Q4 2023 Repay Holdings Corp Earnings Call
Speaker Change: [music].
Operator: Good afternoon. I'd like to welcome everyone to Repay's fourth quarter 2023 earnings conference call. This call is being recorded today, February 29th, 2024. I'd like to turn the session over to Stewart Grisante, Head of Investor Relations at Repay. Stewart, you may proceed.
Good afternoon, I'd like to welcome everyone to repay its fourth quarter 2023 earnings conference call.
This call is being recorded today February 29 2024.
I'd like to turn the session over to Stewart Versace head of Investor Relations at repay Stewart you May proceed.
Stewart Grisante: Good afternoon, and welcome to our fourth quarter 2023 earnings conference. With us today are John Morris, Co-Founder and Chief Executive Officer, and Tim Murphy, Chief Financial Officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events. Those forward-looking statements are subject to risk and uncertainty, including those set forth in the SEC filings related to today's results and in our most recent Form 10. Actual results may differ materially from any forward-looking statements that we make. Such forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them, except as required by law, in an effort to provide additional information to investors. Today's discussion will also include a reference to certain non-GAAP financial... Reconciliations and other explanations of those non-GAAP financial measures can be found in today's press release and in the earnings supplement, each of which is available on the company's IRC website. With that, I would now like to turn the call over to you. Thanks, Stewart. Good afternoon, everyone.
Stewart Grisante: Good afternoon, and welcome to our fourth quarter 2023 earnings conference call with US today are John Morris Co founder and Chief Executive Officer, and Tim Murphy, Chief Financial Officer.
During this call will be making forward looking statements about at least and estimates regarding future events and results.
Stewart Grisante: These forward looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and then our most recent Form 10-K.
Stewart Grisante: Actual results may differ materially from any forward looking statements that we make today are forward looking statements speak only as of today and we do not assume any obligation or intent to update that except as required by law.
Stewart Grisante: The effort to provide additional information to investors. Today's discussion will also include reference to certain non-GAAP financial measures.
Stewart Grisante: A reconciliation and other explanation of those non-GAAP financial measures can be found in today's press release and in the earnings supplement each of which are available on the company's IR site with that I would now like to turn the call over to John Thanks, Stuart Good afternoon, everyone. Thank you for joining us.
John Andrew Morris: Thank you for joining me. I wanted to cover three main topics. First, a review of the fourth quarter. SEC, recap of our 2020. And lastly, our strategic initiative that will drive growth in 2024 and beyond, first in Q4, on a normalized organic basis, reported revenue growth of 14%. Gross Profit Growth of $13.5 Billion, with both metrics performing ahead of our expectations. We closed out the year seeing continued demand from existing clients adopting more payment capabilities. A new client is demonstrating the need for our powerful technology. Repay has become a leading expert within the consumer payments and business payment verticals we serve. We have become a one-stop platform to optimize, and are constantly working to capture new payment flows while enhancing client relationships, adding value.
John Andrew Morris: I wanted to cover three main topics today first a review of the fourth quarter.
John Andrew Morris: A recap of our accomplishments in 2023, and lastly core of our strategic initiatives that will drive growth in 2024 and beyond.
John Andrew Morris: First on Q4.
John Andrew Morris: On a normalized organic basis, we reported revenue growth of 14% and.
John Andrew Morris: And gross profit growth of 13%.
John Andrew Morris: With both metrics performing ahead of our expectations.
John Andrew Morris: We closed out the year seeing the continued demand from existing clients adopting more payment capabilities.
Our new clients demonstrating the need for our powerful technology.
John Andrew Morris: Repay has become a leading expert within the consumer payments business payment verticals, we serve.
John Andrew Morris: We have become a one stop platform to optimize payment streams and are constantly working to capture new payment flows while enhancing client relationships.
John Andrew Morris: With many value added services.
John Andrew Morris: In Q4, our Consumer Payments Organic Gross Profit Growth was 13%, primarily driven by the ongoing secular tailwinds within the consumer payments sector and a continued ramp of recent large client implementation. We added many new partners and clients to our network in Q4, including four new software partners, bringing us to a total of 165 partners in the consumer payments sector. One example was our launch with Akubo, a leading provider of cloud-based solver software that elevates how financial institutions collect and manage their portfolio through the integration with Kubo's Collection Management Software.
John Andrew Morris: In Q4, our consumer payments organic gross profit growth was 13%.
John Andrew Morris: This was primarily driven by the ongoing secular tailwind within the consumer opinions verticals, we serve and the continued ramp of recent large client implementations.
John Andrew Morris: We added many new partners and clients to our network in Q4, including four new software partners, bringing us to a total of 165 partners in the consumer payments segment one.
John Andrew Morris: One example was our launch with the Cooper, a leading provider of cloud based software that elevates, how financial institutions collect and manage their portfolios.
John Andrew Morris: The integration with Kubota collection management software will enable financial institutions to accept digital payments, while utilizing a secure real time data in exchange for streamlined operations robust reporting and simpler reconciliation.
John Andrew Morris: We enable financial institutions to accept digital payments while utilizing a secure real-time data exchange. Streamlined Operations, Robust Reporting. Simpler Rut Conciliation
John Andrew Morris: We also recently announced an integration with LexOp, a self-service software for credit unions, financial institutions, and the public, and other financing companies that optimizes the repayment journey for past-due consumers. Your payment integration with Lifestyle Collections Management software enables their clients to collect late payments more efficiently. Receive real-time payment updates and increase engagement, and minimize loan services. We added 10 new credit unions to Repay, bringing our total number of credit union clients to 276,000.
John Andrew Morris: We also recently announced an integration with Alexa a self service software for credit unions financial institutions and other financing companies that optimizes the repayment journey for past due consumers the repayment integration with lifestyle collections management software enables their clients to collect late payments more efficiently.
John Andrew Morris: Receive real time updates and increase engagement and minimize loan servicing costs.
John Andrew Morris: We added 10, new credit used to repay bringing our total credit union clients to 276.
John Andrew Morris: Repay's vertical expertise and software integrations are a differentiated solution leading to healthy sales. As an example, a New Credit Union client was evaluating multiple processors to solve all their payment processing needs before selecting Repay. We believe we are the only market that has a combination of integrations with our client's core platform, home banking platform, and Collection Platts to fit their unique needs. In addition to credit unions, we're also addressing a STEMR client base and community, and winning new clients through our existing software integration. These new wins continue to give us the confidence that our investments towards creating software partners and further embedding our payment technology within existing integrations are leading to a strong sales pipeline with positive returns across. Additionally, in value-added services, our instant funding product continues to see significant growth, with transactions up approximately 45% year-over-year. What a very productive quarter for our business pain. Group Gross Profit increased by 25%, including the impact of political media. Thank you. Thank you.
John Andrew Morris: Rebased vertical expertise in software integrations are a differentiated solution leading to a healthy sales pipeline.
John Andrew Morris: As an example, a new credit Union client was evaluating multiple processors to solve all their payment processing needs before selecting repay we believe we are the only market participant that has a combination of integrations with our clients' core platform home baking platform and collection platform.
John Andrew Morris: Fit their unique needs.
John Andrew Morris: In addition to credit use we're also addressing a similar client base and community banks and winning new clients through our existing software integrations.
John Andrew Morris: These new wins continue to give us the confidence that our investments towards creating software partnerships and further embedding our payment technology with an existing integrations are leading to a strong sales pipeline with positive returns across repay.
John Andrew Morris: Additionally, <unk>.
John Andrew Morris: And value added services, our instant funding product continues to see significant growth with transactions up approximate 45% year over year.
John Andrew Morris: We had a very productive quarter for our business payment segment, which grew gross profit by 25% when excluding the impact of political media during 2022.
John Andrew Morris: Our normalized gross profit growth was driven by sales penetration within software partners and a strong implementation pipeline for enterprise and mid-market companies, within our health care, property management, auto, and municipality verticals. Within AR, we remain focused on deepening our client bases within existing ERP systems and optimizing payment acceptance, and on the AP. We increased our supplier network to over 261,000 suppliers.
John Andrew Morris: Our normalized gross profit growth was driven by sales penetration within software partners and our strong implementation pipeline for enterprise and mid market companies within our health care property management auto and minutes fatality vehicles.
John Andrew Morris: Within a are we remain focused on deepening our client bases within existing ERP systems and optimizing payment acceptance.
John Andrew Morris: And on the AP side, we increased our supplier network to over 261000 suppliers during the quarter.
John Andrew Morris: Our real-time vendor enablement continues to drive the number of suppliers within our network, which drives the monetization of digital payment flows and deeper virtual card penetration. We've found many new clients across our verticals during the course of the year. And we also continue to grow with our existing... A great example of this is Baywood Hotel. This management portfolio spans many well-known brands as one of the fastest-growing hotel management and development companies in the United States. We signed and began implementing for Baywood Hotels earlier this year.
John Andrew Morris: Our real time vendor enablement continues to drive the number of suppliers without our network, which drives the monetization of digital payment flows and deeper virtual card penetration.
John Andrew Morris: We signed many new clients across our verticals during the quarter. We also continued to grow with our existing clients.
John Andrew Morris: A great example of this is baywood hotels.
John Andrew Morris: Management portfolio spans many well known brands as one of the fastest growing hotel management and development companies in the United States.
John Andrew Morris: We signed and began implementing for baywood hotels earlier this year.
John Andrew Morris: And they have continued to expand on our AP platform by adding many new hotel properties each month. We are now integrated with 97 software partners and have been; A few new and expanded partnerships to highlight include BlackBaud, PDI Technologies, and SEI.
John Andrew Morris: And they have continued to expand on our platform by adding many new hotel properties each month.
We are now integrated with 97 software partners in the business payment segment.
John Andrew Morris: A few new and expanded partnerships to highlight include blackboard.
John Andrew Morris: PDI technologies and stage.
John Andrew Morris: Repay's enhanced integration with Sage Intact will supplement our existing integrations across Sage's products. Software providers are selecting Repay to directly embed our payment technology into their software, as they strive to enhance their users' experience by providing value-added services to their customers. And now on to the next.
John Andrew Morris: <unk> enhanced integration with Sage intact will supplement our existing integrations across stages product suite.
John Andrew Morris: Software providers are selecting repay to directly embed our payment technology into software.
John Andrew Morris: As they strive to enhance their users experience by providing value added services to their customers.
John Andrew Morris: And now on to the next topic a review of full year 2023.
John Andrew Morris: A review of the full year 2000. From a financial perspective, we demonstrated normalized organic revenue growth of 12% and gross profit growth of 13%, while improving our free cash flow generation throughout the year. From a commercial perspective, We made great progress as well, including a continued focus on our sales and distribution. We now have over 262 software partners from 240 at the end of 2022. In addition, we aligned our internal sales, implementation, and support teams to focus on specific articles and software, as well as strengthen the customer experience. And throughout the year, we added talented team members to select areas of our organization while reducing overall net headcount and maintaining our margin. We increased our supplier network 60% year over year to 261,000 vendors.
John Andrew Morris: From a financial perspective, we demonstrated normalized organic revenue growth of 12% and gross profit growth of 13%.
John Andrew Morris: While improving our free cash flow generation throughout the year.
John Andrew Morris: From a commercial perspective.
John Andrew Morris: We made great progress as well, including the continued focus on ourselves and distribution resources.
John Andrew Morris: We now have over 262 software partners up from 240 at the end of 2022.
John Andrew Morris: In addition, we aligned our internal sales implementation and support teams to focus on specific articles and software partners as.
John Andrew Morris: As well as strengthening the customer experience.
John Andrew Morris: And throughout the year, we added talented team members in select areas of our organization, while reducing overall net head count and maintaining our margin profile.
John Andrew Morris: We increased our supplier network, 60% year over year to 261000 vendors.
John Andrew Morris: On the product side, we rolled out additional payment modalities such as PayPal and Venmo, while also enhancing our e-cash system. We also made progress on our mortgage debit exceptions initiatives with Black. In addition, we make key hires to ensure our product..., from capital allocations, started the year streamlining the organization with a divestiture of Blue Cow Salt, which helps us remain focused on investments towards organic growth. And during Q4, we utilized our share repurchase program to buy back shares in a disciplined way. The work we've put in this past year positions us well to execute towards Repay's mission of helping businesses make and receive paychecks, so they can focus on what matters most. This effort involves meshing together a vast..., many moving pieces over the past decade.
John Andrew Morris: On the product side, we rolled out additional payment modalities, such as Paypal venmo.
John Andrew Morris: Also enhancing our E cash solution.
John Andrew Morris: Also made progress on our mortgage debit exceptions initiatives with Black Knight and.
John Andrew Morris: In addition, we made key hires to ensure our product team can support the rollout of future products and services to support our customer needs.
John Andrew Morris: From a capital allocation standpoint, we started the year streamlining the organization with the Divesture of Blue Cal software, which helps us to remain focused on investments towards organic growth.
John Andrew Morris: And during Q4, we utilized our share repurchase program to buy back shares in a disciplined way.
John Andrew Morris: The work we've put in this past year positions us well to execute towards repay its mission of helping businesses make and receive payments. So they can focus on what matters most to them.
John Andrew Morris: This effort involves meshing together, a vast ecosystem of payment flows with many moving pieces over the past decade plus.
John Andrew Morris: It involves the connectivity of all the various networks that allow us to move forward, including our card payment, R.T.P., for instant funding via Visa Direct and MasterCard. It means that we need to provide omni-modality and omni-channel. It includes a software network for embedding payments directly within enterprise software.
John Andrew Morris: It involves the connectivity of all various networks that allow us to move money.
John Andrew Morris: Including all card payment rails, RTP or instant funding via visa direct Mastercard send.
John Andrew Morris: It means that we need to provide omni modality in omnichannel.
John Andrew Morris: It includes the software network of embedding payments directly within enterprise software and workflows.
John Andrew Morris: These integrations open up large verticals with critical mass and allows us to create a network within our NMARC. On the business payment side, we have developed a vertically rich supplier network to create a flywheel, to eventually expand capabilities to enhance our vendor enablement process. This means we are a full-service processor, providing value-added services of Funding and Communication, while also working on various strategic initiatives and opportunities to expand over time. The value created is in digitalization, while also optimizing transaction routing to deliver the best payment experiences to our clients and their customers.
John Andrew Morris: These integrations open up large verticals with critical mass and allows us to create a network with our end market within our end markets.
John Andrew Morris: On the business, putting aside we have developed a vertically rich supplier network to create a flywheel for the future and eventually expand capabilities to enhance our vendor enablement process.
John Andrew Morris: This means we are a full service processor, providing value added services like instant funding and communication solutions, while also working on various strategic initiatives and opportunities to expand over time.
John Andrew Morris: The value created in the digitalization of payment flows while also optimizing transaction routing to deliver the best payment experiences to our clients and their customers.
John Andrew Morris: While we are relatively early in this continuous mission, we are starting to see improved growth, which we believe will drive higher returns over time. As we turn to 2024, we will align our strategic initiatives with this mission while driving growth this year and beyond. As we continue to take advantage of the secular trends toward frictionless digital... will we be squarely focused on? First, go to marketing.
John Andrew Morris: We are relatively early in this continuous mission, we are starting to see improved growth, which we believe will drive higher returns over time.
John Andrew Morris: As we turn to 2024, we will align our strategic initiatives with this mission, while driving growth this year and beyond.
John Andrew Morris: As we continue to take advantage of the secular trends towards frictionless digital payments.
John Andrew Morris: It would be squarely focused on first go to market efficiency.
John Andrew Morris: We will continue to expand our services, and we are now 262 integrated software partners while finding ways to further penetrate these relationships. We look to add new software partners to help fill our expanding sales. And we will selectively add enterprise sales, specific verticals within consumer payments and business. Second, client implementation.
John Andrew Morris: We will continue to expand our services and to leverage our now 262 integrated software partners, while finding ways to further penetrate these relationships.
John Andrew Morris: We look to add new software partners to help fill our expanding sales pipelines.
John Andrew Morris: And we will selectively add enterprise sales team members the specific verticals within consumer payments in business payments.
John Andrew Morris: Second client implementations.
John Andrew Morris: We remain focused on making sure we guide our clients through a seamless onboarding process while providing ongoing and first-class support throughout the entire client and Third Product life cycle. Our tech platform is constantly evolving; we have developed a best-in-class clearing and so on while expanding our payment modality. As we look into the future, our platform continues to scale as we automate manual processing. Lastly, our capital allocation priorities remain focused on creating value for our shareholders by investing in organic growth.
John Andrew Morris: We remain focused on making sure we got our clients through a seamless onboarding process, while providing ongoing in first class support throughout the entire client experience.
John Andrew Morris: And third product.
John Andrew Morris: Our tech platform is constantly evolving as we have developed a best in class clearing and settlement engine, while expanding our payment modalities.
John Andrew Morris: As we look into the future our platform continues to scale as we automate manual processes.
John Andrew Morris: Lastly, our capital allocation priorities remain focused on creating value to our shareholders by investing in organic growth opportunities, while continuing to be open to accretive strategic M&A.
John Andrew Morris: I'll continue to be open to creative strategic M&A, as well as buying back shares in a disciplined way. We exit at 2023 with a solid X, that has continued into January with consistent trends and is strong with that. I turn it over to Tim to go over our financials and our outlook for 2020.
John Andrew Morris: As well as buying back shares in a disciplined way.
John Andrew Morris: We exited 2023 with a solid execution that has continued into January with consistent trends and strong growth.
John Andrew Morris: With that.
John Andrew Morris: I'll turn it over to Tim to go over our financials and our outlook for 2020 for Jim.
Timothy John Murphy: Thank you, John. Now, let's go over our Q4 financial results before I view our financial guidance for 2024. As a reminder, Q4 normalized organic growth is calculated by excluding contributions attributable to the divested Blue Cross software business and the contribution attributable to political media in the fourth quarter of 2022. In the fourth quarter, Repay delivered solid results across Baltimore. The card payment volume was $6.4 billion.
Timothy John Murphy: Thank you John now, let's go over our Q4 financial results before of your financial guidance for 2024.
Timothy John Murphy: As a reminder, Q4 normalized organic growth is calculated by excluding contributions.
Timothy John Murphy: <unk> to the divestiture of Blue kind of software business and the contribution attributable to political media in the fourth quarter of 2022.
Timothy John Murphy: The fourth quarter, we paid delivered solid results across all of our key metrics.
Timothy John Murphy: Card payment volume was $6 4 billion.
Timothy John Murphy: Revenue was $76 million, an increase of 14% on a normalized organic basis over the prior year. Our business continues to benefit from strong performance in both card-based payment revenue and other value-added services, such as communication solutions and funding, along with higher yields and business. Revenue attributable to Blue Cow and political media in Q4 2022 was approximately $3.3 million and $2.8 million, respectively.
Timothy John Murphy: Revenue was $76 million, an increase of 14% on a normalized organic basis over the prior year fourth quarter.
Timothy John Murphy: Our business continues to benefit from strong performance in both card based payment revenue as well as other value added services such as communication solutions include funding.
Timothy John Murphy: Along with higher yields in business payments.
Revenue attributable to Blue column political media in Q4, 2022 was approximately three $3 3 million and $2 8 million respectively.
Timothy John Murphy: Thank you for Normalized Organic Gross Profit growth of 13% in 2014. This normalized organic gross profit growth removes approximately $3.2 million and $2.5 million of gross profit attributable to blue-cow and political media in Q4 2022, respectively. Our consumer payments segment reported organic gross profit growth of 13% in 2014.
Timothy John Murphy: Q4 normalized organic gross profit grew by 13% year over year.
Timothy John Murphy: This normalized organic gross profit growth removes approximately $3 2 million from $2 5 million of gross profit attributable to blue collar and political media in Q4 2022, respectively.
Timothy John Murphy: Our consumer payments segment reported an organic gross profit growth of 13% in Q4.
Timothy John Murphy: Our business payment segment gross profit grew 25% when excluding the impact of political media during Q4 2020. Fourth quarter adjusted IVADA was 33.5, representing 44%. Importantly, Q4 adjusted EBITDA margins improved sequentially as we have maintained relatively stable SG&A costs on a quarter-over-quarter basis and are simultaneously working to align our sales, implementation, and support teams throughout the year. Lastly, fourth quarter adjusted net income was $26.3 million, or $0.27 per share.
Timothy John Murphy: Our business payment segment gross profit grew 25% when excluding the impact of political media during Q4 2022.
Timothy John Murphy: Fourth quarter, adjusted EBITDA was $33 5 million, representing 44% margins importantly, Q4, adjusted EBITDA margins improved sequentially as we have maintained relatively stable SG&A costs on a quarter over quarter basis, while simultaneously working to align our sales implementation and support teams throughout the year.
Timothy John Murphy: Lastly, fourth quarter adjusted net income was $26 3 million or <unk> 27 per share.
Timothy John Murphy: Proforma Net Leverage is now approximately 2. We expect net leverage to naturally decline throughout this year from our strong profitability and cash flow generation, including any potential. As of December 31st, we had approximately $118 million of cash in the balance sheet with access to $185 million of undrawn revolver capacity, a total equity amount of $350,000.
Timothy John Murphy: Our pro forma net leverage is now approximately two six times, we expect net leverage to naturally decline throughout this year from our strong profitability and cash flow generation, excluding any potential M&A.
Timothy John Murphy: As of December 31, we had approximately $118 million of cash in our balance sheet with access to $185 million of Undrawn revolver capacity, our total liquidity amounted $303 million.
Timothy John Murphy: Repay's total outstanding debt of $440 million is comprised of a 0% coupon convertible note that does not mature until February 2020. During the fourth quarter, we used $13.5 million of cash for our software partner, Residual Buyout, and $2.5 million of cash for ShareRepay. As of December 31st, we have $37.5 million remaining available under our current share repurchase authorization.
Timothy John Murphy: We paid total outstanding debt of $440 million is comprised of a zero percent coupon convertible note that does not mature until February 2026. During the fourth quarter, we used $13 5 million of cash for our software partner residual buyouts and $2 5 million of cash for share repurchases as.
Timothy John Murphy: As of December 31, we have $37 5 million remaining available under our current share repurchase authorization.
Timothy John Murphy: Moving on to our thoughts for 2020, the full year 2024 outlook demonstrates our consistent growth algorithm. Growth with Existing Clients. The folio contributions from clients that began ramping during the prior year. Growth from Sine Nucleus.
Timothy John Murphy: Moving on to our thoughts for 2020 for a full year of 2024 outlook demonstrates our consistent growth algorithm.
Timothy John Murphy: With existing clients the full year contribution from clients that began ramping during the prior year.
Timothy John Murphy: And growth from signing new clients.
Timothy John Murphy: We expect revenue to be between $314 million and $320 million. You will no longer be providing guidance for CPV. Our company has evolved over the years to now have over 20% of revenue attributable to value-added services that are non-card volume-tied revenue. We expect gross profit to be between $245 and $250 million, and Adjusted Eva Doc to be between $139 million and $142 million. We expect roughly 44% of customers to just leave
Timothy John Murphy: We expect revenue to be between $314 million and $320 million.
Timothy John Murphy: Will no longer be providing guidance with CPB. Our company has evolved over the years to now have over 20% of revenue attributable to value added services that are non card volume tied revenue streams.
Timothy John Murphy: We expect gross profit to be between 245 and $250 million.
Timothy John Murphy: And adjusted EBITDA to be between 139 million and 142 million.
Timothy John Murphy: Roughly 44% adjusted EBITDA margins.
Timothy John Murphy: As we expect adjusted EBITDA to grow faster than revenue and gross profit during the year, leading to an acceleration of cash conversion, we're introducing a free cash flow conversion target of approximately 60% for a full year 2025. Pre-cash flow conversion is calculated by dividing pre-cash flow by a constant. We plan to reduce overall CAPEX spending, giving us the confidence to accelerate our free cash flow conversion throughout 2024, leading to free cash flow growth of approximately 60% year-over-year and sustained mid-to-high teens growth thereafter.
Timothy John Murphy: We expect adjusted EBIT to grow faster than revenue and gross profit during the year, leading to an acceleration of cash conversion.
Timothy John Murphy: Introducing a free cash flow conversion target of approximately 60% for full year 2024.
Free cash flow conversion is calculated by dividing free cash flow by adjusted EBITDA.
Timothy John Murphy: We plan to reduce overall, capex spending, giving us the confidence to accelerate our free cash flow conversion throughout 2024.
Timothy John Murphy: Leading to free cash flow growth of approximately 60% year over year and sustained mid to high teens growth thereafter.
Timothy John Murphy: We continue to execute on our strategic priorities, and while we have more work to do, we are seeing the sales pipeline develop, giving us confidence in our multi-year growth opportunity. Planning assumptions around a 2024 outlook can involve a measured ramp of the previously announced auto-captive, while lapping strong growth from enterprise clients during 2020 due to the uncertainty around volume.
Timothy John Murphy: We continue to execute on our strategic priorities, while we have more work to do we are seeing the sales pipeline develop giving us confidence in a multiyear growth opportunity.
Timothy John Murphy: Planning assumptions around 2024, I'll look and vulgar measured ramp up of the previously announced auto captive win while lapping strong growth from enterprise clients during 2023.
Timothy John Murphy: Due to the uncertainty around volume timing, our 2024 outlook does not incorporate significant second half contributions from the mortgage debit acceptance opportunity and the recently announced business payments enterprise software integrations such as blackboard.
Timothy John Murphy: The 2024 Outlook does not incorporate significant second-half contributions from the Mortgage Debit Acceptance Opportunity Fund and the recently announced business payments enterprise software integration such as Blackberry. Our quarterly cadence for 2024 is comprised of Q1 being positively impacted by the seasonality of tax requirements. All Q3 and Q4 will benefit from the incremental contributions of our political media business in the Business Payment System. While tax refund season began later this year, early data suggests the total refunds will be consistent with last year, and the average refund size may be up slightly compared to prior years.
Timothy John Murphy: Quarterly cadence for 2024 is comprised of Q1 being positively impacted from the seasonality of tax refunds.
Timothy John Murphy: Q3, and Q4 will benefit from the incremental contributions of our political media business and the business payments segment.
Timothy John Murphy: On tax refund season began later this year early data suggest the total refunds will be consistent with last year. The average refund size may be up slightly compared to prior year.
Timothy John Murphy: Q1 free cash flow conversion is expected to be closer to the full year 2023 profile due to quarterly timing around net working capital is expected to accelerate throughout the year.
Timothy John Murphy: Q1 free cash flow conversion is expected to be closer to the full year 2023 profile. Quarterly Timing Around Networking Capital, which is expected to accelerate throughout the year. As you can see from our results and outlook, we expect free cash flow conversion to improve throughout 2024 as we reduce cap, but also realize the benefits from investments we've made in sales, product, and technology over the past. We've always focused on profitable, refining processes across the business where we can scale through automation, while also maintaining investments toward the future. I'm now turning the call back over to the operator. Operator?
Timothy John Murphy: As you can see from our results and outlook, we expect free cash flow conversion to improve throughout 2024, as we reduce capex, but also realize the benefits from investments we've made.
Timothy John Murphy: In sales product and technology over the past several years, we have always focused on profitable growth refining processes across the business, where we can scale through automation.
Timothy John Murphy: Maintaining investments towards innovation.
Speaker Change: I'll now turn the call back over to the operator to take your questions operator.
Speaker Change: Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two if he would like to remove your question from the queue.
Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting your question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Speaker Change: Our first question comes from the line of Ramsey El <unk> from Barclays. Please proceed with your question.
Speaker Change: Hi, This is Ryan Campbell on for Ramsey. Thanks for taking my question today.
Ryan Campbell: And what are the biggest levers when it comes to improving free cash flow conversion this year and given the 60% rate you provided is that how we should think about the longer term normalized conversion rate.
Ryan Campbell: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Ramsey L. O'Soul from Barclays. Please proceed with your question. Hi, this is Ryan Campbell on behalf of Ramsey.
Thank you.
Absolutely. So yeah, we're very excited about that and so confident in rolling out that new metric.
Timothy John Murphy: Thanks for taking my question today. And what are the biggest levers when it comes to improving free cash flow conversion this year? And given the 60% rate you provided, is that how we should think about the longer-term normalized conversion rate for repayment? Thank you.
Ryan Campbell: Biggest drivers would be adjust.
Ryan Campbell: Adjusted EBITDA growing faster than gross profit so increased profitability.
Ryan Campbell: Reduced capex down to the levels. We have said previously which are around call. It 13% to 14% of revenue those factors combined lead to the cash flow conversion outlook of 60% and like we said on the call. We think that can grow sustainably mid to high teens going forward. So that should lead to an even higher free cash flow conversion <unk>.
Timothy John Murphy: Absolutely, so we're very excited about that and feel confident in rolling out that new metric. The biggest drivers would be adjusted EBITDA growing faster than gross profit, so increased profitability, reduced CapEx, you know, down to the levels we've said previously, which are around called 13% to 14% of revenue. Those factors combined lead to the cash flow conversion outlook of 60%.
Ryan Campbell: And in future years.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from the line of Peter Heckmann with D. A Davidson. Please proceed with your question.
Peter James Heckmann: And like we said on the call, we think that can grow sustainably in the mid to high teens going forward. So that should lead to an even higher pre-cash flow conversion percentage in future years. Thank you. Our next question comes from the line of Peter Heckmann with D.A. Davidson. Please proceed with your question. Good afternoon, everyone.
Peter James Heckmann: Good afternoon, everyone and thanks for taking the question can you comment a little bit about your expectations.
Peter James Heckmann: For the growth in AR.
Peter James Heckmann: Revenue related to political media spend over.
Peter James Heckmann: 2022.
Peter James Heckmann: And then a little bit about how you're thinking about the underlying growth of the business segment.
Timothy John Murphy: Thanks for taking the question. Can you comment a little bit about your expectations for the growth in revenue related to political media and then a little bit about how you're thinking about the underlying growth in 2020? Yeah, so we feel good about how we're set up for this year's presidential cycle.
Peter James Heckmann: As we go into 2025 or growth in 'twenty, four excluding political and media spend.
Speaker Change: Yeah, So we feel good about the.
Speaker Change: How we're set up for this years presidential cycle.
Timothy John Murphy: As we've said previously, in the 2022 cycle, we had about $6 million of gross profit, and we think that'll grow about 20% this year. So we're expecting strong growth, and that's generally related to just the shift to digital payment trend and then just a lot of the industry research we've done. So that's how we're thinking about the contribution for this year, and we think underlying business payments growth, excluding political media, can still be mid-to-high teens. So we think it's a mid-to-high teen growth business in the near term, here, and then what would you, can you talk a little bit about, http://TheBusinessProfessor.com, The Software Partner Residual Buyer? Is that where we will see it show up?
Speaker Change: As we've said previously the 2022 cycle, we had about $6 million of gross profit and we think that will grow about 20%. This year. So we're expecting strong growth and thats generally related to just the.
Speaker Change: Digital payment shift to digital payment trend and then.
Speaker Change: Just a lot of the industry research we've done so that's how we're thinking about the contribution for this year and we think underlying business payments growth, excluding political media can still be.
Speaker Change: Mid to high teens. So we think it's a mid to high teen growth business in the near term.
Speaker Change: That's great to hear and then what would you can you talk a little bit about the expected margin benefit from the software partner residual buyout is that where we want to see it show up in the gross margins.
Timothy John Murphy: Yes, yeah, you'll see it show up there. And, you know, I'd say our outlook assumes that impact. And so you can see a little bit of expansion in the outlook, and that's not solely related to that, but a decent chunk of it is. And so, you know, that's something we've done in the past, and we have opportunities still to do that in the future. We think that's a good use of capital given the multiples we pay for those portfolios, and you do see that show up in both gross profit margin expansion and adjusted even margin expansion. Our next question comes from the line of Andrew Schmidt with Citi. Please receive your question. Hey John.
Speaker Change: Yes, yes, you'll see it show up there and.
Speaker Change: I'd say, our outlook assumes that impact and so you can see a little bit of expansion in the outlook.
Speaker Change: That's not solely related to that but a.
Speaker Change: A decent chunk of it is and so that's something we've done in the past.
Speaker Change: Have opportunities still to do that in the future. We think that's a good use of capital given the multiples we pay for those portfolios and you do see that show up in and really both gross profit margin expansion and adjusted EBIT margin expansion.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from the line of Andrew Schmidt with Citi. Please proceed with your question.
Speaker Change: Yeah.
Andrew Garth Schmidt: Hey, Tim. Good evening. Thanks for taking my questions. I just want to dig into slide 12, the existing client growth bucket. Maybe you could just drill down on that a little bit. I know, historically, this has been driven by increased penetration of your existing clients. I'm just wondering if that's still the case here.
Andrew Garth Schmidt: Hey, John Hey, Tim Good evening, Thanks for taking my questions.
Andrew Garth Schmidt: I just wanted to dig into slide 12, the existing client growth bucket, maybe you could just drill down on that a little bit.
Andrew Garth Schmidt: I know historically this has been driven by increased penetration of <unk>.
Andrew Garth Schmidt: Your existing clients wondering if that's still the case or are there. Other factors maybe just definitional question. Whether this includes clients signed in 'twenty three that are ramping in 2020 for maybe it's a little bit around that existing client growth bucket would be helpful and your visibility there. Thanks a lot.
John Andrew Morris: Are there other factors? And maybe just a definitional question, whether this includes clients signed in 2023 that are ramping up in 2024. Maybe just a little bit around that existing client growth bucket would be helpful in your visibility there. Thanks a lot.
John Andrew Morris: We do have a lot of visibility there. I mean, our business is highly recurring. It's typically tied to, you know, longer-term payment streams. And so we see, you know, a lot of growth from existing clients just adopting more of our payment modalities and our payment channels, which drives, typically drives higher debit acceptance and debit penetration, which leads to a lot of existing client growth. And you know, like you said, there's also some embedded growth from clients that have been signed in prior periods that haven't fully ramped, and usually the ramp is around additional adoption as well. So it's a combination of those things. And then just the underlying clients themselves growing, you know, to help support existing customer growth. Yeah, Andrew. Good evening.
Speaker Change: We do have a lot of visibility there.
Speaker Change: Our business is highly recurring it's typically tied to.
Speaker Change: Longer term payment streams, and so we see a lot of growth from existing clients just adopting more of our payment modalities in our payment channels, which drives typically drives higher debit acceptance and debit penetration, which which leads to a lot of the existing client growth.
Speaker Change: And like.
Speaker Change: Like you said I mean, there's also some embedded growth from clients that have been signed in prior periods that haven't fully ramped and usually the ramp is.
Speaker Change: Is around additional adoption as well so it's a combination of those things and then just the underlying clients themselves growing.
Helps support existing customer growth.
Speaker Change: Good evening.
John Andrew Morris: I would also point you to our investor supplement, which we, you'll see a bridge on new client growth as well as existing client growth in there. And also, I'll give you a couple additional points. If you look at the 45% year-over-year growth in our value-added services, which includes our instant funding, those are kind of leading indicators of existing client growth. And then the network effect we get from some of our supplier networks, the growth in our 60% growth in our supplier network, that in itself drives additional growth as well. Yeah, it's a good point.
Speaker Change: I would also point you to our investor.
Speaker Change: Supplement, which we if you.
Speaker Change: Youll see a bridge on the client growth as well as existing client growth in there.
Speaker Change: And then also give you a couple of additional <unk>.
Speaker Change: If you look at the 45% year over year growth in our <unk>.
Speaker Change: Value added services, which includes our instant funding.
Speaker Change: These are kind of leading indicators of existing client growth and then the network effect, we get off of some of our supplier network the growth in our 6% growth in our supplier network.
Speaker Change: In itself drives additional growth as well.
Speaker Change: And it's a good point I mean in the business payment side, we have a total pay solution. So we do we outsource the entire payables function and so oftentimes, where we're taking payments from say checker HTH to virtual card and driving enhanced virtual card penetration.
John Andrew Morris: I mean, on the business payment side, you know, we have a total payment solution. So we do outsource the entire payables function. And so oftentimes, where we're taking payments from, you know, say, checker ACH to virtual card and driving enhanced virtual card penetration, the way we do supplier enablement and vendor enablement, and some of that could lead to existing client growth as well on the business payment side. I got it.
Speaker Change: And the way, we do supplier enablement and vendor enablement and some of that could lead to existing client growth as well on the business payment side.
Speaker Change: Yes.
John Andrew Morris: That's very helpful. And yeah, a good point about the value-added services. I know that's been an increasing part of the story over the last couple of years. So that's, that's well added. Um, if I could just ask on the, for my follow-up question, just, I get a lot of questions on the convert. Obviously, it's out there in 2026. What's the philosophy around handling that? Are there opportunities to chip away at that in the interim or opportunistically, or is it sort of wait till we get closer to maturity and then determine a course there? Anything around just the strategy there will be helpful. Thanks a lot.
Speaker Change: Got it that's very helpful and you had good point about the value add services I know that's been it.
Speaker Change: Increasing part of the story over the last couple of years. So that's that's well added.
If I could just ask on the for my follow up just I gave a lot of questions on the convert.
Speaker Change: Obviously, it's out there in 2026.
Speaker Change: Whats the philosophy around handling that are there opportunities to chip away at that in the interim or opportunistically or is it you know.
Speaker Change: Sort of wait till we get closer to maturity and then deter.
Speaker Change: Determine of course, there anything around just yet.
Speaker Change: The strategy there would be helpful. Thanks, a lot.
John Andrew Morris: Yeah, I mean, we're obviously very aware of the maturity of that. It's still not for another two years, but, you know, we're thinking through different ways to manage that liability. There are a lot of options.
Speaker Change: Yeah I mean, we're we're we're obviously very aware of the maturity on that it's not still not for another two years, but.
Speaker Change: We're thinking through different ways to manage that liability there are a lot of options that's very flexible capital.
John Andrew Morris: It's very flexible capital, and, you know, we're growing cash, and one of our capital allocation priorities could be to address the convertible, and it likely would be in the form of chipping away at it, like you said, but we haven't made any final decisions on that. Convert Market appears to have opened back up, which will give us those additional options if we choose as well. It makes sense. Thank you, John. Thank you, Tim.
Speaker Change: And we would we're growing cash and one of our capital allocation priorities could be too.
Speaker Change: To address the convert and it likely would be in the form of chipping away at it like you said, but we haven't made any final decisions on that and we have a lot of options.
Speaker Change: I'd add that the convert market appears to have opened back up.
Speaker Change: Which will give us those additional options if we choose as well.
Speaker Change: Makes sense. Thank you John Thank you Tim.
Speaker Change: Thank you.
Steven Fox: Our next question comes from the line of Sanjay Stakhrani with KBW. Please proceed with your question. Hi, this is actually Steven Fox filling in for Saini.
Speaker Change: Our next question comes from the line of Sanjay spoke Ronny with <unk>. Please proceed with your question.
Speaker Change: Hi, This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I have was just around if you could talk about the macro outlook that assumed within the guide and anything around like how we should think about that.
Timothy John Murphy: The first one I had was just a round, guide, and anything around like that. Yeah, I mean, our guidance philosophy is generally based on just looking at current run rate trends in our business and utilizing, you know, what we know about the business, what we have either from existing client growth, like I said, we have a lot of visibility into that, and then new signed clients. So, a lot of it is just based on those recent run rate trends in our own business and then what's going on the most recent trends from a macro perspective. So, those are kind of our planning assumptions based on what's currently happening in the macro. And then, as I mentioned on the call, the quarterly cadence is that Q1 will benefit from tax refunds. And, you know, I mentioned it's still early days in this tax refund season, but so far, it looks like overall returns will be generally consistent with last year, but the average refund size seems to be a bit higher.
Steven Kwok: Gross profit and EBITDA from a quarterly cadence perspective. Thanks.
Speaker Change: Yes, I mean, our guidance philosophy is generally based on just looking at current run rate trends in our business and utilizing what we know about the business. What we have either from existing client growth like I said, we have a lot of visibility into that and then new signed clients.
Speaker Change: So a lot of it is just based on those recent run rate trends in our own business and then whats going on the most recent trends from a macro perspective, so that those are kind of our planning assumptions based on what's currently happening in the macro.
Speaker Change: And then as I mentioned on the call I mean, the quarterly cadence is that Q1 will benefit from tax refunds.
Speaker Change: And.
I mentioned, it's still early days this tax refund season, but so far it looks like overall returns will be generally consistent with last year, but the average refund sizes seems to be a bit higher that would be good for us and then we see it because this year is a presidential cycle, we see an uptick in Q3 and Q4 related to political media volumes.
Timothy John Murphy: That would be good for us. And then we see it, you know, because this year is a presidential cycle; we see an uptick in Q3 and Q4 related to political media volumes and political media spend. So that's generally how we think about the cadence of our overall business. You know, from a free cash flow perspective, as I mentioned, Q1 will likely look like the full year 2023 profile, and it will build throughout the year. So free cash flow conversion will accelerate throughout the year, leading to a full year number of approximately 60%. All right. That's very helpful, and just like following up on the prior comment. Then, how should we think about the cash that you have? And if you could also talk about it,
Speaker Change: Political media spend so that's generally how we think about the cadence of our overall business.
Speaker Change: And from a free cash flow perspective, as I mentioned.
Speaker Change: Q1 will likely look like the full year 2023 profile and it will build throughout the year. So free cash flow conversion will accelerate throughout the year, leading to a full year number for approximately 60%.
Speaker Change: Got it that's very helpful and just like following up around the prior comment on why the convertibles and just how should we think about the the cash that you have and if you could talk also about the potential M&A market because we've been hearing this may be signs of that valuations have been coming to.
Timothy John Murphy: M&A Market, because we've been here..., and many more. Thank you, down. I want to..., by P.O., does the convertibles on the horizon.
Speaker Change: Just wanted to see what Youre seeing out there and if the right deal comes along.
Speaker Change: Does the east.
Speaker Change: These convertibles on the horizon prohibit you from doing anything.
Timothy John Murphy: Okay. Yeah, I mean, on the convert, we, like I said, it's really flexible. We have a lot of options. We're growing cash nicely. Our free cash flow conversion profile should put us over $200 million at the end of 2024. We are looking to maintain flexibility for various capital allocation priorities, the first and foremost being organic growth.
Speaker Change: Okay.
Speaker Change: We like I said, it's a really flexible we have a lot of options, we're growing cash nicely our free cash flow conversion profile should put us over $200 million at the end of 2024.
Speaker Change: Looking to maintain flexibility for various capital allocation priorities.
Speaker Change: First and foremost being organic growth and then we have.
Timothy John Murphy: And then we have, you know, the share repurchase authorization, which we acted on toward the end of last year. And then the conversion is, again, something we're monitoring at 0% interest. And so we're just trying to be thoughtful around, you know, maintaining flexibility to also continue to reduce net leverage. And then from an M&A perspective, we do see the pipeline building. We do see more activity picking up coming into this year, and I think sellers probably have become more rational on valuation. So, you know, the spread between private and public markets is probably narrowing.
Speaker Change: The share repurchase authorization, which we reacted on towards the end of last year.
Speaker Change: And then the convert is.
Speaker Change: Again, something we're monitoring at zero percent interest and so we're just trying to be thoughtful around maintaining flexibility is also continuing to reduce net leverage.
Speaker Change: And then from an M&A perspective, we do see we do see the pipeline building, we do see more activity picking up coming into this year I think sellers probably have become more rational on valuation so.
Speaker Change: The spread between private and public markets as probably compressing, but we haven't done an acquisition in over two years. So we've been very disciplined and we will continue to be disciplined on valuation.
Timothy John Murphy: But, you know, we haven't done an acquisition in over two years. So we've been very disciplined and will continue to be disciplined on valuation. Thanks for taking the time for that. Our next question comes from the line of Joseph Vafi with Canaccord. Please proceed with your question. Hey, guys. Good afternoon.
Speaker Change: Got it thanks for taking my question and congrats on the quarter.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joseph <unk> with Canaccord. Please proceed with your question.
Joseph: Hey, guys. Good afternoon nice results.
Joseph Anthony Vafi: Nice results. Could you just go through the reduced CapEx outlook for 2024? Remind us of some of those investments that were, you know, being invested in at higher run rates? And, you know, are those projects just completed? Or, you know, how should we think about the CapEx reduction relative to forward investment and the opportunities coming from it? And I'll have a follow-up.
Joseph: Could you just go through the reduced Capex outlook for 2024 remind us what were some of those investments or you.
Joseph: You know being invested at a higher run rate then.
Joseph: Or are those projects just completed or you know how should we think about the capex reduction relative to forward investment and the opportunities coming from all the follow up.
Timothy John Murphy: Yeah, we have invested heavily in the business. We've invested in growth. A lot of that was focused on our back-end, RCS, where we're just trying, you know, that is, we as Repay are the largest user of that platform, and so we want that to be as robust and as modern as it can be. So that was a big investment that we don't think is recurring.
Joseph: Yes, we have invested heavily in the business we've invested in growth a lot of that was focused on.
Joseph: Our backend Rcs, where we're just track that as we as repay are the largest user of that platform and so we want that to be as robust as modern as it can be so that was a big investment that we don't think is recurring.
Timothy John Murphy: From a growth investment standpoint, you know, there's a lot of work done on large client implementations and also large software partner implementations and then upgrades. We've been doing a lot to put ourselves in a position to further penetrate existing software relationships in addition to, you know, implementing new relationships. And we've also done a lot of work; we haven't done an acquisition in over two years.
From a growth investment standpoint.
Joseph: There is a lot of work done on large client implementations and also large software partner implementations and upgrades you've been doing a lot to put put ourselves in a position to further penetrate existing software relationships. In addition to.
Joseph: Implementing new relationships.
Joseph: And we've also done a lot of work we haven't done an acquisition over two years. So in addition to doing work on Rcs, we've done a lot of work to integrate prior acquisitions that bring those onto effectively a single platform.
Timothy John Murphy: So, in addition to doing work on RCS, we've done a lot of work to integrate prior acquisitions onto effectively a single platform, and there are integration costs associated with that, and that can sometimes show up in the form of CapEx. So there's some of that work behind us, and like I said, we, you know, CapEx was a bit elevated in 23, and we expect to bring that down to, call it, the 13 to 14 percent of revenue level in 24 and even further down beyond 24. You know, that in addition to just EBITDA growing, just EBITDA growing faster than gross profit, you know, combined leads to free cash flow acceleration. Yeah, Jay, let me add just a little color there. Obviously, that continues our investments and technology go with our embedded payment solutions inside of our software partners, and our ability to do it via networks, all networks that move funds, so an omni-modality as we drive our product features throughout our solutions. We've added many of those this year, so they are very complementary to what we're looking at.
Joseph: And there is integration cost associated with that.
Sometimes show up in the form of Capex. So there is some of that work behind us and so like I said, we there was capex was a bit elevated in 'twenty, three and we expect to bring that down to call it to 13% to 14% of revenue level in 'twenty, four and even further and even further down beyond 24.
Joseph: That that in addition to just EBITDA growing adjusted EBITDA growing faster than gross profit.
Joseph: Combined leads to the free cash flow acceleration.
Speaker Change: Yes, Joe let me add just a little color there, obviously that continues or our investments in.
Speaker Change: In technology.
Joe: Go with our embedded.
Joe: Payment solutions inside of our software partners and.
Joe: And our ability to do it via networks all networks that move funds. So omni modality as we drive our product features throughout our solutions. We've added many of those this year.
Joe: It's very complementary to what we're looking at it we think we're set up well and we've made some of those investments our ability to to drive that those processing features and then and we would expect to as Tim indicated we would expect to scale some of that back.
Timothy John Murphy: We think we're set up well, and we've made some of those investments. Our ability to drive those processing features, and we would expect to, as Tim indicated, scale some of that back as those projects begin to end. Sure, fair enough, thanks for those comments, guys. And then, you know, if we look at this stuff like instant funding and your other value services growing really fast, just trying to get a feel for kind of how penetrated in the market you might be with some of these services. I mean, clearly, it's a small base, but I was just kind of wondering how you're thinking about the CAMs in some of these fast-growing areas. Thanks a lot.
Joe: As it is not.
Joe: It's probably just beginning to end.
Speaker Change: Okay fair enough. Thanks for those comments guys and then you know if we look at the some of the stuff like instant funding in Europe, you know other value services growing really fast.
Speaker Change: Trying to get a feel for kind of how penetrated in the market you might be with <unk>.
Speaker Change: Some of these services I mean, clearly, it's a small base, but just kind of wondering how you're thinking about the Tam and in some of these fast growth areas. Thanks a lot.
John Andrew Morris: The value-added services are certainly a nice grower for us. There are a couple of different revenue streams there. We called out instant funding and communication solutions. Instant funding today, the primary use case is in personal loans; it's funding loans directly onto the consumer's debit card, which we actually think leads to higher debit acceptance because, oftentimes, when you fund a loan onto a debit card, it becomes a default repayment mechanism for automatic recurring payments.
Speaker Change: [laughter].
Speaker Change: The value added services, there's certainly a nice grower for us there's a couple of different revenue streams, there, we called out instant funding and communication solutions.
Speaker Change: Instant funding today, the primary use cases in personal loans, it's funding.
Speaker Change: One is directly onto the consumers' debit card, which we actually think leads to higher debit acceptance because oftentimes when you fund the loan onto a debit card it becomes a default prepayment mechanism for.
Speaker Change: Automatic recurring payments. So that's a benefit just through existing client growth in terms of additional debit acceptance so well.
John Andrew Morris: So that's a benefit just to existing client growth in terms of additional debit acceptance. So we're probably only utilizing that, the instant funding product, with maybe a few hundred lenders, and we have several thousand personal lenders. So the penetration is fairly low.
Speaker Change: The only utilizing that.
Speaker Change: The instant funding product with maybe a few hundred lenders and we have several thousand personal lenders. So the penetration is fairly low.
John Andrew Morris: The primary use case we've seen so far for communication solutions is in mortgage servicing. There is a lot of communication and notifications required around when your payment is due, how your payment can be made, and the various options for making payments. And we often charge for that, and we're also trying to make more of those communications digital and then tie a digital payment to the communication itself. So that's a nicely growing business for us, and that drives some of the growth in mortgage. Those are two areas we see where there's just, you know, not a lot of penetration today but a big opportunity to continue to grow those services. Let me add something as well.
Speaker Change: The primary use cases, you've seen so far for communication solutions as in mortgage servicing there is a lot of a lot of communication and notifications required around one of your payment is due how your payment can be made in the various options for making the payments and we oftentimes will charge for that and we're also trying to make more of those communications digital.
Speaker Change: And then tie a digital payment to the communication itself. So that's a nicely growing business for us and that drives some of the growth in mortgage servicing.
Speaker Change: So those are two areas, we see where theres just not a not a lot of penetration today, but.
Speaker Change: Big opportunity to continue to grow those services, let me add as well.
John Andrew Morris: The real flywheel effect on the business payment side, as you know, we're seeing tremendous amounts of opportunities there, specifically on the payable side. And as you know, for every payable, if someone else is receivable, our ability to really turn that crank is there, and our ability to just continue to accelerate that. Let me add as well embedded payments into very large enterprise software platforms, such as our example we've been giving, BlackBaud. There are several of those opportunities out there and they really help in the monetization of payments, the to and from, which exists in every platform. It's a significant opportunity with many years of growth, as well as we mentioned a few things as well, like our mortgage initiative is really not in our 24 concept, but we think it's a multi-year contributor to organic growth as well. Thanks for that extra color, John.
Speaker Change: <unk>.
Speaker Change: The real flywheel effect on the business payment side as you know.
Speaker Change: We're seeing tremendous amount of opportunities there.
Speaker Change: Specifically on the payable side and as you.
Speaker Change: Fermi payable with someone else's receivable our ability to really.
Speaker Change: Turn that crank is is there and our ability to just continue to accelerate that let me add as well embedded payments into very large enterprise software platforms, such as our example, we've been given as blackboard.
Speaker Change: There are several of those opportunities out there.
Speaker Change: And really help in the monetization of payments to and from which exist in every platform.
Speaker Change: <unk>.
Speaker Change: It's a significant opportunity with many years of growth.
Speaker Change: As well as we mentioned a few things as well like our mortgage initiative.
Speaker Change: It is really not in our 24 concept, but we think it's a multiyear contributor to organic growth as well.
Joseph Anthony Vafi: Nice quarter again, John. Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question. Thank you very much.
Speaker Change: Great.
Speaker Change: Thanks for that extra color, John nice quarter, again, John and Tim.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from the line of James Fawcett with Morgan Stanley. Please proceed with your question.
James Eugene Faucette: Just a quick question. You know, obviously, you answer the question. Anyone else?
James Eugene Faucette: Thank you very much.
James Eugene Faucette: Okay, great. So, I'm going to go ahead and open up the Q&A. We'll start with you, Andrew. I'm going to start with you. So, you guys are doing a lot of work in terms of acquisitions and valuations, and you guys haven't done anything in a couple years. You've been disciplined, but maybe that's starting to open up a little bit. How should we think about what kind of appetite you would have?
James Eugene Faucette: A quick question, obviously, you answer the question around acquisitions and valuations and you guys haven't done anything in a couple of years have been disciplined but maybe that's starting to open up a little but how should we think about.
James Eugene Faucette: What kind of appetite you would have like what are you looking for either from a capability or a size perspective, and then you know.
Timothy John Murphy: Like, what are you looking for, either from a capability or size perspective? And then, you know, in reference to your CAPEX questions, I think your comments about, like, maybe why that was elevated and is now coming down make sense. But if and when you were to do some incremental acquisitions, should we expect CAPEX to come back up, or is that really hard to say ahead of time? Yeah, in terms of M&A priorities, I mean, we look at deals across both consumer payments and business payments. We have a number of attributes we look for, and it usually centers around integrated payments because integrated payments, to us, lead to better retention statistics, and typically higher margins. And that's why we focus on those types of businesses. And those exist across consumer payments and business payments. You know, we'd like to scale business payments. We'd like that to be a bigger part of the overall mix. In the business payments segment specifically, we see targets in both AR and AP. I would say there are probably more targets in AP.
James Eugene Faucette: The reference to your Capex question as I think your comments about like maybe why that was elevated and now that makes sense, but.
James Eugene Faucette: If it as you were to do some incremental acquisition should we expect capex to come back up or is that really hard to say.
James Eugene Faucette: At a time.
Speaker Change: Yes in terms of M&A priorities I mean, we look at deals across both consumer payments and business payments. We have a number of attributes we look for and it usually is centers around integrated payments because integrated payments to us lead to better retention statistics typically higher.
Speaker Change: Margins.
Speaker Change: And that's why we focus on those types of businesses and those exist across consumer payments and business payments, we'd like to scale business payments, we'd like that to be a bigger part of the overall mix, we see in the business payments segment, specifically, we see targets in both they are an AP I would say, there's probably more targets in AP.
Timothy John Murphy: And we would be not only scaling B2B, but we potentially would be buying other capabilities like cross-border payments. We're really not in cross-border payments today. We could be more in the SMB market through acquisition. Right now, we're focused on medium to enterprise. There are some opportunities to potentially participate in the SMB space, or just expand the number of verticals we're in in AP.
Speaker Change: And we would be not only scaling b to b, but we potentially be buying other capabilities.
Speaker Change: Cross border payments, but really not in cross border payments today, we could be more in the SMB market through acquisition right. Now we're focused on medium to enterprise theres some opportunities to potentially participate in the SMB space or just or just expand the number of verticals. We're in an AP theres some of our targets are in different end.
Timothy John Murphy: Some of our targets are in different end markets, and they have their own supplier networks in those end markets. So we'd be getting access to new vertical niches, new software integrations, and an enhanced supplier network. We'd like to grow a supplier network, so that would be one of the attributes we'd look for on the AP side. So, you know, that's how we think about M&A, it's across the board, but we do want to grow the B2B business and scale it. And, you know, we've done a lot of work to bring these platforms together, and I think we have the right platform and infrastructure in place to absorb additional acquisitions without significantly elevated CapEx to integrate them. I mean, there may be some work required initially, but I think we've kind of demonstrated our ability to bring these platforms together, particularly over the last few years when we haven't been doing M&A and been focused more on organic.
Speaker Change: And they have their own supplier networks in those end markets. So we'd be getting access to new vertical niches, new software integrations and.
Speaker Change: On enhanced supplier network, because we'd like we'd like to grow a supplier networks that would be one of the attributes we look for on the AP side. So those are that's how we think about M&A. Its cross it's across the board, but we do want to grow the business and scale it.
Speaker Change: And we've done a lot of work to bring these platforms together and I think we have the right platform and infrastructure in place to absorb additional acquisitions without significantly elevated capex to integrate them I mean, there may be some work required initially, but I think we've kind of demonstrated our ability to bring these platforms together.
Speaker Change: They're particularly over the last few years, when we haven't been doing M&A and been focused more on organic I think and I think segmenting. The business also sets up to absorb acquisitions more effectively and efficiently going forward, which should limit the need for incremental capex.
Timothy John Murphy: And I think segmenting the business also sets it up to absorb acquisitions more effectively and efficiently going forward, which should limit the need for incremental CapEx. James, the thing I would add to that... Tim's dead on about those comments, and the other thing I would add to that is that we have proven our ability to embed payments into these various different software platforms. We would want to add to our scale across the board for our key core competencies of what we do, and we think we can add great shareholder value with the right opportunities there. Yep, I got it. Got it. Thanks a lot. Byeda Bye!
Speaker Change: James the thing I would add to that.
Tim.
One on those come out the other thing I would add to that is.
James Eugene Faucette: We have proven our ability to.
James Eugene Faucette: Embed payments into these various different software platforms, we would want to add to our scale across the board.
James Eugene Faucette: Key core competencies of what we do and we think we can add great shareholder value when they're with the right opportunities there.
Speaker Change: Yep got it got it thanks a lot.
Speaker Change: Hello.
Timothy Edward Chiodo: Our next question comes from the line of Timothy Chiodo with UBS. Please proceed with your question. Okay.
Speaker Change: Our next question comes from the line of Timothy Chiodo with UBS. Please proceed with your question.
John Andrew Morris: Thank you for taking the question. Of the 262 software partners, if we were just to look at the consumer payment side, I just want to get a rough lay-of-the-land update in terms of how would you describe the need for you to sell into those? In other words, I know that for many of them, the sales folks at Repay would be able to contact the underlying merchant working with the software platform. Maybe some of them, if you could just help us, some of them, you're kind of the only payment provider, and anyone working with them is automatic business to you. Maybe just break down the mix there, and then I have a brief follow-up unrelated to RCA. Sure. I'll start. Good evening, Tim.
Timothy Edward Chiodo: Great. Thank you for taking the question of the 262 software partners. If we were just to look at the consumer payment side I just wanted to get a.
Timothy Edward Chiodo: Lay of the land update in terms of how would you describe that.
Timothy Edward Chiodo: The need for you to sell into those in other words I know that for many of them.
Timothy Edward Chiodo: The sales folks that repay would be able to contact the underlying merchant working with the software platform. Maybe some of them. If you could just help us some of them you are kind of the the.
Only payment provider and any anyone working with them. It's automatic business to you maybe just break down the mix there and then I have a brief follow up unrelated on Rcs.
Speaker Change: Sure I'll start good evening Tim.
John Andrew Morris: We are a direct sales force, and most of our software providers are referral partners, as you are aware, in which they're referring new clients to us, and we're obviously going directly into capturing the clients we don't already have. There are several of those inside of every one of those 262. So we're constantly going through our associations, and our conferences, where we are meeting these various new clients. So it's a direct approach where we own the customer relationship. Some of that is obviously reflected in our margins, but we do partner with them. It's probably on a referral basis; it's probably a 50-50 relationship of us being referred to us, but ultimately, because of the payment expertise knowledge needed because of the omni-modality, omni-channel part of this, there's great value in the financial technology embedded into that, and it needs our expertise to guide our clients through that process.
Speaker Change: We are a direct sales force.
Speaker Change: And.
Speaker Change: Most all of our software providers are referral partners as you are aware.
Speaker Change: And which in which they're referring new clients to us and we are actually going directly into capturing the clients. We don't already have which are several of those inside of every one of those.
Speaker Change: Of those 262, so we're constantly.
Speaker Change: Yep.
Speaker Change: Through our associations or conferences.
Speaker Change: We are meeting these various new clients. So it is a direct it's a direct approach where we own the customer relationship.
Speaker Change: Some of that is obviously reflected in our margins.
Speaker Change: But we do partner with them is probably from a referral basis is probably a 50 50 relationship of of us being it being referred to us but ultimately.
Speaker Change: Cause of the payment expertise knowledge needed become because of the omni modality Omnichannel part of this is great value in the financial technology embedded into that and it needs higher expertise to onboard of our clients through that process.
John Andrew Morris: Yeah, and I'll add, you know, on the consumer side, we have 165 of 262. Like, like, I think you were saying, we're often the preferred provider. These these software, Most partners don't need more than, say, two or three at most payment providers on their platform.
Speaker Change: Yeah, and I'll add on the consumer side, we have 165 of the $2 62.
Speaker Change: Like I think you were saying.
Speaker Change: We are often the preferred provider.
Speaker Change: The software.
Partners don't need more than say two or three at most payment providers in their platform and usually our integration is more deeply embedded into the platform and therefore, we get more of the referrals and then we start calling on the clients directly which leads to existing penetration opportunities. So.
John Andrew Morris: And usually, our integration is more deeply embedded into the platform, and therefore, we get more referrals. And then we start calling on the clients directly, which leads to, you know, existing penetration opportunities. So, we're often the preferred provider, and we've had a lot of these relationships for a number of years, and we've gone through an exercise of refreshing the integration, which is some of the CapEx dollars, but that gives us a better opportunity for penetration. John, Tim, thank you. But both of those answers were very helpful. That's exactly what I was trying to get at. And the 50-50 on the 162.
Speaker Change: We are often the preferred provider and we've had a lot of these relationships for a number of years and we've gone through an exercise of refreshing the integration, which is some of the capex dollars that gives us a better opportunity for penetration.
Speaker Change: John Tim Thank you, but both of those answers were very helpful. That's exactly what I was trying to get at in the $50 50 on the 162 and that extra context is great.
Timothy John Murphy: And that extra context is great. The follow-up RCS. So often, we talk about RCS as an acquisition that helps with your gross margins. And anytime you bring on an acquired property, you can switch processing over to RCS. It's in house, it helps your existing business, it helps future acquisitions. But what we often, or don't as often talk about is just RCS as a standalone business and gaining processing share and signing up new partners on its own outside of Repay. Is there any context you could provide around that, how much of a focus is that, how is that going? Yeah, we can. I mean, you're right.
John Andrew Morris: The follow up Rcs, So oftentimes, we talk about Rcs as an acquisition that helped with your gross margins and anytime you bring on an acquired property you can switch the processing over to Rcs. It's in house. It helps your existing business that helps future acquisitions.
John Andrew Morris: But what we often don't as often talk about is just rcs as a standalone business and gaining processing share in signing up new partners on its own outside of repay is there any just.
John Andrew Morris: Con context, you could provide around that how much of a focus is that how is that going.
John Andrew Morris: Okay.
Speaker Change: Yes, we can I mean, you're right I mean, there is there is an effort to bring on new processing clients, we would call them onto Rcs, we have a dedicated sales team doing that some of them with a lot of experience in the industry and has a lot of relationships with the various.
Timothy John Murphy: I mean, there is an effort to bring on new processing clients; we would call them on to RCS. We have a dedicated sales team doing that. Someone with a lot of experience in the industry and has a lot of relationships with the various processing client prospects, and so we do bring in several of those a year, and oftentimes they're coming to us from one of the larger shops looking for a more customized solution, you know, enhanced customer service, and a more, you know, basically a more modernized platform in terms of onboarding and all the different things we do for them. So that's how we win there.
Processing.
Speaker Change: Client prospects and so we do bring on several of those a year and oftentimes, they're coming to us from one of the larger shops looking for a more customized solution enhanced.
Speaker Change: Customer service and a more.
Speaker Change: Basically a more modernized platform.
Speaker Change: In terms of Onboarding and all the different things, we do for them. So that's how we win there.
Timothy John Murphy: We, you know, it's clearly not the number one focus because it's not the largest part of the business, but we do have an effort there to bring in new clients each year. Excellent. Thank you for both of those.
Speaker Change: It's not from a sales and distribution perspective, it's clearly not.
The number one focus because it's not the largest part of the business, but we do have an effort there to bring on new clients each year.
Speaker Change: Excellent. Thank you for both of Us.
Speaker Change: Okay.
Timothy John Murphy: As a reminder, ladies and gentlemen, it is Star 1, to ask a question. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question. Hey guys, thank you. Hey, the first question is just, how are you feeling about the auto and the personal loan end market? And then secondly, just the pipeline, the sales pipeline. How are you feeling about that? Or how is that stacking up kind of relative to the others?
Speaker Change: As a reminder, ladies and gentlemen, it is star one.
To ask a question. Our next question comes from the line of Mike Grondahl with Northland Securities. Please proceed with your question.
Michael John Grondahl: Hey, guys. Thank you.
Michael John Grondahl: Hey, first question is just how are you feeling about the auto and the personal loan and market.
Michael John Grondahl: And then secondly, just the pipeline sales pipeline how are you feeling about that or how is that stacking up kind of relative to other years.
Michael John Grondahl: In terms of personal and auto, you know, very similar trends as we said previously in prior quarters. We try to stay close to our clients there, but the trends we're seeing are pretty similar. And in terms of the sales pipeline, one of the things we like about adding these, you know, four or five new software partners each quarter is it just gives us a much larger distribution opportunity and helps us grow the pipeline. And so we feel like we have a really robust pipeline coming to us via referrals from the 262 software partners and also just with our direct sales force. We've added, you know; we reduced overall headcount by 23, but when we did add, we added in areas around go-to-market, like direct sales reps and sales support. So we have a very healthy, growing pipeline, largely a result of just the growing number of software relationships. Got it, okay?
Michael John Grondahl: Yeah.
Michael John Grondahl: In terms of personal and auto very similar trends as we've said previously in prior quarters.
Michael John Grondahl: We try to stay close to our clients there, but the trends we're seeing are pretty similar and in terms of the sales pipeline I mean, one of the things we like about adding the four or five new software partners each quarter or is it just gives us a much larger distribution opportunity and <unk> helps us grow the pipeline and so we feel like we have a really robust pipeline.
Michael John Grondahl: Coming to us via referrals from the 262 software partners and also with our direct sales force we have added.
Michael John Grondahl: We reduced overall head count in 'twenty, three but when we did add we added in areas around go to market like direct sales reps and sales support so we have a very healthy growing pipeline.
Michael John Grondahl: Largely a result of just the growing number of software relationships.
Speaker Change: Got it okay. Thank you.
John Andrew Morris: There are no further questions in the queue at this time. I'd like to hand it back to you, John Morris, for closing remarks. Thank you again for joining us today. We capped off 2023 with strong results that we have continued to see in the first part of this year. We feel confident in executing on our 2024 plan, as we outlined today, of profitable growth and accelerating free cash flow conversion.
Speaker Change: Yeah.
Speaker Change: There are no further questions in the queue at this time I'd like to hand, it back to John Morris for closing remarks.
John Andrew Morris: Thank you again for joining us today.
John Andrew Morris: We capped off 2023 with strong results.
John Andrew Morris: We have continued to see in the first part of this year we.
John Andrew Morris: We feel confident in executing on our 2024 plan.
John Andrew Morris: As we outlined today are profitable growth and accelerating free cash flow conversion.
Operator: Thanks for joining us. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
Speaker Change: Thanks for joining us.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.