Repay Holdings Corporation (RPAY) Earnings Call Transcript

Okay. Next -- our next session of the day is we have Tim Murphy, CFO of REPAY. Great to have you, Tim. Thanks so much for joining us today.

I appreciate you having us.

Maybe a place to start here, just given Q1 earnings are still a little bit fresh. Give us an update from the most recent quarter, your kind of general thoughts about how the business performed relative to your expectations?

Yes. I think it performed really well. We're really pleased with the results with our Q1 organic growth of 13%, that was driven by consumer organic growth of 17%. We had some good announcements in terms of partnerships with Microsoft Dynamics. We talked about Black Knight. We increased our number of overall software integrations to about 248 and our supplier network is up to almost 175,000. So very strong results.

Fantastic. I wanted to ask you about sort of the core underlying value proposition of REPAY. And I think a part of that over time has been about further penetrating these large payment flows with cards. On both, I guess, the consumer and the commercial side of the business, remind us about the drivers, the underlying kind of demand drivers of why your customers are using you and what you're bringing in that context?

Yes. So on the consumer side of the business, the end consumer, so our customers' customer, wants a more real-time experience. They want a frictionless digital experience. They want mobile payments, tax payments, and it's very similar on the commercial side, so our business payment segment, where the customers just want faster payments. They want the ability to click to pay. They want the ability to pay their vendors electronically and they want it all to be seamless and frictionless. And so that's really the value proposition in both segments is to provide that experience and to provide a really high-quality experience and that's really where we find value and we don't pay for that value. And then that's why you can see that flow through our take rates and our margins.

And the customers, for example, on the consumer side of the business, it's -- the customers are embracing card payments relative -- speaking relative to other sort of payment modalities, what do they get from accepting like the debit card? Is it that they're more likely for the consumer to make the payment? Or is it the data they can glean from it?

The payment is made more quickly. So an ACH takes a few days to clear the Fed system on average. Our card payment is done pretty much within seconds. The consumer, particularly in the consumer segment, the consumer is demanding to be able to use it. So if our customer doesn't offer it and doesn't offer an omnichannel experience, they're potentially losing a customer by not providing as good of a customer experience. So one of our biggest demand drivers in the consumer segment is the end consumer saying, I want to be able to pay with my debit card. I want to be able to pay with my debt card mobile device, I want taxes to pay, I want an IVR solution in addition to the traditional web and phone solutions, and that's what's driving it. So one of the nice parts of our business is one of the biggest demand drivers is the end consumer. So oftentimes, they're selling it for us.

Interesting. Okay. And you guys always do such a great job of kind of helping people think through the TAM of the business and how in some of the key kind of pockets of your business or the key, I should say, pockets but the key sort of sectors that you operate in, where are we at in terms of penetration rates? Is it sort of like as far as I can see, are there certain places where there's more or less penetration? How do you look at that?

So the overall U.S. consumer payment market is probably about 75% penetrated on card. That's our traditional retail payments, restaurant payments, hospitality, travel. Our end markets within consumer are probably on average 20% to 30% penetrated. So huge runway opportunity to just get up closer to the average in the U.S. in terms of consumer payments. Mortgage, for example -- mortgage -- the mortgage servicing market is probably in the single digits from a penetration perspective. And overall, in the U.S., there's $500 billion of annual payment volume in mortgages. So just think about if you just take that up from a few percentage points to low double digits, you'd be -- we'd have -- we do have a massive opportunity. And a good example there is where there's very little debit acceptance in mortgage because a lot of times, the services are not -- have not offered more debit payments to the bars. And we're working with Black Knight and Visa to roll out debit acceptance through Black Knight, who Black Knight cover 70-plus percent in the mortgage servicing market from a software perspective just to allow the servicer to offer the opportunity for the borrower to pay with their debit card. And that, in and of itself, should increase penetration and acceptance and a $500 billion space that takes a lot of volume for us. And then in business payments, it's even lower penetration. So I said, average 20% to 30% in consumer payments, business payments, the card penetration rate is probably less than 10%. There's a tremendous amount of checks still being cut in business payments. And we see most of our conversations are completely greenfield where there's no competitor, we're competing against checks and trying to take away the inertia of -- you've always written checks and that's how you've done -- that's how you done payables and bringing payables to electronic.

Your guidance, I believe, calls for 8% to 14% normalized organic gross profit growth. Describe the growth algorithm for us, how do you build up to that?

Yes. So just to level set, we always focus on gross profit growth because that's how we manage the business. That's how we compensate our sales people. That's how we price new deals. So we are always managing to gross profit. And the way we build up to that organic gross profit outlook is in the consumer segment, probably 2/3 of the growth is coming from existing customers and about 1/3 from new. And it's the opposite in business payments. It's mostly coming from new customers. Like I said, it's usually situations where we're going into an opportunity where they've never taken -- they've never used electronic payments. So they've never taken a card for payments on the AR side and they've never made -- they've never sent electronic payables with a virtual card on the AP side. And so it's the opposite. So it's mostly new customer growth and business payments. So the overall mix ends up being about 2/3. And I should say about 80% of our business is consumer -- is the consumer segment and 20% of our business is the business payment segment. So it averages out to be about 2/3 of our growth comes from existing and 1/3 of our growth from new. So we have a lot of visibility into future growth because we understand what type of ramp can happen with existing customers just based on historical data.

And on the 80% of volumes that are consumer, the yields in that business in Q1 came in very nice. Maybe speak to the dynamics of -- and the drivers of improvement there and maybe how should we should think about those yields trending as we move forward?

Yes. So some of that was a function of tax refund season. Average tax refunds this year were down. So when certain parts of our business, where we have fixed rate -- or flat fee, excuse me, pricing, the lower average ticket would lead to a higher take rate. That was just somewhat of a function of tax refund seasonality. But we also have a few products that are growing nicely that are not volume-based products. For example, we have a communication solutions business within mortgage, where we send out notifications that a mortgage is due. And then we would like, of course, to attach a payment to that notification. There's no volume associated with that, so it's a higher take rate business. And then we have a product in our personal loans business within consumer called Instant Funding. We're not taking balance sheet risk, but we can fund the loan on behalf of our customer directly to a consumer's debit card. We don't count that volume in our CPV and so it's a higher take rate business. Both of those outperformed really nicely in Q1. So a combination of those 3 things led to higher consumer take rates. We expect that there's an opportunity for that going forward. Our guidance doesn't imply that it will stay at that same level, but I think there is an opportunity. I should say as well, as we go up market and experience more enterprise wins, we implemented a very large installment lender in Q1. We just announced the winning of another auto captive, very similar to Mercedes-Benz, the take rates in those businesses will be a little bit lower. They're more competitive with their enterprise wins that potentially could bring take rate slightly down for the next couple of quarters, but not a function of any sort of competitive pressure more around going upmarket.

And embedded finance is a term that people hear more and more these days. Also on the consumer business, I know that you guys kind of go-to-market in a few different ways, but one of those ways is through your partner relationships. Let me talk about your distribution and the consumer business and how you work with partners to get to the customer.

Yes. So we do have an integrated payment strategy. We have a direct sales force, but we also find distribution opportunities. We have about 150 software partners in the consumer segment. And those would be -- examples of those would be dealer management systems in the auto space. And the way we partner with them is we basically embed our technology into their software platform and make it available to all their users. And over time, we enhanced our solution by adding the features and functionality. I mentioned earlier like Global Payments, text to pay and IVR, which they can then roll out to their user base and then we get access to all of their users to utilize that technology. And we usually have a -- typically have a referral relationship with the software provider where we own the customer relationship, we sell the customer, and we pay them essentially a referral fee. So they're not reselling for us, which we think is a much more effective model from a unit economic standpoint, which is one of the reasons we have the margins we do is not giving away a lot of margins to third-party distribution. And so what we're trying to do is be more intentional about really embedding more of those features and functionality into the software because we think we're probably only on average about 10% penetrated within the ISVs. So for example, if a dealer management system has 1,000 users, maybe we have 100 of them. And so if we can provide better technology to enhance the software platform solution and try to touch those other 900, that's a really nice growth driver of new wins.

Stepping in the consumer part of your business a little bit here. You added PayPal and Venmo to your suite of payment solutions. Talk about that a little bit. How did that come about? How does that fit into the value proposition? Do you expect to see any -- what would you expect to see from adding a new payment methods?

Yes. So again, this was driven by the consumer. Consumers would go to a lender and say, I have x amount of dollars in my Venmo account. Can I use that to pay off my auto loan? Can they use that to pay a portion of my mortgage or a personal loan. And if we're not offering that ability to accept the payment that way, there's a gap in what they would call an acceptance gap. And so we're trying to provide as many of these modalities as we can. So there's no gaps. And it likely is not a big driver of additional volume. It's just being able to allow the lender to have all the possible tools available so they don't have to say no to their consumer. But again, this is a good example of the consumer being a demand driver for us saying, we really want to be able to use Venmo, PayPal and then we just embedded into the lender and their software system now that they're able to do that. If they weren't able to do it, that consumer may go to one of their competitors. So they had to offer it. And as we go off market into the enterprise space, like, for example, with this recent captive, they needed to have that. That was a big requirement for them in the bidding process, the incumbent processor did not have that. And so again, that was another way we're able to win by providing that.

The new captive is quite interesting and I want to get to that just to say after 1 more consumer question -- one more related question, I should say. You always have a pretty nuance to view of what's happening in the kind of consumer finance market. And just in general, the health of the consumer from a macro perspective, I guess the question is what are you seeing in terms of sort of top of funnel transit lenders?

Yes. I mean I think they're monitoring credit performance very closely and they're not seeing a worsening or deterioration of credit performance, but I don't think it's getting materially better to them yet. So they're not opening up their underwriting boxes. They're still somewhat tight on credit, which is why you're not seeing a significant increase in origination activity. That being said, if we -- assuming the macro holds steady, we could see a normalization of credit, which I think would allow them to originate more aggressively. And most importantly to us is the consumer is demanding the credit. It's still a very strong demand for credit. I think the consumer is healthy, they have jobs. One of the biggest drivers of being able to provide a new loan is that the borrower is employed and will be able to repay the loan. And so we see that. And also this tells us -- this type of market shows us that these payments are not discretionary, they're nondiscretionary. The consumer places a very high value on paying their auto loans, paying their mortgages, staying card on their personal loans to keep good credit and we see that in this type of environment. So I think the lenders are just sort of in monitoring mode, not at really different trends from prior quarters. But if this holds steady, we could see originations to potentially pick up, which I think could be a tailwind for 2024.

And now moving on to the captive auto deal that you announced and just captive auto as a category in general. I guess, first, how competitive are those deals? I'm presuming it's kind of an RFP process, but maybe that's the first question. And then what are you bringing to the table that are -- there's probably a pretty big deals that kind of the other acquirers are looking for them. What do you bring into the table that the other folks kind of are matching?

Yes. They typically are competitive bidding processes and the good thing in those situations is we have the card brands on our side, particularly Visa. They want to go get more of those dollars on card as well. They know that we've been successful in the past increasing card penetration. Every dollar in card that they don't have today is incremental to them. So they're helping us navigate sort of the contract process and when these RFPs become available, which is very nice to have, they've been helpful in the other captive situations. The most recent auto captive win was a competitive takeaway from a large public company and what we brought to the table was, I think, much better technology. We've brought all of the different payment modalities. We brought all the different payment channels. We brought a lot of domain expertise within the auto space. The other player was probably more of a generalist and then we had a lot of the customizations from our work with Mercedes that they were looking for specifically within auto, where it's very important that they have high-quality reporting and reconciliation tools embedded into their software. We had already done that with Mercedes-Benz financial services. It's a great proof point for this win, and we have several in our pipeline. I think it will be great for the -- great proof points for those as well.

So that's interesting. So part of the value you're bringing to the table and part of the value proposition you're bringing to the table is actually you're increasing card penetration in those books. And so that has -- that benefits -- I mean, obviously, Visa wants that, but there's probably ancillary benefits for the customers as well.