Repay Holdings Corporation (RPAY) Earnings Call Transcript
November 29, 2023
Earnings Call Speaker Segments
Okay. Welcome, everyone. We're here at day 2 of the UBS 27th Annual Global Technology Conference, and we're very happy to have with us today the leadership team from Repay. With us today, we have John Morris, who is CEO and also Co-Founder. We have Tim Murphy, who is the CFO. And we also have Stu Grisante who is Head of IR. So a special thank you to both -- for all 3, to John, Tim and Stu for making the trip here to Arizona.
Thanks for having us.
Thank you.
Okay. Great. We have a good lineup of questions here, and we might have some time for Q&A from the audience as well. But let's start out with the business mix and some updates here. So about 80% of the business is consumer payments and about 20% is business. There's a lot of business that goes through ISVs. And there's clients that come within those ISVs, so there's an element of new ISV adds and there's an element of penetration with ISVs. So with that as context, maybe we could talk around sort of the volume growth that you're looking at, the components of it and some of the changing or evolving mix dynamics.
Sure. So for those of you who are new to our story, about 80% of our company, it's made up about -- on the consumer payment side; about 20% is on the business payment side. We're an embedded payment solution inside of the ISV software, so core enterprise software platforms. And that payment flow mix that we have, we're seeing that transformation to digital is absolutely real. And we're seeing that even more and more. . So our goal is to be a network to all networks that move funds in and out of those systems. And we're starting to see that as we continue to drive all the different payment types. We're starting to see that move throughout. From inside of consumer payments, we actually have sub verticals in there, and some of that is driven off of some of the ISV integrations. But we see cyclicality balanced across the way. Some -- the ebbs and flows are there on some of that as well as on the business payment side. We are typically medium to enterprise level. So we're still seeing our payment flows steady in that side of the world. And I don't know if Tim has some more.
Yes. Yes. In terms of the mix of growth drivers, the -- we've said in the past about 2/3 of our growth comes from existing customers and 1/3 new. I still think that generally holds, it's probably moving a little bit toward -- more toward new as we go upmarket and win enterprise accounts that just drive new wins. And also add ISVs. ISVs are effectively where we get new wins out of the software integrations. And so we still think it's a majority of existing, but it's tilting a little bit more towards new. And to drive existing growth, we are embedding different payment channels into the clients' workflows. For example, allowing them to accept payments, not only over the phone and the web but through IVRs, mobile payments, text payments. Usually as we add channels, the penetration and adoption goes up, which is the biggest driver of existing customer growth.
Excellent, Tim, thank you. A topic related to some of the ISV partners in the payments industry. There's various ways that a company like Repay or other payments companies can work through an ISV with varying levels of involvement from your sales and support teams. It's a topic that comes up when we think about the commission levels that get paid to the ISVs. So with that as a backdrop, Tim, could you maybe just share about how your sales and support teams are maybe more actively involved, and maybe why we really haven't seen much shift in the commission level?
Yes, absolutely. So we're up to close to 260 software partners. We have a direct sales force, but we also have these ISVs, and that's basically our distribution strategies to go to market direct and through ISVs. The ISV relationships, the economics are typically structured as a referral relationship versus a reseller. And the referral relationship allows us to keep more of the economics and give lower rev shares to the ISVs. But because of that, we're also closing -- we're directly selling those accounts, closing the accounts, doing the ongoing risk and compliance, all of the work that allows us to basically manage the relationship. But we're also paying out a lower rev share, like you said, a lower commission. That really flows through the economics in our P&L. That's one of the reasons we think we have higher than industry average margins because of that referral relationship dynamic versus reseller.
Just add some color there. So across consumer payments, business payments, that embedded payment solution, we're the payment experts and the financial technology that plugs into all those systems. So our expert by vertical and our expertise around payments is really part of our moat. Our ability to drive the omnichannel, omni modality experience is also part of that. But then our ability to -- as we all know, software drives most businesses now, right? Every business has some software as the core to their system. But our ability to drive the monetization of payments is what we're really good at. And we're seeing lots of opportunities. As you may have seen an announcement we just made about Blackbaud and driving -- helping them try to drive monetization of payments through their system.
Thank you, John. To wrap up the topic of ISVs working with them and commissions, I just want to confirm, is it fair to say, as I kind of alluded to earlier, that there hasn't been a meaningful change in those commission levels over the last, call it, 5 years or so?
That's fair, yes. I mean I think that dynamic may have shifted in other end markets and other verticals where the commissions have gone up or the software providers are looking to do the payments themselves. We just haven't seen as much of that in our particular end markets. And I think that's because we're in pretty niche complex end markets where the software providers are focused on what they do best, which is providing core software. And then they're just utilizing our payment technology. And our payment technology adds a lot of value to their software system. So not looking to necessarily take more rev share from us, they're looking to increase value to our shared clients.
Excellent. Thank you, Tim. All right. Let's move on to a little bit of the way that investors should think about the outlook for payment volumes across your 2 big segments from a macro perspective. So definitely, the company has diversified a lot since the time of the IPO or a time when you went public. But maybe we could dig into the consumer payments business, which remains the largest portion of the business. And how the current market conditions are potentially evolving market conditions around either interest rates or loan originations or consumer weakness, consumer strength, how should we think about how that could impact your volumes both in real time and then also on a more lagged basis.
Yes. I'll start and then Tim will add some color. So if you look at this year and you look at how our numbers have played out this year, the ebbs and flow of each vertical and each side of our business is embedded already in our results, right? And we think that our results speak for themselves, which we're pleased with, all things considering. And if you look at that, the diversification around the verticals inside of consumer payments and even inside of business payments, the ebbs and flows of that are built in. For example, we've said all year that used cars is effectively embedded in some of our numbers already. And we've said ARM has effectively embedded in some of our numbers, meaning relatively not growing as fast as they historically have. We think that's a future opportunity for -- if you look out into next year and even mortgage in some ways, although it's been strong from a mortgage servicing perspective, we think opportunity with debit as an opportunity, a multiyear opportunity for that. So that's a little bit on that. And you can add some more color to it.
Yes, I think you hit it. I mean the year-to-date results of normalized organic gross profit growth to 13% speaks for the resilience of business. And there are some potential challenges like John said. So we've been a little bit more cautious on the outlook, but there are some opportunities for some of these end markets to also do better in future periods like ARM. And the business payments side of our company has held up very nicely because of the focus on medium to enterprise sized clients versus SMB. And so the growth there has been pretty resilient as well. .
Okay. Thank you, Tim and John. Let's move on to another topic that comes up in investor discussions, which is the take rate. So the take rate has some numerator, denominator, factors that we should consider there's also enterprise mix. There are some acquisitions that have come in at higher take rate. But broadly speaking, the take rate has been an area of relative upside surprise. So with that context, how should investors be thinking about those mix components and the take rate going forward?
Yes. So we report CPV, which is card payment volume and not TPV, which is total payment volume. So CPV is our metric. And we've seen some nice growth in noncard volume-based products like ACH and instant funding and communication solutions. So as those have grown and there's not volume attached to them, to your point, some of the take rate increase has been just driven by that. But I would say if you strip out the noncard volume-based products, our core card-based volume take rate has still been in the mid-90s. And has still been very healthy and very consistent in the mid-90s. So I think that's a good way to think about that, the take rate outside of the 20% to 25% of the business that's not card volume-based. And going forward, I think the total has been about 115 basis points. I think with the mix to enterprise wins, that could come down a little bit, not a lot. It wouldn't be from a competitive pressure standpoint, it would be from mixed enterprise and a mix to B2B. B2B take rates are slightly below the overall average as well. So between the mixed enterprise and B2B, I think they could come down. That being said, we still feel good about gross profit margins. And so even in a lower take rate, if we can drive the gross profit dollars through hold margins, that to us is a lot more important than if the take rate moves around a little bit.
Thank you, Tim. That was a good segue into the next topic around your gross margins. So they've been healthy, and they were sort of in the low 70s back in 2019. Maybe you could just talk around how they've been able to come to where they're at and how we should think about them looking forward, partially related to a lot of these mix issues, but also related to your in-house processing capabilities and how that benefits gross margins.
Yes, we've seen nice pickup from low 70s to 75%, 76%, which is I think is a pretty healthy place for us to be. And a lot of that has to do with us managing the business well and owning our own back end, which we refer to as RCS. So when we've made acquisitions in the past, we've been able to realize synergies by moving the back-end processing to our own in-house platform, which reduces the processing costs and increases gross profit margin. And then like I said, even as we've won enterprise accounts, it might be a slightly lower take rate, but we're still driving through margin by reducing our own processing costs, negotiating with vendors to hold margins. So I think 75%, 76%, which is where they've been more recently is a good place going forward. And because we own our own back end, we have the ability to hold margin there.
Excellent, Tim. And just to clarify on the margins related to the noncard and the enterprise. So I think what you're saying is, and correct me if I'm wrong, that the gross profit dollar contributions there from those 2 are healthy. But if we look at those 2 on a gross margin percentage basis, correct me if I'm wrong, but they would both be slightly lower gross margin percentage.
They would be a slightly lower gross profit margin percentage. But what we would do is look for other ways to continue to work through our back-end to offset any potential decline in gross profit percentage from enterprise or noncard volume-based and maintain similar margins. That's where I think we have the ability to do that. Even if enterprise and noncard volume are at slightly lower margins going forward, we still think we can maintain consistency with where we've been.
Let me add, still really great cash.
So to the point of the absolute gross profit dollars .
Yes. And not only that, we're that one-stop shop. So if you want to, say, on the B2B side, obviously, we're doing -- we'll send it as a virtual card and we'll send it out as an ACH or we'll send it out as a check. So all of those have different metrics to us, but we're doing everything. And so that's part of the holistic package and still very profitable. It just may look -- difference in metrics, but still a very good total package by client as well.
And I'll add, one of the reasons we've always managed the business to gross profit for is because, this point that it gets us closer to free cash flow. And we manage the business to gross profit. We pay our sales reps commissions based on gross profit. We price new deals based on gross profit. All of which we think helps us hold margin and drive more to free cash flow as we get further down the P&L.
Thank you, John, Tim. Well, as we continue to work down the P&L, a nice segue again as we start to think about operating expenses. So I think we covered volumes and take rates and gross margins pretty well. Let's talk about OpEx and some of the big components there, some that might grow a little bit more quickly, some that you might see more leverage. And in general, how we should think about organic OpEx growth?
Yes. I mean we're trying to find operating leverage, of course, as we scale big areas of investment have been sales, product and technology. I mean those are our focus areas and within that, particularly in enterprise sales. And then we try to find other ways to be efficient. For example, in this environment, we've been doing a really good job of managing our rent expense. With fewer people going back to offices, we've now had the opportunity to consolidate some offices and scrub every other component of OpEx, trying to find ways to find leverage outside of nonrevenue-generating areas. And so that rent expense is just one example of that. Technology expense, of course, is very important, not the CapEx portion, but the OpEx portion where we have to always be able to scale up for larger customers. That's something we go negotiate with the vendors and try to bring that down on a per unit basis. We're always looking for ways to find opportunities to manage OpEx growth. And we want ultimately to be able to drive faster adjusted EBITDA growth and gross profit growth, which is finding leverage in OpEx.
Just to add a little bit more. So it's been almost 2 years since we've actually done an acquisition. So we've used that time to really hone in on trying to find additional ways to just make ourselves, our business more excellent in what we do. And we found many of those opportunities, we're continuously getting better at that, and it includes looking at OpEx, looking at -- we really look at it as every dollar is an investment dollar, and where do you put that and how do you invest that. And we still think growth is the opportunity there. So we still lean in that direction but very -- with a high degree of discretion on that as well. But as we move these -- we took that opportunity over the last couple of years to actually consolidate certain parts, which we've constantly always been doing. But one of the things we're honing in as well is our platforms, our technology platforms, although some of that is buried in technology and buried in CapEx. But we're looking -- we're using that to also understand how can we make those pieces better and more efficient. The other thing that you may see from that as well is, just touching on that topic, we also carved out Blue Cow because we didn't find it to be a core asset as an efficient way for us to manage our business on that side. So we have a high keen effort to try to drive more free cash flow generation, and that's one of our goals for next year.
Well, let's touch on that a little bit more in terms of free cash flow conversion, and it relates to the CapEx point. So you talked about getting CapEx down into the kind of 12% to 14% revenue level for next year, I believe. And that will certainly help to improve free cash flow conversion. Maybe we just talk about some of the components that are in CapEx that might not repeat next year, largely related to the RCS investment. And then if you can, to the extent you can expand upon thoughts on how we should think about free cash flow conversion creeping up over time.
Yes. I mean I think the biggest driver will be reducing CapEx down to 12% to 14% next year and potentially even lower in the outer years. And some of the nonrecurring CapEx investments that happened this year are related to the modernization of RCS, like you said. We think we're very unique and differentiated in owning our own back end. We process for about 30 external customers, but more importantly, we process for Repay, our own customers. So we need to keep that modern and we keep that competitive. So that's something that was pretty big investment this year that's not recurring. We've done a lot of work, as John said, bringing our platforms together from some of our acquisitions. But we see the work on that as nonrecurring. We've done some real significant refreshes of our ISV relationships. Some of that work doesn't have to happen again. So these are areas where we thought it was necessary this year particularly when we've been -- we haven't been focused on acquisitions. We've been focused more internally on organic growth to clean up some of these. And some of these investments, some of these projects set us up for success in the future. Like I said, those are the big buckets of nonrecurring and going forward, 12% to 14% is a good number. So I think if we can drive scale and find an operating leverage so we can drive adjusted EBITDA growth faster than gross profit growth, and if we can bring down CapEx to 12% to 14%, you can see how that could accelerate free cash flow conversion. If we continue to compound like that on adjusted EBITDA and bring CapEx even lower than 12% to 14% in the outer years, you can see how that accelerates even more. So there's absolutely a path to acceleration, which we've been saying all year. We recognized a tick up in CapEx this year which we expect to come down.
Because of that portion that won't recur?
Yes.
Well said, Tim, thank you. So still some room for investment, but some improvement because some of these nonrecurring or the RCS investment will come off. Let's dig into a little bit some of those internal organic investments. Maybe talk a little bit about where you'd be spending with either your sales channels, salespeople, sales channels, or other kind of R&D-related projects that might get your attention or dollars.
Yes. So we're going to continue to invest in our enterprise sales. We've made some investments just recently on that. You'll see, on any given year on the enterprise sales side, you're investing really -- we'll be investing in '24 for '25 in a lot of ways. That's going to be the case. We'll invest in what we consider to be competitiveness of innovation and some of that is in CapEx. We continue to drive that. We're refreshing our integrations with our ISVs. So as we're adding more digital wallets or modalities to that, we actually have to do some form of refreshment with that integration. And we have over 250 of those now. So those are investments. We'll prioritize each one of those on how big and how -- the market opportunity there. All those things will drive actually stickiness, which helps us maintain margins. Those are investments, some of the key things we're going to be doing. And we talked about driving efficiency around our core platforms and making those more. We've also invested in security, cybersecurity, et cetera. The world kind of seems to forget about that. We move money, so we understand that. So we're always going to -- that's a hidden investment that's inside of -- should be inside of every business. And we take that serious. So we do invest there, that doesn't necessarily go away, but there are some onetime things that we did. There were some platform things over the last couple of years that we think have long-term legs to it.
Yes. I'll give you a couple of examples. We're implementing the second large captive auto client throughout the early part of next year. There will be some dollars needed for that. We just announced Blackbaud as a very large partner on the AP side. Blackbaud has over 40,000 clients. There will be a lot of technology investment dollars to basically embed our AP solution to Blackbaud and then roll that out to their client base. So those are examples of investment dollars that have many years of growth and legs. And so it makes a lot of sense to do them.
Okay. Great. Thank you, Tim. So John, you alluded to this, it's been a little bit of time since you've made an acquisition. But before that, you had made a good number, CPS, BillingTree, Kontrol, Payix, TriSource, the now RCS that we referenced earlier. So it's been a good list, but it's also been some time. Before we move on to the next round of M&A, maybe we just take a pause on the acquisitions that you've digested. Are there any areas to call out where you've been really, really pleased with maybe the revenue or the cost synergies? And a final question there is fair to say that we're kind of through all the integration and now we're kind of steady as she goes.
Yes. Sure. So capital allocation is really important to us. M&A was super important to us and it allowed us to drive to the scale we are today. If you go back to our very first acquisition, and I remember someone asking why would we make that acquisition, we actually bought a company called TriSource, which means we actually own our own clearing and settlement engine in the payment world. That turns out, if you want to see the value to us of that go and look at our inter-companies and that, really, we wouldn't have that intercompany without all of that savings because we own that piece of it. So we own our own -- we process on behalf of ourselves there. So we think it's -- if I look at kind of a really super positive for the reasons we thought that we didn't exactly know when we did the acquisitions. But that allowed us to capture those synergies around all the payment flows and the payment mechanisms around that. I would call that out as one of a few very successful. I would also call out that we got into B2B before it became the popular buzzword. And we didn't realize that the whole digital transformation be accelerated by the pandemic. But I would think those -- that piece of our -- that's many years of tailwinds behind that part as well. And then our investments into some of these verticals have really diversified around multiple different verticals. It's driven our scale. So I think we've made a very valuable use of those dollars. If you also look back, the only debt we have is the $440 million of converts. And during that time, I think we took that out at $24 with a 40% premium, 0% coupon. And we bought several of these companies with that, those dollars. We bought cash flow with it. We didn't just buy growth. And I think if you look at that, we got 2 more years of that, you'll find that to be a very successful investment when it comes to creating value. Do I think we've been rewarded for all that just yet? No. But I do think we've done a nice job of building multiple -- probably 3x our revenue and twice our EBITDA over that period of time.
And we've converted -- we've successfully converted BillingTree to the back end. We've converted RCS to the back end, we're converting Payix to the backend, which is just about complete. But to your point on being done with some of this work, it's not completely done, but we have done the significant conversions that drive real cost savings. And that's a good example of just the value of owning RCS, the real conversions that we've been successful in executing. So I think the M&A strategy was core to what we did, but I also think it's been really nice to take a pause on that.
Very nice. And on those conversions over to RCS, it's fair to say that there were 2 components there. One was having the expiration of their -- whatever existing contracts they might have had with another processor when you acquired them. And then the other piece is the technical integration.
It is both. And sometimes there's ways to accelerate the contract portion of it, of course. But we have to do the math on that and figure out what makes the most sense. But yes, it's usually figuring out the contract terms and then the actual technical move and making sure the most important thing is there's no disruption to the clients.
Yes. Probably the underappreciated version of that is to move an entire customer base with limited to no disruption is very difficult to do and capture the savings. We -- just because we've been doing that for a while. We understand that. And some unique things about our ability to do some things there allows us to do some things. We didn't have to really physically touch that person -- those clients one by one. That's complicated. Having our own technology, having our own gateway, having our own tech stack, that allowed us to really capture those things with limited disruption.
All right. Thank you. Well, I think we have a few minutes left here. Let's try and wrap up. So we just kind of recapped past M&A and the successes you've had there, RCS and others. Let's talk about where we sit now. And John, you also kind of mentioned this in terms of your debt. So maybe, Tim, you can give us -- kind of give an update on where you sit in terms of leverage and cash and your ability to do more deals. But maybe more specifically, what's attractive to you? Is it new verticals? Is it new geographies?
I mean we've been focused on reducing that leverage. We're at 2.5x net leverage today, which we're pleased with. We have pretty flexible capital and the convert flexibility to manage that liability. Of course, from a capital allocation standpoint, we're most focused on organic growth. We do have a share repurchase program, an authorization of $50 million. We executed on $10 million of that previously, and we'll opportunistically continue to do that. And then from an M&A perspective, we have a very high bar. High bar has to be very strategic and the valuation has to make sense. We've looked at a few deals recently across both the consumer space and B2B and just couldn't get their own valuation, and we stay disciplined. We'll continue to be disciplined. I think we would like to scale or I know we'd like to scale our B2B business, if we're thinking about what's attractive to us. The AP part of B2B is attractive. There are certain integrations in the AR part of B2B we don't have. So acquiring a business that has those capabilities, those integrations could be attractive. So those are a couple of the areas we focus on. And again, we're going to be very disciplined.
Thank you, Tim. I think we're coming to the end here. I think it's probably best we could wrap here. But I want to say again, a special thanks to John, to Tim and to Stu for joining us here in Arizona. It's been a pleasure hosting you guys.
Absolutely.
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