Repay Holdings Corporation (NASDAQ:RPAY) Q3 2023 Earnings Call Transcript

Repay Holdings Corporation (NASDAQ:RPAY) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good afternoon. I’d like to welcome everyone to Repay’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] This call is being recorded today, November 9, 2023. I’d like to turn the session over to Stewart Grisante, Head of Investor Relations at REPAY. Stewart, you may proceed.

Stewart Grisante: Thank you. Good afternoon, and welcome to our third 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. Those 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. 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 and normalized organic growth. As described in our materials, Q3 2023 normalized organic growth is calculated by excluding contributions attributable to the divested Blue Cow software business and the contributions attributable to political media in the third quarter of 2022. With that, I would now like to turn the call over to John.

John Morris: Thanks, Stewart. Good afternoon, everyone. Thank you for joining us today to review our third quarter results. On a normalized organic basis, in Q3, we reported revenue growth of 11% and gross profit growth of 12% and 13% year-to-date. We continue to see stable and resilient trends from our clients throughout the quarter. Our Q3 results performed in line to our expectations. And we believe that these results, as well as the demand we are seeing from our clients, demonstrate the need for our powerful technology and one-stop platform to optimize their payment flows. Throughout this year, we remain focused on operating our business and executing on our strategy. Our efforts in developing our go-to-market and implementation teams, as well as continuously innovating our payment technology, remain our top priority at REPAY as we strive to be a network to all networks.

Our clients are very focused on reducing the complexities around receiving and making digital payments while enhancing the overall experience for their consumers and businesses. On the go-to-market side, we continue to expand our services into now 257 integrated software partners while finding ways to further penetrate the relationships. In addition, our internal sales teams remain focused on a multipronged approach to win clients of all sizes, including large enterprise accounts, as well as expanding our offerings into existing accounts. The customer journey also continues to be an area of focus for our sales and implementation teams. We’re finding that, in today’s environment, many of our clients are doing more with less internal resources.

So we’re making sure we guide them through the onboarding process while providing ongoing and first-class support throughout the entire client experience. As for technology, we remain committed to improving the payment experience for our clients and their customers by delivering innovative solutions that support evolving payments preferences. We’re continuously enhancing our product offerings and have been deploying automation initiatives across our organization, benefiting both our consumer payments and business payments operations. As an example, we have implemented various automation processes for charge-backs, compliance, risk monitoring and enabling our vendor supplier network, leading to significant increases in productivity, which we are expected to scale over time.

Our Consumer Payments segment grew organic gross profit by 14% in Q3. This was primarily driven by the ongoing secular tailwinds within the consumer payments verticals we serve and the continued ramp of recent large client implementations. We’re now integrated with 161 software partners in the Consumer Payments segment. Our team is excited about the new partnerships that represent a variety of software platforms, including one with our previously announced auto captive wins that will ramp during 2024 by also positioning REPAY to pursue enterprise clients across the lending universe. In addition, expanding partnerships for existing and potential new clients continues to be an area of focus. During the quarter, we deepened our integration with Solera, a global leader in vehicle life cycle management.

The expanded integration features REPAY’s suite of payment solutions directly within their platform, enabling Solera’s clients to accept digital payments through our multiple channels, including online portal, text pay and IVR. During the quarter, we added 9 new credit unions to REPAY, bringing our total credit union clients to 266. As a reminder, the credit union market opportunity represents over $185 billion in annual total payment volume. Similar to credit unions, community banks are also an important opportunity for us. For example, we signed a new community bank client that specializes in providing loans to consumers with operations in the vast majority of the United States. REPAY will expand the payment tools available to their agents and customers by offering debit card and ACH processing via newly designed agent portal and customer-facing payment modalities.

Additionally, REPAY’s payment technology is integrated within the bank’s loan management system, allowing our clients to further scale and streamline reconciliation and internal workflows. Credit card servicers as well as accounts receivable management companies continue to be attractive verticals and are a great growth opportunity for us. We began implementing some of the new wins in our growing sales pipeline while also expanding our software partners. As we look into the future, the mortgage servicing space continues to look promising. Banks have been filling back on the servicing side of mortgage industry as they are faced with increasing regulation and capital requirements, allowing nonbank mortgage servicers, who are focused on improving their technology and advancing their payment capabilities, to gain market share.

While we do process mortgage payments for several banks, these nonbank servicers represent our primary target market. In addition to this trend, REPAY is partnering with Black Knight to bring debit accepted capabilities to both existing and potential clients. We’re progressing along to bring this capability towards the second half of 2024 and beyond. Our teams have identified a group of clients and they’re continuing to engage with Black Knight on product development, testing and implementation. And lastly, our Instant Funding product continues to see significant growth with transaction volume up approximately 50% year-over-year. Moving over to Business Payments segment. During the third quarter, our Business Payments gross profit grew 13% when excluding the impact of political media during 2022.

Our normalized gross profit was driven by the continued momentum in our sales and implementation pipeline for enterprise and mid-market companies within our health care, property management, auto and municipality verticals. Our AR portion of the segment continues to perform nicely as we focus on penetration of existing ERP systems and payment acceptance optimization. And on the AP side, we accelerated our supplier network to over 233,000 suppliers, which is the largest quarterly adds our vendor enablement team has onboarded. Last quarter, we highlighted strong traction across our business payment verticals with recent wins like Castle Management Group and Property Management. We’re continuing to execute on our robust sales pipeline in Q3. During the quarter, we signed many new clients across our verticals like Sierra View Medical Center, a premier hospital and full-service health care center in California.

We are now integrated with 96 software partners in the Business Payments segment. A few new partnerships to highlight include PDI Technologies, OMNIA Partners and Blackbaud. PDI Technologies is a leading global provider of software solutions for the convenience retail and petroleum wholesale ecosystem. With our partnership, PDI Technologies’ clients can now rely on REPAY’s embedded accounts payable automation within their software ecosystem to reduce costs by experiencing greater control and transparency. We recently announced a partnership with OMNIA Partners, the largest purchasing organization for public sector procurement, to add REPAY’s automated accounts payable solutions to its portfolio of national supplier contracts. Digitizing outbound vendor payments will streamline and optimize the AP payment experience for government and education organizations.

By automating accounts payable, public agencies can modernize how they make outbound payments, increasing efficiency and vendor satisfaction. And finally, we’re excited to announce our partnership with Blackbaud, a leading software ecosystem designed specifically to meet the unique compliance needs of health care, education and nonprofit organizations. Through our partnership, REPAY is the exclusive AP integrated solution for the Blackbaud platform. Blackbaud’s broad network of clients will be able to perform vendor payment automation directly with Blackbaud’s centralized platform, experiencing both time and cost savings. We are looking forward to implementing this partnership throughout the first half of 2024 and offering embedded solution with Blackbaud clients towards the second half of the year.

To wrap up, you can see the investments we have made in sales and technology are really paying off. We are partnering with leading software providers, integrating clients of all sizes and providing them with advanced products and services that enable seamless acceptance and outbound execution of digital payments. Our strong balance sheet and cash generation enable us to continue to innovate and grow organically while also allowing us to keep our eye on the M&A market in the event an attractive strategic opportunity becomes available. With that, I’ll turn it over to Tim to go over our financials and our outlook for the remainder of the year. Tim?

Tim Murphy: Thank you, John. Now let’s go over our Q3 financial results before I review our financial guidance for 2023. As a reminder, Q3 normalized organic growth is calculated by excluding contributions attributable to the divested Blue Cow Software business and the contribution attributable to political media in the third quarter of 2022. In the third quarter, REPAY delivered solid results across our key metrics. Card payment volume was $6.4 billion, revenue was $74.3 million in the third quarter, which represents a take rate of approximately 116 basis points. Take rates were higher due to continued strong performance in our non-card volume-based businesses within consumer payments, specifically in communications solutions and Instant Funding along with higher yields in business payments.

As a reminder, as we win larger clients, our mix will naturally bring down take rates over time. Revenue attributable to Blue Cow and political media in Q3 2022 was approximately $2.7 million and $1.9 million, respectively. Gross profit was $56.7 million, an increase of 12% on a normalized organic basis. This normalized organic gross profit growth removes approximately $2.7 million and $1.7 million of gross profit attributable to Blue Cow and political media in Q3 2022, respectively. Our Consumer Payments segment reported organic gross profit growth of 14% in Q3. Our Business Payments segment gross profit grew 13% when excluding the impact of political media during Q3 2022. Third quarter adjusted net income was $19.9 million or $0.21 per share.

Lastly, third quarter adjusted EBITDA was $31.9 million. Third quarter adjusted EBITDA as a percentage of revenue was 43%. Adjusted EBITDA margins remained stable quarter-over-quarter but have been partially impacted by inflationary pressures which may continue to increase costs. As a company, we have always focused on profitable growth, refining processes across the business where we can scale through automation while also maintaining investments towards innovation. This has led to REPAY surpassing the Rule of 40 on an organic basis for the 17th consecutive quarter. The combination of resilient double-digit normalized organic gross profit growth and strong adjusted EBITDA margins separates us from many of our peers. Our net leverage is now approximately 2.5x.

We expect net leverage to naturally decline throughout the year from our strong profitability and cash flow generation, excluding any potential M&A. As of September 30, we had approximately $118 million of cash on the balance sheet with access to $185 million of undrawn revolver capacity for a total liquidity amount of $303 million. REPAY’s total outstanding debt of $440 million is comprised of a 0% coupon convertible note that does not mature until February of 2026. Moving on to our thoughts for the remainder of the year. Based on the year-to-date results as well as current trends, we are raising our 2023 revenue outlook. We expect volume to remain between $26 billion and $27.2 billion, revenue to now be between $286 million and $292 million.

We are reaffirming our gross profit outlook to remain between $218 million and $228 million, reflecting normalized organic gross profit growth of 9% to 14%. And our adjusted EBITDA look to remain between $122 million and $130 million, which reflects gross profit margin and adjusted EBITDA margin ranges in line to our year-to-date results. As a reminder, during the fourth quarter, we will be lapping strong overall results in the same prior year period as well as increased contributions from our Business Payments segment due to the political media cycle in 2022. Political media added approximately $6 million of gross profit in 2022, heavily weighted in Q3 and Q4. Our full year 2023 outlook range continues to plan for a potential slowdown in the overall macroeconomic environment during the remainder of the year.

For additional details on 2023 normalized organic gross profit growth, please refer to the 2023 outlook bridge on Page 12 of our earnings supplement posted to the company’s IR cycle. As you can see from our results, we have solid momentum heading into the fourth quarter of the year. We expect adjusted free cash flow conversion to accelerate into 2024 as we realize the benefits from investments we made in sales, product and technology over the past several years. I’ll now turn the call back over to the operator to take your questions. Operator?

Operator: [Operator Instructions] The first question comes from Bob Napoli from William Blair.

See also 25 Best US Cities Where You Can Retire on $2,000 a Month and 11 Best Transportation Stocks To Buy Heading Into 2024.

Q&A Session

Bob Napoli: Solid results. I guess my first question would be just on free cash flow conversion, just your thoughts over the medium term. I mean I think that’s the #1 question that we get, and I think some visibility on that would be really helpful to the valuation of your business. And so I know you’ve made a lot of investments, including this quarter, but some color on what you’re targeting, what you think the right level is over the long term, would be really helpful.

Tim Murphy: Yes, absolutely. Thanks for the question. So yes, as you mentioned, we have made a lot of investments in our products and technology. We’ve been enhancing our existing software integrations. We’ve been combining platforms, and a lot of that work is behind us. CapEx was up a little bit in Q3, but we expect that to come down again in Q4, similar to the Q2 level. So over the medium term, as we grow the top line and bring down CapEx to be probably, call it, in the 12% to 14% range next year, 12% to 14% of revenue, and below that in the outer years, we’ll see free cash flow conversion increase. So we want to continue to invest in the business. We want to continue to innovate and build out our technology stack, build out our product suite. But I expect, as a percentage of revenue, CapEx will come down. So as we grow and CapEx comes down, free cash flow conversion will increase.

Bob Napoli: Just some take on your target would be helpful. But let’s see, the next question I would have nice results out of the consumer business, really, really strong, just any color you can give on where you’re seeing the health. I mean there’s been some noise out there that credit unions have really pulled back on auto loans or just really tightened credit. And I know you’re not tied to originations, but it does affect you eventually. But where is that strength that you’re seeing coming from? And what are your thoughts as we move into next year? I think you called out tougher comps as we move into ’24.

John Morris: So we are pleased with our strong year-to-date performance of our normalized 13% organic growth. And then obviously, we’re seeing some positive trends similar to that in October, similar to Q3. On the consumer payments side, some parts of that is continued enterprise wins that have been rolling out throughout the year, and we expect some additional parts of that. And then on the credit union side, as I mentioned on our call, we had additional credit units added to our total credit union. I think we’re now up to about 266 or so of those. The whole digital transformation is real, and that consumer experience of driving that interaction on the credit union side, we’re providing that financial technology. So we’re still seeing positive confirmations in the marketplace of the need for our technology, at least that’s the part we see.

Bob Napoli: I mean the tightening that you’re seeing in the credit union, that the market is seeing in credit union lending, isn’t affecting you because of the secular trend to digitization of loan repayments. Is that kind of…

Tim Murphy: Yes. I mean the loans are still growing in the credit union space, maybe not as fast as they were previously, but I think they still are showing some level of loan growth. But more importantly, it’s the digitization of payments and credit unions overall, just like some other financial institutions looking to upgrade their tech stacks, and part of their own digital transformation is increasing the payment experience for their borrowers. So as they upgrade their overall technology experience to upgrading their payments with it, we’re benefiting from that.

Operator: The next question comes from Andrew Schmidt from Citi.

Andrew Schmidt: Good to see the consistent results. I guess if I could put a finer point on the fourth quarter normalized organic gross profit outlook, it’s still a pretty wide range for the year. John, you mentioned good trends were consistent with the third quarter through October. Maybe you could just talk about just some of the assumptions that you’re making in the fourth quarter and then, more specifically, how you’re expecting organic gross profit growth to trend relative to the third quarter.

Tim Murphy: Andrew, it’s Tim. As I said on the call, I mean, even on a normalized basis, it’s a tough lapping quarter for us. And when I was talking about the lapping, it was for Q4. If you look at Q4 of last year, even normalized, it was the strongest quarter we had. So that lapping is just part of it. We did mention that we still feel good about trends in October, but the planning assumption for the year is that there will be an overall macroeconomic slowdown and probably the place that’s most visible is in the auto market. And so we’re planning for that. And that’s kind of how we build up to it. So part of it is lapping, part of it is just the planning assumption around potential slowdown and the continued challenge in auto.

Andrew Schmidt: And just a quick follow-up to that. Planning assumption totally makes sense, and you mentioned recessionary trends in auto, but are you seeing anything right now in the repayment volume that might suggest that things are slowing at all? Or is it more of a comp issue when we think about the fourth quarter? I guess what I’m getting at, are you seeing anything that’s changed? Or is it more about just your starting point from a planning perspective?

Tim Murphy: Yes, it’s really the comp issue and then the planning assumption. In personal loans, we’re seeing consistent trends with the prior quarter. And in fact, the large enterprise win that John referenced has been a really nice win for us and has contributed nicely. And then auto is still challenged, like we said, and the credit unions are growing nicely. So there’s positive trends, but the lapping and then just the planning assumption around the slowdown are the main drivers.

Andrew Schmidt: If I could just squeeze one more in, a question that’s on a lot of people’s minds is just the management of payment cost acceptance from enterprise suppliers. Just wondering if you’ve seen any pushback on just virtual card acceptance for large ticket items from enterprise suppliers or, generally speaking, what you’re seeing in terms of just enterprise payment cost acceptance trends. Anything there would be helpful.

Tim Murphy: We’re not seeing anything different. I mean it may depend on the end market you’re serving within AP. We have been serving auto dealerships, hospitals, municipalities, property management companies, and we’re not seeing anything different with the supplier acceptance trends. We’ve grown our supplier network really nicely this quarter to over 233,000. We’re offering a TotalPay solution, which allows us to pay them all different ways, virtual card, enhanced ACH, ACH and check, and we still see really nice virtual card adoption. So we don’t see anything in our particular end markets that would cause us to think there’s a dramatic shift in acceptance trends. So maybe it’s just unique to different verticals.

Operator: The next question comes from Ramsey El-Assal from Barclays.

Ryan Campbell: This is Ryan Campbell on for Ramsey. So your normalized business payments gross profit growth came in at 13% in the quarter. So all else being equal, given next year’s big political cycle, unlike this year, is this the normalized growth rate you should be expecting to see in business payments next year? Really, any color there would be helpful.