Repay Holdings Corp (RPAY) 2020 Q3 法說會逐字稿

Greetings, and welcome to today's earnings conference call being hosted by REPAY. 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 filing related to today's results and in our most recent Form 10-K filed with the SEC. Actual results might differ materially from any forward-looking statements that we may make today. The 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. An explanation of these non-GAAP financial measures as well as reconciliation of these non-GAAP measures to the nearest GAAP financial measures can be found in our earnings available on the company's IR site.

I would now like to turn the call over to Mr. Morris. Please go ahead.

Thank you, operator, and good afternoon, everyone. We hope everyone is doing well and staying healthy. On today's call, I wanted to first give an update on our business in the third quarter, followed by a review of how we're executing on our growth strategy with some exciting business announcements. I'll then turn it over to Tim to discuss our third quarter financials and guidance for the remainder of the year.

As you can see from our results, the value proposition for our business has continued to prove more evident since the COVID-19 pandemic began almost 8 months ago. For the third quarter, we reported 44% and 40% growth in card payment volume and gross profit, respectively. Similar to Q2 and in Q3, we experienced increased demand for our offerings in several of our businesses across existing and new clients as our customers have accelerated the implementation of electronic payment capabilities.

The pandemic has proven that loan repayments are resilient. Borrowers placed a very high priority on staying current on their loan payments. The use of stimulus funds to pay down debt supports this belief. We've also continued to see significant shifts to electronic payments over the past few months, which has been and will continue to be a tailwind for our organic growth.

Specifically, auto loan repayments have been very strong, which has been driven by an increase in auto lending and positive macro trends in the used car space. There's a lot of demand for used cars from people who are moving out of the cities or are more reluctant to use public transportation. Lower interest rates are contributing to the demand as well. Auto lenders are accepting more payments on cards and are seeing increased volumes which benefits us. Our customers are wanting to use more of our channels and are looking for ways to engage consumers more efficiently.

Digital engagement is one such ongoing trend, allowing customers to effectively reach consumers, which drives penetration for us in terms of electronic payments for auto loans. In the future, we also look to more actively address the prime lending market, including captives. Therefore, our TAM for auto is about $600 billion and is one of the fastest-growing parts of our business.

Our mortgage servicing business also performed very well in the quarter due to increased home buying and refinancing activity, along with low interest rates. This increased demand and low mortgage rates has sparked a boom in originations and mortgage service transfers, positioning us well to benefit.

We've seen similar adoption trends in our B2B vertical. Businesses, especially enterprise clients we typically serve, have been forced to adopt electronic methods of payments as well as automate their payments. That is a nice catalyst for accelerated growth in the future.

Our Instant Funding product, which is our product that allows lenders to send funds directly to borrowers' bank accounts through eligible debit and prepaid cards, has also continued to see increased adoption as lenders and borrowers shift towards more electronic payments. So overall, a strong quarter with positive trends.

We made progress against all of our growth strategies during the quarter. We continued to execute on our existing business during the quarter by, first, expanding the usage and adoption of cards with our existing client base as well as acquiring new merchants in existing verticals.

To that end, we had some great client wins in the quarter driven by our direct sales force. These efforts were also aided by software integrations, of which we added 12 new partners during the quarter, mostly via acquisitions. This brought our total to 94 integrations at the end of September. When including the integrations from CPS Payments, we now have a total of 119. We signed 7 credit unions in Q3, bringing our total to 33, which represents approximately 340,000 collective members.

I want to spend a few minutes discussing several of these integrations. In September, we announced a partnership with Advanced Business Computers of America to enhance our card payment acceptance and processing. ABCoA is a leading provider of software with real-time accounting for consumer finance companies. During the quarter, we also announced a partnership with CU*Answers to integrate card processing for credit unions. CU*Answers is a 100% credit union-owned, data processing Credit Union Service Organization that provide combined services to over 270 credit unions nationally, representing over 2 million members.

On the mortgage servicing side, we're also very excited about our recently announced integration to Ellie Mae, the leading cloud-based loan origination platform provider to the mortgage industry. This partnership will enable mortgage originators with the ability to accept digital payments, enhance the customer experience and drive efficiency for interim serviced loans. Ellie Mae has over 4,000 clients using their platform, so it could be a very large distribution opportunity for us with a potential to become one of our largest ISV partners.

And while we're on the topic of mortgage processing, we also recently announced a new service offering, STX, or Service Transfer Exchange, to automate loan transfer payments between mortgage servicers. STX automates the process of routing borrower payments from one lender to another when their mortgage servicing right is sold or transferred from one servicer to another. This product solves a real pain point for our target market by eliminating manual and paper-intensive processes, standardizing the exchange of payment data and funds flow, reducing errors and costs for services and creating a more seamless borrower experience. We are very excited about this new product as efficiency and accuracy are more important than ever in today's environment.

Speaking of STX, we also recently announced the formation of the STX Advisory Board, initially comprised of 6 mortgage industry experts representing a variety of companies and leadership levels who all played a role in the mortgage service transfers between lenders. The goal of the STX Advisory Board is design and promote the implementation of operating standards to ensure consistency; recommend enhancements to products and services to improve workflows; and to promote participation and adoption of these standards throughout their networks.

We also completed some important software integrations for our B2B business with Sage 500 and Sage X3. This is adding on to our integrations with the Sage 100 and Sage 300 solutions. This technology integration between REPAY and Sage 500 and Sage X3 will allow B2B merchants to easily and affordably accept payments with Level 3 processing for B2B transactions to save time and money.

Moving on to our M&A, which continues to be a growth driver for our company, our pipeline remains very active. There are many players out there that are great acquisition candidates for us. Ideal targets are high-growth businesses in large verticals that are underserved from a payment perspective, are integrated with software, have attractive margins and have a need for our technology.

On the topic of M&A, we recently closed the acquisition of CPS Payment Services, which checks all those boxes. CPS is a B2B and accounts payable automation technology provider that facilitates the issuance, execution and reconciliation of virtual card, enhanced ACH, ACH and check payments through their integrated software platform, the CPS Payment Portal. CPS has developed a proprietary database of over 20,000 enrolled suppliers and serves an expanding base of over 160 enterprise clients across various sectors with deepest representation in healthcare, education, media, government and hospitality.

Additionally, CPS has integrations with over 25 ERP and accounting software platforms. CPS also has the opportunity to unlock significant growth potential by cross-selling its new TotalPay solution to capture greater wallet share across its existing client base. We are very excited about the acquisition as it immediately expands us into new verticals and greatly enhances our current B2B offering.

Our ultimate goal for our B2B offering is to truly be a one-stop shop for our clients. We set ourselves up to do that over the past 12 months, having capabilities on both the accounts receivable and accounts payable side. Taking that solution to the market in a comprehensive one-stop way is something that not a lot of folks are doing.

From a competitiveness standpoint, the B2B market is less competitive than some of our other markets. Over 2/3 of the opportunities that we win in this space are greenfield opportunities. And in that rare case where it's not a greenfield opportunity, we're winning because of the quality of our technology and the robustness of our platforms.

Our B2B business now includes over 40 software integrations and a supplier network of over 50,000 plus. We expect to process card and enhanced ACH payment volume in excess of $4 billion annually with accelerating growth ahead, including cross-sell opportunities with other parts of our B2B business. Our total addressable market in the B2B space is now $3.4 trillion, bringing our combined overall TAM to $4.7 trillion.

We're putting a lot of resources behind our efforts in this vertical. With every acquisition we make in this vertical, we've been fortunate to get B2B payments veterans who are helping us really bring together the strategy, unify the businesses and offerings, and will be instrumental in the long-term growth and the development of our larger strategy.

To wrap up, I continue to be incredibly proud of our team for their hard work and dedication to growing this company and providing excellent service to our customers throughout this time. Our business has proven resilient, and our value has become even more apparent as we move into 2021.

With that, I'll turn it over to Tim to discuss the financials in greater detail. Tim?

Thank you, John. Now let's move on to our Q3 financial results before I review our financial guidance for the remainder of 2020.

In the third quarter, REPAY delivered strong results across all of our key metrics. For the third quarter, card payment volume was $3.8 billion, an increase of 44% over the prior year's third quarter. Total revenue was $37.6 million, an increase of 43% over the prior year third quarter. TriSource, APS, Ventanex and cPayPlus contributed approximately $10.2 million of incremental revenue during the third quarter.

Moving on to expenses in the quarter, other costs of services were $10.5 million compared to $6.8 million in the third quarter of 2019. The increase was primarily due to the additions of TriSource, APS, Ventanex and cPayPlus. However, when excluding those additions, the amount was down in Q3.

Gross profit was $27.1 million, an increase of 40% over the prior year's third quarter. On an organic basis, we saw gross profit growth in the high single digits compared to the third quarter of 2019. Please note that organic growth now includes TriSource. Organic growth was solid in July and September, but August was flat due to the lapping of a very strong August 2019 for personal loan repayments.

Also, the increased mix shift to auto and the TriSource recovery resulted in slightly lower gross margin for the quarter. However, our September organic gross profit growth was in the low teens, and volume trends in October were strong, which provides us continued confidence in our mid- to high-teens organic growth outlook.

SG&A was $28.6 million compared to $55.1 million in the third quarter of 2019. As a reminder, in the third quarter of 2019, we incurred transaction costs related to the business combination with Thunder Bridge. Excluding the impact of those items, expenses were up year-over-year, primarily due to commission restructurings completed during the quarter, increased hiring, share-based compensation and added operating costs from our acquisitions.

During the quarter, we modified sales commission plans for certain direct sales reps by making an upfront payment in exchange for the release of future commission rights associated with designated customer accounts. Given our balance sheet strength and the low multiples paid for these ongoing cash flow streams, we felt it was a very good use of capital. We may consider additional commission or partner residual restructurings in the future as we look to deploy capital in a productive and efficient manner.

Third quarter pro forma net loss was $6.6 million compared to combined net loss of $41.4 million in the third quarter of 2019. The increase was mainly the result of general business growth and the impact of the aforementioned business combination expenses to net loss last year.

Third quarter adjusted net income was $9.5 million or $0.12 per share compared to adjusted net income of $10.4 million or $0.18 per share in the third quarter of 2019. The decrease was driven primarily by a pro forma tax adjustment in the current period, which we did not include in the prior year period, as well as a higher outstanding share count.

Lastly, third quarter adjusted EBITDA was $15.6 million, an increase of 31% over the prior year third quarter. Third quarter adjusted EBITDA as a percent of the total revenue was 42% compared to 45% in the prior year third quarter. This increase in adjusted EBITDA is a result of organic growth and contributions from TriSource, APS, Ventanex and cPayPlus. As a reminder, adjusted EBITDA margins from these acquired companies are slightly below our loan repayment business. However, they are typically growing faster, and we want to continue to invest in growth in the future.

In mid-September, we closed an upsized public offering of common stock where we sold approximately 14.4 million shares of REPAY's Class A common stock at a price to the public of $24 per share. All the net proceeds of this offering were used to acquire an equivalent number of LLC units from an entity controlled by Corsair Capital. Accordingly, the offering resulted in aggregate increase to the company's public float of Class A common stock by approximately 14.4 million shares, but there was no increase to the total as-converted share count.

As a result of this transaction, which included the full exercise of the over-allotment option by the underwriter, Morgan Stanley, Corsair and its affiliated funds no longer hold an equity stake in the company. Corsair's private equity investment in REPAY occurred in September 2016. It's been a great 4-plus-year relationship with the Corsair team. We want to thank them for all their contributions to helping us along the way.

As John mentioned, on November 2, we announced the closing of the acquisition of CPS Payment for up to $93 million, of which $78 million was paid at closing last week. The remaining $15 million may become payable depending upon the achievement of certain growth targets. The closing of the acquisition was financed with cash on hand.

Our cash and liquidity positions remain very strong. As of October 31, pro forma assuming $78 million was paid for CPS, we have $101 million of cash in the balance sheet, $30 million of undrawn revolver capacity and $46 million of undrawn delayed draw term loan capacity for a total liquidity amount of $177 million.

Our pro forma net leverage is now only 2.3x, which is well below our current net leverage covenant level of 5x. Please note that we recently amended our credit agreement with the only material change being to extend the availability period for the delayed-draw term loan.

As of September 30, we had approximately 79.6 million shares outstanding on an as-converted basis. Our fully diluted share count, including unvested shares, equaled approximately 82.2 million shares as of quarter end.

Finally, moving on to our outlook for the remainder of the year, as I mentioned earlier, October volume trends have remained strong, providing us continued confidence in our mid- to high-teens organic growth outlook. However, we have continued to see increased mix shift to auto and recovery of our TriSource business, which has resulted in slightly lower margins. Our personal loan business, which typically has higher margins, has experienced some volatility over the past few months due to the introduction and then lack of stimulus benefits. We expect this volatility may continue while we're in this period of uncertainty around the economy and pandemic.

Due to all of these factors, we expect our gross profit margin in the fourth quarter to be more similar to the first quarter of this year. In addition, we expect adjusted EBITDA margins to be down slightly in the fourth quarter due to investments we are making in sales, product and technology to set us up for continued growth in 2021. We have also added 2 months of contribution from CPS. However, please note there is seasonality in this business as it has some concentration in the media and education sectors, which means contribution in Q4 may not be equivalent to prior quarters.

Finally, with only a quarter left to report, we thought it was best to narrow our guidance range to the following: card payment volume to be between $14.75 billion and $15 billion, total revenue to be between $148 million and $153 million, gross profit to be between $110 million and $113 million, and adjusted EBITDA to be between $63 million and $65 million. As with prior quarters, this range assumes no further unforeseen COVID-related impacts, which could create substantial economic duress in the fourth quarter.

Looking forward, with our several recent acquisitions, additional software integrations, new team members and expanding addressable market, we continue to enhance our key growth levers and have significant momentum heading into 2021.

I'll now turn the call back over to the operator to take your questions. Operator?

(Operator Instructions) And our first question is from Craig Maurer with Autonomous Research.

So first, what was the composition of your business in terms of revenue or EBITDA, however you want to present, between the different segments within your business? And as we head into 2021, I wanted to get some additional color on how you're thinking about the personal loan vertical. Obviously, stimulus is not a guarantee. And the volatility there, should we expect that margins should continue to be under pressure if that vertical does not improve? Yes, I'll leave it there.

Craig, it's Tim. So we were -- the mix of the business was about 65% loan repayment, 20% B2B and 15% other. However, that -- now with the CPS acquisition, that mix is shifting more toward B2B, so we expect that to be more like 65% loan repayment -- excuse me, 60% loan repayment, 30% B2B and 10% other going forward heading into next year.

And then personal loans, that -- what happened this quarter was really a result of reduced originations in Q2, and we just saw less volume coming out of that origination dynamic. We have seen really positive trends in October where we've seen some of our larger personal lenders with more volume.

And so we feel good about that, and we're just monitoring it closely, and that's part of the commentary around where we expect to see margins in Q4, just given some of that lack of visibility with personal loans. But the trend in October has been positive, and it's something we're keeping a close eye on going into next year.

And our next question is from Ramsey El-Assal with Barclays.

You mentioned some cross-sell opportunities with CPS. So maybe specific to CPS, but also just in terms of all the recent acquisitions you've done, can you sort of rank order for us or give us more color on the cross-sell opportunities and kind of maybe help us dimensionalize the degree to which that could have a noticeable impact next year?

Sure. So with -- the first one is both CPP and CPS. We can take their AP solution and sell it to our customers within APS on the AR side. So there's been a lot of demand for that over time, and APS has not been able to deliver an AP solution to their customers where they're facilitating acceptance of card payments. And now those conversations are happening where they're offering both acceptance and AP. And similarly, for example, with some of CPS' customers, maybe a large hospital system, for example, we could offer acceptance services and acquiring services.

So I think it definitely goes both ways, and we're actually starting to have some of those discussions on both fronts and getting more organized internally around how we want to roll that initiative out in a cohesive way going into next year. So it's still fairly early with both of those, but we're starting to see dialogue happening within the sales force.

Okay. And I also wanted to ask you about, if you kind of -- it's a bit of a higher-elevation question. If you fast-forward a few years, say, 5 years, how do you think REPAY's business mix looks? I guess it's another way of asking, are you -- with all the M&A you're doing, are you solving for a particular end state? Are you looking to drive diversification in a certain direction? Or do you have just sort of target areas that you can basically acquire and you're just -- you're chasing kind of more opportunistic deals, if that makes sense?

Yes. I mean I don't think we have a specific percentage we're solving for. We certainly have diversified quite a bit in the last 12 to 15 months where loan repayments have come down as a percentage of the mix, and B2B has increased, for example. And then even within loan repayments, we've seen auto become a much part of that -- a bigger part of that mix, and now we see credit unions and mortgage increasing as well.

And so that, like I mentioned previously, prior to CPS and CPP, it was probably 65 in 2015 in terms of loan repayments, B2B and other. Today, pro forma with what we know now, it's probably 65, 25 and 10. And then into next year, that becomes -- that looks more like 60, 30 and 10, with 30 being B2B. So we see it shifting to B2B. It's just a very large addressable market with a lot of room to grow, but we're not necessarily solving for a specific percentage.

Yes. Ramsey El, this is John. I'll add to that. The opportunity, as you've heard me say before, we have been watching -- I have been watching B2B for probably 10 years, and the opportunity was there. If you remember, we inorganically bought APS last year way before there was a pandemic. And obviously, the pandemic proved some of our theories correct on the acceleration of the shift of payments to digital, and we are seeing more and more of that. So we've been fortunate and blessed that it was a good area for us to go to, and it has all the attributes that we talk about.

So the opportunities are there. And we're chasing markets to try to achieve -- our organic growth rate, we think, is a significant opportunity out there. But our current loan repayment vertical as well as the B2B vertical, the organic opportunity is significant. We think it's got many years of runway left on that. We don't necessarily have to go to another vertical. If we find the opportunity to be there, we will. We look big picture, very long term. We think there's a significant opportunity to continue to grow both of those.

Without inorganic acquisition growth, kind of it will probably be hard to change the mix if both are really growing well. But obviously, with acquisitions, that can change that mix. From there, it's just a matter of opportunities we see in the marketplace that really match who we are and what we think we can do if you're listening to some of the attributes we look for from the software integration and the growth projections that we look for in those opportunities.

And our next question is from Sanjay Sakhrani with KBW.

First question, I guess, Tim, you talked about the air pocket as far as like stimulus and its implications to the fourth quarter. I guess as we look ahead to 2021, how are you planning for the year on that front? What does it mean for growth and investments if there is stimulus or if there isn't?

Yes. So we are trying to focus on what we do best, which is provide high-quality technology to these underserved verticals and really, really strong direct sales force and customer service. And we've been investing from a sales and product perspective in auto. We think it's a very attractive opportunity. It's a very large market, and that's something we've been investing in. We've also been investing in B2B, not only through acquisitions, but now new hires with each of those acquisitions. And so we think that sets us up nicely.

And we can't necessarily predict the stimulus or if there is a stimulus or timing of it. But what we can do is just monitor our top customers very closely and look for trends like we saw in October related to personal lenders, for example, and try to get a sense by looking at some market research and also having discussions with those customers about what's underlying those trends and if that's something we should be projecting. So just trying to get our arms around as much data as possible to inform what scenarios could look like with and without stimulus and the timing of that, but also just investing -- the key investments are focused on auto and B2B.

Okay. And you guys think you can hit your historical growth rates, whether -- I mean I assume there will be some sort of stimulus. It's just a matter of how large or how small. I guess as we think about whether it's small or large, do you guys think you can probably hit your long-term growth targets?

Yes. Yes, we feel as confident, like we've talked about, in the mid- to high-teens organic growth longer-term outlook. We have a lot of avenues for growth. In addition to auto and B2B, we talked about mortgage. We've had a lot of really positive momentum in mortgage related to the Ellie Mae partnership and then the STX announcement. And so that's another area. And then we've had really, really good success this year on credit unions. We signed 7 in the most recent quarter, and we have a lot of targets out there just through our partnerships we've announced in that space. We now have 3 partnerships.

So I think what we're trying to do is, either organically or through acquisitions, set ourselves up with a lot of different avenues for growth. And if one part of the business is down, then other parts of the business will be up. And that gives us the confidence in the combined organic growth outlook I just mentioned.

Okay. Perfect. Just one follow-up for John. Maybe just could you talk to the pipeline of M&A, like size and sort of where you're looking? It sounds like B2B is an area, but maybe you could just characterize a little bit more.

Sure. And let me also kind of follow on on Tim's last comment as well. Listen, we're trying our best to be transparent with everything we can see, versus just not giving any type of numbers and drawing guidance and things like that. We're trying our best here. But also, what we're also looking out is to have a complete absolute shutdown again, that's something that could be significant to everybody, all public companies, right? So we're not seeing that, but -- and we're hoping and praying that doesn't exist again, but that could have an impact on how we see things happening in 2021, obviously.

But now on the M&A pipeline, it is very actionable from what we see. We have been blessed to be very acquisitive in the last -- since we were public, we've done 5 acquisitions. We see some good opportunities out there still, and we obviously will have to do homework on those. From a numbers perspective, we don't really want to forecast those. We never like to forecast that we have to do an acquisition. We're very particular and very specific about that, as you can see what we've done in the past. And we're also very measured on how we want to make sure we incorporate those into our organization.

So we look for these attributes. We see some and several in the marketplace with those attributes that they're coming to market. We're also going to be patient and be diligent with our shareholders' money. So we are excited though. There can be some opportunities out there.

And our next question is from Andrew Jeffrey with SunTrust.

I think the mix conversation is an interesting one, especially as we start to think about mortgage and this Ellie integration. John, can you give us a sense as to when you think you might be able to talk about some pretty significant mortgage payment volume? I assume maybe some of that STX revenue is in the 10% that you've talked about, but I'm wondering when you think that's a vertical for -- you're going to be discussing in more detail from a payment perspective.

Yes, sure. So we are very excited about that. If you think about -- we haven't seen anything like the exchange that we're kind of putting together there. We think that's a long-term, very value-creation opportunity for us in the entire industry. It just really solves a lot of pain points and eliminates a lot of friction there. But it also allows us the opportunity to gain additional foothold into solving other payment solutions and needs for those specific lenders. And then I would not -- since to us that's a longer-term investment, meaning next -- over the next couple of years, so I ask you to be patient with us there because we see significant opportunity and create significant shareholder value long term and integrations as we move in creating and developing that asset over time.

So not an immediate-term enormous bump, but we do see activity happening, and we see conversations happening. And we're looking -- as we kind of move through the first part of 2021, we see additional wins out there. But also moving into 2022, we think there's even more opportunity as we build that out.

Mortgage, especially when it involves large banks, will take time. Those are longer sales cycles and decisions, which is why you kind of hear me say let's be measured in that, but we do think it's a really wise use of dollars.

Okay. Yes, that's an exciting opportunity. On the personal loan front, which -- and please correct me if I'm mischaracterizing this, but to the extent that there's current organic revenue growth deceleration, it seems like it's coming from that line of business, which is still 60% pro forma or so. Is it demand or supply? Is this an underwriting issue? Or is it a consumer demand issue?

Well, to clarify, within the 60% to 65% loan repayment, personal loans is just a part of that. So it's probably about 30%. The rest, the balance of that is auto, and then there's a small portion still that's credit unions, mortgage and then our Canadian business. So personal loans is just a part, probably about half, maybe a little less than half of that total loan repayment business.

And I think that when there was a lot of stimulus dollars out there, when the CARES Act really started flowing money out and the enhanced unemployment benefits were happening around April and May and maybe into June, there was a lot of excess cash. And so consumers were paying their loans, but there wasn't a lot of demand. And so originations were down, and they were down because consumers were flushed with cash and also lenders were tightening credit, tightening underwriting standards.

However, what we see and what we think now that's becoming a trend in our data is when the stimulus benefits ran out at the end of July or early August, demand picked back because there wasn't as much cash in the system and consumers needed personal loans. And so those originations that have started to occur in August and September are now resulting in repayments, and we think that's what we started to see at the end of September into October. And that's kind of a trend that we have probably need a little bit more time to understand if that truly is a trend and will last.

So I think that's how we've seen it play out. Certainly, the CARES Act direct payments to individuals helped with repayment volume, but potentially hurt originations, and that's what we felt this quarter. And it's just -- it's a little bit higher margin. So even though our volume held strong, that was really driven by auto and the TriSource recovery, but auto is slightly lower margin than personal loans and then TriSource is lower margin as well.

Okay. So just so I'm 100% clear, to the extent that demand for these -- for personal loans has come back, you don't have a strong sense that it's being blunted in any way by tighter underwriting standards?

No. I think it's -- there may have been a short period where that happened, but I think that they've started -- our lenders started originating loans more aggressively, like I said, in August and September, and we're starting to see the repayment volume on that now.

From what we can understand, and again remember, we're not a lender, in that particular piece of our book it's a demand issue, right? That's a good thing overall for consumers. It means they have more cash. They were spending less cash, but we also think that that doesn't take longer term.

And our next question is from Peter Heckmann with Davidson.

Just to clarify, trying to back into some numbers here, but I think you've lapped TriSource. And then within the quarter, you'll lap CPS. And so in terms of thinking about just amount of acquired revenue in the fourth quarter, something in the kind of $5 million, $6 million, $7 million -- or $4 million, $5 million, $6 million, $7 million, is that about the right range?

Yes. In terms of the incremental revenue, that sounds about right. But we'll be -- we've included TriSource in our organic growth numbers for Q3 and basically pro forma'd them for Q3 of '19. And then yes, I mean, we'll do the same thing with APS in Q4. So they'll both be in the Q4 numbers.

Got it. Got it. Okay. That makes sense. And then just in terms of that opportunity with the captives, can you remind us when Mercedes-Benz was contributing a full quarter and how would you kind of size or think about the rest of the captives? And are there some current prospects you think are relatively higher probability for the next, let's just say, couple of quarters?

That was -- we started processing with them in May. And so they have been just continuing to ramp up and add volume each month. And so that's been going really well. We're seeing that continue each month, in that we are trying to have discussions with other captives just through our network of relationships in the auto space and our relationship with the card brands and others.

As you well know, those are really long sales cycles, and we have to sort of make sure that we're in the renewal discussions, and they may put out RFPs. So we're trying to get ahead of that and make sure we're in those discussions. And so that's where we are in terms of additional captives. But Mercedes relationship's now -- we've been now been processing with them for about, I guess, 4 or 5 months, and it's going really well.

And our next question is from Joseph Vafi with Canaccord.

I was wondering if you could maybe just kind of switch over to the integration side of the business. Clearly, a lot of M&A activity. Maybe get some thoughts here on, I guess to a certain degree, cost synergies from here, on acquisition activity. And I know you're putting stakes on the ground in some different payment volume areas of the economy. So also just wondering, to the extent that that provides or does not provide capability for more kind of tightly integrated technology integration on the back end. And then I'll have a quick follow-up.

Is the question about just integration of acquisitions?

Yes, integration, I mean, of the business side and if you look across your business and so far kind of integrating the various payment buckets into perhaps a single platform; or do you think you've got to run a lot of different stacks to address some of these different payment areas that you're focused on at this point?

Yes, sure. This is John. I'll take that. So actually, our integrations in the last 12 months are actually on track and on target. We -- starting with the APS, Ventanex and then cPayPlus, the first 2 have gone well, and we've integrated most of those through operationally. And then there's a few things we were changing on APS on the back end, including a [similar] piece related to our TriSource platform since they're more of an acquiring asset. That has been successfully done. So we're looking forward to going into 2021 with most of those pieces already integrated in.

And I think it's a great point on the technology piece. As we do future parity and we do -- we actually have -- we go in and look from a work stream perspective, we lay out work streams for all of our acquisitions to determine how we integrate them. And as I said, they're all on track from that perspective. But on the technology side, we also do work streams around future parity to understand how we get this top sale and ultimately sense that we are on track with all of those assets.

Sometimes, some of those, we're picking up really good technology, and we're also picking up some key integrations. So integrations will be as important as you -- even with technology, you have to work through your integrations. Those are critical to the whole seamless piece of the payment piece that we do. So those work streams are going well, as well. We, in the B2B on the AP automation side, we think there's opportunity to [integrate] some technology there.

And then as we -- as you heard me say as well to come together with a kind of one-stop shop and put those pieces together. That will take us a little while to put the one-stop shop piece together as there's integrations around some of that, but we see demand. We talked about earlier on this call, the cross-sell opportunity between the AR and the AP side and on the B2B side. So we're seeing that.

And our Ventanex acquisition, as you heard us talk about there, some of the mortgage, the intelligent routing, some of the platform pieces of that, is merely going to be additional features, and that's a plug-in to our overall technology because it does several great things that we needed the ability to do that. So very complementary, that becomes a part of our entire technology stack. So we continue to work all our work streams there. And our overall goal is to consolidate technology that makes sense. That ad technology that we buy is superior or complements well and then obviously sense that technology that possibly duplicates what we already do.

What's unique about us, I want to reiterate this, is we are a payment processor that also has a superior financial technology to integrate into these ERP systems. We have the ability to move and settle funds. We have -- we own our clearing and settling engine on the cards side as well as we own our own clearing and settlement engine on the ACH side and our ability to even print mail as well as checks. So we have a total end-to-end solution there as we continue to put our pieces and parts together with some of our acquisitions. We'll continue to finish that out and build those out in 2021. But overall, everything looks very good, and we're excited about the people as much as the technology assets in this.

I want to stress that we've said before, we don't always have OpEx synergies when we are acquiring fast-growing companies, and we're a fast-growing company. We acquire great people who help us continue to accelerate growth there. So this is why you suddenly will see us forecast any kind of OpEx synergies. Most of the time, it will be some type of processing synergy on that side. And you'll obviously continue to see us invest in technology because we think that's part of the winning formula or the moat that we'll build around our business and provide excellent solutions there.

Sure. That's helpful. And then just quickly, kind of the outlook for, let's call it, organic integrations, if you're looking into next year, some commentary around that. And then, I guess, penetration and user penetration in some of your existing integrations and the opportunity there.

In terms of software integrations, we now have -- you see that we've been able to accelerate those in recent quarters just because we have a lot more verticals to address, and then each of those verticals has their own unique software partners. And so that's something we've placed a lot of focus on recently and putting resources toward that. And so we think that's going to really benefit us longer term.

And a lot of those now are coming from our acquisitions because we're helping them with resources. They're -- oftentimes, we find during diligence that there's partners that they want to have but just have not been able to get them across the finish line or for various reasons not been able to actually sign them up, and we're now helping them do that. And so we think that's just one other example of being able to accelerate growth with these businesses we're acquiring.

And so there's -- in terms of the penetration question, a lot of them offer electronic payments within their customer base. There's a provider or several providers, but maybe not as focused on the particular vertical or not providing all the different channels we have from a payment perspective, for example, mobile or web or IVR. It may just be a simple web-based or phone transaction without the other channels. That's how we see ourselves gaining share, increasing penetration and not lose certain partnerships. So that's definitely a key distribution avenue for us, and it's something that we're very focused on.

Yes, I want to add to that in terms of we -- all of you, most of you, since you've known us, we almost -- we probably over-doubled that software integration partner list. With CPS, we're now at 119. Obviously, some of those were through acquisitions, but we think that's substantial. As we continue to build that out, that represents lots of prospective customers inside of each one of those integrations.

And I also want to emphasize, we continue to build out our supplier network. We're now over 50,000 of those with our recent acquisitions. We think that's going to be a great opportunity over time as we look to continue to build those out. That will have some long-term benefits to it as that network builds over time. That will create some -- I'm not sure it's really cross-sell opportunities as much as it creates some opportunity to -- we need to enhance existing customers or future customers as we bring them on if we already have a supplier network that services many of those.

Your next question is from Bob Napoli with William Blair.

A question on the mortgage business. Can you give a little more color on exactly what that -- the servicing, the transfer of servicing and the revenue stream, the recurring nature of the revenue stream and the opportunity that you see with the likes of Ellie Mae? I mean are you competing with Black Knight in that business? A little bit of color would be helpful.

Sure. So Black Knight is actually a software partner of ours. So they provide software to mortgage servicers, and so they are the software partner, just like Ellie Mae is just more focused on originations. So those would all be partners of us, not necessarily competitors.

And right now, that -- there's a lot of ACH payments happening there. It's become electronic, but it's still pretty heavy ACH. We are -- one of our initiatives is to convert some of that to card and increase card penetration, which would be an opportunity for us. And so it's a per-transaction-based revenue model. We want to convert it to more of a volume-based revenue model, and then we would pay a referral fee, for example, to a partner like an Ellie Mae or a Black Knight.

So Ellie Mae has about 4,000 mortgage originators using their platform. We get involved in the kind of initial closing of the mortgage, where there's maybe escrow fees or appraisal fees. There is the first payment. We would be involved in processing for that, and then there would be -- that would be transferred to a servicer most likely. And we could be processing the ongoing recurring payments with that servicer if they were our customer.

And so oftentimes, we're involved in that kind of complex refinancing activity, service transfer-related activity, where if it's not done correctly, it can create a lot of errors. And that's why we're trying to automate it and make it more efficient, and we get processing fees for that.

Okay. Then a question on the B2B payments business and the kind of the revenue and profit models between -- the difference between the revenue streams on the AR business versus the AP automation business. Like how much of that is -- is there software revenue on the AR side? Is it pure transaction on the AP side? How much difference is there in the revenue models for those each, the AR and the AP side of the business?

So on the AR side, it's a typical merchant discount rate. So we're doing merchant acquiring for businesses in a business-to-business, card-based transaction. So very similar model where we're charging basis points on volume and then maybe a per-transaction fee as well.

And then on the AP side, we are also getting bps on volume, but it's on the interchange. And so the -- we're basically on the issuing side, where interchange is our revenue, and we pay processing partners and then have -- and there's also rebates involved where you might pay rebates for virtual card usage, and that's the model there.

So it's also similar in the sense that it's basis points on volume. It's not subscription-based or a flat fee per month, but it's the interchange part of the transaction where we're getting the revenue versus on the merchant acquiring side for changes that cost us.

And also -- there's also the concept of enhanced ACH on the AP automation side, which would be a percentage of volume, and all that's designed to -- for seamless automation reconciliation and data transfers. So that's a version of that on the AP side. There's some of that as well on the AR side. And then there's normal just ACH transfers, where you may have large file transfers and even potentially the mailing of checks, which is automated as well. But predominantly, it's the first two [uses].

And then, John, the Instant Funding piece that you're launching, what kind of penetration rate do you expect? And what's the pricing on the Instant Funding, please?

Yes. Yes, that's a per transaction. So that's going to feel something like an ACH, but that's a per-transaction fee. So good margins for transaction, but it's not -- it would not be bps as a percent of the transaction there. We're seeing -- from our users that are using it, we're starting to see really strong activity there. We're still early on, Bob, just to kind of predict an exact penetration rate. But for our specific lenders that are using it, we're seeing really -- we're seeing month-over-month growth in their penetration rate there.

So I don't want to quote one just yet as we wanted to see a little more -- see how it's going. But we're seeing uptake, and we're seeing also more people using it. And just the automation piece, as you can -- just common sense, that's way more efficient. And so we're seeing that.

And our next question is from Timothy Chiodo with Crédit Suisse.

I want to dig a little bit more into the automotive captive opportunity. I know that last quarter and earlier on this call you mentioned as well, you've increased your addressable market, the analysis you provided in the slides to better account for this opportunity. You mentioned also earlier some of the RFP processes and renewal timing that you want to get ahead of. In that light, maybe you could just give us -- I'm not mentioning any specific, but when we look at the top 15-or-so automotive captives, what's the status quo? What are they offering now to their consumers to repay the loans? Is it set up in ACH, just one payment method? Is it not multichannel, omnichannel, et cetera? Maybe just give us a sense of what the status quo is.

Sure. So very large addressable market, and I don't want to give you quoted names or anything like that because it is various different cycles, but you hear me smiling. So it is longer sales cycles. So again, be patient here. But specifically across the board, there are some captives that merely is that you mail the payment in or it's an ACH, kind of what we consider an ACH automatic draft, and then maybe an ACH if they have an online presence. But those who would not be using many of the omni-channels, they would need (inaudible) for the omnichannel, meaning a complete IVR solution or maybe even a tech solution or a mobile solution as well.

So we think there's -- web presence is generally the first presence there. But the concept of 24/7 being able to take a payment, that still exists in some of those players. Definitely, the ability to take a debit card is -- there's -- that exists with a few that don't even take debit card. Now there are several who are -- or have been taking debit card. In that case, that would be a competitive win. But we have built certain features and functionalities to the auto relending space that we think can create winners for us. It's just a matter of timing, and we have to get there and then tell our story. Yes, we don't win everything, but there's plenty there. If we get our fair share, we should do well.

That sounds good. A quick follow-up. You've mentioned this just a couple of minutes back. I just want to dig into it a little bit. The enhanced ACH offering came over a little bit from CPS, and it's for use in accounts payable. Fully recognize that it allows you to send remittance data as part of the workflow and the process reconciliation, very important in accounts payable. Maybe you could just give us what the good use case is there. What's a good example -- sorry, like a good use case for that relative to traditional ACH or virtual card? In other words, when is a good time to use enhanced ACH?

I think if they're cost-conscious about virtual card fees but want more data and want a more efficient workflow, the balanced product is enhanced ACH, where it's not a straight ACH, so it doesn't -- the cost isn't as low, but you're also getting much better data quality and data transfer. So it costs a little bit more than a traditional ACH, but not the same as virtual card. And so there's just certain players out there that want that product and want that kind of balance in between, which is hence why that product exists.

And so -- but you also, from our perspective, can price it in a way that probably is more similar to a card transaction and make the economics a little bit better for us because the cost to us is lower. And so that's why it's become, I think, more popular and something that CPS has done a really good job with and we'll continue to, and we can now bring that to the cPayPlus customer as well.

Yes. That one-for-one, Tim, that you're aware of, listen, if you have a very large file, thousands of payments, right, and if you need 10 to 15 attributes per payment, if you were to get that file in bulk and it's all in ACH and you got 5 of those attributes, but now you've got to pay someone if you want to go find the other 10 attributes that fits your kind of need or would like to supplement in a world of big data, right, we can do those one-for-one exchanges, completely link it so it's seamlessly back into the ERP system.

There's a tremendous amount of man hours. It's about man hours, and it's about speed and it's about the whole digital experience. And then we obviously can move and sell the funds and let you know exactly where the funds are settling. And when they're settling, the whole reconciliation of -- you can imagine when does a check clear kind of concept, right? We can show how these various different movements are happening. It has tremendous value if you look at the man hours that could be spent in AP. And it eliminates and drives up certainty and drives -- reduces errors and drives down cost.

And our next question is from James Faucette with Morgan Stanley.

John, Tim, hey, I wanted to ask you, you mentioned that you're looking at some incremental or potential acquisitions, but still work to be done there. And you also indicated that you thought that diversification of the revenue stream, at least by end market type, et cetera, would most likely come through acquisition. I want to make sure I understood that correctly.

But on the topic of acquisitions, how much flexibility do you think you have in your balance sheet right now and in the capital structure to go do acquisitions? And I'm just wondering if you can achieve that diversification through a single acquisition. Or are we going to have to look at multiples to -- or acquisitions within the same area to get to the diversification that you might be thinking about?

Sure. So I think the comments around organic versus acquisitions from a diversification standpoint is just that it just takes more time organically to move the needle. And so although we have really solid organic opportunities in areas like mortgage and credit unions, that's just going to take time for those to be large enough to actually shift the mix, whereas an acquisition can happen right away. And as you've seen, a great example is B2B, where about a year ago, we were -- our percentage of B2B was 0%. We didn't have a business there. And now it's up to probably, call it, 25% with -- if you include CPS pro forma.

And so we'd be looking for other opportunities on the B2B AP side. We would now look at that like we did in merchant acquiring, where we're just out there acquiring new verticals, is one way to look at, or go deeper within existing verticals within AP. And so that's something that we would want to focus on, and that could bring that percentage of the overall mix up above 25%. So I think that was really the point of the comment.

But -- and then balance sheet-wise, we're at 2.3x net leverage today. We would feel comfortable going up to, call it 3.5 to 4x range for something very strategic. And so we have some flexibility there to do deals probably similar in size to what we've been doing. And then if it was something larger, we would have to tap the equity markets and look at that. So we have some flexibility to do more M&A. But if it was something larger, it wouldn't be all debt financed.

Great. That makes sense. And then quickly, I guess, you made -- you provided some color on the adjustments you made this quarter in commissions. I think previously you had mentioned your commissions are maybe a bit lower than industry because you control the merchant relationship. Do you expect that to be the case as you enter new markets? Or how should we think about that part of the expense group?

Yes. So we do -- we are very focused on rev shares. Historically we've been able to have, we think, lower-than-market rev shares. To your point, we -- as we enter some of these new markets, it will be more competitive, particularly if there's already an existing payment provider or several payment providers. But we try to structure those in a way that allows us to grow volumes with those partners and make sure that they benefit from that, but not destroy our own margins. And so we're focused on those deals.

And then we have the ability to restructure some of these commissions like we did this quarter, either with direct sales reps or with partners. And we can typically do that at very good attractive multiples, and we think that could make a lot of sense, too. So that's just another tool we could use if we felt like the dollars we're paying for commissions or residuals to partners were large enough, we could just look to restructure them and bring more of that cash flow to our P&L.

And our next question is from Mike Grondahl, Northland Securities.

Two quick ones. One, your pipeline of ISVs, does that kind of map the volume of the different verticals in your business? Or is there an area where maybe your pipeline is a little bit outsized compared to the volume?

And then secondly, just in the personal loan space, have you lost any lender customers kind of through the turmoil this summer?

So first question, I don't know that it maps one-for-one with the addressable market opportunities. It really is just more about where we're trying to focus resources. So there's still a lot of partners to get in auto, for example. There's still some we want in mortgage. There's a few (inaudible) market. And so we think of it kind of more strategically of where do we want to be placing resources and where do we want to find a way to accelerate growth and find new distribution versus just strictly mapping to the largest addressable market size. So I'd say it probably kind of loosely ties to that one-for-one.

And then in terms of personal, there's -- we've not lost any personal lenders. We're not aware of any that have been damaged to the point where they would be no longer lending or be out of business. It's just that some of their volumes have contracted as either they've tightened credit or demand was lower due to originations. But the larger ones that we're aware of and through our own monitoring and underwriting and we think that their balance sheets are still fine, and they've weathered this pretty well.

And we have reached the end of our question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a good day.

Thanks, everyone.

Thanks, everyone.