Q2 2023 Repay Holdings Corporation Earnings Call
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Good afternoon, I'd like to welcome everybody to repay its second quarter 2023 earnings Conference call. This call is being recorded today August nine 2023.
Like to turn the session over to Stewart Crisanti head of Investor Relations at repay Stuart you may begin.
Thank you good afternoon, and welcome to our second quarter 2023 earnings Conference call with US today are John Morris Co founder and Chief Executive Officer, and Tim Murphy, Chief Financial Officer.
During this call we will make forward looking statements about our beliefs and estimates regarding future events and results.
These forward looking statements are subject to risks and uncertainties.
Including those set forth in FCC.
These filings related to today's results and our most recent Form 10-K.
Actual results may differ materially from any forward looking statements that we make today.
Forward looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.
In an effort to provide additional information to investors. Today's discussion will also include references to certain non-GAAP financial measures reconciliation and other explanation of those non-GAAP financial measures can be found in today's press release and then the earnings supplement each of which are available on the company's IR site that was good.
Cereals include reconciliations and other explanations with respect to repay its organic growth.
As described in other materials Q2, 2023 organic growth is calculated by excluding contribution attributable to the blue coat, a software business and the <unk>.
Second quarter of.
2022 since repaid the baskets look out during Q1 2023.
With that I would now like to turn the call over to John .
Thank you Stuart and good afternoon, everyone. Thank you for joining us today to review our second quarter results.
On an organic basis in Q2, we reported revenue growth of 9% and gross profit growth of 12%.
Our strong results through the first half of the year give us the confidence to raise the midpoint of our revenue and gross profit guidance for 2023, which Dan will discuss in greater detail.
Our focus as a company is to help businesses, except it's been payments by providing integrated payment solutions to verticals that have specific transaction processing needs.
Our proprietary embedded payment technology reduces the complexity of electronic payments for clients.
And the overall experience for consumers and businesses.
As we continue to take advantage of the secular trends towards frictionless digital payments, we have been focusing on thoughtfully investing in our go to market efforts as well as technology to ensure.
We remain best in class in both the consumer and business payments segments.
On the go to market side, our investments are paying off we continue to further penetrate and expand our services into the 252 integrated software partners.
We're also diving deeper into the existing integrations, including with Microsoft dynamics 365 business Central.
Our current integration enables clients to automate their accounts payable payments and we are now in the process of developing for accounts receivable payment streams.
In addition, our direct sales team.
<unk> made great traction, especially you went further penetrating large enterprise accounts.
Our investments into technology also continued to generate positive returns.
We're regularly evaluating and leveraging new payment modalities to reduce friction and boost revenue for our clients last quarter, we announced the additional digital wallet capabilities like Paypal and venmo.
And we continue to offer the industry, leading best in class cash solution.
We're forging ahead on offering real time payments for clients, while continuing to development work on that now.
Our consumer payments segment grew organic gross profit by 16% in Q2.
This was primarily driven by the ongoing secular tailwind within the consumer payments verticals we serve.
And the ramp of recent large client implementations.
We are pleased with our strong sales activity in the personal loans and credit Union verticals, adding many new clients in each market.
We are now integrated with 150 H software partners in the consumer payments segment.
During the quarter, we announced an integration with Q2's digital banking platform, but the Q T partner accelerator program.
This program enables financial institutions to purchase repaid products and then offer a payment technology directly through Q2's digital banking platform.
Further expanding repays reach into the personal loan and credit Union industries.
In addition, we establish new partnerships to offer repays embedded payments across a variety of software platforms, including loan servicing management and accounts receivable management systems.
But if you use a community bank continues to be a key focus for our sales teams.
This platform helps financial institutions and financial providers automate payment streams across all payment types, we signed seven credit Union clients this quarter, bringing our total credit union clients to 257.
We are well positioned to continue winning clients in this underserved market of approximately 4750 credit unions across the U S.
We have also been enhancing our existing software partnerships by adding new product features and payment modalities as well as our go to market efforts that present, new sub vertical opportunities.
Credit card services are a great example of a new opportunity for me back.
We have been building a strong pipeline in this exciting new sub vertical.
The mortgage servicing space continues to be a significant growth opportunity in our consumer payments segment.
And we look to increase debit card penetration in this vertical.
As a reminder, our recent visa study found that more than 50% of consumers if given the option would use your debit card for mortgage payments. In addition over 50% of mortgages in the U S are not currently set up for automatic recurring payments.
We're able to provide those consumers with the opportunity to use their debit cards for the next months.
This process is made easier through our partnership with Black Knight. The early results of testing are promising and we began marketing the debit capabilities to both existing and potential clients.
Black Knight software platform supports the majority of the mortgage servicers in the U S. So we believe this could be a great growth lever in 2024 and beyond.
Instead of funding, which we priced in real time through visa direct and Mastercard send.
Should resonate with new and existing clients in the second quarter transaction volumes were up approximately 60% year over year.
And lastly, our Rcs platform performed nicely in the quarter as a modern platform is resonating well within the marketplace.
Moving over to the business payments during the second quarter, our business payment gross profit grew single digits year over year on a reported basis, but more importantly grew 15% when excluding the impact of political media during 2022.
Our normalized growth was driven by the continued momentum in our sales and implementation pipeline for enterprise and mid market companies within our health care property management auto municipalities articles.
We're integrated with 94 software partners in the business payment segment, including Claudia a leading cloud based communications solutions provider.
Partnership businesses that huge Claudius AP automation software comply such payments seamlessly with repays realtime dinner enablement and embedded payment technology.
We're also working with Kodiak to expand repays, reaching Canada by offering accounts payable capabilities to their clients.
Within the hospitality vertical we're excited to announce our recent integration with inflow.
With respect to embedded accounts payable solutions hotel orders in hotel management groups using inflow can continue operating one comprehensive hotel management platform.
On the automation side of business payments, we recently expanded our integration but account.
Launching click to pay is a new feature provided by rebate that enables count meet users to get paid faster and provide a simplified convenient payment experience.
We pay continues to see the prioritization of AR and AP automation initiatives by efficiencies across all verticals.
And a growing list of software partners presents the opportunity to provide our embedded payment solution to them.
As a result of the investments we have been making with software partners and our go to market efforts, we signed and implemented many of your clients across our business payment verticals during the quarter.
A great example is castle management group, a premier property management company with approximately 500 HOA properties.
Castle management acquired a unified payment system to make their vendor payments across all of their managed properties and selected Rebased total pay solution for their accounts payable neat.
And in the health care vertical a large health care system in the state of Arkansas selected repay from their supplier payment needs.
We continue to build our vendor enabled functionality accelerating to over 195000 suppliers and our AP supplier network.
Which includes additions across all key sub verticals within a P. While simultaneously enhancing our go to market proposition.
We will continue to invest towards our real time vendor enablement as the business payments that mix scale by vertical.
In addition, we're always looking for ways to find processing cost efficiencies from the business.
So theres a lot of excitement and progress happening across the company as we guide businesses through the ever changing world of embedded payments Rick.
We're excited about the future of repay being strategically positioned in the middle of the new.
Digital payment flows in North America.
We are poised for success with a strong balance sheet and profitable organic growth to accelerate cash generation.
As we're starting to see various opportunities come back to the market, we always maintained that the future for strategic M&A.
To wrap up and before turning the call over to Tim I am proud of our solid results for the first half of the year.
Our sales pipelines are strong and growing.
Have a great opportunity ahead of us as we continue to innovate and drive the transformation of integrated digital payments by expanding and enhancing our network to all networks that send and receive funds on behalf of our clients.
With that I'll turn it over to Tim to go over financials.
Our outlook for the remainder of the year.
Thank you John now, let's go over our Q2 financial results before of your financial guidance for 2023.
The second quarter repay delivered solid results across our key metrics.
Card payment volume was $6 3 billion, which was partially impacted by lower overall tax refunds in 2023.
Revenue was $71 8 million, an increase of 9% on an organic basis over the prior year second quarter.
It presents a take rate of approximately 115 basis points.
Take rates were higher primarily due to strong performance in our non card volume based businesses within consumer payments, specifically in communication solutions and instant funding revenue.
Attributable to Blue collar in Q2, 2022 was approximately $1 7 million.
Gross profit was $54 9 million, an increase of 12% on organic basis, it's organic gross profit growth removed approximately $1 7 million of gross profit attributable to blue cow. The Q2 2022.
Our consumer payments segment reported organic gross profit growth of 16% in Q2 our.
Our business payments gross profit increased 4% year over year on a reported basis and grew.
15% when excluding the impact of political media during Q2 2022.
Business payments gross profit growth when excluding media demonstrates the ramp of our strong sales pipeline. While also realizing the benefits from our processing cost optimization and automation initiatives.
Second quarter, adjusted net income was $18 8 million or <unk> 19 per share.
Lastly, second quarter, adjusted EBITDA was $30 3 million.
Second quarter adjusted EBITDA as a percentage of revenue was 42%.
Adjusted EBITDA margins were slightly lower than initially expected due to the timing of investments towards sales product and technology into key verticals and the impact of inflationary pressures, which may continue to increase costs.
We thoughtfully invest for growth while also reviewing our business to see where we can efficiently scale, our operation through process automation.
Repay has surpassed the rule of 40% on an organic basis for the 16th consecutive quarter as a public company.
Continue to believe that the combination of double digit organic gross profit growth along with strong adjusted EBITDA margins makes us unique compared to our peers.
Our net leverage is now approximately two seven times, we expect net leverage to naturally decline during the year from our strong profitability and cash flow generation.
Putting any potential M&A.
As of June 30, we had approximately $104 million of cash on the balance sheet with access to 185 million of Undrawn revolver capacity for a total liquidity of about $289 million.
Total outstanding debt of $440 million is comprised of a zero percent coupon convertible note that does not mature until February 2026.
Moving onto our outlook for 2023.
As the year to date results showed strong performance and resilience in our business model, we are raising the midpoint of our 2023 revenue and gross profit outlook.
We expect volume to remain between $26 billion and $27 2 billion revenue to now be between $280 million and $288 million.
Gross profit to now be between $218 million and $228 million.
Ducting organic gross profit growth of 6% to 11% normalized organic gross profit growth of 9% to 14%.
We are reaffirming our adjusted EBITDA outlook of between $122 million and 130 months.
As a reminder, during the second half of the year, we'll be lapping strong results in our business payments segment due to the political media cycle in 2022.
We expect Q4 2023 contributions to be greater than Q3, given the continued ramp of our recent wins and implementations.
Our full year 2023 outlook range continues to plan for a slowdown in the overall macroeconomic environment during the remainder of the year.
For additional details on 2023 organic gross profit growth. Please refer to the 2023 outlook bridge on page 12 of our earnings supplement posted to the company's IR site.
As you can see from our results we have a great deal of momentum in the first half of 2023 heading into the second half of the year.
<unk> adjusted free cash flow conversion to remain strong in 2023 accelerating throughout the year into 2024 as we realize the benefits from investments we've made in sales product and technology over the past several years I'll now turn the call back over to the operator to take your questions operator.
Thank you at this time, we will be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is that the question queue.
You wish to remove your question from the queue. Please press star two for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Ramsey El <unk> with Barclays.
Hi, Thanks for taking my questions. This afternoon I wanted to ask about the take rate in business at the Super healthy it popped really nicely quarter over quarter, just wondering what the driver there was and also what we should expect from business yields in the in the back half of the year.
Yeah. So we feel really good about that we've signed some customers recently that were a bit higher margin and higher take rate. We have been doing a lot of work to optimize our pricing, particularly within business payments and that's showing up in the yield so we.
We feel strong about that and in terms of overall revenue take rate for the remainder of the year, we're projecting that it will be slightly down from where it was in the first half of the year, mainly just because we're not projecting the non card volume based products like communications and solutions and instant funding to contribute quite as much those generally would lead to higher take.
So I think that the yields will still be very strong, we're just projecting them to be quite to what they were in Q2.
Okay, and you also mentioned that guidance contemplates some slowdown some macro pressure and and later in the year.
Yes.
Two questions related to that one is are you seeing any signs you know most recently of a slowdown and if one doesn't materialize secondly, what is the magnitude of what we might expect to kind of flow back into guidance.
I mean, we exited the quarter.
C pace.
Early Q3 into July has trends have remained stable. So we're not necessarily seeing anything different from a trend perspective within the different verticals.
We just wanted to.
To be conservative just given the uncertainty with the macro and in the overall potential slowdown. So I think if that so coming into Q3, and we don't see that then there's potential to revisit our guidance and just like we did this quarter revisit the ranges.
Everything has been stable so far through through the end of the quarter and into early Q3.
Yeah.
All right fair enough. Thanks, so much appreciate it.
Our next question is from Peter Heckmann with D. A Davidson.
Good afternoon. Thanks for taking my question could you give us just a quick update I think last was it last quarter, you announced the signing of a second a captive lender.
Car manufacturer to could you remind us when do you expect that to ramp.
Yeah. Good afternoon, Peter this is John .
So we have indicated that we are in an implementation process with them. That's a very long detailed schedule process.
That is ongoing and on plan and on schedule in just like we had indicated earlier as well that's how 2020 for contribution.
Okay, and then in terms of real time payments.
How are you thinking about that.
Primarily on the business side do you see that as primarily switching from ACTH and St.
Or are you thinking that there's going to be maybe some some some applications that actually take us take real time payments take volume from cards.
No. So yes, we do see that it's early on.
Business payments side as we've as I've indicated we want to be a network to all networks that move funds to and from and.
And we see some value there on that side of it on the business Famacide well add it in as an additional modality.
And I would see people are it would be probably something similar to an enhanced ACTH option, where people would want to.
To accelerate funds do not necessarily see it cannibalizing specific card on the on the payable side of the world.
But in reality, we we would continue to be able to charge for that so it could be good margins as well, but overall, we are looking to enhance the overall experience to the end <unk> payable side vendor and we looked at to just augment existing in our total pay solution.
Okay I appreciate it thank you.
Our next question comes from Andrew Schmidt with Citi.
Hey, John Hey, Tim Good evening, Thanks for taking my questions.
I wanted to start off with it just a question on free cash flow conversion Tim.
Tim I know you had some comments in the release about that maybe just talk about what you're expecting for frequent free cash flow conversion this year.
And then it sounds like you're expecting some improvement in the 2020 for me if you could talk a little bit about that and the key drivers there that'd be helpful. Thanks, a lot guys.
Yeah sure so the.
As you probably have seen the Capex number came down from Q2 to Q1, so it drove a little bit higher conversion in the second quarter, we expect that capex number to remain somewhat stable for the rest of the year and likely decline as a percentage of overall revenue. So as revenue grows and Capex dollars remains stable, we'll see free cash flow conversion increase in.
You saw that in Q2, and we expect that to continue throughout the rest of the year. We're not we haven't given a specific number or we havent provided guidance on adjusted free cash flow conversion, but we would expect the same trend that happened from Q1 to Q2 to continue throughout the year and exit at a higher rate going into next year.
Got it thank you for that Tim.
And then maybe digging into the mortgage opportunity.
And I know you have the mortgage partnership with Black Knight and <unk> and John you talked about a little bit about that in your prepared remarks, but.
If you could talk a little bit about how that's progressing any early learnings whether it's consistent with the study that you outlined.
Anything there that's I know, it's early days, but anything there that's incremental would be would be interesting. Thank you very much.
Sure I can give you a little color.
As we indicated before we definitely are confirming that demand is there.
We're confirming that.
That opportunities are there as we're engaging with our clients existing clients as well as prospective clients that would be basically servicers.
And that's going well and we're in the process of doing some testing there as well as well as you know as we advance that initiative lungs throughout the third quarter into the fourth quarter.
We as we indicated earlier, we did not.
Indicate.
That there was any contribution for that in 2023. So we do think that'll be a 2024.
Contribution as we move throughout the third quarter and fourth quarter, we should be able to give you. Some updates on what we think that will look like for 2024.
Perfect. Thank you very much John .
Our next question is from Andrew Jeffrey with Truth Securities.
Hey.
Good evening, Thanks for taking the question I appreciate it.
Tim I Wonder, if we could get a little bit of color on the second quarter, the vertical mix within the consumer business auto versus personal loans and I guess, if if there were.
Uh huh.
Or do you sell in the economy to Randy's question, where do you think that manifests.
Yeah. So the breakdown is very similar to last quarter personal loans at 20%. This is within consumer auto at around 20%.
And then Rcs is about 10% and the balance of the categories would make up.
Get you to the 80% total for consumer and those would be like and.
Verticals like arm credit unions health care in mortgage.
And so I think where we would see some pressure and have been seeing pressures in the auto space I think that used car prices are coming down which is a good sign but there still remains some affordability concerns.
We expect could ease, but we havent seen it materially changed so that's an area. We're focused on and then we talked earlier in the year about arm volumes coming back and arm is about 10% of our business. We do think that's still happening. We just don't necessarily think it could happen as soon as we planned which was Q4, we think that's probably one to 2024.
Sure.
Now that could be that could happen sooner, but what we've done in our recent.
Forecasting has moved that out to 2024, so I think auto an arm, where we're playing close attention there.
Okay now I mean, I guess, you know and I know, you're not talking about 24, but I think about.
A big auto captive and some of the mortgage opportunities arm.
Presidential election cycle. It seems like you've got a lot of drivers that likely manifest maybe four came in at the beginning of next year is that sort of directionally the right way to.
To think about the business and any considerations from a mixed perspective, if that does indeed come to pass.
Correct, Yeah, Directionally, you're sure you're accurate there and those are investments that we talked about.
Sales in technology and product and those are those are byproducts of those investments that are starting to pay off for us and in 'twenty. Four is when we think we'll start seeing those contributions I'll, let Tim maybe talk about.
Mixes I agree I think.
That's where you may see.
Business payments become a slightly bigger part of the overall mix given the political.
We think that the cycle in 24 will be a lot higher than 'twenty two in terms of overall spend.
What should help and then.
Like I said I think arm could be a bigger contributor next year and you can see that in some of the public.
Our folks.
The public folks norm vertical talking about supply coming back and that will eventually be TARP repayment volumes.
Okay. Thanks.
As a reminder, ladies and gentlemen, if you'd like to ask a question. Please press star one. Our next question is from Tim Chiodo with credit Suisse.
Great. Thank you for taking the question I wanted to hit on a topic that comes up often with investors, which is the commissions paid to Isps.
Tim I know, we've talked about this in the past and the math that we were able to back into it suggests that they are really low and I don't believe that we've got.
Just on this in a little bit of time here and just thought it would be worth a brief update I gather that they're low because of the specific capabilities you bring the role that you take on that is larger maybe than other integrated payments players and also a relative lack of competition in some of the verticals, which all adds up to low commissions paid to the ICU. So.
Everything kind of checks out quite well, but just wanted to see if theres been any changes or trends or anything or if you could maybe even just quantify what portion of your cost of goods sold or other cost of services is those commissions that get paid to ISP partners.
Yeah, I think you're spot on I mean everything you. Just described is the reason why they're lower than the overall industry average I mean, just as a reminder, we engage in these relationships as referral partners not resellers and so <unk> is not reselling our product and so we're doing a lot of the heavy lifting in terms of.
Contracting onboarding risk and compliance.
Product development. So all of that is on us, which leads us to have a higher share of the economics. So just like you described and we haven't seen that dynamic change materially at all in the past several years.
And you know it is a big if there's a pretty big portion of our overall Cogs and within Cogs, That's probably the biggest number but then we also have things like sponsor bank fees and other.
Other processing costs, maybe for processing thats not on Rcs icon.
In other parts of the business. So it's a big part of our cost structure, but we've managed it closely it's still much lower than industry average for all those reasons.
I'm with you.
So other things in there right the sponsor bank fees and then on the acquiring bank sponsors and then also.
Portions of the business that have not yet been migrated to Rcs that are still using some contracted third party processor correct.
Correct and then on the on the <unk> side, particularly in AP, we wouldn't have them on Rcs.
Okay.
Yeah.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to John Morris for closing remarks.
Thank you everyone for joining us today.
We are very proud of our first quarter first half or second quarter first half results. Our sales pipelines continued to be strong and growing.
We have a great opportunity ahead of us as I mentioned earlier as we continue to drive and innovate with.
With our integrated digital payments.
And expanding into the various different networks that move funds to and from and we're very excited about that I. Appreciate your call today and look forward to additional discussions. Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time.
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Oh.
Okay.
Okay.
Uh huh.
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Yeah.