Q3 2020 Repay Holdings Corp Earnings Call
Greetings and welcome to todays earnings conference call being hosted by repaid with US today are John Morse 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.
Certainty, including those set forth in the FCC filing related to today's results.
Our most recent form 10-K filed with the FTC actual results might differ materially from any forward looking statements that we may make today.
For the good statements speak only as of today, and we do not assume any obligation or intent to update 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.
In addition to these non-GAAP financial measures as well as reconciliation of these non-GAAP measures to the nearest GAAP financial measures can be found in our earnings release available on the company's IR site.
I would now like to turn the call over to Mr. <unk>. Please go ahead.
[music].
Thank you operator, and good afternoon, everyone.
We hope everyone is doing well and staying healthy.
On today's call I wanted to first give an update on our business in the third quarter, followed by a review of how we're executing on our growth strategy with some exciting business announcements.
I'll, then turn it over to Tim to discuss our third quarter financials and guidance for the remainder of the year.
As you can see from our results the value proposition for our business has continued to prove more evidence that the carbonite keeping them. It began almost eight months ago.
For the third quarter, we reported 44% in 40 plus percent growth in card payment volume and gross profit respectively.
Similar to Q2 and in Q3, we experienced increased demand for our offerings in several of our businesses across existing and new clients as our customers have accelerated the implementation of electronic payment capabilities.
Okay, and then it gets proving that loan repayments are resilient.
Our worst place a very high priority on stay current on their loan payments use of stimulus funds to pay down debt sports this belief.
We also continued to see significant shifts to electronic payments over the past few months.
Has been and will continue to be a tailwind for our organic growth.
Specifically auto loan repayments have been very strong which has been driven by an increase in auto any positive macro trends in the used car space.
There's a lot of demand for used cars from people, who are moving out of the city or are more likely to use public transportation.
Lower interest rates are contributing to the demand as well.
Other lenders are accepting more payments on cards and are seeing increased flights, which benefits us our customers are wanting to use more of our channels and are looking for ways to engage consumers more efficiently.
Digital engagement is one such ongoing trend, allowing customers to effectively reach consumers, which drives penetration for us in terms of electronic payments for auto loans and.
In the future. We also looked more actively addressed the prime lending market, including captives. Therefore, our Tam for auto is about 600 billion is one of the fastest growing parts of our business.
Mortgage servicing business also performed very well in the quarter due to increased home buying in refinancing activity along with low interest rates. This.
This increased demand and low mortgage rates I support the boom in originations and mortgage servicing transfers positioning us well to benefit.
We've seen a similar adoption trends and our b to b vertical.
This is especially enterprise clients, we typically serve I've been forced to adopt electronic methods of payments as well as automate their payments.
That's a nice catalyst for accelerated growth in the future.
Our instant funding product, which is our product that allows lenders to send funds directly to borrowers make accounts through eligible debit and prepaid cards.
We also continued to see increased adoption as lenders and borrowers shifts towards more electronic payments. So overall, a strong quarter with positive trends.
We made progress against all of our growth strategies during the quarter.
We continue to execute on our existing business during the quarter My first expanding the usage and adoption of course with our existing client base as well as acquiring new merchants in existing verticals.
To that end, we have some great client wins in the quarter driven by our direct sales force. These efforts were also aided by software integration of which we added 12 new partners during the quarter.
Mostly by acquisitions.
This brought our total to 94 integrations at the end of September.
When including the integrations from Cps payments.
We now have a total of 119.
We signed seven credit unions in Q3, bringing our total to 33, which represents approximately 340000 collective members.
I want to spend a few minutes discussing several of these integrations in September we.
We announced a partnership with advanced business computers of America to enhance our card payment acceptance in processing.
Maybe feel a leading provider of software with real time accounting for consumer Finance company.
During the quarter, we also announced a partnership with C. you answers to integrate card processing for credit unions.
You answered that a 100% credit you own data processing credit Union service organization.
If I combine services to over 270 credit unions nationally representing over 2 million members.
On the mortgage servicing side.
We're also very excited about our recently announced integration to Ellie Mae the leading cloud based loan origination platform provider to the mortgage industry.
This partnership will enable mortgage originators with the ability to accept digital payments enhance the customer experience and drive efficiency for interim service loans.
And they has over 4000 clients using their platform.
So it could be a very large distribution opportunity for us what could potentially become one of our largest IC partners.
And while we're on the topic of mortgage processing. We also recently announced a new service offerings Stx or service transfer exchange to automate loan transfer payments between mortgage servicers.
Stx automates the process of routing borrower payments from one vendor to another when their mortgage servicing rights sold or transferred from one service or to another.
Its product solves a real pain point for our target market by eliminating manual went paper intensive processes standardizing the exchange of payment data and funds flow, reducing errors in cost for services and creating a more seamless borrower experience.
We are very excited about this new product deficiency in actually are more important than ever in today's environment.
Speaking of FCX, We also recently announced the formation of the Stx Advisory Board.
Initially comprised of six mortgage industry experts, representing a variety of companies and leadership levels. We all played a role in the mortgage servicing transfers between lenders.
The goal of the Ethics Advisory Board and its designed to promote the implementation of operating standards to ensure consistency.
Recommend enhanced Mr products and services to improve workflows into remote participation adoption of these standards throughout their networks.
We also completed an important software integration score I b to B business, which sage 500 and stage X three.
This is adding onto our integrations with the Sage 100 say 300 solutions.
This technology integration between repay and Sage 500, and stage X three well allow me to be merchants to easily and affordably, except payments with level three processing for BD transactions to save time and money.
Moving onto your M&A, which continues to be a growth driver for our company.
Our pipeline remains very active.
There are many players out there that are a great acquisition candidates for us ideal.
The old targets or high growth businesses, and large verticals that are underserved from a payment perspective.
Our integrated with software have attractive margins and have a need for our technology.
On the topic of M&A, we recently closed the acquisition of Cps payment services.
All those boxes TPS is a b to b and accounts payable automation technology provider facilitates the issuance execution, a reconciliation of virtual card enhance safety H.H.T.H. in check payments.
There was a integrated software platform the CBS payment portal.
TPS has developed a proprietary database of over 20000 enrolled suppliers and there's an expanding base of over 160 enterprise clients across various sectors, but depicted representation in health care education media government and hospitality.
Additionally, cpss integrations with over 25, ERP and accounting software platforms.
TPS also had the opportunity to unlock significant growth potential by cross selling its new total pay solution to capture greater wallet share across existing client base.
We are very excited about the acquisition as it immediately expands us into new verticals and greatly enhances our current b to b offering.
Our ultimate goal for our beauty offering Mr truly be a one stop shop for our clients, we set ourselves up to do that over the past 12 months, having capabilities on both accounts receivable and accounts payable side.
Taking that solution to the market in a comprehensive one stop way, it's something that not a lot of folks are doing.
From a competitive standpoint, the b to B market is less competitive than some of our other markets.
Two thirds of the opportunities that we win in this space are greenfield opportunities.
And that rare case, where it's not a greenfield opportunity, we're winning because of the quality of our technology and the robustness of our platforms.
Our b to B business now includes over 40 software integrations that supplier network of over 50000 plus.
We expect the process card and enhance AC h. payment volume in excess of 4 billion annually with accelerating growth ahead, including cross sell opportunities with the other parts of our B to B business.
Our total addressable market in the B to B space is now 3.4 trillion, bringing our combined overall 10 to 4.7 trillion.
We're putting a lot of resources behind our efforts in this vertical with every acquisition we make in this vertical we've been fortunate to get B to B payments veterans, who are helping us.
Really bring together the strategy unified the businesses is the offerings will be instrumental into long term growth and the development of our larger strategy.
To wrap up I continue to be incredibly proud of our team for their hard work dedication to growing this company, providing excellent service to our customers throughout this time.
Our business has proven resilient.
<unk> has become even more apparent as we move into 2021.
With that I will turn it over to Tim to discuss the financials in greater detail Tim.
Thank you John now, let's move on to our Q3 financial results before I review, our financial guidance for the remainder of 2020.
The third quarter repaid delivered strong results across all of our key metrics for the third quarter card payment volume was 3.8 billion, an increase of 44% over the prior year's third quarter.
Total revenue was 37.6 million an increase of 43% over the prior year third quarter Tri source Hps and panic since he pay costs contributed approximately 10.2 million of incremental revenue during the third quarter.
Moving onto expenses in the quarter.
Other cost of services were 10.5 million compared to 6.8 million in the third quarter of 2019.
The increase was primarily due to the additions of Tri Starr Cps from 10, X. and see if they close.
However, when excluding those additions came out was down in Q3.
Gross profit was 27.1 million an increase of 40% over the prior years third quarter.
On an organic basis, we saw gross profit growth in the high single digits compared to the third quarter of 2019.
Note that organic growth now includes tri source.
Organic growth was solid in July and September but August was flat due to the lapping of a very strong August 2019 for personal loan repayments also the increased mix shift to auto and try search recovery resulted in slightly lower gross margin for the quarter.
<unk> our September organic gross profit growth was in the low teens and volume trends in October were strong which provides us continued confidence in our mid to high teens organic growth outlook.
As you know it was 28.6 million compared to 55.1 million in the third quarter of 2019.
As a reminder, in the third quarter 2019, we incurred transaction cost related to the business combination with Thunderbridge, yes.
Excluding the impact of those items expenses were up year over year, primarily due to commission restructuring was completed during the quarter increased hiring share based compensation and added operating cost from our acquisitions.
During the quarter, we modified sales commission plans for certain direct sales reps that making an upfront payment in exchange for the release of future Commission rights associated with designated customer counts.
Given our balance sheet strength and the low multiples paid for these ongoing cash flow streams.
Yes, it was a very good use of capital.
We may consider additional commission or partner residual restructurings in the future as we look to deploy capital and productive and efficient manner.
Third quarter pro forma net loss was 6.6 million compared to combined loss of 41.4 million in the third quarter of 2019.
The increase was mainly the result of general business growth and the impact of the after mentioned business combination expenses net loss last year.
Third quarter adjusted net income was 9.5 million or 12 cents per share compared to adjusted net income of 10.4 million or 18 cents per share in the third quarter of 2019.
The decrease was driven primarily by a pro forma tax adjustment in the current period, which we did not include in the prior year period, as well as higher outstanding share count.
Lastly, third quarter adjusted EBITDA was 15.6 million, an increase of 31% over the prior year third quarter.
Third quarter adjusted EBITDA as a percent of the total revenue was 42% compared to 45% in the prior year third quarter. This increase in adjusted EBITDA as a result of organic growth and contributions from Tri Starr Cps mechanics, and see pay costs.
As a reminder, adjusted EBITDA margins for these acquired companies are slightly below our loan repayment business. However, there are typically gone faster and want to continue to invest in growth in the future.
In mid September we closed an upsized public offering of common stock we sold approximately 14.4 million shares of repairs class a common stock at a price to the public a $24 per share.
All the net proceeds of this offering were used to acquire an equivalent number of LLC units from a neat controlled by of course your capital.
Accordingly, the offering resulted an aggregate increase in the Companys public float of class a common stock were approximately 14.4 million shares, but there was no increase the total as converted share count.
As a result of this transaction, which included the full exercise of the overallotment option by the underwriters Morgan Stanley course.
Coursera and its affiliated funds the long hold an equity stake in the company Chris.
Chris there's private equity investment and repay occurred in September 2016.
There's been a great four plus year relationship with of course our team.
Want to thank them for all their contributions to helping us along the way.
As John mentioned on November 2nd we announced the closing of the acquisition of Cps payments for up to 93 million of which 78 million was paid at closing last week.
Meaning 15, mainly become payable depending upon the achievement of certain growth targets.
A closing of the acquisition was financed with cash on hand.
Our cash and liquidity positions remain very strong as of October 31st pro forma assuming 78 million was paid for CP has been 101 million of cash on the balance sheet 30 million of Undrawn revolver capacity and 46 million of Undrawn delayed draw term loan capacity for a total liquidity amounted to 177 million.
Our pro forma net leverage is now 2.3 times, which is well below our current net leverage covenant level five times. Please.
Please note that we recently amended our credit agreement the only material change being to extend the availability period for the delayed draw term loan.
As of September 30, we had approximately 79.6 million shares outstanding on an as converted basis, our fully diluted share count, including Unvested shares equal approximately 82.2 million shares as of quarter end.
Finally, moving onto our outlook for the remainder of the year as I mentioned earlier October volume trends have remained strong providing us continued confidence that mid to high teens organic growth outlook.
However, we have continued to see increased mix shift to auto and recovery of our Tri source business, which is resulting in slightly lower margins.
Our personal loan business, which typically has higher margins has experienced some volatility over the past few months due to the introduction and then lack of stimulus benefits. They expect this volatility may continue while we're in this period of uncertainty around the economy and pandemic.
Due to all these factors.
Expect our gross profit margin in the fourth quarter to be more similar to the first quarter of this year.
In addition, we expect adjusted EBITDA margins to be down slightly in the fourth quarter due to investments we are making in sales product and technology to set us up for continued growth in 2021.
We have also added two months of contribution from Cps.
However, please note there is seasonality in this business as it has some concentration the media and education sectors, which means contribution Q4 may not be equivalent to prior quarters.
Finally, with only a quarter left to report we thought it was best to narrow our guidance range to follow.
Heart failure payment volume to be between 14.75 billion to 15 billion.
Total revenue to be between 140 million and 153 million gross profit to be between 110 to 113 million and adjusted EBITDA to be between 60 365 million.
As with prior quarters. This range assumes no further unforeseen kogan related impacts, which could create substantial economic during the fourth quarter.
Looking forward with our several recent acquisitions additional software integrations, new team members and expanding addressable market.
We continue to enhance our key growth levers can have significant momentum heading into 2021.
Now I'll turn the call back over to the operator to take your questions operator.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May Press Star two if you like to remove your question from the Q.
Yes, it makes using speaker equipment, it may be necessary to pick up your handset before Crescent D Star keys.
And our first question is from Craig Marwin Autonomous Research. Please proceed with your question.
Yeah, Hi, John Tim Thanks.
First it what did what was the composition of your business in terms of revenue or EBITDA. However, you want to present between the different segments within your business and as we head into 2021, you know I wanted to get some additional color on how you're thinking about the personal loan vertical obviously.
Lee.
Stimulus is not a guarantee.
And the volatility there should we expect that margins should continue to be under pressure if that vertical does not improve.
Yeah I'll leave it there thanks.
Hi, Thanks, Craig it's Tim So, we where the mix of the business was about 65% loan repayment.
Many percent b to b and 15% or other.
However that now with the Cps acquisition that mix is shifting more toward Buda beef. So we expect that to be more like 65% loan repayments.
She's me, 60% loan repayment, 30% b to B and 10%, how they're going forward.
Heading into next year.
And then personal loans.
You know that there what happened this quarter is really a result, a reduced originations in Q2.
And then we just saw less volume coming out of other those that origination dynamic Oh, we have seen really positive trends in October where we've seen some of our larger personal lenders with more volume.
And so we feel good about that and we're just monitoring it closely and that's a part of the commentary around where we expect to see margins in Q4, just given some.
Some of that lack of visibility with personal loans, but the trend in October has been it's been positive Ah that's something we're keeping a close eye on going into next year.
All right. Thank you.
And our next question is from Ramsey.
Barclays. Please proceed with your question.
[music].
Hi, Thanks for taking my questions evening, you mentioned, some cross sell opportunities with Cts and maybe specific to TPS, but also just in terms of all the recent acquisitions you've done can you sort of rank order for us or give us more color on the on the cross sell opportunities and kind of maybe help us dimensionalize the degree.
Rich.
That could have a have a noticeable impact next year.
Sure Hey, so with.
The first one is booked CPP and Cps.
We can take their ATP solution.
And sell it to our customers within a P.S. on they are side. So there's been a lot of demand for that overtime in hps has not been able to deliver an ERP solution to their customers where their facilitating acceptance of card payments now those conversations are happening where their offering.
Acceptance and HP.
And similarly for example, with.
I'm sort of CBS is customers you know maybe a large hospital system. For example, we could offer except in services on acquiring services. So I think it definitely goes both ways and we're actually starting to have some of those discussions.
On both fronts and getting war.
Organized internally around how we want to roll that initiative out in a cohesive way going into next year. So it's still it's still fairly early with both of those but we're starting to see dialog happening.
Within the sales force.
Okay.
And I also wanted to ask you about because it's a bit of a higher elevation question. If you fast forward a few years say five years.
How do you think repays.
Business mix looks like I guess, that's another way of asking are you well the M&A you're doing are you solving for a particular end state are you looking to drive diversification in a certain direction or do you have just sort of a you know target areas that you can you can basically acquire in and you're just you're chasing kind of more opportunistic deal.
Deals.
That makes sense.
Yeah, I mean, I don't think we have a specific percentage we're solving for.
We certainly have diversified quite a bit and the last 12 to 15 months where.
Yep loan repayments have come down as a percentage of the mix and B to B has increased for example, and then what the even within loan repayments, we have seen auto become a much part of that a bigger part of that mix and now we see credit unions and mortgage increasing as well.
And so that you know like I mentioned previously.
You know prior to Cps and CPP It was probably 65.
You know 2015 in terms of loan repayments b to B and other you know today pro forma with what we know now it's probably 65 25 and 10 and then.
Into next year at that because that looks more like 60 30 intent.
The 30 being b to B, so I, we see it shifting to be to be it's just a very large addressable market with a lot of room to grow.
But were not necessarily solving for a specific percentage.
Yeah Ramsey John Good afternoon, I'll add to that.
Okay.
Just the opportunity as you've heard me say before right. We have been watching I had been watching b to b for probably 10 years.
And the opportunity was there and if you remember we were you.
We inorganically bought a P.S. last year wait before there was a pandemic.
And obviously they tend to make prove some of our theories correct on the acceleration of the shift of of.
Payments to digital and we are seeing more and more that's a little bit unfortunate blessed that.
It was a good area for us to go to and it has all the attributes that we talk about so the opportunities are there.
And and we're.
We're chasing markets.
To try to achieve that.
Our organic growth rate, we think is a significant opportunity out there, but our current loan repayment vertical as well as the b to b vertical the organic opportunity a significant.
We think it's got it many years of runway left on that we don't necessarily have to go to another vertical if we if we find the opportunity. There we will we look big picture very long term.
We think there's a significant opportunity to Phoenix, who drove both of those are.
Without inorganic or acquisition growth kind of we'll probably be hard to change the mix a if both are really growing well, but obviously with acquisitions. It can it can change that mix.
From there, it's it's a matter of opportunities we see in the marketplace that really match, who we are and what we we think we can do if I. If you if you're listening to some of the attributes we look for.
From the software integration.
Andy and that the growth.
<unk> projections that we look for those opportunities.
Great. Thanks for this or answer.
And our next question is from Sandy Sakhrani with KBW. Please proceed with your question.
Thanks first question I guess, Tim you talked about the air pocket as far as like stimulus and its implications of the fourth quarter I guess as we look ahead to 2021, how are you planning for the year on that front, what does it mean for growth and investments if there is stimulus or if there isn't.
Yeah. So we are trying to focus on.
What we do best which is you know provide high quality technology to these underserved verticals and.
Really really strong direct sales force and customer service.
And where we've we've been investing.
From a sales and product perspective in auto.
We think it's a very attractive opportunity, it's a very large market.
And you know that's been investing and.
We've also been investing in b to B, not only through acquisitions, but now the new hires or with.
With each of those acquisitions and so we think that sets us up nicely.
And we can't necessarily predict the stimulus or if there is stimulus or timing of it. All we can do is just monitor our top customers very closely and look for trends like we saw in our October related to personal lenders for example, and try to get a sense by you know looking at you know some market research and also having discuss.
As with those customers, but what's underlying those trends and if that's something we should be projecting.
So just trying to get our arms around as much data as possible to inform you know what scenarios could look like with and without stimulus and timing of that but also just reinvesting. The key investments are focused on auto and b to b.
Okay and you guys think you can hit your historical growth rates, whether you know I mean, I assume there will be some sort of stimulus. It's just a matter of how large oh, you know or how small I guess as we think about whether its small or large you guys think you can probably hit your long term growth targets.
Yes, Yeah, we felt confident like we talked about in the mid to high teens organic growth longer term outlook, we have a lot of avenues for growth.
In addition to auto and B to B, we talked about a mortgage.
We've had a lot of really positive momentum in mortgage related to the Ellie Mae a partnership and then the Stx announcement.
And so that's another area and then we've had a really really good success. This year and credit unions, you signed seven in the most recent quarter.
And we have a lot of <unk> targets out there just through our partnerships, we've announced that space. We now have three partnerships.
So I think what we're trying to do is either organically or through acquisitions set ourselves up with a lot of different avenues for growth in one part of the business.
Is down than other parts of the business will be up and that gives us the confidence of the combined.
Yeah growth outlook I, just mentioned, okay, perfect and just one follow up for John maybe just can you talk to the pipeline of M&A like size and sort of where you're looking thanks. It sounds like you need to be as an area, but maybe you could just characterize a little bit more.
Sure and let me also kind of follow on the Thames last come as well listen we're trying our best to be transparent, but everything we can see versus just not giving any type of numbers and you know sterling guidance and things like that we're trying our best here.
But also you know what we're also looking out as you know to have a complete absolute shutdown again, you know that.
Yes, that's something that could be significant to everybody I Oh, yeah, all public companies right. So.
Are not seeing that but and we're hoping praying that doesn't exist again, but that could have an impact on how we see things happening in 2021, obviously, but now on the M&A pipeline. It is very actionable from what we see or we have.
I've been blessed to be very acquisitive in the last you know since we went public okay done five acquisitions, we see some some good opportunities out there still.
And we obviously will have to do your homework on those from a numbers perspective, we don't really want to forecast those.
We we never like to forecast that we have to do an acquisition. We are very particular in very specific about that.
You can see where what we've done in the past and we're also very measured on how we want to make sure we incorporate those into our organization and so we look for these attributes we see some and several in the marketplace with those attributes are.
That they're come into market.
We're also gonna be pay should be diligent with our shareholders money. So rare we are excited though there can be some opportunities out there.
Thank you I appreciate it.
And our next question is from Andrew Jeffrey with Suntrust. Please proceed with your question.
Hey, Good afternoon, guys. Appreciate you taking the question.
You know I think the the mix conversation than interesting one, especially as we start to think about mortgage and the Sally.
Integration.
John can you give us a sense as to when you think you might be able to talk about some pretty significant.
Mortgage payment volume I assume maybe some of that.
S T X revenues in the 10% that you talked about but I'm wondering when you think that's a vertical for you know.
You're gonna be discussing in more detail from a payment perspective.
Yeah sure. So we're very excited about that if you think about we haven't seen anything like the exchange that we're kind of putting together. There are we think that that long term very value creation opportunity for us.
In the entire industry. It just really solves a lot of pain points and eliminates a lot of friction there, but it also allows us the opportunity to gain additional you know.
Hold into solving other payment solutions and needs for those specific lenders and then I would say I would not so to us that's a long longer term investment, meaning you know next over the next couple of years to ask you to be patient with us there because we see significant opportunity and create significant shareholder value.
Long term and integrations as we move into creating and developing that asset over time, so not an immediate turn right you.
Enormous bump, but we do see activity are happening and we see conversations happening and we looking as we kind of move through you know the first part of 2021, we see additional.
Wins out there, but also moving into 2022, we think there's even more opportunity as we build that out a mortgage, especially when it involves large banks will take time as are longer sales cycles and decisions are which is why you can hear me say, let's be measured.
In that but we do think it's a really wise use of dollars.
Okay, Yeah, that's an exciting opportunity.
On the personal loan front, which and please correct me if I missed characterizing this but.
To the extent that there.
Heres current organic revenue growth deceleration it seems like it's coming from that line of business, which is still 60% pro form or so.
Hey, you didn't demand or supply you know is this an underwriting issue or is it a consumer demand.
Oh, well to clarify within the 60% to 65% loan repayment personal loans is just a part of that so it's probably about 30%. The rest the balance of that is auto and then there's a small portion still that's credit unions, a mortgage and then our Canadian.
In business. So personal loans is just a priest apart probably about half maybe a little less than half about <unk> of total loan repayment business.
And I think that when there was a lot of stimulus dollars out there I really cares act really started flowing money out in the enhanced unemployment benefits were happening throughout April and May and maybe even into June there was a lot of excess cash and so consumers who are paying their loans, but there wasn't a lot of demand and so originations were down and they were down.
Because consumers are flush with cash and also lenders work tightening credit tightening.
Tightening underwriting standards. However, what we what we see or we think now is becoming a trend in our data is when the stimulus benefits run out at the end of July or early August.
Man pick back up because there wasn't as much cash in the system and consumers needed personal loans and so those originations that it started to occur in August and September are now, resulting in repayments and we think that's where we started to see at the end of September into October.
And that's that's kind of a trend that we have probably been a little bit more time to understand if that truly is a trend and will last so I think that's how we've seen it play out certainly the cares act direct payments to individuals health with repayment volume.
But you know potentially hurt originations and that's what we felt you know this quarter and it's just a it's a little bit higher margin. So even though our volume how strong that was really driven by auto.
And the Tri source recovery, but auto is a slightly lower margin in personal loans and then try.
Try sources as lower margin as well.
Okay. So just on 100%.
Clear TV.
To the extent that demand for these you know for personal I'll just come back.
You don't.
Had a strong sense that it's being slotted in any way by tighter underwriting standards.
I know I think it's you know there may have been a short period, where that happened, but I think that they started originally our lender started originating loans more aggressively like I said in August and September and we're starting to see the repayment volume on that now.
Okay.
Thanks, that's helpful.
And from what we can understand and again remember we're not a lender.
In that particular piece of our book, it's a demand issue.
All right.
That's a good thing overall for consumers that means they have more cash they were spending less cash.
But we also think that that doesn't take long term.
Right makes.
Makes sense okay.
And our next question is from Peter Heckmann <unk> Davidson. Please proceed with your question.
Hi, good afternoon. Thanks for taking the question just to clarify are trying to back into some numbers here, but Mickey you laugh I'm try source and then within the quarter.
Yes, so in terms of thinking about just the amount of acquired revenue in the fourth quarter something in that.
Hi, six 7 million or four or $567 million is that about the right range.
Yes in terms of the incremental revenue that sounds about right but.
You know who will be we've included Tri source and organic growth numbers for Q3, and basically pro forma them for Q3 of my team and then yes. They will do the same thing with a P. S. In Q4.
Both be in the Q4 numbers.
Got it got it okay that makes sense and then just in terms of that opportunity with the captives can you remind us when when Mercedes Benz, what's contributing a full quarter and and how would you kind of size or or or.
Think about that.
The rest of the captives and <unk>.
Current prospects you think are.
Relatively high probability for the next let's say couple of quarters.
That was we started processing with Devon may and so they have been just continuing to ramp up and add volume each month, and so that's been going really well and we're seeing that continue each month.
And that the you know that we are trying to have some discussions with other captives just through our network of relationships in the auto space in our relationship the card brands and others. As you well know those are really long sales cycles, and we have to sort of make sure that we're in the renewals.
Discussions and they may put out our fees fourth where we're trying to get ahead of that and make sure. We're in those discussions and so that's where we are in terms of additional captives, but mercedes relationships now and.
Well, we've been adding processing accounted for about.
Yes, you know four or five months.
And its gets gone really well.
Good deal I appreciate it thank you.
And our next question is from Joseph Vafi with Canaccord. Please proceed with your question.
Hey, guys. Good afternoon, I was wondering if we could maybe just kind of switch over to the to the to the integration side of the business you know clearly a lot of M&A activity.
Maybe just some thoughts here on.
On you know I guess to a certain degree cost synergies from here on acquisition activity and I know, you're you're putting stakes in the ground and then some.
Different payment volume areas of the economy. So also just wondering you know to the extent that you know that provides or does not provide.
Oh capability for you know.
More kind of tightly integrated technology integration on the backend and then a quick follow up.
There's a question about just integration of acquisitions.
The integration I mean, you know the business side and then you know if you know if you look across your business and the potential for kind of a.
Integrating the various payment buckets into you know, perhaps a single platform or or do you think you've got to run a lot of different stacks to to address some of these different payment areas that you're focused on this point.
Yeah, Yeah sure. This is John I'll take that so actually our integrations in the last 12 months or actually on track and on target.
We starting with the P.S. from tenants and then see pay plus.
The the first to have gone well and.
Integrated most of those through operationally and then there's a few things we were changing on on a P.S. on the backend clearing and settlement piece over to Archrock source platform since they're more of an acquiring asset.
That has been successfully done so we're we're looking forward to you know going into 2021 with.
Most of those pieces already integrated in and I think it's a it's a great point on the technology piece that you know is we do.
We do feature parity, we do we actually have a.
We go in and look at from a work stream perspective, we lay out workstream for all of our acquisitions.
Determine how we did we integrate them.
And as I said they are all on track from that perspective, but on the technology side. We also do work streams around feature parity to understand how we get to stop sale and.
Ultimately sunset, we're on track with all of those assets, sometimes some of those were picking up some really good really good technology and then we're also picking up some key integrations.
Integrations will be it's important as you even with your technology you have to work through your integrations a those are critical to the whole.
Seamless piece of that the payment piece that we do so.
So.
Those work streams are going well, it's as well we in the B to B on the automation side. You know, we we think there's opportunity to consolidate some technology there.
And then as we as you heard me, saying isn't as well to come come together with a kind of one stop shop.
Put those pieces together that will take us a little while to put the one stop shop piece together as you know there's integrations around some of that but we see demand are we talked about earlier on this call a cross sell opportunity between the A. R&D a p. sat in on the B to B side.
So we're seeing that.
And our content acquisition as you heard US talk about there are some of the mortgage to be intelligent routing some of the platform pieces that it's really going to be additional features and its a plug into our overall technology because it does civil great things that we we needed the ability to do that so very complementary.
That becomes a part of our entire technology stack. So.
We continue to work over work streams, there and we want our overall goal is to consolidate technology that makes sense that the AD technology that we buy that superior or complements well and then obviously sense that technology that possibly duplicate what we already do what's unique about us they want to reiterate this.
<unk> as well.
We were a payment processor that also has a superior financial technology. That's integrated into these ERP systems, and we have the ability to move and settle funds. We have we own are clearing and settlement engine on the car side as well as we only own clearing and settlement engine on the on the a C H side and our ability to even a print mail as well.
Lets checks so we have a total Indian solution there as we continue to put our pieces imports together with some of the acquisitions will continue to build finish that out and build those out and 2021, but overall everything looks very good and we're excited about the people as much as the the technology assets in this I want to.
Stress, we've said before.
We are we don't always have opex synergies when we are acquiring a fast growing companies and we are fast growing company Oh, we acquire great people, who help us continue to accelerate drugs. There Ah. So this is why they sell them, you'll see us forecast any kind of opex synergies most of the time it will be some type of.
Processing synergy on that side, and you'll probably see continuing see us invest in technology.
We think that's part of the winning formula the moat that will build around our business and provide excellent solutions there.
Sure. That's helpful. Thanks, and then just quickly on kind of the outlook for let's call. It organic integration if you're looking into next year.
Some commentary around that and then I guess, you know penetration and user penetration and some of your existing integrations and the opportunity there. Thanks.
And in terms of the software integrations. Yeah. You know we now have you see that weve been able to accelerate those in recent quarters, just because we have a lot more.
Verticals to address it in each of those verticals has their own unique software partners and so that's something we placed a lot of focus on recently in putting resources towards that and so we think that's going to really benefit us longer term.
And a lot of those now are coming from our acquisitions, because we're helping them with resources there often times, we find during diligence that as partners that they want to have but just not have not been able to get them across the finish line are for various reasons not been able to actually sign them up and where we're not helping them do that and so we think that's just.
On one other example of being able to accelerate growth with these.
Businesses were acquiring and so you know there's in terms of the penetration question.
You know a lot of them offer electronic payments to with like within their customer base, there's a provider or several providers but.
Maybe not as focused on the particular vertical or not providing all the different channels. We have from a payment perspective for example, mobile or web or IDR. It may just be a simple web based or phone transaction without the other channels. That's how we see ourselves gaining share increasing penetration in all these different.
Partnership so.
Yeah, that's definitely a key distribution Avenue for us and that's something that we're very focused on.
Yeah, I want to add to that and said if we.
Oliver you most of you since you've known US we've we've almost we probably ever doubled that so for integration partner list.
Let's see PS one out of 119, obviously some of those will come.
Acquisitions, but.
But we think that's substantial as we continued to build that out that represents yeah lots of.
Prospective customers inside of each one of those integrations and I also want to emphasize a we continue to build out our so I supplier network now over 50000 of those with with our recent acquisitions, we think that's going to be a great opportunity over time as well as as we look to.
Do you to build those out.
That'll that'll have some long term benefits to it as it is that network builds over time that'll create some metrics really cross sell opportunities as much as it creates some opportunity to continue to enhance existing.
Existing customers or future customers as we bring them on.
We already have a supplier network that services many of those.
Great guys, thanks, very much what color.
Our next question is from Bob Napoli with William Blair. Please proceed with your question.
Hi, Thank you good afternoon no <unk>.
Question on the mortgage business can you give a little more color on exactly what that.
The servicing transfer servicing and the the the revenue stream recurring nature of the revenue stream and.
Or the opportunity that you see with the likes of Ellie Mae or I mean are you competing with black Knight in that business. It was a little bit color would be helpful.
Sure so black.
Black Knight is actually a software partner of ours. So they provide software to mortgage servicers and so there there was centered up software partner.
Just like.
Is it more focused on originations.
So those are those would all be partners of us I'm, not stray competitors and right.
Right now that there is a lot of a C H payments happening there.
You know, it's become electronic but it's still it's still pretty heavy a C. H. A we are yeah. You know one of our initiatives is to convert some of that to card and increased credit card penetration, which.
Yeah for us.
So its a per transaction based revenue model.
We want to convert it to more of a volume based revenue model.
And and then we.
You know, we would pay a referral fee to for example to a partner like Sallie Mae her black Knight so.
You know <unk> Ellie Mae has about 4000 mortgage originators using their platform yeah. We get involved in any kind of initial closing of the mortgage where there's maybe escrow fees or appraisal fees. There's the first payment yeah, we would be involved in processing all of that and then.
There there would be that that would be transferred to our service or most likely.
And we couldn't be processing, the ongoing recurring payments with that service or if there are customer.
And so often times were involved in that kind of complex.
No refinancing activity service transfer related activity, where if it's not done correctly. It can create a lot of errors and that's why we're trying to automate it make it more efficient and we get you know trip processing fees for that [noise].
Okay.
Thank you kind of question on the a the b to B, a payments business and the kind of the revenue and profit models between the difference between the revenue streams on D.A.R. business versus the 80 automation business like how much of that is is their software revenue on the order side, but pure transaction.
On the APC side.
How much different is there in that they are the revenue models for those each D.A.R.J.P. side of the business.
So on the air side, it's a typical merchant discount rate. So we're doing merchant acquiring.
For businesses in a business to business a card based transaction. So very similar model, where we're charging basis points on volume and then maybe a per transaction fee as well.
And then on the APC side, we are also getting bets on volume, but it's on the interchange and so they were basically an issue on the issuing side where interchange as our revenue and then we pay processing partners.
And then have you know there's also rebates involved where you might pay rebates for a virtual card usage and that's the model. There. So it's it's also similar in the sense that its basis points on volume, it's not subscription based or a flat fee per month, but it's it's the interchange part of the transaction work.
Getting the revenue versus on the merchant acquiring side interchange is a cost to us.
Great and then also.
There's also a the concept enhance DCH on a eight the automation side.
Which would be a percentage of volume and and all that's designed to for seamless automation reconciliation and data transfers. So that that's a version of that on the AG side, there's some of that off as well and they are site.
And then there's normal just a C. H transfers, we have large file transfers.
And even potentially yeah, yeah, the mailing of checks, which is automated as well.
But predominantly it's the first two years.
And then John the instant funding piece I think you're launching what kind of penetration rate do you expect the what's the pricing on the instant funding piece.
Yeah, that's a per transaction so.
That's gonna feel something like an AC age, but that's a per transaction fee. So it's.
Good margins per transaction, but it's not it would not be bips as a percent of the transaction there.
We're seeing forgot sorry users that are using it were starting to see really strong activity. There. We're still early on Bob just can't predict an option like that penetration rate, but for our.
Civic lenders that are using it or we're seeing really we're seeing month over month growth.
In their penetration rate there so I don't want to quote one just yet as we want to keep a little more.
I see how its going but we're seeing we're seeing uptake and we're seeing also more people using it or you just the automation pieces. You can you just kind of the same sales that's way more efficient and so we're we're seeing that.
Okay. Thank you appreciate it.
Our next question is from Timothy Joker with Credit Suisse. Please proceed with your question.
Great. Thanks, Scott I want to dig a little bit more into the automotive captive opportunity I know that last quarter and earlier on this call you mentioned as well you've increased your addressable market. The analysis, we've provided in the slides to better account for this opportunity.
You mentioned, you're also earlier some of the RFP processes and renewal timing that you want to get ahead of it in that light maybe you could just give us an not mentioning any specific but when we look at the top 15, or so automotive captives whats the status quo what are they what are they offering now to their consumers to retain.
The loans is it is it.
Set up an AC age is that just one payment method is it not multi channel omni channel et cetera can you just give us a sense of what the status quo is.
Sure.
So very large addressable market.
And I don't want to give you quoted names or anything like that because it is [laughter] various different.
Cycles or.
But you gave me smiling and so it is longer sales cycle. So again be patient here, but specifically across the board. There are some captives that may merely if it you mailed. It you know the payment in or if an AC H kind of what we consider an AC h. automatic draft.
And then maybe an ace Yates if they have an online presence but.
But those who would not be using a mini the omni channels. They they're there they wouldn't it be a need for the omni channel's meeting and I, a complete Ivy our solution or.
Maybe my tech solution or a mobile solution as well. So we think there's a web presence is generally the first presence there, but the concept of 20 sort for seven being able to take a payment that still exist in some of those some of those players are definitely the ability to take a debit card is there's there's that's come at it I think.
This with a few that don't even take debit card now there are several people are or have been taking debit card in that case that would be you know that would be a competitive win but we have built certain features and functionalities to the auto lending space. We think can create winners for us, it's just a matter of timing and.
We have to get theater in and win and tell our story.
Yeah, we don't win everything we put it there's plenty there if we get our fair share we should do well.
It sounds good. Thanks, a quick follow up you mentioned, that's just a couple of minutes back I just wanted to dig into it a little bit the enhanced E. C. H offering came over a little bit from Cts.
And it's for use in accounts payable.
Fully recognize that it it allows you to send remittance data, it's part of the work flow and the process reconciliation very important and accounts payable maybe you could just give us what the good use cases, there. What's a good example, sorry, they could use case for that relative to traditional AC age or virtual card.
The words once a good time to use enhance Stacy H.
I think if there.
You know if it's.
They are cost conscious about a virtual card fees, but want more data and one or more efficient workflow.
The balance product as it had Stacy age.
Where it's it's not a it's not a straight AC age, but doesn't cost you know the cost isn't as low, but you're also getting much better data quality and data transfer cost a little bit more of the traditional IC age, but not the same virtual card.
So there's just certain.
You know players out there that want that product and want that kind of balance in between pushes hence why that product exists and so but you're also from our perspective can price it.
In a way that probably is more similar to our card transaction.
And make the economics, a little bit better for us because the cost to us and lower.
And so that's why it's become more popular and something that Cps has done a really good job with.
And we'll continue to and we can now bring that to the see pay plus customers as well.
Yeah, that's right does that one for war that one for one tenants you're aware of.
Lets me be have a very large file thousands of payments right and if you need tend.
10 to 15 attributes per payment.
If you were to get that file in bulk and I sell when they see h. and you've got five of those attributes, but now you got to pay so when it goes fine.
The other 10 attributes that tissue kinda need or would like to supplement in a world of big data right. We can do those one for one exchange is completely link it to its you know seamlessly back into the ERP system I know, there's a tremendous amount of man hours its about man hours and it's about.
Speed and it's about the whole digital experience and then we obviously can move and settle the funds and understand let you know exactly where the funds are settling.
And when they are settling the whole reconciliation of could you can imagine when does a check clear kind of concept right.
We can we can show how these various different movements are happening.
It has tremendous value. If you look at the man hours that could be spent an a b and that it eliminates is ER and drives up certainty and drives reduces errors and drive down costs.
Excellent really appreciate the overview, thank you Tim and John.
Yeah.
And our next question is from James Faucette with Morgan Stanley. Please proceed with your question.
Thank you Hey, John hates him Hey, I wanted to ask you you mentioned that you're looking at some.
Incremental or potential acquisitions, but still work to be done there and you all indicated that you thought that diversification of the revenue stream at least by end market type et cetera would most likely come through acquisition I want to make sure I understood that correctly, but.
On the topic of acquisitions, how much flexibility do you think you have in your in your balance sheet right now and in the capital structure to go do acquisitions and I'm. Just wondering if you can achieve that diversification through a single acquisition or are we going to have to look at multiples to acquisitions within the same area to get to.
The diversification that you might be thinking about.
Yeah sure. So yeah, I think the comments around organic versus acquisitions from a diversification standpoint, it's just that it's.
It just takes more time organically to move the needle and so although we have really a solid organic opportunities in areas like mortgage and credit unions. It's just going to take time for those to be large enough to actually you know shift the mix rather than acquisition can happen.
Right away and as you've seen a great example is b to B, where you know about.
About a year ago, we were hit our percentage of PDP was zero percent, we didnt have a business there and now it's up to probably called 25% with if you include Cps pro forma and so we'd be looking for other opportunities on the b to B P side. We've now looked at that like we did in merchant acquiring where we're just.
Out there acquiring Oh, new verticals is one way to look at our go deeper within existing verticals within a peak.
I think that was really the appointed the comment, but and then balance sheet wise you know we're at 2.3 times net leverage today, you know, we would feel comfortable going up to you know called three and a half to four times range for something very strategic.
And so we have some flexibility there to do deals probably similar in size to what we've been doing and then if it was something larger we would have to.
Tap the equity markets and and look at that so we.
We have some flexibility to do more M&A, but.
You know through something larger wouldn't be all debt financing.
Right that makes sense and then quickly I guess to me you provide some color on the adjustment you made this quarter and commissions I think previously you had mentioned or commissions or maybe a bit lower than industry, because you control the merchant relationship.
Do you expect that to be the case as you enter new markets or how should we think about that part of the expense group.
Yeah. So we do we are very focused on Rev shares you know historically, we've been able to have we think lower than market Rev shares to your point, we as we enter some of these new markets. It will be more competitive, particularly if there's already an existing payment provider for several.
Payment providers, but you know.
We try to structure those in a way that allows us to grow volumes with those partners and you know make sure they benefit from that but not you know destroyer on margins and so we're we're focused on those those those deals and then we have the ability to restructure some of these.
Commissions like we did this quarter, either with direct sales reps or with partners and we can typically do that at very good attractive multiples and we think that could make lot of sense too. So that's just another tool we could use if we felt like the dollars were paying for.
For commissions, our residual residuals to partners were large enough, we could just look to restructure them and bring more of that cash flow. So our piano.
That's very useful thank you.
Okay.
And next question is from Mike Grondahl.
Rando with Northland Securities. Please proceed with your question.
Yeah. Thanks, guys two quick ones one your pipeline of I guess these.
Does that kind of that.
The volumes of the different verticals in your business or is there an area, where maybe your pipeline a little bit outsized compared to the volume.
And then secondly, dipped in the personal loan space.
Lost any lender customers kinda through the turmoil this summer.
So first question I I don't know that it maps one for one with the addressable market opportunities. It really is just more about where we're trying to focus resources. So there's still a lot of partners to get in and auto for example.
There's still some we want and mortgage.
There's a few credits.
Blurred a submarket.
And so.
We think of it kind of more strategically or where do we want to be placing resources and where do we want to find a way to accelerate growth and find this distribution versus just strictly mapping to the largest addressable market size. So it I'd say, probably kind of loosely ties that are wonderful.
And then in terms of personal there's we've not lot lost any personal lenders were not aware of any that have been damage to the point, where they would be no longer lending or.
You know be out of business. It's just that some of their volumes are contracted has either they've tightened credit or demand or.
It was lower used to originations but.
The larger ones that were aware off and through our own monitoring and underwriting.
You know, we think that their balance sheets are still fine and they've whether that's pretty well.
Great. Okay. Thanks, guys.
Yep.
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