Repay Holdings Corporation (RPAY) Earnings Call Transcript

Good morning, everybody. Thanks for joining us this morning. All right, kicking off the third day of the Morgan Stanley TMT conference here from San Francisco, very pleased this morning to have Tim Murphy, CFO of Repay Holdings. Before we get started with Tim and chatting about Repay, I do have a disclosure to read. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So Tim, thank you very much for joining us today. I'm excited to be able to chat with you about Repay. I know you guys have recently provided some incremental disclosures around your business, et cetera, so maybe we can start there.

Maybe provide a high-level overview of your business, for those investors that are a little less familiar. And as an example, can we talk about vertical mix, go-to-market, et cetera? And along with that, I guess the point is we saw last week with earnings you broke out your segment reporting by Consumer and Business Payments, so can you talk about how you view those within the overall context of the business?

Absolutely. Thanks for having me. Good to be here. So Repay is an integrated payment technology provider. We -- our primary segments are Consumer Payments and Business Payments. Consumer Payments makes up about 80% of our volume and Business Payments makes up about 20% of our volume. And overall we have 240 integrations with software providers, so we go to market direct through our direct sales force and through -- indirectly through these 240 software partners. In consumer, we have about 150 of those. In B2B, we have about 90. And so that's our go-to-market strategy. In consumer, we have roughly 20,000 clients; in B2B, roughly 4,000. And in 2023, we're anticipating we'll process over $26 billion of card payment volume. And again, about 80% of that is in the Consumer Payments business and 20% is in B2B. In consumer, the primary end markets would be personal loans, auto loans, mortgage servicing, credit unions and consumer health care. And in B2B, we have -- we're unique, I think, in the fact that we do both accounts receivable payments and accounts payable automation. There's not that many that do both, but we do. And the target end markets there would be property management, auto dealerships, hospitals, those types of end markets, where it's just a lot of white space wide open, with most payments being made on the AP side via check, a lot of paper. We're trying to make that more digital.

Got it, got it. So when you talk about like on the consumer side, how do we think about like the opportunities within those? You talked, you mentioned just now health care, auto, mortgage, personal loans, but what are the areas that excite you most? And where are you focusing your investments?

Yes. So I should also mention these are really large addressable markets. And even in the consumer side, one of the reasons we've chosen to address these markets is because there's still just a lot of paper and we're trying to move that to digital. So for example, in mortgage servicing, it's probably less than 10% card payments. It's a lot of checks still. And then there's ACH. And we're trying to work with partners like Black Knight, who provides mortgage servicing software for probably over 70% of the market, that roll out debit card payments across their servicing space; and that's a huge opportunity. I think mortgage in the U.S. is over $500 billion of annual payment volume and less than 10% of it is on card, so even just moving a little bit more of that to card is huge. Auto is another example, where we go to market through dealer management software providers. And we find, in some of our relationships that may have 1,000 users, we're only touching 50 of them because the others are not even taking card. I mean some of them are only still using -- taking check payments, and so there's just a really underserved market that's extremely large. And we're excited about all of the verticals within consumer, but those are a few examples.

So on that point around card, well, let's -- on that point around card is that, most of the time when you talk about mortgage or auto or any type of loan repayment, like you said, it's a lot of that tends to be ACH if it is electronic. Card can represent a bit of an extra cost for the servicer or that kind of thing, so can you talk about the value proposition you bring to customers at a high level and why they may want to facilitate accepting card as a repayment option?

Yes. Specifically in loan repayments, the -- probably the biggest demand driver is the consumer. The consumer is coming to our customer, saying, "We want to be able to use a debit card. And we not only want to be able to use a debit card to pay over the phone or the web, but we want to be able to use mobile payments, text payments and IVR solutions," so in addition to offering these different payment products like card and ACH, we offer different channels, the channels being web, phone, IVR, mobile text. So our customer, who's the auto lender or the mortgage servicer, is hearing from their customer, who is the borrower, that they want to pay that way. They want the flexibility and convenience to do that, and so by not offering it, they're at a disadvantage with their own customer. That's the biggest demand driver. Then in terms of the actual money movement, we just allow them to facilitate collections a lot more efficiently and quickly, so they're getting their money real time. ACH is not real time. It's -- at best, it's same day, but typically it's a couple of days to clear the Fed system. And when a lender can get their money right away, they can relend that. So [ this is the ] velocity of lending. And if they -- if the payment isn't good, they know they can start collecting on it immediately versus waiting 2 or 3 days to collect on them, which increases the collection rate, so there's a lot of value to them in taking card. And then like I said, one of the bigger -- biggest demand drivers is the consumer saying, "We want to use our card."

Right, right, right. So if that's the market and product positioning at least on the consumer side, what about on the B2B side? You mentioned that you're one of few that has both accounts payable and accounts receivable automation, et cetera. Like what are the drivers there? And what's the value prop for -- that Repay is bringing to the market now?

So in that instance, it's a commercial transaction, so it's business to business. There's no consumer involved, and so really there it's about bringing efficiency to these paper-based manual processes. So on the AR side, for example, we're integrated with Sage and Acumatica as 2 large ERP accounting systems that have tens of thousands of users. And a lot of those users are still writing checks and there's still a ton of paper in the system, which is very manual to bring into your ERP. If we allow them to -- a business to accept a card to payment from another business, it can be -- and we can send the invoice. They can click to pay it. It automatically is paid and reconciled through their ERP accounting system. It creates a lot of efficiencies in the AR side. On the AP side, it's the opposite, where their -- where our client is paying their supplier. And we're trying to facilitate virtual card payments, so if we have a large hospital system or an auto dealership and they have thousands of different suppliers, we're paying them with virtual card. Our -- the value proposition to our customer is that we outsource their entire AP function. And so what's unique about us too is that we not only do virtual cards. We also do enhanced ACH, ACH. And we can process checks, so when we go to our client, we say, "We want to outsource your entire payables function," not just the virtual card piece which may only be 15% or 20% of their payables.

Right, right.

And we give them a rebate, so they like the fact that they're actually turning their cost center more -- making the cost center more efficient but turning it into a profit center. And then on the other side of the transaction, the supplier is willing to pay the fee to accept the virtual card for working capital purposes. They get the cash more quickly and it also reconciles into their ERP system. And again we're not talking about 100% of the payments here on virtual cards; and so we balance that to say, "Okay, what percent can we facilitate?" And we start with virtual card. And then we default down through enhanced ACH, ACH and check. Virtual card is the strongest economics to us. Enhanced ACH is actually similar economics and that's a product that we're trying to roll out across our user base as well, so it's just about bringing -- in the B2B side it's about bringing efficiencies, taking away manual processes, automating them and then turning the payments from paper into digital.

What's that sales cycle like for the customer, et cetera? And what do you typically -- I mean because -- look. If you say the word automation, it seems like that should be a pretty good -- easy sell, but it's also one that causes for a lot of businesses a change in processes that can be a little bit daunting, so can you walk us through what that sales cycle looks like?

Yes, absolutely. And so we're focused -- in B2B, we're focused on medium to enterprise accounts, so we don't do SMB. SMB is a totally different sales cycle. It's a different product. It's off the shelf. It's not customized, which is why you're going after more accounts. And I think the play there is to get as many as you possibly can because [ there's ] lower spend. For us, we're going after larger accounts, so it can be a longer sales cycle. You're basically talking to a controller or a CFO or a treasurer about trying to figure out a way to make their manual processes more automated. And a few years ago, that would be way down on the priority list, but now I think it's come up to the top 2 or 3 things in any CFO's priority. It's to automate as much as they can. It may be automating the invoicing part of payables and then eventually automating the actual payment execution. We can do both. And so they're starting to realize through their own labor force as well -- who's saying, "Why am I cutting checks? Why -- I'm using card in the rest of my life. I'm using digital transactions in the rest of my life. Why am I sending checks?" There's pressure internally. I don't think the labor force is threatened by it like they once were, like -- meaning they're not going to lose their job. [ In fact ], we're just going to make the entire process more efficient. And then once you start figuring out what the potential rebate looks like, I think that starts to speed up the cycle. And the way you determine the rebate is by matching their supplier database against our supplier database and seeing what the hit rate is, and that determines the rebate. Once you start having that discussion and they're willing to give you the supplier information, then you're starting to really advance the sales cycle. We have 160,000 suppliers now. We want that to grow, continue to grow rapidly like it has been. So it's like, the larger the supplier base, the bigger the hit rate [ in ] new client situations, the shorter the sales cycle.

Sure.

So it also varies by industry. So auto dealerships, we can sell a 20-location auto dealership in a matter of 2 weeks; and they can be processing in 3 days. A large hospital system may take 3 months to sell and 3 months to implement. It kind of depends on the end market as well.

Got it, got it, got it. So I want to talk about the financials and kind of how you think about the business and the growth. We'll come back to near-term trends in a moment, but can you talk us through how you're thinking about both organic growth and margin expansion on a multiyear basis? Like what's the algorithm that investors should be thinking about?

Yes. So I'll break that down between Consumer and Business Payments. In consumer, a majority of our growth, probably 2/3 of our growth, comes from existing customers. And it's existing customers just taking more of their payments in these different methods and these different channels. And then about 1/3 of it is new customer growth, and that's coming both from a direct sales force and the 150 software partners that I mentioned. In Business Payments, it's the opposite. It's about 2/3 new because it's such an open space just wide open. Most of the time, we're going to a conversation where the client has never considered automating their payment processes. We're not displacing an existing competitor. And then about 1/3 of it is existing client growth, so it's the opposite in B2B. And the existing client growth, we facilitate by saying, okay, if you were only using virtual cards previously, adopt our TotalPay solution. And we'll allow you to then take -- or make payments with enhanced ACH, ACH and check. So we turn a customer where they're -- maybe have automated 15% of their payables to one where we're automating 40% of their payables.

Right, right.

And so that's the existing customer part of the growth story in B2B. And so -- but backing up, I mean these are very large markets. The total addressable market across both of them is over $5 trillion of annual payment volume. And consumer, again, is mostly existing; and then Business Payments is mostly new. And that's the growth algorithm in terms of organic growth. The other big opportunity is within the 240 software providers. Sometimes, we're less than 10% penetrated, so if you go into a dealer management system that has 1,000 users, there's cases where we have 50 of them, so there's a massive opportunity with the existing software providers to just further penetrate. One of the big uses of organic dollars this year for us is to embed more product and channels within the 240 software providers and do sort of cross-promotional campaigns to go and access the other 950 [indiscernible]. And so really a big, big driver of organic growth. And then margins: We've -- we're kind of -- one of our operating philosophies is to always be working with our partners, whether it's a front-end processing partner or a sponsored bank, Visa, Mastercard, just to talk about ways to grow volume together. And we can, over time, I think, optimize our processing cost infrastructure...

Yes. So back on, for example, the software integrations. And it seems like you've been growing those pretty nicely. It stepped up a little bit this year from last year, at the same point, but you gave the example a moment ago. It was like, well, even within the integrations, that customer -- or that software company may have X number of customers. And we're pretty -- Repay is pretty small or has low penetration with -- into that customer base of that software company. What are the things that you can do to specifically improve the opportunity to win some of those customers that maybe are using a software but not taking advantage of what Repay can provide on the payment side, et cetera?

Yes. So perfect example is one of the dealer management systems I'm thinking of. Only -- we're only integrated with them to allow payments over the phone and the web.

Okay.

And so we're talking about them to integrate our IVR solution, our mobile solution, our text solution. And eventually we'll have a digital wallet solution that we'll be integrating with them as well to allow for just as many different types of payment modalities and channels as we can. If we can do that, then we can go out and sort of cross-promote that to their user base, saying, "Hey. Did you know that we now allow you to accept payments these multiple ways? And we're doing it via Repay." And that will allow us to, hopefully, touch another 10% or 20%. And then we just continue to do that and work with them as partners, and that's the approach. And we've seen that work, so far, but we're spending a lot more dollars to try to do that in a more widespread way across all 240 of them. And that's -- but that -- it's really technology, product and then promotion.

And have -- you hadn't changed anything internally operationally to better address and work with them. Or is this just like an ongoing organic part of the relationships?

We've had to build out our -- what we call our partner relationship management team. The partner relationship management team is going after new software partners and then finding ways to further penetrate existing software partners. And then we've had to really ramp up our software development efforts to actually go out and embed the product in them. You have to go -- oftentimes to go out and say, "We'll do the development work. We'll do the heavy lifting for you. We'll spend the promotional dollars. That will benefit both of us." And so it's a combination of the partner relationship management team expanding and then just our technology and product team focusing on that more.

Got it. So let's talk about the kind of the, like, current macro environment for a few minutes. We've seen this backdrop of a weakening consumer credit. And to be fair is that it seems like we're still kind of approaching back to normal. It's like not necessarily worse than what we would have expected, pre pandemic at least, but can you talk about any impacts that you're seeing across your business? And how confident are you in your ability to still grow high single to low double digits in that type of environment?

Yes. So to clarify: We're not a lender. We're a service provider to the lenders, so we don't take credit risk. And in our guidance for the year, we've talked about basically planning for a mild to moderate recession, so the planning assumption is that things may end up in that mild to moderate area. And we talked about that, how that impacts personal loans, how that might impact auto finance, but what we see and what we feel good about is that the job market is very strong. That's one of the biggest determinants of getting a loan and being able to repay your loan. There's a lot of demand for personal loans. I think, as people have worked through stimulus cash and are now maybe working through credit card balances, there's just a lot of demand. If the demand is there, our personal lending customers will then monitor their own credit performance and decide how to tighten or loosen their underwriting box to fill the demand. If the demand isn't there, that's a much bigger issue. So the fact that the job market is strong and the demand is there are both 2 very good underlying factors for personal loans. And then in auto. Auto, I think, has been operating effectively in a recession for at least a few quarters now, but recent data suggests that used car prices are potentially starting to tick down. I think one of the biggest issues there has been affordability concerns. I think, if prices continue to come down, the affordability concerns loosen and then we start to see more origination activity. The difference between personal and auto, for us, is auto loans have a much longer duration, so we wouldn't fill it as quickly.

Right.

And so part of our planning has been to say we might fill some of that this year. And that's in the planning assumption, but we do see some signs of that market is getting better.

Got it, got it. And it sounds like most of your verticals are nondiscretionary, but can you hit on what mix of your business you view as countercyclical versus acyclical; and help us better isolate like where you do see, if there is, any discretionary impact, et cetera?

Yes. I mean it's all really is -- nondiscretionary. I mean if -- and we learned during COVID that, when people received their stimulus payments, they almost immediately made loan payments.

Got it.

They made loan payments and they went to the grocery store.

Right, right.