to switch gears to talk a little bit more about B2B. B2B is an area that we're super-excited about. It's highly underpenetrated, which is characteristic of a market that Repay would go after. But could you just provide us a rundown of the recent acquisitions? I think overall, since there is a lot of complexity on the B2B side, yet -- obviously of AP and AR, and then you have different parts of the value chain within AP and AR. Could you just talk through kind of where your assets are positioned today from a B2B perspective? And then maybe what some of the more recent acquisitions, CPS, I think you recently closed, what that brings you?

Yes. So we -- actually, just for reference, we put a slide in our earnings supplement. So if folks want to take a look at that, it's basically what does our combined B2B business look like today. And as you mentioned, we have made -- our last 4 acquisitions have been in B2B. The Ventanex business had a mortgage servicing part of it, but they also had a B2B health care. So if you think about those deals, APS, which we have done in Q4 of last year is in B2B merchant acquiring. So we're on the acquiring side of the transaction, which is acceptance. So it's AR. Ventanex brought us into B2B health care, where we're making outbound payments on behalf of third-party administrators and insurance companies to providers. cPayPlus, which we acquired in July, brought us into the AP automation world, where we're facilitating AP payments automated through ERP systems, and building out a supplier network in select verticals. For example, CPP was in -- or is in auto, field services verticals with a lot of spend. And then CPS is very complementary to cPayPlus in it -- that is doing very similar things in terms of AP, virtual card payments, but in different verticals. So they're in more of an enterprise level customer, doing things like education, hospitals, media, hospitality. So what we're doing now is we're not only entering spaces like AP automation within B2B, but also subverticals, which is very similar to what we did on the acquiring side within loan repayments, for example. And so -- and we're also building out a supplier network that is enabled to accept electronic payments. We now have over 50,000 in our network and we're looking to add to that each month. And so collectively, we now have over a $3 trillion addressable market in B2B. We have over 3,000 customers. We'll process on a pro forma basis, over $4 billion of payments annually between virtual card and enhanced ACH. Like I said, we have over 50,000 suppliers. And so we think it's shaping up to be a very nice business. It's probably on a pro forma basis, about 25% of our business today now. And so that's what we're focused on. We're focused on additional organic and inorganic growth there. And just looking for ways to further penetrate either acquiring or AP automation in either of the existing verticals that I just mentioned or maybe branch into new verticals. And so that's really how the B2B business is shaping up for us, and that's just been over the last 12 to 15 months.

Right. Yes. A lot has happened in a short period of time. What is -- and you mentioned both of these things, but what is the focus between adding new capabilities on B2B within the value chain versus getting into new verticals with your existing assets? Clearly, there's a lot of organic growth runway to continue to penetrate the existing verticals. But just wondering if there's priority for capabilities or vertical expansion or both?