RPAY - NASDAQ

Good afternoon. I'd like to welcome everyone to REPAY's Second Quarter 2025 Earnings Conference Call. This call is being recorded today, August 11, 2025. I'd like to turn the session over to Stewart Grisante, Head of Investor Relations at REPAY. Stewart, please go ahead.

Thank you. Good afternoon, and welcome to REPAY's Second Quarter 2025 Earnings Conference Call. With us today are John Morris, Co-Founder and Chief Executive Officer; and Thomas Sullivan, Interim CFO and Chief Accounting Officer. During this call, we will be making forward-looking statements about our beliefs and estimates regarding future events and results. Those forward-looking statements are subject to risks and uncertainties, including those set forth in the SEC filings related to today's results and in 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 reference certain non-GAAP financial measures. Reconciliations and other explanations 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. With that, I will now turn the call over to John.

Thanks, Stewart. Good afternoon, and thank you for joining us today. On today's call, we plan to cover 3 main topics: first, a review of second quarter 2025; second, an update to our 2025 outlook and capital allocation priorities; and lastly, an update on our CFO process. In the second quarter, REPAY executed on our path to reaccelerating growth during 2025. Across the company, we have made great strides to sequentially improve on our go-to-market, implementation pipelines and operational excellence. REPAY's core growth strategy and resilient business model is built upon a never-ending commitment to optimizing payment flows to our clients. We are embedding payments to drive payment technology with software platforms to seamless experiences and these clients, businesses and consumers that we serve will continue to benefit from the ongoing secular tailwinds of digital payment flows in the U.S. As a company, we are putting the right processes in place, enhancing partnerships, fine-tuning our go-to-market. And as we continue to gain traction across our sales pipeline, REPAY is building momentum into the second half of the year. During the second quarter, our year-over-year growth sequentially improved with reported revenue increasing 1% year-over-year. Our Q2 performance demonstrated steady gross profit growth when excluding political media contributions due in 2024 and the previously communicated client losses. We began to deploy incremental strategic investments into our organic growth opportunities while maintaining strong adjusted EBITDA margins of 42% during the quarter. In addition, Q2 reported free cash flow sequentially improved, resulting in 71% cash flow conversion. Across our segments, we are benefiting from the go-to-market investments we've made in prior years within our enterprise sales and customer support teams, leading to healthy sales pipelines with enterprise clients. We are encouraged by the sustainable bookings growth experienced over the past several quarters, and we continue to expect these positive trends to reflect our normalized growth in the second half of 2025. As we continue to focus on our core business, we are working on various operational initiatives to improve productivity, automate processes and enhance implementation workflows. Within the Consumer Payments segment, our reported year-over-year growth sequentially improved as we expected during the second quarter. As a reminder, our Q2 gross profit growth was impacted by approximately 3 points from previously mentioned clients rolling off our platform. However, our core growth algorithm of recurring and incremental contributions from existing clients plus the ramp of new client wins gives us confidence for continued sequential improvement leading to accelerated growth as we exit the year. Across our consumer verticals, our go-to-market teams are building strong sales pipelines with our 185 software partners, while our customer support teams are hard at work enhancing our overall client experience. As a great example, during the second quarter, we announced enhancements to our integration with MeridianLink, a leading provider of software platforms for financial institutions and consumer reporting agencies. By expanding account funding options with REPAY's payment technology, credit unions and financial institutions using MeridianLink can start accepting funds into member accounts faster and improve their customers' overall experience. REPAY's payment technology is integrated into multiple core financial institution and credit union software systems, which helps us generate a strong sales pipeline targeting the thousands of financial institutions nationwide. During Q2, our financial institution vertical onboarded several new clients, including 10 new credit union wins, increasing our total credit union client base to 353 out of approximately 5,000 across the U.S. Year-to-date, our core consumer bookings have continued to increase from this go-to-market strategy across our consumer verticals. As we also focus on client implementations and ramp processes, we remain confident that our growth will accelerate as we move through the second half of 2025. We have been building momentum from prior enterprise sales initiatives. And as we further enhance our direct sales model with investments towards future organic opportunities, we expect overall momentum to continue into 2026. Now turning to our Business Payments segment. In Q2, reported gross profit decreased by approximately 5% year-over-year as we lapped approximately 6 points of political media contributions and an approximate 10-point impact from last year's client loss. When excluding these impacts, gross profit would have increased double digit year-over-year. Business Payments growth was driven by our focus on our core accounts payable platform and payment monetization initiatives like expanding enhanced ACH and float income. Our health care and hospitality verticals continue to be points of strength, adding new clients and expanding existing relationships during the second quarter. We also continue to expand with government municipalities and nonprofit organizations. During the second quarter, the municipal authority of Westmoreland County entrusted REPAY to handle their vendor invoicing and AP automation after experiencing vulnerabilities with vendor fraud. REPAY's AP platform prevents and protects against persistent fraud and cybersecurity threats within the payment industry. Our AP platform provides security solutions such as vendor payment validation to remove the risk from our clients while also increasing digital payment flows to ensure faster and secure payments to our supplier network. During the quarter, we did experience softness in our AR client base as we prioritize resources towards AP opportunities and payment mix shifts with suppliers as we work on building our TotalPay adoption. Nevertheless, we are starting to benefit from our underlying strategic initiatives, giving us confidence that the positive trends we experienced in the first half of the year will lead to growth acceleration in the back half of 2025. Our sales teams are continuing to capitalize on our software partnerships, embedded integrations, building our client pipelines as we target enterprise opportunities across our core verticals. We continue to add to our supplier network, growing 47% year-over-year to over 440,000 suppliers. In addition, we are focused on increasing both TotalPay adoption and digital payment penetration across our clients' total payment volumes, leading to incremental gross profit contributions from existing clients. Our solid execution in Q2, strong balance sheet and cash generation give REPAY the ability to continue investing organically into the business while producing results to generate long-term value to our shareholders. In addition, we used the second quarter as a prime opportunity to buy back approximately 5% of REPAY's outstanding shares. Through August 7, we have opportunistically used a total of $38 million to repurchase 7.9 million shares. Looking forward, we have strong momentum giving us confidence across both our Consumer and Business Payments segments to accelerate growth exiting 2025. As we move into the second half of the year, I'd like to provide an update on our previously issued financial outlook. Given the trends we are seeing into Q3, we will continue executing on our strategic initiatives to deliver sequential quarterly normalized gross profit growth. In Q4, we continue to expect high-single digit to low-double digit normalized gross profit growth and free cash flow conversion to accelerate above 60%. During the remainder of 2025, our capital allocation priorities remain focused on organic growth and investments, managing CapEx as a percentage of revenue, maintaining a strong balance sheet with ample liquidity and cash generation to address the 2026 convertible notes upon maturity, where we can use cash on hand to reduce our outstanding debt. And on our current share buyback authorization, we're able to opportunistically repurchase shares. Additionally, we continue to be open to strategic tuck-in M&A to further accelerate REPAY's position and growth potential. And lastly, we're excited to announce the appointment of Robert Houser as our Chief Financial Officer, who will be joining the company on September 8. Rob brings over a decade of divisional CFO and operational experience within the payment industry. We look forward to Rob joining as he will become a great strategic partner in running our company. With Rob's appointment, Interim CFO, Thomas Sullivan, will return to his role as Chief Accounting Officer. We're extremely grateful for Thomas' help in managing the finance organization over the past several months and the entire REPAY team for supporting the company through this process. With that, I'll turn it over to Thomas to review our Q2 financials. Thomas?

Thank you, John. In the second quarter of 2025, revenue was $75.6 million, representing an increase of 1% year-over-year. Reported gross profit declined by 2% year-over-year, which was impacted by approximately 5 points as we continue to lap the previously discussed client losses in 2024 and by approximately 1 point from political media contributions during last year's presidential election cycle. When excluding these impacts, Q2 gross profit increased single-digit year-over-year. As a reminder, tax seasonality during the first quarter creates lower activity and gross profit on a quarter-over-quarter basis in Q2. As John mentioned, our Q2 Consumer Payments gross profit growth sequentially improved and was approximately flat year-over- year. When excluding the approximate 3-point impact from one-off client losses, our Consumer Payments gross profit growth showed improvement towards the fundamental growth profile of our Consumer Payments segment. The Business Payments segment reported gross profit declined by 5% year-over-year. Business Payments normalized gross profit increased approximately 1% in Q2 2025 when excluding the political media contributions in Q2 2024. Q2 Business Payments growth was impacted by a 10-point headwind related to the previously communicated client loss during 2024. In addition, the Business Payments segment experienced some softness in our AR client base and payment mix shifts with suppliers as we focus on TotalPay adoption. Q2 adjusted EBITDA was $31.8 million, representing approximately 42% adjusted EBITDA margins while beginning to strategically place incremental investments towards our sales, implementation and client service teams across the company. Second quarter adjusted net income was $19.1 million or $0.20 per share. Q2 free cash flow was $22.6 million, resulting in 71% free cash flow conversion that demonstrates the solid cash generation of our business model. We continue to expect free cash flow conversion to accelerate above 60% in Q4. As of June 30, we had approximately $163 million of cash on the balance sheet with access to $250 million of undrawn revolver capacity for a total liquidity amount of $413 million. REPAY net leverage was approximately 2.5x. Total outstanding debt of $507.5 million is comprised of a $220 million convertible note due in February 2026 with a 0% coupon and a $287.5 million convertible note due in 2029 with a 2.875% coupon. During the second quarter, we were active in buying back shares under our share repurchase program as we repurchased approximately 4.8 million shares for $23 million. In addition, we repurchased another $15 million for a total of $38 million and 7.9 million shares year-to-date. As of August 7, we had approximately 91.3 million fully diluted shares outstanding with $23 million remaining under our existing share repurchase program. I'll now turn the call back over to the operator to take your questions. Operator?

[Operator Instructions] And our first question comes from the line of Sanjay Sakhrani with KBW.

This is actually Steven Kwok filling in for Sanjay. The first question I have was just around the guidance. If we just look back at the first 2 quarters, excluding the political media along with the customer loss, you guys are growing low-single digits, but you're guiding towards the high-single digits for the back half of the year. I was wondering like if you can help us bridge like how -- what gives you confidence in being able to achieve that?

Steven, thanks for your question. As you know, the normalized growth was negative 1% in Q2. That's, of course, excluding the political media. With the client losses, as you pointed out, we have low-single digit growth as expected, that was a sequential improvement from Q1. We do expect sequential improvement again into Q3 as we accelerate. We expect to accelerate further into Q4 as we continue to lap the previously discussed client losses. I think the -- again, I'd like to reiterate the appropriate way to think about Q4 is the midpoint of our outlook, which is again, high-single digit, low-double digit normalized growth.

Got it. And then just a follow-up around the capital management priorities, given that you still have the $220 million remaining of the convertible notes that's due with less than 6 months, should we expect that the primary use of cash will be allocated towards that? Or do you guys envision taking out additional debt to basically cover for that $220 million that's due?

Yes, I can add -- this is John. So as we said on the call, obviously, the allocation of capital specifically is investments in organic growth, which we've been making, but specifically as well as we -- and obviously monitoring our CapEx spend, but we would prioritize the use of cash or capital towards the convert, which is due in February of '26. We would not have 100% cash available to pay that off in full cash, just to be clear. But we would like to use significant cash on hand to pay some debt down from a prioritization perspective, but we would have to tap back up our revolver to take down the rest of that.

Got it. And if I could sneak one last one in. It's just around the strategic tuck-in M&As that you called out that you were still interested. Any specific verticals or what does the pipeline look like?

No, we don't have any specific -- it would be something that would obviously -- we have -- obviously, we have several criteria we look at in order to be able to evaluate a specific opportunity. We've looked at these things for even in the last 3 years. So you have to be very strategic to us kind of in our swim lanes that we like to give us an opportunity to accelerate growth or give us a really strategic advantage. It would be in consumer payments or business payments, obviously, which is what we're already in today and embedded payments in some form.

The next question comes from the line of Joseph Vafi with Canaccord Genuity.

Nice to see the guidance for the year reiterated here. And so just maybe a couple of quick questions. I know exiting the strategic review, there was -- there's clearly a little bit of a change in the go-to-market or an expanded go-to-market. I know you mentioned a little bit of it here, but just thinking about your platform is pretty broad. It's pretty robust. Does it feel like you can move upmarket into larger customers versus kind of where your wheelhouse has been today and maybe some of the other growth opportunities you see on your platform as it's kind of grown and seasoned here?

Yes. Joe, so you are correct. We have been investing in part of our strategic review we exited, as you're aware, we looked at many different things there, but we specifically looked at how we could accelerate and really accelerate organic growth. We had been last year investing in enterprise sales. We continue to add incremental additional investments and enhancing our direct sales model, allocating more resources to our overall sales team. We have been capitalizing as well on our monetization opportunities as we drive other noncard payment opportunities. And then our overall indirect partnerships where kind of our partner channels, those that we embed our solutions into, we're continuing to invest in those. So those pieces are going well for us. We are -- the items that we've invested in, we've got those moving. Those are all going in the right direction that we wanted them to do. That should enhance our overall go-to-market and in the implementation pipelines, we're working hard on that. Just overall operational excellence, we're investing into that. So I think your other question was ways to other verticals or key verticals. We think specifically, if you look at the verticals we're in, in the B2B side, that's in health care and hospitality and government and nonprofit, those have long runways to them. We love those as we -- even as we drive some of that opportunity with some of our overall implementation partners or overall channel partners there. But specifically on the consumer side, we have the ability, and we are -- on the enterprise side, our pipelines are healthy with some of the enterprise opportunities we're looking at. And so we think those investments will pay off for us. I wouldn't call it any net new verticals on the consumer side at this point, just larger opportunities in the existing verticals we're in.

Great. And then any more updates? I know you were focused some on the opening up the mortgage payments market for card payments. Anything going on there worth talking about at this point?

From a materiality perspective, no. But from an opportunity and a healthy pipeline, yes, we're seeing positive -- really positive traction on a few opportunities there and a healthy pipeline on some of the things we're working on there. So -- but materiality in 2025, I would not consider it to be a 2025 needle mover from that perspective.

The next question comes from the line of Alex Neumann with Stephens Inc.

Can you give an update on the recent RCS partnership with the POS provider you talked about last quarter? And just any early trends you're seeing with that relationship?

Yes. So I would say nothing significant other than we're in our process of implementations, et cetera. So no major updates on that other than we like the relationship. We're excited about what the future holds there with us.

Okay. And then just quickly on B2B. Could you remind us the mix between AR and AP for that segment because as you called out some softness in the AR side?

Yes. It's probably 60-40, AR-AP.

The next question comes from the line of James Faucette with Morgan Stanley.

This is Shefali Tamaskar on for James. So just on consumer payments, you noted in the supplement that you're seeing resilient trends across auto and personal loans and mortgage, but you're seeing some pockets of consumer softness. Can you give a little bit more color on where the softness is coming from and if you think it's more temporary or cyclical in nature?

Yes. So specifically, on our overall, we actually see similar trends in Q2 as we did in Q1. And we are seeing a resilient consumer, at least from what we can see. And remember, we're not the actual -- we're the payment provider and in our case, not the actual lender. So overall, we do see specifically on the auto side, when we -- in the first quarter, we talked about that, and we've talked about that for a couple of quarters. We do think the auto piece still remains challenged, but we have not specifically seen any impact from the tariffs there. We haven't seen any major increase or decrease on that side of it, but we entered into this quarter knowing it was challenged from a few quarters back. We do see normalized spending.

Got it. And just to check through July and early August, are you seeing kind of consistent resilient trends as well?

Yes, similar trends.

[Operator Instructions] And the next question comes from the line of Tim Chiodo with UBS.

This is Pat Ennis on for Tim Chiodo. I wanted to touch on the TotalPay solution and the monetization efforts you had referenced on the last call and on this call as well. Could you maybe update us on the strategy there and any progress worth noting?

Sure. Yes. So actually, we're making really good progress there. Specifically, one way we see that is our TotalPay solution, as you recall, is we're processing all the payables for our specific client. And those payables could be executed in the form of a virtual card of an enhanced ACH, even -- and then also specifically, if we can't pay with one of those ways, we can obviously have to pay with a virtual or digital check or even a physical check. So we pay all their payables. That's what we call TotalPay. So the monetization piece of that is to try to monetize that. If you look at the whole specific TotalPay number, our gross TotalPay number is actually increasing. Now we don't report volume on total TPV, but we get to see that on our side. So our TPV itself overall, we see that increasing. So that's a positive sign for us as we work through and try to monetize that. We have been leaning in on our ACH monetization opportunities, and we're seeing positive results from that as we have a few different offerings we offer there as we try to roll out our offering to the various different vendors in our vendor network, and we're seeing some of our initial sampling, some of our initial testing has been positively received.

Appreciate it. And then just a follow-up on the supplier network. I mean, growth has been pretty strong over the last several quarters, even on a Q-over-Q basis as well. So is that growth a function of existing client demand? Or is this a priority to win new business in the B2B segment? And will that pay dividends eventually?

Yes. So the network effect is real. So we -- over 440,000 vendors, as you can see, year-over-year, nice growth rate. The growth rate itself does -- as you mentioned, it does include existing but also net new wins and net new overall growth. So we do think the network effect is -- and we see it specifically. This is why we like to be vertically focused in that -- in our solutions there. As you can imagine, as we build critical mass in a specific vertical on a net new basis, we've seen that -- for sure, we've seen a national vendor in a lot of ways. So incrementally, it does help us accelerate adoption as we go by vertical when we build up our overall vendor network by vertical.

[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to John Morris for closing remarks.

Thank you so much for your time today. As we're building momentum into our second half of the year, REPAY continues to execute towards our profitable growth and strong free cash flow generation. We're making progress. We remain focused on reaccelerating our growth as we move throughout 2025 and into 2026. Really appreciate your time. Thanks again for joining us today.