Okay. Our next session of the day is with Tim Murphy, CFO of REPAY. Great to have you, Tim. Thanks so much for joining us today.
Appreciate you having us.
Maybe, a place to start here is just given Q1 earnings are still a little bit fresh. Give us an update from the most recent quarter, your kind of general thoughts about how the business performed, you know, relative to your expectations.
Yeah. I think it performed really well. We're really pleased with the results with our Q1 organic growth of 13%. That was driven by consumer organic growth of 17%. We had some good announcements in terms of re- partnerships with Microsoft Dynamics. We talked about Black Knight. We increased our number of overall software integrations to about 248, and our supplier network is up to almost 175,000. Very strong results.
That's fantastic. I wanted to ask you about sort of the core underlying value proposition of REPAY. I think part of that over time has been about further penetrating these large payment flows with cards. you know, on both, I guess, the consumer and the commercial side of the business, remind us about the drivers, the underlying kind of demand drivers of why your customers are using you and what you're bringing in that, in that context.
Yeah. In the on the consumer side of the business, the end consumer, so our customer's customer wants a more real-time experience. They want a frictionless digital experience, they want mobile payments, text payments. It's very similar on the commercial side, so our business payment segment, where the customers just want faster payments, they want the ability to click-to-pay, they want the ability to pay their vendors electronically. They want it all to be seamless and frictionless. That's really the value proposition in both segments, is to provide that experience and to provide a really high quality experience, and that's really where we find value and they'll pay for that value. That's why you can see that flow through our take rates and our margins.
The customers, for example, on the consumer side of the business, it's, you know, the customers are embracing, you know, card payments relatively speaking, relative to other sort of payment modalities. What do they, what do they get from accepting, like, the debit card payment? Is it that they're more likely for the consumer to you know, to make the payment or is it, their data they can glean from it, you know?
The payment is way more quickly.
Mm.
An ACH takes a few days to clear the Fed system on average. A card payment is done pretty much within seconds. Particularly in the consumer segment, the consumer is demanding to be able to use it. If our customer doesn't offer it and doesn't offer it an omni-channel experience, they're potentially losing a customer. They're not providing as good of a customer experience. One of our biggest demand drivers in the consumer segment is the end consumer saying, "I wanna be able to pay with my debit card, and I wanna be able to pay with my debit card mobile device, I want text to pay, I want an IVR solution in addition to the traditional web and phone solutions," and that's what's driving it.
One of the nice parts of our business is one of the biggest demand drivers is the end consumer. It's oftentimes they're selling it for us.
Interesting. Okay. You guys always do such a great job of kind of helping people think through the TAM of the business.
Yeah.
How. You know, in some of the key kind of pockets of your business or the key, I shouldn't say pockets, but the key sort of sectors that you operate in, where are we at in terms of penetration rates? Is it sort of like, you know, as far as the eye can see? Are there certain places where there's more or less penetration? How are you looking at that?
The overall U.S. consumer payment market is probably about 75% penetrated on card. That's your traditional retail payments, restaurant payments, hospitality, travel. Our end markets within consumer are probably on average 20%-30% penetrated, so huge runway opportunity to just get up closer to the average in the U.S. in terms of consumer payments. Mortgage for example, the mortgage servicing market is probably in the single digits from a penetration perspective. Overall in the U.S. is $500 billion of annual payment volume in mortgages. Just think about if you just tick that up from a few percentage points to, you know, low double digits, we do have a massive opportunity.
A good example there is where there's very little debit acceptance in mortgage because a lot of times the services have not offered debit payments to the borrowers. We're working with Black Knight and Visa to roll out debit acceptance through Black Knight, who Black Knight covers 70%+ of the mortgage servicing market from a software perspective, just to allow the servicer to offer the opportunity for the borrower to pay with their debit card. That in and of itself should increase penetration and acceptance in a $500 billion space. That's a lot of volume for us.
Mm.
Um, and, and then-
Yes.
in business payments.
Mm-hmm.
it's even lower penetration. I said average 20%-30% in consumer payments. Business payments, the card penetration rate's probably less than 10%. There's a tremendous amount of checks still being cut in business payments. We see most of our conversations are completely greenfield where there's no competitor. We're competing against checks and trying to take away the inertia of you've always written checks and that's how you've done payables and bringing payables to electronic.
Your guidance, I believe, calls for 8%-14% normalized organic gross profit growth.
Yep.
Describe the growth algorithm for us. You know, how do you build up to that?
Yeah. We just, to level set, we always focus on gross profit growth because that's how we manage the business, that's how we compensate our salespeople, that's how we price new deals. We are always managing to gross profit. The way we build up to that organic gross profit outlook is. In the consumer segment, probably two-thirds of the growth is coming from existing customers and about one-third from new. It's the opposite in business payments. It's mostly coming from new customers. Like I said, it's usually situations where we're going into an opportunity where they've never used electronic payments. They've never taken a card for payments on the AR side, and they've never sent electronic payables with a virtual card on the AP side. It's the opposite.
It's mostly new customer growth and business payments. The overall mix ends up being. I should say, about 80% of our business is consumers, is the consumer segment, and 20% of our business is the business payment segment. It averages out to be about two-thirds of our growth comes from existing and one-third of our growth from new. We have a lot of visibility into future growth because we understand what type of ramp can happen with existing customers just based on historical data.
On the 80% of volumes that are consumer, the yields in that business in Q1 came in very nice. Maybe speak to the dynamics of, and the drivers of improvement there, and maybe how we should think about those yields trending as we move forward.
Some of that was a function of tax refund season. Average tax refunds this year were down. When certain parts of our business, we have fixed rate or flat fee, excuse me, pricing, the lower average ticket would lead to a higher take rate. That was just somewhat of a function of tax refund seasonality. We also have a few products that are growing nicely that are not volume-based products. For example, we have a communication solutions business within mortgage, where we send out notifications that our mortgage is due, and then we would like, of course, to attach a payment to that notification. There's no volume associated with that, so it's a higher take rate business. We have a product in our personal loans business within consumer called Instant Funding.
We're not taking balance sheet risk, but we can fund a loan on behalf of our customer directly to a consumer's debit card. We don't count that volume in our CPV. It's just a higher take rate business. Both of those outperformed really nicely in Q1. A combination of those three things led to higher consumer take rates.
Mm.
We expect that there's an opportunity for that going forward. Our guidance doesn't imply that it'll stay at that same level, but I think there is an opportunity. I should say as well, as we go up market and experience more enterprise wins, we implement a very large installment lender in Q1. We just announced the winning of another auto captive very similar to Mercedes-Benz. The take rates in those businesses will be a little bit lower. They're more competitive. They're enterprise wins. That potentially could bring take rates slightly down for the next couple quarters, but not a function of any sort of competitive pressure more around going up market.
You know, embedded finance is a term that people, you hear more and more these days. Also, on the consumer business, I know that you guys kind of go to market in a few different ways, but one of those ways is through your partner relationships. Maybe talk about your distribution and the consumer business and how you work with partners to get, you know, to the customer?
We do have an integrated payment strategy. We have a direct sales force, but we also find distribution opportunities. We have about 150 software partners in the consumer segment, and those would be examples of those would be dealer management systems, you know, near in the auto space. The way we partner with them is we basically embed our technology into their software platform and make it available to all their users. Over time, we enhance our solution by adding the features and functionality I mentioned earlier, like mobile payments, text-to-pay, and IVR, which they can then roll out to their user base, we get access to all of their users to utilize that technology.
We usually typically have a referral relationship with the software provider where we own the customer relationship, we sell the customer, and we pay them essentially a referral fee. They're not reselling for us, which we think is a much more effective model from a unit economic standpoint, which is one of the reasons we have the margins we do, is we're not giving away a lot of margins to third-party distribution. What we're trying to do is be more intentional about really embedding more of those features and functionality into the software because we think we're probably only on average about 10% penetrated within the ISVs. For example, if a dealer management system has 1,000 users, maybe we have 100 of them.
If we can provide better technology to enhance the software platform solution and try to touch those other 900, that's a really nice growth driver of new wins.
Sticking with the consumer part of your business a little bit, here, you added PayPal and Venmo to your suite of payment solutions. Talk about that a little bit. How did that come about? How does that fit into the value proposition? Do you expect to see any, you know, what would you expect to see from adding a new payment methods?
Again, this was driven by the consumer. Consumers would go to a lender and say, "I have X amount of dollars in my Venmo account. Can I use that to pay off my auto loan? Can I use that to pay portion of my mortgage or a personal loan?" If we're not offering that ability to accept the payment that way, there's a gap, and what they would call an acceptance gap. We're trying to provide as many of these modalities as we can so there's no gaps. It likely is not a big driver of additional volume. It's just being able to allow the lender to have all the possible tools available, so they don't have to say no to their consumer.
Again, this is a good example of the consumer being a demand driver for it, saying, "We really wanna be able to use Venmo, PayPal," and then we just embed it into the lender and their software system, and now they're able to do that. If they weren't able to do it, that consumer may go to one of their competitors.
Mm.
They had to offer it. As we go up market into the enterprise space, like for example, with this recent captive. They needed to have that. That was a big requirement for them in the bidding process, and the incumbent processor did not have that. Again, that was another way we were able to win by providing that.
The new captive is quite interesting, and I wanna get to that in just a second after one more consumer question. Or one more related question, I should say. You guys have a pretty nuanced view of, you know, what's happening in the, you know, kinda consumer finance market, and just in general, the health of the consumer from a macro perspective. You know, I guess the question is: What are you seeing in terms of sort of top of funnel trends at lenders?
I mean, I think that they're monitoring credit performance very closely. They're not seeing a worsening or deterioration of credit performance, I don't think it's getting materially better to them yet. They're not opening up their underwriting boxes. They're still somewhat tight on credit, which is why you're not seeing a significant increase in origination activity. That being said, if assuming the macro holds steady, we could see a normalization of credit, which I think would allow them to originate more aggressively. Most importantly to us is the consumer is demanding the credit. There's still a very strong demand for credit. I think the consumer is healthy. They have jobs. One of the biggest drivers of being able to provide a new loan is that the borrower is employed and will be able to repay the loan.
We see that. We also. This tells us, this type of market shows us that these payments are not discretionary. They're non-discretionary. The consumer places a very high value on paying their auto loans, paying their mortgages, staying current on their personal loans to keep good credit, and we see that in this type of environment. You know, I think the lenders are just sort of in monitoring mode, not that really different trends from prior quarters.
Mm-hmm.
If this holds steady, we could see originations potentially pick up, which I think could be a tailwind for 2024.
Now moving on to the Captive auto, you know, the Captive auto deal that you announced and just Captive auto as a category in general. I guess first, how competitive are those deals? I'm presuming it's a kind of an RFP process, but maybe that's the first question.
Sure.
Then, you know, what are you bringing to the table that other? There probably, you know, there are probably pretty big, you know, deals there. What kind of acquired are looking for them? What are you bringing to the table that the other folks kinda aren't matching?
They typically are competitive bidding processes. The good thing is those situations is we have the card brands on our side, particularly Visa. They wanna go get more of those dollars on card as well. They know that we've been successful in the past increasing card penetration. Every dollar in card that they don't have today is incremental to them. They're helping us navigate sort of the contract process and when these RFPs become available, which is very nice to have.
Mm-hmm.
They've been helpful in the other captive situations. The most recent auto captive one was a competitive takeaway from another large public company. What we brought to the table was, I think, much better technology. We brought all of the different payment modalities. We brought all the different payment channels. We brought a lot of domain expertise within the auto space. The other player was probably more of a generalist. We had a lot of the customizations from our work with Mercedes-Benz that they were looking for specifically with an auto, where it's very important that they have high-quality reporting and reconciliation tools embedded into their software. We had already done that with Mercedes-Benz Financial Services. It's a great proof point for this win. We have several in our pipeline. I think it'll be great for those, great proof points for those as well.
That's interesting. Part of the value you're bringing to the table and part of the value proposition you're bringing to the table is actually you're increasing card penetration in those books, and so that has. That benefits, I mean, obviously Visa wants that, but there's probably ancillary benefits for, you know, for the customer as well. Yeah.
Yeah. Their customer's asking for it.
Mm-hmm.
They're not only asking to be able to use their card, but again, they're saying, "Yeah. I'm paying a lot of money for this vehicle. I'm a prime or super prime borrower. Why can't I pay this with a text? Why can't you send me a link to the text that says your payment is due, and I type Y or P-A-Y, and my payment is made?" Most of the captives do not have that technology. If anybody has, in the audience, has purchased a vehicle and financed it through them, you'll, you've probably had a similar experience where they spent a lot of time on their vehicle technology, they are just now sort of getting up the curve in terms of digital payment technology, and we're at the forefront of that.
Mortgage is something you guys have also called out as a, as a fast-growing part of the consumer business. Tell us what's happening there with the company. You know, how is that going? You know, how is the solution developing and, you know, give us an update.
Yeah. Mortgage is a fairly complex business, and we play well in complex businesses where there's not a lot of competition, and it's pretty niche and nuanced. You know, as I said earlier, our partner there is Black Knight. Black Knight. We're primarily focusing on the mortgage servicing space, which is where the payments are. Black Knight has probably 70%-75% of the mortgage servicing space from a software perspective.
We're working with them to roll out debit card acceptance to all the services that are integrated to Black Knight to be able to allow the services to offer debit card as a payment feature to the borrowers, which in many cases today, based on our research in conjunction with Visa, is that a lot of times the servicer has just not made it available. The borrower may wanna use their debit card, it's just not available to use. From our perspective, we were just at the Black Knight user conference with Black Knight and with Visa, there were a lot of buying signs around, you know, we wanna be able to offer a debit and We think our borrowers will use debit cards. That was a very positive experience.
We have a lot of momentum there. We estimate that's about a $500 billion annual payment volume opportunity. As I said earlier, very little debit card acceptance. Partnering Black Knight and Visa puts us in a good position to win.
In consumer also, you have the RCS, I guess, the clearing and settlement business. You know, how does that fit into your model and, you know, how are you sort of positioned with that business?
RCS is the clearing and settlement, other people refer to as the back-end processing. It's where you clear and settle transactions through the card networks, through the banking system, and back to the merchants. It's a critical function for any payment company. Tri-Source was our largest vendor, so in 2019 we bought them and brought the processing in-house. Of course, it was critical to manage that part of our business and not have any vendor concerns. We have about 30 other processing customers today. Basically, we're competing with Global and TSYS and First Data, Fiserv for those businesses. What we're finding is a lot of these independent processors just want more control over their own experience.
They want portability and control to move their merchants as freely as they choose, and we're providing that. Not only is it benefiting REPAY, but it's benefiting those 30 customers. We've spent a lot of CapEx dollars, frankly, to invest in that business to have the most modern platform possible. Outside of those bigger names, there's really not any other independent processors providing clearing and settlement services. It's pretty unique, and it also gives us benefits from an M&A perspective. When we go and bid on businesses in an M&A context, we think we can win because we know we have processing synergies that another bidder doesn't have.
With BillingTree, for example, we converted them off of their existing processor onto RCS and experienced anywhere from one and a half million dollars to $2 million of annual cost synergies just by bringing that processing in-house. It benefits our P&L, but it also benefits us in M&A processes.
I see. It's a very, very strategic kind of vertical integration.
Exactly.
Moving to B2B. I guess give an overview of that business. You guys have done a lot of M&A there. you know, help the audience just understand exactly how that business within B2B, how it sort of breaks out.
When we became public in 2019, we had 0% of B2B business, and today it's 20% of our business, so it's growing. To your point, it's grown through acquisitions. We made about five acquisitions to grow the B2B business to be 20%. We're pretty unique there in that we do both AR and AP. We allow customers to accept credit card payments. This is business to business, so we allow businesses to accept credit card payments from other businesses. We also allow clients to send payables to their suppliers electronically, primarily on virtual cards. Oftentimes you see a processor on one side or the other. They're either doing AR or AP. We're doing both. We're integrated into ERP systems like Sage and Acumatica to do both AR and AP.
We're pretty sure we're the only player that can do both AR and AP within Sage and Acumatica, at least today. you know, we think we're unique in that way. The biggest growth area for us, we think, is payables. Like I said, we have in that space, we have probably around 90-95 software partners. We have close to 175,000 suppliers in our network. We're focused on verticals like hospitals, auto dealerships, municipalities, property management players. The idea there is to go and find new software relationships to give us a bigger user base. As we add clients, we enroll them in our supplier network. This is a networking effect of just increasing that vendor network.
The more vendors you have when you go into a new client situation, the greater likelihood that it is the vendor is in our network and we're able to pay them with a virtual card. What we find in our network is who has accepted a virtual card previously. It allows us to have a positive client discussion around how we think we can increase their electronic payables, and specifically on virtual cards. That part of the business, you do give the client a rebate on virtual card volume. They have an incentive to grow the virtual card volume as well. The higher the virtual card volume, the bigger the rebate is to them, which is why it's critical to grow the supplier network that accepts their virtual cards.
Just a bit of a virtuous cycle. The bigger the directory gets, the easier the sale is basically, It kind of feeds on itself.
Absolutely. The addressable market opportunity is many multiples the size of the consumer payments opportunity for us.
Yeah.
It's just a much larger addressable market. Like I said, we're very focused on growing the supplier network.
How do you pick where to play? I mean, to your point, you know, the B2B TAM is, not just for you, but just in general, the B2B TAM is this massive number. How do you pick where to play there, sort of from a vertical perspective? I know some of your M&A has had some vertical specificity to it. You know, sort of like maybe another way to phrase the question is, what verticals are you kind of active in today?
Today we're active in auto dealerships, municipalities, hospitals, property management, and media. Those are our primary verticals. You choose typically based on the software relationships you have.
Mm.
For example, in the auto dealership space, we have a software relationship with CDK. We think the other payables provider in CDK is Nvoicepay, which is owned by FLEETCOR. We win in auto dealerships because we can go to market through CDK to address their 15,000+ users. Then we have similar software relationships in the hospital space, in the property management space, which gives us access to the users of that software to do electronic payables. Typically, it's a function of which software you have. Once you grow your supplier network, you of course start to add more and more suppliers that are in that particular vertical.
For example, with auto dealers, we now have many of the auto dealer suppliers in our vendor network. Which helps us win the next auto dealer. The same thing with hospitals. It's really what type of software you have and then where your, where your supplier network is geared to.
What's the revenue model or the revenue mix or model, however you wanna characterize it, within B2B, Is there a software component to it versus, you know, transaction?
It's primarily payment-
Okay.
primarily transaction based. In, you know, in AR, it's typical merchant acquiring, merchant discount rates. On the AP side, we're actually issuing the cards, we're getting interchanges revenue.
Mm.
It's the opposite. We're on the issuing side within virtual cards, and then we would split, basically split the interchange between the rebate to the client and our processing cost to the issuer, issuing processor. Then the rest flows through our P&L, and of course, we have software relationship referral fees. It's a transaction processing volume-based business. It's not really software.
Not software. What are you seeing right now in terms of the macro, the demand environment? There's some other, you know, B2B, you know, providers out there who've called out certain vertical specific kind of weakness. What are you seeing when you look across, you know, sort of the demand side of your B2B business?
I should say that we're more focused. In addition to the verticals I mentioned, we're more focused on medium to enterprise-sized customers. I think a lot of the spend weakness recently has been more geared toward SMBs, you're hearing a lot of discussion around SMB spend slowing down and probably lower middle market spend slowing down. We haven't really seen a direct impact on spend in the upper middle market to enterprise, which is what we address. We are seeing longer implementation cycles, potentially some longer sales cycles, no real, you know, impact on direct spend, which I think, again, is more focused in SMBs.
When you think about what competition means in B2B, do you feel like you're going up against other, you know, providers offering similar services, or is it more like you're competing with, you know, legacy technology? You know, how do you frame up, you know, the competitive environment in this, in this part of your business?
It's more often competing against legacy forms of payment, legacy forms of technology than we are against a direct competitor. Well, most conversations we go into, they're writing checks, they've never been sold electronic payment processing, electronic payables on the payable side, and we have to basically sell them on why it's valuable to outsource your payables. The rebate is important, but just the automation of their entire payables function is just as critical. We win the business. That's the more typical sale. If we are competing in the middle to upper middle, the upper middle market to enterprise, we would see AvidXchange. In auto dealerships, we see Nvoicepay, which is, like I said, is owned by FLEETCOR. Occasionally, we'll see CSI.
In the really large deals, we may be competing as a treasury management solution.
What about cross-sell in the business? You know, you've got a lot of interesting assets and, you know, touching a lot of different players across the value chain. You know, how do you think about the cross-sell opportunity and, you know, how you execute on that?
Yeah, we are executing on that. That's one of the benefits of being able to do both AR and AP and having AR and AP integrated into Sage Intacct. What we're typically doing is cross-selling AP solutions to existing AR clients within the Sage Intacct community. You're an existing Sage client where we're allowing you to accept a credit card payment from another business, but you have a different vendor. If you have automated your payables and have electronic payables, you would likely have a different vendor. We would be able to provide you one vendor to do both AR and AP.
Mm.
Oftentimes, they've automated their receivables, but they haven't automated their payables, so we can sell payables to the AR customer. We're already integrated in Sage Intacct, so there's no integration, additional integration work that has to happen. That cross-sell between AP and AR is happening. We also have experienced some recent success in cross-selling AP to our consumer clients. For example, you have a very large lender that has 400 or 500 branch locations across the U.S., they have a lot of AP. We've been doing acquiring services for them, but now we're selling them AP solutions to basically go and automate the payables across their entire branch network and centralize it. We've experienced some success there. We're doing cross-sell within B2B, AP to AR, and we're also doing now cross-sell AP into the consumer segment.
How does that work from a sort of an organizational perspective? Do you have your salespeople, you know, how do you engineer that? You have ex-domain experts in different parts of the company you gotta bring in to bear on one, you know, one sale. You know, just out of curiosity.
Yeah. It's a little tricky-.
Yeah.
We would have in the example of cross-selling consumer, the consumer rep would be making the introduction, and we'd bring in the expert from the AP side.
Yeah. That makes the most sense. We are about out of time, but I greatly appreciate it. It was a great conversation, and thanks so much for being here.
Absolutely. Thanks for having me.