Paya Holdings Inc.

Good morning, ladies and gentlemen, and welcome to the Pi Media Holdings, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone should require assistance, please press star and then zero on your telephone. A question-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Matt Humphreys. Head of Investor Relations at Paya. You may begin.

Good morning, and welcome to the Paya First Quarter 2021 Earnings Conference Call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations, and beliefs, including financial guidance, the growth of Paya's business, our objectives and business strategies, as well as other forward-looking statements. Please refer to the disclosure at the end of the company's earnings press release in Form 8K filed with the SEC today for information about forward-looking statements that will be made or discussed on this call. All statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that will occur after this call. You can learn more about the specific risk factors that could cause our actual results to differ materially from today's discussion in the Risk Factors section of the company's Form 10K filed with the SEC on March 8, 2021 and in subsequent periodic reports that the company files with the SEC. Also during the call, we will discuss certain non-GAAP measures of our performance. GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release in the 8K filed with the SEC. This call is also available via webcast. You can find all the information I have just described in the investor relations section of PIA's website. Please note we posted a supplemental first quarter 2021 presentation to the investor relations section of the PIA website. Joining us on the call today are PIA CEO Jeff Hack and CFO Glenn Renzulli. Following their prepared remarks, we will open the call to your questions. With that, let me turn the call over to Jeff.

Thank you, Matt, and good morning, everyone. Thank you for joining us today as we discuss our first quarter 2021 financial results and our recently announced acquisition of Paragon Payment Solutions. The Paragon acquisition marks our fourth acquisition, which follows our playbook of executing strategic M&A of integrated payment providers in attractive verticals, serving as a powerful complement to our organic growth strategy. Let's begin with a discussion on the Paragon transaction, and then we'll turn to our quarterly results. Paragon is a growing integrated payment solution provider based in Tempe, Arizona, that focuses primarily on serving the unique needs of the nonprofit and healthcare verticals. Paragon brings to PIA some terrific partners and unique capabilities that complement PIA's existing solutions in these verticals. Annual payment volume is approximately $1.5 billion, and importantly, Paragon has been one of PIA's distribution partners since 2011. Similar to PIA, Paragon has a robust omni-channel offering, a partner-centric distribution model, a payment agnostic platform, including ACH, and a high card-not-present mix, which makes this a highly additive acquisition. Given our longstanding relationship, we have a very solid understanding of Paragon's business model, capabilities, talent, and culture. The nonprofit and healthcare verticals Paragon primarily serves are very attractive to Paya, as they are still highly underpenetrated from an integrated payments perspective and continue to grow at a double-digit annual rate. With an attractive roster of growing ISV partners, the acquisition will expand PIA's existing ISV partnership base, providing additional opportunities to drive penetration rates higher and continue to elevate the PIA brand within these verticals. All told, the acquisition of Paragon allows us to further expand and strengthen our strong positioning capabilities in these key verticals while positioning us to deliver future growth. Going forward, as we have in past transactions, we're focused on reinvesting the highly visible synergies back into sales and marketing, which will accelerate the growth at Paragon and allow the business to naturally scale while delivering accretive returns. Len will cover the financial details shortly, but suffice to say, we're excited about this transaction and will look to leverage Paya's existing infrastructure and capabilities to accelerate Paragon's growth. Our integration efforts are well underway and we're making solid progress, despite closing the transaction a few short weeks ago. At the same time, our pipeline for accretive near-term strategic deals remains strong. Combining this actionable pipeline with the successful capital raise we completed on March 22nd, we have the flexibility and the capacity to accomplish additional strategic M&A to further accelerate our growth strategy. Now, let's review PIA's strong first quarter results. Payment volume grew 24 percent in the first quarter to $9.5 billion, led by 62 percent volume growth in our proprietary ACH solution and 6 percent growth in card volume, even with one less business day in the period versus 2020. We saw notable strength in key verticals led by B2B and government. Total revenue grew 12.4 percent to $55.3 million, primarily driven by strong ACH growth and solid momentum in our integrated card business. Adjusted EBITDA grew 40 percent to 14.8 million, while adjusted EBITDA margins expanded 520 basis points year-over-year to 26.8 percent. It is worth noting that the year-over-year growth rates are even more impressive given that Q1 2020 was a strong quarter with minimal pandemic-related impacts. Now I want to share with you some of our recent product innovation that highlights the focus we have on delivering value-added services to our partners and clients. As Sage's U.S. preferred payments partner, we released advanced new features that enhance the Sage 100 and Sage Intacct solutions, supporting both card-present and card-not-present transactions that increase user productivity while deepening our integration into Sage's software suite. Specifically, we introduced new enhanced customer portals and e-invoicing capabilities for Sage 100 users, allowing for further automation of the collection and reconciliation process for CAR ECH payments. We also delivered turnkey EMV capabilities via Paia's Cloud EMV solution to Sage Intacct users, which reduces hardware setup and compliance complexity. We take great pride in our approach to delivering tailored solutions to our partners. And as such, we also delivered a new merchant boarding solution this quarter. The solution offers boarding optionality, giving our partners enhanced flexibility in how they want to engage with their customers. By offering a more streamlined and efficient experience, our partners can accelerate their speed in monetizing payments while also delivering a higher level of satisfaction for the end user. And finally, we went live with our new modern citizen-facing municipal portal, featuring an intuitive UI and enhanced tools and features built off our flagship Piya Connect solution. This continued innovation and focus on customer experience continues to be a hallmark of our approach at Piya and serves to differentiate ourselves in the market. While these new features and improvements are vital in driving adoption and deepening penetration, our go-to-market efforts remain essential to deliver return on these investments. Recently, we launched and scaled numerous engagement campaigns with some of our key partners as we focus on accelerating penetration levels within our partners' customer base. In just the first month of one of these campaigns with a select nonprofit partner, we saw a threefold increase in the number of new clients signed. We've also dedicated additional resources to co-marketing with newer partners, focusing on accelerating partner production. And finally, in our government vertical, we had some noteworthy wins against long-established and well-known incumbents that are currently in various stages of implementation. These actions and recent wins will lay the foundation for continued growth over the next few years while further deepening our integration within our partners' software suites. With that, I'll turn it over to Glenn to walk you through the financials in more detail, as well as cover our outlook for 2021. Glenn?

Thanks, Jeff, and good morning, everyone. As stated, we're pleased with our first quarter financial results and the momentum we're seeing in the business. Total payment volume in the first quarter was $9.5 billion, an increase of 24.1% year-over-year. ACH volumes up 62% with ACH transactions growing 34%. Card volume growth also accelerated in the quarter, up 6% versus the prior year. Importantly, we saw strong growth in our B2B and government verticals. Our volume performance was notable given we had one less business day in the quarter versus the same period last year, and as a point of reference, Q1 is typically our lowest volume quarter of the year. Total revenue in the quarter was $55.3 million, an increase of 12.4% versus last year. From a segment perspective, integrated solutions revenue was $32.9 million, up 12% year-over-year, led by growth in our ISV channel and our government verticals. Payment services revenue was $22.4 million, up 13% year over year, driven by broad strength within our ACH solutions, combined with a full quarter benefit from a large ACH conversion. Gross profit for the quarter was $29.1 million, up 18.2% year over year, with gross margin of 52.7%, up 260 basis points, Integrated Solutions' gross profit of $18.2 million was up 17% with gross margin expanding 260 basis points to 55.3% driven by positive contribution from TPG and favorable mix. Payment Services' gross profit of $10.9 million was up 19% with gross margin expanding 240 basis points to 48.8%, with ACH continuing to drive gross margin expansion in our payment services segments. First quarter adjusted operating expenses came in at $14.3 million, as expected, as we focused on building out our talent to support future growth while layering in incremental public company costs. For the second quarter, we expect to see operating expenses step up moderately due to incremental expenses related to our Paragon acquisition as well as certain public company costs. We also expect certain expenses to layer back in that were temporarily reduced in 2020 due to COVID. Adjusted EBITDA in the quarter was $14.8 million, up 39.6% over the prior year. Adjusted EBITDA margin expanded 520 basis points to 26.8% as we continue to see favorable operating leverage as our business continues to grow and scale. Finally, GAAP net income for the quarter was $1 million versus a loss of $0.6 million in the prior year. Adjusted net income was $9.2 million for the quarter. Regarding our balance sheet and statement of cash flows, at the end of the first quarter, we had $134 million of cash and $228 million of gross debt with a net leverage ratio of 1.65. Our cash position reflects the proceeds from the primary equity offering that was completed in March but excludes cash paid for Paragon subsequent to the end of the quarter. With the March equity offering, we raised $117 million net of fees, further strengthening our balance sheet and giving us more flexibility to pursue a creative M&A. You should expect us to continue to focus on strategic M&A as a key pillar of our growth strategy going forward. Net cash provided by operating activities in the quarter was $3 million. And finally, our share count at the end of the first quarter was 126.7 million shares outstanding. inclusive of approximately 5.7 million earn-out shares that have not yet met issuance thresholds. Our supplemental earnings presentation provided this morning contains an illustrative walkthrough of our share count at the end of the quarter, as well as at various share price levels, in order to provide additional detail on our equity capital structure. Turning to our recently announced acquisition of Paragon Payment Solutions, I want to echo Jeff's excitement and provide some financial details on the transactions. First, the total consideration paid at closing was $27.5 million, comprised of $20 million in cash and $7.5 million in Class A common stock. Also, there is an earn-out in place of up to $5 million, consisting of half cash and half stock, that is payable upon the achievement of certain future growth objectives. For full year 2021, we expect a high single-digit million-dollar revenue contribution from Paragon. We also expect the transaction to be net neutral to adjusted EBITDA in 2021. We expect Paragon to be highly accretive with visible synergies which we are already making solid progress against. As such, for 2022, we expect the transaction to contribute approximately $2.5 million in fully synergized adjusted EBITDA. Turning now to our revised full-year 2021 financial guidance, we are raising our total revenue range to $242 million to $248 million reflecting 19% growth year-over-year at the midpoint, driven by a combination of overall business performance and the incremental Paragon contribution. Our gross margin and adjusted EBITDA ranges remain unchanged from prior guidance. That concludes my prepared remarks. I'll turn the call back over to Jeff to close us out. Jeff?

Thank you, Glenn. We've started the year off on a strong note and have accomplished much in a short period of time. While we're pleased with our recent financial performance and excited about our acquisition of Paragon, we remain focused on the opportunities ahead. We're committed to delivering against our growth initiatives, and you should continue to expect us to seek out further inorganic opportunities to complement our attractive organic growth profile in terrific high-growth end markets. Once again, I'm reminded that the support of our employees, both existing and our new colleagues from Paragon, our software partners, and our shareholders reinforce our ability to quickly execute in order to maximize value creation. We appreciate your continued support and thank you for joining us today. With that, operator, we're ready to take questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bob Napoli from William Blair. Your line is now open.

Thank you. Good morning, Jeff and Glenn. I appreciate the opportunity. Nice job on the quarter and interesting acquisition. I was wondering if you could give a little color on how the business trended through the quarter and then into April. I know your business, Jeff, was not nearly as affected as many other companies by the pandemic. But did you see – have you seen any acceleration in trends or any notable items you could call out related to economic acceleration?

Glenn, you want to – well, good morning, Bob, and thank you. Glenn, you want to speak to the trends through the quarter?

Sure, happy to do that. This is Glenn. Hey, Bob. Yeah, we certainly did. You know, I think, like you said, yeah, it's important to note that our, you know, trough was kind of better than others last year, right? But we saw great, good momentum coming out of the Q1 quarter. So March was the, you know, highest month in the quarter and saw good trends. And then for April, we actually, in our card business, saw volume north of 30% year over year. So, you know, we were, we did obviously have impact last year, right, which aids that. We continue to see kind of a good start to the second quarter with a 30% plus year-over-year growth in CARD in the month of April.

Great. Okay. Thank you. Appreciate that. And then, you know, you called out the B2B segment and the government segment as areas of particular strength. Any subverticals in there that stood out for you?

Yeah, sure. Happy to take that one as well. This is Glenn. Yeah, no, I think the ones that are – look, I think everything seems like it's improving across the board, which is great. The, you know, the contractor construction side, the, you know, hardware equipment supplier part of our business on the B2B side is certainly continuing to see acceleration. That's aided by some of the macro things going on, right, when you think about You know, housing and some of the spend going on and the manufacturing side, that's, I think, helping that. The other components, we have some really strong partners in that area, which also helps. But that's probably the, you know, one of the larger highlights at the moment as far as momentum.

Thank you. And then just last question on the M&A front. I mean, Paragon being a partner, it makes it an easy integration, I guess, and a low risk. transaction. Are many of the transactions that you're looking at partner-related? Is that the key hunting ground, if you would? Bob, it's Jeff.

That's a very good question. The vast majority of the pipeline are not of that type, but there are some terrific opportunities within existing partner bases, and we obviously pursue those enthusiastically. It's a nice if you will, it makes a good transaction even better if you really understand their business, you understand the quality of their solutions, the quality of their team, and obviously understand from an integration point of view how to make the most of the asset. So they do present, and there are certainly some in the pipeline, but not the majority of the pipeline.

Thank you. Appreciate it.

Thank you. Our next question comes from the line of David Tuga from Evercore ISI. Your line is now open.

Thank you. Good morning. If we exclude the high single-digit million revenue contribution anticipated from the Paragon acquisition, is there any change in your 2021 revenue guide recognizing that high single-digit could be anywhere between $7 and $9 million?

Yeah, no, good question. Thanks, David. This is Glenn. No, no change. That's essentially what we're doing is kind of reiterating our guidance and just layering in the impact from the acquisition.

Thanks for that. And then is there any apples to apples change in the take rate either versus the fourth quarter of 2020 or Q1 of 2020 if we adjust for the 62% growth in ACH volume, in other words, on an apples to apples basis? Is take rate changing at all?

Yeah, no, good question. Thanks. This is Glenn again. Yeah, take rate improved in card for the quarter both sequentially and year-over-year. So we didn't see a huge lift there because it really wasn't a large pricing quarter for us, but we did see a slight uptick in card spread, which was encouraging. And on the ACH side, from a spread perspective, pretty much stability when you think about it sequentially. from Q4 to Q1. So you kind of see it in the overall spread number as well.

Great. And then how should we think about potential revenue contribution from the accounting suite partnership over the next 12 months? Is that materially positive to the revenue outlook?

So, David, it's Jeff. So generally, I think you know this. You will not hear us speak to the individual contribution or, you know, of any one partner. I would say, you know, look in totality at the deals that we have announced, and we've talked about the fact that some of them, depending on the nature, can ramp as quickly as the first quarter post-signing. Larger deals can take two or three quarters to respectively layer in.

Understood. And just finally, you called out strength, Jeff, in the acquisition pipeline. Any specific call-outs in terms of likely near-term closure of acquisitions? Any specific verticals that stand out?

Yeah, so great question, David. It's Jeff again. A couple things. First of all, the pipeline itself, is very strong. Within the pipeline, the next leg is how much of that pipeline is actionable in the near term. And I would say that feels about as strong as it has in a long time. So actionable pipeline good. In terms of the categories, it runs the gamut. It runs the gamut of size. It runs the gamut of traditional strike zone integrated payments. There are some terrific deeper software capabilities that meet payments in the pipeline, and then obviously there's always some really unique assets that present as well. So it really is across-the-board strength, and I can't point to anything in the pipeline that I wish were fuller. The quality is good, the quantity is good, the actionability is good, and we are very excited and focused on finding the next right opportunity and getting it done.

Understood. Actually, just one quick final one. With economic reopening, you and Glenn called out strength in B2B, especially construction, but are there any call-outs that you see in terms of consumer behavior changing with economic reopening? Are you seeing even more of a shift towards your online business? Any call-outs in terms of card presence volume?

So I'll let Glenn speak to the volume item itself, but I would remind folks that our card mix today is already 87% card not present. So the vast majority of our business is geared to middle market, business-to-business types of activity, you know, rather than the in-person. And I would also remind you, even within card presence, You know, if it's paying a utility bill, just to pick a simple example, it's not really, you know, driven by the market cycle. So overall, you know, are we a beneficiary of consumer physical reopening? We are on the margin, but it's not a primary driver of our momentum.

Yeah. Okay. Thanks so much.

Thank you. Our next question comes in the line of John Davis from Raymond James. Your line is now open.

Hey, thanks. Good morning, guys. I just wanted to start off with a couple of follow-ups on Paragon. I apologize if I missed it, Jeff and Glenn, but did you guys give a growth rate for how fast that business is growing today and maybe expectations for what it could look like under Paya?

Yeah, this is Glenn. We didn't disclose that, John. But, you know, it is going to be a growing area for us. They bring some really nice feature sets and partner relationships on the ISV side. So we're confident that we can – look, it was growing coming in to Paya, and we're confident we can kind of accelerate that. They have a really strong commercial team there that we're looking to tap into as well. So we're excited about it. And, you know, I don't think we're going to give you the exact growth number, but, you know, we think it can grow nicely for us.

Okay, and then on the synergy side, is it $2.5 million? Is that all costs or any sort of revenue synergies would be upside? And then I think you've already said you're kind of well on your way on integration, so any chance some of those synergies could slip into this year? Because I assume it was a business unprofitable before, and so upside synergies this year would just get you to break even or just maybe to talk a little bit about that would be helpful.

Yeah, that's a good question. This is Glenn again. The answer is, yeah, they're primarily on the cost side. So, you know, the good news about that is they're, you know, high visibility. Right. Um, and to your question about this year, I think, yeah, I think it's a layering impact this year. Um, so we're trying to be, you know, uh, conservative and make sure we don't, um, uh, you know, get too aggressive in the timeline for those synergies. But again, the visibility strong, we're, you know, highly confident in what that's going to mean to next year's numbers. And, you know, it'll be a process this year. Um, and we'll see kind of where we get through, get to in the second half. Um, from a Synergy perspective. But we have a good line of sight into it.

Okay, great. And then maybe another one for you, Glenn, just organic growth. I think it's about 11% in the quarter. My message is to get to your guide. That kind of needs to step up to roughly 16% for the rest of the year. And so I'm just trying to think about, on average, how should we think about the cadence of organic growth after laying in these acquisitions for 2Q through 4Q? Because, like, you know, your comps actually get more difficult, which I think is different than most of your competitors.

No, good question. Look, I think, you know, like we said, the second quarter is already showing some good momentum, right? It's early in the quarter, so we want to be careful with that. But so far, so good there. We also have some of our biannual pricing actions that take place as well in April here, so that will provide some nice lift. Uh, you know, we have our government, um, partner, one of our larger government partners layering in right throughout the year. So seeing some good momentum there as well. Um, so yeah, each, each quarter kind of can continue to see the step up. We've talked about Q1 being a low seasonal, uh, quarter as well, which helps on the sequential. So, um, we still have a good line of sight into and feel good about kind of where we've, uh, where we've put our guidance.

Okay. And then last one for me, Jeff, maybe this is a higher level question. If I think about ACH specifically, I think it's really important in some of your verticals, which may be a little bit different than some of the other larger public peers. So just talk about your ACH offering, how that's competitively differentiated, and where you're kind of winning that ACH share. Because people think ACH, they think legacy, but you're replacing a lot of checks in some of these verticals, like government education. I just want to understand your ACH offering and how it's set up competitively in the verticals in which you play.

Yeah. Thanks, Sean. That's a great question. This is Jeff again. So think of ACH in two different ways. So first of all, I think you all understand the breadth of our middle market franchise, larger average ticket in the verticals we always talk about. So for many of those folks, the ability to bolt on ACH into the integration to solve for the larger tickets that are never going to be cost-effective on a card, that is prime hunting ground because you're basically widening the net of an existing partner and existing integration and allowing them to both serve more customer needs, their customer needs, as well as, you know, monetized payments. So think of that as integrated ACH as the companion to integrated card. So that's prime hunting zone. And folks continue to understand how that works. That's, you know, that is a classic adoption curve that you would expect. And then secondarily, John, but, you know, just as important is, ACH as a solution, either, you know, standalone or as a companion to card but not through the same integration, continues to be very strong. I mean, maybe even stronger than we expected as folks start to tune into that. And what you might ask, you know, why would people do it that way? Well, there are a lot of people today who have a card model in place. and want to add ACH, and there are a bunch of reasons why they might not always be in the same integration. And so that standalone ACH is showing a lot of momentum. And it's really for the reason that you just mentioned. There's still all this physical invoice, physical check. And if you are skewed to very large tickets, you might never have been a card acceptor. You were just on paper. So nice movement from folks who are adopting ACH on its own, um, as opposed to as part of a broader offer. So very good momentum on both sides of the coin. And from a capabilities point of view, I think you asked about this is we made a very big decision a couple of years ago when we were building Pi Connect to put ACH alongside card acceptance in the full tech stack or solutions ecosystem. So you can take the friction out of boarding. You have enhanced reporting portals. You have flexible funding. So the idea is that an ACH acceptor should have available to them all of the same great technology that is being offered or, frankly, has been offered on the card side. And we think that's a big differentiator for bias.

Thank you. Our next question comes from the line of Mike Grondahl from Northland Securities. Your line is now open.

Hey, guys. Thanks, and good morning. Two quick questions. One, when you talked about some of your marketing with this nonprofit client, you kind of said that you got three times the new client engagement or sign-ups. Could you kind of describe that co-marketing that you do, that marketing process? And then secondly, any updates to the sales force to call out?

Great. Hey, Mike, it's Jeff again. Two good questions. So the first one on the co-marketing, you've heard me say many, many times before, the single biggest opportunity at Paya is the further penetration of the installed base of our existing partners, by far the biggest tailwind. And the way you get at that beyond the obvious continual enhancements in your solutions and offers, which is a given, is to really embed our resources, marketing, you know, tools, marketing content, marketing talent in the efforts of our partners. So that's a classic ground game, partner by partner, to understand their marketing calendar. How do we stand tall within that? In some cases, we, in fact, drive the marketing calendar. and think about campaigns, think about incentives, all the kind of stuff that gets that attention to drive adoption. So it is really executing bread and butter basics over and over again, partner by partner. And the reason we call that out is, you know, very strong start to the year in that kind of partner engagement. To your second question, you know, on the sales force, no major updates to speak of. But I will remind you of a couple things. When we do things like the Paragon acquisition, importantly, there will always be operating synergies. And we plow those back into sales and marketing. That is our growth acquisition playbook. So as it relates to Paragon, we have now inherited or brought on some amazing sales talent. And it's one of the benefits of the fact that Paragon is was operating in a similar vein to Paya, obviously with particular strength in healthcare and not-for-profit, is experienced salespeople who really understand the value prop and can carry that dialogue through the client is a very big deal. So it's one of the things. I mean, I'm excited about a lot of things on Paragon. Quality of the talent, both sales and other talent, is a big part of it.

Great. Thank you.

Thank you. Our next question comes from the line of Craig Moore from Autonomous Research. Your line is now open.

Yeah, good morning. Thanks. I wanted to ask you a question about the way you're disclosing the business. I know a lot of ACH is integrated volume, and the way you're segmenting right now gives the impression that your old line payments business is outgrowing your integrated business, which isn't going to help your story. So I was wondering if you could tell us if you included integrated ACH in the integrated segment, what integrated versus non-integrated growth in the business would look like.

Yeah, no, it's a good question. Good question, Craig. Thank you for that. This is Glenn. Um, Yeah, look, I think ACH, you're correct. There's some combination in there of both integrated and kind of non-integrated or more traditional. The ACH business, I think we've disclosed kind of in our supplement, you know, the growth of that, which we're excited about. But, yeah, I don't think we're going to break out kind of the underlying components of payment services other than what we've disclosed in the supplements.

Okay.

Craig, let me just add, you know, one thing on is, and I think I mentioned this on a prior call, you know, segmenting is, you know, is science and art, right, to make it the most useful. There's no perfect way to slice and dice it. If we had sliced it the other way, then you guys would have said we're having trouble with yields in the combined segments. So we did it this way to try to give you guys a better understanding of You know, certainly the biggest chunk of our business is the integrated card in and of itself, and we didn't want that in any way, you know, confused with, you know, overlapping payment methods, et cetera. So the intention was to try to be helpful to all of you. The second thing I would observe is, you know, to the point about payment services in the segment in the story is, It also has great and growing margins. It also has very strong top-line growth characteristics. So it's not, you know, a question of a good and a bad segment, right? It is a very fast-growing, very strong margin segment and another segment that is also growing nicely and also has great and growing margins.

No, I understand that. I'm just making the point that it's a little misleading because I know there's a good portion of ACH that is integrated in PI Connect and is flowing through there. But thank you.

Thank you. Our next question comes from Joseph Vaffey from Canaccord. Your line is now open.

Hey, guys. Good morning. Just maybe focus on gross margin a little bit, which I think was pretty strong. I think, Glenn, you called out a few things there on favorable mix. And then we're talking a lot about ACH, but ACH as well. Just, you know, outlook on gross margin, you know, I think you're also doing some price increases, but, you know, maybe perhaps that large government partner of yours is an attractive driver here as well. And then, you know, if ACH continues to grow like this, you know, what's the implication there for payment services gross margin? And I'll have a quick follow-up.

Yeah, thanks, Joe. This is Glenn. Yeah, no, that's right. I think we're seeing really good trends in gross margin. A few drivers there. One, we talked about previously the ACH growth is favorable to gross margin at a higher rate than our blended. So that helps. The TPG acquisition had more favorable gross margin as well compared to kind of our average. So that's also helped as well. And then, yeah, we've seen a good mix in the quarter. Really, without, again, I've mentioned before, not much, really not much of a pricing, not much in pricing initiatives this quarter in Q1 where that really comes into play in Q2. So to your point, that will also help margins a little bit. So, yeah, we're feeling good about gross margins. I think we're trying to be conservative in our guidance and not get too ahead of ourselves. But the trend is good there, and we're feeling good in Q2. a lot of underlying drivers that are going to stick.

Okay. And then what about Paragon gross margin?

Yeah, no, good question. Yeah, Paragon gross margins are slightly below our blended average. So that's another reason kind of just to make sure we're being careful with guidance, but not to the point where it would impact kind of the continued good trend we're seeing on a year-over-year basis.

Sure. And then anything in the sales pipeline moving forward? I know it does sound like your large government partner, Wynn, was a nice feather in the company's cap here for this year. How does the pipeline look for maybe some of those larger deals out there?

Thanks a lot, guys. Joe, thank you. This is Jeff. So the pipeline for larger deals, as you would imagine, they are chunky. I would say we are much more systematic about identifying those and working them. And I think, as you know, right, they take longer. But once you have them, you will have them forever, and they will be large. So we're very pleased with how that pipeline is building, and we are equally pleased at our ability to successfully prosecute those opportunities. So obviously it takes longer for them to manifest in the P&L itself, and that's okay. So we're very excited about it. And, of course, each opportunity builds on the previous successes as well, right? The more of those you do, the easier it is to get others to understand and embrace it as well.

Sure. Great. Thanks, Jeff.

Thank you. Our next question comes from the line of Peter Heckman from Davidson. Your line is now open.

Hey, good morning. Most of my questions have been answered, but I just thought I'd check in and just trying to think about the seasonality, any seasonality that may have changed last year between timing of payments, maybe tax payments, anything that we should be considering that may have been in the second quarter last year that won't be in there this year or wasn't in there last year and normally is?

No, good question. I think the largest headline is the one we mentioned, right, one less business day this quarter versus last year's quarter. So that muted the growth a little bit more. It would have been slightly higher. without that impact. Good question on the tax payments. We haven't spent a lot of time looking at that. It is a component of our business, but not enough really probably to drive any kind of substantial year-over-year variance. But that should have a little bit of benefit in Q2 if there's any deferral of tax payments. Most of our tax payments, however, are at the property and municipal level, which for the most part I think don't have much in terms of deferral. So probably not much impact there.

Okay, and then just thinking about, again, the cadence through the year. I don't want to pin you down too hard on quarterly numbers, but I guess based on your read of the business, is the consensus for the second quarter in the right ballpark, given kind of the layout of EBITDA for the rest of the year?

Yeah, no, good question. Yeah, look, Q2 jumps up seasonally, so that – that trend is right, right, when you think about the larger jump that's kind of embedded in the numbers in Q2. We feel good about that, and that matches kind of the seasonal flow. So, yeah, no, I think the numbers are in line. I think we did call out the cost side, right, you know, with some of the, you know, things for the COVID comment really is around things like travel, right? You do have travel starting to get layered back in a little bit, which is really a net positive for us, right, and all of us getting back on the road and, On the commercial side, really, you know, increasing momentum even there. So we're really excited about that. But, you know, those things have a little bit of an uptick in cost. Obviously, Paragon, you know, layering that in as well is going to have some impact. And, you know, I think the year-over-year on public company costs, right, we still have a couple quarters of that getting layered in when you think about prior year comparisons. But, yeah, look, I think that's – You know, that's probably the best commentary I can give on it. And then maybe the last point would be, you know, gross margin. You know, I think we're looking good there. So, you know, any offset on the cost side I think is going to be picked up on gross profit.

All right.

Good to hear.

All right. Good to hear. Thank you.

Thank you. Our next question comes from the line of Timothy Chiodo from Credit Suisse. Your line is now open.

Thank you. Good morning. On ACH, we spent a lot of good time on the call today digging into that opportunity. Maybe you could just talk a little bit. You guys have done a great job of laying out what you think the card opportunity is, your TAM there, and some of your presentation materials. When you think internally about within your core verticals, what is the multiplier on that opportunity for ACH? I know it might be a harder thing to put a number on, but when you guys talk about it, how much bigger is that opportunity? And then I have a quick follow-up on some of the deals that you mentioned that you won away from some of the larger encodements?

Hey, Tim, it's Jeff. Thanks. And that's a great question. You know, here's how we think about ACH. I think you know this. The reports of the tens of trillions of dollars of TAM that are ripe for electronic payments that today are physical paper and physical check, you start there. The cardable portion of that is by far the smaller half, if you will. much, much smaller. So ACH from a payments volume perspective, and this is because in the middle markets where we play, as you know, ticket sizes get larger. ACH is more suitable. And so it is many times larger than the card opportunity. And then, of course, importantly, the way to capturing value on that is not through the commodity processing, but is through the integrated experience that also facilitates, you know, both the front-end order management, the back-end accounting and reconciliation. So as you can tell, and we've been consistent on this from the get-go, we are incredibly excited by it. We see our capabilities as differentiated. And, you know, pace of adoption obviously is the great unknown. But tons of headroom, and we couldn't be more excited, and we will continue to invest heavily in that.

Okay, excellent. Thank you. And then the follow-up was around, you mentioned during your prepared remarks that there were a few recent partners that you won away from some of the larger merchant acquirers. Maybe you could just put a little more on that, just bring it to life in terms of how that came about, what the RFP process was like, and what some of the differentiating factors, I guess, were that helped you win that business.

Yeah, Tim, great question. So the first – you know, notion is, by definition, we are now talking about competitive steals as opposed to first-time adopters. And as you know, many of our newer partners are first-time adopters to integrate payments. So with competitive steals, two trends or two themes that we hear over and over again, lack of continuing the pace of technology enhancements in support of the partnerships, So people may get them signed up, but over a few years, eyes wander elsewhere. They take partners for granted, and they do not keep pace. And then the second is the 360 customer experience. So what I mean by that is, and you've heard me say this before, Tim, it's technology change management. It's joint incident management. Customer support at its most basic level is you have to have a commitment to to understanding the partner, their software, the nature of their integration with our integration, and the end user base. And so it's service. So basically when we get the call and somebody's talking about swapping out a provider, the net result is they've been at it for a few years and they have very low penetration. So we will often hear about single-digit penetration after three years' time, which is a disappointing result. and then you work back to the solutions and the support to take a single-digit penetrating partner and figure out how together you're going to move it into the 30s or 40s percent of penetration, which is ultimately why these software companies are doing this. So the themes are very similar. In the end, you prevail on tailoring the solutions. You prevail on demonstrating, and this is not the pitch book, right, this is referenceability and other things, that your support model is really respective of the software suite as opposed to what you would think of as the traditional customer support of, you know, commodity merchant processing.

Great. Thank you so much, Jeff. Yeah, that absolutely brings it to life. That's exactly what we're looking for. So I appreciate the time and thank you for taking the questions.

Thanks for the questions, Tim.

Thank you. Our next question comes from the line of Bob Napoli from William Blair. Your line is now open.

Hi. Thank you for the follow-up question. Jeff, you had called out the new merchant onboarding solution up front, and knowing that your biggest opportunity is the penetration of the installed base, I was wondering if that is an important tool in improving that penetration rate.

Great question, Bob. So I want to answer this in two ways. The first is it is very important because the specific enhancements we deployed make the boarding experience inside of our partners' ecosystems far more natural. So it doesn't feel as much like a separate event from other cross-selling of services that they are providing or, frankly, the software sale itself. So that is a big deal, and we're very excited about the recent enhancements, and so are our partners, and they helped us, frankly, inform how it would look. Flexible, by the way, so that it's relevant to each partner the way they want to consume it. So that's point one. But point two, what I do want to say to everybody on this call is, You'll hear me talk about boarding again in a few quarters and then again in a few quarters. So boarding is one of the holy grails of this business. It is a continuous investment in those experiences, in the flexibility, in the tailoring for unique use cases and verticals. So I don't want you to think in terms of a single very exciting boarding event as being the end of an item. running a real growth business like we do for a living, we will be investing in this part of our capability for the rest of our lives, more or less at a BAU state, if you know what I mean.

Yes. Thank you. That's really helpful. The card improvement that you called out, Glenn, in the month of April, was that going to put upward pressure on the take rate. How much higher is the card take rate than the blended average? You know, 30% growth in April was pretty eye-popping.

Yeah, no, good question. I think, you know, the card take rate is much more favorable versus the ACH take rate, right? You're talking, you know, in the 80 basis point level versus, you know, 20s on a spread basis. And as you know, you know, ACH is usually priced on a per-trend basis. But no, the answer is no, it won't. It's actually the opposite. We have more favorable economics. And again, we have some pricing initiatives layering in as well. So we don't have any concern about spread in the second quarter.

No, I think that that would put upside, as was my question, is that put upside on spread as opposed to... Exactly. Yeah, yeah. And then the sequential growth and the integrated solutions, you should see stronger sequential growth in integrated solutions versus payment services in the second quarter? Yes. Yeah. Okay. Great. Thank you. Appreciate it.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Jeff Hack for closing remarks.

Great. Thank you, Operator. And thanks, everybody, for joining us on this early Friday morning. Very pleased to be with you. I think you can tell from our remarks, we are very proud and pleased of the progress we're making, both in the organic growth efforts as well as, obviously, another great strategic accretive transaction under our belts. We will always be trying for more, and hopefully, you hear a consistency in what we've been saying to you since we began speaking last summer about clearly setting out our objectives and meeting or exceeding those objectives every step of the way. And really pleased to see that again in the first quarter, and we'll look forward to talking to you guys again soon.

This concludes today's conference call. Thanks for participating. You may now disconnect.