Repay Holdings Corporation (RPAY) Earnings Call Transcript

Hello, welcome to everybody joining us for this session of the Morgan Stanley Global Financials and Payments Conference. Really excited to have all of you joining us to chat with Repay. Before we get over to chatting with Tim and Jake from Repay, I do have an important disclosure to read. For any important disclosures, please see morganstanley.com/researchdisclosures. So with that, I'll introduce here Repay's CFO, Tim Murphy; as well as Jake Moore, the EVP of Corporate Development and Strategy and as well the winner of today's background competition. Congratulations, Jake. Hope, we will send a trophy out soon, but nice work.

So maybe just to kick off, and I should say before we get started, for those of you that are joining on the webcast, if you'd like to pose a question, you can do so via the portal. I'll be monitoring those as we go through the next 30 minutes or so. But maybe I'll start with kind of my line of questioning. And for those that maybe aren't completely familiar with Repay, what are the markets and customers you serve? And how do you think about the business' growth drivers?

Yes. Thank you, James. It's great to be here with everyone today. So we're a payment processing, payment technology company. We serve 3 large buckets of customers. Loan repayments is the first bucket. So we're processing payments for auto lenders, personal lenders, mortgage servicers, credit unions, and we're doing something similar in Canada. The next bucket, which is probably the largest is business-to-business payments, where we're doing both B2B merchant acquiring, where we're facilitating acceptance of cards in a business-to-business transaction. We're also allowing our customers to pay their vendors and their suppliers electronically with virtual cards. So we're on both the AR side of the business, which is merchant acquiring, and the AP side of the business, which is electronic payables. And now with our BillingTree acquisition, we're much larger in health care as well. And so we have a presence in the consumer payments driven part of health care with BillingTree. And then we own our own back end, which is called TriSource. We do a back-end clearing and settlement. And then we have some kind of smaller sub-verticals, for example, accounts receivable management. And then with BillingTree, we also picked up energy. And so these are really large attractive markets that represent about over $5.3 trillion market opportunity. We think they're underserved from a payment perspective. And what I mean by that is that the penetration rates of electronic payments and particularly card payments are relatively low given the size of the markets. And so to your question about future growth, we think that sets us up really nicely for a strong organic growth going forward. We think our organic growth can be in the high teens 20% for a sustained period, just given the size of these end markets. And then that growth was driven both by existing customer, new customers. The existing customer growth is probably the majority of organic growth, and that's supported by additional penetration of card payments and then new customer acquisition comes through our direct sales force. And we now have over 175 ISV relationships that provide distribution and an opportunity for new customer wins as well. So a majority of our organic growth is coming from existing, which we really like.

So Tim, I think that's a great overview. Can you help us deconstruct a little bit the different segments, like what portion of their revenues, at least the major ones represent including recent acquisition? And how you think about -- if you're able to deconstruct it this way, what the growth rates are for each of those segments, just how that algorithm kind of builds up to that mid to high teens revenue growth rate you're targeting?

Yes. So right now, post-BillingTree, about 50% of the business is loan repayments, 20% is B2B, 10% health care, 10% account receivable management and 10% is that other bucket I mentioned with TriSource and energy really being part of that. So that's how the business looks today post-BillingTree. And I'd say within loan repayments, probably the fastest-growing vertical is auto. Auto continues to be probably one of our fastest-growing businesses, probably 20% to 25% grower. It just got great macro drivers, and it's a very large market with a nice penetration story, and we have a lot of software integrations. And then probably the fastest-growing part of our business is B2B, particularly on the payable side. There are some of our businesses that are growing well north of 30%. I'd say, combined, that business is growing 25% to 30%. And then you've got the health care business, which is basically the BillingTree acquisition is kind of mid to high teens. Then you've got some other parts of our business that are growing kind of mid-teens like, for example, TriSource. So all of that is what builds up to that kind of high teens to 20% organic growth. And again, we like the fact that we now have a lot more scale in our business post-BillingTree, and a lot more diverse verticals would provide the runway and the opportunity for sustained kind of growth.

So talk us through, you're addressing a lot of different markets, Tim, and maybe you can take us through the sales process. Like how does Repay win customers and merchants? Who are they typically already working with? Is it another payment partner or somebody else? And how do you convince them to come over to Repay? I guess, I'm really trying to get into what are the key points of differentiation and improvement for your merchant partners that they realize when they move over to Repay?

Yes, it's a good question. I mean, so we're going to market in a very integrated way. And so we -- one of the reasons we like BillingTree was because it also is very integrated. And so with access to over 175 software partners where when we win business, a lot of times it's because we're already integrated with the merchant, and that's important to them. And we're oftentimes not displacing a competitor, we're displacing a different payment type. So we're displacing cash, check or ACH, moving to card, and that's a big driver of our organic growth. And because these verticals are so large and there's tailwinds away from paper to electronic and particularly card, we think that's sustainable. And when we are winning, we're winning against a competitor. We're winning on technology. We're winning on the integration. We're winning on the omnichannel approach where we can offer the ability to accept payments not only over the phone and the web but also IVR, mobile and text. And we're winning with the fact that our integrations are very efficient and seamless and provide a much better experience for the customer when that integrated transaction happens. And that's how we go to market and that's how we win business. But again, I'd like to reiterate that oftentimes, we're competing against other payment forms, which, again, is why we've chosen these end markets.

So you mentioned loan repayment and within loan repayment, auto being kind of the fastest growth segment. What portion of that loaned bucket is auto today?

It's the majority of it. So I'd say, it's about -- of the 50%, about 30% is auto and growing. And so -- go ahead.

Yes, yes. No, I don't want to cut you off there. Go ahead, Tim.

Yes. So it's the biggest part of it, and it's growing because we're adding sales resources there and because we're winning your software relationships. And it's just a very large market, so that's why we're really focused on it.

So in the current environment, like just trying to get a handle and this is a common question for anybody with exposure to auto, whether you're a component supplier or you're providing part of the financing or even in your case, part of the payment -- repayment of auto loans. How is the current environment of high used car prices, low new car inventory, relatively high cash availability from stimulus impacting your business? And I guess, maybe more importantly, how are you thinking about those elements if and when they [ may return? ]

Yes. So we focus probably more on used car sales. And so the fact that used car sales are stronger is good for us. And as long as the higher prices don't result in fewer sales, higher price results in a larger loan amount, a larger loan amount results in more repayment volume for us. So the current kind of macro setup, I think, has been very strong and continues to be. But even if those prices were to come down a bit, as long as sales remain strong and more leaning towards used cars, I think that's a fine setup for us going forward. Even pre-COVID, our auto business was growing very nicely. I think there's been a bit of a tailwind and a push forward as a result of COVID and some of the macro factors you just mentioned, but I think even if that reverts back, it still reverts back to a very nice place.

Yes. No, that makes sense. And I guess, more generally, and once again, this is something we ask of all the payment companies that we cover. But -- within your business, what have you perceived to be the ebb and flow of impact from stimulus disbursements, et cetera, if any?

Yes. I mean when stimulus disbursements go out, we experienced an increase in payment volume almost immediately. And that's actually a good thing because it shows that consumers place a really high priority on paying back their loans, auto loans, personal loans, mortgages. And so we think that's really good that we've proven that, that priority does, in fact, exist. But then it may result in slightly reduced originations for a period of time as consumers have paid off those loans and have cash. It may cause originations to decline for a brief period. But then we see those come back. And as originations come back, that leads to more repayment volume for us. So there certainly has been an ebb and flow related to loan repayments, particularly personal loan repayments, but we're starting to see originations pick up in Q2 as economic activity picks up and consumer demand happens and travel happens back to school in the fall. All of those are drivers of personal loan demand. So we feel good about that. And then, in health care, in a health care part of the business, elective procedures were certainly down during COVID. That's not related to stimulus, just COVID in general. And we think there's a recovery play for us in health care coming out of this, which sets us up really well going into next year.

So back on the auto segment, and then we can touch on health care and some of the other strategic areas. But one of the things that was an interesting phenomenon that you highlighted back in the early days of COVID when things were really locked down, you had merchants that -- or auto dealers that were removing the ability to pay in cash because they didn't want to see people face-to-face and they also didn't want to be handling the cash for fear of what that could mean. You saw a lot of people shift to paying with their debit cards or some sort of other account, et cetera. As the world starts to normalize, are you seeing that behavior stick? Or is there some reversion back to using cash? And what does that look like? And is that presenting any type of headwind at all?

No. In fact, we think the digital engagement is continuing. Auto dealers, in general, are looking for ways to engage more digitally with their consumer. I think that just was pushed forward and pulled forward significantly by COVID, but that's something that we're really trying to figure out prior to COVID. And I think they've now really placed more of a focus on that, and they realized that payments is a big part of that. One of the ways they engage with their consumer frequently and regularly is through the payment experience. So I think they recognize they need better payment technology to further enhance that digital engagement. So we don't see that going backward, we see that moving forward. And we will have that conversation with a lot of different auto customers.

So I want to talk about strategic initiatives and bring Jake into the conversation. Acquisitions seem to be a key part of value creation for Repay. And let's start first with maybe the BillingTree acquisition. What's attractive about that from a strategic standpoint? You already mentioned what it does from a business composition of Repay, but top line at least, but what about other aspects of profitability? Where do you see potential synergies, et cetera? Just kind of break down that acquisition, how it was evaluated and came to be.

Sure. Absolutely. Well, it's very, very rare that we find an acquisition that checks all of our boxes or at least the vast, vast majority. BillingTree was that opportunity. And one of the biggest reasons is scale, which is something that we've talked about early on. It opened up some new markets for us. But specifically, it allowed us to go much, much deeper into health care, which is an area that we've spent a lot of time on. We've invested in it from an inorganic perspective over the last 12 to 18 months, and we're going to continue to do the same. But this allowed us that opportunity to kind of make a very big step function move into the space. And similarly, Credit Union, which is an area that we've been serving for quite some time. They also have quite a bit of exposure within Credit Union. So the strategic overlap there made a ton of sense. In terms of the growth profile, their business grows kind of in the mid to high teens rate across most metrics just as kind of our existing Repay business prior to BillingTree does. So to be able to acquire an asset of that size and have similar growth dynamics, we thought was an extremely attractive almost no-brain decision or no-brainer decision. But -- and then from a margin profile standpoint, they actually have higher margins than we do slightly even before synergy realization. So once we layer that on, we think we can kind of really add some value in that really across gross and EBITDA margins. And we've talked about synergies publicly and hitting a $5 million annualized target. And we think about 30% of those are going to come from processing cost improvements, just from taking BillingTree's volume and moving it over to our platform. And then the balance is personnel rationalization.

So Jake, you mentioned like boxes, which implies that you have a checklist of things that you're trying to fill when you look at potential acquisitions, et cetera. Can you kind of run through like what's important to you and to the team? And then how likely you are to vary from those -- that checklist and criteria and other cases and give where you did that and why? Just trying to get into the mindset that you're carrying as you're evaluating potential acquisitions.