Good afternoon. I'd like to welcome everybody to REPAY's Second Quarter 2023 Earnings Conference Call. This call is being recorded today, August 9, 2023. I would like to turn the session over to Stewart Grisante, Head of Investor Relations at REPAY. Stewart, you may begin.

Thank you. Good afternoon, and welcome to our second quarter 2023 earnings conference call. With us today are John Morris, Co-Founder and Chief Executive Officer; and Tim Murphy, Chief Financial Officer. During this call, we will 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 our most recent Form 10-K. Actual results may differ materially from any forward-looking statements that we make today. Forward-looking statements speak only as of today, and we do not assume any obligation or 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. Reconciliation 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 are available on the company's IR site. Those materials include reconciliations and other explanations with respect to REPAY's organic growth. As described in other materials, Q2 2023 organic growth is calculated by excluding contributions attributable to the Blue Cow software business in the second quarter of 2022, since REPAY divested Blue Cow during Q1 2023. With that, I would now like to turn the call over to John.

Thank you, Stewart, and good afternoon, everyone. Thank you for joining us today to review our second quarter results. On an organic basis, in Q2, we reported revenue growth of 9% and gross profit growth of 12%. Our strong results through the first half of the year give us the confidence to raise the midpoint of our revenue and gross profit guidance for 2023, which Tim will discuss in greater detail. Our focus as a company is to help businesses accept payments by providing integrated payment solutions to verticals that have specific transaction processing needs. Our proprietary embedded payment technology reduces the complexity of electronic payments for clients, while enhancing the overall experience for consumers and businesses. As we continue to take advantage of the secular trends towards frictionless digital payments, we have been focusing on thoughtfully investing in our go-to-market efforts as well as technology to ensure we remain best-in-class in both the consumer and business payment segments. On the go-to-market side, our investments are paying off. We continue to further penetrate and expand our services into the 252 integrated software partners. We're also diving deeper into existing integrations, including with Microsoft Dynamics 365 Business Central. Our current integration enables clients to automate their accounts payable payments, and we are now in the process of developing for accounts receivable payment streams. In addition, our direct sales team has made great traction, especially when further penetrating large enterprise accounts. Our investments into technology continued to generate positive returns. We are regularly evaluating and leveraging new payment modalities to reduce friction and boost revenue for our clients. Last quarter, we announced additional digital wallet capabilities like PayPal and Venmo, and we continue to offer the industry-leading best-in-class cash solution. We are forging ahead on offering real-time payments for clients while continuing the development work now. Our Consumer Payments segment grew organic gross profit by 16% in Q2. This was primarily driven by the ongoing secular tailwinds within the consumer payments verticals we serve and the ramp of recent large client implementations. We are pleased with our strong sales activity in the personal loans and credit union verticals, adding many new clients in each market. We are now integrated with 158 software partners in the Consumer Payments segment. During the quarter, we announced an integration with Q2's digital banking platform via the Q2 Partner Accelerator Program. This program enables financial institutions to purchase REPAY products and then offer our payment technology directly through Q2's digital banking platform, further expanding REPAY's reach into the personal loan and credit union industries. In addition, we established new partnerships to offer REPAY's embedded payments across a variety of software platforms, including loan servicing management and accounts receivable management systems. Credit unions and community banks continue to be a key focus for our sales teams. REPAY's platform helps financial institutions and financial providers automate payment streams across all payment types. We signed 7 credit union clients this quarter, bringing our total credit union clients to 257. We are well-positioned to continue winning clients in this underserved market of approximately 4,750 credit unions across the U.S. We have also been enhancing our existing software partnerships by adding new product features and payment modalities as well as our go-to-market efforts that present new subvertical opportunities. Credit card services are a great example of a new opportunity for REPAY, and we have been building a strong pipeline in this exciting new subvertical. The mortgage servicing space continues to be a significant growth opportunity in our Consumer Payments segment, and we look to increase debit card penetration in this vertical. As a reminder, a recent Visa study found that more than 50% of consumers, if given the option, would use our debit card for mortgage payments. In addition, over 50% of mortgages in the U.S. are not currently set up for automatic recurring payments. We're able to provide those consumers with the opportunity to use their debit card for the next monthly payment. This process is made easier through our partnership with Black Knight. The early results of testing are promising, and we began marketing the debit capabilities to both existing and potential clients. Black Knight's software platform supports the majority of the mortgage services in the U.S., so we believe this could be a great growth lever in 2024 and beyond. Instant funding, which we process in real-time through Visa Direct and MasterCard Send, continues to resonate with new and existing clients. In the second quarter, transaction volumes were up approximately 60% year-over-year. Lastly, our RCS platform performed nicely in the quarter as the modern platform is resonating well within the marketplace. Moving over to the Business Payments. During the second quarter, our business payment gross profit grew single digits year-over-year on a reported basis, but more importantly, grew 15% when excluding the impact of political media during 2022. Our normalized growth was driven by the continued momentum in our sales and implementation pipeline for enterprise and mid-market companies within our healthcare, property management, auto, and municipality verticals. We're integrated with 94 software partners in the Business Payments segment, including Quadient, a leading cloud-based communications and solutions provider. Through our partnership, businesses that use Quadient's AP automation software can process payments seamlessly with REPAY's real-time vendor enablement and embedded payment technology. We're also working with Quadient to expand REPAY's reach in Canada by offering accounts payable capabilities to their clients. Within the hospitality vertical, we're excited to announce our recent integration with Inflow. With REPAY's embedded accounts payable solutions, hoteliers and hotel management groups using Inflow can continue operating in one comprehensive hotel management platform. Now on the AR automation side of business payments, we recently expanded our integration with accounts payable, launching Click to Pay as a new feature provided by REPAY that enables account users to get paid faster and provide a simplified convenient payment experience. REPAY continues to see the prioritization of AR and AP automation initiatives by businesses across our verticals. And our growing list of software partners represents the opportunity to provide our embedded payment solution to them. As a result of the investments we have been making with software partners and our go-to-market efforts, we signed and implemented many new clients across our business payment verticals during the quarter. A great example is Castle Management Group, a premier property management company with approximately 500 HOA properties. Castle Management acquired a unified payment system to make their vendor payments across all of their managed properties and selected REPAY's total paid solution for their accounts payable needs. And in the healthcare vertical, a large healthcare system in the state of Arkansas selected REPAY for their supplier payment needs. We continue to build our vendor enablement functionality accelerating to over 195,000 suppliers in our AP supplier network, which includes additions across all key subverticals within AP while simultaneously enhancing our go-to-market proposition. We will continue to invest towards our real-time vendor enablement as the Business Payments segment scales by vertical. In addition, we're always looking for ways to find processing cost efficiencies in the business. So there's a lot of excitement and progress happening across the company as we guide businesses through the ever-changing world of embedded payments. We're excited about the future of REPAY, being strategically positioned in the middle of the new digital payment flows in North America. We are poised for success with a strong balance sheet and profitable organic growth to accelerate cash generation. As we are starting to see various opportunities come back to the market, we always maintain the potential for strategic M&A. To wrap up and before turning the call over to Tim, I am proud of our solid results for the first half of the year. Our sales pipelines are strong and growing. We have a great opportunity ahead of us as we continue to integrate and drive the transformation of integrated digital payments by expanding and enhancing our network to all networks that send and receive funds on behalf of our clients. With that, I'll turn it over to Tim to go over our financials and our outlook for the remainder of the year.

Thank you, John. Now let's go over our Q2 financial results before I review our financial guidance for 2023. In the second quarter, REPAY delivered solid results across our key metrics. Card payment volume was $6.3 billion, which was partially impacted by lower overall tax refunds in 2023. Revenue was $71.8 million, an increase of 9% on an organic basis over the prior year second quarter. This represents a take rate of approximately 115 basis points. Take rates were higher primarily due to strong performance in our noncard volume-based businesses within consumer payments, specifically in Communications Solutions and Instant Funding. Revenue attributable to Blue Cow in Q2 2022 was approximately $1.7 million. Gross profit was $54.9 million, an increase of 12% on an organic basis. This organic gross profit growth removes approximately $1.7 million of gross profit attributable to Blue Cow in Q2 2022. Our Consumer Payments segment reported organic gross profit growth of 16% in Q2. Our business payments gross profit increased 4% year-over-year on a reported basis and grew 15% when excluding the impact of political media during Q2 2022. Business Payments gross profit growth when excluding media, demonstrates the ramp of our strong sales pipeline while also realizing the benefits from our processing cost optimization and automation initiatives. Second quarter adjusted net income was $18.8 million or $0.19 per share. Lastly, second quarter adjusted EBITDA was $30.3 million. Second quarter adjusted EBITDA as a percentage of revenue was 42%. Adjusted EBITDA margins were slightly lower than initially expected due to the timing of investments towards sales, product, and technology into key verticals and the impact of inflationary pressures, which may continue to increase costs. We thoughtfully invest for growth while also reviewing our business to see where we can efficiently scale our operations through process automation. REPAY has surpassed the rule of 40 on an organic basis for the 16th consecutive quarter as a public company and we continue to believe that the combination of double-digit organic gross profit growth, along with strong adjusted EBITDA margins, makes us unique compared to our peers. Our net leverage is now approximately 2.7x. We expect net leverage to naturally decline during the year from our strong profitability and cash flow generation, including any potential M&A. As of June 30, we had approximately $104 million of cash on the balance sheet with access to $185 million of undrawn revolver capacity for a total liquidity amount of $289 million. REPAY's total outstanding debt of $440 million is comprised of a 0% coupon convertible note that does not mature until February 2026. Moving on to our outlook for 2023. As the year-to-date results showed strong performance and resilience in our business model, we are raising the midpoint of our 2023 revenue and gross profit outlook. We expect volume to remain between $26 billion and $27.2 billion, revenue to now be between $280 million and $288 million; gross profit to now be between $218 million and $228 million, reflecting organic gross profit growth of 6% to 11% and normalized organic gross profit growth of 9% to 14%, and we are reaffirming our adjusted EBITDA outlook of between $122 million and $130 million. As a reminder, during the second half of the year, we will be lapping strong results in our Business Payments segment due to the political media cycle in 2022. We expect Q4 2023 contributions to be greater than Q3 given the continued ramp of recent wins and implementations. Our full year 2023 outlook range continues to plan for a slowdown in the overall macroeconomic environment during the remainder of the year. For additional details on 2023 organic gross profit growth, please refer to the 2023 outlook bridge on Page 12 of our earnings supplement posted to the company's IR site. As you can see from our results, we have a great deal of momentum in the first half of 2023 heading into the second half of the year. We expect adjusted free cash flow conversion to remain strong in 2023, accelerating throughout the year into 2024 as we realize the benefits from investments we've made in sales, product, and technology over the past several years. I'll now turn the call back over to the operator to take your questions.

Our first question is from Ramsey El-Assal with Barclays.

I wanted to ask about the take rate in business. It was super healthy. It popped really nicely quarter-over-quarter. Just wondering what the driver there was and also what we should expect from business yields in the back half of the year?

Yes. So we feel really good about that. We've signed some customers recently that are a bit higher margin, higher take rate. We've been doing a lot of work to optimize our pricing, particularly within business payments, and that's showing up in the yield. So we feel strong about that. And in terms of overall revenue take rate for the remainder of the year, we're projecting that it will be slightly down from where it was in the first half of the year, mainly just because we're not projecting the noncard volume-based products like communications solutions and instant funding to contribute quite as much. Those generally would lead to higher take rates. So I think that the yields will still be very strong. We're just not projecting them to be quite to what they were in Q2.

Okay. You mentioned that guidance takes into account potential slowdowns and macro pressures later in the year. I have two questions regarding that. First, are you observing any recent indications of a slowdown? If a slowdown does not occur, what impact might we see reflected in guidance?

We finished the quarter at a strong pace, and trends have remained stable as we moved into early Q3. We're not observing any significant changes in trends across various sectors. However, we want to maintain a cautious approach due to uncertainties in the macro environment and the possibility of an overall slowdown. If we enter Q3 without experiencing these issues, we could consider adjusting our guidance, similar to what we did this quarter. So far, things have remained stable through the end of the quarter and into early Q3.

Our next question is from Peter Heckmann with D.A. Davidson.

Could you provide a brief update? If I recall correctly, last quarter you mentioned signing a second captive lender for a car manufacturer. Can you remind us when you expect that to ramp up?

Peter, this is John. So we have indicated that we are in an implementation process with them. That's a very long detailed schedule process that is ongoing and on plan and on schedule. And just like we had indicated earlier as well, that's a 2024 contribution.

Okay. And then in terms of real-time payments, I guess how are you thinking about that? I assume primarily on the business side, do you see that as primarily switching from ACH and same to ACH? Or are you thinking that there's going to be maybe some applications that actually take real-time payments to take volume from cards?

No. Yes, we see potential in the business payment sector as we aim to be a network that facilitates the movement of funds. There is value in this area, and we plan to introduce it as an additional option. It would likely resemble an enhanced ACH option for those wanting to expedite funds. I don't believe it will replace specific card usage in the accounts payable space, but we will still be able to generate revenue from it, which could result in good margins. Ultimately, our goal is to improve the overall experience for B2B vendors, enhancing our total pay solution.

Our next question comes from Andrew Schmidt with Citi.

I want to start off with just a question on free cash flow conversion. Tim, I know you had some comments in the release about that. Maybe just talk about what you're expecting for free cash flow conversion this year. And then it sounds like you're expecting some improvement into 2024. Maybe you could talk a little bit about that and the key drivers there, that would be helpful.

Yes, sure. As you may have noticed, the CapEx number decreased from Q2 to Q1, which led to a slightly higher conversion in the second quarter. We anticipate that the CapEx number will remain relatively stable for the remainder of the year and is likely to decline as a percentage of total revenue. As revenue increases and CapEx dollars stay stable, we expect free cash flow to convert and rise. You saw that in Q2, and we expect this trend to continue for the rest of the year. While we haven't provided a specific number or guidance on adjusted free cash flow conversion, we do expect the same trend observed from Q1 to Q2 to persist throughout the year and exit at a higher rate as we move into next year.

Got it. And then maybe digging into the mortgage opportunity. I know you have the mortgage partnership with Black Knight, and John, you talked a little bit about that in your prepared remarks. But can you talk a little bit about how that's progressing, any early learnings, whether it's consistent with the study that you outlined. Anything there? I know it's early days, but anything there that's incremental would be interesting.

Sure. I can provide some insights. We are confirming that there is demand and opportunities as we engage with both our current and potential clients who would be servicers. This process is progressing well, and we're conducting some testing as we continue this initiative through the third quarter and into the fourth quarter. Earlier, we mentioned that we do not expect any contribution from this in 2023, so we anticipate it will contribute in 2024. As we progress through the next two quarters, we should be able to give updates on what we expect that will look like for 2024.

Our next question is from Andrew Jeffrey with Truist Securities.

Tim, I wonder if you could get a little bit of color on the second quarter vertical mix within the consumer business, auto versus personal loans. And I guess if there were a decel in the economy to Ramsey's question, where do you think that manifests?

The breakdown is similar to last quarter. Personal loans are at 20%, with auto also around 20%. RCS accounts for about 10%, and the remaining categories contribute to the total 80% for consumer, including verticals like ARM, credit unions, healthcare, and mortgage. We have noticed some pressure in the auto sector, with used car prices declining, which is a positive sign. However, affordability concerns still persist, and while we expect this situation could improve, we haven't seen significant changes yet. We're monitoring this closely. Earlier this year, we noted the possibility of increased ARM volumes, which make up about 10% of our business. This resurgence is still anticipated, but it may not occur as soon as we had hoped, which was in Q4. We're now forecasting that this will likely extend into 2024. While it could happen sooner, our recent forecasts have been adjusted to reflect this timeline. Therefore, we are particularly focused on the auto and ARM sectors.

Okay. I know you're not discussing 2024, but I see a lot of potential factors at play, such as a large auto captive, various mortgage opportunities, adjustable-rate mortgages, and the presidential election cycle. It seems there are several drivers that might become evident in the fourth quarter and into the start of next year. Is that a reasonable way to consider the business? Also, are there any mix-related factors that should be noted if that indeed happens?

Correct. Directionally, you're accurate there. And those are investments that we talk about in sales and technology and product. And those are byproducts of those investments that are starting to pay off for us, and '24 is when we think we'll start seeing those contributions. I'll let Tim maybe talk about mixes.

Yes, I agree. I believe business payments will likely play a larger role in the overall mix due to the political climate. We anticipate that spending in 2024 will exceed 22%, which should be beneficial. Additionally, I think ARM could contribute more next year. This is evident from the discussions among public ARM companies about the return of supply, which will eventually result in increased repayment volumes.

Our next question is from Tim Chiodo with Credit Suisse.

I want to hit on a topic that comes up often with investors, which is the commissions paid to ISVs. Tim, I know we've talked about this in the past and the math that we rolled back into suggests that they're really low. And I don't believe that we've touched on this in a little bit of time here. I just thought it would be worth a brief update. I gather that they're low because of the specific capabilities you bring, the role that you take on that is larger maybe than other integrated payments players and also a relative lack of competition in some of the verticals, which all adds up to low commissions paid to the ISVs. So I think everything kind of checks out quite well. But just want to see if there's been any changes or trends or anything? Or if you could maybe even just quantify what portion of your cost of goods sold or other cost of services is those commissions that get paid to ISV partners?

Yes, I believe you are correct. Everything you mentioned is why our figures are lower than the overall industry average. It's important to note that we operate as referral partners rather than resellers; the ISVs do not resell our product. We undertake a significant amount of work regarding contracting, onboarding, risk and compliance, and product development. This responsibility allows us to capture a larger share of the economics. We haven't seen this dynamic change significantly over the past few years. This represents a substantial part of our overall cost of goods sold, with this component likely being the largest. Additionally, we have sponsor bank fees and other processing costs outside of RCS, which also contribute to our overall costs. While this makes up a considerable portion of our cost structure, we manage it closely, and it remains lower than the industry average for all the reasons mentioned.

All right. I'm with you have some other things in there, right? The sponsor bank fees and then the acquiring bank sponsors and then also portions of the business that have not yet been migrated to RCS that are still using some contracted third-party processor, correct?

Correct. And then on the B2B side, particularly in AP, we wouldn't have them on RCS. So there will be processing.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to John Morris for closing remarks.

Thank you, everyone, for joining us today. We are very proud of our second quarter results. Our sales pipelines continue to be strong and growing. We have a great opportunity ahead of us, as I mentioned earlier, as we continue to drive and innovate with our integrated digital payments and expanding into the various different networks that move funds to and from, and we're very excited about that. We appreciate your call today and look forward to additional discussions. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time.