Repay Holdings Corporation (RPAY) Earnings Call Transcript

Hey, everybody. Good morning. Thanks for joining us this morning for REPAY. I'm James Faucette, I run fintech research at Morgan Stanley. Very pleased to have REPAY with us today. Directly to my left is Tim Murphy, CFO. And to his left is Jake Moore, Head of Corporate Development and Strategy. So before we get started, just a quick disclosure from us. We have a set of disclosures that should be read for those that are watching on the webcast at morganstanley.com/researchdisclosures. If you have any questions about those, you can reach out to your Morgan Stanley representatives. So Tim, Jake, thanks a lot for joining us today. Appreciate you helping kick off the TMT conference or be part of the TMT conference's return. It's been a couple of years since we've been in person. So I really appreciate you being here in person as well.

One of the things that I wanted to start with for you is that REPAY has been very active doing acquisitions recently. And that's a little bit atypical in the space. And we hear a lot of people talk about, oh, valuations are hard, et cetera. But -- with the acquisitions, maybe, Tim, can you remind us at a high level of where the business is now? And in particular, how you're thinking about organic growth and margin expansion on kind of a multiyear basis? Like what's the algorithm or growth trajectory we should be expecting as investors?

Yes. Yes. Thanks for having us. And I appreciate the question. So with all these acquisitions today, where the business sits, it's about 70% of what we would consider to be consumer-driven payments. And within that bucket would be things like auto loans, mortgages, health care, anything that the payment is driven by the consumer. So that's about 70% of the business. B2B, so business payments is about 20% of our business and growing and within B2B, we do both AR and AP. So we do acceptance of payments between businesses, and we also do outbound payables primarily via virtual card on behalf of our customers to their vendors and suppliers. And then the remaining 10% of the business is really -- we own our own back-end what we call REPAY clearing and settlement, where we do clearing and settlement through Visa and Mastercard, the banking system and back to the merchants. And so about 70% consumer, 20% business and 10% other, and we think the consumer business is probably growing around high teens organically. The business -- payments business is probably growing north of 30%, which is 1 of the reasons we love that business. And then I'd say the other -- the back-end settlement is growing probably in the low teens. So that kind of leads to a combined overall growth rate for 2022, we said organically, of 20%. I think longer term, we could stay in the high teens to 20%. We're in the mid-40s from an adjusted EBITDA margin perspective. We see ourselves being able to stay in that range. From a gross margin perspective, we're around 75%. We still have a lot of opportunities, we think, to reduce processing costs as we grow volume, which allows for a slight margin expansion on the gross profit side. But I think we would probably plow that back into continued growth and keep our adjusted EBITDA margins kind of in the mid-40s. So medium term, high teens to 20% organic growth, 75% or so gross profit margin and mid-40s adjusted EBITDA margins.

So if that's kind of the growth and overall P&L profile of what you expect for at least the medium term, as you said, what are the verticals that you're really kind of exposed to and are targeting both on the consumer side as well as the B2B side?

So within consumer, our largest vertical is auto loans, which that business has been doing really well and continues to do well. It's where the auto lender needs to accept payments from the borrower. Long-duration loans can be as much as 72 months. Those durations have been increasing recently, which is good for us. It leads to more repayment volume. So that's the biggest part of the consumer business. We're also in mortgage, we are in personal loans, we're in credit unions, and we're in health care. Those are the main verticals within consumer. And I think the fastest growing of those is auto, and I think we really also like where we are in mortgage. And like I said, in B2B, it's both AR and AP. Within AP, that business is becoming more verticalized. So we're participating in AP in auto dealerships, property management, field services, hospitals, large education systems where there's centralized purchasing, where then we can make those payments electronic out to the vendors and suppliers. And we're up to 110,000 suppliers in our supplier network on the AP side and we want to keep that growing. That's 1 of the ways we continue to facilitate growth in that business as well. So those are the kind of -- all the different verticals we serve, but some of the highlights as well.

So one of the questions that we get a lot, given that you guys are helping with repayment of auto loans and mortgage in some cases, et cetera. What's your sense of your sensitivities within the business in terms of credit risk and how the credit cycle affects REPAY from a fundamental perspective? Can you kind of walk us through how you think about, all right, if delinquencies are rising in auto and maybe the repayment -- like the delinquencies on those repayments is increasing, how does that affect your business?

Yes. So as I mentioned, we have become more diversified into other areas like B2B. But within loan within loan repayments, in an environment of increasing delinquencies, our product becomes much more valuable.

Okay.

And we have very little exposure to a cycle. So we don't consider ourselves cyclical, and we actually consider ourselves countercyclical in a sense that as delinquencies rise, people are focused on getting repaid. They're focused on decreasing delinquencies and our solutions and technology allow them to get paid faster. So we would see adoption and usage increase, which will increase volume for us. And so we think that we actually have a nice balance against any sort of cycle, even though there may be a misperception that because we have exposure to loan repayments, we're exposed to cycles, we actually think it's the opposite. We think we're in a really good spot right now where we could see adoption and usage increase as our lenders need to use our payment tools to get paid faster.

And as we've started to see consumer credit behavior normalize and delinquencies kind of return to more normalized levels and where they were prepandemic, are you actually seeing evidence of that play itself out? Or is it still on the margin it's hard to detect?

No, we are. We're seeing that because we have lenders coming to us saying, we've been taking payments with you over the phone and the web. We now want to use your mobile technology, your text-to-pay technology, your IVR, because we need to get paid faster. We need to basically control delinquencies. And we provide a lot of value to them because not only do they get paid faster, but they get those funds, which they can relend and it increases the velocity of lending, so it helps them on both sides of the equation. So we are seeing evidence of that. Generally speaking, our lenders are all talking about going completely digital. They're talking about moving away from paper and that really plays in our favor.

So a lot of times when lenders move to digital, they want to rely pretty heavily on ACH, et cetera, either non-card or -- non-card related or payment repayment processes, I guess. As they basically don't want to use cards, they want to avoid the fees associated with debit and run ACH. How does that impact you in the mix? And what's that decision process usually look like?

So card -- our ACH is not real time and card is.

Right.

Hence, our name real-time electronic payments. And so we've always tended to focus on card because in times where there may be credit normalization and rising delinquencies, they need to get paid faster. And ACH may take 2 or 3 days to clear through the Fed system. Typically, these payments are being made before the weekends. So if an ACH is paid on Friday, it might not clear until Tuesday. And a real problem for lenders is when it doesn't clear.

Right.

When it returns, and they thought they got paid, that's a reconciliation disaster for them.

Right. Right. Right.

We allow them to know within a matter of seconds whether the funds were good or not. If the funds are good, they have them and they can relend them and if the funds are not good, they can pick up the phone and start collecting on them.

Right.

So that becomes critically important, particularly in this type of environment that you're describing. And so they'll pay for that. And we've seen customers go from 5% or 10% of their payments on card to 50-plus percent of their payments on card. And they are doing the ROI math on their side, understanding the cost is higher, but it's just leading to a much better result for their business.

Interesting, interesting. Got it. I think that's kind of an interesting point is that a lot of times people say, "Hey, we need -- we have to do real-time payments. We have to do these other things." But the existing carded system is actually really effective at identifying, securing and making sure that you can't double-spend or the funds are there, et cetera.

Particularly for recurring payments that are automatically recurring for a long duration, like I said, I mean our auto loan context, it could be 72 months. It's real time. It's very effective. It's pulled out of the account. I think something like real-time payments may be more useful in a situation where you're pushing a payment. That might be really -- a good use case there could be B2B or oftentimes, the invoice amounts are different. You don't want it to be automatic. You want to look at as a button to say, I want to push the button to make this payment.

Right, right. Exactly. So on the B2B side, like how did you get into that business firstly? Because that's not something you typically see from companies like yourselves? And then what's the go-to market? How do you attract customers, get them signed up? And what is that type of ROI evaluation that the customers are doing?

Yes, I can start, and then Jake can jump in too. But we entered the space through acquisition. We bought a business called APS in late 2009, which was in the acceptance side of B2B, so the AR side of B2B payments. We've since moved into the AP side of B2B payments, where we're allowing our customers to pay their vendors with virtual cards. And so in both cases, we're going to market in an integrated fashion. So we're integrating with the software providers in the space and working through them to process payments and integrate them through that software system. On the AR side, a good example would be, if a SMB and a distributor or a manufacturer is using an ERP like Sage or Acumatica, we'll be integrated with Sage and Acumatica and allow them to accept the card payment and reconcile it directly through Sage or Acumatica, and that's how we go to market. We go to market through the ERPs on the AR side. Similarly, on the AP side, this is where we're allowing our customer to pay their vendor. We're integrated. So we have CDK, for example, in the auto dealer space where we're integrated and we'll allow customers to make payments to their vendors and all of that becomes reconciled back through CDK. So it's a very similar value proposition. The difference on the AP side is we need to go out and build a supplier network that will accept the virtual card, we need to enable them to accept the virtual card. And then our customer actually gets a rebate.

Right.

And so our customers' AP department just became completely optimized and efficient and electronic and digital and they get a rebate. So it's a high value for the customer. And then the vendor accepting the virtual card likes it because they know they get paid right away, and they're cutting down that time of payables. And so it's a lot of value -- there's a lot of value in both sides of that transaction on the AP side. So it's generally the same across all of our different verticals of consumer and business. We're going to market in an integrated way through software providers, providing that integrated technology and reconciliation. That's the stuff that these customers really like.

Yes. Anything you want to add, Jake, or...

I would just kind of -- Tim did a very good job of covering it. But it's -- the go-to-market is identical in the business side as it is on the consumer side. It's a two-pronged approach of direct sales, our sales force going out directly to customers and then pulling through the integrations that we're already working with.

Got it. Got it. Within your verticals and your business exposures, where do you tend to see the most competition? And a lot of -- one of the things that we're very cognizant of is just the tremendous amount of capital that's been raised by fintechs generally in kind of trying to attack lots of different parts of the ecosystem and potential end markets. So are you running into new entrants? Or where do you tend to see competition primarily and from whom?

I mean, I think that the primary form of competition is older payment methods. I mean it's cash and check across both our consumer business and our business payments division. But the influx of capital that you mentioned is, I think investors are seeing what we see and what we love about the business and that there's a huge secular trend that's been happening for many years and has plenty of runway on it, and they're wanting to put dollars behind that and willing to put dollars behind companies like ours that are attacking that. But specifically on the competition front, within our consumer payments kind of business unit, as we think about it, and the underlying verticals, the competition set varies. It's Paymentus, ACI and some mortgage processors. And then within the business payments division, it's companies like AvidXchange and Nvoicepay are the primary competitors.

Got it. Got it. With that capital coming in, I mean, you say you've seen -- you see primarily competition from older technologies or older forms of payment. I mean, are you starting to see that change at all or not really?

Not really. I mean it's a grand big world out there, and we focus on kind of a narrow lens. And our competition has remained relatively unchanged.

But I would say an example of a smaller competitor would be Payix, and we acquired them. We acquired them in January. And so there are -- it's typically ACI, Paymentus, the bigger guys that Jake mentioned in the consumer side. But there are occasionally smaller players, and they find -- what happens typically is they'll be deeply integrated with a certain software provider within a vertical, like Payix was within auto. We have not -- we were not able to penetrate that particular software provider. So we said, well, this might make sense from an acquisition standpoint, and that is one of the primary drivers behind that deal. And then they happen to also have some really nice buy now, pay later customers, which is an area that we've been focused on. And so that's something that attracted us to them as well. So there are, from time to time, smaller competitors, and we could use -- potentially use M&A as a way to...

Sure. So can you expand on Payix. So it sounds like you're aware of them. They're -- they had an integration with a particular software vendor that you couldn't extract them from and they've been doing some other things. But maybe you can elaborate a little bit the rationale, how big were they or how important was it to get that software vendor? How does that change the landscape? And kind of walk through other things like cross-sell opportunity and integration and synergy potential.

Sure. I mean the rationale for the Payix acquisition was, it was a very, very quickly growing business. They had phenomenal integrations within a few integrations that were additive to our integration library. So there's no cannibalization effect there. They had particular product differentiators in terms of having a significant tilt towards mobile capabilities as well as some real-time integrations that were specifically with the ones that they had, and we didn't that were a little bit -- they had a better presence there. And so when we think about that holistically, we have a quickly growing business with great products and great integrations in an area that we know extremely well. And our ability to take some of those products and push them to other parts of our business is an obvious revenue synergy. But then also, we can just bring some professionalization and go-to-market strengths that they didn't necessarily have.

Eventually, we can bring them on to our back end and reduce costs. We're using another third-party provider. So...

And how does that work? Like what's that -- like what needs to be done from a lifting perspective, the time, what catalyzes that if it's kind of an eventual idea and end target for you?

Yes. So as a reminder, we own our own back-end processing system, like I said. And so we've done this with APS. We've converted APS off of another back end. We're in the process of doing it with BillingTree as we speak. And then we will work on it with Payix. Some of it is just around contractual obligations that they have with their existing processor. Some of it is based on portability of the merchant contracts. All those things factor into how quickly you can do it and how easily it is done. But once it's done, we effectively are cutting out that third-party processing cost and doing the processing ourselves. So from an M&A perspective, one of the reasons we bought this back end in the first place was to give us that synergy opportunity. Again, we've effectively done it with APS we're doing with BillingTree and probably at some point next year, we would do with Payix.

And the lift for realizing those synergies varies by acquisition. But if we're going to underwrite to it and plan on it, it's going to be within a year. Yes.