Repay Holdings Corporation (RPAY) Earnings Call Transcript

Okay. Welcome, everyone, to the 26th Annual Technology Conference here in Arizona. We are very fortunate to have with us the team from Repay. We both -- we have both John Morris, the CEO; and Tim Murphy, the CFO. John and Tim have been loyal attendees of our conference for years now, and it's a pleasure to have you both here back in Arizona.

Thanks for having us.

Glad to be here. Thank you.

All right. Excellent. We have plenty of questions to get through, and I doubt we'll make it through all of them. But why don't we start with -- I think you have a great slide in your investor deck that really, really summarizes this quite well for investors that are looking at super important topic these days, which is business mix. Maybe just talk about the volume mix and that pie chart that we're referring to.

Sure. So I'll start out, and Tim can add some to that as well. So if you look at our overall mix, especially specifically, so you break it into 3 buckets: consumer payments, business payments and software and services. Consumer payments makes up about 70% of our business. But specifically, I want to call out about 50% -- not 50% of 70%, but 50% of the business is loan repayments. And of that 50%, say 20% of our business is personal, 20% of it is auto lenders and about 5% of that is mortgage and then about 5% is credit unions in kind of Canada. That makes up the 50% loan repayments. And then the other consumer, about 10% of that is ARM, accounts receivable management. That's on the consumer side. That would be somewhat like collections or receivables, collections, et cetera. And then about 10% is in the health care space, maybe revenue cycle management. That's the total. That involves a consumer invoice being paid or repaid, et cetera. What we love about that is the recurring nature of that. What we love about that is generally, it's nondiscretionary. And then 20% of our business is business payments, and that would be AR and AP split about 50-50. And then we see lots of runway in that space. And then about 10% is software and services, and that's really our clearing and settlement engine and a couple of software things we have on that side of it. So that makes up our -- kind of what we see our business mix.

That's perfect, John. I'm glad that you dug into the 50% that is broadly characterized as loan repayments and talked about the 20% and 20% in there, which is the personal and the auto. Maybe just touch on the differing durations of those 2 types of loans.

Sure. Yes. So personal would be much shorter duration. Those loans can be anywhere from 2 to 24 months on average. And so in that space, we would see activity around originations and repayment volumes within a quarter or 2, whereas auto is a much longer average durations have now been pushed out to probably 6 or 7 years. And then if we touch on mortgage even longer to 15-year plus average duration, sometimes up to 30 years. So like John said, these are really highly recurring long-duration revenue streams. And even in personal, they can be up to 2 years.

I had a couple of things. Some questions that kind of came up in some of our one-on-ones to highlight is what the market -- what was the market thinking when people will ask us that piece. And specifically, it's one we kind of highlight that the personal piece is only 20%. It's not 70% of our business. It's only the 20% of our business, which can have some duration, things that we obviously have already talked about third quarter, and we still see positive trends that we've seen. We gave some outlook on -- or we gave some thoughts around scenarios of the macro world, et cetera. But the 1 thing we do see is as a return of demand for credit, and we think that's a positive thing overall across most of our consumer lending space.

Right. Actually, before we -- so I absolutely want to move to those macro scenarios in a second. But since you hit on that, John, if you don't mind, why don't we just touch on that? So oftentimes, when we think about, okay, in a downturn, personal loan originations could decrease meaningfully, right? But there are offsets, right? There's traditional bank to nontraditional non-bank lenders. Maybe just talk about some of those offsets. Before we get to the scenarios, let's tackle that separately.

Sure. Yes. So there's the drifting down concept to your point. If you were getting the bank loans, you may drift down into more of a non-bank lender and an installment loan, we can pick up from that. In an environment where there are more delinquencies, we're seeing this today, our sales activity picks up. We see it happening because lenders are very focused on getting paid back. And so to get paid back, they need better payment tools and technology which we provide to them, meaning they want to be able to engage with their customer via IVR, via mobile, via text, in addition to just the traditional web and phone payments. And so we're seeing a lot of sales activity where we think we can help them stabilize or bring down delinquencies. So those are 2 clear offsets to potential increase in delinquencies.

Perfect. Tim, I thought it was worth taking a quick stop on that, a little off script if you don't mind. All right. Let's get back to the script. So John, you alluded to this, and I think this is important. Investors have this question, which is, all right, in varying economic scenarios, what are some potential ranges or kind of past that, the business could follow in terms of growth over the coming years.

Yes. So we don't provide -- we're not providing 2023 guidance, but we did think it was important to give investors a range of outcomes, like you said, in different scenarios. So we would think in more of a mild recession, we probably grow low to mid-teens; more of a moderate recession, it's high single digits to low double digits; and then if it's a more severe recession, we'd probably still grow mid to high single digits. So that's the range of outcomes we would see in different economic scenarios. And I think we wanted to make sure that investors understood we had visibility into that because our business is highly recurring because a lot of the growth comes from existing customers, and we didn't really see a scenario where we went negative, for example.

All right. And I think, first of all, Tim, thank you for that range of outcomes. I think people appreciate that. And also, we can look back to COVID. And maybe you could just recap, I mean, the business also never went negative during COVID, right, which there was -- there were some severe impacts there. Maybe just talk about how the growth trended through that period. And what's the lowest it ever went?

Yes. That's a good point. I mean when COVID first hit, a lot of our peers, unfortunately, because of the end markets they serve, were down 40% or 50% within a matter of weeks. If you're serving international, specifically Europe, if you're serving travel, restaurants, retail, all of that got hit pretty hard. I think our lowest growth rate was maybe 4% or 5%. So again, we still grew low single digits, mid-single digits, which is that leads you to that more severe economic scenario that I pointed to earlier. So that lines up with that to your point. And so that shows the variability of our model and the visibility that we have. And what was proven during COVID was that these payments truly are nondiscretionary. When stimulus went out, one of the first things that consumers did was make loan payments. So that proved to us that these payments are not discretionary, which is something that I think in the medium term, there could be impact like I talked about. But longer term, that's a very good thing.

If you take that view as well, remember, no one inside that first 30 days, that April, no one exactly knew what June was going to be like, if you recall. But what we saw were people making loan repayments, and they didn't know what June was going to be like either. And we saw them making those payments, which is the positive part of that recurring nature of that. We think that's -- so we -- we've also seen historically going back into the beginning part of Repay, there is a positive part of -- there's a time over the last 1.5 years where the demand for credit was low. We've seen that return. Remember, we're not a lender, but we've seen that demand for credit return. I think that's a positive overall trend for our clients, which ultimately we've always seen. When there's a demand for credit, it always finds a home. It can be on various different areas of the spectrum, but it will find a home eventually that generally turns into some type of installment obligation, and we help people get paid back on those obligations.

Well said, John. Point well taken that during COVID with stimulus checks went out, some of the demand for credit for your customers who are the lenders, not Repay, who is helping just on the repayment of those loans on behalf of your customers which are the lenders, that was certainly a factor. And then, Tim, to your point, I would just say, I think when we talk about that severe scenario, I think you're right, especially when we think about the TriSource business which was meaningfully impacted. Now it's not a huge part of your business, but it's also some pretty severe impacts for a period of time as well during the onset of COVID.

Yes, it was. The part that was exposed more to retail, but the part that does the processing so that the back-end processing for 30 or so customers, stayed pretty strong. And actually, that business has grown very nicely as we've added new customers, so you're right.

A component of TriSource.

That's a short-term impact, yes.

Absolutely. Okay. Great. All right. Let's move on to another very topical piece of the discussion of Repay, which is competition in some of the loan -- the broader loan repayment verticals. So of course, we cover FIS, we cover Fiserv, we cover GPN. We've talked about them with you in the past. And you've mentioned that you don't really see them participating in your vertical so much from time to time maybe, but it's not the norm. It's more the exception. Maybe just talk about why is that? Why are they not entering into these relatively healthy growth markets that have supported your relatively strong organic growth?

Yes. So let me back up for a little bit, so been in payments for a long time. And when we first started Repay, we kind of had to go where they're not, to go out to normal retail. And we were a start-up, right? And so we did go where they were not. And the areas that we chose are still true, and we actually have seen it lived out, but we see it even more. So consumer payments, we -- the loan repayment vertical is a real underserved market that historically was cash and check when we first started and then became a little bit of ACH. And now we've seen that transformation to more real time. And we've always been integrated embedded payments. That is where we started. We literally created tender types inside of loan systems as a way to add that additional payment methodology to. Same thing we see in the business payment world, where we think that digital transformation is absolutely happening, where I think it's the last great frontier of payables. The payable side of the world, the biggest part of payables, was payroll and payroll is a normal outsourced function in payables today, very popular, easily done. The last part of the payables are all the other payables, and we're helping digitize and transform that, giving that, that single pane of glass. So we see those pieces happening in.

Yes. I'll add to that, that these are debit-only payments. And I think -- so I think when the big guys early on when we were getting into the market, there wasn't a lot of card volume, and they were probably focused a lot more on credit card payments. And so I think they just overlooked these verticals for those reasons. They found there are other niches where they're playing, and then we've been able to develop through relationships with the key software providers within these end markets. And as you know, when you have those relationships, that's a real barrier to entry to others coming in. So not to say the bigger guys couldn't come in, but organically, it would be difficult for them to do without the software relationships.

A current day scenario on the consumer side might be in the mortgage world. I would bet no one in this room can make their mortgage payment with a debit card. It's because it's not available. It's not made available. Our goal and doing some things with Black Knight and some of the other service -- software service providers is, we know, we've seen this play out. When you make real-time payments available, consumers will adopt. We, as consumers, already want to do that. So that's a perfect example. So the larger processors wouldn't be there because in their view, there's no volume there. But that integrated technology piece is also very critical. Without those integrations, it's difficult to actually service that industry.

The follow up to that -- part of the script here, but I guess, partially off script a little bit, too, but we were going to say, who are the competitors that you actually do see. But I'm going to change the question a little bit. When you're integrated into a software company, right, sometimes they're just integrated with Repay, right? And you have access to their underlying customers, lenders, et cetera, right? But sometimes, there's more than 1 player that's integrated to that software company. So just maybe just talk about how often that is and when there is a second or a third integration, who is it?

Sure. I'll start. So we have about 236-ish of those. Those are constantly adding. Again, we started a long time ago with one, so it's kind of neat to see that. And those make up thousands of potential end user businesses that may be lending or they may be on the B2B side. Majority of those are on the consumers' payment side of that. I think about 85% or so are on the business payment side. But specifically, if we -- so most of the time, there's no exclusivity if you think about it because ERP systems, they want to be generic. We have been foundational in a lot of those. But maybe on the B2B side, it wouldn't necessarily be the case. If there is more than one, they're not going to be -- usually, there are not lots of different options just because specifically or maybe on the consumer payment side, that industry is less of an API-first industry. So they really have to code to your software, which is really kind of acts as a little bit of a barrier to entry, and we've been there for a long time. On the B2B side, there are more API-first options there, but ultimately gets around if you think on the B2B side, what makes us even more competitive there is we can do the AR and the AP. Most can do just kind of one or the other. And remember, we serve the medium enterprise level on that side of it. Now the very largest scenarios generally own their own core systems, so those in themselves would be unique integrations and we kind of have that technology-first integration. And like the large win we just said we had in the third quarter, it chose us because of our technology across the board. They chose us because of our omnichannel approach. Simple things that you would think were simple, our ability to have a universal token across all payment channels and all payment modalities is very unique. It seems simple, but it's kind of complex when you start coming in and out of different software platforms and different modalities.

And to add on to that on the competition point, in the loan repayment verticals, if we see another player, we'd likely see ACI or Paymentus. And then those are -- we see them usually in the larger customer situations across personal auto and sometimes in mortgage. And on the B2B side, they are -- we would likely see Paya, we see Worldpay. And then on the AP side, we're serving more of the medium to enterprise size customer, not SMBs, so we would see Avid, we would CSI. And of course, across all these verticals, our primary competition is typically cash or paper forms of payment like checks in B2B world, for example.

Tim, that was a great recap. Thank you for going across all those competitors across the various subsegments. And thank you, John, as well. All right. We're going to go to another topic, which is one of your fastest-growing areas, and a big interest of investors and people applaud the increasing mix towards B2B, which you've been very successful with over the past few years. When we first met each other, the mix was de minimis and now it's meaningful. Let's talk about this B2B business. So also, John, you sort of alluded to this just in your last -- you mentioned the 85 ISV integrations within B2B. You're now close to roughly 4,000 clients. Maybe talk a little bit about some of those end markets or verticals where maybe you're most exposed. And then I want to hit on RFPs or lack thereof because I think this is something investors might not appreciate that it's not always a competitive RFP. Sometimes, it's -- you're discussing with them, and you're going up against the status quo, and that's it.

Right. Yes. I mean I think on the AR side, it's a little bit more competitive. It's -- like I said, we see Paya, Worldpay. It's maybe more traditional merchant acquiring, but in a business-to-business environment. And the typical customer would be a manufacturer, wholesaler, distributor probably medium to enterprise. And yes, you get -- we do -- we have integrations with Sage or Acumatica. We then are able to go into Sage or Acumatica's user base and have discussions directly with customers to win business, and there's typically not RFPs. And similarly, on the AP side, we're going into situations where they've never taken electronic payments. So we're talking to clients that have only used checks, and they've never really understood what the electronic payment capabilities are. They don't know what virtual cards are. So we're certainly not an RFP there. Again, we're competing against checks. Where we would see RFPs in the AP side is with hospitals. Hospitals will often do RFPs. And in those RFPs, we see the large treasury management solutions. And so we're competing against those names within RFPs, and we win and have recently won a lot of business away from them, which speaks to our product, our -- quality of our product and solution, total pay solution. But you're right, there's -- very rarely, there are RFPs and even in this large customer win recently, it wasn't -- it didn't go broad and put out a request 10 bids, and it was a long lengthy process. It's typically more direct to the customer.

So it's having the right technology in this single pane of glass, say, on the B2B side, specifically, say, on the AP side, where, let's just say, it's a treasury management solution. They actually -- again, a bank can process most things, but they may not have all of those things. And if they do have those things, they tell you to go to 3 different places for those things and self-serve yourself. They may say, hey, log into the treasury management system and senior ACH is over here, log in over here, and you can possibly send something this way or...