Repay Holdings Corporation (NASDAQ:RPAY) Q4 2023 Earnings Call Transcript

Repay Holdings Corporation (NASDAQ:RPAY) Q4 2023 Earnings Call Transcript February 29, 2024

Repay Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. I’d like to welcome everyone to REPAY’s Fourth Quarter 2023 Earnings Conference Call. This call is being recorded today, February 29, 2024. I’d like to turn the session over to Stewart Grisante, Head of Investor Relations at REPAY. Stewart, you may proceed.

Stewart Grisante: Good afternoon, and welcome to our fourth 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. 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. I wanted to cover three main topics today. First, a review of the fourth quarter. Second, a recap of our accomplishments in 2023. And lastly, go over our strategic initiatives that will drive growth in 2024 and beyond. First on Q4. On a normalized organic basis, we reported revenue growth of 14% and gross profit growth of 13%. With both metrics performing ahead of our expectations. We closed out the year seeing the continued demand from existing clients adopting more payment capabilities and new clients demonstrating the need for our powerful technology. REPAY has become a leading expert within the consumer payments and business payment verticals we serve.

We have become a one stop platform to optimize payment streams, and are constantly working to capture new payment flows on enhancing client relationships with many value added services. In Q4, our consumer payments organic gross profit growth was 13%. 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 added many new partners and clients to our network in Q4, including, or new software partners, bringing us to a total of 165 partners in the consumer payment segment. One example, was our launch with AKUVO, a leading provider of cloud based software that elevates how financial institutions collect and manage their portfolios.

The integration with AKUVO’s collection management software will enable financial institutions to accept digital payments, while utilizing a secure real time data in exchange for streamlined operations, robust reporting, and simpler reconciliation. We also recently announced an integration with Lexop, a self-service software for credit unions, financial institutions and other financing companies that optimizes the repayment journey for past two consumers. The repayment integration with Lexop collections management software enables their clients to collect late payments more efficiently, receive real time payment updates and increase engagement and minimize loan servicing costs. We added 10 new credit use to repay bringing our total credit union clients to 276 REPAYs vertical expertise and software integrations are a differentiated solution leading to a healthy sales pipeline.

As an example, a new credit union client was evaluating multiple processors to solve all their payment processing needs before selecting REPAY. We believe we are the only market participant that has a combination of integrations with our client’s core platform on banking platform and collection platform to fit their unique needs. In addition to credit unions, we’re also addressing a similar client base and community banks and winning new clients through our existing software integrations. These new wins continue to give us the confidence that our investments towards creating software partnerships and further embedding our payment technology within existing integrations are leading to a strong sales pipeline with positive returns across REPAY.

Additionally, in value added services our incident funding product continues to see significant growth with transactions up approximately 45% year-over-year. We had a very productive quarter for our Business Payment Segment, which grew gross profit by 25%, when excluding the impact of political media during 2022. Our normalized gross profit growth was driven by sales penetration within software partners, and a strong implementation pipeline for enterprise and mid-market companies, within our healthcare property management, auto, and municipality verticals. Within AR, we remain focused on deepening our client bases within existing ERP systems and optimizing payment acceptance. And on the AP side, we increased our supplier network to over 261,000 suppliers during the quarter.

Our real time vendor enablement continues to drive the number of suppliers with our network, which drives the monetization of digital payment flows and deeper virtual card penetration. We find many new clients across our verticals during the quarter and we also continue to grow with our existing clients. A great example of this is Baywood Hotels, whose management portfolio spans many well-known brands is one of the fastest growing hotel management and development companies in the United States. We signed and began implementing for Baywood hotels earlier this year. And they have continued to expand on our AP platform by adding many new hotel properties each month. We are now integrated with 97 software partners in the business payment segment.

A few new and expanded partnerships to highlight include Blackbaud, PDI technologies and Sage. REPAY’s enhanced integration with Sage intact will supplement our existing integrations across Sage’s product suite. Software providers are selecting REPAY to directly embed our payment technology into their software, as they strive to enhance their users experience by providing value added services to their customers. And now on to the next topic, a review a full year 2023. From a financial perspective, we demonstrated normalized organic revenue growth of 12% and gross profit growth of 13% while improving our free cash flow generation throughout the year. From a commercial perspective, we made great progress as well, including the continued focus on our sales and distribution resources.

We now have over 262 software partners up from 240 at the end of 2022. In addition, we aligned our internal sales, implementation and support teams to focus on specific verticals and software partners, as well as strengthening the customer experience. And throughout the year, we added talented team members and select areas of our organization while reducing overall net headcount and maintaining our margin profile. We increased our supplier network 60% year-over-year to 261,000 vendors. On the product side, we rolled out additional payment modalities such as PayPal and Venmo, also enhancing our E-cash Solution. We also made progress on our mortgage debit accepted initiatives with Black Knight. In addition, we make key hires to ensure our product team can support the rollout of future products and services to support our customer needs.

From a capital allocation standpoint, we started the year streamlining the organization with a divestiture of Blue Cow software, which helps us to remain focused on investments towards organic growth. And during Q4, we utilize our share repurchase program to buyback shares in a disciplined way. The work we put in this past year positions as well to execute towards REPAY’s mission of helping businesses make and receive payments, so they can focus on what matters most to them. This effort involves meshing together a vast ecosystem of payment flows with many moving pieces over the past decade plus. It involves the connectivity of all various networks that allow us to move money, including our card payment rails, RTP, or instant funding via Visa Direct and MasterCard Send.

It means that we need to provide omni modality and omnichannel. It includes the software network of embedding payments directly within enterprise software workflows. These integrations open up large verticals with critical mass and allows us to create a network with our — within our end markets. On the business payment side, we have developed a vertically rich supplier network to create a flywheel for the future and eventually expand capabilities to enhance our vendor enablement process. This means we’re a full service processor providing value added services like instant funding and communication solutions, while also working on various strategic initiatives and opportunities to expand over time. The value created is the digitalization of payment flows.

While also optimizing transaction routing to deliver the best payment experiences to our clients and their customers. While we are relatively already in this continuous mission, we are starting to see improved growth, which we believe will drive higher returns over time. As we return to 2024, we will align our strategic initiatives with this mission while driving growth this year and beyond. As we continue to take advantage of the secular trends towards frictionless digital payments, we will be squarely focused on first, go-to-market efficiency. We will continue to expand our services and to leverage our now 262 integrated software partners, are finding ways to further penetrate these relationships. We look to add new software partners to help fill our expanding sales pipelines.

And we will selectively add enterprise sales team members to specific verticals within consumer payments and business payments. Second client implementations. We remain focused on making sure we guide our clients through a seamless onboarding process, while providing ongoing and first class support throughout the entire client experience. And third product. Our tech platform is constantly evolving, as we have developed a best-in-class clearing and settlement engine while expanding our payment modalities. As we look into the future, our platform continues to scale as we automate manual processes. Lastly, our capital allocation priorities remain focused on creating value to our shareholders, by investing in organic growth opportunities. While continue to be open to a creative strategic M&A, as well as buying back shares in a disciplined way.

We exited 2023 with a solid execution that has continued into January with consistent trends and strong growth. With that, I’ll turn it over to Tim to go over our financials and our outlook for 2024. Tim?

Tim Murphy : Thank you, John. Now let’s go over our Q4 financial results, before I review our financial guidance for 2024. As reminder Q4 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 fourth quarter of 2022. In the fourth quarter, REPAY delivered solid results across all of our key metrics. Card Payment volume was $6.4 billion, revenue was $76 million, an increase of 14% on a normalized organic basis over the prior year fourth quarter. Our business continues to benefit from strong performance in both card base payment revenue, as well as other value added services such as, communication solutions and Instant Funding center funding, along with higher yields and business payments.

Revenue attributable to Blue Cow and political media in Q4 2022, was approximately $3.3 million and $2.8 million respectively. In Q4, normalized organic gross profit grew by 13% year-over-year. This normalized organic gross profit gross removes approximately $3.2 million and $2.5 million of gross profit attributable to Blue Cow and Political Media in Q4 2022, respectively. Our consumer payments segment reported organic gross profit growth of 13% in Q4. Our business payment segment, gross profit grew 25% when excluding the impact of political media during Q4 2022. Fourth quarter adjusted EBITDA was $33.5 million representing 44% margins. Importantly, Q4 adjusted EBITDA margins improve sequentially, as we have maintained relatively stable SG&A cost on a quarter-over-quarter basis, while simultaneously working to align our sales implementation and support teams throughout the year.

Lastly, fourth quarter adjusted net income was $26.3 million or $0.27 per share. Pro forma net leverages is now approximately 2.6 times. We expect net leverage to naturally decline throughout this year from our strong profitability and cash flow generation, excluding any potential M&A. As of December 31, we had approximately $118 million of cash on the balance sheet with access to $185 million of undrawn revolver capacity or a total liquidity amount of $303 million. REPAY’s total outstanding debt of $440 million is comprised of a 0% coupon convertible note and does not mature until February 2026. During the fourth quarter, we used $13.5 million of cash for software partner residual buyout and $2.5 million of cash for share repurchases. As of December 31, we have $37.5 million remaining available under our current share repurchase authorization.

Moving on to our thoughts for 2024. For a full year 2024 outlook demonstrates our consistent growth algorithm of growth with existing clients. The full year contribution from clients that began ramping during the prior year and growth from signed new clients. We expect revenue to be between $314 million and $320 million, we will no longer be providing guidance for CPV. Our company has evolved over the years to now have over 20% of revenue attributable to value added services that are non-card volume tied revenue streams. We expect gross profit to be between $245 million and $250 million, and adjusted EBITDA to be between $139 million to $142 million. We expect roughly 44% adjusted EBITDA margins. As we expect adjusted EBITDA to grow faster than revenue and gross profit during the year, leading to an acceleration of cash conversion.

We’re introducing a free cash flow conversion target of approximately 60% for full year 2024. Free cash flow conversion is calculated by dividing free cash flow by adjusted EBITDA. We plan to reduce overall CapEx spending, giving us the confidence to accelerate our free cash flow conversion throughout 2024, leading to free cash flow growth of approximately 60% year-over-year, and sustained mid to high teens growth thereafter. We continue to execute on our strategic priorities. And while we have more work to do, we were seeing the sales pipeline develop, giving us confidence for our multi-year growth opportunity. Planning assumptions around the 2024 outlook involved or measured ramp of the previously announced auto captive win, while lapping strong growth from enterprise clients during 2023.

Due to the uncertainty around volume timing, our 2024 outlook does not incorporate significant second half contributions from the mortgage debit acceptance opportunity, and the recently announced business payments enterprise software integration such as Blackbaud. Our quarterly cadence for 2024 is comprised of Q1 being positively impacted from the seasonality of tax refunds. Our Q3 and Q4 will benefit from the incremental contributions of our political media business in the business payments segment. Our tax refund season began later this year. Early data suggests the total refunds will be consistent with last year, the average refund size may be up slightly compared to prior year. Q1 free cash flow conversion is expected to be closer to the full year 2023 profile, due to quarterly timing around networking capital and it is expected to accelerate throughout the year.

As you can see from our results and outlook, we expect free cash flow conversion to improve throughout 2024, as we reduce CapEx, but also realize the benefits from investments we’ve made in sales product and technology over the past several years. We’ve always focused on profitable growth, refining processes across the business where we can scale through automation, while also maintaining investments towards innovation. I’ll turn the call back over to the operator to take your questions. Operator.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ramsey El-Assal from Barclays. Please proceed with your question.

Ryan Campbell: Hi, this is Ryan Campbell on for Ramsey. Thanks for taking my question today. Tim, what are the biggest levers when it comes to improving free cash flow conversion this year? And given the 60% rate you provided? Is that how we should think about the longer term normalized conversion rate for REPAY? Thank you.

Tim Murphy: Absolutely. So, we’re very excited about that and can feel confident in rolling out that new metric. The biggest drivers would be you know, adjusted EBITDA growing faster than gross profits. So increased profitability, reduce CapEx down to the levels we’ve said previously, which are around called 13% to 14% of revenue. Those factors combined lead to the cash flow conversion outlook of 60%. And like we said on the call, we think that can grow sustainably mid to high teens going forward. So that should lead to an even higher free cash flow conversion percentage in future years.

Ryan Campbell: Great, thank you.

Operator: Our next question comes from the line of Peter Heckmann with DA Davidson. Please proceed with your question.

Peter Heckmann : Good afternoon, everyone. Thanks for taking the question. Can you comment a little bit about your expectations for the growth in revenue related to political media spend over 2022? And then a little bit about how you’re thinking about the underlying growth business segment as we go into 2025, or growth in 2024, excluding political media spend?

Tim Murphy: Yes, so we feel good about our setup for this year’s presidential cycle. As we’ve said previously, the 2022 cycle, we had about $6 million of gross profit. And we think that’ll grow about 20% this year. So we’re expecting strong growth and that’s generally related to just the digital payment shift to digital payment trend. And then just a lot of the industry research we’ve done. So that’s how we’re thinking about the contribution for this year. And we think underlying business payments growth, excluding political media can still be mid to high teens. So we think it’s a mid to high teen growth business in the near term.

Peter Heckmann: That’s great to hear. And then what would you — can you talk a little bit about the expected margin benefit from the software park or residual buyout? Is that where we will see it show up in the gross margins?

Tim Murphy: Yes, you’ll see it show up there. And, you know, I’d say our outlook assumes that impact and so you can see a little bit of expansion in the outlook. And that’s not solely related to that. But a decent chunk of it is. And so, you know, that’s something we’ve done in the past, we have opportunities still to do that in the future. We think that’s a good use of capital, given the multiples we pay for those portfolios. And you do see that show up in in really both gross profit margin expansion and adjusted EBITDA margin expansion.

Peter Heckmann: Great, thank you.

Operator: Our next question comes from a line of Andrew Schmidt with Citi. Please proceed with your question.

Andrew Schmidt : Hey, John. Hey, Tim. Good evening, thanks for taking my questions. I just want to dig into Slide 12, the existing client growth bucket, maybe you could just drill down to that a little bit. I know historically, this has been driven by increased penetration of your existing clients wondering if that’s still the case here. There are other factors and maybe just definitional question, whether this includes clients signed in 2023 that are ramping in 2024, maybe just a little bit around that existing client growth bucket would be helpful and your visibility there? Thanks a lot.

Tim Murphy: We do have a lot of visibility there. I mean, our business is highly recurring, it’s typically tied to longer term payment streams. And so we see, a lot of growth from existing clients just adopting more of our payment modalities. And our payment channels, which drives typically drives higher debit acceptance and debit penetration, which leads to a lot of the existing client growth. And, you know, like you said, I mean, there’s also some embedded growth from clients that have been signed in prior periods that haven’t fully ramped, and usually the ramp is, is around additional adoption as well. So it’s a combination of those things. And then just the underlying clients themselves growing, helps support existing customer growth.

John Morris: Yes, Andrew, good evening. We’ll also point you to our investor supplement, which we see a bridge on new client growth as well as existing client growth in there. And also give you a couple additional points. If you look at the 45% year-over-year growth in our value added services, which includes our instant funding, those are kind of leading indicators of existing client growth. And then the network effect, we get off of some of our supplier network that growth in our — 60% growth in our supplier network that in itself drives additional growth, as well.

Tim Murphy: Yes, and it’s a good point. I mean, in the business payment side, we have a total pay solution. So we do — we outsource the entire payables function. And so oftentimes, where we’re taking payments from say check, or ACH to virtual card and driving enhanced virtual card penetration in the way we do supplier enablement and vendor enablement. And some of that could lead to existing client growth as well on the business payment side.

Andrew Schmidt: Got it. That’s very helpful. And yes, good point about the value add services, I know, that’s been an increasing part of the story over the last couple of years. So that’s well added. If I could just ask on the — for my follow up — just gave a lot of questions on the Convert. Obviously, it’s out there and 2026. What’s the philosophy around handling that? Are there opportunities to chip away at that in the interim? Or, you know, opportunistically, or is it you know, sort of weekly, a closer maturity? And then, you know, determine of course there. Anything around just the strategy there will be helpful? Thanks a lot.