Repay Holdings Corporation (RPAY) Earnings Call Transcript
December 2, 2020
Earnings Call Speaker Segments
All right. I think we've gotten started here. Good morning, everyone. Welcome to day 3 of our 4-day 24th Annual Credit Suisse Technology Conference, began a 4-Day event running Monday through Thursday. We're very happy to be hosting this with both John Morris, who is the CEO of REPAY; and also Tim Murphy, who's the CFO of REPAY. So with that, I'd like to thank both John and Tim for their time today, and welcome you both to the conference.
Good to be here. Thank you for having us.
Good morning. Great to be here.
Great, guys. Okay. So we've got a good long list of questions here and about another 30 minutes or so that we can depend on them. Why don't we start with the general level setting question for any investors that might be newer to the REPAY story, and perhaps we can start out with an overview of the company's background and history in the roots in the personal loan repayment sector. And then perhaps we can end with an update on the current vertical mix and of the pro forma volumes mix following some of your more recent acquisitions?
Yes. So like you said, Tim, we started in the loan repayment space, specifically in personal loans. We now have other sub verticals within loan repayment. We're in auto, mortgage, credit unions. But we started in personal loans, really providing debit card processing to personal lenders who have been really slow to adopt electronic payments in general. And so a lot of them are heavy cash and check and maybe starting to use ACH at that time, but a lot of them never taken debit before. So we feel like we brought debit card processing to that market and not only to the lenders themselves, which are the software providers, where we would be interacting with the software. We doing integrated payments really early on. Where the software systems, so in that case, a loan management system didn't have the ability to take a debit card. So it was really brand-new in that space. So that's how we started. And then we recognize that auto is very adjacent to personal loans in a large, large market. We were starting to go into auto organically and realized there were some players that we thought made sense to acquire. So we started to acquire our way into auto, moved into that space. That's a $600 billion market opportunity, including captives, which we're now addressing the captive space as well. And then more recently, through an acquisition, we entered mortgage and credit unions evented organically. And so that is a very nice part of our business that probably represents somewhere around $1.3 trillion of TAM across those verticals. And then -- so that's where we started. And then more recently, we've now entered the B2B space. And that collectively represents about $3.4 trillion of TAM. So in total -- our total addressable market across loan repayments and B2B now is about $4.7 trillion of annual payment volume. So much more comprehensive than when we started. And in B2B, we're playing in multiple places. We're in the merchant acquiring part of B2B, but we're also in AP automation, where we're sending payments out to suppliers in facilitating electronic payments, specifically virtual card payments. That's kind of our primary target is to increase virtual card penetration within the verticals we serve within AP. And so we now have -- and we own our own back end processor, which is called TriSource, and that's what we call other payments. So our business is segmented across loan repayments, B2B payments and other payments, total addressable market opportunity of $4.7 trillion. So -- and that B2B part of our business now, if you include our more recent CPS acquisition, the pro forma volume is probably about 25% of our business. So when we became public last July, we had no B2B business. We were really focused on 1 repayment, today It's already up to 25% and growing. So we think it's a really -- that is a wide open space, a lot of greenfield opportunities, not as competitive, and we're really excited about that. We also are building out our supplier network there. We have over 50,000 suppliers and able to accept electronic payments, and we're growing that every month. So we feel like we have all the pieces in place to grow, continue to grow a really nice B2B business and that on top of a very solid foundation of the personal loan -- auto loan business as well.
Yes. We've come a long way since that first $850,000 loan that we started the company on. So very bless, very fortunate. You can see the markets we've chosen are underserved, we think there's a lot of opportunity there as we continue to build great financial technology that's integrated into these ERP systems. We kind of have been doing that since the beginning because that's the way it operated in kind of a card-not-present world or a builder world, and we continue to build that out. That's worked really well for us, a large addressable markets in themselves. A large addressable market with a secular shift to more digital. And that existed for us. We chose that way before there was such a thing as the pandemic. And that obviously, the pandemic has confirmed that there are even more opportunities as people accelerate their decisions to optimize digital enhance -- ways to enhance their transactions. We've built our ecosystem around the ability to move and settle in payments and money and the different payment mechanisms that make up. We have the ability to truly create and sell all those funds, but we also have built great financial technology that integrates into these ERP systems to help decision those and reconcile those seamlessly.
Excellent. Thank you, both John and Tim for that overview to kick off the discussion here. I want to turn to a couple of follow-ups on a few of the items that you mentioned around the addressable market. You mentioned some of the total dollar volume amounts, which are clearly large. Maybe we could talk a little bit about penetration of debit card within some of these verticals, almost all of them, I believe, below 50%, some of them as low as 10%, so barely penetrated at all. Maybe you could talk a little bit about debit card penetration within some of these verticals, where it is and where it could head longer term?
Yes. So if we start with loan repayments, mortgages, like you said, probably 10% or less. That is still a heavy check in ACH. There's a larger average ticket there. So that may just take a little bit longer to find the right pricing models with the card brands in order to penetrate card. But I do think there's a potential to increase that and that's something we're actually working on actively now is finding the right pricing program to do that. So I think there's room for additional card penetration within mortgage. Personal loans is probably in kind of the mid- to high-teens percentage that when we started, it was probably less than 10%. So we've seen that grow, and we think that can continue to grow into the 20s or even higher. We have some customers now who are taking 75-plus percent of their payments on debit. We don't think it's going to get there, but that's just a case study. So we think that definitely has room to grow. But probably the most penetrated is auto, auto being around 40-plus percent it's just -- they've been taking card for longer, and they've been using the channels for longer, like IVR and mobile and text. So it's just become more mature market. But I'm saying all these percentages. And keep in mind, this is relative to the overall U.S. consumer payment market that's probably approaching 70%. So even auto at 40% is still very underpenetrated. We think that -- and that's a $600 billion market. So even a few percentage points of increased penetration will move the needle there. And then on the B2B side, we think our merchant acquiring business is, again, probably in the 10% range that's a business that seems to be ready to grow more quickly and take more cards and increase acceptance. So I think that could be moving into the teens or even 20% eventually. And then you have virtual cards on the AP side. And in our markets, we think generally, virtual card adoption is probably in the mid-teens into 20% range. We think there's room for that to expand as well, virtual cards may not get to the same level of penetration as they do on the consumer side. On the business side, we still think there's probably room to grow. And we also offer enhanced ACH processing, which -- so if there isn't the desire to accept the virtual card, we think that the pricing model on enhanced ACH is actually pretty interesting where the supplier is -- likes that model, and then we actually make similar profit margins as we got on a virtual card. So just to wrap up on that point, very under-penetrated across all of our verticals. And that's, we think, a big tailwind for us and what we like and why we chose them, like John said, they were all strategically chosen. And one of the attributes we looked at was the penetration rate.
Perfect. Thanks a lot, Tim. And your point on enhanced ACH. I definitely want to circle back to that later during the session if we have time, now a brief final follow-up on this TAM topic, and then we'll move on. But you mentioned autos being a segment that has higher debit penetration, been doing it longer, but also the combination of the fact that the cap-to-bottom market is a newer one to REPAY. So that's a good, healthy combination. Maybe you could just talk a little bit about what services that you're providing to your current large automotive captive customer that you publicly announced in Mercedes Benz? And just maybe talk about the overall offering and what sort of you can bring to the captive segment?
Yes. They -- we're doing both ACH and card for them, which we think they were taking both before. We don't -- we think is new with us is that we're offering all the channels. So IVR, mobile and text, we think previously, they are probably taking cards specifically in maybe a limited way just over the phone or the web, and they weren't really promoting it or making it easy and efficient to use. So that's what we brought to them. And I think that's why they chose us is they wanted to have a better payment experience for their consumer, which, in the case of Mercedes, is a pretty high-end consumer that is probably demanding high-quality technology across the entire experience with them. So -- and I think that there's -- that's a similar situation with a lot of the other captives that they may be taking card but in a limited way. And so actually, within that part of all, the penetration rate would likely be much lower than 40%. We would think it probably feels more like in the 10% to 15% range just because if they were take only offering in a limited way over the phone or web, then the acceptance would be lower. So that's an opportunity, an opportunity for us to provide ways to increase acceptance and that's why we like the space and why we're targeting.
And thanks a lot. That really helps on the automotive captive. It's definitely a topic that comes up in investor discussions quite often. Let's move to the growth algorithm overall for the company on the medium term, you've been talking about some time now targeting mid- to high-teens volumes and organic revenue growth. And you've talked about that being sort of a 75% via your existing merchants and 25% from new. Maybe you could dig into that overall growth algorithm a little bit more in terms of same-store sales and increasing penetration? And how we should think about that growth algorithm going forward?
Yes. I mean I still think that the majority of organic growth will come from existing customers. It's maybe not quite as high as 75% now that we've entered B2B, and we're out with a larger sales force and more -- over 120 million software partners more actively acquiring new merchants. So I still think it's going to be largely from existing customers and penetration, but we're also obviously adding new merchants very regularly and actively through all of our different distribution channels and partners. So -- And just given the way I just walked through kind of the penetration rates within each of these verticals, that opportunity certainly exists to tick up those rates. So I still think it's largely a majority existing customers through additional penetration. Now it's probably tilted a little bit more to new customers. And even within the new customer part of it, relying more on our software partners as referral sources, not as resellers, but referral sources. Ultimately, we still closed the deal, we still contract with the customer. We still own the relationship, we do the onboarding risk, compliance, customer relationship management, but we are seeing more activity coming from those relationships because we have a lot more of them at 120. We've significantly increased that number as well. So and that's how we -- and then we have added new verticals organically in the past as well. We've added credit unions organically. We've gone into Canada organically. So although most of those new verticals we talked about previously came through acquisition, we selectively will find adjacencies where we can add them organically, and that's another part of the growth algorithm.
All right. Excellent. You meant -- I think we can probably because you made a good point there, Tim, around the ISV integrations that I want to touch on a little bit more. So around 120 now, and I believe you were at 53 as recently as the end of 2018, that's a pretty big step-up in a short period of time. Let's dig into that a little bit more in terms of your mix of volumes that come through either the direct sales channel or through the referrals, as you mentioned, in terms of the partners on the ISV side? And then maybe we could dig into a couple of the sort of brand name ISVs that you've added over the past year or so and what runway that might provide you with?
Yes. I mean I think when we were operating solely within loan repayments and personal and auto, it was probably about 50-50. I think now that we've entered verticals where the primary distribution is through referral partners, like, for example, our APS business, working through the ERP accounting systems like Sage, or CPS has many, many different distribution partners, specifically within different ERP systems within their verticals. It's probably increased more -- probably a little bit higher than 50 coming from referral sources, which we like. I mean, we have great relationships with them, and we want that to continue. We think that's a great, efficient way of distribution. And so that's how we kind of think about the mix coming from referral versus direct to merchant sales. And then, yes, we've recently announced Ellie Mae as a new partner, for example, in mortgage. We've added several Sage products recently in the credit union space, we have Jack Henry Symitar product. We have Corelation, which is another key software provider in credit union and now we just recently added CU*Answers. So we think we have 3 of the key software providers in the credit union space. We do want to continue adding ERP accounting systems within APS. There's several we're targeting that are really large distribution opportunities like NetSuite, for example. And so -- but we're actively adding them. We have a partner relationship management team. We have channel managers, and that's a whole group that's dedicated to not only adding existing or adding new ISVs but also penetrating existing.
Excellent. Great. And this next one, this one could be for either Tim or John really, but I just want to dig into a little bit of the ISV landscape within your core verticals. Not just overall, but also the ones that you're already working with, can you characterize the number of payments providers that they opt to integrate with is -- are some of them out there still at 0, and it's just white space, others that you've integrated with? Are you the only partner? Sometimes perhaps are there a handful of partners? Maybe just give us an overview of what that looks like.
John, do you want to take that?
Yes, sure. So by vertical, it matters specifically and even in sub verticals and B2B. So on the B2B side, it's obviously going to be more of a 1 to 3 or even more. Usually, those are API driven, meaning you can go to their APIs. So we see a little -- it is subject to different providers. So you see more people integrated there, but there's just so many different businesses, right? And there are so many different sub verticals inside of that, which is why we work with some channel partners there, who create customizations. And as the versions of that software rollout or customizations roll out, it matters really the other verticals that are in there. And many times, we are -- if we're teamed up with one of the key channel partners there, there may be some other possibilities to integrate there, but you may not be integrated to that specific version. And as the versions kind of move out over time, that becomes more competitive to do. But that's generally -- there's more people in the B2B space when it comes to that. But you will also find people who are not even taking payments for AR in the B2B vertical or they may -- they, for sure, have never even automated their payables, right? There's still a lot of greenfield white space there. And on the loan repayment side, there are several occasions where we still can be one of the only providers there. We may not be exclusive, but we're the preferred provider. And there may be someone who just randomly is there. Most of the time in that space, we would be one of the main only providers there, having been there for a long time. The very largest people in the longer payment space sometimes will own their own proprietary software. And so in that situation, many -- kind of, obviously, we're the only provider. So we would be exclusive in a proprietary type system.
Yes. And Tim, we would get a sense for how -- like in loan repayments or auto, for example, we usually would have a sense for how many other providers there are or how relevant they are and in terms of how we get leads from the software. So if we're getting a lot of leads from the software, they're providing us their list of customers, we would likely be the preferred, and we're not too worried about competition. If we have to kind of fight for leads and be on the phone with them all the time, trying to make sure that we're getting the proper amount of referrals, then clearly, there's competition. So we can usually get a sense of that. And if we feel like there is competition, then we can start working on how do we become the preferred and make sure that we're preferred. So it's -- you can sometimes get a feel. And I think we have -- because we have just more relationships, and we've been in on repayments longer, we have a better feel for that. But like John said, there's another layer on the B2B side, oftentimes, where there's a channel partner that has to bring you to the ERP. And so then you have to really develop the relationship with the channel partners to make sure that you're always getting the proper spot in line with the ERP system. So a little bit of a different go-to-market it will be, but we typically will have some sense of how many players there are. And then that -- like in merchant acquiring, that becomes M&A target list, right. If we start seeing other players in certain ERPs that we're bumping up against, we get our corporate development guys to start digging and finding out if that something that we should pursue. And so that's actually led to a few different targets that we now have on our list. So that's an inorganic opportunity coming out of that as well.
That's a good point, Tim. Thank you for that context. That's really helpful. I don't want to spend too much more time here, but this is an important topic. I just want to hit it real quick on the credit union. So Symitar, Corelation, CU*Answers, that in combination, those 3 can give you access to a whole lot of credit unions. And there are also 3 partners that are relatively new to the platform, meaning there should be some runway in there for REPAY. Maybe you could just touch on the opportunity there with credit unions? Talk about what loan products you're mostly focused on, if there's perhaps a potential to expand to others? And just in general, the credit union opportunity with these 3 large new partners?
Yes. So primarily focused on auto financing within credit unions. We entered the credit union space because we were bumping into credit unions at a lot of auto shows where they were looking for payment providers. And so I think that was a natural extension for us. And so what was happening there is that there's a lot of -- credit unions doing auto financing to nonmembers. And they then have to find ways to get paid by the nonmembers that they don't have money with the credit union. And so that's the pain point that we're solving is finding -- providing efficient ways to engage with the nonmember for auto loan repayments, for example, a mobile device or a text or an IVR solution. And we think with those 3 software partners, collectively, it represents about 1,000 credit unions in their network. And today, we have about 35. Now a lot of those 35 have come from those relationships, specifically Symitar. But clearly, there's a lot of room to grow. And we are targeting other software platforms as well that could give us access to broaden out that 1,000 member -- excuse me, 1,000 credit union list. So it's a little bit longer sales cycle, almost like working with the bank. So it's probably not going to be as fast as signing up an auto finance company, an independent auto finance company. But certainly, longer term, there will be a lot of volume. And credit unions are in all of those decision trees as to where you want to get an auto loan. And oftentimes, they're the lowest rate, which is why they end up lending a lot of money to nonmembers.
All right. Excellent. Thank you, Tim. I'm glad we covered that one. I want to move to the topic of more recent results. And as we think about growth heading into 2021, being fully respectful in times of the fact that there's a lot of moving parts but maybe we could recap for investors Q3 in terms of -- there was some timing of originations that would have slowed a little bit ahead of Q3. There was a tough August comp but then there was some improvement towards the back end of the quarter and some of the implied in some of the Q4 commentary. So perhaps we could just talk about those moving parts around organic gross profit growth for investors? And then also think about how investors can think about some of these trends heading into 2021?
Yes. I mean, so like you said, I mean, what we saw happen was as a result of the CARES Act benefits going out to consumers, they were repaying their loans and sometimes paying off their loans in Q2, which is a really good thing for us. That fundamentally proves that consumers place a very high priority on staying current on their consumer loans or auto loans. So -- and specifically, personal loans. So that was positive, but that resulted in payoffs and then less demand for loans, personal loans because there was so much cash in the system. And at the same time, our personal lenders were tightening their own credit standards. So that combination of events, which is a very unique combination of events that we've probably never experienced before to that extent that quickly led to a pretty sharp decline in originations. And we didn't start feeling that in our repayment volumes until Q3. There's a lag effect to when they stop slow down originations and leads into our payment volume depending on the duration of the loan. So we think that was really what happened in Q3 in the personal lending part of the business, which does drive a good bit of the organic growth. We did -- we have started to hear from our lenders and see in some of our data that once the CARES Act benefits stopped, demand increased, and they started originating again. And those originations, again, will be on a lag effect, and we're starting to see some of that come into our repayment volumes, which is what we talked about on the call, but still monitoring it, making sure that what we saw happening then is truly a trend. And we do hear from our customers that they are originating again, maybe not to the same levels they were pre-COVID, but they're ticking back up, which will eventually lead to increased repayment volume. So that was kind of the context for what happened in Q3 and the background for how we thought about the guidance for the full year, which implies a Q4 number. But then more importantly, going into next year. And so if those originations are continuing, which we think they are, that will set us up nicely going into Q1. Which is important because Q1 is also a tax refund season. And so we want to make sure there's enough loans on the street to be repaid when consumers receive their tax refunds and use those to repay loans. And so we think it actually could be a fairly nice setup for originations leading to repayment volume in Q1, where there'll actually be some -- maybe some funds for repayment of those loans coming from tax refunds. So that's just kind of some anecdotal points going into next year. But longer term, we did say that we feel confident in kind of the mid- to high-teens outlook. We think that's kind of more of a middle to end of next year once we get through what will be probably a somewhat difficult comp for Q1 and Q2 given what we did this year, but much more favorable going into the second half of next year. And we also now have bought businesses throughout this year, for example, cPayPlus and CPS, which will eventually be coming into the organic mix toward the end of next year as well. And those businesses are growing very, very nicely, faster than the corporate average. And we think that's one of the reasons we wanted to do those deals was to diversify and give us additional avenues for organic growth.
Excellent. And that's great context. And [indiscernible] appreciate that transparency. We only have a minute or 2 left here. John, I want to turn it back to you to wrap up potentially on M&A. So you mentioned earlier how you diversified the business very nicely over the past year or so. And now B2B is about 25% of the mix. You've made multiple acquisitions since the IPO, since becoming public. Maybe you could talk a little bit about the M&A and how it plays a part in your strategy? I think investors really appreciate the mid- to high-teens organic plus the prospect of further M&A ahead.
Yes, sure. So on that side, we're very active, as you can tell, actually from the last 12 months. We do look at things. And we also -- we turn things down. Some things just don't fit all the attributes that we look for. The attributes that we are looking for, we would have to complement our existing verticals that we're in. We'd love to complement what we're doing in B2B, which you've seen us do. We'd love to continue to complement what we do in our loan repayment space, which you've seen us through Ventanex. We're continuing to look at those -- the specific attributes that drive that secular shift that integrated software. The organic growth that's built up inside of those. We like -- we love businesses that we can take and provide additional resources and even better technology to drive that accelerated growth that are growing nicely when we buy them. We see some of those out there still. And they're very attractive to us. There is some competition now. But typically, we don't see that way upstream. Downstream, we occasionally see private equity, and we organically go out and drive our own pipeline of deals as we continue to look for those. That is -- inorganic is a part of our strategy as we continue to grow. We've got a nice balance sheet. We'll use it when it makes sense to we can truly add our shareholder value there. There couldn't be an opportunity for us to look at something that's even larger. We see some things out there that are attractive to us. If it makes sense for us to do some things like there that can really accelerate some of the areas that we want to go to. That would be something we would look to act on, obviously, with the blessing of our Board. But we like our position. Our business model has proven well. Obviously, we didn't predict the pandemic, but we love the way the business is positioned, especially on a post pandemic normalized basis. What we think we continue to do and invest in growth. We are a growth company. We do make money, but we are a growth company, and we continue to try to find our balance there. But yet, we think the opportunities for the next 3 to 5 years is we're well positioned for that with our technology, with our integrations, with our ISV partners. Our balance sheet is positioned well for that. So we can complement that with inorganic growth, but also look for opportunities to make key investments there.
Excellent, John, I think that's a great place to end. We unfortunately ran out of time. But John and Tim, I want to sincerely thank you for being with us today. I hope you have a great day of meetings, and thanks for taking the time to be on today here.
Absolutely. Thank you, Tim.
Thanks, everyone.
Appreciate it. Have a great time. Bye-bye.
Bye.
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