Q2 2020 Earnings Call
Hi.
Good day, everyone and welcome to the three verticals second quarter 2020 earnings Conference call.
Today's call is being recorded and a replay will be available starting today through may 15th.
The number for the replay is 7194 or 570 820, and the code is 8694 705.
A replay maybe also accessed for 30 days at the company's website.
It's time for opening remarks, I would like to turn the call over to Scott memory weather Chief Operating Officer. Please go ahead Sir.
Good morning, and welcome to the second quarter 2020 conference call from three verticals joining me on this call our Greg Daley, our chairman and CEO.
Hey, what's in our CFO and Rick Sanford our precedent.
To the extent any non-GAAP financial measures discussed on todays call. You'll also find a reconciliation of GAAP measure to the most directly comparable financial measures calculated according to GAAP by reviewing yesterday's earnings release. It is a comedies intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as prepared in accordance with.
Yeah. This non-GAAP information should be considered by each individual in addition to but not instead of the financial statements prepared in accordance with gap.
This conference call may contain certain forward looking statements within the meaning of the private Securities Litigation Reform Act of matching 95, including statements among others regarding the company's expected financial and operating performance and the expected in potential impact of the Kevin 19 pandemic for this purpose any statements made during this call that are not statements of historical.
Maybe deemed to be forward looking statements you were hereby cautioned that these forward looking statements may be affected by the important factors among others set forth in the company's earnings release and reports that are filed or furnished to the FCC, including risks and uncertainties associated with the kept 19 pandemic. Consequently, actual operations and results may differ materially from the results discuss.
Such forward looking statements finally, the information shared on this call is valid as of today's date and the company undertakes no obligation to update it except as may be required under applicable law I now turn the call over to the company's chairman and CEO Greg Daily.
Thanks, Scott and good morning to all of you.
We delivered strong second fiscal quarter results, despite the impact of covet 19.
As we start this call I want to first address our employees many who are listening to this call I'm extremely proud of our employees response.
To this crisis, they've been flexible and focused and I'm inspired by their dedication and supporting our customers.
One highlight in the past quarter.
It was a 25% increase in net revenue.
As revenue net revenues increased $39.3 million.
In Q2 fiscal year 2020 from 31.4 million in Q2 fiscal year 2019.
Primarily from the growth in public sector vertical.
Performing adjusted EBITDA increased the $10 million in Q2 2020.
From 8.7 million in Q2 2019.
Our integrated payments volume continues to grow.
55% of our payment volume was integrated during Q2 fiscal year 2020.
Up from 49% during Q2 fiscal year 2019.
The company had great momentum throughout the quarter.
Until the second half of March.
When we began to see the economic impact because it 19.
The common phrase to use to describe this current crisis is in these unprecedented times.
I do not think any of us imagine a time when there would be a government mandate business closures.
Stay at home orders.
Okay to 12 schools shutting down for the remainder of the school year.
We anticipate a greater impacts of cobot 19 in our financials of our third fiscal quarter.
Our education hospitality customers have had the greatest impact.
From April 2019 to April 2020, our total run rate of net revenue and education was down 66%.
The net revenue.
The run rate of net revenue and payments in education was down 90%.
Our SaaS software model helped offset the sharp decline in payments related revenue to blend to 66%.
Our restaurant and hotel customers also saw significant decreases.
Payment volumes fell in restaurants weren't as they were not allowed to host customers.
The hotel traffic was slowed.
Our net revenue from restaurants in hotels, Phil 32% in the month of March.
As cobot 19 hit mid month.
We saw continued weakness in both payment volume and new Pos system sales throughout April.
Payment volume.
Our diversification and multiple verticals have reduced the impact at any one market sector sector on our overall performance.
We anticipate this diversification will also serve us well and the recovery.
Going forward I three is focused on delivering solutions that provide contact those payments and an omnichannel platforms.
Across all verticals Cobot 19 has enhanced our customers awareness of their needs for our solutions.
We have responded with an intense focus on providing solutions that will enable our customers businesses in the current environment and the anticipated new normal.
We believe cobot 19 will lead to further migration from checking cash to electronic payments in particular public sector and education verticals will accelerate their acceptance of electronic payments integrated with software platforms.
These two verticals have historically been slower to adopt electronic payments.
One last thing in <unk> impact that's covered 19 will be a pushed from these two markets to upgrade their technology and ability to meet constituents needs.
We also believe pant public sector and education verticals will have budget pressures in the short term.
Our SaaS solution and payment platforms what.
Alleviate many of these issues.
Well, our payment volume and these two verticals have been impacted local governments and K through 12 schools don't go out of business week said expect these two verticals to rebound.
To their historic activity and growth rates.
Rick will speak about M&A momentarily.
Wanted to briefly touch on our strategy.
Due to the uncertainty and economic environment, we pause all acquisition activity.
Until there's greater visibility into the impacts of cobot 19.
We put several deals on hold.
Despite the current economic environment, our acquisition pipeline continues to build over the last several weeks.
We have a strong balance sheet.
Our recent convertible notes offering provided us with plenty of ammunition for our acquisition activity.
States are beginning to open.
We exited April was stronger payment volume than we entered.
As we see economic activity pick up we anticipate our M&A activity heating up again.
We feel like we simply hit pause.
For a few months.
So we are well positioned to both whether the short term crisis and grow in the rebound.
We have technology solutions that meet our customers' needs.
As may begins.
We see signs of continued improvement in the economy and are paying a volume.
We look forward to economic recovery and are confident in our ability to gain market share and deliver strong future performances.
Clay would you please provide financial overview.
Sure.
The following pertains to the second quarter of fiscal year 2020, which is the three month period ended March 31st 2020.
Despite the Kogut 19 downturn, we had a solid quarter with net revenues of 39.3 million, an adjusted EBITDA of 10 million.
Net revenues increased 25% for Q2 2020 from 31.4 million for Q2 2019.
Driven principally by acquisitions in our public sector and education verticals.
Acquisitions contributed approximately $9 million in the quarter.
Our net revenue yield defined as net revenues divided by payment volume improved to 110 basis points for Q2 2020 from 107 basis points for Q2 19.
Reflecting increasing software revenues.
As discussed on the call last quarter the face of the income statement shows a decline in revenue as a result of adopting yes see six so six.
Q2, 2019 presents gross revenues.
Presents revenues gross of interchange and network fees, while Q2, 2020 presents and revenues revenues net of interchange and network fees for an apples to apples comparison. Please refer to the supplemental segment in presentation contained in Yesterdays 8-K filing.
Excluding the purchase portfolios and our IPO Es business organic growth was flat for the quarter.
We entered marks on the 9% Hayes for organic growth.
Government mandated business closures school closures and stay at home orders took a toll on our our organic growth, particularly during the last two weeks of March and continued through April.
We exited April with payment volumes for the same set of companies down approximately 30%.
Year over year consolidated basis.
The first week of May has predictably improved as economic activity has begun to resume in several areas.
And we expect further improvement as more and more sectors of the economy open up.
Adjusted EBITDA grew 14% to 10 million for Q2 2020 from 8.7 million for Q2 2019.
Please see the press release for reconciliation between net income and adjusted EBITDA.
Adjusted EBITDA as a percentage of net revenues was 25.3% for Q2 2020.
I don't from 27.8% for Q2 19.
Reflecting fixed cost spread over a lower net revenues than anticipated due to the cobot 19 impact.
In the absence of the covered 19 impact we would have expected to improve our EBITDA margin this quarter.
Effective April 1st we instituted previously disclosed cost savings that save approximately 1 million per quarter.
Adjusted diluted earnings per share were 20 cents for the quarter again, please refer to the press release for full description and reconciliation.
[noise] segment performance. Please refer to the supplemental slides titled segment performance on our website and as an exhibit to yesterday's 8-K filing for reference with this discussion.
In our proprietary software and payments segment net revenues grew 93% to 14.8 million for Q2 2020 from 7.7 million for Q2, 19, reflecting acquisitions in our public sector and education verticals.
Adjusted EBITDA increased 66% to 5.9 million from 3.6 million, principally reflecting recent acquisitions in our public sector vertical.
EBITDA as a percentage of net revenues was 40% for Q2 2020 versus 46% for Q2 19.
Simply reflecting school closures and the associated absence of payment revenues.
Net revenues for our merchant services segment, excluding the purchase portfolios increased 5% to 25 million for Q2 2020.
I'm 23.8 million for Q2 19.
Principally reflecting growth that our pace payments business.
Which works, mainly with public sector software vendors with good exposure to utilities, which have held up well and the covet 19 environment.
The purchase portfolios declined 33% to 1 million inline with expectations.
Adjusted EBITDA for our merchant services segment declined 7% to 7.3 million for Q2 2020 from 7.8 million for Q2 19.
EBITDA margin was 29% for Q2 2020 versus 33% for Q2 19, reflecting the decline in the purchase portfolios, which carry higher margins.
Balance sheet.
We have a strong balance sheet the convertible notes offering we executed in February.
A lot in 138 million, which was used to repay borrowings under our revolving credit facility.
As of March 31st we had only 19 million borrowed under our revolver.
Which is a 275 million facility.
Certainly our senior leverage ratio was low 0.4 times.
Our total leverage ratio, which includes the convertible notes was 3.4 times, while the current constraint is 5.0 times.
The interest rate for the convertible notes or 1% all the interest rate for the revolver is currently around 4%.
Overtime, we expect to convert roughly two thirds of EBITDA into free cash flow, which can either be used for acquisitions or debt repayment.
[noise] outlook.
Cobot 19 pandemic has created significant uncertainty in the economy and the extent of which covered 19 will impact the company's future results is difficult to reasonably estimate at this time.
Therefore, the company is not providing a financial outlook for the fiscal year ending September 32020.
However to give a better understanding of our business mix. We have estimated representative net revenues by vertical on a run rate basis prior to covert 19.
We do not currently planned to update this in the future.
Our public sector.
Vertical represented 25%.
Hospitality, 15%.
That's that's both restaurant in hotel.
Education, 10%.
B to B, 10%.
Health care, 10%.
Retail 10%.
Nonprofit 5% and other 15%.
As Greg mentioned, we have seen the greatest impact from the pandemic and our education and hospitality verticals.
During April education payment net revenues were down 90%.
We have SaaS software revenues, which cushions that decline so the total run rate for education net revenues were down 66% in April.
Our current expectation is for K through 12 schools to reopen after labor day.
Greg discussed the decline in hospitality.
Our other verticals have seen lower impacts and we believe that our diversification positions us well for recovery.
Governments in schools do not go out of business.
Health care as an essential service and B to B will grow over time.
Digitization of payments away from cash and check will continue.
And we have differentiated payment solutions to offer our customers.
Integrated through our software and other leading software providers.
I'll now turn the call over referred to Rick for an update on M&A activity. Thank you clay good morning, everyone.
Before I talk about our M&A status I want to.
Our ski quickly give you a few updates regarding information provided on the last call and some additional new information.
First we are continuing to pursue a unified product offering in our public sector vertical we intend on offering our customers in this vertical a more robust and comprehensive suite of products that work together seamlessly.
Second relative to the peso conversion, we set a goal for ourselves to have that non integrated piece completed by the end of summer. It now looks as if we will be completed mid summer. The one caveat is that business is start opening as planned.
Third on the IC front, our total number of signed an integrated is fees at the end of our second fiscal quarter is 53 with three more in process of integration.
Fourth we have been discussing in implementing meaning you educational communications around products that are likely to be methods of choice was consumers like contact was inept payments and online payments with our existing verticals.
Cobot 19 has changed customer expectations in these areas and we intend to meet those expectations.
We're pleased with the products and methodologies that our business leaders are deploying on this front.
Lastly regarding M&A, we've continued to add to the pipeline during Q2 and are still preparing new term sheets for those deals that we are interested in having as part of the team.
The pipeline is still very pool at this time and the recent downturn has not affected our pipeline.
In fact, new opportunities have arisen over the past couple of months.
Strong organic growth has always been a key driver in our decision making process about acquiring a business. We have now added an extra level of diligence and understanding around how the potential acquisition partner was affected by cobot 19, and weather when or if the business is likely to grow in the new normal.
We mentioned on the Q1 call. We had four executed term sheets and process a full diligence seeing the potential impact of the pandemic and industry trends mid March we made the decision to go pencils down with all diligence and closing preparations for those deals.
Without exception each of these sellers understood the circumstances and stand ready to restart their acquisition process.
Although there are no guarantees in a cobot 19 world, we hope to start ramping up towards completing these four acquisitions in an effort to accelerate our vertical strategy in the near future, particularly in education and public sector.
Our general pipeline as populated with an emphasis on public sector and education with some nonprofit and health care mix steel.
We believe that we will remain successful in executing our M&A strategy. Once we start closing deals again.
This concludes my comments Lora and at this time will open the call up for questions.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Yes.
Please make sure your mute function is turned off.
Right.
Again that is star one to ask a question.
And we'll pause for just a moment to hello, everyone and opportunity to say.
Yes.
Well take our first question from George Mihalos with Cowen.
Good morning. This is Allison on for George Thank you for taking my questions and really glad to hear from everyone.
My first question is given the Greek unique strategy to diversify the business across key verticals, which we heard about and your commentary around public stature and B to B for example, being more insulated what percentage of your revenue do you think will ultimately be impacted by corporate 19.
[noise] well I think all of it is is impacted currently and I.
[noise] you know we've seen different declines in different verticals.
Long term we expect.
Government and education to bounce back to 100% because those customers don't go out of business.
Hospitality, we'll see some attrition there.
But we think we're well positioned on the other side the gain market share with our technologies.
Okay, great. Thank you that's helpful. And then I'm curious if you can talk a little bit about the caved into the volumes you are seeing clay I heard you mentioned that payment volume exited April down, 30% and improved in the first week of May I think I got that rate I'm, just curious how that volumes trended throughout the month of April.
If you experienced peaks declines mid April similar to commentary from some of your payments tiers.
It improved sequentially all across April and continue to improve.
The first week of May and the first week of May.
Had a had a market improvement.
As the economy it was opening backup in certain areas.
Okay, Great. That's headed here and then just last one sorry go ahead.
Well the end of March was was probably the worst and then April improved and maze improved again.
Okay, great. Thank you and then just last one from me with respect to the M&A pipeline do you think you would be feasible to close the transaction by the end of this fiscal year.
And then also lastly, given the environment, we are and how have you seen multiple trending.
Yeah, I definitely think that we'll be able to closing deals by year end as far as multiples were very tuned into the market and we'll respond appropriately.
Great. Thanks for taking my question.
Next question comes from John Davis with Raymond James.
Hey, good morning, guys I'm glad to hear your voices and hopeful as well. So just maybe Rick appreciate the comments on M&A, but maybe just a follow up on the last question what sort of capacity do you have in how should we think about leverage and the co bid world kind of where would you be willing to take leverage on the other side of this or.
And then those that are.
Trending well in April in the current environment.
We have a lot of capacity under our credit line only 19 borrowed out of 275.
And then we have strong cash flow.
And so between those things, we'll see how it goes but.
We currently believe we have the ability to make some strategic acquisitions that are smaller size.
Oh, <unk> are already leverage a. or leverage.
Are leverage Covenant is 5.0, and we're currently 3.4.
Okay I would assume in this environment, you're not going to push the upper limit so that it's a fair.
That's fair.
Oh.
And then maybe.
Play or Greg, maybe just talk a little bit about the geographic mix of the school education business, you know, where what state you're the biggest and you as we kind of thinking about reopenings and and who it was likely going back to school in the fall.
Oh <unk>, Colorado.
California.
Or three we do have a nice.
A group of businesses in New Jersey, I think they may be impacted a little bit more than.
Hi, <unk> in California, Inge in California, but I mean, Colorado, we are.
You know in tune with what's going on each of the states and we believe they will open on time.
And the ball.
Okay, and then well I think clay you'd mentioned that to to Q. is seasonally the weakest. So as we think about the education mix for the full year.
Maybe just helpless thing about the cadence, which cordial strongest an education as we kind of think about the model going forward isn't talking about school in the fall.
That well there are a little different for pay schools in school pay pay schools has their strongest quarter.
And September for her.
School, Hey has their strongest quarter in the March quarter.
Both fall off in the June quarter because.
You get about a half a month in May and then zero in June.
And so.
You know if I had to pick a quarter for this to happen this wouldn't be the quarter, but.
It's still very painful.
Okay.
Then maybe last one for me I really appreciate the the break out on the front verticals percentage of of revenue there, but maybe just comment on health care of you guys seen significant negative impacts there yeah. I think we've heard some not a horror stories, but some pretty bad health care numbers elsewhere, just curious kind of what you're seeing your health care.
Vertical.
No I, our health care is held up very nicely.
Mm.
Okay I think that's it for me thanks, guys.
Thanks, John.
My next question comes from Jason Kupferberg with Bank of America.
Hi, This is Kathy on for Jason. Thanks for taking my question I think she wanted to ask about sort of an update on China, maybe in states or you've already seen stay at home order is being lifted versus state that haven't seen restrictions lifted have you seen sort of.
I'm an increase in payment volume trends as people are searching more to online or know about transactions. Thank you.
Yeah.
So I I think is <unk> everybody's mentioned, we have seen nice tick and.
The end of April that has continued in may.
I believe the state's started opening around May one and we definitely saw the increase.
But it it's hard I I don't think I can tell you by state.
How we've seen but a lot of our business is online. So it's not like that mixes changed the it's it's it's improving on a daily basis.
Our our card not present number tracks pretty closely with our integrated number that we report so 55% of our traffic is card not present that hasn't been increasing over time as as you know and we think that'll continue industrywide to improve.
Over time, so we're well position to there.
Got it and.
Oh, the thoughts about what vertical have you seen that in fact, the fastest sort of incrementally throughout April and into May now.
Oh, and then not not the schools schools have been completely closed.
Probably retail restaurant that states I've opened up.
Thanks, and just one more question from me I didn't want to to get a little bit more detail about which areas the cost of sort of focused on reducing and obviously you know the payroll expenses will come back later as things wrap up again, but sort of how sustainable or maybe some of the other areas.
You know long run cost cutting thank you.
Okay well.
Most of our we have a bout a 70 per cent gross margin.
Not quite a little little less than that but if whatever you're modeling for revenues you could apply a percentage like that.
And everything else is our operating expense, which ran about a little over 17 million this quarter.
The cuts we've made will reduce that the 16 million of operating expenses, that's a relatively.
Fix the number and that it's mainly headcount rent insurance et cetera employee related costs and so.
Until we if we ever reduce again, it'll change that number and if our revenues pick back up that number could increase over time, but.
Current run rate is about is a little over 16, a a quarter.
Does that help caffeine.
Yeah, Yeah. That's helpful. Thanks for taking my question.
Thank you.
And as a reminder, that as star one to ask a question.
Our next question comes from Josh Beckett with Keybank.
It might be a little tough to discern, but I thought I would ask just.
Given you have a decent number of small businesses you know within your portfolio have you seen any.
Packs for relief as some of these P.P.P. loans, you don't have been made over the last month.
It might be tough to discern, but just thought I'd ask.
We haven't seen.
<unk> and and merchant attrition.
You know, we anticipate there will be some but we we don't see we didn't see it at the end of more and our data at the end of March.
I don't know that I have granular enough information to comment on the P.P.P. impact, but we've definitely seen a rebound in may of.
Volume.
Okay, Yeah, that's really helpful and I'm not sure you've cut the business. This way, but you I think you mentioned the card not present mix.
Is a good proxy <unk> integrated <unk>. If you were just to look at the card not present mixes it.
I have a pretty substantially different growth rate it any way to to quantify that not treat really cut it that way.
Well, we've reported that number over every quarter and it's been increasing as we have made more software acquisitions.
But.
I I don't know that we've seen a spike just because of the environment as it's been more as a result of business mix I would say.
Okay, and I I think there's been a couple of different ways, but.
If you look across your verticals are there any ones that actually had positive your your growth in the last couple of weeks I was thinking about some of the ones that.
You were highly is more defensive or even close to flat I guess in terms of the year over year trends are we still just not there maybe within say public sector or some of the word resilient ones.
Public sector had a good March the warrant round up happens in March and it was.
Good it was.
Solid year up until you know the last two weeks.
But I don't know that I can comment on any.
Oh, my rent share bounced a little bit, but it's so small BTB was pretty good how but healthcare nonprofit was above what we expected yeah. It's just the the thing that's dragging us down is.
Hospitality and education and.
We know education is coming back.
Right Yeah. So it it seems like the the visibility on the other side.
Quite reasonable for for your book a business images less who just to clarify so quick you had mentioned 16 million.
The other good the number that you get to you know over time over the next couple of quarters or is that a good.
Runrate is think about April just want to make shred model, though right.
Well so the March quarter was 17.4.
And then effective April 1st for we cut a million dollars and so that would go to 16.4 so.
It's not something that happens over time, we got it done on April 1st.
Okay. That's really helpful will thanks, everyone.
Yeah.
Our next question comes from Peter Heckman with Davidson.
Hey, good morning, everyone. Thanks for taking the question Yeah, It's regards to public sector space. It seems as if some of the pressure that we'll probably see on state and local budget useful budget, you really should play pretty well for for an integrated payments solution.
Includes convenience fees that effectively cell phone did it have you seen enough picking interest there or is it is it still a little early and and if it's early do you agree with that thesis.
Well there are a lot of push is to get more.
Automated <unk> digitized.
And the exchange of of money and we've seen that <unk>, we're gonna willing to see more for that in schools and in government.
We have a different business mix and education in government government.
We're we're 60% only 40% of revenues are payments.
And so that's helped to cushion the this downturn.
Education on the other hand is [noise].
70% of payments since so.
They have a little bit different dynamics, there our software revenues have increased over time.
This this quarter software.
Represented 24%.
Payments represented 67% so.
That number continues to go up in software is generally more insulated then payments as you know.
So yeah, we think we're very well positioned.
You know both schools I am governments are probably not the leaders technology wise, they're slowed to adopt.
Until they really need to but now they really need to and so we think that'll help us.
Gotcha Gotcha and then another question just in in your in regard to the I.S.D.'s any change there in terms of you have kind of the terms you know relative number a partner system. These I.S.D.'s are getting a you know in it so any thoughts about revenue share or or any other term.
That are notable in terms of changing.
We haven't seen any any changes.
We're continuing to sign <unk>.
Revenue shares range anywhere from 20% to 35%.
They're they're looking for technology solutions ease is important to them.
But we haven't seen any movement and revenue share or the number five sees that we're able to secure that are looking for payment integration.
Okay. As regards that you see you see more I.S. fees, I mean, what what would be the mmm.
Courage number of of of partners did an I.S. you might have might might they have two or three or or or are there some champion challenger take relationships.
Yeah, I can't speak to the numbers.
But I can tell you that we are seeing an increase number of I.S.V. opportunities with the pace acquisition when that went down we combined our internal I.S.B. team with pace.
And they've proven to be a a market force we've expanded our our rage to all of our subsidiaries that we've got sales people across the country or referring noise fees into the pace organization now. So we're seen an uptick there I think most of it was an education. We brought on some really talented people would pace that.
Oh, the I.S.V. space and that's helped as well.
Got it right that's helpful. Thank you.
And at this time there are no further questions I'd like to turn the conference back to Greg Danny for any additional are closing remarks.
Thank you everyone. So.
You know this is an interesting time I think you'll see.
I just talk more about the increase from checking cash to electronic payments in our future calls because it is coming.
We're prepared for the rebound I think it's already started the numbers that we're seeing for may or.
Very positive and so anyway, thank everybody for being on our call. Thank you.
And that does concluded days conference. We can keep your participation you may not disconnect.
Oh.
[music].
Okay.
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