Repay Holdings Corporation (NASDAQ:RPAY) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good afternoon. I would like to welcome everybody to REPAY’s First Quarter 2023 Earnings Conference Call. This call is being recorded today, May 10, 2023. I would like to turn the session over to Stewart Grisante, Head of Investor Relations at REPAY. Stewart, you may begin.

Stewart Grisante: Thank you. Good afternoon, and welcome to our first quarter 2023 earnings conference call. With us today are John Morris, Co-Founder and Chief Executive Officer; and Tim Murphy, Chief Financial Officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today’s results and in our most recent Form 10-K and 10-Q filed with the SEC. Actual results may differ materially from any forward-looking statements that we make today. Forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.

In an effort to provide additional information to investors, today’s discussion will also include references to certain non-GAAP financial measures. Reconciliations and other explanations of those non-GAAP financial measures can be found in today’s press release and in the earnings supplement, each of which are available on the company’s IR site. Those materials include reconciliations and other explanations with respect to REPAY’s organic growth. As described in our materials, Q1 2023 organic growth is calculated by excluding incremental contributions attributable to Blue Cow software business in Q1 2022. Since REPAY divested Blue Cow during Q1 2023. With that, I now would like to turn the call over to John.

John Morris: Thank you, Stewart, and good afternoon, everyone. Thank you for joining us today to review our first quarter results. which provided a strong start to the year. On an organic basis, in Q1, we reported revenue growth of 12% and gross profit growth of 13%. We believe these results highlight the benefit of our resilient and diversified business model. Organic growth was largely driven by strong performance in our Consumer Payments segment. We remain excited about the opportunities across both the Business Payments and Consumer Payment segments. We also now have 248 software integration partners across REPAY, enabling our go-to-market to develop robust sales pipelines across our verticals. From a business perspective, during the quarter, we continued to make progress streamlining and optimizing our organization while also investing in growth.

As we discussed on our Q4 call, we have segmented our results as well as our organization into Consumer Payments and Business Payments. And on February 15, we completed the divestiture of Blue Cow. This has enabled us to place a greater focus on the needs and results of each business line. Our Consumer Payments segment experienced 17% organic gross profit growth year-over-year, mainly driven by recent large client implementations, the ongoing secular tailwinds within the payments industry as well as the demand for our products, along with our focus on go-to-market and product expansions. During the quarter, we added 4 new software partners in Consumer Payments. bringing our total software integrations to 154. We are also focusing on expanding our relationships with these partners by enhancing our existing integrations with new product features and payment modalities as well as decrease in our sales efforts.

Our internal sales efforts continue to focus on large enterprise clients, and we are winning. In Q4, we signed a large private captive auto lender. And during Q1, we signed another large captive auto lender which is the internal finance arm for 1 of the largest automakers in the United States. REPAY will be providing a full suite of debit card and ACH payment processing for new and used vehicle payments across the captive auto clients enterprise. We continue to believe that the automotive market is a great opportunity for future growth. Credit unions also remain a focus of ours. We signed 11 new credit union clients this quarter, bringing our total credit union customers to over 250. We continue to enhance and upgrade our integrations with partners such as MeridianLink and Jack Henry Symitar in order to facilitate accelerated distribution within this key vertical.

The underlying trends have not changed from last quarter. We are still seeing demand for our clients’ products and our clients are looking to us for more ways to engage and interact with the borrower from a payment perspective. Mortgage servicing space continues to be a growth opportunity for Consumer Payments segment. Digital solutions help mortgage servicers keep their cost of servicing down. From an acceptance methods to customize messaging tools to automated servicing transfers is easy to enable better borrower experiences with REPAY. We found from our recent internal consumer perception study conducted by Visa, more than half of consumers are interested in using a debit card to pay their mortgage bill. In addition, our conversations with existing and prospective clients indicate strong demand for additional payment modalities within the mortgage vertical.

Our partnership with Black Knight to offer a truly differentiated capability continues to progress. And we are teaming with Visa to align our growth force in new payment flows of the future. On the product side, we’re excited to announce that we are adding PayPal and Venmo U.S. digital wallet services to our suite of payment solutions, making them available to clients across REPAY’s verticals. With the addition of these digital wallet capabilities, REPAY’s clients will have the ability to accept payments using funds from customers, PayPal and Venmo accounts, enabling secure and convenient payments and eliminating long payment forms. This additional offering is designed to help clients boost their overall revenue as companies have found supporting preferred payment methods makes customers likely to make more payments on time.

Our Instant Funding product which we process real time through Visa Direct and MasterCard Send continues to perform strongly. In the first quarter, transaction volumes were up approximately 45% year-over-year. And lastly, our modern RCS platform continues to take share and received a positive reception at the most recent Electronic Transactions Association Conference. We recently announced that MiCamp Solutions has selected REPAY as its back end clearing and settlement processor. We’re selected due to REPAY’s ability to deliver customizable and comprehensive solutions while also providing an ever-increasing important operating model with banking and transaction processing redundancies. Moving on to our Business Payments segment. During the first quarter, Business Payments gross profit grew single digits year-over-year.

Our net new growth was impacted from lapping political media spending, implementation time line delays and a large client being acquired. Exiting the quarter in March, we saw positive momentum. Additionally, our sales pipelines remain as robust as ever. Our integrations with dealer management systems and hospitality management systems are leading to shorter sales cycles with larger clients. During the first quarter, we went live with previously announced LifeBridge Health in the Baltimore area and signed several large hospital systems within the healthcare vertical. In the property management vertical, we are adding hotel properties, driven by our recent integrations to HelloGM and HIA. And in the municipality vertical, we recently onboarded a large county in the Northeast with a multibillion-dollar annual budget.

During the quarter, we continued to increase our internal sales and account service teams to further penetrate this massive business payment market. We added 4 integrated software partners during the quarter and are now integrated with 94 in total. One of our new technology integrations was with Optima, a software and services firm specializing in providing IT consulting and digital transformation solutions. The integration will enable Optima’s customers to further streamline accounts payable processes and securely pay vendors and suppliers directly to Optima’s intelligent accounts payable automation solution. We are adding a technology integration with Microsoft Dynamics 365 Business Central, enabling Dynamics customers to send and automate accounts payable AP payments through the REPAY platform.

This integration aims to streamline operations, improve relationships with vendors and suppliers and support the evolution of businesses moving towards overall digitization. Additionally, we continue to build our vendor enablement functionality, now reaching over 174,000 suppliers in our AP supplier network. And we’re consistently looking for ways to find processing cost synergies in the business. In March, we began realizing the cost savings from a strategic initiative to consolidate processing of business payments AP volumes. So as you can see, a busy and productive quarter for the team across consumer payments and business payments. We remain focused on executing on our strategy as we see an incredible amount of organic growth opportunities.

While also continues to monitor M&A landscape and related valuations. REPAY is currently well positioned with a strong balance sheet, growing profitability to accelerate cash generation while maintaining the potential for strategic M&A. To wrap up, before turning the call over to Tim, I am proud of our progress we have made so far this year. Our sales pipelines are strong and growing. We have new products rolling out as we speak that we believe will drive new and existing client adoption. We’ll also have 1 of the best teams in the industry that believes in our mission and is excited about the road ahead. With that, I’ll turn the call over to Tim to provide more color on our results and updated thoughts about the remainder of the year. Tim?

Timothy Murphy: Thank you, John. Now let’s go over our Q1 financial results before a review of financial guidance for 2023. In the first quarter REPAY delivered solid results across our key metrics. Card payment volume was $6.6 billion, which was impacted by tax refunds being down approximately 10% this year. Revenue was $74.5 million, an increase of 12% on an organic basis over the prior year first quarter. This represents a take rate of approximately 113 basis points. Take rates were higher primarily due to a lower average tax refund amounts in 2023 versus prior years, resulting in lower repayment volumes and typically experienced during tax refund season. In addition, we had strong performance in several of our noncard volume-based businesses within Consumer Payments, specifically in Communication Solutions and Instant Funding.

Incremental revenue attributable to Blue Cow in Q1 2022 was approximately $0.9 million. Gross profit was $56.6 million, an increase of 13% on an organic basis. This organic gross profit growth removes approximately $850,000 of incremental gross profit attributable to Blue Cow in Q1 2022. Our Consumer Payments segment reported an organic gross profit growth of 17% in Q1. As John mentioned, we saw continued strong growth from existing clients and recent large client implementations. Our Business Payments gross profit increased 2% year-over-year. Business Payments net new growth was offset from lapping political media spending during the ’22 election cycle, delays in implementation on the client side and lower volumes from a large client who started consolidating payment providers after being acquired.

Exiting the quarter, Business Payments gross profit growth when excluding media, accelerated, demonstrating the ramp in our sales pipeline while realizing the benefits from our processing cost optimization and automation initiatives. First quarter adjusted net income was $19.2 million or $0.20 per share. Lastly, first quarter adjusted EBITDA was $31.2 million. First quarter adjusted EBITDA as a percentage of revenue was 42%. Adjusted EBITDA margins came in lower than expected during the first quarter due to this year’s tax refund seasonality, resulting in higher revenue take rates along with continued investments towards sales, product and technology. For the 15th consecutive quarter as a public company, on an organic basis, REPAY has surpassed the rule of 40.

We continue to believe that the combination of double-digit organic gross profit growth, along with best-in-class adjusted EBITDA margins makes us unique compared to our peers. Our net leverage is now approximately 2.8x on a pro forma basis. We expect our net leverage to naturally decline during the year from our strong profitability and cash flow generation, excluding any potential M&A. As of March 31, we had approximately $92 million of cash on the balance sheet with access to $185 million of undrawn revolver capacity for a total pro forma liquidity amount of $277 million. REPAY’s debt of $440 million is convertible with a 0% coupon and does not mature until February 2026. Moving on to our outlook for 2023. Our year-to-date results remain resilient based on the current macroeconomic uncertainty, we are reaffirming our 2023 outlook.

We expect volume to be between $26 billion and $27.2 billion, revenue to between $272 million and $288 million, gross profit to be between $216 million and $228 million and adjusted EBITDA to be between $122 million and $130 million. As we talked about on our Q4 call, the growth implied by our 2023 outlook assumes a mild to moderate recession. As we previously mentioned, organic growth is expected to be slightly higher in the first half of 2023 due to tough comps in the second half of the year while we maintain the normal cadence of quarterly contributions. As a reminder, we will be lapping strong results in our Business Payments segment due to the political media cycle in 2022. For additional details on 2023 organic gross profit growth, please refer to the 2023 outlook bridge on Page 12 of our earnings supplement posted to the company’s IR site.

We continue to expect adjusted free cash flow conversion to remain strong in 2023, accelerating throughout the year into 2024 as we realize the benefits from investments we made in sales, product and technology over the past several years. We’re off to a strong start in 2023 and look forward to continuing this momentum throughout the remainder of the year. I’ll now turn the call back over to the operator to take your questions. Operator?

Q&A Session

Operator: [Operator Instructions]. And our first question comes from the line of Ramsey El-Assal with Barclays.

Operator: Our next question comes from the line of Peter Heckmann with D.A. Davidson.

Operator: Our next question comes from the line of Andrew Schmidt with Citi.

Operator: Our next question comes from the line of Sanjay Sakhrani with KBW.

Operator: Our next question comes from the line of Andrew Jeffrey with Truist Securities.

Operator: Our next question comes from the line of Bob Napoli with William Blair.

Operator: Our next question comes from the line of Timothy Chiodo with Credit Suisse.

Operator: Our next question comes from the line of Joseph Vafi with Canaccord.

Operator: Our next question comes from the line of Charles Nabhan with Stephens.

Operator: [Operator Instructions]. Our next question comes from the line of James Faucette with Morgan Stanley.

Operator: Our next question comes from the line of Mike Grondahl with Northland Securities.

Operator: Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back to John Morris for any closing remarks.

John Morris: Thank you. We are very pleased with our first quarter results. We remain focused on executing our strategy as we see incredible amounts of organic growth opportunities, and we’ll continue to invest in those. We will continue to execute our operational efficiencies as we expand our sales pipelines and we’ll continue converting on our implementation pipelines as well. Look forward to speaking with you in the next coming weeks here. Thank you very much.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.