Earnings Call Transcript - RPAY Q1 2022

Operator, Operator

Greetings. 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 in our most recent Form 10-K filed with the SEC. Actual results may differ materially from any forward-looking statements that we make today. The 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. An explanation of those non-GAAP financial measures, 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, sir.

John Morris, CEO

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to review our first quarter results. During the quarter, we reported card payment volume growth of 39%, total revenue growth of 42% and gross profit growth of 46%. We also now have 225 total software integration partners. In addition, Q1 new client implementations across our business was a record, setting us up well for 2022 and beyond. Moving on to our first quarter business highlights. First, our business payments vertical, which is going after a massive $3.4 trillion TAM, continued to perform well during the quarter. On our Q4 call, we talked about our initiative to focus on cross-selling our AR/AP unified capabilities in a more streamlined and formal way. One recent example of this was with Hotel Investor Apps, HIA, which is a hospitality management ERP provider, that currently uses Repay for payment processing and learned of our payables capability during Q4 2021. We signed a partnership to begin adding our payable solution to HIA properties during the second quarter of this year. We now have 85-plus B2B software integrations, representing approximately 15 vertical end markets, and have over 3,700 clients. On the AP side, we've grown our supplier network to over 127,000. During the quarter, we signed Shepherd Center, an Atlanta-based private not-for-profit hospital, which will be using our AP automation and vendor payment solutions. By automating their accounts payable processes, our technology will allow Shepherd Center to improve operational efficiencies, create a better experience for internal AP teams and hospital vendors as well as allow Shepherd to benefit from its cash rebates. We've also been looking at new ways to expand our TAM for B2B AP. For instance, we recently found a significant investment opportunity in 2022 and 2027. This translates into substantial investment opportunities at all levels of government. In fact, we recently signed a large municipality in Metro Atlanta. B2B is a big part of our mix now and will continue to be a key growth driver as we expand our TotalPay solution and drive virtual card penetration. We had another strong quarter in the consumer payments side of our business. We saw strength on the personal loan side in Q1 as volumes from tax refund season were strong. This strength in personal loan repayment volume continued into April and early May. Additionally, many of our clients have recently experienced above seasonal pre-pandemic levels of originations. The data suggests that the recovery in personal loans is now accelerating and will continue to do so for the remainder of the year. Experian recently noted that the industry originated $222 billion of personal loans last year, up 31% versus 2020 and 22% over 2019. The growth in personal loans tracks a broader increase in spending and borrowing. According to the Federal Reserve Bank of New York, non-mortgage consumer debt totaled $4.33 trillion at the end of last year, the highest level on record. Our auto loan business, which is very much focused on used car payments, is growing rapidly as used car demand and prices remain elevated, driven by the lack of new vehicles. We continue to see extended durations and higher loan amounts. We're having success expanding into the credit union space. We recently announced a technology integration with FLEX, a leading provider of core system software for credit unions. The partnership further expands credit unions' abilities to offer digital payment options to members, enhancing the overall member experience and streamlining payment operations and reconciliation efforts for credit unions. This brings us to over 210 credit union clients. The Payix integration is going well. We recently entered into an exclusive partnership between Payix and Nortridge Software, a leading software provider for lenders and loan servicing companies to provide Nortridge clients online cash payment acceptance, known as eCash. eCash streamlines payment acceptance by enabling borrowers to make payments on their loans using cash at thousands of participating retail locations, including major convenience stores, dollar stores and pharmacies. Cash payments are then settled electronically through the system of record to simplify reconciliation and end-to-end payment management, all from one place. Turning to our mortgage service and payment business, much of our growth is coming from existing customers as some of our largest clients are servicing more mortgage volume. Our STX offering is fully live in processing transactions, and the feedback has been very positive thus far. An emerging mortgage servicer recently joined our STX Board of Advisors, bringing the total advisory Board members to nine leading servicers. We're continuing to add new members to the exchange, and this offering can really take off as new participants go live. Our instant funding volume for Q1 2022 was roughly 70% above Q1 2021. We're excited to be part of the Visa Direct partner program to help grow our instant funding solution. As a Visa Direct partner, Repay will have access to Visa's tools and resources aimed at helping launch and sell real-time payment solutions. Lastly, Repay clearing and sentiment continues to perform nicely with a significant pipeline for future growth. We recently attended the Electronic Transactions Association ETA Conference and came away with the sentiment that both the market and the networks believe that we are well-positioned to continue winning new business via competitive takeaways, as we provide superior technology and an enhanced onboarding experience. This presents an opportunity for Repay to take share with our proprietary platform, which offers ISOs and payment facilitators more autonomy and greater flexibility than traditional large acquired programs. In fact, we're excited to join the Visa Acceptance Fast Track program as a Visa-preferred partner providing us with direct access to Visa's capabilities and its global network of partners. Through the Acceptance Fast Track program, Visa will point prequalified fintechs and payment facilitators to its preferred partners who are willing to provide key acquiring processes and services, developing a network of networks globally. So we feel it was a solid first quarter that sets us a strong foundation for success in 2022. The secular trends towards frictionless digital payments will not go away in the current macro environment and will continue to be a tailwind that will drive our business for years to come. As a reminder, we laid out a few specific initiatives on our last call, which will be guiding our focus and investments for the year. As discussed, we continue to increase card penetration across all our verticals with top clients. We expect the majority of our growth to be derived from our existing client base. We have been optimizing our processing infrastructure in order to reduce costs as we grow the volume. This will help us drive automation from first touch and every interaction. We are formally commercializing, marketing and are cross-selling our AR/AP unified capabilities this year. As shown by the impressive growth this quarter, we continue to increase our AP supplier network as well as signing new B2B virtual card clients and expanding virtual card adoption. We will also continue to focus on developing the best software and payment solutions for all verticals. Lastly, we are focused on thoughtful capital allocation. Strategic M&A remains a powerful value creation lever for us, and we're continuing to see attractive opportunities in the pipeline. We believe that private valuations are beginning to moderate, and we remain confident that M&A will continue to enhance our performance relative to peers. Before turning the call over to Tim, I want to thank our entire Repay team for their hard work so far this year. With that, I will turn it over to Tim to discuss the financials and guidance in greater detail.

Timothy Murphy, CFO

Thank you, John. Now let's move on to our Q1 financial results before I review our financial guidance for 2022. As John mentioned, in the first quarter, Repay delivered strong results across all of our key metrics. Card payment volume was $6.4 billion, an increase of 39% over the prior year first quarter. Total revenue was $67.6 million, an increase of 42% over the prior year first quarter. This represents a take rate of approximately 106 basis points. We believe the primary reason for the sequential decline in take rates is that average individual tax refund dollar amounts were much higher in 2022 versus prior years. For certain pricing types such as convenience fees where the consumer pays the fee, the higher refunds would lead to lower take rates. This happens because the payment volume is up, but the flat fee paid by the consumer stays the same. Please recall that approximately 15% of our business is priced on convenience fees and these client types would correlate with those that would use tax refunds to repay loans, medical bills or other outstanding debts. We do expect overall take rates to be higher in Q2 and future periods, back closer to the 110 basis points we experienced in Q4 2021. BillingTree, Kontrol and Payix contributed approximately $17.2 million of incremental revenue during the quarter. Moving on to expenses in the quarter. Other costs of services were $16.6 million compared to $12.5 million in the first quarter of 2021. The incremental other cost of services from BillingTree, Kontrol and Payix was $3 million for Q1. Gross profit was $51 million, an increase of 46% over the prior year first quarter. On an organic basis, we saw gross profit growth of 5% compared to the first quarter of 2021. Please recall that Q1 is a tough comparison for us since there were two rounds of signals sent out in Q1 2021 in addition to the normal tax refund season. We expect organic growth to be higher in Q2 and future periods. In fact, our current estimate for April is at least 10%. SG&A was $32.2 million compared to $23.4 million in the first quarter of 2021. First quarter adjusted net income was $18.4 million or $0.19 per share. Lastly, first quarter adjusted EBITDA was $29.3 million, an increase of 43% over the prior year first quarter. First quarter adjusted EBITDA as a percentage of total revenue was 43%. We do still anticipate increased investment in sales, technology and product to continue putting in place the proper infrastructure for accelerated organic growth throughout 2022 and beyond. We remain confident in staying above the Rule of 60 for the foreseeable future. Combined pro forma net leverage is approximately 3.5x. We expect this to be below 3.3x by the end of 2022, a very comfortable level, which will allow us to continue to fund organic and inorganic opportunities. As of March 31, we had $65 million of cash on the balance sheet and access to $165 million of undrawn revolver capacity for a total liquidity amount of $230 million. As of March 31, we had approximately 100 million shares outstanding on a fully diluted basis. Finally, moving on to our thoughts for the remainder of the year. We are pleased with our results in Q1, and we are reiterating our guidance for 2022, which includes volumes to between $27 billion and $28 billion, total revenue to between $296 million and $306 million, gross profit to be between $224 million and $232 million and adjusted EBITDA to be between $128 million and $134 million. We continue to expect approximately 45% of the P&L contribution to come in the first half of 2022. The strong growth in the second half of 2022 is anticipated to be driven by growth in our B2B business, which we expect to comprise a greater share of the overall mix by the end of 2022. This B2B growth includes exposure to the AP Media vertical, which is expected to be positively impacted by the political cycle, as well as fast-growing assets such as Payix, and the continued recovery in personal loans in healthcare. This 2022 outlook assumes organic gross profit growth of approximately 20%. We expect organic growth to gradually increase throughout the year with much stronger growth in the second half of the year. We are already off to a strong start in 2022 and look forward to continuing this momentum throughout the remainder of the year. I'll now turn the call back over to the operator to take your questions.

Operator, Operator

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

Ramsey El-Assal, Analyst

I was wondering if you could provide some color on the macro assumptions baked into your guidance. How are you thinking about some of the notable drivers across the verticals in relation to factors like rate hikes, supply chain issues, and everything that's going on in the environment?

Timothy Murphy, CFO

Sure. We believe several factors are contributing to stronger organic growth and overall growth for the rest of the year. The general recovery in personal loans, particularly in healthcare, is a key macro assumption for us. While we recognize there are challenges in the auto sector, our focus on used cars remains strong, with high demand, longer loan durations, and increased loan balances leading to more repayment volume in that sector. Additionally, we observe growth in B2B driven by the increased adoption of electronic payments. This overall outlook influences our expectations for the remainder of the year. Specifically, we find that B2B is the fastest-growing segment of our business and will play a larger role in our operations during the second half of the year. We also have some involvement in the AP Media vertical, particularly during the political media cycle, which should benefit us positively.

Ramsey El-Assal, Analyst

So it doesn't sound like you're worried about, for example, loan originations in the personal loan area facing a headwind or other types of macro headwinds? It sounds like for your business, you're thinking macro is more of a tailwind at this point than a potential headwind.

Timothy Murphy, CFO

Yes. As John mentioned, there has been some interesting data on personal loan originations that have been really strong recently, which will lead to greater repayment volume in the future. Even if we experience credit normalization, we believe we will benefit from that, as our customers are more likely to adopt our payment solutions when they focus on efficient collection tools. This could also drive us and potentially increase volumes.

Ramsey El-Assal, Analyst

Got it. Okay. And really quick follow-up, and I might have missed this, but what was the organic growth in the quarter?

Timothy Murphy, CFO

It was 5%. Our estimate for April so far is at least 10%, which is why we expect to continue to see increases.

Operator, Operator

Our next question is from Sanjay Sakhrani with KBW.

Sanjay Sakhrani, Analyst

I guess first question on the M&A backdrop. Obviously, there are lots of companies with valuations that have decreased quite a bit. John, maybe you could just sort of update us on your thinking about what might be out there and what you're looking for?

John Morris, CEO

Yes, sure. Good afternoon, Sanjay. Obviously, we have had great discussions with our Board around thoughtful capital allocation relating to what's the highest and best use for our funds for both our shareholders. And if we look specifically around the M&A side of that, we still think it's a very powerful value creation lever for us, as I said on the call. We still see a strong organic pipeline for ourselves, and we have a team that looks at this. We do think that the private valuations are beginning to moderate, and we'll see that even more so as we move throughout this year. We are positioned well. We have a history of being very successful there. We will continue to assess opportunities in the marketplace that will overall help us enhance our long-term growth strategy where it makes the most sense for us. We have many criteria we use to evaluate key strategic M&A. So we have a strong pipeline and see good opportunities. We will be very diligent and watch from a valuation perspective, ensuring discipline in our approach, expecting some of that to moderate throughout this year. Our balance sheet will be set strong for the opportunities we think will be heading our way, but we also have had great conversations regarding overall capital allocation.

Sanjay Sakhrani, Analyst

Perfect. And maybe, Tim, just following up on Ramsey's question, like obviously, your point is that your customers might be seeking repayment options, the market is sort of assuming we are going to go to a period of softness in the economy. Are you seeing some of the lenders actually seek you out and look for that? And then what else are you sort of paying attention to in terms of consumer repayment behavior so that you can be informed?

Timothy Murphy, CFO

And so that is something that we are hearing and something that we've talked about, and we think will continue. We believe the consumer is very healthy right now. The payable market is strong. There's great demand for personal loans. So we think those are all positive signs, which we have talked about being baked into the rest of the year.

Operator, Operator

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

Peter Heckmann, Analyst

Can you talk a little bit more about the B2B business and when you're winning there, for example, like the hospital? Are those competitive takeaways? Or is there a mix of takeaways as well as just customers that have not yet gone to an electronic payment solution for B2B?

Timothy Murphy, CFO

It's typically just actually winning against other forms of payment. So it's usually just moving business to electronic, moving away from checks and specifically into virtual cards. So it's not often competitive takeaways; it's just completely greenfield, particularly within the verticals we serve in B2B.

Peter Heckmann, Analyst

Okay. And then just in terms of thinking about the seasonality of the business, generally, the first quarter is strong for the personal lending business due to tax refunds. In the second quarter, would you expect it to be sequentially down or flattish compared to the first quarter?

Timothy Murphy, CFO

Typically, coming out of tax refund season, it's slightly down. We do have some parts of our business, like I said, B2B growing faster, which will support faster growth in the second half of the year. But we expect organic growth to actually be higher in Q2. As I said, we're estimating at least 10% in April already. So that's kind of how we think about Q2 versus Q1, but for the second half of the year, we expect a lot of strength. We believe the personal loan recovery is happening more rapidly than it was in prior periods, as John mentioned, and that will support future growth in Q3 and Q4 as well.

Operator, Operator

Our next question is from Andrew Schmidt with Citi.

Andrew Schmidt, Analyst

First, I want to ask on the B2B business. I think just a clarification. Is the go-to-market strategy now fully TotalPay? Or is the go-to-market still the individual brand? Just curious if the consolidation of the individual brands has happened yet or if there's a multi-brand approach from a distribution perspective?

John Morris, CEO

Yes, Repay will be the single brand, referred to as TotalPay, as it encapsulates the complete solution for both sending and receiving funds. On the accounts payable side, it enables us to handle all types of payments, not just those using virtual cards or ACH, but also checks and other payment methods. This term best captures our offering. We will promote Repay as the sole brand in the market. As we implement this comprehensive solution, accounts receivable and accounts payable will be integrated into various ERP systems. Throughout this year and into next year, as we enhance our integrations for new versions, we will incorporate both accounts receivable and accounts payable. Our acquisitions have provided us with integrations on both fronts, and as we update different versions of these accounting ERP systems, we will continue to expand our offerings in both areas.

Andrew Schmidt, Analyst

Okay. Very helpful. And good to hear about the vertical expansion to government. I think it's obviously a very lucrative end market. But is there any investment that's required when we think about vertical expansion within B2B, whether it’s Salesforce or the existing integrations and go-to-market strategy? Is there more than just modifying some sales materials? Just curious when we think about vertical expansion within B2B.

John Morris, CEO

For the most part, it's not a significant investment. Obviously, from a talent perspective, if we're adding specific vertical BizDev talent, that's really incremental. From an integration perspective, we're touching a lot of ERP systems already. If there would be something that would be unique maybe on the AP side, it's a much lighter lift from an integration perspective, which is where we would generally touch. That's a fairly easy integration for us or a light lift for us on the technology side.

Andrew Schmidt, Analyst

Perfect. And then if I could just sneak one more in just on the outlook. It sounds like there's more confidence in the outlook. Obviously, in the first quarter, it probably doesn't make sense to increase it just yet. But I just want to confirm that what you're seeing out there, you're more optimistic about the full-year outlook. It sounds that way with what you're seeing in the underlying business momentum, personal loan growth, but just curious if there are any offsets for the full year that we should consider.

Timothy Murphy, CFO

No. No. Like we've said, we're confident in the rest of the year, which is why we reiterated the outlook. There are a number of drivers there. You mentioned personal loans. There's also a recovery happening in healthcare, where we have exposure to a few different parts of health care. We have consumer health care payments, claims payables, as well as hospital payables. We believe that ongoing recovery in health care supports the outlook as well.

John Morris, CEO

And then I would also add that, as I mentioned in my opening remarks, we had a record Q1 client implementations. Some of those are layered into our forecast, the recurring nature of those. As they come live and actually begin processing gives us more confidence as well.

Operator, Operator

Our next question is from Andrew Jeffrey with Truist Securities.

Andrew Jeffrey, Analyst

A couple of things for me. One, encouraging to hear about instant funding and the 70% growth in that product. John, can you just remind us, when you look at that solution, does that drive yield? Or is it really more of just a point of competitive differentiation such that you feel like you have stickier solutions and are offering more value to the customer? And how should we think about that perhaps sort of driving the business over time? A little more nuanced, it would be helpful.

John Morris, CEO

Sure. Yes. Looking at the overall situation, a significant aspect of this is on the consumer payment side, where the outflows that used to occur mainly through cash, checks, and some ACH forms are shifting towards digital card-based transactions. This transition will impact repayment methods as well. Usually, the way something gets funded is linked to a default stored card or payment method, which we believe plays a crucial role. We're noticing increasing activity as we discuss the broader digital shift, indicating progress in that direction, which will likely reciprocate in how repayments are processed. As we enhance these different experiences and behaviors, it's part of the ongoing digital transition we're witnessing, evidenced by the data we share. This focus is more transactional in nature, with significant volume that provides insight into future repayments. It predominantly reflects a transactional dynamic without incorporating basis points per transaction. Instead, it resembles a click-type transaction fee, but it serves as a solid indicator of what lies ahead.

Andrew Jeffrey, Analyst

Right. Right. Drives that secular flywheel. And then Tim, can you just also elaborate a little bit on gross profit margin? The organic revenue growth was a little light this quarter, and I understand it's going to ramp. Margin looks really good. Can you just talk about the puts and takes and how mix should affect margin throughout the year here?

Timothy Murphy, CFO

Yes. A lot of that has to do with BillingTree. BillingTree has been actually better than expected from a gross profit margin north of 80%. And they had a strong Q1 as it relates to tax refund season. Their volume and revenue has much higher gross profit margins than the overall average, which brings the average up. That's one driver of that. We are in the process, as we've discussed converting BillingTree back into our RCS platform, which effectively will reduce processing costs, driving margin up as well, and that will happen in Q2. We would actually think that gross profit margins could potentially be a little bit higher for the remainder of the year for those reasons.

Andrew Jeffrey, Analyst

Okay. So you don't have to worry about seasonality necessarily in that number?

Timothy Murphy, CFO

No, because of the conversion of the back end, I think that will help support similar to slightly higher margins.

Operator, Operator

Our next question is from James Faucette with Morgan Stanley.

Jeffrey Goldstein, Analyst

This is actually Jeff Goldstein on for James. You mentioned that the reason for the take rate decline was due to the tax refund dynamics. I just wanted to ensure that longer term, exiting the year and into 2023, you'd still expect either stable or growth in your ongoing take rate? Just any change to your long-term thinking around that?

Timothy Murphy, CFO

Yes. So it was. We think it was unique to the tax refund dynamic, like I mentioned with higher average individual refunds and our flat fee convenience repricing model. We're already seeing that back up in April so we would expect it to increase back up closer to 110 basis points, as I mentioned. We wouldn't expect any real material change going into next year or beyond. So I believe it really was related to this specific dynamic for the 2022 tax refund season.

Jeffrey Goldstein, Analyst

Okay. Fair enough. And then you mentioned growing your supplier network to 127,000 suppliers, which was up from 110,000 last quarter. Just how should we think about your ability to keep growing that network? What resources do you have dedicated there? And is there a way to think about maybe like a critical level that if you reach, it could help accelerate adoption of your solutions? Is there something like a network effect that you would imagine would encourage? How should we think about that?

Timothy Murphy, CFO

Well, you will see it continue to grow at a similar pace. Obviously, that has to do with really as we drill down into some of these niche verticals; we could get more suppliers added. But as we expand into different areas, you will see us able to add more suppliers. Ultimately, the network effect is real. If you have all your people on the network, that means most of your customers could take virtual card; that's a good thing as well. We expect it might continue to grow at a similar pace, but as we continue to grow organically with new sales, that should also drive growth. Ultimately, that network effect is about getting as many people as possible onto the network so that our virtual card adoption drives out there. We see it when we drill down into specific unique areas where we have a unique niche, where we start to see many of those vendors over and over, which is a positive effect for us.

Operator, Operator

There are no more questions at this time. I would like to turn the conference back over to John for closing comments. Actually, we do have a question from Cris Kennedy with William Blair.

Cris Kennedy, Analyst

Thanks for taking the question and squeezing me in. And I apologize if I missed it. But did you happen to give some kind of revenue growth by category, so B2B consumer loan repayments, what have you?

Timothy Murphy, CFO

We've not done that on this call, but we have done that in the past. Consumer payments are probably in the high teens. B2B is by far the fastest-growing part of our business at 30-plus percent. What we call 'other,' which is really the RCS, the back-end platform, is probably growing in low teens. That's one of the reasons we have confidence in the outlook for the remainder of the year, just because B2B is becoming a bigger part of the mix and it is the fastest grower. We have healthy organic growth rates in the other areas as well.

John Morris, CEO

No more questions? Great. I just want to thank everybody for joining us this evening. We greatly appreciate your time. We're very encouraged by our strong start to the year, which has positioned us well to succeed in 2022 and beyond as we continue to take advantage of the secular trends towards frictionless digital payments. I look forward to seeing many of you as we attend various conferences. Thank you.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.