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

Thank you. Good afternoon, and welcome to our second quarter 2023 earnings conference call. With us today are John Morris, Co-Founder and Chief Executive Officer; and Tim Murphy, Chief Financial Officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and our most recent Form 10-K. Actual results may differ materially from any forward-looking statements that we make today. Forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them, except as required by law. In an effort to provide additional information to investors, today's discussion will also include references to certain non-GAAP financial measures. Reconciliation and other explanation of those non-GAAP financial measures can be found in today's press release and in the earnings supplement, each of which are available on the company's IR site. Those materials include reconciliations and other explanations with respect to REPAY's organic growth. As described in other materials, Q2 2023 organic growth is calculated by excluding contributions attributable to the Blue Cow software business in the second quarter of 2022, since REPAY divested Blue Cow during Q1 2023. With that, I would now like to turn the call over to John.

Thank you, Stewart, and good afternoon, everyone. Thank you for joining us today to review our second quarter results. On an organic basis, in Q2, we reported revenue growth of 9% and gross profit growth of 12%. Our strong results through the first half of the year give us the confidence to raise the midpoint of our revenue and gross profit guidance for 2023, which Tim will discuss in greater detail. Our focus as a company is to help businesses acceptance and payments by providing integrated payment solutions to verticals that have specific transaction processing needs. Our proprietary embedded payment technology reduces the complexity of electronic payments for clients, while enhancing the overall experience for consumers and businesses. As we continue to take advantage of the secular trends towards frictionless digital payments, we have been focusing on thoughtfully investing in our go-to-market efforts as well as technology to ensure we remain best-in-class in both the consumer and Business Payment segments. On the go-to-market side, our investments are paying off. We continue to further penetrate and expand our services into the 252 integrated software partners. We're also diving deeper into existing integrations, including with Microsoft Dynamics 365 Business Central. Our current integration enables clients to automate their accounts payable payments, and we are now in the process of developing for accounts receivable payment streams. In addition, our direct sales team has made great traction, especially when further penetrating large enterprise accounts. Our investments into technology also continued to generate positive returns. We are regularly evaluating and leveraging new payment modalities to reduce friction and boost revenue for our clients. Last quarter, we announced additional digital wallet capabilities like PayPal and Venmo, and we continue to offer the industry-leading best-in-class in cash solution. We are forging ahead on offering real-time payments for…

Thank you, John. Now let's go over our Q2 financial results before I review our financial guidance for 2023. In the second quarter, REPAY delivered solid results across our key metrics. Card payment volume was $6.3 billion, which was partially impacted by lower overall tax refunds in 2023. Revenue was $71.8 million, an increase of 9% on an organic basis over the prior year second quarter. This represents a take rate of approximately 115 basis points. Take rates were higher primarily due to strong performance in our noncard volume-based businesses within consumer payments, specifically in Communications Solutions and Instant Funding. Revenue attributable to Blue Cow in Q2 2022 was approximately $1.7 million. Gross profit was $54.9 million, an increase of 12% on an organic basis. This organic gross profit growth removes approximately $1.7 million of gross profit attributable to Blue Cow in Q2 2022. Our Consumer Payments segment reported organic gross profit growth of 16% in Q2. Our business payments gross profit increased 4% year-over-year on a reported basis and grew 15% when excluding the impact of political media during Q2 2022. Business Payments gross profit growth when excluding media, demonstrates the ramp of our strong sales pipeline while also realizing the benefits from our processing cost optimization and automation initiatives. Second quarter adjusted net income was $18.8 million or $0.19 per share. Lastly, second quarter adjusted EBITDA was $30.3 million. Second quarter adjusted EBITDA as a percentage of revenue was 42%. Adjusted EBITDA margins were slightly lower than initially expected due to the timing of investments towards sales, product and technology into key verticals and the impact of inflationary pressures, which may continue to increase costs. We thoughtfully invest for growth while also reviewing our business to see where we can efficiently scale our operations through process automation. REPAY…

[Operator Instructions] Our first question is from Ramsey El-Assal with Barclays.

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

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

Okay. And you also mentioned that guidance contemplates some slowdowns, some macro pressure later in the year. I guess -- two questions related to that. One is, are you seeing any signs most recently of a slowdown? And if one doesn't materialize, secondly, what is the magnitude of what we might expect to kind of flow back into guidance?

I mean, we exited the quarter in a healthy pace. Early Q3 into July as trends have remained stable. So we're not necessarily seeing anything different from a trend perspective within the different verticals. We just wanted to continue to be conservative just given the uncertainty with the macro and the overall potential slowdown. So I think if that -- coming into Q3, and we don't see that, then there's potential to revisit our guidance and just like we did this quarter, revisit the ranges. But right, everything has been stable so far through the end of the quarter and into early Q3.

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

Could you give us just a quick update. I think last -- was it last quarter, you announced the signing of a second captive lender of a car manufacturer. Could you remind us when do you expect that to ramp?

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

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

No. So yes, we do see that as early on, on the business payment side as we -- as I've indicated, we want to be a network to own networks that move funds to and from. And we see some value there on that side even on the Business Payments side. We'll add it in as an additional modality. And I would see people -- it would be probably something similar to an enhanced ACH option where people would want to accelerate funds. I do not necessarily see it cannibalizing specific card on the payable side of the world. But in reality, we would continue to be able to charge for that. So it could be good margins as well. But overall, we're looking to enhance the overall experience to the end B2B payable side vendor, and we looked at that to just augment existing in our total pay solution.

Our next question comes from Andrew Schmidt with Citi.

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

Yes, sure. So the -- as you probably have seen, the CapEx number came down from Q2 to Q1, so it drove a little bit higher conversion in the second quarter. We expect that CapEx number to remain somewhat stable for the rest of the year and likely decline as a percentage of overall revenue. So as revenue grows and CapEx dollars remains stable, we'll see free cash flow convert an increase. And so you saw that in Q2, and we expect that to continue throughout the rest of the year. We're not -- we haven't given a specific number. We haven't provided guidance on adjusted free cash flow conversion, but we would expect the same trend that happened from Q1 to Q2 to continue throughout the year and exit at a higher rate going into next year.

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

Sure. I can give you a little color. As we indicated before, we definitely are confirming that demand is there. We're confirming that that opportunities are there as we're engaging with our clients -- existing clients as well as prospective clients that would be basically servicers. And that's going well, and we're in the process of doing some testing there as well as, as we advance that initiative long throughout the third quarter into the fourth quarter. As we indicated earlier, we did not indicate that there's any contribution for that in 2023. So we do think that will be a 2024 contribution. And as we move throughout the third quarter and the fourth quarter, we should be able to give you some updates on what we think that will look like for 2024.

Our next question is from Andrew Jeffrey with Truist Securities.

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

Yes. So the breakdown is very similar to last quarter. Personal loans 20%. This is within consumer, auto at around 20%. And then RCS is about 10% and the balance of the categories would make up -- get you to the 80% total for consumer. And those would be like verticals like ARM, credit unions, health care and mortgage. And so I think where we would see some pressure and have been seeing pressures in the auto space. I think the used car prices are coming down, which is a good sign, but there still remains some affordability concerns that we expect could ease, but we haven't seen it materially change. So that's an area that we're focused on. And then we talked earlier in the year about ARM volumes coming back and ARM is about 10% of our business. We do think that's still happening. We just don't necessarily think it could happen as soon as we planned, which was Q4. We think that's probably more into 2024. I know that could happen sooner. But what we've done in our recent forecasting is move that out to 2024. So I think auto and ARM where we're playing the closest attention there.

Okay. Now -- I mean, I guess -- I know you're not talking about '24, but I think about a big auto captive, some of the mortgage opportunities, ARM, presidential election cycle. It seems like you've got a lot of drivers that likely manifest maybe 4Q into the beginning of next year. Is that sort of directionally the right way to think about the business? And any considerations from a mix perspective that, that does indeed come to pass.

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

Yes, I agree. I think that's where you may see business payments become a slightly bigger part of the overall mix, given the political others. We think that the cycle in '24 will be a lot higher than 22% in terms of overall spend, which should help. And then like I said, I think ARM could be a bigger contributor next year. And you can see that in some of the public ARM folks in that -- the public folks in a ARM vertical talking about supply coming back and that will eventually lead to target repayment volumes.

[Operator Instructions] Our next question is from Tim Chiodo with Credit Suisse.

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

Yes, I think you're spot on. I mean everything you just described is the reason why they're lower than the overall industry average. I mean just as a reminder, we engage in these relationships as referral partners, not resellers. And so the ISV is not reselling our product. And so we're doing a lot of the heavy lifting in terms of contracting, onboarding, risk and compliance, product development. So all of that is on us, which leads us to have a higher share of the economics. So just like you described. And we haven't seen that dynamic change materially at all in the past several years. And it is a big -- it is a pretty big portion of our overall COGS. And within COGS, that's probably the biggest number, but then we also have things like sponsor bank fees and other processing costs maybe for processing that's not on RCS like in other parts of the business. So it's a big part of our cost structure, but we've managed it closely. It's still much lower than industry average for all those reasons.

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

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

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

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

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