Repay Holdings Corp Q4 FY2020 Earnings Call

Greetings, and welcome to today's earnings conference call being hosted by REPAY. With us today are John Morris, Co-Founder and Chief Executive Officer; and Tim Murphy, Chief Financial Officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and in our most recent Form 10-K filed with the SEC. Actual results might differ materially from any forward-looking statements that we may make today. The forward-looking statements speak only as of today, and we do not assume any obligation or your intent 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. An explanation of these non-GAAP financial measures as well as a reconciliation of these non-GAAP measures to the nearest GAAP financial measures can be found in our earnings release and earnings supplement, each of which are available on the Company's IR site. I would now like to turn the call over to Mr. Morris. Please go ahead.

Thank you, operator, and good afternoon, everyone. We hope everyone is doing well and staying healthy. On today's call, I wanted to first give an update on our business for the full year and fourth quarter, followed by a review of how we're executing on our growth strategy. I'll then turn it over to Tim to discuss our fourth quarter in more detail and provide guidance for 2021. When we first previewed our thoughts for 2020 in March of last year, we would have never predicted that the world would be like today. And while there was so much uncertainty throughout the year, there were two things that became even more certain: The value proposition of our business, and the strength of our organization. The value proposition of our business was demonstrated through the growth we experienced this year, which included an increase in card payment volume of 42%, total revenue growth of 48%, gross profit growth of 44% and adjusted EBITDA growth of 41%. As for the strength of our organization, I could not be more proud of how incredibly hard our team has worked this year despite all the challenges in everyday life. In 2020, we were able to acquire and have been working to integrate three companies. Through those acquisitions, we further solidified our position in the B2B space, and they also allowed us to add new verticals to our platform, including mortgage services within loan repayments, along with field services, hospitals and education in B2B, just to name a few. We launched service transfer exchange to automate loan transfer payments between mortgage servicers, increasing speed, accuracy and transparency in mortgage service transfer for both servicers and borrowers. We also added 54 new software partners in 2020 across all verticals, further demonstrating that we are a key offering in many of these platforms. In addition to expanding our product suite and partnership roster, we take pride in integrating new teams from our acquired companies into the REPAY family of employees as we continue to rely on talent to grow. This employee-first focus has been rewarded with certification as a Great Place to Work for the past five years, thanks to a dedicated company culture in which over 90% of our employees have validated the positive work environment. Now to move on to the fourth quarter, which was the strongest quarter we've ever had. For the three months we reported, card payment volume growth of 16%, total revenue growth of 23%, gross profit growth of 23% and adjusted EBITDA growth of 29%. During the quarter, we also completed one of the acquisitions I've just mentioned, CPS Payment Services, an accounts payable automation business, which further enhances our existing health care B2B business and helps to accelerate expansion into new verticals. Our loan repayment business was strong in the quarter, especially in the auto loan side, where we expect to continue to see rapid growth. The COVID-19 pandemic is reshaping the auto marketplace. According to EY's 2020 Mobility Consumer Index published in November, nearly 1/3 of the respondents who do not currently own a car say they plan to buy one in the next six months. As a reminder, we believe our TAM for auto is about $600 billion. It's one of the fastest-growing parts of our business. Our mortgage servicing business also performed very well in the quarter due to increased home buying and refinancing activity along with low interest rates. This increased demand in low mortgage rates has sparked a boom in originations and mortgage service transfers, positioning us well to benefit. We continue to guide development of our service transfer exchange solution through the STX Advisory Board, which is composed of mortgage industry experts, representing a variety of companies, including U.S. Bank and Home Depot. Our goal is to improve and standardize payment flow, eliminate errors, reduce delinquencies and create a better experience for borrowers and servicers. On the personal loan side, many of our customers have recently seen a return to sequential quarterly loan portfolio growth in Q4, and we are hearing positive trends into Q1 as well. Our Instant Funding product continues to experience significant adoption. We've nearly tripled the number of users of this product since the beginning of 2020 and continue to add to this each month as consumers move away from cash and physical locations to access their loan disbursements. The pandemic has proven that loan repayments are resilient. We've also seen significant shifts to electronic payments during this time as many lenders have been focused on increasing digital engagement, which fits well with our enhanced payment technology offering. We believe the shift is permanent and will increasingly grow over time. Our B2B business was also strong during the quarter. We were particularly pleased with the performance of CPS Payments and can already see the growing value of electronic payables with enterprise customers, such as large health care networks and education systems. We now have approximately 45 total B2B software integrations. And on the AP side, we've grown our supplier network to over 60,000. We made progress against all our growth strategies in the fourth quarter. We've had some great client wins in the quarter driven by our direct sales force. We've ended the year with 43 total credit union customers, which represented approximately 350,000 collective members. We expanded processes and services and integrated partnerships in the Canadian marketplace. REPAY was also recognized as an approved vendor and a FinTech Innovator of the Year by the Canadian Lenders Association. Credit unions in Canada will be a big focus area for growth in 2021. We are also now actively processing in the buy now, pay later space. This is a natural move for us given our long history and expertise in installment lending. All of these efforts were also aided by software integrations, of which we added 30 new partners during the quarter, mostly by acquisitions. This brought our total ISV integrations to 124 at the end of December. I want to spend a few minutes discussing several of these integrations. In December, we announced our partnership with the Strategic Regional Health Care Organization, the National Association. This partnership expands our reach within the health care sector by providing health system members, accounts payable with disbursement automation and revenue-generating rebates. Also, in December, we announced a technology integration with LiveVox, a next-generation contact center platform. The partnership further enhances the LiveVox customer experience by providing additional digital payment options and processing capabilities in either self-service or agent-assisted transactions. And more recently, in January, we announced a technology integration with Billtrust, a B2B accounts receivable automation and integrated B2B payments leader. Through our participation in Billtrust Business Payments Network, or BPN, as they call it, our corporate customers will instantly gain the ability to automate electronic payments to build to a vast network of suppliers, distributors and vendors, both accelerating and simplifying the payment process while also further scaling adoption of virtual credit cards. In addition, last month, we announced a technology integration with PN3 solutions, a ticketless B2B AP authorization automation software provider. Through the partnership, PN3's business customers will gain the ability to automate outbound payments through the use of virtual card or ACH to their vendors, adding seamless, fully integrated payment capabilities to its procurement and AP work streams. Our partnership will also allow us to realize synergies with our B2B receivables offering as REPAY's footprint now overlaps payables and receivables across key integrations, including Acumatica and Sage. And just last week, we announced an integration with BBA, a leading-edge software design company, revolutionizing the insurance industry through employee benefit administration solutions. The two-way integration between the platforms will enable insurance companies to pay health care providers, including licensed health care facilities, programs, agencies and doctors or services directly from the BBA system. On the international front, we are also implementing one of the largest nonbank lenders in Canada, and we should be live in early March. Moving on to M&A, which continues to be a key growth driver for our company; in January, we completed a concurrent common stock and convertible notes offering; and in February, closed the revolver, providing us with ample liquidity to pursue deals. Our pipeline remains very active, and we believe this capital raise positions us even better in the marketplace. Having completed five acquisitions since going public less than two years ago, we expect that there will continue to be mid-market industry consolidation across the payments industry on both the receivables and payables side. There are many players out there that are great acquisition candidates for us. Ideal targets for high-growth businesses and large verticals that are underserved from a payment perspective are integrated with software, have attractive margins and have a need for our technology. Lastly, to continue to position us well for the tailwinds we are seeing in digital payments and the growth we expect to continue to see for our business, we have recently opened a software development office in Ireland in partnership with a local firm called Protego. We are excited about this partnership and believe it to be a great asset as we expand. To wrap up, I continue to be incredibly proud of our team for their hard work and dedication in growing this company and providing excellent service to our customers. I'm very encouraged by the trends we see in the verticals we serve and also impressed with the businesses we have been able to integrate today. REPAY has proven resilient during these times and is positioned even better moving forward into 2021. With that, I'll turn it over to Tim to discuss the financials in greater detail.

Thank you, John. Now let's move on to our Q4 financial results before I review our financial guidance for 2021. In the fourth quarter, REPAY delivered strong results across all of our key metrics. Card payment volume was $4 billion, an increase of 16% over the prior year's fourth quarter. Total revenue was $41.4 million, an increase of 23% over the prior year fourth quarter. TriSource, APS, Ventanex, cPayPlus and CPS contributed approximately $6.5 million of incremental revenue during the fourth quarter. Moving on to expenses in the quarter. Other cost of services were $11.5 million compared to $9.3 million in the fourth quarter of 2019. The incremental other cost of services from TriSource, APS, Ventanex, cPayPlus and CPS were $1.8 million for Q4. Gross profit was $30 million, an increase of 23% over the prior year's fourth quarter. On an organic basis, we saw gross profit growth in the mid-single digits compared to the fourth quarter of 2019. Organic growth was solid in October and December, but November was down due to the lapping of a very strong November 2019 for personal loan repayments. That said, our December organic gross profit growth was in the low teens, and volume trends in early Q1 2021 were strong, which provides us continued confidence in our mid- to high-teens organic growth outlook. As John mentioned, we've seen many of our larger personal loan customers return to loan growth in recent months, and we benefited from the second round of stimulus payments. We typically see an uptick in Q1 in our loan repayment verticals as a result of tax refunds and a lower sequential Q2. SG&A was $21.5 million compared to $24.8 million in the fourth quarter of 2019. Fourth quarter pro forma net loss was $0.8 million compared to a pro forma net loss of $7.5 million in the fourth quarter of 2019. Fourth quarter adjusted net income was $13.5 million or $0.17 per share compared to adjusted net income of $12.3 million or $0.20 per share in the fourth quarter of 2019. The decrease in adjusted net income per share was primarily driven by a pro forma tax adjustment in the current period, which we did not include in the prior year period, as well as a higher outstanding share count. Lastly, fourth quarter adjusted EBITDA was $19 million, an increase of 29% over the prior year fourth quarter. Fourth quarter adjusted EBITDA as a percentage of total revenue was 46%, compared to 44% in the prior year fourth quarter. This increase in adjusted EBITDA and adjusted EBITDA margin is a result of organic growth and contributions from acquired businesses as well as rigorous cost management, delays in hiring several positions and residual payout plans for certain third-party sales partners. On January 19, 2021, we completed a public offering for approximately 6.2 million shares of our Class A common stock at a public offering price of $24 per share. On the same date, we also completed the offering of $440 million of convertible notes with a 0% coupon. We also announced the closing of a new undrawn $125 million senior secured revolving credit facility on February 3. Therefore, our cash and liquidity positions remain very strong. As of January 31, pro forma for the concurrent offerings and the payoff of the previous term loan facility, we had $394 million of cash on the balance sheet and access to $125 million undrawn revolver for a total liquidity amount of $519 million. Our pro forma net leverage is down only 0.6x, which is the lowest we've been since becoming a public company. As of January 31, pro forma for the common stock offering, we had approximately 86 million shares outstanding on an as-converted basis. Our fully diluted share count, including unvested shares, equaled approximately 88.4 million shares. Regarding the convertible notes, we are still considering treatment on this, but will likely elect next share settlement, principal and cash in the money value and shares, which allows us to benefit from treasury stock method for accounting purposes. In this case, the convertible will only result in dilution to stock price increases above the conversion price of $33.60. Finally, moving on to our outlook for 2021, we are still in a period of uncertainty around the economy and pandemic. Depending on the pace of recovery, we currently expect much stronger growth in the second half of 2021 versus the first half. Also, the second half of the year generally has easier comps. And to position us well for the significant shifts we are experiencing in electronic payments, we are planning to invest in sales, technology and product this year to further accelerate growth as we move into 2022. With all these factors in mind, we expect the following for 2021. Card payment volume to be between $17.5 billion and $18 billion; total revenue to be between $178 million to $188 million, we expect gross profit to be between $134 million and $140 million, which includes organic gross profit growth of 15% at the high end. We have a slide in our investor supplement on our IR site, which can provide a detailed explanation of our gross profit expectations for the year. And lastly, we expect adjusted EBITDA to be between $75 million and $80 million. Just to note that we expect approximately 55% of our P&L contribution to come in the back half of the year due to the reasons mentioned a moment ago. As of prior quarters, this range assumes no further unforeseen COVID-related impacts, which could create substantial economic duress during the year. We are already experiencing strong momentum in early 2021 and look forward to an exciting year ahead. I'll now turn the call back over to the operator to take your questions.

At this time, we will be conducting a question-and-answer session. Our first question is from Ramsey El-Assal with Barclays. Please proceed with your question.

I wanted to ask about the effect of stimulus on the personal loan aspect of your business. Last year, your customers decreased their loan originations while the end consumer was actively paying down loans. It appears to be a bit of a mixed situation for you. I'm curious if you can describe what has been happening in that part of your business considering the recent stimulus and the potential for more in the near future.

This is Tim. Thanks for the question. We have seen many of our larger personal loan customers returning to loan growth in the fourth quarter and early first quarter of this year, which is very encouraging. Their originations have been on the rise in recent months, and that trend seems to be continuing. We did experience some volume from the recent $600 stimulus payments that were distributed in early January, but we have not seen any decrease in originations since then as a result. What we know this time, compared to last spring, is that our personal loan customers are not as worried about credit issues and delinquencies as they were before. They appear to be more aggressive in lending now, focusing on loan growth rather than just protecting against delinquencies and losses. This shift indicates a more positive trend. We are, of course, keeping an eye on any additional stimulus, and depending on its timing and structure, we will assess its impact on originations. However, given that our customers are concentrated on loan growth, we expect that this will be beneficial and will likely prevent a sharp decline in originations if there are further direct payment stimulus initiatives.

That's super helpful. And your guidance does not include the potential incremental stimulus that we might see if the Senate in fact, passes it?

Well, really, the way we thought about it is if it happens, it's likely going to happen at the end of the first quarter or early Q2, and we would think that, that may flow through to our volumes sometime in Q2, if it does. And so that's why we wanted to comment on the call that we expect stronger growth in the second half of the year after that kind of flushes through in the second quarter. And we would expect also the overall economy to be recovering and consumer spending and demand to be greater, which causes more demand for personal loans. And so all those factors kind of led us to back weight the year a bit, as I mentioned, and we're just monitoring it. So again, it will ultimately depend on the timing and the form it takes, but we do have some assumption in the guide for that.

Okay, terrific. And one more quick one for me. Could you give us an update on the captive auto loan side of the business, the Mercedes contract and also just how the pipeline looks there and progress on implementation?

Yes, this is John. Good afternoon, Ramsey. Our relationship has developed very positively, benefiting both parties, and we believe there is still potential for further gains. While we do not disclose specific outcomes, our overall OEM pipeline remains strong. As we previously mentioned, these contracts can be lengthy, and the decision-making process may take time. We are confident in our position, although we do not reveal customer specifics or large contracts. We value our offerings in the industry, and we recognize a demand for our features and financial technology. Therefore, we aim to continue promoting our services in the auto sub-sector and anticipate opportunities as we progress through this year.

And our next question is from Peter Heckmann with Davidson. Please proceed with your question.

I believe you said $6.5 million in acquired revenue in the quarter. Can you talk about what would be a good run rate for the first quarter? I think CPS was only included for a partial quarter in the fourth quarter.

Yes. So Pete, this is Tim. So that's the incremental revenue, not the total revenue. And so I think that as we continue to lap acquisitions, for example, Ventanex in Q1, that number could come down slightly just because it's really just the incremental amount. You will have a full quarter of CPS, but there'll also be some revenue from Ventanex in Q1 of 2020. So I'd say so maybe just a little bit lower than where that is and that's why.

That's great. And then could you just talk a little bit about some of the B2B run rates? I think the last time we heard, we're looking at maybe, was it $4 billion of payment volume attributable to the growing B2B business. But kind of how you think about that and where you can go in terms of the supplier network? And how do we envision that business growing and kind of unifying what you've acquired so far?

Yes. Yes. So we put an updated slide in our earnings supplement to show some of the more recent stats. And like we talked about on the call, we now have about 45 software integrations in B2B, over 60,000 suppliers. That supplier network is growing every month. One of the reasons we like cPayPlus and CPS was because they did a really good job of building and growing that network. And that network is largely able to accept electronic payments and specifically virtual cards, which we think is better margin for us. So we see that, both the software providers and the supplier network, continuing to grow nicely in 2021. And then overall volume, we're still probably around 25% of our total business is B2B, but that's growing faster than the other parts of our business. So we could see that moving to, call it, closer to 30% through this year. And we want to see that continue to become a bigger part of our business. Now other parts of our business are growing really nicely, too, for example, auto. So that will continue to become a bigger part of the mix as well. So there's that growth on that side of the business, but we do want to see a big part. We have all the pieces in place, we think now with the people that have come to us through acquisitions and the technology to continue to grow that.

And our next question is from Andrew Jeffrey with Truist Securities. Please proceed with your question.

I'm intrigued by the BNPL commentary. John, can you elaborate a little bit on sort of vertical markets where they overlap with your existing vertical markets? They probably look a little bit different. And who the customers are? Are they some of the household names in that space? Or are they some of the perhaps smaller providers in BNPL?

Yes, of course. We recognize that retail installment sales can vary, particularly in the auto sector, where there may be differences. Some entities focus primarily on retail financing for retail transactions, which presents a significant opportunity for us. As you know, many retail transactions are conducted under a buy now pay later model. This aligns with our capabilities since we are familiar with payment processing. Often, an external processor is required to facilitate fund transfers. We believe we are well-positioned for this, especially as technology evolves and certain portfolios reach maturity, particularly those with longer timelines rather than short-term cycles. While we do not specify particular customers, we have observed strong growth with several existing clients in 2020, and we anticipate this trend will persist this year. We are also actively engaging with potentially familiar names, and we see a steady process for achieving further growth opportunities.

Okay. That's helpful. And it sounds like you've made some good headway in mortgage repayments and in some of the B2B aspects of mortgage as well. I think, Tim, you called out pretty robust volume, which we've seen across the industry. Any thoughts or concerns about grow over in mortgage if rates back up and refis slow down, for example?

No. I mean we are processing a pretty specific type of transaction within mortgage, which is the kind of more complex service transfers or situations where it's not just a typical recurring mortgage payment. And so, we think our technology, there's still a need for our technology there. Even if the refinancing activity were slowed down somewhat, those types of complex transactions that require better payment technology and reconciliation tools will still be there. And we think we're just really early in our Ellie Mae relationship, and we're starting to gain some traction there. So we have a lot of runway in mortgage. And I think if the overall industry slows down a bit, obviously, that's not great in general, but we think within our business, we still have a lot of room to grow.

And our next question is from Bob Napoli with William Blair. Please proceed with your question.

Just the growth rate mid- to high-teens, your comfort level in that, maybe just give a little color organically where you see the largest contributors to that over the next three to five years? Which portions of your business are going to be the largest contributors to that growth rate?

Yes, Bob, we feel confident about that. I would refer you to the gross profit bridge included in the earnings supplement to illustrate how we reached this point. We believe this will likely trend towards the middle or end of the year as the overall economy recovers. We think this pace is appropriate for growth. Looking further ahead, I anticipate that the automotive sector will be a significant driver, with growth exceeding 25% for us. Additionally, once we move past the first year of an acquired business, we expect that our B2B segments will also significantly contribute to growth in the following years. We have multiple avenues for growth and a diverse set of verticals, which we believe will enhance our performance in both the automotive and B2B areas.

All right. And then the credit union customers, I know you're moving into Canada. Is that purely auto? Or are there opportunities for mortgage or other types of repayments for the business?

It's largely auto today. That's why we entered the space just because we were running into credit auto is what they're doing a lot of direct lending. So that's primarily what it is. That doesn't mean we couldn't process some of their other types of payments, but it's still primarily auto. In Canada, it's a mix. It's actually a lot of personal loans, in addition to auto in Canada.

Okay. I'm curious about the Billtrust partnership. How does it impact your B2B business?

They have a strong position in certain sectors where we also excel. Our head of B2B, Darren, who oversees cPayPlus, has been discussing a partnership with them for quite some time due to the overlap in these sectors. We believe they are effective in promoting our adoption, allowing us to strengthen our foothold in the areas where we are already active. Additionally, it supports the adoption of virtual cards, which provides higher margins for us on the accounts payable side. This is how it benefits us, and there are significant clients within those sectors that we believe we could easily attract if we engage through BPN.

It's interesting. I have one last question about health care payments. It's a huge market. Although we haven't discussed it much, is there a strategy in place to make it a larger part of the business? If so, could you provide some details on that?

Yes. I think so.

Go ahead, John.

Yes, we definitely see significant potential in the healthcare space, especially considering its vast size. We are focused on the payment aspect, as there is substantial pent-up demand for elective procedures that have not yet returned to pre-pandemic levels. This presents a promising opportunity. In the B2B sector, we see large institutions with considerable payment volumes, which allows us to further expand our supplier network and enhance our integrations. We have a strong pipeline with our current businesses targeting specific healthcare institutions, and we are eager to complement this with potential inorganic growth opportunities as we look to the future.

We recently announced our partnership with BBA, which involves our Ventanex business focused on B2B healthcare for providers. This partnership allows for two-way integration with BBA, while SRHO integrates through CPS. CPS primarily targets enterprise customers on the payable side, aiming at hospital networks and large healthcare providers. Our presence spans various segments of healthcare, including third-party administration that facilitates payments between insurance companies and providers, along with benefits administration. Additionally, we are involved in the hospital and healthcare network segment where numerous suppliers are paid. As John mentioned, there's significant payment volume in these areas, and we are positioned in multiple sectors.

And our next question is from Timothy Chiodo with Credit Suisse. Please proceed with your question.

Great. I want to touch base briefly on the credit union opportunity. So you have announced some very, very large partners in Jack Henry Symitar, CU*Answers, Correlation, and I think it gives you access to roughly 1,000 or so credit unions. So clearly, that's a big opportunity. I was hoping you could give us a little bit of an update on where you stand in terms of penetrating that opportunity and how that could progress throughout this year?

Thank you, Tim. Currently, we have 43 credit union customers. There’s a significant opportunity to reach 1,000 with our various software partners. Many of these 43 customers were signed in the past six months and are now ramping up. The credit union space has a longer sales cycle and implementation process compared to working with banks. These partnerships started rolling out at the end of 2020, and we expect them to positively impact our performance in 2021 as we benefit from a full year of their volume. We are actively pursuing growth in this sector, and with 43 out of approximately 1,000, we see considerable room for expansion. The contributions from the credit unions we signed in 2020 will be instrumental in 2021.

The annualization is clear. Regarding the bridge slide you highlighted for gross profit, it's quite informative, specifically Slide 12. You indicated that we should anticipate around 15% organic gross profit growth, with expectations for it to be more pronounced in the second half of the year. In the first half, there's the tax aspect you mentioned, where Q1 tends to be slightly larger, and also we have to consider the year-over-year comparison issue, as some payments from last year were shifted into Q2 due to timing. With that in mind, could you elaborate on how we might expect the gross profit growth to unfold in Q1 and Q2, without needing to provide specific numbers?

Yes. So you're right. So Q1 is usually a strong quarter for us. Q1 of last year was also strong, and then Q2 of last year, really strong because of the stimulus. So typically, we don't see as strong of a Q2 as we had in 2020 because the stimulus payments happened and we benefited from that. And then, of course, that led to some origination issues going into Q3. So with those kind of comps in mind, I would say probably similar kind of single-digit organic growth in the first part of the year, maybe going up into 10% range, but then expecting higher accelerated growth in the back half of the year to get to the full year mid-teens summer.

Okay. All right. Great. But we should think about Q2 as maybe a little bit lower than Q1, just given the comp?

Yes, that's right. Yes.

And our next question is from Sanjay Sakhrani with KBW. Please proceed with your question.

I want to go back to the first question Ramsey had about the stimulus. Tim, it sounds like you guys are thinking, despite stimulus, the second half, you'll see more sort of economic robustness and that will drive loan growth. Because doesn't stimulus usually have sort of a temporary impact on loan growth and therefore, your revenue?

It does, but there are two key points to emphasize. First, we believe our customers are not going to be as hesitant to pull back on originations due to credit losses and delinquencies; instead, they are likely to lend more aggressively this time. This should be beneficial compared to the last situation where there was significant uncertainty about consumer behavior, leading to decreased originations amid lower demand. Therefore, we see a different dynamic at play regarding our lenders' perspective on loan growth. Additionally, while there may be some slight downturn or softness tied to the stimulus, if the overall economy improves and the vaccine distribution is successful, we anticipate this will positively influence demand. As a result, we think this could help mitigate some of the softness we might see this time.

And are you guys seeing, go ahead, John.

Yes. Just the biggest thing that we all are aware of is that this year, there's a vaccine, right? Last year, that time of the year, people thought it would be 18 to 24 months before there's a vaccine. So that's a big difference maker, although, obviously, we are still in a pandemic, and we're having to take all those things into consideration in our outlook we're looking at as well.

When you look at the different lending asset classes, it seems that auto is performing really well. Do you think there is still a lot more potential for success? I believe personal loans are facing a bit more stress since the stimulus occurred. Is that a fair assessment?

Yes. Personal loans is impacted more by the stimulus, I think, than auto. Auto had performed really well. There was maybe a short blip right when the pandemic started, but they ended up performing really well throughout the year and early into this year. So yes, I think the personal loans space is where it could be more impacted, but we still see a lot of strong growth in auto.

And our next question is from John Morris with William Blair. Please proceed with your question.

Sure. As mentioned in the announcement, we have a strong pipeline of opportunities. What we shared when we raised funds in January remains accurate. I believe 2021 will see continued consolidation in the marketplace, and we want to be well-prepared on our balance sheet for that. There are sizable opportunities in our pipeline that exceed what we typically pursue. Our pipeline also includes many traditional-sized deals that are currently under evaluation. Additionally, we are looking at larger transactions that could be some of the biggest deals in our history. This presents a significant opportunity for us this year, provided they meet our criteria. We aim to accelerate growth through any inorganic opportunities available. We're enthusiastic about our position and the influx of opportunities for valuation purposes.

And those would be additive to the verticals that you're currently in, or could they be outside of them?

Some, yes, absolutely could be for the verticals that we're currently existing, and there could be a complement there for an expansion of some of the areas we already touch. And then obviously, there's some opportunities that would be a new vertical for us that we think have the great characteristics of our existing verticals.

Our next question is from Joseph Vafi with Canaccord. Please proceed with your question.

Good end to the year. Just wondering here, just with all the M&A activity in 2020. How far along are you at this point in cost synergies relative to those acquisitions? And kind of more specifically more maybe perhaps on the back end on transaction efficiency and stuff given the processing capability, and how to think about that over the next couple of years? And then just a quick follow-up after that.

Sure. Joe, so we have converted one of our acquisitions, APS, to our back end. We did that in Q4 of 2020. And then we see some opportunity in the B2B AP businesses to potentially consolidate providers and find some synergy opportunity. That's part of our plan for 2021 is to work on that. And so that's actively happened and will continue to happen. And like you said, having on back end from a merchant acquiring standpoint, has been really helpful for that.

How should we consider the potential impact on transaction margin? Is this something you can specify over time, or is it more of an incremental change?

It's likely to be more incremental, but our gross margins have increased in 2021 compared to last year. We anticipate being able to lower some of our processing costs related to these conversions.

Okay, great. It would be helpful to understand the current business run rate, particularly the revenue contribution from consumer loans, personal payments, auto, and B2B, if you can share that information. Thank you.

Yes. Yes. So I think it's still probably similar to what we talked about, which is 65% loan repayments, about 25% B2B and then 10% other, which is really TriSource. But I think the mix within loan repayments is really shifting to auto away from personal loans. And so that's becoming a bigger part. And then credit unions, Canada and mortgage are also all growing, which will become a bigger part of that loan repayment mix. And then like I said earlier, the B2B side is growing probably faster than other parts of our business. And so that's why we want to see that continue to increase from 25% towards the 30% range.

And our next question is from James Faucette with Morgan Stanley. Please proceed with your question.

I wanted to follow up quickly on the comments and questions that you've already answered regarding acquisitions. First, in terms of your outlook for '21, is there any contribution from acquisitions built into the guidance, but for deals that you haven't yet announced or completed?

No, no.

Okay, that makes sense. I was thinking along the same lines. My second question is to gain more insight into your perspective on potential deals. What are your thoughts on valuations, payback periods, and potential synergies? Are these factors changing significantly compared to what you've experienced previously? Also, regarding the types of deals in your pipeline, how should we assess their expected financial contributions based on your past performance?

Yes, one of the reasons we raised capital was to pursue larger opportunities in the market than we have in the past. These larger opportunities typically come with more synergies and greater volume that can be allocated to our backend, potentially leading to operational efficiencies. We are noticing an increase in such opportunities. While these processes might influence valuations, we are still engaged in discussions with business owners that could be beneficial for us from a valuation perspective. It's a mixed situation. However, we are optimistic about the larger deals available across various sectors, which supports our confidence in our current balance sheet. We will remain careful in structuring these deals and may consider implementing earn-out structures while also identifying actionable synergies that can be realized in a relatively short timeframe.

And our next question is from Mike Grondahl with Northland Securities. Please proceed with your question.

You mentioned the buy now pay later space. How long have you been in there? And can you kind of let us know what you're doing there specifically?

Yes, Mike, we've been involved in this area for some time. It's essentially an extension of another type of installment loan, specifically occurring at the point of sale during e-commerce transactions. We've had customers utilizing this kind of lending for a few years now. They appreciate our expertise in managing recurring, scheduled installment loan payments, which is essentially what a buy now pay later transaction entails. Over the years, many of our customers have enhanced their technology capabilities to better engage with their customers, and payment technology is a significant aspect of that. Therefore, we anticipate many positive opportunities ahead.

And our next question is from Tim Willi with Wells Fargo. Please proceed with your question.

I have one question that I don't think has been asked yet. I apologize if I missed it, but could you elaborate on the investments you mentioned in 2021, particularly regarding technology and sales? Were there any other specific areas you highlighted? Additionally, could you provide some insights into the timing of the investment spending and how we should conceptually model that throughout the year?

Yes, we identified sales, technology, and product as our three primary areas of focus. I want to highlight our partnership with Protego, where we established a development office in Ireland to enhance our software development capacity. We have numerous initiatives and verticals to explore, and this collaboration is a strategic move to boost resources and productivity in technology. Additionally, hiring top-tier sales professionals and partner relationship managers across our various verticals is crucial for increasing our software partnerships, which currently number 124. We began recruiting for these roles in 2021, both in technology and sales. Product development is another important area where we will collaborate with the technology team to commercialize our efforts and engage directly with customers. The pace of our investments is expected to pick up around the middle of the second half of the year as we gain more confidence in the overall environment. This positions us well to potentially accelerate growth as we move into 2022.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to John Morris for closing remarks.

Thank you, everyone, for your time today. We sincerely appreciate it. We're looking forward to an exciting year ahead of us and believe we are well positioned to take advantage of the opportunities we see, both through organic growth and acquisitions. As I mentioned earlier, we have an exceptional team and some of the best technology available. We are very enthusiastic about what lies ahead, especially as we transition to a more normalized post-pandemic environment. We are optimistic about all aspects of our business and eager to continue creating value for our shareholders. Thank you for being here today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.