`Well, thank you everyone for joining our fireside chat with Repay. Repay provides integrated payment processing solutions to verticals that have specific transaction processing needs. Repay's proprietary integrated payment technology platform reduces the complexity of electronic payments for customers while enhancing the overall experience for consumers and businesses. Today, I'm pleased to introduce John Morris, Co-Founder and CEO of Repay, and Tim Murphy, CFO of Repay. John and Tim, thank you for being with us today.
Thank you.
John, could you give a quick overview of Repay and how Repay is positioned to serve the verticals you're operating in today?
Sure. Thank you, Scott. Good afternoon, everyone. Thank Thank you for coming this afternoon. Thank you for JPM for having us at the conference this week, specifically today. We've had some great meetings. Repay, we started in 2006. As Scott indicated in his intro, we're an integrated technology company into the various different ERP systems that manage the workflows of the consumer payment side of the world, as well as the business payment side of the world. Really, ultimately, we're helping businesses get paid back on some type of bill invoice from a consumer, and we're integrated into that ERP system that helps manage that. Same thing on the business payment side, where we're helping a business either get paid for an invoice or pay an invoice.
The movement of money flows in and out of the system on a fully integrated basis, on a fully reconcilable basis, as well as our ecosystem includes the ability to truly move those funds behind the scenes, where we're actually moving funds in and out of the various networks that funds flow, specifically in the U.S. and Canada.
Great. Maybe turning towards the last quarter, you know, Repay had an impressive start to the year in 2023 in Q1, growing 13% year-over-year organic gross profit growth. You know, can you talk a little bit about the demand environment, you know for both the businesses you have, both in consumer payments and business payments?
Sure. If you see, some of you have probably seen on our in our investor presentations. We have over a $5 trillion addressable, total addressable market that we are made up of both the consumer side and the business payment side. We see a large unaddressed solutions in the marketplace on how automation is happening. The digital transformation that was brought about by the overall pandemic era really accelerated that digital transformation to electronic payments, to electronic, you know, basically the elimination of paper, the driving of efficiencies out of that. That's our giant addressable market. Inside of that, we have sub verticals, both on the consumer side, it may be in the auto space, it may be in the mortgage space, it may be in the consumer lending space.
On the business payment side it may be in hospitals or hospitality or even municipalities. As you mentioned, we had a very strong first quarter from an organic growth perspective. I say that in that we see years of potential growth organically as that transformation happens, where these large under addressed markets are looking to... The consumers are demanding high quality in consumers, in experiences, as well as businesses. Consumers in the back office of businesses are trying to catch up to the speed of transformation as well, and we're helping to deliver the financial solution to do that, as well as helping them move the funds in and out of the systems. That's where we see a long-term great opportunity to continue to go that. For the next three to five years we see that.
Maybe digging in a little bit into the consumer payments segment, you know, given the macro backdrop, it was growing an impressive 17%, you know, growth in Q1 for organic gross profit. You know, can you dig a little deeper into what you're seeing in consumer payments and, you know, the drivers of growth in that segment?
As John said, we see real demand coming from the consumers wanting a more digital experience. A lot of these verticals we're serving on the consumer side are really under-penetrated, as John mentioned as well. We see a lot of growth coming from existing clients just wanting to use more of our payment tools to drive demand. We had a large enterprise win in the consumer space that drove a lot of the strong results in Q1. We have a few other enterprise wins we've announced since then that will drive growth for the rest of this year into next year. Those are a couple factors driving the 17% performance.
Ultimately, what we see, Scott, is the consumer really obviously expects now for a couple clicks and everything to happen, right? Many of our clients, we're helping them modernize that, those features and functionalities. We're actually helping them become omni-channel as well as omni-modality. Any way you wanna pay, anywhere you wanna pay, and any how you wanna pay, we're actually helping them deploy that. The consumer is demanding it, which is the hardest thing to create from our perspective, and we're actually helping them deliver that high quality consumer experience.
Helpful.
Maybe we could switch to go to market approach and maybe in the consumer payment segment. You know, in terms of your go to market, are you seeing any changes in how you approach these, you know, software partners and you know, in a very, what is a very changing landscape?
Sure. As you know, our overall integrated solutions are around these software partners. We have now 248 of those. We have about 150 of those in the consumer payment side and the remainder in the business payment side. What we're seeing is, specifically this year we're kinda doubling back on some of our existing partners that have many clients that we don't have. We are taking some of our features and functionalities and upgrading some of our integrations, specifically like Google Pay, Apple Pay, Venmo, PayPal. As we add those features and functionalities into those existing integrations, we think that's gonna drive even more organic growth. Our partners, we have a direct sales force, our partners also act as referral partners to us.
We partner tightly with them, key partners to us, but we think we add tremendous value add to their overall experience, and we become the payment experts as well as the vertical experts, as well as the overall, we bring the financial technology that really executes on that. We're excited about what we see ahead of us here as we implement some of those new features and functionalities. Again, the consumer wants to be able to use some of those features, it's just not available today.
You mentioned becoming the vertical experts. Your business is much more diversified today, you know, than it was maybe even five years ago. You know, how are you know, you're in healthcare, you're in all these different verticals now? How are you know? You have obvious strength in loan repayment and that vertical. How are you know, becoming more vertical experts in each of these different verticals?
Yeah. As we've segmented the business, and now consumer payments is about 80% of the business and business payments is about 20% of the business. As we focus on segmentation, we've also tried to refine the go to market strategy. We've done that in a couple ways. One, we've gone up market, and we're addressing the enterprise portion of consumer payments more specifically. We're trying to align our sales force around the different end markets and around the key software providers within the end markets. In B2B, it's a similar strategy. We've always been more middle market to enterprise there, we're not addressing SMBs really. We're going up market there, and we're going to market through integrated partners.
We also now have approximately 175,000 vendors in our vendor network, that's, you know, very helpful as we go after new client wins and look to further penetrate virtual cards with our existing clients and with new clients. A lot of, as John touched on earlier, a lot of the go-to-market is around the vertical specific software and going generally up market into enterprise sales.
What are a couple things that I think are, you know, very unique to Repay? You know, can you talk a little bit about the benefits with, one, you have your own, you know, proprietary clearing and settlement platform, which is, you know, unique, and two, it seems like you're investing a lot in products, you know, recently and talking about those on your earnings calls around, you know, instant funding, digital wallets. Can you talk about, you know, your technology and the stuff that you're doing to invest there?
Yeah, sure. One of my goals has always been the ability to be a network to own networks that move funds both in and out of the system. If you're not a bank, financial institution, you actually can't do that. You have to use someone like us to enter into the financial system. Even if you're an e-commerce company, you're using someone like us to transact.
That omni-modality experience that we have talked about before, Scott, is not just credit card or not just debit card, in our case, on the consumer side, predominantly just debit card, but the ability to add ACH, the ability to add all flavors of ACH the ability to add, you know, as we want to add, we have virtual card on the business payment side as we are looking at RTP and adding that as well as FedNow coming, and then the adding all the different wallets that are out there. That single pane of glass feature, we find that even large financial institutions do not have the ability to have a single pane of glass to view and track and trace an invoice through its entire payment life cycle and back and fully reconciled and fully integrated.
We think we really have a tremendous strength as we add more innovation to that. That's without even bringing up the AI topic.
That's right. Another benefit on Repay clearing and settlement is in the context of M&A. It does allow us to realize some meaningful synergies on some of the acquisitions we've made. We've done about eight acquisitions since we've become public. Several of them have been converted to RCS, and again, we can realize significant synergies, which we have done and we could do in future M&As. That's another benefit in addition to just the daily organic operations of our business.
With all the consolidation historically in the payment processing space, there's really four, five, maybe six people who can actually do that. Most people are using one of us to do that. We think it's a real strength, our ability to truly understand how to route, intelligently route, transactions, understanding truly what interchange is, understanding all the other networks and tying into those. I think it's going to be super valuable. I think people undervalue us for that.
Maybe we could turn our attention to the business payment segment a little bit and talk a little bit about what are you seeing in that segment in terms of the growth opportunities? I know there was, you know, a slowdown with some implementation delays in the last quarter, but, you know, where do you see this segment going in the future?
Yeah, that's right. We had a few implementation delays. Like we said, we're mainly going up market to middle market to enterprise, these are larger deals that sometimes just take longer to implement, usually on the client side, not on our side. The bigger opportunity is massive. Of the five trillion+ TAM that John mentioned, over three trillion of that is what we address within business payments. We do both AR and AP, we think we're unique in that way. A lot of folks, you know, tend to focus on one or the other. For example, we're integrated within Sage and Acumatica to do both AR and AP payments, which is fairly unique, and we can then cross-sell our AP services to our AR clients integrated into each of those ERPs.
We think the opportunity is really large, and there's still a lot of checks being written in business payments, and we're displacing those checks, primarily trying to with virtual card, enhanced ACH, and ACH. We also think we're unique because we have what we call a Total Pay solution, where we'll allow our clients on the AP side to outsource their entire payables function, not just one form of payment, but all of the payables. We'll of course, try to utilize our vendor network to pay with a virtual card. If we can't pay with a virtual card, we can default to ACH plus ACH, and then we also are able to do checks. By selling both AR and AP, by selling it integrated, and by selling the Total Pay solution, we think that's pretty differentiated.
Like I said, it's just a really massive underserved market.
Land grab, Scott.
Now what do you think in terms of consolidation? Do you see that continuing to happen in business payments? There seems to be.
I do. I think-
Lot of activity.
... there's plenty of room in the marketplace for the limited number of players that are there today. To put it in perspective, many years ago, payroll wasn't outsourced, and now it's predominantly outsourced, and everybody's very comfortable with that as a payable being outsourced. This is the last frontier-- tier of payables, and it's everything else. We, as consumers now went back to work and says, "Why are we, why are we printing invoices and why are we writing checks?" It just seems very crazy that you would do that today, which is fantastic for us. The market is ready, it's right, the technology is ready. We have the right total solution for that. To be able to track and trace that throughout its system, we think there's great value proposition in itself.
Probably the best value proposition I've seen in payments, I've been in payments 25 years, where you can outsource all this solution, and it's worth the cost of someone paying you for it. Instead, we actually give them a rebate based on their virtual card usage. In a marketplace where it's a tight labor market, that payables department needs more help, needs more resources. We can truly drive automation. Lots of very positive value props there. Marketplace, again, even in that world, we're vertically specific. When you hear me say hospitality or hospitals or municipalities or auto, we have some unique niches and some unique integrations in there. We drive our expertise because our know-how in that specific vertical, that's another winning piece of our formula. I see many years of opportunity there.
It's just kind of really beginning. There will be consolidation, though, as I know most industries will eventually consolidate. We, we think there's lots of opportunity. We, we hope to be a consolidator, and we'll see how all that works out.
Turning to your outlook for 2023, you know, you've mentioned you're planning for a mild to moderate recession that's coming up. I don't know if anybody knows what's gonna happen. It's very uncertain. You know, what areas of the business could potentially be impacted from any slowdown economically and, you know, where could there be very strong, you know, demand and growth from that?
Yeah. We had a strong first quarter, like we said, we grew 13% organically, and the consumer business grew 17%. We're generally planning for a mild to moderate recession. We're not necessarily predicting the overall macro environment. Our planning assumptions, though, are based on a mild to moderate recession. We think within the consumer payment space, there may be potentially some impact to the lending verticals that we talked about earlier. We also have a business that we call accounts receivable management, where we're effectively processing for collections, which is very countercyclical. Although there may be some exposure within the lending verticals, there's real countercyclicality within ARM, and that's about 10%-15% of our business, and we think there's a lot of supply coming to that market later this year, which could potentially drive growth in 2024.
In business payments, as I said earlier, we're not as exposed to SMBs. I think SMBs are feeling, you know, they're already seeing slowdown in their spend. We're not necessarily seeing that in the medium-sized to enterprise-sized customer, but we did put some conservatism in our planning assumptions for that. Generally, the mild to moderate commentary is around just trying to be conservative given that some of the macro challenges.
Can you talk a little bit about the competitive landscape? You guys have done an excellent job, you know, penetrating these verticals and finding areas of opportunity. You know, both on the consumer side and the business side, how do you think about the landscape? Has anything changed from what you're seeing in terms of competition, you know, in the last year or two?
We see some of the same people we compete against in the marketplace. That hasn't specifically changed. What we find is a more sophisticated, especially as you go up on the enterprise level, a more sophisticated sell, which actually helps us, our ability to have All of the one-stop solutions, as well as, you know, obviously being a public company in itself helps all the different audits we have, those in themselves, our ability to drive compliance. We competitively, and as you had mentioned earlier, us, our ability to process our own internal processing, what we find is if we really wanna win a deal, we can win a deal. As you can see our margins, we have really strong growth with really good, great margins.
We've tried to kinda balance that. People will ask me, you know, "What's challenging?" I would tell you that the more challenging thing I see is I see all the opportunity for growth, and I think we could grow faster if we spent more, but yet we've said we will be profitable growth. We're not trying to find the concept of, you know, how do we path profitability. We've been profitable for most of our existence. Competitively wise, we do stack up well. There's some things that we're adding that's gonna make us even, I think, more powerful in the marketplace. But I will say our integrated features is super important. If we decide to go into a new sub-vertical, it is more challenging if we're not there.
If we don't have the right integrations, it's more challenging. That's just a compliment to the integrations we already have. We know that it creates a barrier to entry.
I'll say on the consumer side specifically, we've selected these verticals because they aren't as competitive. They're underserved, under-penetrated. There's not as much competition, we can typically price deals more attractively to us. There's better margins and unit economics across consumer. In business payments, specifically in AP, because we're medium to enterprise, we would see names like Avid. We see Nvoicepay, which is owned by FLEETCOR. We see CSI occasionally. Really, in that part of our business, we're competing against checks. We're competing against other forms of payment and trying to displace those to be moved more to digital and specifically virtual cards. I don't think the competitive environment has changed all that much, although we have, like I said, revamped our go-to-market strategy to compete even more effectively.
Another example that we're talking about this year is, as in our mortgage on the consumer payment side in the mortgage vertical, we're rolling out a test which we mentioned on our call, our earnings call with Black Knight to drive the accepance of debit to make your mortgage payment. If I were to ask this room today, "Can you make your mortgage payment with a debit card?" Raise your hand. Pretty common. You can't because it's not usually offered. What we have seen in all our other consumer payment verticals is if you make it available it gets used. You just have to turn it on. We're excited about that in the third quarter as we, you know, Black Knight is a very, it's 70% plus of the mortgage servicing world as a software provider.
We're integrating there. We're rolling that out with them in the third quarter. We're excited about what that means on the consumer side of that. We know demand is there on the consumer side. We know there's a great value proposition to it. That's an example of what you were talking about, just an underserved market. If you kinda go into Visa or Mastercard, where they think they're gonna get their net new organic growth from, it's areas in which we operate. If you go and look at their presentations or investor presentations about one of what they call net new payment flows, those are the environments we're in, 'cause that's net new interchange if it's a card transaction.
That, that's exciting to us as we try to, you know, bring that to market this year, and see how the market's gonna react to that.
That's great. You know, maybe we could switch gears and talk a little bit about capital structure. You guys have very robust EBITDA margins. It's really impressive. How are you prioritizing future cash flow generation, you know, as it relates to your overall capital allocation priorities?
Today we're at, excuse me, we're at about 2.8x net leverage. One of our priorities over the last 12 months has been to bring net leverage down below 3x , so we've accomplished that. We've been focusing capital allocation on organic growth, reducing net leverage. We do have a share repurchase authorization in place, and we're starting to see a little bit more M&A. We're starting to see deals come back to market and less of a disconnect between public and private valuations. It's not totally back to where it was a few years ago, but we start to see some activity come back. The priority for us, though, has been reducing net leverage and adding cash to the balance sheet, and we`ll just selectively look at M&A.
Yeah. Speaking of M&A, you know, since going public, Repay has been, you know, pretty acquisitive, taking advantage of the market. You know, I think it's been over a year since the last M&A deal that you guys have done. You know, how do you think about M&A opportunities going forward between consumer and business payments and, you know, areas of focus for you?
Yeah. I mean, like I said, we're starting to see more. The deals we're seeing are both in consumer and B2B, and then in B2B typically, they're more on the AP side.
Mm-hmm.
We've tried to stay disciplined. We haven't done an acquisition, like you said, in close to a year and a half. The last one we did was with Payix. That business is still growing very nicely. When we look at deals, you know, we have a set of attributes we look at. Usually, it's around the addressable market opportunity. Is the company integrated in the software in the verticals they serve? Are they maybe a competitor? Do they have really strong retention statistics, strong margins and unit economics? Those are the type of attributes we look at. Of course, we think about valuation and structure. Those are all things we weigh.
In this environment, we're also just trying to, you know, weigh all of that against. Keeping net leverage at a reasonable place. Like I said, we're at 2.8x. We weigh all of those things as we look at opportunities. We have an internal team that focuses on M&A every day. That gives us greater visibility into the pipeline and also just due diligence.
I'll just add, again, we will be patient. Gotta have, we have been in the past. I think we've built a really nice company by being patient there. We like the position we're in today. The only debt we have is our convertible debt, which is 0% coupon and not due for three more years, no debt service associated with that. We're a highly cash-flow profitable business growing organically. We still think the highest best use of $1 is organic growth 'cause of the markets we've talked about already. We would love to complement that with the right valuations, we also are aware of where we stand today in the marketplace as far as our valuation. That in itself will act as a really good guardrail for us.
We love the fact we don't really have to do anything. We just keep executing on a great game plan here. We think the market will find that valuable. What we historically seen, if you look back, we actually acquired. We started acquiring B2B before people were talking about B2B. We started acquiring B2B in the middle of a pandemic when, you know. So we're okay being patient, and we'll continue to fill the storehouse, and when the right time's there, we'll be able to act on what we choose to do there.
You mentioned valuation, you know. What aspect of Repay do you guys think is super unique, and what are investors or the market missing about it? You guys have tremendous scale, you're growing very nicely organically, and you have huge margins. You know, what do you think that it's missing?
I think I agree with you. I think we have a very nice financial profile. We've done a lot of good M&A in the past. We have a strong balance sheet. I think maybe it's just where we play in certain end markets, there may be some perception risk. We don't think that. We haven't seen that yet given the organic growth in Q1, but that may be there, which is again, why we talked about a mild to moderate recession in our outlook. Why we're being conservative in our outlook. That may be something that is just misunderstood. We don't take balance sheet risk. We think that might be misunderstood. You know, we don't take any credit exposure. We're a service provider to these industries.
those are some of the things that maybe people.
Correct.
People aren't really understanding. The convertible note at 0%, not due for three years is something else that we like to highlight. Those are the strengths and some of that just may be missed.
Yeah. Maybe someone has something wrong.
It's true.
Makes sense. I have more questions, but maybe we can open the floor up to questions from the audience if we have any. Okay. I'll start. What does Repay look like in five years? You know.
I talked a little bit about before. The great thing for us is the organic opportunity for us over the next three to five years on the consumer payments and the business payments piece of that. The transformation to digital, that secular tailwind is legit. Now we gotta get timing right, we gotta get sequencing right. We don't see a scenario where we're seeing great demand in the marketplace for what we have and what we're delivering. That's the hardest thing to do is sell someone something they don't need. We're not seeing that. The ability to...
If you think about the automation that's going to be happening, the driving of that automation through the system, in the next three to five years, both of our verticals, like we've been asked before specifically, can B2B be 50% of our business? Well, we'd love that to be the case, but consumer, you just heard Tim say, grew 17% organically in the first quarter. It's growing as fast as that, we can't catch it. We see, continue to see opportunity in both sides of our business. Very large, underserved markets. I think we just need to keep delivering on that. Obviously, we're big fans of delivering great technology along with payments, fully integrated. And really in today's world as well, adding great customer service to that.
We believe in what we call fanatical customer service. Doesn't get talked about in today's world much. We know it when you feel it. We think that's a great winning formula for us. Executing on that could potentially come with complementing. You know, M&A is in our background. That's how we got here as well. We think consolidation will continue to happen in the marketplace. You know, we would love to, at some point, as we look really further out and we go, you know, go across and go beyond the mainland and be more of an international company. That would obviously likely happen in some form of acquisition for us to be an expert in other parts of the world.
Fantastic. You know, John and Tim, what keeps you up at night, you know, for Repay, and what are you worried about the most?
One of my, our mantra this year is called next level. I don't think you can ever. As a free enterprise person, I'm a big fan of, if you're not changing, you're getting left behind. Ultimately trying to find that next level, always in search of that. Another one of my phrases this year is, in order for something to change, something has to change. You're constantly trying to find ways to move that. I'm excited. I'm excited about some of the things we can do with that. Constantly trying to increase and then speed. How can you do things faster? We know we can. You know, we kinda talked about we'd love to be able to increase the speed of our implementations. There's 2 sides to that.
We can't, you know, speed a client up if they don't wanna go any faster, but maybe we can build technology that helps them click, click and speed up. I don't know. Some of the things that we think about on AI, we think can help with that. Ultimately, so thinking through that, building a talented team, always looking for great talent. That definitely kept me up last year when we were all trading each other's team members. I would say that's kinda subsided a little bit. Ultimately, looking for the great additional talent out there and finding great people. Companies are merely names. It's the people that actually do all the great creations. Innovating. We wanna constantly be innovating.
You know, waking up in the middle of the night and having a great idea. you know, Tim's probably gotten a few of my emails on those things.
How do you, how do you put in place the right people, like, you know, attract and retain the right people to go execute on all that? We think about that and talk about that all the time, especially in technology and sales. How do you get the best technologists and the best salespeople to help you execute on that?
Big word, obviously, that, listen, we're a public company, and I get that. Expectation is what everybody's ultimately, you know, what is the expectation? Are you delivering on that expectation? I love the challenge of ultimately trying to deliver that. It just makes you better.
Agreed. If, you know, we've seen, you know, what's happened in the banking industry in the last few months. You know, are you seeing any, anything affecting the payments industry in general or Repay specifically in terms of the, you know, the banking industry?
No. I mean, fortunately, we've had no direct exposure to any of the regional banks that have had troubles. That's been good. We've built a lot of redundancy in our banking processing relationships across card and ACH and other forms of payment. We don't have any direct exposure there. We do process for credit unions. It's less than 5% of our business. We have about 250 credit unions. We have actually seen credit unions exhibit some strength, where they've had prior deposit inflows, not deposit outflows, just because of their sticky member base and their own forms of deposit insurance. We think there's potentially a benefit to credit unions. We haven't really seen any negative impacts. We're monitoring it. None to date.
I guess last question, in terms of time. You know, in terms of the macro environment, you know, how do you think about where the industry's headed in payments and technology and, you know, what makes you excited, you know, for the future in this particular space?
We talked about some of that. I think, you know, kinda the latest buzz is on FedNow, right? RTP's been around for five years. It's basically very similar to the same thing. Digital transformation is real, and I think as that continue, as the consumers gets younger and things continue to change there, the expectation level on which way and how they wanna transact. I mean, I have kids that seem to transact out of a digital wallet, right? That piece of it's happening. Ultimately, what I love about our space is commerce can't happen without what we do. Someone needs to make sure that when an approval happens, you're guaranteed to get those funds.
If you think about it, in reality, most of the time, we're talking about funds that none of us ever actually see. Unless you actually go to the ATM, you actually never see the money in your bank account. It's all in some form of digital concept. That's already there today. It's gonna have a few new flavors to it. But the efficiencies of that, and driving that into the system as we talked about, that's exciting for me as we look out in the future here.
Well, thank you, John and Tim. Very nice of you to join us, and thank you for the opportunity.
Yeah. Appreciate you having us.
Thank you.
Appreciate it.