Repay Holdings Corporation (RPAY) Earnings Call Transcript

Good morning, and thank you to all of you for joining us for this morning's Virtual Morgan Stanley TMT Conference. Very pleased to have the team from REPAY here. And before we get started with them, I do have an important disclosure to read. For important disclosures, see morganstanley.com/researchdisclosures. So with that, very pleased, as I said, to have the leadership team here from REPAY. We have John Morris, Founder and CEO; as well as Tim Murphy, the CFO. And they reported results earlier this week, and they were good. They announced an acquisition. So I'm excited to get to spend some time with them today going through REPAY and how they're trying to direct the business, the trajectory they're looking for, et cetera. For those of you that are following along via the webcast, I would say to you that you can submit questions via the web. I'll be able to pick those up, and then we'll integrate those into our conversation this morning. So without further ado, let's kick off.

I've got probably 2 to 3 hours worth of questions. We only have about 30 minutes, so don't want to waste a lot of time here at the beginning. So let's start off at a high level. REPAY is operating in a number of verticals today. And for those that are maybe less familiar with REPAY, can you walk through your key verticals, the relative size and the growth dynamics that you're expecting that it -- out of each of these businesses?

Yes. So hey, morning, James. Nice to speak with you. Nice to speak with everyone. And just for reference, we do have an investor presentation and earnings supplement on our Investor Relations website, which may be helpful. Specifically, on your question around verticals. So today, we think we -- overall, we estimate we have a $4.7 trillion addressable market in terms of annual payment volume. We break our business into 3 large buckets, which are loan repayments, B2B payments and other payments. And the other payments is really our back-end processing business called TriSource, we can do back end clearing and settlement. In the loan repayment space, we have various sub verticals, which are auto, personal loans, mortgage, credit unions, and we're also doing loan repayments in Canada. Probably the largest subvertical is auto, which we estimate to be about $600 billion annual addressable market in terms of payment volume. That includes the captive auto space, which we're now actively addressing. And then if we move over to B2B, in the B2B space, we're on both sides of the transaction. So we're doing merchant acquiring, which is AR, accepting credit card payments. We're also doing AP, where we're facilitating electronic payables, either ACH, enhanced-ACH or virtual cards with a real focus on virtual card payments. And that, as you know, the B2B space is a massive market in the trillions of dollars. And so we're really excited to be there. We think we're unique in the fact that we're on both sides of the transaction, both AR and AP, and then there's a lot of sub verticals. So for example, on the AP side, we have probably close to 10 subverticals. And some examples would be auto, field services, education systems, hospital networks, where there's a lot of outgoing spend, and that's what we're facilitating electronically.

Got it, got it. And maybe you can talk a little bit, and maybe this is also a good place for you, John, to talk a little bit about your background, but also, more importantly, how that leads you to the types of merchants that you're targeting and which are the -- how you're targeting those across different verticals? And ultimately, the value-add that they see in REPAY that gives you the customer lens?

Yes, sure. Thank you, everybody. Thank you for your time this morning. Yes, from our value-prop perspective, obviously, we've chosen these specific verticals because we think they're still underserved. We think there's still a large secular shift to more digital engagement out there. We saw that, obviously, for sure, in 2020, during the pandemic. The need for our services, the need for our financial technology was even more apparent. The key value proposition for us is that our integrated financial technology into the various ERP systems that manage the workflows in these verticals, that Tim mentioned. We think there's an enormous opportunity as that shift continues to happen for them to use our omnichannels that we provide specifically in the loan repayment space. And then on the B2B side, we think there's an opportunity there for us, as we continue to offer both the AR and the AP side, both sides of the transaction. As we build out our supplier network there, we think there's even more opportunity. Ultimately, what we're doing is we're allowing our financial technology as it's integrated in to really take out the friction in the process, the inefficiency that exists today but also give them the ability to make payments in the multiple different payment ways they want to make a payment. We do think the world is going in more towards a real-time type of payment. We will continue to build out that network. So we -- not only do we have the technology to help execute these transactions, we actually had the ecosystem to actually move and clear the funds behind the scenes. So we think that's a critical piece of our value proposition as we solve these challenges for them. And the size of merchants is going to range in the loan repayment side, anywhere from small to very large, all the way up to captive autos or large lenders or even banks and credit unions, as Tim mentioned. But then you -- on the B2B side, it's going to be medium-to-enterprise level customers as there are more opportunities, more transactions for us to help solve, lots of sub verticals in the B2B space, just -- both are very large as we look at our growth out there into the future. We think there's significant opportunity for us to continue to add value there.

John, you said something that's interesting. And I want to go a little bit into B2B, in particular, B2B has been a topic within the payment space for quite a while. At the same time, a lot of the processes that are the drive B2B payments, et cetera, have really been in place for, in some respects, hundreds of years in terms of like, how do you manage reconciliation and accounting and then ultimately, the money transfer systems have been in place for decades. But obviously, a scenario you're attacking, and you mentioned as you were -- as you were talking about B2B, engaging with the suppliers and signing them up. Can you just talk a little bit about what that network looks like, that sales motion? And what the benefits are to the different parties?

Yes, sure. So on the B2B side, obviously, we think -- again, I think the whole world is eventually headed towards a real-time transaction in some form of some way of moving real-time confirmation. We've seen that for many years. So on the B2B side, I think there's some inefficiencies on when and how you can take a payment. And we think that as you -- the AP automation side is going to make that a more seamless transaction as it's presented out to the actual person that's going to be making the payments. We think we can obviously integrate great technology in there. So it's more of a click transaction concept. There's ways to aggregate multiple transactions to multiple vendors. So if we have thousands of customers, and everybody has a utility build and ultimately, there's ways to aggregate transactions and transaction data. We've seen that across the board where suppliers are willing to pay for enriched data that's easy and accessible to be able to load back into their ERP systems. There's a great amount of information so they can -- we can transfer that with our technology as well as transfer the money so that it's fairly easy to do that. As you build out that network and as you continue to build your -- as we grow our own business, your network in itself grows because we do what we call supplier enhancement. So we're constantly looking and adding people to our virtual card network. Over time, and obviously, we were not the first to start here. So there's others that have large networks as well, and even we just announced our integration into the VPN network. We think there's a large opportunity. Those networks will, eventually over the next 3 to 5 years, will mature. We think we're going to have a sizable network. We think, obviously, others will as well. As we bring those together over time, we will eventually start closing the gap on the inefficiencies there in that. And then I also think over time, we'll also see different payments taken. As we look out into the digital world, there will be opportunities there, which is why we will continue to build our network out. It's going to be beyond just virtual card and beyond ACH. There'll be other types of digital things that we want to do that will help fulfill based on what they want -- the specific supplier wants to be able to receive.

And James, I'll add to that real quick. And this, from a sales perspective, what's different on the AP side, like John said, is supplier enablement. And we think that we do a really good job of enabling them to accept electronic payments and specifically virtual cards with a real focus on virtual card adoption and penetration, which, to us, is a higher-margin transaction, and we think also is kind of more seamless in terms of reconciliation. So that's just different on the AP side than other parts of our business where you have to have the enablement teams going out and doing that and train to do that. And that's pretty unique in terms of AP versus merchant acquiring.

Yes. That makes sense. So talking about like the business as a whole, can you help describe for us how you think about at least the growth algorithm, how much of your growth are you getting from processing more for your existing clients and customers versus winning new clients? And how is that expected to shift over time?

Yes. So we still have a majority of our growth coming from existing customers. And so there's -- like John said earlier, these verticals are still very underpenetrated from an electronic payment standpoint and specifically from card payments. Some of our verticals are less than 10% penetration on card. So it's a huge opportunity. As you know, the overall U.S. consumer market is probably 65% to 70% card payments, and we're in less than 10% or maybe an overall portfolio in the teens to 20%. So huge opportunity just to go after existing customers and increase penetration. And then we have now a growing sales force and also a growing list of software partners, we've talked to over 124 software partners, which facilitates new client wins, which is the balance of our organic growth. And we now like -- so over time, I think it has shifted more to new client wins. We still think the majority is existing through penetration. But because we're adding to our sales force and our partner network, it's shifting a little bit more to new. And we're also diversifying into verticals where we're going and acquiring new customers. So -- but we like the fact that most of it's coming from existing.

For sure. So speaking of these partnerships, you have announced a number of new software partners and relationships like with Ellie Mae. Can you talk about these -- which of these relationships, maybe in particular, you're most excited about? And what could they potentially do for the business? Like you alluded to a little bit that it may shift a little bit of the growth to new customers. But how does that dynamic work? And where should we be looking for evidence of success there?

Yes. So Ellie Mae is a great example. So when we -- in the mortgage space, which we historically have been working with mortgage servicers. And so we have the Mortgage Service Transfer Exchange where we're facilitating service right transfers and making that process easier and more seamless. But Ellie Mae gets us into the origination part of the mortgage transaction. So we're now part of the mortgage transaction from closing, where, as you know, a lot of payments, a lot of pain points in closing a transaction between closing fees, escrow, appraisal fees, the first payment being due, then that being transferred to a servicer. So we're -- Ellie Mae, obviously, is on the origination side. So we're now part of the transaction from closing to first payment, to transfer, to ongoing servicing. So that's what that brings us is getting into that part of mortgage. And then John mentioned VPN, so Billtrust payment network. Very excited about that on the AP side. They're really strong in certain sub verticals that we're in today. And having that connectivity, we think gains -- gives us access to their customers, and they're already enabled to accept virtual cards. So we think it increases our virtual card penetration in those sub verticals. So those are 2 that I would call out that we have clear kind of value-add from having that connection in each of those verticals.

And John, what's the pipeline look for further partnerships? And how are you approaching those potential partners? And what are those conversations usually like or what path do they usually take?

Yes. Sure. We got a team that actually specifically focuses on strategic partnerships and relationships in both of our large verticals. So we got a really strong pipeline of what's out there as we continue to expand in the B2B space, there's several opportunities there. There are some proprietary, obviously, partnerships, right, out there that, meaning from the standpoint of there's software partners that just are proprietary to very large enterprise customers. So those don't always really show up in our -- like our 124-number relationships. But we will continue to add to that quarterly. We got a strong pipeline there. It's going to be in both verticals as we expand out even into other areas. So we think there's lots of opportunity and a really strong pipeline there.

So let's talk about Mercedes-Benz. You kind of mentioned at the outset without naming them as 1 of the captive auto loan partners. And you announced that Mercedes-Benz Financial Services as a new client. What is the opportunity within that partnership? And how long before it starts to flow through the P&L? And I guess really what most investors we talk to want to understand is what the process was? Was there an RFP? And how did you win that? And obviously, they're looking to see how broadly applicable this could be to other brands and captive financing arms?