Repay Holdings Corporation (RPAY) Earnings Call Transcript
May 19, 2021
Earnings Call Speaker Segments
Hi, everyone. Our next panel today is with the CEO, John Morris; and CFO, Tim Murphy of Repay. Gentlemen, thank you so much for joining me today. Greatly appreciate it.
Absolutely. Thanks for having us.
Pleasure. Why don't we jump right in here and give us a more color around this larger acquisition you announced recently, BillingTree, I talk about strategic fit rationale for the deal and what you kind of see going forward with the asset?
Yes, sure. Good morning, Ramsey, again. So we -- I think this is very strategic and compelling for us. Obviously, we raised capital earlier this year for good reasons. We think this is a unique year where some strategic assets will trade. This is someone we've known for a long time, built some relationships there. We think there probably is not a better kind of one-for-one fit on some of the things we do, specifically in the verticals that are served here they're very similar to us in many ways in that their omnichannel integrated payment technology provider. Their go-to-market is with a direct sales force through strategic relationships with ISVs. They'll add about 50 ISVs to our platform, which will put us by over 175. They specifically serve the healthcare vertical, which we have identified as a vertical, we think, is still underserved. If you look at the characteristics we look at it on a longer payment vertical, you look at the characteristics in our B2B verticals, very large, under-penetrated, underserved verticals that need great financial technology as well as the ability to clear and settle those funds. This one matches up really well with that. In the healthcare space, credit unions, we are already -- we're in the credit union space. They actually have more credit unions than us. Account [indiscernible] management, we have our toe dip there, but they are a strong player there. So strong verticals and vertical presence would really good technology that's integrated into that, delivering superior solutions. Really, we think that helps us grow scale, but also diversifies our vertical mix and adding a key strength in the healthcare piece. So -- and obviously, they got great financial -- attractive financial profile that Tim can talk about, but we are super excited about it.
And talk to us about the integration process. Maybe with this asset specifically, but also just in general, how does that typically play out? You guys are getting pretty good at this? I'm sure what a -- what the typical integration process look like? And what might it look like in BillingTree?
Yes, sure. So if you having gone back in history with us, you remember that we chose to go public because we wanted the ability to access the public markets for currency here when needed. And probably some may have not realized our first move was to buy our own back end clearing and settlement process, which was TriSource. Now if you look kind of back in history, you realize why we want to do that. That's even more when we are buying something of even bigger scale here. So part of the integration will be -- when you have your own clearing and settlement piece of that, there's great synergy part of it on the acquire -- this is the acquiring side of the business versus the B2B is going to be on the AP side. Is the merchant acquiring side of our business. That gives us great ability to scale. There's lots of things that go on -- go in with interchange and clearing and settling those funds and how you do your billing and pricing complexities if we've made simple, but we've built out our scale there. This is going to make sense for that as we add this on. When we look at this, this is an asset that comes with scale you've seen us buy things in the $5 million -- sub $5 million EBITDA basis, which are really good assets, growing well for us. This one is growing well, but it comes with scale, right? If you look at the EBITDA of $26-plus-million here. That, but also it was professionally managed, run by private equity. We think there's actually versions of this will actually be easier for us. It's going to come with scale. It's going to -- the verticals and the way they go-to-market are so similar to us. There's pieces here that are going to be actually probably easier for us. But yet, and we're going to -- it's going to come with the horsepower of the people that know and serve these verticals already. So we think we can that and scale that even more, complement the existing things we do. We've gotten good at that, as you said, our Chief Operating Officer, Mike Jackson has been with us a long time, is we've actually -- we even started our work streams. So the first 2 acquisitions, TriSource and APS are fully integrated. Our Ventanex is integrated as well. And then I should say, always technology, some of the technology assets will take a little time sometimes, but we find the best of all the technology and people gravitate to our, what we call it technology target operating model. And then we're over 75% integrated with our last 2 acquisitions of cPayPlus and CPS. So we go fast. We've created some diligent work streams that are very effective for us. We actually have learned as well. We actually start our work streams in our due diligence process. So we jump ahead of it. If we know we're -- obviously, we're headed towards close and we get ahead of some of those asks, including how we evaluate the technology and how we look at potential future stop sale opportunities. So in this particular case, on BillingTree, we've already got work streams moving, although we're not officially closed until we -- the HSR is finally approved in the latter part of June. So we are excited about that. We create some -- we've created some disciplines there, right? We've got really strong team members that work around that. So we would look to accelerate our integration as we move into both on the processing side, and there will be some people synergies, particularly on this deal. But we're very excited about how we can continue to expand. We will be patient, we will absorb. We won't get ahead of ourselves but we are finding that eventually, we're starting to get more and more scale. This will add us and more scale to us. And our back-end clearing and settlement engines, we've been doing that. Our team there has been -- some people have been on that team 20-plus years. So we know what we're doing on that side. There's a significant mapping process that goes on, not to bore you with that, but it's -- our team is -- it's a strength of our team. So we would look to continue to be able to operate and add scale there. Those initiatives are moving through quite nicely already.
Okay. And can you help us think through the sort of performance profile, profiles of the newly organized verticals in terms of maybe revenue growth or gross profit contribution I think you guys have -- your business has grown, and you've introduced new sort of revenue streams over time. That would be helpful if you could just kind of walk through the mix there in terms of the growth profile.
Yes. So if we take it piece by piece, so loan repayments is our kind of legacy business within that. Auto is growing the fastest still. It's probably 20% to 25% growth, personal loans grew nicely in Q1. On a normalized basis, that probably grows kind of mid-teens. It's been a little bit down because of origination declines late last year, but we expect that to come back, particularly in the second half of this year and maybe even stronger going into 2022. And now we've added credit union strength through BillingTree within loan repayments. That's going to help facilitate faster growth there. And then mortgage is starting to become a more material part of the business in loan repayments. And then we also have Canada. And then B2B is probably still the fastest part of our business. If you combine all of the B2B assets, which are both merchant acquiring and electronic payables, that business is probably growing more like 25% to 30%. And then healthcare, which is a really large market, and we're now both in the consumer side of healthcare with BillingTree, which is patient-driven payments. And we've also -- we've been in the payable side of healthcare with Ventanex and CPS. That's been pretty depressed and hit hard by COVID. That business was actually probably around flat for BillingTree through 2020. And despite that, that BillingTree grew mid- to high teens. So we actually think that presents a pretty nice opportunity to come out of this with some pent-up demand and growth within healthcare going into the second half of this year and again, stronger in 2022. That demand will come back. I think that's just a matter of timing, within healthcare. And then other includes TriSource, which has been growing kind of mid-teens, I think that could actually accelerate as retail and restaurants, those types of industries open up, and then we're seeing more e-commerce there with our back-end processing ISO. So that's growing nicely, but I think has some room to accelerate. And then the energy business, which is a new vertical for us within BillingTree is kind of in kind of the teens growth. That's an example of a business where they own a software asset. Where we're trying to monetize payments within Fuel and Propane distribution. This is about a $30 billion addressable market, nice niche within energy. We actually own software, and there's very low level of monetization of the payments within the software platform. So it's our first example of really owning a software asset, and we're working on a monetization plan. And I think going forward, from an M&A perspective, it may open us up to software in addition to traditional payments businesses. All of that combined kind of gives us more confidence in that future outlook of kind of high teens, maybe even accelerating faster going into next year.
Yes. That's terrific. And within healthcare, you mentioned that you were both on the B2B and the consumer side. Which do you think is the bigger opportunity there in terms of kind of the growth runway?
I think they're both massive. I think the AP side may be larger just from an overall total payment volume. If you think about all of the different parts of healthcare and AP, we're addressing large hospital systems. That are still doing a lot of vendor payments via check, and we're trying to convert that to virtual card volume. And then there's the third-party administrator world, which is Ventanex, where we're facilitating payments between insurance companies and providers, electronically and virtual cards. So that's just a very large under-penetrated opportunity where a lot of the discussions we have are completely greenfield. It's not a competitive takeaway. It's more of just, hey, are you interested in taking -- or making electronic payments to suppliers. So I think that's probably the larger opportunity, but consumer-driven healthcare payments to hospitals, dental practices, urgent cares are growing very nicely. That's the BillingTree business is also a pretty attractive growth profile.
The bulk of the consumer side is still insurance driven, right? So that the bulk of your volume on that side is going to be more insurance than consumer payments, although it's growing, right? I mean, deductibles and everything is growing, getting bigger. So -- and we even -- we even see some lenders in that world, right? So we think we fit really nicely in a lot of different attributes there. Although we have not pre-scripted any cross-sell there, we know there's cross-sell there, both with our AP automation people because some of the same decision-makers exist inside of hospitals for each side of the transaction. So we do think there's definite opportunity there in the healthcare verticals for cross sell.
You guys do such a great job finding these kind of underserved verticals and really executing nicely. So it sounds like things are very much on track. That's nice to hear. John, you ended leverage, if I'm calculating all this correctly, a little less than 3x. At the end of the quarter with a little less leverage, which I think is well below your covenant. And you also have talked about the pipeline being active. We've touched on a few new potential TAM expanding business lines you've gotten into, how would you characterize the M&A pipeline, your strategy there at this point?
Yes, sure. So one of the things we talked about is the 2.9x leverage. That's on a post close basis end of April concept for BillingTree. So obviously, on an actual basis in the quarter, we've been much lower, right? That was I said, a really good I mean we're very, very comfortable with that rate. It gives us -- considering that the seller in this case really actually liked and wanted stock. We -- that gives us even more kind of fresh powder for seeking things out in the future. We -- as we've said, back in January, we raised our convertible offering back in January because we thought unique opportunities going to happen this year. This being one of the things that we knew we had a relationship with many different people in this space. I've been doing payments for a long time now. So we constantly are building relationships. We understand payments. We have been doing that for a long time. Sometimes, it feels like I understand too much, meaning like you know too much. But we think as we look at our pipeline, we see some opportunities out there. As the industry will continue to consolidate. We have some key attributes that we look for and some things that -- one of the things you probably don't see are the deals we pass on. You may see them trade, they just may not be something that we think is right for us. And so there's some things out there that we think line up well with what we do. They may be complementary to what we've we currently do. They may add some key 4 technology or they may also add a unique vertical niche that we like to operate in. And as you can tell, we like to be very specific. If you look at the key verticals we're serving, very large, underserved from a financial technology perspective and also from a payment's perspective, they're integrated, right? And so we think we add tremendous value where we are in those verticals. And all 3 of these large verticals, as we've added healthcare, we think there's a lot of runway there, plenty of room in the marketplace for many years to come. We're now serving a multitrillion dollar total addressable market. So we like where we are, just with what we have. We don't necessarily forecast acquisitions. But when the right asset is out there, so we've got a strong pipeline of deals, as you can see historically. We have our own team that does that. We have Jake -- you can see Jake is on our leads our team there, and we have a couple other people that are constantly working and looking at relationships as we drive our pipeline there. So very opportunistic opportunities as we look into this year, very actionable.
And how would you be willing to take up leverage? If you saw the right deal come along? Where are you comfortable kind of levering up to understanding that you guys can probably de-lever pretty quickly if you set your mind to it.
Yes. I mean, 4x has always been kind of a range that we've circled. If something was really strategic, maybe a little bit above that, but with the path to de-levering quickly, like you said, and kind of more of a normalized 3x to 3.5x longer term. So I think that's how we look at that. And we're at less than 3x today. So we do have room to move there. And if we're buying something with EBITDA that's growing, that could even support a larger deal. So -- and then in terms of specific areas we're looking, this continues to be interesting opportunities in payables, electronic payables in different sub verticals. Where we can find businesses that are really doing nicely with penetrating virtual card payments. Healthcare continues to be an interesting vertical. There's lots of other parts of healthcare that we're not in or we could add to where we are now with BillingTree. So those are some of the areas that we're looking in just generally and then trying to understand this payment monetization opportunity within energy and maybe using what we can learn there in terms of looking at software assets from an M&A perspective and other verticals if we prove out that modernization model.
Very interesting. And also on sort of, in general, this topic of kind of M&A, the cross-sell opportunities now you've acquired a handful of companies, more than a handful of companies since -- in the not-too-distant past. How do you rank order and kind of help us think through the kind of cross-sell opportunities. My team and I sat down with a piece of paper and tried to sort of start plotting some things out and the lines start crossing pretty quickly. So how do you -- what do you think are the most compelling opportunities? How do you kind of organize that and prioritize that internally?
We announced that we have AP integration now is in Sage. And so we've always thought that buying businesses in the AP side would allow us the opportunity to cross-sell to customers where we have merchant acquiring. So for example, now within Sage, we have customers where we were doing acquiring, and they were using the Sage's, their ERP system, and we were integrated to that, that we're now also doing their AP. And that's -- we're fully up and running with that. We announced that this morning and so that's just a perfect example of cross-sell where we're bringing AP to AR. And then within hospitals, like John touched on earlier, we now -- we're doing hospitals. We've been doing AP, electronic payments, particularly virtual card for our hospital systems through our CPS acquisition. We're now going to have customers through BillingTree who are customers who are doing patient payments within a hospital. And so we could take customers where we've been doing vendor payments and bring acquiring for patient payments, we can take customers where we've been doing acquiring for patient payments and we start doing their vendor payables. So hospitals is another kind of clear cross-sell example now that we own BillingTree. So those are 2 that I would highlight.
Okay. And I think you mentioned recently that you're adding some new senior sales hires, including one to the TriSource team. You touched on TriSource and how it's sort of -- in some ways, I look at it as kind of some glue on the back end that you can -- that sort of helps with connecting a lot of these dots. But talk about the expansion strategy for this part of your business and kind of how that's evolved over the past year or 2?
John, do you want to touch on that in terms of the sales here?
Yes. So on that side, on the sales side, we're really excited about the 3-key team members we have recruited them for some time, and we're excited about what they can do for us as we continue to add to each part of our business, specifically on the TriSource side. As I was talking, we bought that asset for scaling purposes and a lot of just owning our own infrastructure and ecosystem, having done this for a while. We understand the critical pieces of that you basically -- so you can control your own destiny and that side of it, how you do and ultimately control your data, control your overall client experience. So we continue to build that out technology-wise for scale because we think there's even better opportunities there. Ramsey, I think we're probably -- most people don't realize we're probably the one of the top independents left at clearing and settlement out there as the consolidation happened at the FIC 6, your options are very limited now. And most of the time, you have to do authorization and settlement through them and so maybe even in possibly in some type of shared den. So with the growth of e-commerce, the growth of some of the super ISOs out there, we're starting to be able to meet some of those needs in the marketplace. Our ability to create certain customizations and be nimble and give them great financial technology on clearing and settlement. They're on BIN and ICOs. That's all -- that's become a unique thing in the marketplace. We're just kind of at the right place there with really good technology. So we've grown there better than we expected for that particular part of the business. We did it for our own reasons. And so we -- with scale, we think we can continue to invest there, and there's going to be some really good opportunities, which is why we want to continue to develop that out. That part of the business has grown, as I was saying. So -- but we also think that if I'm looking at big picture as well, we are continuing to build our ecosystem to be a network to the networks. If there's any network that clears and settles funds, we want to be able to do that on behalf of the end consumer or the end business, right? I mean everything ultimately is some type of bill, whether you call it a bill or an invoice, card payment ultimately is some type of invoice you're paying. On the B2B side, there's some type of bill you're paying from a business to business. We want to be able to facilitate that transaction. And any kind of means you want to be able to do that as we're building out our total enterprise ecosystem. We want to build a great technology that interfaces with that and helps you reconcile back to that and you track and trace those payments. But we also have the ability and expertise to actually truly clear and settle those funds. If you're not a bank, you actually can't sell your own funds, right? So the financial technology world ultimately is hooking into the banking system in some way, whether it be through the Fed, whether through the card brands, at some point, there will be real-time networks. And obviously, there's all kind of flavors in the digital wallet already. So based on what flavor that is, we want to be able to help clear and settle that out into the future. So probably more than you asked for on that piece. But as we're looking out into the future, we're building our back-end system to be able to handle multiple types of ways to move money.
In terms of the hire specifically, one of the hires is to sell to ISOs for TriSource for back end processing. And then the others will be, like John said, really experienced sales folks with payments backgrounds that could be selling more of an enterprise customer across other verticals, for example, in auto, maybe going up market, talking to some of the captives or other large auto finance companies or maybe just that kind of enterprise level sales. So that was the goal there with bringing those folks on.
And that's a perfect seg-way to Captive Auto, which is another topic that investors are certainly interested in. Help us flesh out your value proposition in Captive Auto. When you -- the Mercedes win, which you can talk about in a second, was impressive. What are you bringing these, this customer that they can't get in the marketplace elsewhere. What's the meat of the value proposition that Repay brings to the table and Captive Auto?
Sure. It's really it's superior financial technology that helps them enhance their digital engagement with their customer. And that can come through many different channels, whether it be through web, tel, IVR, multiple different channels. So the whole concept of allowing them to interact with their customer. Many times when, I say, a lender type is interacting with their end borrower. Ultimately, that customer wants to make a payment. Many people might want to know what their balance is, but most of the time, they're going there because they actually want to make a payment. And so we believe we have this saying -- we enable our clients and customers to interact with their borrowers to pay anywhere or any way, any time. And when you can open up the whole world of real time, which is being demanded more and more by the consumer, that is a really high-quality experience across the board. And what we also say on the lending side is, if someone comes to pay you, you want to take a payment when they want to make a payment. You don't want to make them come back tomorrow. So we are really -- our technology really enhances that overall experience, gives them the ability to take that payment multiple different ways. As you heard me also say we're going to continue to expand as the wallet expands. So as some of those things expand, we're going to give them all those tools and technologies. Our goal is to give them superior financial technology that they just don't have internally. But we can give them the plug-and-play to the best cutting-edge technology that interacts with their digital engagement on their customer side and that's the solutions we can bring to the table. And we just obviously can bring superior clearing and settlement of those multiple different payment types.
These lenders are really good at lending. And they have proprietary software platforms that help with that. I just don't think that they've fully built out the payment technology part of it to accept payments and all the ways John just described. And I think that they're realizing that that's now critical because the consumer is demanding better technology in their payment experience, and that's the value we can bring in.
Okay. And maybe you could update us specifically on Mercedes progress with rollout there and that particular deal.
It's rolling out. It's been -- we've been with them now for a little over 1 year. And so it continues to roll out -- continues to grow and the consumer adoption is probably even faster than they anticipated, which goes back to our earlier point of they are trying to provide a better experience for their customer to interact with their own software platform in making a payment. And so they've seen, I think, better adoption statistics than they were prepared for, and we've had to work with them now on how to sort of manage that volume and manage the marketing campaigns and efforts to continue to have that happen in a profitable way. So that's where we are with them now. I think we're beyond sort of a testing pilot phase and more into the sort of ongoing recurring payment phase.
And we're about out of time here, but I'm going to sneak in 1 last one, which is talk about the pipeline in Captive Auto. That's another topic that folks are excited about. There's a lot of brands out there. What's the pipeline look like?
Yes. We've got a strong pipeline. As we've said before, the very large ones there. Some are contractually if they were taking electronic payments before there's some contracts that are moving around. We have a healthy pipeline there. Obviously, you saw some of the things we did on the sales side as well. We are aware of that piece as well. So there's some while's in the overall financial services world that are starting to bubble up as contracts move around as also the whole digital engagement world is starting to real -- making even financial institutions realize their need to service auto loans and various different things. So as we move throughout this next 12 to 18 months, you'll see some of those turn that some of those things are big, so it takes a little while. There's also some opportunities in that pipeline that do actually even take debit card. They actually may take it through some type of aggregator. So the concept of real-time is there. We see that in that world. We see that even in the mortgage world. There's going to be some unique opportunities over the next 18 to 24 months. Of course, we will do our part and winning our fair share when those do surface.
Sure. Gentlemen, thanks so much for joining me today. I think we're about out of time here, but John, Tim. Great to have you. And thanks for your insightful comments.
Thank you. Nice to be here. Bye-bye.
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