Repay Holdings Corporation (RPAY) Earnings Call Transcript
May 23, 2023
Earnings Call Speaker Segments
Well, thank you, everyone, for joining our fireside chat with REPAY. REPAY provides integrated payment processing solutions to verticals that have specific transaction processing needs. REPAY's proprietary integrated payment technology platform reduces the complexity of electronic payments for customers while enhancing the overall experience for consumers and businesses. Today, I'm pleased to introduce John Morris, Co-Founder and CEO of REPAY; and Tim Murphy, CFO of REPAY. John and Tim, thank you for being with us today.
John, could you give a quick overview of REPAY and how REPAY is positioned to serve the verticals you're operating in today?
Sure. Thank you, Scott. Good afternoon, everyone. Thank you for coming this afternoon. Thank you for JPM for having us at the conference this week, specifically today we've had some great meetings. So REPAY, we started in 2006. And as Scott indicated in his intro, we're an integrated technology company into the various different ERP systems that manage the workflows of the consumer payment side of the world as well as the business payment side of the world. Really, ultimately, we're helping businesses get paid back on some type of bill invoice from a consumer, and we're integrated into that ERP system that helps manage that. Same thing on the business payment side where we're helping a business either get paid for an invoice or pay an invoice. So the movement of money flows in and out of the system on a fully integrated basis, on a fully reconcilable basis as well as our ecosystem includes the ability to truly move those funds behind the scenes, where we're actually moving funds in and out of the various networks that funds flow, specifically in the U.S. and Canada.
Great. And maybe turning towards the last quarter. REPAY had an impressive start to the year in 2023 in Q1, growing 13% year-over-year organic gross profit growth. Can you talk a little bit about the demand environment for both the businesses you have, both in Consumer Payments and Business Payments.
Sure. And if you see -- some of you have probably seen in our investor presentations, so we have over a $5 trillion addressable -- total addressable market that we are made up of both the consumer side and the business payment side. And we see a large unaddressed solutions in the marketplace on how automation is happening. So the digital transformation that was brought about by the overall pandemic era really accelerated that digital transformation to electronic -- to electronic payments, to electronic -- basically the elimination of paper, the driving of efficiencies out of that. So that's our giant addressable market. And inside of that, we have sub-verticals, both on the consumer side that may be in the auto space, it may be in the mortgage space and maybe in the consumer lending space. On the business payment side, it may be in hospitals or hospitality or even municipalities. So as we're -- as you mentioned, we had a very strong first quarter from an organic growth perspective. I say that in that we see years of potential growth organically as that transformation happens. These large under-addressed markets are looking to -- the consumers are demanding high-quality end consumers in experiences as well as businesses -- consumers in the back office of businesses are trying to catch up to the speed of transformation as well, and we're helping to deliver the financial solution to do that as well as helping them move the funds in and out of the systems. So that's where we see a long-term great opportunity to continue to grow that. For the next 3 to 5 years, we see that.
So maybe digging in a little bit into the Consumer Payments segment. Given the macro backdrop, it was growing an impressive 17% growth in Q1 for organic gross profit. Can you dig a little deeper into what you're seeing in Consumer Payments and the drivers of growth in that segment?
As John said, we see real demand coming from the consumers wanting a more digital experience. And a lot of these verticals we're serving on the consumer side are really underpenetrated as John mentioned as well. So we see a lot of growth coming from existing clients, just wanting to use more of our payment tools to drive demand. We had a large enterprise win in the consumer space that drove a lot of the strong results in Q1. We have a few other enterprise wins we've announced since then that will drive growth for the rest of this year into next year. And so those are a couple of factors driving the 17% performance.
Ultimately, what we see, Scott, is the consumer really obviously expects now for a couple of clicks and everything to happen, right? And so many of our clients were helping them modernize that -- those features and functionalities. So we're actually helping them become omnichannel as well as omni-modality. So any way you want to pay, anywhere you want to pay and anyhow you want to pay, we're actually helping them deploy that. The consumer is demanding it, which is the hardest thing to create from our perspective, and we're actually helping them deliver that high-quality consumer experience.
Helpful. Maybe we could switch to go-to-market approach and maybe in the Consumer Payment segment. In terms of your go to market, are you seeing any changes in how you approach these software partners in a very -- what is a very changing landscape?
Yes. Sure. As you know, our overall integrated solutions are around these software partners. We have now 248 of those. We have about 150 of those in the Consumer Payment side and the remainder in the Business Payment side. And so as we -- what we're seeing is specifically this year, we're kind of doubling back on some of our existing partners that are -- have many clients that we don't have. So we are taking some of our features and functionalities and upgrading some of our integrations, specifically like Google Pay, Apple Pay, Venmo, PayPal. As we add those features and functionalities into those existing integrations, we think that's going to drive even more organic growth. Our partners -- we have a direct sales force, but our partners also act as referral partners to us. So we partner tightly with them, key partners to us, but we also -- we think we add tremendous value add to their overall experience, and we become the payment experts as well as the vertical experts as well as the overall we bring the financial technology to really execute on that. And we're excited about what we see ahead of us here as we implement some of those new features and functionalities. Again, the consumer wants to be able to use some of those features is just not available today.
And then you mentioned becoming the vertical experts. Your business is much more diversified today than it was maybe even 5 years ago. How are you -- you're in health care, in all these different verticals now, how are you -- you obvious strength in loan repayment in that vertical. How are you becoming more vertical experts in each of these different verticals?
Yes. So as we've segmented the business and now Consumer Payments is about 80% of the business and Business Payments is about 20% of the business. So as we focus on segmentation, we've also tried to refine the go-to-market strategy. We've done that in a couple of ways. One, we've gone upmarket, and we're addressing the enterprise portion of Consumer Payments more specifically. And then we're trying to align our sales force around the different end markets and around the key software providers within the end markets. And B2B, it's similar strategy. We've always been more middle market to enterprise there. So we're not addressing SMBs, really, we're going upmarket there, and we're going to market through integrated partners. We also now have approximately 175,000 vendors in our vendor network. And so that's very helpful as we go after new client wins and look to further penetrate virtual cards with our existing clients and with new clients. And so a lot of -- as John touched on earlier, a lot of the go-to-market is around vertical-specific software and going generally upmarket into enterprise sales.
Well, a couple of things that I think are very unique to REPAY. You talk a little bit about the benefits with one, you have your own proprietary clearing and settlement platform, which is unique. And two, it seems like you're investing a lot in products recently and talking about those on your earnings calls around Instant Funding, digital wallets, and you talk about your technology and the stuff that you're doing to invest there.
Yes, sure. So one of my goals has always been the ability to be a network to own networks that move funds, both in and out of the system. If you're not a financial -- if you're not a bank, financial institution, you actually can't do that. You have to use someone like us to enter into the financial system even. If you're an e-commerce company, you're using someone like us to transact. So we -- that omni-modality experience that we have talked about before, Scott, is not just credit card or not just debit card, in our case on the consumer side, predominantly just debit card, but the ability to add ACH, the ability to add all flavors of ACH, the ability to add -- as we want to add, we have virtual card on the business payment side, as we are looking at RTP and adding that as well as FedNow coming and then the -- adding all the different wallets that are out there. That single pane of glass feature, we find that even large financial institutions do not have the ability to have a single pane of glass to view and track and trace an invoice through this entire payment life cycle and back and fully reconciled and fully integrated. So we think we really have a tremendous strength as we add more innovation to that. And that's without even bringing up the AI topic.
That's right. Another benefit on REPAY clearing and settlement is in the context of M&A. It does allow us to realize some meaningful synergies on some of the acquisitions we've made. We've done about 8 acquisitions since we've become public. Several of them have been converted to RCS. And again, we can realize significant synergies, which we have done and we could do in future M&A. So that's another benefit in addition to just the daily organic operations of our business.
With all the consolidation historically in the payment processing space is really 4, 5, maybe 6 people who can actually do that. Most people are using one of us to do that. So we think it's a real strength. Our ability to truly understand how to route -- intelligently route transaction, understanding truly what interchange is, understanding all the other networks and tying into those, I think it's going to be super valuable. I think people undervalue us for that.
So maybe we could turn our attention to the Business Payment segment a little bit, and talk a little bit about what are you seeing in that segment in terms of the growth opportunities? I know there was a slowdown with some implementation delays in the last quarter. But where do you see this segment going in the future?
Yes, that's right. We had a few implementation delays. Like we said, we're mainly going upmarket to middle market to enterprise, and these are larger deals that sometimes just take longer to implement, usually on the client side, not on our side. But the bigger opportunity is massive. Of the $5 trillion plus TAM that John mentioned, over $3 trillion of that is what we address within business payments. And we do both AR and AP. So we think we're unique in that way. A lot of folks tend to focus on one or the other. And so for example, we're integrated within Sage and Acumatica to do both AR and AP payments, which is fairly unique, and we can then cross-sell our AP services to our AR clients integrated into each of those ERPs. And so we think the opportunity is really large, and there's still a lot of checks being written in Business Payments, and we're displacing those checks primarily trying to with virtual card, enhanced ACH and ACH. We also think we're unique because we have what we call a TotalPay solution, where we'll allow our clients on the AP side to outsource their entire payables function, not just one form of payment, but all of the payables. And we'll, of course, try to utilize our vendor network to pay with a virtual card. But if we can't be with virtual card, we can default to ACH plus, ACH and then we also are able to do checks. So by selling both AR and AP, by selling an integrated and by selling the TotalPay solution, we think that's pretty differentiated. And like I said, it's just a really massive underserved market.
Land grab, Scott.
What do you think in terms of consolidation? Do you see that continuing to happen in the Business Payments, there seems to be a lot of activity...
I think there's plenty of room in the marketplace for the limited number of players that are there today. So to put it in perspective, many years ago, payroll wasn't outsourced. And now it's predominantly outsourced and everybody is very comfortable with that as a payable being outsourced. This is the last frontier of [ TR ] payables, and it's everything else. We, as consumers, now went back to work and says, why are we printing invoices and when are we writing checks? It just seems very crazy that you would do that today, which is fantastic for us. The market is ready. It's ripe. The technology is ready. And then we have the right total solution for that. So to be able to track and trace that throughout its system, we think there's great value props in itself. Probably the best value proposition that I've seen in payments, and I've been in payments 25 years where you can outsource all this solution, and it's worth the cost of someone paying you for it. But instead, we actually give them a rebate based on their virtual card usage. So -- and in a marketplace where it's a tight labor market, that payables department needs more help. Needs more resources. We can truly drive automation. Lots of very positive value props there. Marketplace, again, we -- even in that world, we're vertically specific. When you hear me say hospitality or hospitals or municipalities or auto, we have some unique niches and some unique integrations in there. And we drive our expertise because our know-how in that specific vertical, that's another winning piece of our formula. I see many years of opportunity there. It's just kind of really beginning. And so there will be consolidation, though. I know most of the industries would eventually consolidate. So we think there's lots of opportunity. We hope to be a consolidator, and we'll see how that works out.
So turning to your outlook for 2023. You've mentioned you're planning for a mild to moderate recession that's coming up. I don't know if anybody knows what's going to happen is very uncertain. What areas of the business could potentially be impacted from any slowdown economically? And where could there be very strong demand and growth from that?
Yes. So we had a strong first quarter. Like we said, we grew 13% organically, and the consumer business grew 17%. And -- so we're generally planning for a mild-to-moderate recession. We're not necessarily predicting the overall macro environment. Our planning assumptions though are based on a mild-to-moderate recession. And we think within the Consumer Payments space, there may be potentially some impact to the lending verticals that we talked about earlier, but we also have a business that we call accounts receivable management, where we're effectively processing for collections, which is very countercyclical. So although there may be some exposure within lending verticals, there's real countercyclicality within ARM, and that's about 10% to 15% of our business, and we think there's a lot of supply coming to that market later this year, which could potentially drive growth in 2024. In Business Payments, as I said earlier, we're not as exposed to SMBs. I think SMBs are feeling -- they're already seeing a slowdown in their spend. We're not necessarily seeing that in the medium-sized enterprise-sized customer, but we did put some conservatism in our planning assumptions for that. So generally, the mild to moderate commentary is around just trying to be conservative given that some of the macro challenges.
So can you talk a little bit about the competitive landscape. You guys have done an excellent job penetrating these verticals and finding areas of opportunity both on the consumer side and the business side, how do you think about the landscape? Has anything changed from what you're seeing in terms of competition in the last year or two?
We see some of the same people we compete against in the marketplace. That hasn't specifically changed. What we find is a more sophisticated, especially as you go up on an enterprise level and more sophisticated sell, which actually helps us our ability to have all of the one-stop solutions as well as obviously, being a public company in itself helps all the different audits we have, those in themselves, our ability to drive compliance. So we competitively, and as you have mentioned earlier, our ability to process our own internal processing. What we find is if we really want to win a deal, we can win a deal. And so we -- as you can see, our margins, we have really strong growth with really great margins. So we've tried to kind of balance that. So people ask me what's challenging, I would tell you that the more challenging thing I see is I see all the opportunity for growth. And I think we could grow faster if we spent more, but yet we've said we will be profitable growth. So we're not trying to find the concept of how we path to profitability. We've been profitable for most of our existence. But we -- competitively wise, we do stack up well. There are some things that we're adding that's going to make us even, I think, more powerful in the marketplace. And as we -- but I will say, our integrated features is super important. If we decide to go into a new sub-vertical, it is more challenging if we're not there. If we don't have the right integrations, it's more challenging. That's just a complement to the integrations we already have. We know that it creates barrier to entry.
Yes. And I'll say on the consumer side, specifically, we've selected these verticals because they aren't as competitive. They're underserved, underpenetrated, because there's not as much competition, we can typically price deals more attractively to us, there's better margins and unit economics across consumer and business payments, specifically in AP, we would -- because we're medium to enterprise, we would see names like Avid, we see Nvoicepay, which is owned by FLEETCOR. We see CSI occasionally. But really in that part of our business, we're competing against checks. We're competing against other forms of payment and trying to displace those to move more to digital and specifically virtual cards. So I don't think the competitive environment has changed all that much, although we have like I said, revamped our go-to-market strategy to compete even more effectively.
Another example that we're talking about this year is in our mortgage -- on the Consumer Payments side in the mortgage vertical, we're rolling out a test, which we mentioned on our call -- our earnings call with Black Knight to drive the acceptance of debit for -- to make your mortgage payment. If I were to ask this room today, can you make your mortgage payment with a debit card, raise your hand? Pretty common. You can't because it's not usually offered. So what we have seen in all our other consumer payment verticals is, if you make it available, it gets used. You just have to turn it on. So we're excited about that in the third quarter as we -- Black Knight is a very -- it's 70-plus percent of the mortgage servicing world as a software provider. We're integrating there. We're rolling that out with them in the third quarter. We're excited about what that means on the consumer side of that. We know demand is there on the consumer side. We know there's a great value proposition to it. That's an example of what you were talking about just an underserved market. If you kind of go into Visa or Mastercard, where they think they're going to get their net new organic growth from, it's areas in which we operate. So if you go and look at their presentations or investor presentations about what we call net new payment flows, those are the world -- that's the environment we're in because that's a net new interchange if it's a card transaction. So that's exciting to us as we try to bring that to market this year and see how the market is going to react to that.
That's great. Maybe we could switch gears and talk a little bit about capital structure. You guys have very robust EBITDA margins. It's really impressive. How are you prioritizing future cash flow generation as it relates to your overall capital allocation priorities?
So today, we're at about 2.8x net leverage. One of our priorities over the last 12 months has been to bring the net leverage down below 3x. So we've accomplished that. And so we've been focusing capital allocation on organic growth, reducing net leverage. We do have a share repurchase authorization in place, and we're starting to see a little bit more M&A. We're starting to see deals come back to market, and less of a disconnect between public and private valuations. It's not totally back to where it was a few years ago, but we start to see some activity come back. So the priority for us, though has been reducing net leverage and adding cash to the balance sheet, and we'll just selectively look at M&A.
Yes. Speaking of M&A, since going public, REPAY has been pretty acquisitive, taking advantage of the market. I think it's been over a year since the last M&A deal that you guys have done. How do you think about M&A opportunities going forward between Consumer and Business Payments and areas of focus for you?
Yes. I mean, like I said, we're starting to see more -- the deals we're seeing are both in consumer and B2B and then -- and B2B, more typically, they're more on the AP side. And so we've tried to stay disciplined. We haven't done an acquisition, like you said, in close to 1.5 years. The last one we did was Payix. That business is still growing very nicely. And when we look at deals, we have a set of attributes we look at. Usually, it's around the addressable market opportunity. Is the company integrated in the software within the verticals they serve? Are they maybe a competitor? Do they have really strong retention, statistics, strong margins and unit economics. Those are the type of attributes we look at. And then, of course, we think about valuation and structure. And so those are all things we weigh. And then in this environment, we're also just trying to weigh all of that against keeping net leverage at a reasonable place. Like I said, we're at 2.8x, but we weigh all of those things as we look at opportunities. But we have an internal team that focuses on M&A every day. So that gives us greater visibility into the pipeline and also just doing diligence.
I will just add -- again, we will be patient. We got to have -- we have been in the past. And I think we've built a really nice company by being patient there. We like the position we're in today. The only debt we have is our convertible debt, which is 0% coupon, and not due for 3 more years. So no debt service associated with that. We're a highly cash flow profitable business growing organically. We still think the highest best use of the dollar is organic growth because of the markets we've talked about already. We would love to complement that with the right valuations. But we also are aware of where we stand today in the marketplace as far as our valuation and in itself will act as -- is a really good guardrail for us. So we love the fact we don't really have to do anything. We just keep executing on a great game plan here. We think the market will find that valuable. And then what we've historically seen, if you look back, we actually acquired -- we started acquiring B2B before people were talking about B2B. And we started acquiring B2B in the middle of a pandemic when -- so we're okay being patient, and we'll continue to fill the storehouse. And when the right time is there, we'll be able to act on what we choose to do there.
And so you mentioned valuation. What aspect of REPAY do you guys think is super unique? And what are investors or the market missing about it? Because you guys have tremendous scale, growing very nicely organically, and you have huge margins. So what do you think that it's missing?
I think -- I agree with you. I think we have a very nice financial profile. And we've done a lot of good M&A in the past. We have a strong balance sheet. I think maybe it's just where we play in certain end markets, there may be some perception risk. We don't think that -- we haven't seen that yet, given the organic growth in Q1, but that may be there, which is, again, why we talked about a mild-to-moderate recession in our outlook and why we're being conservative in our outlook. That may be something that is just misunderstood. We don't take balance sheet risk. We think that might be misunderstood. We don't get any credit exposure. We're a service provider to these industries. And so those are some of the things that maybe people aren't really understanding. Also the convertible note at 0%, not due for 3 years or something else that we'd like to highlight. So those are the strengths, and some of that just may be missed.
Yes. So maybe someone has something wrong.
That's true. Makes sense. I have more questions, but maybe we can open the floor up to questions from the audience if we have any. Okay. I'll start. So what does REPAY look like in 5 years?
So I talked a little bit about it before. The great thing for us is the organic opportunity for us over the next 3 to 5 years on the Consumer Payments and the Business Payments piece of that. The transformation to digital, that secular tailwind is legit. Now we got to get timing right. We got to get sequencing right. But we don't see a scenario where we've seen great demand in the marketplace for what we have and what we're delivering. That's the hardest thing to do is sell someone something they don't need, and we're not seeing that. The ability to -- and then if you think about the automation that's going to be happening, the driving of that automation through the system. In the next 3 to 5 years, both our verticals, like we've been asked before, specifically, can B2B be 50% of our business? Well, we'd love that to be the case, but consumer, you just heard Tim say grew 17% organically in the first quarter. It's growing as fast as that we can't catch it. And we see -- continue to see opportunity in both sides of our business. Very large underserved markets. I think we just need to keep delivering on that. Obviously, we're big fans of delivering great technology along with payments fully integrated. And really, in today's world as well, adding great customer service to that. We believe in what we call fanatical customer service. It doesn't get talked about in today's world much, but we -- you know it when you feel it. So we think that's a great winning formula for us. Executing on that, that could potentially come with complementing -- M&A is in our background. We -- that's how we got here as well. So we think consolidation will continue to happen in the marketplace. We would love at some point as we look really further out, and we go across and go beyond the mainland and be more of an international company, that would obviously likely happen in some form of acquisition for us to be an expert in other parts of the world.
Fantastic. So John and Tim, what keeps you up at night for REPAY? And what are you worried about the most?
So one of my -- our mantra this year is called next level. And so I don't think you can ever -- I'm -- as a free enterprise person, I'm a big fan of if you're not changing, you're getting left behind. So ultimately trying to find that next level, always in search of that. Another one of my phrases this year is in order for something to change, something has to change. So you're constantly trying to find ways to move that. I'm excited. I'm excited about some of the things we can do with that. So constantly trying to increase in speed, how can you do things faster. We know we can. We kind of talked about we'd love to be able to increase the speed of our implementations. Now there's 2 sides of that. We can't speed a client up if they don't want to go any faster. But maybe we can build technology that helps them click, click and speed up, I don't know. Some of the things that we think about on AI, we think, can help with that. But ultimately -- so thinking through that, building a talented team, always looking for great talent. And that was probably -- that definitely kept me up last year when we were all trading each other's team members. So -- but I would say that's kind of subsided a little bit, but ultimate looking for the great -- additional talent out there, finding great people. Companies are merely names. It's the people that actually do all the great creations. Innovating, we want to constantly be innovating, having -- waking up in the middle of night and having a great idea. Tim's probably gone a few of my e-mails on those things.
And then how do you put in place the right people -- attract and retain the right people to go execute on all that. When we think about that and talk about that all the time, especially in technology and sales. How do you get the best technologists and the best salespeople to help you execute on that?
Big word, obviously -- we're a public company, and I get that. Expectation is what everybody is ultimately. And what is the expectation? And are you delivering on that expectation? I love the challenge of ultimately trying to deliver that. It just makes you better.
Great. So we've seen what's happened in the banking industry in the last few months. Are you seeing anything affecting the payments industry in general or REPAY specifically in terms of the banking industry?
Now I mean we've had -- fortunately, we've had no direct exposure to any of the regional banks that have had troubles. And so that's been good. We've built a lot of redundancy in our banking processing relationships across card and ACH and other forms of payment. So we don't have any direct exposure there. We do process for credit unions. So less than 5% of our business, but we have about 250 credit unions. We have actually seen credit unions exhibit some strength where they've had prior deposit inflows, not deposit outflows, just because of their sticky member base and their own forms of deposit insurance. And so we think there's potentially a benefit to credit unions. So we haven't really seen any negative impacts. We're monitoring it, but none today.
So I guess last question in terms of time. In terms of the macro environment, how do you think about where the industry is headed in payments and technology? And what makes you excited for the future in this particular space?
We talked about some of that. I think kind of the latest buzz is on FedNow, right? Well, RTP has been around for 5 years. It's basically very similar to the same thing. Digital transformation is real. And I think as that continues -- as the consumer gets younger and things continue to change there, the expectation level on which way and how they want to transact -- I mean I have kids that seem to transact out of a digital wallet, right? So that piece of it is happening. But ultimately, what I know about our space is commerce can't happen without what we do. And someone needs to make sure that when an approval happens, you're guaranteed to get those funds. If you think about it in reality, most of the time, we're talking about funds that none of us ever actually see. Unless you actually go to the ATM, you actually never see the money in your bank account. It's all in some form of digital concept. That's already there today. It's going to have a few new flavors to it, but the efficiencies of that and driving that into the system, as we talked about, that's exciting for me as we look out in the future here.
Well, thank you, John and Tim. Very, very nice of you to join us, and thank you for the opportunity.
Thank you for having us.
Thank you.
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