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Edited Transcript of RPAY.OQ earnings conference call or presentation 14-Nov-19 10:00pm GMT

Q3 2019 Repay Holdings Corp Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Repay Holdings Corp earnings conference call or presentation Thursday, November 14, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Morris;Co-founder and Chief Executive Officer

* Timothy Murphy;Chief Financial Officer

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Conference Call Participants

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* Brian Dean Hogan

William Blair & Company L.L.C., Research Division - Associate

* Craig Jared Maurer

Autonomous Research LLP - Partner, Payments and Financial Technology

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Mark Anthony Palmer

BTIG, LLC, Research Division - MD & Financials Analyst

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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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 filings related to today's results. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend 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 a reconciliation of these non-GAAP measures to the nearest GAAP financial measures can be found in our earnings release available in the company's IR site.

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

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John Morris;Co-founder and Chief Executive Officer, [2]

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Thank you, operator, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results. I'm pleased to announce another successful quarter. Our ability to deliver robust organic growth speaks to the strength of our people and the consistent execution of our strategy, building on our unique competitive advantages, including our integrated platform, proprietary technology and our comprehensive solution set.

We are consistently winning market share, and we continue to see strengths across our business. We are investing for the future, and we are delivering strong results for shareholders by pursuing highly strategic acquisitions, deploying new products and technologies and expanding into new verticals.

We are pleased with our results in the quarter, which included volume growth of 40% to $2.6 billion, gross profit growth of 39% to $19.4 million and adjusted EBITDA growth of 29% to $11.9 million compared to the third quarter of 2018.

During the quarter, we made strong progress across key growth categories. Starting with organic growth, we expanded usage, increased adoption of debit cards within our existing customer base as we continue to see the secular shift away from cash, check and ACH payments to debit cards. We continue to win new customers in existing and new verticals by leveraging our sales and marketing efforts with our open platform strategy to convert near-term pipeline of both merchants and software partners.

We added 3 software partners during the quarter, bringing our total number to 59. Software integrations are invaluable to our business. They enable our direct sales force to more easily access customer opportunities and respond to inbound leads.

In the quarter, we announced that we joined the Jack Henry Symitar Vendor Integration Program, providing access to over 800 credit unions. Participation in the program will provide us with connectivity to Symitar's technical resources to enable REPAY's proprietary payment platform to integrate with Symitar's Episys platform. The vendor integration program is designed to help ensure that Symitar's customers can easily deploy third-party products.

Finally, we continue to develop our business relationships and partnerships in Canada. As part of that effort, next week, we are excited to be a key sponsor and presenter at the Canadian Lenders Summit, an event that positions itself as a key platform to network with Canadian finance experts and to focus on tools, policies and fintech solutions that will provide measurable ROI for Canadian lenders.

As an organic initiative at REPAY, success in Canada is expected to require a multiyear commitment, but we continue to anticipate that we will see benefits from the effort in 2020.

We also remain focused on finding operational efficiencies across our business. In the third quarter, we continued to work with our various processing partners on ways to more effectively and efficiently grow volumes.

On the M&A front, as you know, during the third quarter, we completed the acquisition of TriSource Solutions, which provides back-end transaction processing services. So far, the integration of that business is going extremely well, and Tim will provide further color on this later out on this call.

Continuing with M&A, subsequent to the end of third quarter, we completed the acquisition of APS Payments, which significantly broadens our addressable market in B2B. APS, founded in 2008 and headquartered in Mesa, Arizona, is an integrated payments provider focused on B2B vertical. It fits our M&A strategy of acquiring high growth businesses with superior margins, a strong existing distribution model and the need for enhanced technology. We believe this acquisition provides us with the end market diversification, organic growth opportunities and the ability to leverage our technology capabilities. It also launches us into a brand-new vertical, the B2B market, which fits perfectly with our approach of our operating end markets that are large, fast growing and require a highly integrated solution. APS is capitalizing on the ongoing growth in B2B electronic payments as businesses continue to move away from paper checks.

APS goes to the market through key integrations with ERP platforms, including Sage, SAP, Adagio, Acumatica and AccountMate. These ERPs and accounting software systems have approximately $1 trillion in total annual payments, of which approximately $80 billion are card payments. APS' existing distribution methods and channel relationships are strong, but could benefit from our professionalization and resources. We believe the migration to REPAY's processing infrastructure could result in efficiencies and could facilitate deeper ERP integrations.

As we said previously, one of the benefits of the TriSource acquisition is that having our own back-end platform can make some of these acquisition opportunities more attractive and provide synergy opportunities that we didn't have previously. The APS acquisition is a perfect example of this.

Further, now that we have entered into the B2B vertical with the acquisition of APS, I would like to elaborate on the B2B solution and our value proposition, which provides incentives for commercial merchants, ERP partners and resellers to drive continued long-term growth in B2B electronic payments.

Our payment technology ecosystem processes customers' accounts receivable payments, primarily of our credit and debit cards. In addition to the transaction processing, our technology interfaces with the ERP platform to seamlessly present the invoice to the paying merchant.

Commercial merchants are increasingly demanding the ability to pay with credit and debit cards as card payments are quicker, more efficient and lead to reduced merchant-side error rates relative to paper checks. Additionally, the ERP integrations result in personnel efficiencies for the merchant as our solutions eliminate the need for dual payment entry and merchant-side error correction processes.

Lastly, our level 2 and level 3 processing capabilities enable B2B customers to significantly reduce the cost of card acceptance. Importantly, our B2B solutions also benefit ERP partners and resellers by enabling them to deliver enhanced products to their customers.

To conclude, the highly integrated nature of our B2B solutions, coupled with the secular shift within the B2B space from paper checks to card payments, results in strong retention statistics and card payment volume growth. We remain excited about our B2B business, and we'll continue to enhance our technology and broaden our distribution as more and more merchants transition away from paper checks to card and other forms of electronic payment.

Just to wrap up. This quarter was a successful one on executing our growth plan, and we are very pleased with our Q3 results. We're excited to have completed 2 strategic acquisitions over the past few months and have a very active M&A pipeline, which our in-house corporate development team continues to regularly evaluate.

I will now turn the call over to Tim to discuss Q3 results. Tim?

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Timothy Murphy;Chief Financial Officer, [3]

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Thanks, John. Now on to our Q3 results. As mentioned, REPAY delivered another strong quarter across all of our key metrics. Card payment volume was $2.6 billion, an increase of 40% over the prior year's third quarter. Total revenue was $41.1 million, an increase of 27% over the prior year's third quarter.

I'd like to also point out that Q3 results were up versus Q2. Our total revenue take rate during the quarter, excluding TriSource, was 1.62%, which is consistent with what we previously discussed. Including TriSource, our combined take rate was 1.57%. TriSource contributed $3.4 million of revenue during the third quarter.

Moving on to expenses. Interchange and network fees were $14 million compared to $12 million in the third quarter of 2018. The increase was primarily due to increased card payment volume, which leads to higher interchange and network fees. Other cost of services were $7.6 million compared to $6.3 million in the third quarter of 2018. The increase was primarily due to the addition of TriSource. However, when excluding TriSource, the amount was down in Q3, consistent with trends in prior periods.

Gross profit was $19.4 million, an increase of 39% over the prior year's third quarter. As a reminder, this is a key metric for us as this is how we price new customer deals and our sales team and incentive structure is based on gross profit. We continue to experience expanding gross profit margins versus prior years.

SG&A was $55.1 million compared to $6.1 million in the third quarter of 2018. The increase was primarily due to transaction costs related to the closing of the business combination with Thunder Bridge and stock compensation expense related to new equity issuances.

Third quarter pro forma net loss was $41.4 million compared to net income of $3.7 million in the third quarter of 2018. The decrease was mainly the result of increased SG&A for the reasons just mentioned.

Third quarter adjusted net income was $10.4 million or $0.18 per share compared to $7 million in the third quarter of 2018.

Lastly, third quarter adjusted EBITDA was $11.9 million, an increase of 29% over the prior year third quarter. Third quarter adjusted EBITDA as a percentage of processing and service fees was 44% compared to 45% in the prior year third quarter. This slight decrease is primarily a result of additional costs related to becoming a public company, such as new legal, accounting and tax resources.

As you all know, on July 11, we completed our business combination with Thunder Bridge. And on August 14, we announced the acquisition of TriSource. On October 14, we announced the acquisition of APS Payments for up to $60 million, of which $30 million was paid at closing and the remaining $30 million may be payable through performance-based earnouts. The APS acquisition was financed with the combination of cash on hand and proceeds from borrowings under REPAY's existing credit facility. Combined pro forma net leverage is expected to be approximately 3.5x on a post transaction basis.

Moving on to our full year 2019 outlook, which includes expected contributions from APS. The difference between the previous guidance and the updated guidance is solely related to the contributions from APS. Card payment volume is anticipated to be between $10.1 billion and $10.25 billion. Total revenue is anticipated to be between $160.5 million and $165.5 million. Gross profit is expected to be between $76.8 million and $78.8 million, and adjusted EBITDA is expected to be between $46.8 million and $48.3 million.

I also want to give you an update on our share count. As of September 30, 2019, we had approximately 57.5 million shares outstanding on an as converted basis. As noted in the earnings release, subsequent to the quarter end, REPAY issued or released an additional approximately 5.2 million shares resulting in approximately 62.7 million shares outstanding on an as converted basis as of today. We posted an updated investor presentation to our IR site, which includes a slide that lays out our share count.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mark Palmer with BTIG.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [2]

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Very nice quarter. With regard to the M&A pipeline that you mentioned as being active, if you can talk a little bit about what areas you're potentially focused on and, in particular, the extent of which an expansion of the B2B vertical may be a part of that.

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Timothy Murphy;Chief Financial Officer, [3]

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Mark. Yes. So we are focused on M&A across a variety of verticals, both existing and new. As we've talked about, we're actively in discussions with various targets in all of those verticals. And we do have -- we do see opportunities in B2B, others and competitors of APS that could be interesting for us and allow us to expand in that vertical. So we're exploring that as well.

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Mark Anthony Palmer, BTIG, LLC, Research Division - MD & Financials Analyst [4]

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Okay. And with regard to Canada, you went live in the second quarter. If you could put that opportunity into perspective, what it could mean in terms of contribution starting in 2020.

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John Morris;Co-founder and Chief Executive Officer, [5]

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Sure. So Canada, as you are aware, we just went into Canada organically this year. And we think our commitment, and when we're going into a new vertical and even in a new market, would -- is a 2- to 3-year commitment. So it is our first year. We're continuing to build our ecosystem around that, both front and back-end as well as our integrations to their various software integrated partners. And that takes a little bit of time. We are obviously building our potential client list and pipelines associated with that as well.

We like all the signs that we see for the reasons we wanted to go there. Those all still exist. We're still excited about that. As far as 2020 goes, we think it will be year 2 into that investment. We think that we will see some important movement there as we continue to bring on potential new customers. But I would say it would be in the latter part of 2020. And then, obviously, in year 3, if we're talking just organically, we see that being the higher probability of contribution.

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Operator [6]

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Our next question comes from the line of Mike Grondahl with Northland Capital Markets.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [7]

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First question, the 3 new software partners get you to 59. I'm assuming Jack Henry is one of those with the credit union connection. What area or niche are the other 2 in?

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Timothy Murphy;Chief Financial Officer, [8]

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Yes. So -- Mike, yes. So the other 2 are in the auto vertical. And so as we've talked about, we're very focused on that from a sales perspective and we have our sales team as well as our partner relationship manager focused on adding new auto relationships.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [9]

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Got it. And both of the other 2 software partners were auto?

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Timothy Murphy;Chief Financial Officer, [10]

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Yes.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [11]

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Okay. 2 in 3. Okay. And then any high-level comments just on the personal loan market and the auto market, just kind of what you're seeing incrementally out there?

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John Morris;Co-founder and Chief Executive Officer, [12]

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Yes. So we've seen great activity across all of our verticals. All of our verticals are -- we see strong progress all the way across all verticals in personal loan, including auto as well. We continue to have a strong organic sales pipeline there with contributions from each one of those verticals. And we're excited about even our fourth quarter associated with that.

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Operator [13]

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Our next question comes from the line of Craig Maurer with Autonomous.

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Craig Jared Maurer, Autonomous Research LLP - Partner, Payments and Financial Technology [14]

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Regarding the guidance, the -- despite the strong result, the underlying guidance was not increased. Could you discuss why that was? Was that related to take rate pressure from auto or cost of being a public company, et cetera, which I would imagine you would have known about already? And secondly, there are 2 very large auto players out there that you guys don't have, Credit Acceptance and Exeter. Could you talk about whether either of those guys might be in your sales pipeline?

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Timothy Murphy;Chief Financial Officer, [15]

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Sure. On the guidance point, as you've seen, we feel like we had a very strong quarter and we feel good about the remainder of the year. We did want to make it clear that we are updating the ranges for the APS contributions not because we see any weakness in the core business, just because we wanted to remain conservative for the remainder of the year. That being said, look, we do feel positive about it and feel really good about this quarter as well.

And then in terms of the large auto opportunities, we have had discussions with those, and they're in various stages, and that -- those are definitely in our pipeline. It's something that we're targeting for 2020.

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Operator [16]

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(Operator Instructions) Our next question comes the line of Brian Hogan with William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [17]

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First question is actually on the capacity for additional deals now as you've done TriSource and APS and you're leveraged at 3.5x. What is your capacity considering your active deal pipeline?

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Timothy Murphy;Chief Financial Officer, [18]

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Yes. So we do have some capacity under our existing credit facility. We have cash in the balance sheet. And as you've seen historically, we're buying businesses that have EBITDA and are growing very quickly. And so as we ourselves delever, we'll find additional capacity and in those businesses that we're acquiring will provide further capacity. And as -- they'll continue to accelerate growth as well.

And so we do feel comfortable at 3.5x. If something was very strategic, we may consider going slightly above that with a target of deleveraging back down closer to 3x within 6 to 12 months. And so we do feel like there is room for additional M&A.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [19]

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All right. The next question is actually, considering your acquisitions of TriSource and APS, what do you feel your long term -- has your long-term growth rates, kind of targets, changed? I mean I think you were targeting maybe high-teens organic growth rate. Has that changed with the APS given the substantial market opportunity? Or are you still targeting around the high-teens?

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Timothy Murphy;Chief Financial Officer, [20]

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Yes. So that's -- APS is growing a little bit faster than our business. But it will be a fairly minor contribution to the pro forma combined business. So we do think there's a potential for a slight pickup in growth rates, but we would still target the high-teens.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [21]

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All right. And then last question for me at the moment is actually the gross margin came in at 72% or so. Is that a margin that's go forward levels? Or was there kind of nuance in there given obviously there's moving parts of the TriSource and take rates and what have you? I'm just going to get some color on what the go forward should be.

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Timothy Murphy;Chief Financial Officer, [22]

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Yes. And so if you have seen our disclosures, TriSource's gross profit margin is about 50%. And so although it was a fairly small contributor, that was part of that. And we would expect that given APS' margin profile, that will probably stay consistent for the next few quarters and then potentially be able to expand toward the end of next year. That being said, both these acquisitions are driving additional gross profit dollars. So we feel good about where we are in margins and still feel like there's room for expansion as we realize some of the synergies from APS and as we continue to decrease our processing costs.

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Operator [23]

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Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [24]

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I apologize. I jumped on late, so I'm sure you've covered some of this. But let me just start with congratulating you on the acquisition. And maybe you could talk strategically about how you think about the exposure to B2B at this point and where you think you're going to be able to start to make an impact in maybe some of the operational positives that you're taking from your current business into that environment.

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John Morris;Co-founder and Chief Executive Officer, [25]

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Sure. We are actually very excited about that as a new vertical for us. We think it's a very large TAM and lots of opportunities there. Just with many of the sub-verticals, as you can see, we're integrated with several of the accounting softwares, which will lean toward some of the small businesses, but also kind of the small to midsized ranges where we're at. B2B in itself is a very large space. We think that if we continue to invest in sales as well as technology, which is something we think we have a core competency in, we can continue to expand that with them, add more resources there. There's several more integrations we think we can do. We can team up with several additional channel partners in the B2B space. We think we can continue to accelerate our growth organically there. And we obviously see some possible opportunities out there in the inorganic side of that.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [26]

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Got it. And then just, Tim, a question for you. Just from a modeling perspective, what should we think or how should we think about kind of sequential versus annual? And anything you'd point out specifically around modeling that you'd want the investment community to know sort of going forward from the acquisition or otherwise?

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Timothy Murphy;Chief Financial Officer, [27]

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Yes. I mean like we've talked about, take rates have come down slightly as a result of TriSource and APS. We've been consistent with that. And so you'll see that it was down slightly in Q3. It's not anything to do with the core business. Our core business was at 162 basis points, and so that's actually a little bit higher than we had discussed previously.

But the take rate may continue to come down just because of the profiles of APS and TriSource. But as we talked about, we focus on gross profit. We still feel strong about gross profit margins and gross profit dollars. And then I'd say also just in terms of the adjusted EBITDA margin, so slight tick down from adding public company costs, which is something we've mentioned previously. We will continue to invest in the business for growth in terms of sales and technology. So I'd say adjusted EBITDA margin of 44% is consistent with what we would expect going forward.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [28]

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Got it. And then the last one for me. As you look at expanding the business strategically, should we expect more opportunistic acquisitions within the core or outside the core or both? I'm just wondering if there's more kind of to do within sort of the core business or B2B or are you open to finding the best ROIs.

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Timothy Murphy;Chief Financial Officer, [29]

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Yes. We're always looking at opportunities across verticals. I mean there are opportunities with the existing verticals. And certainly as I mentioned earlier within some of the competitors in B2B. So -- but that we don't want to limit ourselves to our existing verticals because we do think there are attractive opportunities out there that I think -- and new verticals that will provide really strong returns.

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Operator [30]

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Our next question comes from the line of Brian Hogan with William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [31]

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One more kind of follow-up question. And actually, do you have any comments, any changes in the competitive dynamics of the markets you focus on, your core markets, in particular, and just kind of discuss your -- obviously, it's a massive market, but the B2B payments and who your primary competitors are focused there?

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Timothy Murphy;Chief Financial Officer, [32]

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Yes. We don't see any new competitive threats. I mean the players that we've discussed previously, ACI, they're still a competitor, but nothing has changed in terms of that dynamic. And then in B2B, there are a couple that we are running up against in these ERP integrations. But we think with our fin technology, we can actually expand within some of these existing integrations and win new business. And then that creates potential M&A opportunities as well. So there's no new threats, and we'll -- as we go deeper into B2B and more and more about that business, I'm sure we'll gain more insights.

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Operator [33]

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Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Morris for any closing remarks.

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John Morris;Co-founder and Chief Executive Officer, [34]

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Yes. Thank you so much for your time today. We, again, are encouraged by our third quarter results of how the business has continued to perform well. We're excited about our business. We're excited -- grateful for our customers and we're looking forward to a positive fourth quarter and as well as a positive 2020. Thank you for your time today.

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Operator [35]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.