Great. Thank you, everyone, for joining. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at UBS. And we're pleased to be joined by the team from Repay. So with us on stage, we have John Morris, the CEO and co-founder. We also have Tim Murphy, the CFO. And also joining us here is Stu Grisante, who is the head of investor relations. And we just want to say a special thank you to John, Tim, and Stu for being very loyal to our conference and joining. I believe this is the fifth year in a row. I could be wrong, but we appreciate you being here. So thanks for making the trip.
Thank you. Great to be here. Hello, everyone.
All right, great. We're going to move into a number of topics. So just to kind of outline, we're going to talk a little bit about the addressable market and how much it's expanded over that time period that we just referenced. We'll talk about the importance of your software and ISV partners. We'll talk a little bit about the business mix. We'll talk about the outlook for the various segments, consumer and business payments. And then we'll get into a few newer products/offerings, whether it be mortgage debit acceptance or the Instant Funding opportunity. And then we'll get into some numbers around margins and free cash flow. So with that as our agenda, why don't we get started with the addressable market topic?
In your investor deck, you had highlighted that your TAM has grown from roughly, call it, $535 billion back in July of 2019 to more than $5.2 trillion now. Maybe you could talk about some of the drivers of that large TAM expansion that you've seen over the past half-decade or so?
Absolutely. So I'll start. So yes, as you did mention, we went public in July of 2019. We have done eight acquisitions since we've been public. Some of those acquisitions took us into additional TAMs, specifically if you think about some things in the mortgage space on the consumer side, even in the credit union space, even in the ARM space. So that increased our TAM size there. And then obviously, our additional acquisitions on the business payment side, that's how we ultimately got into the B2B space, is through acquisitions. And that opened up additional addressable markets. So if you kind of roughly say, the consumer side is about $2 trillion of the $5.2 trillion, and then B2B is about the other $2.2 trillion of that. So that's ultimately how the addressable market piece of it grew for us.
We think all the reasons we wanted to be in those emerging markets have been confirmational. We see that. Obviously, there's some microdynamics inside of each vertical. But as we look out into what really happened in the COVID, post-COVID world, we've talked about this, the digital transformation piece, we still see affirmations of that, where the consumer side of any kind of bill pay is expecting that same e-commerce-type frictionless experience. And we're helping deliver that embedded solution on behalf of our clients. And on the business payment side, we still see the business back office really catching up to driving the efficiency of really digitizing payments in a lot of ways, and even digitizing invoices. So addressable market absolutely has grown with us. We think that gives us years of growth trajectory. And maybe, Tim, if you want to add some more color to that.
Yeah, sure. So the $5 trillion plus represents total payment volume, and historically, we've reported and focused on card payment volume. We think there's a real opportunity to monetize more of the non-card. We always lead with card just because it's the highest margin and best unit economics for us, but we do see an opportunity now that we have the platforms in place, both on the consumer side and the B2B side, to address more of the TPV, so that's one of the reasons we've shown the TAM that way, because although we have focused on card, the rest of it is addressable as well, and like John said, I mean, one of the big drivers of getting into B2B in general was it's a much larger addressable market than consumer, and it's much lower penetration.
So we thought those were two good factors to drive us to those spaces.
Okay. Thank you, John. Thank you, Tim. That was a great overview of the addressable market expansion. Let's next talk about the importance of your software and ISV partners. So currently, you partner with more than 275 ISVs. Maybe you could just talk about the trends that you're seeing with these software platforms, especially on the consumer payment side. Talk about some of the unit economics associated with these partners.
Absolutely, so I would say if we kind of divided that 275 up, about 100 of those are on the business payment side, so the remainder will be on the consumer payment side, and as you know, we go to market with our ISV partners, so we embed our financial technology into their actual core systems, and then we actually help fully execute on the total p ay solution, even on the consumer side, where we actually, we're not just moving card. We're moving all types of payments through there. The omni-modality, omni-channel experience, as we build that out, that's a critical part of our go-to-market. They're referral partners to us on that side, so that does drive how we are successful in our go-to-market.
So if we're looking at that on the consumer and the business payment side, our ability to drive that throughput is super critical as we build solutions out for that into the marketplace.
And I'd add, specifically in consumer, which is where you're mainly asking, the software providers, which would be dealer management systems or core platforms in the credit union space or mortgage servicing software, they're typically focused on their software. And they haven't really been as focused on payments. So we're the payment expert. We're the embedded payment provider. There's not as much of a movement towards software-led payments where they're doing their own payments. We provide the payments in their ecosystem. And then, like John said, typically, these relationships are structured as referral relationships, not reseller relationships. So we maintain a greater share of the economics. And we do a lot of the heavy lifting in terms of contracting, onboarding, risk, and compliance. But we maintain a greater share of the economics, which generally leads to higher gross profit margins. And you can see that flow through our P&L.
Let me mention monetization. So monetization of payments was a little bit of what you were talking about there as well. Very, very large enterprise software platforms, as you've heard, we're partnering with those specifically on the business payment side, because they really want to drive monetization both on the AP and the AR side. We think that's a significant opportunity if we look out over the next five-plus years of being able to partner with someone who has vertical expertise, who also has payment expertise. If it's all things payments, not just credit cards, and when you think about some people think about PayFac, PayFac generally are just a card-based type monetization. We have to do all payments. So it takes a total, fully integrated platform that can do all payments and all channels.
So that's a unique sell cycle that we think we are well qualified to help monetize that across those large software ecosystems. We think as we continue to enhance our solution there to be able to do both on the business payment side, we think there's a great opportunity for that. We really are focusing hard on the AP side, but we do know that there's other opportunities to do that. And then obviously, on the consumer side, we have great partners there who value all the things I just mentioned.
Excellent. Thank you, John. Thank you, Tim. The minor follow-up there is I think the answer is both, but to the extent you could expand upon the growth here being partially by adding more ISV partners and also just further penetrating the existing ones.
Yeah, I think I mean, we've been consistently adding around three to five a quarter organically. If we acquire a business, it's typically because they have software integrations we don't have. So that's part of the thesis on the acquisition. And so adding them, of course, gives us the opportunity to hunt in those ecosystems. But I think probably the bigger opportunity is the penetration of existing software partners, where, for example, an auto dealer management system might have 1,000 users, and today we have less than 100. So we're already integrated. We already have the relationship. We already have clients using the platform. We just need to increase the penetration within that ecosystem, within that user base to go from less than 10% to 20% or 30%. And that is a big driver of growth.
It's also a focus from our investment perspective, from a CapEx perspective, embedding more software into that existing partner in the form of additional channels or additional payment types usually gives us greater access for penetration.
OK, excellent. Thank you, Tim. Let's talk about the business mix. So the business is roughly sort of 80/20, right? About 80% consumer, 20% business. Maybe you could just talk about if there are any opportunities that jump off the page that make you think that that mix is going to evolve one way or the other over the medium term.
So we've talked about we would love for our business payments segment to be bigger. And obviously, it has the potential. There's lots of wide open space there for it to grow, lots of inefficiencies happening on the business payment side, back office side of that. So we would love for that to grow faster. The consumer payment side has been growing nicely. But we would love to continue to drive some of those enterprise opportunities we talked about on the business payment side. We've talked about some of our wins. We do drive by vertical on that side of the world as well. As you heard us talk about in health care, hospitals, we've had some nice wins in that space. Overall, property management, auto. But we do that to build our vendor network. So we'd love to build our 300-plus thousand vendor network out to even more so.
We think ultimately that point-to-point solution is really good for us. So we'd love to see that continue to grow as more of a part of Repay. But we see opportunity as well in certain subsegments of our verticals on the B2B side, as we talked about, maybe some long-term opportunities coming through on mortgage, some of the investments we've made on credit unions coming through. And then obviously, return of the growth rates of auto and ARM, that in itself will add to that as well.
All right, great. Let's get into a little bit on the consumer business. So you mentioned on the most recent earnings call some normalization in consumer trends. Specifically, you mentioned auto, personal, and then credit union verticals. Maybe you could talk a little bit more about those trends that you were seeing at the time, and also if you're able to comment on how things have evolved since.
Yeah, I'll start. So we talked a little bit about kind of normalizing, a little bit of softening in some of those verticals on the consumer side, and maybe a little bit of some things on the business payment side, on the corporate spend piece of that a little bit. But we haven't seen any major shifts since we spoke of that. But there is a little bit of macro effect there that we're aware of. But we don't think that's anything that wouldn't normalize itself as the economy moves its way through.
Yeah, and specifically, I think we talked more specifically about auto and ARM. ARM is Accounts Receivable Management, where we would be processing for outstanding receivables, like on medical bills, for example. And the auto industry has been challenged by just affordability concerns of used cars specifically. And fewer used car sales means fewer financings. And so that's really been the challenge. And that's happening. But felt that more specifically last quarter. And I think that would continue through this quarter as well into early next year. But I do think that market will come back. And we're seeing some signs of affordability and that pressure easing. And then in the accounts receivable management space, we are tracking delinquencies and potential charge-offs, which would lead to additional volume for our clients. And we think that's coming as well.
I think coming out of COVID and stimulus, consumers were able to pay off and pay down medical bills, telecom bills, utility bills. And there wasn't as much supply and volume for our clients. And we think that'll come back as well. So those we think there will be some near-term pressure from those in the next couple of quarters. But I think going into the second half of next year and beyond, we should see some benefits from recovery there.
Excellent. All right, thank you, Tim. So let's move to the business segment. So the political contributions were quite strong. But when we look underneath the kind of ex-political, it seems that maybe the business payment segment isn't just quite growing at the opportunity that was expected at the moment. But there's hope for a reacceleration back to that teens plus. Maybe we could just talk about the drivers and/or confidence in the reacceleration.
Yeah, I can start. So John mentioned corporate spending slowdown. That's been an impact on that business. And then implementation delays. Those are two of the specifics. But we still think the market's there, specifically in AP. And we think the two drivers of growth and reacceleration of growth will be the enterprise software opportunity that John was describing, which is embedding payables into enterprise software systems like Blackbaud, is one we've mentioned. And we're growing our user base there with Blackbaud in that environment. And then, as I mentioned earlier, just further monetization of TPV. So we still have some clients with us that are fairly large that are only doing virtual cards. And we have a TotalPay solution where we can take their entire spend and convert more of the non-virtual card payments to our platform and monetize those, likely in the form of enhanced ACH.
So if it wouldn't be virtual card, it would be enhanced ACH. And for us, our unit economics are similar enhanced ACH, because although the fee to the supplier is lower, our costs are lower as well on enhanced ACH. So we have similar GP margins. So we're driving more of the total spend, specifically trying to not only increase virtual card penetration, but also enhanced ACH monetization. So that coupled with embedded payables within software are two ways we think we can reaccelerate growth.
All right, thank you, Tim. Let's move on to I mentioned this earlier, but the mortgage debit acceptance. So you disclosed on the last earnings call that you began processing for a mortgage debit acceptance offering. And you offered that to a select group of mortgage servicers in Q3. Can you talk a little bit about this opportunity in the mortgage market?
Yeah, sure. So you've heard us talk about this for some time. It tells you how important integrations are. It took us well over a year plus to get our integration with Black Knight. Black Knight probably controls 70-+% of the mortgage servicers to get our debit acceptance integration in there. In a good way, that's a great thing. You've made it over the wall. And as we continue to move that, provide that offering out to the various servicers, it's opening up some new doors for us. And our conversations are very good on that piece of it. That's a multi-year grower for us. We're kind of going where someone hasn't effectively gone before in some of these offerings. We know that the demand is there on the consumer side, which we've talked about before. We like the positive things we're seeing.
But we're kind of early on still. So we do think that is a 25%-26% type contributor. And we haven't fully said exactly what that is. We just want to gather a little bit more data around that.
As a reminder, the mortgage market is very large and one of the lowest in terms of penetration of debit. It's a lot of check and ACH payments still. So we've been working not only to get the integration right, but also working on what the pricing structures look like in order to go address that market. There's very low penetration of card. It's also a lot of volume. That's why we've spent a lot of resources there, because we think it could be a big opportunity just given the size of the market and the low penetration rate.
OK, thank you, Tim. Another opportunity is the Instant Funding one. Instant Funding, it's sort of a value-added service, if you will. It's been growing at a high rate, 24% in the most recent quarter. Maybe you could just talk a little bit about that offering, where it's resonating most.
Sure. So just like mortgage, Instant Funding today sits in the consumer segment. And the use case for us today is using Visa Direct and Mastercard Send rails to fund personal loans directly onto the consumer's account, directly onto the consumer's debit card. And so that is we still have fairly low penetration rates of our existing user base in personal loans of using electronic funding. We think as more of these lenders have a mandate to go fully electronic, not only with their payments, but also with their funding, we'll see higher penetration. And that's one of the reasons it's been growing faster is because it's a fairly new offering in that market. And then really, that's the use case for us today. But there are a number of other consumer use cases of that technology and of those rails, Visa Direct, Mastercard Send, that we're not doing today.
So potentially in the future, in terms of future product roadmaps, there could be other extensions of that product to other areas within consumer disbursements. For example, consumer auto claims payments is one example, ways to get the consumer money faster using the technology we've already built. So those are not again, those are not something we have specifically in the next call, 12 months. But that is something that we're considering as a way to diversify our revenue streams more into value-added services, not always tied to card payment volume.
Think about money movement. It's just a real-time way to move money, push money, and obviously, you think about RTP or FedNow. Those are real-time ways, but the Visa Direct and Mastercard Send systems can already do that. It's just about finding use cases, so we see that opportunity as money movement. I think over the next five years, money movement speeds up on how people move that. It's going to be digital. It's just a matter of what flavor of digital it is in the wallet, what it looks like in the wallet, but ultimately, what we have historically found is somewhere along the way, there's always home base, and home base is always a bank account.
All right, thank you for that. We appreciate it, John. Let's move on to the next topic, which is gross profit margins. So the gross profit margins have expanded nicely over the years from the low 70s in 2019 to now into the high 70s. Could you talk a little bit about, one, the drivers that got us to this high 70s and the drivers of continued margin expansion going forward, and particularly some of the mix shifts that you're seeing card, non-card?
Yeah, so we own our own back end and consumer or any acquiring verticals, really. And so we call that RCS. And so that gives us benefits around processing costs. And we've made a number of acquisitions where we've realized synergies from bringing processing costs onto our platform and reducing them. And that expands gross profit margins. So that's a big driver of the expansion historically. We also, because we own RCS, have ways to control the billing. And we control the accounting and the reporting on the back end. And so we have ways to manage that effectively from a margin perspective. One of the reasons they're higher this year specifically would be the political media business is a very high margin. So as we have a mix shift more to non-political B2B and enterprise wins, I would think the margins would be kind of in the mid-70s.
So I wouldn't call for any additional margin expansion. I would say we could stay in the mid-70s range because of that shift to B2B and enterprise, which again should lead to more volume and higher gross profit dollars. But they may be a slightly lower margin. We also think mid-70s is very healthy. The uptick this year, like I said, was due to political. And that's a high-margin business. So those are the drivers of how we got here and where we think they're going.
All right, excellent. Let's talk about another metric that's improved, which is free cash flow conversion. So maybe just talk about the drivers of that improvement more recently, and then how investors should think about free cash flow conversion for Repay in the out years.
I'll start. So it's a new metric for us this year. And obviously, we issued that in March. I'm sure there was a little bit of wait and see there. But if you look throughout our year, we think we are obviously, we're delivering on that. And we actually bumped our guidance up that some of that a little bit to do with our working capital. But ultimately, we said we'd be at 60-plus%. We still feel good about that part. And as we look into next year, you kind of have to adjust for the political next year being not a political year when it comes to the percentage piece. But we're making the right decisions.
As I said on the call, we're looking at all aspects of the business, trying to make sure we're focusing our dollars on growth, looking at the efficient ways we do that, making sure we're prioritizing how we spend CapEx. We had some investment years behind us. Those things are all coming through, and I think that's producing the results we're talking about.
Yeah, I would add to everything John said and I would add to it that if you kind of boil it down to a few points, we've been focused on growing adjusted EBITDA faster than top line. We've been focused on bringing CapEx as a percentage of revenue down. This year will be about 12%-14%. We think longer term, there's an opportunity to get that number down to, call it 10%-12%, and then we've been managing working capital, we think, more effectively, so a combination of all of those things has led to an acceleration of free cash flow conversion and we think we can continue to do that.
All right, thank you. Well, I think we covered free cash flow conversion well. Why don't we move on to the next topic, which is, and despite, Tim, what you mentioned around EBITDA growing faster than revenue or gross profit, but being able to still invest in some areas that you want to put money behind. So maybe just talk about some of those areas of organic investment.
I'll start. We still think there's a fantastic ROI on organic growth. We talked in the beginning about our addressable market. We still think that opportunity is there. We've invested in our technology to be able to deliver the product and solutions. We've got some key critical integrations. We want to continue to invest in enterprise sales, which we talked about this year. It's a little bit longer, 12- to 18-month delivery of that on the enterprise side because of just the sequencing of how some of that works. We want to go upstream on a few of those enterprise level, specifically in auto. We've invested some in our credit union integrations. That should start paying dividends. There's a delay in acceptance usually, and that's a slow-moving acceptance cycle sometimes in that world.
We think, obviously, on the B2B side, we want to invest in some of our enterprise relationships like we did with Blackbaud that we think would continue to help monetize. So investment in things and tools and people and resources and talent that can help us monetize payments are the key things we want to be able to do that drive that digital transformation piece of that. We're doing most of those things. But we want to continue to work harder to be able to deliver on our organic growth rate.
All right, well, that's a great segue into so we just covered organic. Let's talk about inorganic or the M&A pipeline. So as it relates to potential M&A, can you talk about how Repay thinks about deepening its presence in existing verticals versus using M&A as a tool to potentially enter new verticals or geographies?
Yeah, so we have a strong balance sheet. As John mentioned and as we talked about in our call, the capital allocation priorities are organic growth, and then we're at 2.5 times net leverage today. So we do have the ability to, I think, do some tuck-in M&A and stay at reasonable leverage levels. We see opportunities in existing verticals where there are smaller competitors. We've done that in the past, for example, Payix. We see opportunities in new bill pay-oriented verticals where there's a direct biller model and consumer. There's some targets there that could be interesting, and then, of course, within B2B, there's a number of targets within AP, and within AP, we'd be looking to get into likely new verticals where we would be buying a larger supplier network for that vertical specifically, so it gives us another vertical to address.
And then through the acquisition, we'll gain the supplier network. And we think through our real-time enablement efforts, we could likely increase the virtual card and enhanced ACH penetration of the target. So there would be a sort of a revenue synergy opportunity. We've historically focused on cost synergies. But if we can get there a larger supplier network and do a better job of monetizing that to us is a real opportunity. So existing verticals with smaller players and consumer, potentially some adjacent bill pay verticals and consumer, and then new verticals with the largest supplier networks in AP.
Excellent. Thank you, Tim. In the last minute or so that we have remaining here, I want to turn the microphone over to John to see if there are any closing comments that you would just like to make around the Repay story for investors.
Yeah, thank you. Thank you for having us today as well. Great conference. As I said really on our earnings call, I expect more of us. I think there's things that we can do to drive shareholder value. We're looking at all the levers we can look at inside the business, inside of how we look at our OpEx, how we can drive what we consider to be free cash flow, how do we drive growth, how do we look at returning a great shareholder value to our shareholders. So we're looking at all those things and how we can execute on that as we look out into 2025 and be able to deliver that.
We think if I look out into the next five years, what's happening in payments, if I look at the technology features and functionalities that we have, our ability to actually deliver these frictionless solutions. People have to pay and get paid. That is an absolute if you're in business. And the areas that we're operating in, we think the opportunity for accelerating that digital transformation is absolutely real. And we need to execute. And so we're going to work hard to do even better at that. But we like really the verticals we're in. We like some of the overall digital tailwinds. And we're going to continue to work hard to deliver a great outcome on behalf of our shareholders.
All right, John, Tim, Stu, again, just on behalf of our team and everyone at UBS, we want to thank you for being at our conference and making the trip to Arizona. It's a pleasure having you guys here and hope you have a great day of meetings.
Absolutely.
Thank you.
Thank you.